Company Quick10K Filing
Quick10K
Hershey
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$125.50 209 $26,200
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-07-01 Quarter: 2018-07-01
10-Q 2018-04-01 Quarter: 2018-04-01
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-10-01 Quarter: 2017-10-01
10-Q 2017-07-02 Quarter: 2017-07-02
10-Q 2017-04-02 Quarter: 2017-04-02
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-10-02 Quarter: 2016-10-02
10-Q 2016-07-03 Quarter: 2016-07-03
10-Q 2016-04-03 Quarter: 2016-04-03
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-10-04 Quarter: 2015-10-04
10-Q 2015-07-05 Quarter: 2015-07-05
10-Q 2015-04-05 Quarter: 2015-04-05
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-28 Quarter: 2014-09-28
10-Q 2014-06-29 Quarter: 2014-06-29
10-Q 2014-03-30 Quarter: 2014-03-30
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-04-25 Earnings, Exhibits
8-K 2019-04-18 Officers
8-K 2019-01-31 Earnings, Exhibits
8-K 2018-11-07 Enter Agreement
8-K 2018-10-25 Earnings, Exhibits
8-K 2018-10-17 M&A, Other Events
8-K 2018-09-12 Enter Agreement, Other Events
8-K 2018-08-28 Regulation FD, Exhibits
8-K 2018-08-16 Officers, Regulation FD, Exhibits
8-K 2018-07-26 Earnings, Exhibits
8-K 2018-05-25 Other Events
8-K 2018-05-10 Enter Agreement, Off-BS Arrangement
8-K 2018-05-03 Enter Agreement, Other Events
8-K 2018-02-20 Officers
8-K 2018-02-01 Earnings, Exhibits
8-K 2018-01-31 M&A, Other Events, Exhibits
8-K 2018-01-18 Officers
8-K 2018-01-08 Enter Agreement, Off-BS Arrangement
APC Anadarko Petroleum 36,840
CUBE Cubesmart 6,120
BCO Brinks 3,880
NVEE NV5 Global 958
SAH Sonic Automotive 839
ACLS Axcelis 567
FSFG First Savings Financial Group 131
CTIC CTI Biopharma 53
STMM Stemcell Holdings 0
DNO United States Short Oil Fund 0
HSY 2019-03-31
Part I - Financial Information
Item 1. Financial Statements.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings.
Item 1A. Risk Factors.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Item 3. Defaults Upon Senior Securities.
Item 4. Mine Safety Disclosures.
Item 5. Other Information.
Item 6. Exhibits.
EX-10.1 exhibit101-2019rsunoti.htm
EX-10.2 exhibit102-2019rsunoti.htm
EX-10.3 exhibit103-2019rsunoti.htm
EX-10.4 exhibit104-2019optiont.htm
EX-10.5 exhibit105-2019psunoti.htm
EX-31.1 hsy20190331exhibit311.htm
EX-31.2 hsy20190331exhibit312.htm
EX-32.1 hsy20190331exhibit321.htm

Hershey Earnings 2019-03-31

HSY 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

Document
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period
from ______to_______

Commission file number 1-183
 
THE HERSHEY COMPANY
(Exact name of registrant as specified in its charter)
    
Delaware
 
23-0691590
(State or other jurisdiction of incorporation
or organization)
 
(I.R.S. Employer Identification No.)
19 East Chocolate Avenue, Hershey, PA
17033
(Address of principal executive offices)
(Zip Code)
717-534-4200
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
x
 
Accelerated filer
¨
 
Smaller reporting company
¨
 
 
 
 
 
 
 
 
 
 
Non-accelerated filer
¨
(Do not check if a smaller reporting company)
 
Emerging growth company
¨
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No  x

Indicate the number of shares outstanding of each of the registrant’s classes of common stock as of the latest practicable date.
Common Stock, one dollar par value—148,185,733 shares, as of April 19, 2019.
Class B Common Stock, one dollar par value—60,613,777 shares, as of April 19, 2019.









THE HERSHEY COMPANY
Quarterly Report on Form 10-Q
For the Period Ended March 31, 2019

TABLE OF CONTENTS

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 






PART I — FINANCIAL INFORMATION
Item 1. Financial Statements.
THE HERSHEY COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
 (unaudited)
 
 
Three Months Ended
 
 
March 31, 2019
 
April 1, 2018
Net sales
 
$
2,016,488

 
$
1,971,959

Cost of sales
 
1,123,984

 
997,899

Gross profit
 
892,504

 
974,060

Selling, marketing and administrative expense
 
453,573

 
485,324

Business realignment costs
 
62

 
8,224

Operating profit
 
438,869

 
480,512

Interest expense, net
 
37,458

 
29,339

Other (income) expense, net
 
5,477

 
1,942

Income before income taxes
 
395,934

 
449,231

Provision for income taxes
 
92,053

 
98,512

Net income including noncontrolling interest
 
303,881

 
350,719

Less: Net (loss) income attributable to noncontrolling interest
 
(477
)
 
516

Net income attributable to The Hershey Company
 
$
304,358

 
$
350,203

 
 
 
 
 
Net income per share—basic:
 
 
 
 
Common stock
 
$
1.49

 
$
1.71

Class B common stock
 
$
1.36

 
$
1.55

 
 
 
 
 
Net income per share—diluted:
 
 
 
 
Common stock
 
$
1.45

 
$
1.65

Class B common stock
 
$
1.36

 
$
1.55

 
 
 
 
 
Dividends paid per share:
 
 
 
 
Common stock
 
$
0.722

 
$
0.656

Class B common stock
 
$
0.656

 
$
0.596


See Notes to Unaudited Consolidated Financial Statements.




THE HERSHEY COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)

 
 
For the three months ended
 
 
March 31, 2019
 
April 1, 2018
 
 
Pre-Tax Amount
 
Tax (Expense) Benefit
 
After-Tax Amount
 
Pre-Tax Amount
 
Tax (Expense) Benefit
 
After-Tax Amount
Net income including noncontrolling interest
 
 
 
 
 
$
303,881

 
 
 
 
 
$
350,719

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments:
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation gains (losses) during period
 
$
3,428

 
$

 
3,428

 
$
(1,267
)
 
$

 
(1,267
)
Pension and post-retirement benefit plans:
 
 
 
 
 
 
 
 
 
 
 
 
Reclassification of tax effects relating to U.S. tax reform
 

 

 

 

 
(36,535
)
 
(36,535
)
Reclassification to earnings
 
6,718

 
(1,807
)
 
4,911

 
5,097

 
(1,025
)
 
4,072

Cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
 
Gains (losses) on cash flow hedging derivatives
 
(789
)
 
718

 
(71
)
 
4,245

 
(990
)
 
3,255

Reclassification of tax effects relating to U.S. tax reform
 

 

 

 

 
(11,121
)
 
(11,121
)
Reclassification to earnings
 
1,438

 
(891
)
 
547

 
2,260

 
(609
)
 
1,651

Total other comprehensive income (loss), net of tax
 
$
10,795

 
$
(1,980
)
 
8,815

 
$
10,335

 
$
(50,280
)
 
(39,945
)
Total comprehensive income including noncontrolling interest
 
 
 
 
 
$
312,696

 
 
 
 
 
$
310,774

Comprehensive income attributable to noncontrolling interest
 
 
 
 
 
78

 
 
 
 
 
1,300

Comprehensive income attributable to The Hershey Company
 
 
 
 
 
$
312,618

 
 
 
 
 
$
309,474


See Notes to Unaudited Consolidated Financial Statements.


4



THE HERSHEY COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
 
 
March 31, 2019
 
December 31, 2018
 
 
(unaudited)
 
 
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
465,965

 
$
587,998

Accounts receivable—trade, net
 
694,136

 
594,145

Inventories
 
791,289

 
784,879

Prepaid expenses and other
 
265,539

 
272,159

Total current assets
 
2,216,929

 
2,239,181

Property, plant and equipment, net
 
2,108,075

 
2,130,294

Goodwill
 
1,803,601

 
1,801,103

Other intangibles
 
1,267,833

 
1,278,292

Other assets
 
459,754

 
252,984

Deferred income taxes
 
1,184

 
1,166

Total assets
 
$
7,857,376

 
$
7,703,020

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
500,633

 
$
502,314

Accrued liabilities
 
650,657

 
679,163

Accrued income taxes
 
74,562

 
33,773

Short-term debt
 
1,168,780

 
1,197,929

Current portion of long-term debt
 
3,553

 
5,387

Total current liabilities
 
2,398,185

 
2,418,566

Long-term debt
 
3,236,317

 
3,254,280

Other long-term liabilities
 
618,133

 
446,048

Deferred income taxes
 
181,381

 
176,860

Total liabilities
 
6,434,016

 
6,295,754

 
 
 
 
 
Stockholders’ equity:
 
 
 
 
The Hershey Company stockholders’ equity
 
 
 
 
Preferred stock, shares issued: none in 2019 and 2018
 

 

Common stock, shares issued: 299,287,967 at March 31, 2019 and December 31, 2018
 
299,287

 
299,287

Class B common stock, shares issued: 60,613,777 at March 31, 2019 and December 31, 2018
 
60,614

 
60,614

Additional paid-in capital
 
996,181

 
982,205

Retained earnings
 
7,193,240

 
7,032,020

Treasury—common stock shares, at cost: 151,275,897 at March 31, 2019 and 150,172,840 at December 31, 2018
 
(6,786,065
)
 
(6,618,625
)
Accumulated other comprehensive loss
 
(348,520
)
 
(356,780
)
Total—The Hershey Company stockholders’ equity
 
1,414,737

 
1,398,721

Noncontrolling interest in subsidiary
 
8,623

 
8,545

Total stockholders’ equity
 
1,423,360

 
1,407,266

Total liabilities and stockholders’ equity
 
$
7,857,376

 
$
7,703,020


See Notes to Unaudited Consolidated Financial Statements.


5



THE HERSHEY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
Three Months Ended
 
March 31, 2019
 
April 1, 2018
Operating Activities
 
 
 
Net income including noncontrolling interest
$
303,881

 
$
350,719

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
72,329

 
74,416

Stock-based compensation expense
10,556

 
10,458

Deferred income taxes
1,300

 
2,521

Write-down of equity investments
1,152

 
434

Other
8,497

 
9,055

Changes in assets and liabilities, net of business acquisitions and divestitures:
 
 
 
Accounts receivable—trade, net
(99,991
)
 
(9,882
)
Inventories
(6,410
)
 
(11,266
)
Prepaid expenses and other current assets
(8,740
)
 
7,309

Accounts payable and accrued liabilities
(2,798
)
 
(146,623
)
Accrued income taxes
56,282

 
82,231

Contributions to pension and other benefit plans
(4,661
)
 
(7,449
)
Other assets and liabilities
(1,437
)
 
(9,866
)
Net cash provided by operating activities
329,960

 
352,057

Investing Activities
 
 
 
Capital additions (including software)
(92,814
)
 
(60,133
)
Proceeds from sales of property, plant and equipment and other long-lived assets
75

 
112

Equity investments in tax credit qualifying partnerships
(18,884
)
 
(6,281
)
Business acquisitions, net of cash and cash equivalents acquired

 
(915,457
)
Net cash used in investing activities
(111,623
)
 
(981,759
)
Financing Activities
 
 
 
Net (decrease) increase in short-term debt
(28,990
)
 
1,686,816

Long-term borrowings
1,370

 

Repayment of long-term debt and finance leases
(3,135
)
 
(607,922
)
Repayment of tax receivable obligation

 
(42,500
)
Cash dividends paid
(146,463
)
 
(134,300
)
Repurchase of common stock
(198,500
)
 
(178,073
)
Exercise of stock options
34,573

 
1,884

Net cash (used in) provided by financing activities
(341,145
)
 
725,905

Effect of exchange rate changes on cash and cash equivalents
775

 
52

(Decrease) Increase in cash and cash equivalents
(122,033
)
 
96,255

Cash and cash equivalents, beginning of period
587,998

 
380,179

Cash and cash equivalents, end of period
$
465,965

 
$
476,434

Supplemental Disclosure
 
 
 
Interest paid
$
35,271

 
$
38,323

Income taxes paid
28,733

 
12,817


See Notes to Unaudited Consolidated Financial Statements.


6



THE HERSHEY COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
(unaudited)

 
Preferred
Stock
 
Common
Stock
 
Class B
Common
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Treasury
Common
Stock
 
Accumulated Other
Comprehensive
Income (Loss)
 
Noncontrolling
Interests in
Subsidiaries
 
Total
Stockholders’
Equity
Balance, December 31, 2018
 

 
299,287

 
60,614

 
982,205

 
7,032,020

 
(6,618,625
)
 
(356,780
)
 
8,545

 
1,407,266

Net income (loss)
 
 
 
 
 
 
 
 
 
304,358

 
 
 
 
 
(477
)
 
303,881

Other comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
8,260

 
555

 
8,815

Dividends (including dividend equivalents):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common Stock, $0.722 per share
 
 
 
 
 
 
 
 
 
(107,288
)
 
 
 
 
 
 
 
(107,288
)
Class B Common Stock, $0.656 per share
 
 
 
 
 
 
 
 
 
(39,763
)
 
 
 
 
 
 
 
(39,763
)
Stock-based compensation
 
 
 
 
 
 
 
10,463

 
 
 
 
 
 
 
 
 
10,463

Exercise of stock options and incentive-based transactions
 
 
 
 
 
 
 
3,513

 
 
 
31,060

 
 
 
 
 
34,573

Repurchase of common stock
 
 
 
 
 
 
 
 
 
 
 
(198,500
)
 
 
 
 
 
(198,500
)
Impact of ASU 2016-02 related to leases
 
 
 
 
 
 
 
 
 
3,913

 
 
 
 
 
 
 
3,913

Balance, March 31, 2019
 
$

 
$
299,287

 
$
60,614

 
$
996,181

 
$
7,193,240

 
$
(6,786,065
)
 
$
(348,520
)
 
$
8,623

 
$
1,423,360


 
 
Preferred
Stock
 
Common
Stock
 
Class B
Common
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Treasury
Common
Stock
 
Accumulated Other
Comprehensive
Income (Loss)
 
Noncontrolling
Interests in
Subsidiaries
 
Total
Stockholders’
Equity
Balance, December 31, 2017
 

 
299,281

 
60,620

 
924,978

 
6,371,082

 
(6,426,877
)
 
(313,746
)
 
16,227

 
931,565

Net income
 
 
 
 
 
 
 
 
 
350,203

 
 
 
 
 
516

 
350,719

Other comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
6,927

 
784

 
7,711

Dividends (including dividend equivalents):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common Stock, $0.656 per share
 
 
 
 
 
 
 
 
 
(98,495
)
 
 
 
 
 
 
 
(98,495
)
Class B Common Stock, $0.596 per share
 
 
 
 
 
 
 
 
 
(36,130
)
 
 
 
 
 
 
 
(36,130
)
Stock-based compensation
 
 
 
 
 
 
 
10,474

 
 
 
 
 
 
 
 
 
10,474

Exercise of stock options and incentive-based transactions
 
 
 
 
 
 
 
(9,487
)
 
 
 
11,371

 
 
 
 
 
1,884

Repurchase of common stock
 
 
 
 
 
 
 
 
 
 
 
(178,073
)
 
 
 
 
 
(178,073
)
Reclassification of tax effects relating to U.S. tax reform
 
 
 
 
 
 
 
 
 
47,656

 
 
 
(47,656
)
 
 
 

Balance, April 1, 2018
 
$

 
$
299,281

 
$
60,620

 
$
925,965

 
$
6,634,316

 
$
(6,593,579
)
 
$
(354,475
)
 
$
17,527

 
$
989,655



See Notes to Unaudited Consolidated Financial Statements.


7

THE HERSHEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data or if otherwise indicated)




1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The unaudited consolidated financial statements provided in this report include the accounts of The Hershey Company (the “Company,” “Hershey,” “we” or “us”) and our majority-owned subsidiaries and entities in which we have a controlling financial interest after the elimination of intercompany accounts and transactions. We have a controlling financial interest if we own a majority of the outstanding voting common stock and the noncontrolling shareholders do not have substantive participating rights, or we have significant control over an entity through contractual or economic interests in which we are the primary beneficiary.
The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial reporting and with the rules and regulations for reporting on Form 10-Q. Accordingly, they do not contain certain information and disclosures required by GAAP for comprehensive financial statements. The financial statements reflect all adjustments which are, in our opinion, necessary for a fair presentation of the results of operations, financial position, and cash flows for the indicated periods.
Operating results for the quarter ended March 31, 2019 may not be indicative of the results that may be expected for the year ending December 31, 2019 because of seasonal effects on our business. These financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2018 (our “2018 Annual Report on Form 10-K”), which provides a more complete understanding of our accounting policies, financial position, operating results and other matters.
Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842). This ASU requires lessees to recognize most leases on their balance sheets as lease liabilities with corresponding right-of-use ("ROU") assets.  The Company adopted the standard as of January 1, 2019, using a modified retrospective approach and applying the standard’s transition provisions at January 1, 2019, the effective date.
We elected the package of practical expedients permitted under the transition guidance, which among other things, allows us to carryforward the historical lease classification.  In addition, we made accounting policy elections to combine the lease and non-lease components for asset categories that support selling, marketing and general administrative activities. These asset categories comprise the majority of our leases. Finally, we made elections to exclude from balance sheet reporting those leases with initial terms of 12 months or less.
Adoption of the new standard resulted in the recording of operating lease ROU assets and lease liabilities of $227,258 and $216,966, respectively, with the difference largely due to prepaid and deferred rent that were reclassified to the ROU asset value. In addition, we derecognized a build-to-suit arrangement in accordance with the transition requirements, which resulted in an adjustment to retained earnings of $3,913. The standard did not materially affect our consolidated net income or cash flows. See Note 7 for further details.
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which amends ASC 815. The purpose of this ASU is to better align accounting rules with a company’s risk management activities and financial reporting for hedging relationships, better reflect economic results of hedging in financial statements, simplify hedge accounting requirements and improve the disclosures of hedging arrangements. We adopted the provisions of this ASU in the first quarter of 2019 using a modified retrospective approach. Adoption of the new standard did not have a material impact on our consolidated financial statements.


8

THE HERSHEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)

In June 2018, the FASB issued ASU No. 2018-07, Compensation – Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting. This ASU is intended to simplify aspects of share-based compensation issued to non-employees by making the guidance consistent with accounting for employee share-based compensation. We adopted the provisions of this ASU in the first quarter of 2019. Adoption of the new standard did not have a material impact on our consolidated financial statements.
In February 2018, the FASB issued ASU No. 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This ASU permits a company to reclassify the income tax effects of the 2017 Tax Cuts and Jobs Act (“U.S. tax reform”) on items within AOCI to retained earnings. We adopted the provisions of this ASU in the first quarter of 2018. We elected to reclassify the income tax effects of U.S. tax reform from items in AOCI as of January 1, 2018 so that the tax effects of items within AOCI are reflected at the appropriate tax rate. The impact of the reclassification resulted in a $47,656 decrease to AOCI and a corresponding increase to retained earnings.
Recently Issued Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU modifies the measurement of expected credit losses of certain financial instruments. ASU 2016-13 is effective for annual periods beginning after December 15, 2019 and interim periods within those annual periods. The amendments in this ASU should be applied on a modified retrospective basis to all periods presented. We are currently evaluating the effect that ASU 2016-13 will have on our consolidated financial statements and related disclosures.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. This ASU modifies the disclosure requirements for fair value measurements by removing, modifying or adding certain disclosures. ASU 2018-13 is effective for annual periods beginning after December 15, 2019 and interim periods within those annual periods, with early adoption permitted. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. We are currently evaluating the effect that ASU 2018-13 will have on our consolidated financial statements and related disclosures.
In August 2018, the FASB issued ASU No. 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General (Topic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans, which modifies the disclosure requirements for defined benefit pension plans and other post-retirement plans. ASU 2018-14 is effective for annual periods beginning after December 15, 2020, with early adoption permitted. The amendments in this ASU should be applied on a retrospective basis to all periods presented. We are currently evaluating the effect that ASU 2018-14 will have on our consolidated financial statements and related disclosures.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40), Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). ASU 2018-15 is effective for annual periods beginning after December 15, 2019 and interim periods within those annual periods, with early adoption permitted. The amendments in this ASU should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. We are currently evaluating the effect that ASU 2018-15 will have on our consolidated financial statements and related disclosures.
No other new accounting pronouncement issued or effective during the fiscal year had or is expected to have a material impact on our consolidated financial statements or disclosures.


9

THE HERSHEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)

2. BUSINESS ACQUISITIONS
2018 Activity
Pirate Brands
On October 17, 2018, we completed the acquisition of Pirate Brands, which includes the Pirate's Booty, Smart Puffs and Original Tings brands, from B&G Foods, Inc. Pirate Brands offers baked, trans fat free and gluten free snacks and is available in a wide range of food distribution channels in the United States. The purchase consideration for Pirate Brands totaled $423,002 and consisted of short-term borrowings and cash on hand. Acquisition-related costs for the Pirate Brands acquisition were immaterial.

The acquisition has been accounted for as a purchase and, accordingly, Pirate Brands' results of operations have been included within the North America segment results in our consolidated financial statements since the date of acquisition. The purchase price allocation presented below has been finalized as of the end of the fourth quarter of 2018. The purchase consideration was allocated to assets acquired and liabilities assumed based on their respective fair values as follows:

Inventories
$
4,663

Plant, property and equipment, net
48

Goodwill
129,991

Other intangible assets
289,300

Accrued liabilities
(1,000
)
Net assets acquired
$
423,002



Goodwill was determined as the excess of the purchase price over the fair value of the net assets acquired (including the identifiable intangible assets). The goodwill derived from this acquisition is expected to be deductible for tax purposes and reflects the value of leveraging the Company's resources to expand the distribution locations and customer base for the Pirate Brands' products.

Other intangible assets includes trademarks valued at $272,000 and customer relationships valued at $17,300. Trademarks were assigned estimated useful lives of 45 years and customer relationships were assigned estimated useful lives ranging from 16 to 18 years.

Amplify Snack Brands, Inc.

On January 31, 2018, we completed the acquisition of all of the outstanding shares of Amplify Snack Brands, Inc. (“Amplify”), previously a publicly traded company based in Austin, Texas that owns several popular better-for-you snack brands such as SkinnyPop, Oatmega and Paqui. Amplify's anchor brand, SkinnyPop, is a market-leading ready-to-eat popcorn brand and is available in a wide range of food distribution channels in the United States. Total consideration of $968,781 included payment of $12.00 per share for Amplify's outstanding common stock (for a total of $907,766), as well as payment of Amplify's transaction related expenses, including accelerated equity compensation, consultant fees and other deal costs. The business enables us to capture more consumer snacking occasions by contributing a new portfolio of brands.

The acquisition has been accounted for as a purchase and, accordingly, Amplify's results of operations have been included within the North America segment results in our consolidated financial statements since the date of acquisition. The purchase price allocation presented below has been finalized as of the end of the fourth quarter of 2018. The purchase consideration, net of cash acquired totaling $53,324, was allocated to assets acquired and liabilities assumed based on their respective fair values as follows:


10

THE HERSHEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)

Accounts receivable
$
40,763

Other current assets
34,593

Plant, property and equipment, net
67,989

Goodwill
966,389

Other intangible assets
682,000

Other non-current assets
1,049

Accounts payable
(32,394
)
Accrued liabilities
(132,519
)
Current debt
(610,844
)
Other current liabilities
(2,931
)
Non-current deferred income taxes
(93,489
)
Non-current liabilities
(5,149
)
Net assets acquired
$
915,457



In connection with the acquisition, the Company agreed to pay in full all outstanding debt owed by Amplify under its existing credit agreement as of January 31, 2018, as well as the amount due under Amplify's existing tax receivable obligation. The Company funded the acquisition and repayment of the acquired debt utilizing proceeds from the issuance of commercial paper.

Goodwill was determined as the excess of the purchase price over the fair value of the net assets acquired (including the identifiable intangible assets) and is not expected to be deductible for tax purposes. The goodwill that resulted from the acquisition is attributable primarily to cost-reduction synergies as Amplify leverages Hershey's resources, expertise and capability-building.

Other intangible assets includes trademarks valued at $648,000 and customer relationships valued at $34,000. Trademarks were assigned estimated useful lives ranging from 28 to 38 years and customer relationships were assigned estimated useful lives ranging from 14 to 18 years.

The Company incurred acquisition-related costs of $20,577 related to the acquisition of Amplify, the majority of which were incurred during the first quarter of 2018. Acquisition-related costs consisted primarily of legal fees, consultant fees, valuation fees and other deal costs and are recorded in the selling, marketing and administrative expense caption within the Consolidated Statements of Operations.
3. GOODWILL AND INTANGIBLE ASSETS
The changes in the carrying value of goodwill by reportable segment for the three months ended March 31, 2019 are as follows:
 
 
North America
 
    International and Other
 
Total
Balance at December 31, 2018
 
1,782,845

 
18,258

 
1,801,103

Foreign currency translation
 
2,286

 
212

 
2,498

Balance at March 31, 2019
 
$
1,785,131

 
$
18,470

 
$
1,803,601




11

THE HERSHEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)

The following table provides the gross carrying amount and accumulated amortization for each major class of intangible asset:
 
 
March 31, 2019
 
December 31, 2018
 
 
Gross Carrying Amount
 
Accumulated Amortization
 
Gross Carrying Amount
 
Accumulated Amortization
Intangible assets subject to amortization:
 
 
 
 
 
 
 
 
Trademarks
 
$
1,174,817

 
$
(70,271
)
 
$
1,173,770

 
$
(60,995
)
Customer-related
 
164,606

 
(36,485
)
 
163,860

 
(33,516
)
Patents
 
16,478

 
(16,027
)
 
16,306

 
(15,772
)
Total
 
1,355,901

 
(122,783
)
 
1,353,936

 
(110,283
)
 
 
 
 
 
 
 
 
 
Intangible assets not subject to amortization:
 
 
 
 
 
 
 
 
Trademarks
 
34,715

 
 
 
34,639

 
 
Total other intangible assets
 
$
1,267,833

 
 
 
$
1,278,292

 
 


Total amortization expense for the three months ended March 31, 2019 and April 1, 2018 was $12,238 and $8,451, respectively.
4. SHORT AND LONG-TERM DEBT
Short-term Debt
As a source of short-term financing, we utilize cash on hand and commercial paper or bank loans with an original maturity of three months or less. We maintain a $1.4 billion unsecured revolving credit facility, which currently expires in November 2020.
The credit agreement contains certain financial and other covenants, customary representations, warranties and events of default. As of March 31, 2019, we were in compliance with all covenants pertaining to the credit agreement, and we had no significant compensating balance agreements that legally restricted these funds. For more information, refer to the Consolidated Financial Statements included in our 2018 Annual Report on Form 10-K.
In addition to the revolving credit facility, we maintain lines of credit with domestic and international commercial banks. We had short-term foreign bank loans against these lines of credit for $125,226 at March 31, 2019 and $113,189 at December 31, 2018. Commitment fees relating to our revolving credit facility and lines of credit are not material.
At March 31, 2019, we had outstanding commercial paper totaling $1,043,554, at a weighted average interest rate of 2.5%. At December 31, 2018, we had outstanding commercial paper totaling $1,084,740, at a weighted average interest rate of 2.4%.


12

THE HERSHEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)

Long-term Debt
Long-term debt consisted of the following:
 
 
March 31, 2019
 
December 31, 2018

2.90% Notes due 2020
 
$
350,000

 
$
350,000

4.125% Notes due 2020
 
350,000

 
350,000

3.10% Notes due 2021
 
350,000

 
350,000

8.8% Debentures due 2021
 
84,715

 
84,715

3.375% Notes due 2023
 
500,000

 
500,000

2.625% Notes due 2023
 
250,000

 
250,000

3.20% Notes due 2025
 
300,000

 
300,000

2.30% Notes due 2026
 
500,000

 
500,000

7.2% Debentures due 2027
 
193,639

 
193,639

3.375% Notes due 2046
 
300,000

 
300,000

Finance lease liabilities
 
78,185

 
101,980

Net impact of interest rate swaps, debt issuance costs and unamortized debt discounts
 
(16,669
)
 
(20,667
)
Total long-term debt
 
3,239,870

 
3,259,667

Less—current portion
 
3,553

 
5,387

Long-term portion
 
$
3,236,317

 
$
3,254,280


Interest Expense
Net interest expense consists of the following:
 
 
Three Months Ended
 
 
March 31, 2019
 
April 1, 2018
Interest expense
 
$
40,663

 
$
32,853

Capitalized interest
 
(1,257
)
 
(1,299
)
Interest expense
 
39,406

 
31,554

Interest income
 
(1,948
)
 
(2,215
)
Interest expense, net
 
$
37,458

 
$
29,339


5. DERIVATIVE INSTRUMENTS
We are exposed to market risks arising principally from changes in foreign currency exchange rates, interest rates and commodity prices. We use certain derivative instruments to manage these risks. These include interest rate swaps to manage interest rate risk, foreign currency forward exchange contracts to manage foreign currency exchange rate risk, and commodities futures and options contracts to manage commodity market price risk exposures.
In entering into these contracts, we have assumed the risk that might arise from the possible inability of counterparties to meet the terms of their contracts. We mitigate this risk by entering into exchanged-traded contracts with collateral posting requirements and/or by performing financial assessments prior to contract execution, conducting periodic evaluations of counterparty performance and maintaining a diverse portfolio of qualified counterparties. We do not expect any significant losses from counterparty defaults.
Commodity Price Risk
We enter into commodities futures and options contracts and other commodity derivative instruments to reduce the effect of future price fluctuations associated with the purchase of raw materials, energy requirements and


13

THE HERSHEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)

transportation services. We generally hedge commodity price risks for 3- to 24-month periods. Our open commodity derivative contracts had a notional value of $1,166,051 as of March 31, 2019 and $693,463 as of December 31, 2018.
Derivatives used to manage commodity price risk are not designated for hedge accounting treatment. Therefore, the changes in fair value of these derivatives are recorded as incurred within cost of sales. As discussed in Note 13, we define our segment income to exclude gains and losses on commodity derivatives until the related inventory is sold, at which time the related gains and losses are reflected within segment income.  This enables us to continue to align the derivative gains and losses with the underlying economic exposure being hedged and thereby eliminate the mark-to-market volatility within our reported segment income.

Foreign Exchange Price Risk
We are exposed to foreign currency exchange rate risk related to our international operations, including non-functional currency intercompany debt and other non-functional currency transactions of certain subsidiaries. Principal currencies hedged include the euro, Canadian dollar, Japanese yen, British pound, and Brazilian real. We typically utilize foreign currency forward exchange contracts to hedge these exposures for periods ranging from 3 to 12 months. The contracts are either designated as cash flow hedges or are undesignated. The net notional amount of foreign exchange contracts accounted for as cash flow hedges was $66,330 at March 31, 2019 and $29,458 at December 31, 2018. The effective portion of the changes in fair value on these contracts is recorded in other comprehensive income and reclassified into earnings in the same period in which the hedged transactions affect earnings. The net notional amount of foreign exchange contracts that are not designated as accounting hedges was $7,933 at March 31, 2019 and $11,072 at December 31, 2018. The change in fair value on these instruments is recorded directly in cost of sales or selling, marketing and administrative expense, depending on the nature of the underlying exposure.
Interest Rate Risk
We manage our targeted mix of fixed and floating rate debt with debt issuances and by entering into fixed-to-floating interest rate swaps in order to mitigate fluctuations in earnings and cash flows that may result from interest rate volatility. These swaps are designated as fair value hedges, for which the gain or loss on the derivative and the offsetting loss or gain on the hedged item are recognized in current earnings as interest expense (income), net. We had one interest rate derivative instrument in a fair value hedging relationship with a notional amount of $350,000 at March 31, 2019 and December 31, 2018.
In order to manage interest rate exposure, in previous years we utilized interest rate swap agreements to protect against unfavorable interest rate changes relating to forecasted debt transactions. These swaps, which were settled upon issuance of the related debt, were designated as cash flow hedges and the gains and losses that were deferred in other comprehensive income are being recognized as an adjustment to interest expense over the same period that the hedged interest payments affect earnings.
Equity Price Risk
We are exposed to market price changes in certain broad market indices related to our deferred compensation obligations to our employees. To mitigate this risk, we use equity swap contracts to hedge the portion of the exposure that is linked to market-level equity returns. These contracts are not designated as hedges for accounting purposes and are entered into for periods of 3 to 12 months. The change in fair value of these derivatives is recorded in selling, marketing and administrative expense, together with the change in the related liabilities. The notional amount of the contracts outstanding at March 31, 2019 and December 31, 2018 was $23,501 and $33,168, respectively.


14

THE HERSHEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)

The following table presents the classification of derivative assets and liabilities within the Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018:
 
 
March 31, 2019
 
December 31, 2018
 
 
Assets (1)
 
Liabilities (1)
 
Assets (1)
 
Liabilities (1)
Derivatives designated as cash flow hedging instruments:
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
$
2,065

 
$
786

 
$
3,394

 
$
485

 
 
 
 
 
 
 
 
 
Derivatives designated as fair value hedging instruments:
 
 
 
 
 
 
 
 
Interest rate swap agreements
 
504

 

 

 
4,832

 
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
Commodities futures and options (2)
 
5,862

 
552

 
7,230

 
262

Deferred compensation derivatives
 
3,043

 

 

 
4,736

Foreign exchange contracts
 
44

 
169

 
70

 
484

 
 
8,949

 
721

 
7,300

 
5,482

Total
 
$
11,518

 
$
1,507

 
$
10,694

 
$
10,799



(1)
Derivatives assets are classified on our balance sheet within prepaid expenses and other as well as other assets. Derivative liabilities are classified on our balance sheet within accrued liabilities and other long-term liabilities.
(2)
As of March 31, 2019, amounts reflected on a net basis in assets were assets of $94,078 and liabilities of $89,233, which are associated with cash transfers receivable or payable on commodities futures contracts reflecting the change in quoted market prices on the last trading day for the period. The comparable amounts reflected on a net basis in assets at December 31, 2018 were assets of $63,978 and liabilities of $57,351. At March 31, 2019 and December 31, 2018, the remaining amount reflected in assets and liabilities related to the fair value of other non-exchange traded derivative instruments, respectively.
Income Statement Impact of Derivative Instruments
The effect of derivative instruments on the Consolidated Statements of Income for the three months ended March 31, 2019 and April 1, 2018 was as follows:
 
 
Non-designated Hedges
 
Cash Flow Hedges
 
 
 
 
 
Gains (losses) recognized in income (a)
 
Gains (losses) recognized in other comprehensive income (“OCI”)
 
Gains (losses) reclassified from accumulated OCI into income (b)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2019
 
2018
 
2019
 
2018
 
2019
 
2018
Commodities futures and options
 
$
(26,641
)
 
$
66,590

 
$

 
$

 
$

 
$

Foreign exchange contracts
 
215

 
(152
)
 
(789
)
 
4,245

 
931

 
136

Interest rate swap agreements
 

 

 

 

 
(2,369
)
 
(2,396
)
Deferred compensation derivatives
 
3,043

 
(393
)
 

 

 

 

Total
 
$
(23,383
)
 
$
66,045

 
$
(789
)
 
$
4,245

 
$
(1,438
)
 
$
(2,260
)

(a)
Gains (losses) recognized in income for non-designated commodities futures and options contracts were included in cost of sales. Gains (losses) recognized in income for non-designated foreign currency forward exchange contracts and deferred compensation derivatives were included in selling, marketing and administrative expenses.


15

THE HERSHEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)

(b)
Gains (losses) reclassified from AOCI into income for foreign currency forward exchange contracts were included in selling, marketing and administrative expenses. Losses reclassified from AOCI into income for interest rate swap agreements were included in interest expense.
The amount of pretax net losses on derivative instruments, including interest rate swap agreements and foreign currency forward exchange contracts expected to be reclassified into earnings in the next 12 months was approximately $8,287 as of March 31, 2019. This amount is primarily associated with interest rate swap agreements.
Fair Value Hedging Relationships