Edgar Filing: HERSHEY CO

2013_Form10-K_DRAFT Q4

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

x Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2013

¨ 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.)

100 Crystal A Drive, Hershey, PA	17033
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (717) 534-4200

Securities registered pursuant to Section 12(b) of the Act:
Title of each class	Name of each exchange on which registered
Common Stock, one dollar par value	New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Title of class
Class B Common Stock, one dollar par value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

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” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)

Large accelerated filer x Accelerated filer ¨

Non-accelerated filer ¨ Smaller reporting company ¨

(Do not check if a smaller reporting company)

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

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter.

Common Stock, one dollar par value—$13,338,511,816 as of June 28, 2013.

Class B Common Stock, one dollar par value—$1,478,477 as of June 28, 2013. While the Class B Common Stock is not listed for public trading on any exchange or market system, shares of that class are convertible into shares of Common Stock at any time on a share-for-share basis. The market value indicated is calculated based on the closing price of the Common Stock on the New York Stock Exchange on June 28, 2013.

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—163,185,446 shares, as of February 7, 2014.

Class B Common Stock, one dollar par value—60,619,777 shares, as of February 7, 2014.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Company’s Proxy Statement for the Company’s 2014 Annual Meeting of Stockholders are incorporated by reference into Part III of this report.

PART I


Item 1.	BUSINESS

The Hershey Company was incorporated under the laws of the State of Delaware on October 24, 1927 as a successor to a business founded in 1894 by Milton S. Hershey. In this report, the terms “Company,” “we,” “us,” or “our” mean The Hershey Company and its wholly-owned subsidiaries and entities in which it has a controlling financial interest, unless the context indicates otherwise.

We are the largest producer of quality chocolate in North America and a global leader in chocolate and sugar confectionery. Our principal product groups include chocolate and sugar confectionery products; pantry items, such as baking ingredients, toppings and beverages; and gum and mint refreshment products.

Reportable Segment

We operate as a single reportable segment in manufacturing, marketing, selling and distributing our products under more than 80 brand names. Our two operating segments comprise geographic regions including North America and International. We market our products in approximately 70 countries worldwide.

For segment reporting purposes, we aggregate the operations of North America and International to form one reportable segment. We base this aggregation on similar economic characteristics; products and services; production processes; types or classes of customers; distribution methods; and the similar nature of the regulatory environment in each location.

Organization

We operate under a matrix reporting structure designed to ensure continued focus on North America and on continuing our transformation into a more global company. Our business is organized around geographic regions and strategic business units. It is designed to enable us to build processes for repeatable success in our global markets.

Our geographic regions are accountable for delivering our annual financial plans. The key regions are:



Ÿ	North America, including the United States and Canada; and
Ÿ	International, including Latin America, Asia, Europe, Africa and exports to these regions.

In addition, The Hershey Experience manages our retail operations globally, including Hershey’s Chocolate World Stores in Hershey, Pennsylvania, New York City, Chicago, Shanghai, Niagara Falls (Ontario), Dubai, and Singapore.

Our two strategic business units are the chocolate business unit and the sweets and refreshment business unit. These strategic business units focus on specific components of our product line and are responsible for building and leveraging the Company’s global brands, and disseminating best demonstrated practices around the world.

Business Acquisitions

In December 2013, we entered into an agreement to acquire all of the outstanding shares of Shanghai Golden Monkey Food Joint Stock Co., Ltd. (“SGM”), a privately held confectionery company based in Shanghai, China. SGM manufactures, markets and distributes Golden Monkey branded products, including candy, chocolates, protein-based products and snack foods, in China. As of the date of the agreement, SGM manufactured products in five cities and had more than 130 sales offices and approximately 1,700 sales representatives and 2,000 distributors covering all regions and trade channels in China.

In January 2012, we acquired all of the outstanding stock of Brookside Foods Ltd. (“Brookside”), a privately held confectionery company based in Abbottsford, British Columbia, Canada. As part of this transaction, we acquired two production facilities located in British Columbia and Quebec. The Brookside product line is primarily sold in the U.S. and Canada in a take-home re-sealable pack type.

Products

North America

United States

The primary products we sell in the United States include the following:



Under the HERSHEY’S brand franchise:
HERSHEY’S milk chocolate bar	HERSHEY’S BLISS chocolates
HERSHEY’S milk chocolate with almonds bar	HERSHEY’S COOKIES ‘N’ CRÈME candy bar
HERSHEY’S Extra Dark pure dark chocolate	HERSHEY’S COOKIES ‘N’ CRÈME DROPS candy
HERSHEY’S Nuggets chocolates	HERSHEY’S POT OF GOLD boxed chocolates
HERSHEY’S Drops chocolates	HERSHEY’S sugar free chocolate candy
HERSHEY’S AIR DELIGHT aerated milk chocolate	HERSHEY’S HUGS candies
HERSHEY’S Miniatures chocolate candy	HERSHEY'S SIMPLE PLEASURES candy
	HERSHEY'S Spreads



Under the REESE’S brand franchise:
REESE’S peanut butter cups	REESE’S sugar free peanut butter cups
REESE’S peanut butter cups minis	REESE’S crispy and crunchy bar
REESE’S PIECES candy	REESESTICKS wafer bars
REESE’S Big Cup peanut butter cups	REESE’S FAST BREAK candy bar
REESE’S NUTRAGEOUS candy bar

Under the KISSES brand franchise:

HERSHEY’S KISSES brand milk chocolates

HERSHEY’S KISSES brand milk chocolates with almonds

HERSHEY’S KISSES brand milk chocolates filled with caramel

HERSHEY’S KISSES brand SPECIAL DARK mildly sweet chocolates

HERSHEY'S KISSES brand Cookies 'n' Creme candies

Our other products we sell in the United States include the following:



5^th AVENUE candy bar	PAYDAY peanut caramel bar
ALMOND JOY candy bar	ROLO caramels in milk chocolate
ALMOND JOY PIECES candy	ROLO Minis
BROOKSIDE chocolate covered real fruit juice pieces	SKOR toffee bar
CADBURY chocolates	SPECIAL DARK mildly sweet chocolate bar
CARAMELLO candy bar	SPECIAL DARK PIECES candy
GOOD & PLENTY candy	SYMPHONY milk chocolate bar
HEATH toffee bar	SYMPHONY milk chocolate bar with almonds and toffee
JOLLY RANCHER candy	TAKE5 candy bar
JOLLY RANCHER CRUNCH 'N CHEW candy	TWIZZLERS candy
JOLLY RANCHER sugar free candy	TWIZZLERS sugar free candy
KIT KAT BIG KAT wafer bar	WHATCHAMACALLIT candy bar
KIT KAT wafer bar	WHOPPERS malted milk balls
KIT KAT Minis	YORK Minis
LANCASTER Caramel Soft Crèmes	YORK peppermint pattie
MAUNA LOA macadamia snack nuts	YORK sugar free peppermint pattie
MILK DUDS candy	YORK PIECES candy
MOUNDS candy bar	ZAGNUT candy bar
MR. GOODBAR chocolate bar	ZERO candy bar

We also sell products in the United States under the following product lines:

Premium products

Artisan Confections Company, a wholly-owned subsidiary of The Hershey Company, markets SCHARFFEN BERGER high-cacao dark chocolate products, and DAGOBA natural and organic chocolate products. Our SCHARFFEN BERGER products include chocolate bars and tasting squares. DAGOBA products include chocolate bars, drinking chocolate and baking products.

Refreshment products

Our line of refreshment products includes ICE BREAKERS mints and chewing gum, ICE BREAKERS ICE CUBES chewing gum, BREATH SAVERS mints, and BUBBLE YUM bubble gum.

Pantry items

Pantry items include HERSHEY’S, REESE’S, HEATH, and SCHARFFEN BERGER baking products. Our toppings and sundae syrups include REESE’S, HEATH and HERSHEY’S. We sell hot cocoa mix under the HERSHEY’S BLISS brand name.

Canada

In Canada we sell HERSHEY’S milk chocolate bars and milk chocolate with almonds bars; OH HENRY! candy bars; REESE PEANUT BUTTER CUPS candy; HERSHEY’S KISSES brand milk chocolates; TWIZZLERS candy; GLOSETTE chocolate-covered raisins, peanuts and almonds; JOLLY RANCHER candy; WHOPPERS malted milk balls; SKOR toffee bars; EAT MORE candy bars; POT OF GOLD boxed chocolates; BROOKSIDE chocolate-covered fruit, real fruit juice pieces and nuts; and CHIPITS chocolate chips.

International

The primary products we sell in our International businesses include the following:

China

We import, market, sell and distribute chocolate and candy products in China, primarily under the HERSHEY’S, KISSES and LANCASTER brands.

Mexico

We manufacture, import, market, sell and distribute chocolate, sweets, refreshment and beverage products in Mexico under the HERSHEY’S, KISSES, JOLLY RANCHER and PELON PELO RICO brands.

Brazil

We manufacture, import and market chocolate, sweets and refreshment products in Brazil, including HERSHEY’S chocolate and confectionery items and IO-IO items.

India

We manufacture, market, sell and distribute sugar confectionery, beverage and cooking oil products in India, including NUTRINE and MAHA LACTO confectionery products and JUMPIN and SOFIT beverage products.

Other International

We also export, market, sell and distribute chocolate, sweets and refreshment products in Central America and Puerto Rico, and other countries in Latin America, Asia, Europe, the Middle East and Africa regions. We license the VAN HOUTEN brand name and related trademarks to sell chocolate products, cocoa, and baking products in Asia and the Middle East for the retail and duty-free distribution channels.

Customers

Full-time sales representatives and food brokers sell our products to our customers. Our customers are mainly wholesale distributors, chain grocery stores, mass merchandisers, chain drug stores, vending companies, wholesale clubs, convenience stores, dollar stores, concessionaires and department stores. Except for wholesale distributors, our other customers resell our products to end-consumers in retail outlets in North America and other locations worldwide. In 2013, sales to McLane Company, Inc., one of the largest wholesale distributors in the United States to convenience stores, drug stores, wholesale clubs and mass merchandisers, amounted to approximately 25.5% of our total net sales. McLane Company, Inc. is the primary distributor of our products to Wal-Mart Stores, Inc.

Marketing Strategy and Seasonality

The foundation of our marketing strategy is our strong brand equities, product innovation and the consistently superior quality of our products. We devote considerable resources to the identification, development, testing, manufacturing and marketing of new products. We have a variety of promotional programs for our customers as well as advertising and promotional programs for consumers of our products. We use our promotional programs to stimulate sales of certain products at various times throughout the year. Our sales are typically higher during the third and fourth quarters of the year, representing seasonal and holiday-related sales patterns.

Product Distribution

In conjunction with our sales and marketing efforts, our efficient product distribution network helps us maintain sales growth and provide superior customer service. We plan optimum stock levels and work with our customers to set reasonable delivery times. Our distribution network provides for the efficient shipment of our products from our manufacturing plants to strategically located distribution centers. We primarily use common carriers to deliver our products from these distribution points to our customers.

Price Changes

We change prices and weights of our products when necessary to accommodate changes in costs, the competitive environment and profit objectives, while at the same time seeking to maintain consumer value. Price increases and weight changes help to offset increases in our input costs, including raw and packaging materials, fuel, utilities, transportation, and employee benefits.

Usually there is a time lag between the effective date of list price increases and the impact of the price increases on net sales. The impact of price increases is often delayed because we honor previous commitments to planned consumer and customer promotions and merchandising events subsequent to the effective date of the price increases. In addition, promotional allowances may be increased subsequent to the effective date, delaying or partially offsetting the impact of price increases on net sales.

In March 2011, we announced a weighted-average increase in wholesale prices of approximately 9.7% across the majority of our U.S., Puerto Rico and export portfolio, effective immediately. The price increase applied to our instant consumable, multi-pack, packaged candy and grocery lines. Direct buying customers were able to purchase transitional amounts of product into May 2011, and seasonal net price realization did not occur until Easter 2012.

Raw Materials

Cocoa products are the most significant raw materials we use to produce our chocolate products. Cocoa products, including cocoa liquor, cocoa butter and cocoa powder processed from cocoa beans, are used to meet manufacturing requirements. Cocoa products are purchased directly from third-party suppliers. These third-party suppliers source cocoa beans which are grown principally in Far Eastern, West African and South American equatorial regions to produce the cocoa products we purchase. West Africa accounts for approximately 72% of the world’s supply of cocoa beans.

Adverse weather, crop disease, political unrest, and other problems in cocoa-producing countries have caused price fluctuations in the past, but have never resulted in the total loss of a particular producing country’s cocoa crop and/or exports. In the event that a significant disruption occurs in any given country, we believe cocoa from other producing countries and from current physical cocoa stocks in consuming countries would provide a significant supply buffer.

We also use substantial quantities of sugar, Class II fluid dairy milk, peanuts, almonds and energy in our production process. Most of these inputs for our domestic and Canadian operations are purchased from suppliers in the United States. For our international operations, inputs not locally available may be imported from other countries.

We enter into futures contracts and other commodity derivative instruments to manage price risks for cocoa products, sugar, corn sweeteners, natural gas, fuel oil and certain dairy products. For more information on price risks associated with our major raw material requirements, see Commodities-Price Risk Management and Futures Contracts on page 39.

Product Sourcing

We manufacture or contract to our specifications for the manufacture of the products we sell. We enter into manufacturing contracts with third parties to improve our strategic competitive position and achieve cost effective production and sourcing of our products.

Competition

Many of our brands enjoy wide consumer acceptance and are among the leading brands sold in the marketplace in North America and certain markets in Latin America. We sell our brands in highly competitive markets with many other global multinational, national, regional and local firms. Some of our competitors are much larger companies that have greater resources and more substantial international operations. Competition in our product categories is based on product innovation, product quality, price, brand recognition and loyalty, effectiveness of marketing, promotional activity, the ability to identify and satisfy consumer preferences, as well as convenience and service.

Trademarks, Service Marks and License Agreements

We own various registered and unregistered trademarks and service marks, and have rights under licenses to use various trademarks that are of material importance to our business. We also grant trademark licenses to third parties to produce and sell pantry items, flavored milks and various other products primarily under the HERSHEY’S and REESE’S brand names.

We have license agreements with several companies to manufacture and/or sell and distribute certain products. Our rights under these agreements are extendible on a long-term basis at our option. Our most significant licensing agreements are as follows:



Company	Brand	Location	Requirements

Cadbury Ireland Limited	YORK PETER PAUL ALMOND JOY PETER PAUL MOUNDS	Worldwide	None
Cadbury UK Limited	CADBURY CARAMELLO	United States	Minimum sales requirement exceeded in 2013

Société des Produits Nestlé SA	KIT KAT ROLO	United States	Minimum unit volume sales exceeded in 2013

Huhtamäki Oy affiliate	GOOD & PLENTY HEATH JOLLY RANCHER MILK DUDS PAYDAY WHOPPERS	Worldwide	None

Backlog of Orders

We manufacture primarily for stock and fill customer orders from finished goods inventories. While at any given time there may be some backlog of orders, this backlog is not material to our total annual sales.

Research and Development

We engage in a variety of research and development activities in a number of countries, including the United States, Mexico, Brazil, India and China. We develop new products, improve the quality of existing products, improve and modernize production processes, and develop and implement new technologies to enhance the quality and value of both current and proposed product lines. Information concerning our research and development expense is contained in the Notes to the Consolidated Financial Statements, Note 1, Summary of Significant Accounting Policies.

Food Quality and Safety Regulation

The manufacture and sale of consumer food products is highly regulated. In the United States, our activities are subject to regulation by various government agencies, including the Food and Drug Administration, the Department of Agriculture, the Federal Trade Commission, the Department of Commerce and the Environmental Protection Agency, as well as various state and local agencies. Similar agencies also regulate our businesses outside of the United States.

Our Product Excellence Program provides us with an effective product quality and safety program. This program is intended to ensure that all products we purchase, manufacture and distribute are safe, are of high quality and comply with all applicable laws and regulations.

Through our Product Excellence Program, we evaluate the supply chain including ingredients, packaging, processes, products, distribution and the environment to determine where product quality and safety controls are necessary. We identify risks and establish controls intended to ensure product quality and safety. Various government

agencies, third-party firms and our quality assurance staff conduct audits of all facilities that manufacture our products to assure effectiveness and compliance with our program and all applicable laws and regulations.

Employees

As of December 31, 2013, we employed approximately 12,600 full-time and 2,200 part-time employees worldwide. Collective bargaining agreements covered approximately 5,025 employees. During 2014, agreements will be negotiated for certain employees at five facilities outside of the United States, comprising approximately 67% of total employees under collective bargaining agreements. We believe that our employee relations are good.

Financial Information by Geographic Area

Our principal operations and markets are located in the United States. The percentage of total consolidated net sales for our businesses outside of the United States was 16.6% for 2013, 16.2% for 2012 and 15.7% for 2011. The percentage of total consolidated assets outside of the United States as of December 31, 2013 was 19.4% and as of December 31, 2012 was 20.5%.

Corporate Social Responsibility

Our founder, Milton S. Hershey, established an enduring model of responsible citizenship while creating a successful business. Driving sustainable business practices, making a difference in our communities, and operating with the highest integrity are vital parts of our heritage. Milton Hershey School, established by Milton and Catherine Hershey, lies at the center of our unique heritage. Mr. Hershey donated and bequeathed almost his entire fortune to Milton Hershey School, which remains our primary beneficiary and provides a world-class education and nurturing home to nearly 2,000 children in need annually. We continue Milton Hershey's legacy of commitment to consumers, community and children by providing high-quality products while conducting our business in a socially responsible and environmentally sustainable manner.

In 2013, we published our corporate social responsibility (“CSR”) scorecard, which provided an update on the progress we have made in advancing the priorities that were established in our first CSR report. The report outlines how we performed against the identified performance indicators within our four CSR pillars: environment, community, workplace and marketplace.

The safety and health of our employees, and the safety and quality of our products, are consistently at the core of our operations and are areas of ongoing focus for Hershey in the workplace. Our over-arching safety goal is to consistently achieve best in class safety performance, and Hershey has achieved continuous improvement in employee safety in the workplace since 2006. We continue to invest in our quality management systems to ensure product quality and food safety remain top priorities. We carefully monitor and rigorously enforce our high standards of excellence for superior quality, consistency and taste, and absolute food safety.

In 2013, Hershey was recognized for its environmental, social and governance performance by being named to both the Dow Jones Sustainability World Index and the North America Index. Hershey is one of only 13 companies from the Food, Beverage and Tobacco Industry in the World Index and ranked in at least the 90th percentile in each of the three categories of Economic, Environmental and Social Criteria. The Dow Jones Sustainability World Index tracks the performance of the top 10% of the 2,500 largest companies in the S&P Global Broad Market Index that lead the field in terms of sustainability.

Hershey has committed to minimizing the environmental impacts of our operations, regularly reviewing the ways in which we manage our operations and secure our supply of raw materials. Compared with our 2009 baseline, Hershey decreased waste generation by 23% and green house gas emissions by 8%, while improving our company-wide recycling rate to 80%. Additionally, we improved our Carbon Disclosure Project Performance and Disclosure scores. Hershey has made impressive strides in achieving Zero Waste to Landfill status at its facilities, with 8 facilities now operating at this level.

In the marketplace, Hershey focuses on promoting fair and ethical business dealings. A condition of doing business with us is compliance with our Supplier Code of Conduct, which outlines our expectations with regard to our suppliers' commitment to legal compliance and business integrity, social and working conditions, environment and food safety. We continue our leadership role in supporting programs to improve the lives of cocoa farming families through a variety of initiatives. Our 21st Century Cocoa Strategy aims to impact more than 2 million West Africans by

2017 through public/private programs as well as through Hershey initiatives, including the Hershey Learn To Grow farmer and family development centers and CocoaLink, a first-of-its kind approach that uses mobile technology to deliver practical information on agricultural and social programs to rural cocoa farmers. It is our goal to source 100% certified cocoa for our global chocolate product lines by 2020, assuming adequate supply. During 2013, 18% of the cocoa we sourced globally was certified, exceeding our goal for the year. Our active engagement and financial support also continues for the World Cocoa Foundation and the International Cocoa Initiative.

Our employees share their time and resources generously in their communities. Both directly and through the United Way, we contribute to hundreds of agencies that deliver much needed services and resources. In 2012, Hershey donated more than $9 million in cash and product to worthy causes, our employees volunteered more than 200,000 hours in their communities, and we conducted our first “Good to Give Back Week,” a week of volunteerism that saw over 350 employees across the United States and Canada volunteer over 1,300 hours. Our focus on “Kids and Kids at Risk” is supported through contributions to the Children's Miracle Network; Project Fellowship, where employees partner with student homes at the Milton Hershey School; an orphanage for special needs children in the Philippines; and a children's burn center in Guadalajara, Mexico, to name a few.

Our commitment to CSR is yielding powerful results. As we move into new markets and expand our leadership in North America, we are convinced that our values and heritage will be fundamental to our continuing success.

Available Information

We are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended. We file or furnish annual, quarterly and current reports, proxy statements and other information with the United States Securities and Exchange Commission (“SEC”). You may obtain a copy of any of these reports, free of charge, from the Investors section of our website, www.thehersheycompany.com, shortly after we file or furnish the information to the SEC.

You may obtain a copy of any of these reports directly from the SEC’s Public Reference Room. Contact the SEC by calling them at 1-800-SEC-0330 or by submitting a written request to U.S. Securities and Exchange Commission, Office of Investor Education and Advocacy, 100 F Street N.E., Washington, D.C. 20549. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov. You can obtain additional information on how to request public documents from the SEC on their website. The electronic mailbox address of the SEC is publicinfo@sec.gov.

We have a Code of Ethical Business Conduct that applies to our Board of Directors and all Company officers and employees, including, without limitation, our Chief Executive Officer and “senior financial officers” (including the Chief Financial Officer, Chief Accounting Officer and persons performing similar functions). You can obtain a copy of our Code of Ethical Business Conduct from the Investors section of our website, www.thehersheycompany.com. If we change or waive any portion of the Code of Ethical Business Conduct that applies to any of our directors, executive officers or senior financial officers, we will post that information on our website.

We also post our Corporate Governance Guidelines and charters for each of the Board’s standing committees in the Investors section of our website, www.thehersheycompany.com. The Board of Directors adopted these Guidelines and charters.

We will provide to any stockholder a copy of one or more of the Exhibits listed in Part IV of this report, upon request. We charge a small copying fee for these exhibits to cover our costs. To request a copy of any of these documents, you can contact us at The Hershey Company, Attn: Investor Relations Department, 100 Crystal A Drive, Hershey, Pennsylvania 17033-0810.


Item 1A.	RISK FACTORS

We are subject to changing economic, competitive, regulatory and technological risks and uncertainties that could have a material impact on our business, financial condition or results of operations. In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, we note the following factors that, among others, could cause future results to differ materially from the forward-looking statements, expectations and assumptions expressed or implied in this report. Many of the forward-looking statements contained in this document may be identified by the use of words such as “intend,” “believe,” “expect,” “anticipate,” “should,” “planned,” “projected,” “estimated” and “potential,” among others. Among the factors that could cause our actual results to differ materially from the results projected in our forward-looking statements or could materially and adversely affect our business, financial condition or results of operations are the risk factors described below.

Issues or concerns related to the quality and safety of our products, ingredients or packaging could cause a product recall and/or result in harm to the Company’s reputation, negatively impacting our operating results.

In order to sell our iconic, branded products, we need to maintain a good reputation with our customers and consumers. Issues related to quality and safety of our products, ingredients or packaging, could jeopardize our Company’s image and reputation. Negative publicity related to these types of concerns, or related to product contamination or product tampering, whether valid or not, could decrease demand for our products, or cause production and delivery disruptions. We may need to recall products if any of our products become unfit for consumption. In addition, we could potentially be subject to litigation or government actions, which could result in payments of fines or damages. Costs associated with these potential actions could negatively affect our operating results.

Increases in raw material and energy costs along with the availability of adequate supplies of raw materials could affect future financial results.

We use many different commodities for our business, including cocoa products, sugar, dairy products, peanuts, almonds, corn sweeteners, natural gas and fuel oil.

Commodities are subject to price volatility and changes in supply caused by numerous factors, including:



Ÿ	Commodity market fluctuations;
Ÿ	Currency exchange rates;
Ÿ	Imbalances between supply and demand;
Ÿ	The effect of weather on crop yield;
Ÿ	Speculative influences;
Ÿ	Trade agreements among producing and consuming nations;
Ÿ	Supplier compliance with commitments;
Ÿ	Political unrest in producing countries; and
Ÿ	Changes in governmental agricultural programs and energy policies.

Although we use forward contracts and commodity futures and options contracts, where possible, to hedge commodity prices, commodity price increases ultimately result in corresponding increases in our raw material and energy costs. If we are unable to offset cost increases for major raw materials and energy, there could be a negative impact on our financial condition and results of operations.

Price increases may not be sufficient to offset cost increases and maintain profitability or may result in sales volume declines associated with pricing elasticity.

We may be able to pass some or all raw material, energy and other input cost increases to customers by increasing the selling prices of our products or decreasing the size of our products; however, higher product prices or decreased product sizes may also result in a reduction in sales volume and/or consumption. If we are not able to increase our selling prices or reduce product sizes sufficiently to offset increased raw material, energy or other input costs, including packaging, direct labor, overhead and employee benefits, or if our sales volume decreases significantly, there could be a negative impact on our financial condition and results of operations.

Market demand for new and existing products could decline.

We operate in highly competitive markets and rely on continued demand for our products. To generate revenues and profits, we must sell products that appeal to our customers and to consumers. Our continued success is impacted by many factors, including the following:



Ÿ	Effective retail execution;
Ÿ	Appropriate advertising campaigns and marketing programs;
Ÿ	Our ability to secure adequate shelf space at retail locations;
Ÿ	Product innovation, including maintaining a strong pipeline of new products;
Ÿ	Changes in product category consumption;
Ÿ	Our response to consumer demographics and trends; and
Ÿ	Consumer health concerns, including obesity and the consumption of certain ingredients.

There continue to be competitive product and pricing pressures in these markets, as well as challenges in maintaining profit margins. We must maintain mutually beneficial relationships with our key customers, including retailers and distributors, to compete effectively. Our largest customer, McLane Company, Inc., accounted for approximately 25.5% of our total net sales in 2013. McLane Company, Inc. is one of the largest wholesale distributors in the United States to convenience stores, drug stores, wholesale clubs and mass merchandisers, including Wal-Mart Stores, Inc.

Increased marketplace competition could hurt our business.

The global confectionery packaged goods industry is intensely competitive and consolidation in this industry continues. Some of our competitors are much larger companies that have greater resources and more substantial international operations. In order to protect our existing market share or capture increased market share in this highly competitive retail environment, we may be required to increase expenditures for promotions and advertising, and continue to introduce and establish new products. Due to inherent risks in the marketplace associated with advertising and new product introductions, including uncertainties about trade and consumer acceptance, increased expenditures may not prove successful in maintaining or enhancing our market share and could result in lower sales and profits. In addition, we may incur increased credit and other business risks because we operate in a highly competitive retail environment.

Disruption to our manufacturing operations or our supply chain could impair our ability to produce or deliver our finished products, resulting in a negative impact on our operating results.

Approximately three-quarters of our manufacturing capacity is located in the United States. Disruption to our global manufacturing operations or our supply chain could result from, among other factors, the following:



Ÿ	Natural disaster;
Ÿ	Pandemic outbreak of disease;
Ÿ	Weather;
Ÿ	Fire or explosion;
Ÿ	Terrorism or other acts of violence;
Ÿ	Labor strikes or other labor activities;
Ÿ	Unavailability of raw or packaging materials; and
Ÿ	Operational and/or financial instability of key suppliers, and other vendors or service providers.

We believe that we take adequate precautions to mitigate the impact of possible disruptions. We have strategies and plans in place to manage such events if they were to occur, including our global supply chain strategies and our principle-based global labor relations strategy. If we are unable, or find that it is not financially feasible, to effectively plan for or mitigate potential impacts of such disruptive events on our manufacturing operations or supply chain, our financial condition and results of operations could be negatively impacted if such events were to occur.

Our financial results may be adversely impacted by the failure to successfully execute or integrate acquisitions, divestitures and joint ventures.

From time to time, we may evaluate potential acquisitions, divestitures or joint ventures that align with our strategic objectives. The success of such activity depends, in part, upon our ability to identify suitable buyers, sellers or business partners; perform effective assessments prior to contract execution; negotiate contract terms; and, if applicable, obtain government approval. These activities may present certain financial, managerial, staffing and talent, and operational risks, including diversion of management’s attention from existing core businesses; difficulties integrating or separating businesses from existing operations; and challenges presented by acquisitions or joint ventures which may not achieve sales levels and profitability that justify the investments made. If the acquisitions, divestitures or joint ventures are not successfully implemented or completed, there could be a negative impact on our financial condition, results of operations and cash flows.

Changes in governmental laws and regulations could increase our costs and liabilities or impact demand for our products.

Changes in laws and regulations and the manner in which they are interpreted or applied may alter our business environment. These negative impacts could result from changes in food and drug laws, laws related to advertising and marketing practices, accounting standards, taxation requirements, competition laws, employment laws and environmental laws, among others. It is possible that we could become subject to additional liabilities in the future resulting from changes in laws and regulations that could result in an adverse effect on our financial condition and results of operations.

Political, economic, and/or financial market conditions could negatively impact our financial results.

Our operations are impacted by consumer spending levels and impulse purchases which are affected by general macroeconomic conditions, consumer confidence, employment levels, availability of consumer credit and interest rates on that credit, consumer debt levels, energy costs and other factors. Volatility in food and energy costs, sustained global recessions, rising unemployment and declines in personal spending could adversely impact our revenues, profitability and financial condition.

Changes in financial market conditions may make it difficult to access credit markets on commercially acceptable terms which may reduce liquidity or increase borrowing costs for our Company, our customers and our suppliers. A significant reduction in liquidity could increase counterparty risk associated with certain suppliers and service providers, resulting in disruption to our supply chain and/or higher costs, and could impact our customers, resulting in a reduction in our revenue, or a possible increase in bad debt expense.

International operations may not achieve projected growth objectives, which could adversely impact our overall business and results of operations.

In 2013, we derived approximately 16.6% of our net sales from customers located outside of the United States. Additionally, 19.4% of our total consolidated assets were located outside of the United States as of December 31, 2013. As part of our global growth strategy, we are increasing our investments outside of the United States, particularly in Mexico, Brazil, India and China. As a result, we are subject to numerous risks and uncertainties relating to international sales and operations, including:



Ÿ	Unforeseen global economic and environmental changes resulting in business interruption, supply constraints, inflation, deflation or decreased demand;
Ÿ	Inability to establish, develop and achieve market acceptance of our global brands in international markets;
Ÿ	Difficulties and costs associated with compliance and enforcement of remedies under a wide variety of complex laws, treaties and regulations;
Ÿ	Unexpected changes in regulatory environments;
Ÿ	Political and economic instability, including the possibility of civil unrest, terrorism, mass violence or armed conflict;
Ÿ	Nationalization of our properties by foreign governments;
Ÿ	Tax rates that may exceed those in the United States and earnings that may be subject to withholding requirements and incremental taxes upon repatriation;
Ÿ	Potentially negative consequences from changes in tax laws;
Ÿ	The imposition of tariffs, quotas, trade barriers, other trade protection measures and import or export licensing requirements;
Ÿ	Increased costs, disruptions in shipping or reduced availability of freight transportation;
Ÿ	The impact of currency exchange rate fluctuations between the U.S. dollar and foreign currencies;
Ÿ	Failure to gain sufficient profitable scale in certain international markets resulting in losses from impairment or sale of assets; and
Ÿ	Failure to recruit, retain and build a talented and engaged global workforce.

If we are not able to achieve our projected international growth objectives and mitigate numerous risks and uncertainties associated with our international operations, there could be a negative impact on our financial condition and results of operations.

Disruptions, failures or security breaches of our information technology infrastructure could have a negative impact on our operations.

Information technology is critically important to our business operations. We use information technology to manage all business processes including manufacturing, financial, logistics, sales, marketing and administrative functions. These processes collect, interpret and distribute business data and communicate internally and externally with employees, suppliers, customers and others.

We invest in industry standard security technology to protect the Company’s data and business processes against risk of data security breach and cyber attack. Our data security management program includes identity, trust, vulnerability and threat management business processes as well as adoption of standard data protection policies. We measure our data security effectiveness through industry accepted methods and remediate significant findings. Additionally, we certify our major technology suppliers and any outsourced services through accepted security certification standards. We maintain and routinely test backup systems and disaster recovery, along with external network security penetration testing by an independent third party as part of our business continuity preparedness. We also have processes in place to prevent disruptions resulting from the implementation of new software and systems of the latest technology.

While we believe that our security technology and processes provide adequate measures of protection against security breaches and in reducing cybersecurity risks, disruptions in or failures of information technology systems are possible and could have a negative impact on our operations or business reputation. Failure of our systems, including failures due to cyber attacks that would prevent the ability of systems to function as intended, could cause transaction

errors, loss of customers and sales, and could have negative consequences to our Company, our employees, and those with whom we do business.

Future developments related to civil antitrust lawsuits and the possible investigation by government regulators of alleged pricing practices by members of the confectionery industry in the United States could negatively impact our reputation and our operating results.

We are a defendant in a number of civil antitrust lawsuits in the United States, including individual, class, and putative class actions brought against us by purchasers of our products. The U.S. Department of Justice also notified the Company in 2007 that it had opened an inquiry into certain alleged pricing practices by members of the confectionery industry, but has not requested any information or documents. Additional information about these proceedings is contained in Item 3. Legal Proceedings of this Form 10-K.

Competition and antitrust law investigations can be lengthy and violators are subject to civil and/or criminal fines and other sanctions. Class action civil antitrust lawsuits are expensive to defend and could result in significant judgments, including in some cases, payment of treble damages and/or attorneys' fees to the successful plaintiff. Additionally, negative publicity involving these proceedings could affect our Company's brands and reputation, possibly resulting in decreased demand for our products. These possible consequences, in our opinion, currently are not expected to materially impact our financial position or liquidity, but could materially impact our results of operations and cash flows in the period in which any fines, settlements or judgments are accrued or paid, respectively.


Item 1B.	UNRESOLVED STAFF COMMENTS

None.


Item 2.	PROPERTIES

Our principal properties include the following:



Country	Location	Type	Status (Own/Lease)
United States	Hershey, Pennsylvania (2 principal plants)	Manufacturing—confectionery products and pantry items	Own
	Lancaster, Pennsylvania	Manufacturing—confectionery products	Own
	Robinson, Illinois	Manufacturing—confectionery products, and pantry items	Own
	Stuarts Draft, Virginia	Manufacturing—confectionery products and pantry items	Own
	Edwardsville, Illinois	Distribution	Own
	Palmyra, Pennsylvania	Distribution	Own
	Ogden, Utah	Distribution	Own
Canada	Brantford, Ontario	Distribution	Own⁽¹⁾
Mexico	Monterrey, Mexico	Manufacturing—confectionery products	Own

(1) We have an agreement with the Ferrero Group for the use of a warehouse and distribution facility of which the Company has been deemed to be the owner for accounting purposes.

In addition to the locations indicated above, we also own or lease several other properties and buildings worldwide which we use for manufacturing, sales, distribution and administrative functions. Our facilities are well maintained and generally have adequate capacity to accommodate seasonal demands, changing product mixes and certain additional growth. The largest facilities are located in Hershey and Lancaster, Pennsylvania; Monterrey, Mexico; and Stuarts Draft, Virginia. We continually improve these facilities to incorporate the latest technologies.


Item 3.	LEGAL PROCEEDINGS

In 2007, the Competition Bureau of Canada began an inquiry into alleged violations of the Canadian Competition Act in the sale and supply of chocolate products sold in Canada between 2002 and 2008 by members of the confectionery industry, including Hershey Canada, Inc. The U.S. Department of Justice also notified the Company in 2007 that it had opened an inquiry, but has not requested any information or documents.

Subsequently, 13 civil lawsuits were filed in Canada and 91 civil lawsuits were filed in the United States against the Company. The lawsuits were instituted on behalf of direct purchasers of our products as well as indirect purchasers that purchase our products for use or for resale. Several other chocolate and confectionery companies were named as defendants in these lawsuits as they also were the subject of investigations and/or inquiries by the government entities referenced above. The cases seek recovery for losses suffered as a result of alleged conspiracies in restraint of trade in connection with the pricing practices of the defendants. The Canadian civil cases were settled in 2012. Hershey Canada, Inc. reached a settlement agreement with the Competition Bureau of Canada through their Leniency Program with regard to an inquiry into alleged violations of the Canadian Competition Act in the sale and supply of chocolate products sold in Canada by members of the confectionery industry. On June 21, 2013, Hershey Canada, Inc. pleaded guilty to one count of price fixing related to communications with competitors in Canada in 2007 and paid a fine of approximately $4.0 million. Hershey Canada, Inc. had promptly reported the conduct to the Competition Bureau, cooperated fully with its investigation and did not implement the planned price increase that was the subject of the 2007 communications.

With regard to the U.S. lawsuits, the Judicial Panel on Multidistrict Litigation assigned the cases to the U.S. District Court for the Middle District of Pennsylvania. Plaintiffs are seeking actual and treble damages against the Company and other defendants based on an alleged overcharge for certain, or in some cases all chocolate products sold in the U.S. between December 2002 and December 2007 and certain plaintiff groups have alleged damages that extend beyond the alleged conspiracy period. The lawsuits have been proceeding on different scheduling tracks for different groups of plaintiffs.

Defendants have briefed summary judgment against the direct purchaser plaintiffs that have not sought class certification (the “Opt-Out Plaintiffs”) and those that have (the “Direct Purchaser Class Plaintiffs”). The Direct Purchaser Class Plaintiffs were granted class certification in December 2012. Liability, fact and expert discovery in the Opt-Out Plaintiffs’ and Direct Purchaser Class Plaintiffs’ cases has been completed. The hearing on summary judgment for the Direct Purchaser Class Plaintiffs, combined with the summary judgment hearing for the Opt-Out Plaintiffs, was held on October 7, 2013. A decision is expected in the near term. Putative class plaintiffs that purchased product indirectly for resale (the “Indirect Purchasers for Resale”) have moved for class certification. A briefing schedule has not been finalized. Putative class plaintiffs that purchased product indirectly for use (the “Indirect End Users”) may seek class certification after summary judgment against the Direct Purchaser Class Plaintiffs and the Opt-Out Plaintiffs has been resolved. No trial date has been set for any group of plaintiffs. The Company will continue to vigorously defend against these lawsuits.

Competition and antitrust law investigations can be lengthy and violations are subject to civil and/or criminal fines and other sanctions. Class action civil antitrust lawsuits are expensive to defend and could result in significant judgments, including in some cases, payment of treble damages and/or attorneys' fees to the successful plaintiff. Additionally, negative publicity involving these proceedings could affect our Company's brands and reputation, possibly resulting in decreased demand for our products. These possible consequences, in our opinion, are currently not expected to materially impact our financial position or liquidity, but could materially impact our results of operations and cash flows in the period in which any fines, settlements or judgments are accrued or paid, respectively.

We have no other material pending legal proceedings, other than ordinary routine litigation incidental to our business.


Item 4.	MINE SAFETY DISCLOSURES

Not applicable.

PART II


Item 5.	MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

We paid $393.8 million in cash dividends on our Common Stock and Class B Common Stock (“Class B Stock”) in 2013 and $341.2 million in 2012. The annual dividend rate on our Common Stock in 2013 was $1.81 per share.

On January 30, 2014, our Board of Directors declared a quarterly dividend of $0.485 per share of Common Stock payable on March 14, 2014, to stockholders of record as of February 24, 2014. It is the Company’s 337th consecutive quarterly Common Stock dividend. A quarterly dividend of $0.435 per share of Class B Stock also was declared.

Our Common Stock is listed and traded principally on the New York Stock Exchange (“NYSE”) under the ticker symbol “HSY.” Approximately 229.8 million shares of our Common Stock were traded during 2013. The Class B Stock is not publicly traded.

The closing price of our Common Stock on December 31, 2013, was $97.23. There were 35,859 stockholders of record of our Common Stock and 6 stockholders of record of our Class B Stock as of December 31, 2013.

Information regarding dividends paid and the quarterly high and low market prices for our Common Stock and dividends paid for our Class B Stock for the two most recent fiscal years is disclosed in Note 20, Quarterly Data.

Unregistered Sales of Equity Securities and Use of Proceeds

None.

Issuer Purchases of Equity Securities

There were no purchases of our Common Stock during the three months ended December 31, 2013. In April 2011, our Board of Directors approved a $250 million share repurchase program. As of December 31, 2013, $125.1 million remained available for repurchases of our Common Stock under this program.

Performance Graph

The following graph compares our cumulative total shareholder return (Common Stock price appreciation plus dividends, on a reinvested basis) over the last five fiscal years with the Standard & Poor’s 500 Index and the Standard & Poor’s Packaged Foods Index.

*Hypothetical $100 invested on December 31, 2008 in Hershey Common Stock, S&P 500 Index and S&P 500 Packaged Foods Index, assuming reinvestment of dividends.

Item 6. SELECTED FINANCIAL DATA

SIX-YEAR CONSOLIDATED FINANCIAL SUMMARY

All dollar and share amounts in thousands except market price

and per share statistics



	5-Year Compound Growth Rate		2013		2012	2011		2010	2009	2008
Summary of Operations
Net Sales	6.8	%	$	7,146,079	6,644,252	6,080,788		5,671,009	5,298,668	5,132,768

Cost of Sales	2.7	%	$	3,865,231	3,784,370	3,548,896		3,255,801	3,245,531	3,375,050
Selling, Marketing and Administrative	12.4	%	$	1,922,508	1,703,796	1,477,750		1,426,477	1,208,672	1,073,019
Business Realignment and Impairment Charges (Credits), Net	(27.7	)%	$	18,665	44,938	(886	)	83,433	82,875	94,801
Interest Expense, Net	(2.0	)%	$	88,356	95,569	92,183		96,434	90,459	97,876
Provision for Income Taxes	19.0	%	$	430,849	354,648	333,883		299,065	235,137	180,617

Net Income	21.4	%	$	820,470	660,931	628,962		509,799	435,994	311,405

Net Income Per Share:
—Basic—Class B Stock	21.7	%	$	3.39	2.73	2.58		2.08	1.77	1.27
—Diluted—Class B Stock	21.6	%	$	3.37	2.71	2.56		2.07	1.77	1.27
—Basic—Common Stock	21.7	%	$	3.76	3.01	2.85		2.29	1.97	1.41
—Diluted—Common Stock	21.6	%	$	3.61	2.89	2.74		2.21	1.90	1.36
Weighted-Average Shares Outstanding:
—Basic—Common Stock			163,549		164,406	165,929		167,032	167,136	166,709
—Basic—Class B Stock			60,627		60,630	60,645		60,708	60,709	60,777
—Diluted			227,203		228,337	229,919		230,313	228,995	228,697
Dividends Paid on Common Stock	8.3	%	$	294,979	255,596	228,269		213,013	198,371	197,839
Per Share	8.7	%	$	1.81	1.56	1.38		1.28	1.19	1.19
Dividends Paid on Class B Stock	8.7	%	$	98,822	85,610	75,814		70,421	65,032	65,110
Per Share	8.8	%	$	1.63	1.41	1.25		1.16	1.07	1.07
Depreciation	(6.0	)%	$	166,544	174,788	188,491		169,677	157,996	227,183
Advertising	29.3	%	$	582,354	480,016	414,171		391,145	241,184	161,133
Salaries and wages	2.7	%	$	735,889	709,621	676,482		641,756	613,568	645,456

Year-end Position and Statistics
Capital Additions	4.3	%	$	323,551	258,727	323,961		179,538	126,324	262,643
Capitalized Software Additions	6.1	%	$	27,360	19,239	23,606		21,949	19,146	20,336
Total Assets	8.1	%	$	5,357,488	4,754,839	4,407,094		4,267,627	3,669,926	3,629,614
Short-term Debt and Current Portion of Long-term Debt	(19.8	)%	$	166,875	375,898	139,673		285,480	39,313	501,504
Long-term Portion of Debt	3.6	%	$	1,795,142	1,530,967	1,748,500		1,541,825	1,502,730	1,505,954
Stockholders’ Equity	35.2	%	$	1,616,052	1,048,373	880,943		945,896	768,634	358,239
Full-time Employees			12,600		12,100	11,800		11,300	12,100	12,800
Stockholders’ Data
Outstanding Shares of Common Stock and Class B Stock at Year-end			223,895		223,786	225,206		227,030	227,998	227,035
Market Price of Common Stock at Year-end	22.9	%	$	97.23	72.22	61.78		47.15	35.79	34.74
Price Range During Year (high)			$	100.90	74.64	62.26		52.10	42.25	44.32
Price Range During Year (low)			$	73.51	59.49	46.24		35.76	30.27	32.10


Item 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

EXECUTIVE OVERVIEW

Results for the year ended December 31, 2013 were strong with increases in net sales, earnings per share and profitability despite continued macroeconomic challenges. Net sales increased 7.6% compared with 2012 due to sales volume increases in the United States and key international markets as we continued our focus on core brands and innovation. Advertising expense increased 21.3% for the year, supporting core brands along with new product launches. Net income and earnings per share-diluted also increased at greater rates than our long-term growth targets. The investments we have made in both productivity and cost savings resulted in a business model that is more efficient and effective, enabling us to deliver predictable, consistent and achievable marketplace and financial performance. We continue to generate strong cash flow from operations and our financial position remains solid.

Adjusted Non-GAAP Financial Measures

Our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section includes certain measures of financial performance that are not defined by U.S. generally accepted accounting principles (“GAAP”). For each of these non-GAAP financial measures, we are providing below (1) the most directly comparable GAAP measure; (2) a reconciliation of the differences between the non-GAAP measure and the most directly comparable GAAP measure; (3) an explanation of why our management believes these non-GAAP measures provide useful information to investors; and (4) additional purposes for which we use these non-GAAP measures.

We believe that the disclosure of these non-GAAP measures provides investors with a better comparison of our year-to-year operating results. We exclude the effects of certain items from Income before Interest and Income Taxes (“EBIT”), EBIT margin, Net Income and Income per Share-Diluted-Common Stock (“EPS”) when we evaluate key measures of our performance internally, and in assessing the impact of known trends and uncertainties on our business. We also believe that excluding the effects of these items provides a more balanced view of the underlying dynamics of our business.

Adjusted non-GAAP financial measures exclude the impacts of charges or credits recorded during the last four years associated with our business realignment initiatives and impairment charges. Non-service-related pension expenses also are excluded for each of the last four years, along with acquisition closing, integration and transaction costs, and a gain on the sale of certain non-core trademark licensing rights in 2011.

Non-service-related pension expenses include interest costs, the expected return on pension plan assets, the amortization of actuarial gains and losses, and certain curtailment and settlement losses or credits. Non-service-related pension expenses may be very volatile from year-to-year as a result of changes in interest rates and market returns on pension plan assets. Therefore, we have excluded non-service-related pension expense from our results in accordance with GAAP. We believe that non-GAAP financial results excluding non-service-related pension expenses will provide investors with a better understanding of the underlying profitability of our ongoing business. We believe that the service cost component of our total pension benefit costs closely reflects the operating costs of our business and provides for a better comparison of our operating results from year-to-year. Our most significant defined benefit pension plans were closed to most new participants after 2007, resulting in ongoing service costs that are stable and predictable.



For the years ended December 31,	2013						2012
	EBIT		Net Income		EPS		EBIT		Net Income		EPS
In millions of dollars except per share amounts

Results in accordance with GAAP	$	1,339.7	$	820.5	$	3.61	$	1,111.1	$	660.9	$	2.89
Adjustments:
Business realignment charges included in cost of sales (“COS”)	0.4		0.2		—		36.4		23.7		0.10
Non-service-related pension expense included in COS	5.4		3.3		0.02		8.6		5.3		0.03
Acquisition costs included in COS	0.3		0.2		—		4.1		3.0		0.01
Business realignment charges included in selling, marketing and administrative (“SM&A”)	—		—		—		2.4		1.6		0.01
Non-service-related pension expense included in SM&A	5.5		3.3		0.01		12.0		7.4		0.03
Acquisition costs included in SM&A	3.8		5.2		0.03		9.3		6.2		0.03
Business realignment and impairment charges, net	18.6		11.6		0.05		45.0		31.9		0.14

Adjusted non-GAAP results	$	1,373.7	$	844.3	$	3.72	$	1,228.9	$	740.0	$	3.24



For the years ended December 31,	2011									2010
	EBIT			Net Income			EPS			EBIT		Net Income		EPS
In millions of dollars except per share amounts

Results in accordance with GAAP	$	1,055.0		$	628.9		$	2.74		$	905.3	$	509.8	$	2.21
Adjustments:
Business realignment charges included in COS	45.1			28.4			0.12			13.7		8.4		0.04
Non-service-related pension expense included in COS	—			—			—			0.9		0.6		—
Business realignment charges included in SM&A	5.0			3.0			0.01			1.5		0.9		—
Non-service-related pension expense included in SM&A	2.8			2.0			0.01			5.0		3.2		0.02
Gain on sale of trademark licensing rights included in SM&A	(17.0		)	(11.1		)	(0.05		)	—		—		—
Business realignment and impairment (credits) charges, net	(0.9		)	(0.5		)	—			83.4		68.6		0.30

Adjusted non-GAAP results	$	1,090.0		$	650.7		$	2.83		$	1,009.8	$	591.5	$	2.57



	Adjusted Non-GAAP Results
Key Annual Performance Measures	2013		2012		2011
Increase in Net Sales	7.6	%	9.3	%	7.2	%
Increase in adjusted EBIT	11.8	%	12.7	%	7.9	%
Improvement in adjusted EBIT Margin in basis points (“bps”)	70bps		60bps		10bps
Increase in adjusted EPS	14.8	%	14.5	%	10.1	%

SUMMARY OF OPERATING RESULTS

Analysis of Selected Items from Our GAAP Income Statement



										Percent Change
										Increase (Decrease)
For the years ended December 31,	2013			2012			2011			2013-2012		2012-2011
In millions of dollars except per share amounts

Net Sales	$	7,146.0		$	6,644.3		$	6,080.8		7.6	%	9.3	%
Cost of Sales	3,865.2			3,784.4			3,548.9			2.1		6.6

Gross Profit	3,280.8			2,859.9			2,531.9			14.7		13.0

Gross Margin	45.9		%	43.0		%	41.6		%

SM&A Expense	1,922.5			1,703.8			1,477.8			12.8		15.3

SM&A Expense as a percent of sales	26.9		%	25.6		%	24.3		%

Business Realignment and Impairment Charges (Credits), Net	18.6			45.0			(0.9		)	(58.5	)	N/A

EBIT	1,339.7			1,111.1			1,055.0			20.6		5.3
EBIT Margin	18.7		%	16.7		%	17.4		%

Interest Expense, Net	88.4			95.6			92.2			(7.5	)	3.7
Provision for Income Taxes	430.8			354.6			333.9			21.5		6.2

Effective Income Tax Rate	34.4		%	34.9		%	34.7		%

Net Income	$	820.5		$	660.9		$	628.9		24.1		5.1

Net Income Per Share—Diluted	$	3.61		$	2.89		$	2.74		24.9		5.5

Net Sales

2013 compared with 2012

Net sales increased 7.6% in 2013 compared with 2012 due primarily to sales volume increases. Sales volume increases of 7.8% reflected core brand sales increases and incremental sales of new products in the U.S. and our international businesses. Higher sales of Brookside products contributed approximately 1.3% to the net sales increase. These increases were partially offset by the unfavorable impact of foreign currency exchange rates which reduced net sales by approximately 0.3%. Net sales in U.S. dollars for our businesses outside of the U.S. and Canada increased approximately 15.7% in 2013 compared with 2012, reflecting sales volume increases primarily in our focus markets of China, Mexico and Brazil. Net sales increases for our international businesses were offset somewhat by the impact of unfavorable foreign currency exchange rates.

2012 compared with 2011

Net sales increased 9.3% in 2012 compared with 2011 due to net price realization and sales volume increases in the U.S. and for our international businesses. Net price realization contributed approximately 5.7% to the net sales increase. Sales volume increased net sales by approximately 2.2% due primarily to sales of new products in the U.S. The Brookside acquisition contributed approximately 1.9% to the net sales increase. These increases were partially offset by the unfavorable impact of foreign currency exchange rates which reduced net sales by approximately 0.5%.

Excluding incremental sales from the Brookside acquisition, net sales in the U.S. increased approximately 7.1% compared with 2011, primarily reflecting net price realization, along with sales volume increases from the introduction of new products. Net sales in U.S. dollars for our businesses outside of the U.S. increased approximately 9.1% in 2012 compared with 2011, reflecting sales volume increases and net price realization. Net sales increases for our international businesses were offset somewhat by the impact of unfavorable foreign currency exchange rates.

Key U.S. Marketplace Metrics



For the 52 weeks ended December 31,	2013		2012		2011
Consumer Takeaway Increase	6.3	%	5.7	%	7.8	%
Market Share Increase	1.1		0.6		0.8

Consumer takeaway and the change in market share for 2013 and 2012 are provided for measured channels of distribution accounting for approximately 90% of our U.S. confectionery retail business. These channels of distribution primarily include food, drug, mass merchandisers, including Wal-Mart Stores, Inc., and convenience stores.

Consumer takeaway for 2011 is provided for channels of distribution accounting for approximately 80% of our U.S. confectionery retail business. These channels of distribution include food, drug, mass merchandisers, including Wal-Mart Stores, Inc., and convenience stores. The change in market share for 2011 is provided for channels measured by syndicated data which include sales in the food, drug, convenience store and mass merchandiser classes of trade, excluding sales of Wal-Mart Stores, Inc.

Cost of Sales and Gross Margin

2013 compared with 2012

Cost of sales increased 2.1% in 2013 compared with 2012. The impact of sales volume increases and supply chain cost inflation together increased cost of sales by approximately 9.4%. Lower input costs, supply chain productivity improvements and a favorable sales mix reduced cost of sales by approximately 6.3%. Business realignment and impairment charges of $0.4 million were included in cost of sales in 2013, compared with $36.4 million in the prior year, reducing cost of sales by 1.0%.

Gross margin increased by 2.9 percentage points in 2013 compared with 2012. Reduced input costs, supply chain productivity improvements, a favorable sales mix and lower fixed costs as a percent of sales together improved gross margin by 3.9 percentage points. These improvements were partially offset by supply chain cost inflation which reduced gross margin by 1.6 percentage points. The impact of lower business realignment and impairment charges recorded in 2013 compared with 2012 increased gross margin by 0.6 percentage points.

2012 compared with 2011

The cost of sales increase of 6.6% in 2012 compared with 2011 was primarily due to higher input costs, the impact of sales volume increases and higher supply chain costs which together increased cost of sales by approximately 7.1%. The Brookside acquisition further increased cost of sales by approximately 2.0%. Supply chain productivity improvements reduced cost of sales by approximately 2.5%. Business realignment and impairment charges of $36.4 million were included in cost of sales in 2012, compared with $45.1 million in the prior year.

Gross margin increased by 1.4 percentage points in 2012 compared with 2011, primarily as a result of price realization and supply chain productivity improvements which together improved gross margin by 4.1 percentage points. These improvements were substantially offset by higher input and supply chain costs which reduced gross margin by a total of 2.9 percentage points. The impact of lower business realignment and impairment charges recorded in 2012 compared with 2011 increased gross margin by 0.2 percentage points.

Selling, Marketing and Administrative

2013 compared with 2012

Selling, marketing and administrative expenses increased $218.7 million or 12.8% in 2013. Contributing to the overall increase was a 19.7% increase in advertising, consumer promotions and other marketing expenses to support core brands and the introduction of new products in the U.S. and international markets. Advertising expenses increased 21.3% compared with 2012. Additionally, selling and administrative expenses increased 8.8% primarily as a result of higher employee-related expenses, increased incentive compensation costs, legal fees and increased marketing research expenses, along with the write-off of certain assets associated with the remodeling of increased office space. There were minimal business realignment charges included in SM&A in 2013 compared with $2.5 million in 2012.

2012 compared with 2011

Selling, marketing and administrative expenses increased $226.0 million or 15.3% in 2012. The increase was primarily a result of increased advertising, marketing research and consumer promotion expenses, higher employee-related expenses, increased incentive compensation costs and expenses associated with the Brookside acquisition. In addition, selling, marketing and administrative costs were reduced in 2011 by a $17.0 million gain on the sale of non-core trademark licensing rights. Advertising expense increased approximately 15.9% compared with 2011. Business realignment charges of $2.5 million were included in selling, marketing and administrative expenses in 2012 compared with $5.0 million in 2011.

Business Realignment and Impairment Charges

In June 2010, we announced Project Next Century (the “Next Century program”) as part of our ongoing efforts to create an advantaged supply chain and competitive cost structure. As part of the program, production was transitioned from the Company's century-old facility at 19 East Chocolate Avenue in Hershey, Pennsylvania, to an expanded West Hershey facility, which was built in 1992. Production from the 19 East Chocolate Avenue plant, as well as a portion of the workforce, was fully transitioned to the West Hershey facility during 2012.

We estimate that the Next Century program will incur total pre-tax charges and non-recurring project implementation costs of $190 million to $200 million. As of December 31, 2013, total costs of $190.4 million have been recorded over the last four years for the Next Century program. Total costs of $16.8 million were recorded during 2013. Total costs of $76.3 million were recorded in 2012, total costs of $43.4 million were recorded in 2011 and total costs of $53.9 million were recorded in 2010.

During 2009, we completed our comprehensive, supply chain transformation program initiated in 2006 (the “global supply chain transformation program”).

In December 2012, the Company recorded non-cash asset impairment charges of approximately $7.5 million, primarily associated with the write off of goodwill and other intangible assets of Tri-US, Inc., a subsidiary in which we held a controlling interest.

Charges (credits) associated with business realignment initiatives and impairment recorded during 2013, 2012 and 2011 were as follows:



For the years ended December 31,	2013		2012		2011
In thousands of dollars

Cost of sales
Next Century program	$	402	$	36,383	$	39,280
Global supply chain transformation program	—		—		5,816

Total cost of sales	402		36,383		45,096

Selling, marketing and administrative - Next Century program	18		2,446		4,961

Business realignment and impairment charges, net
Next Century program:
Pension settlement loss	—		15,787		—
Plant closure expenses	16,387		20,780		8,620
Employee separation costs (credits)	—		914		(9,506		)
India voluntary retirement program	2,278		—		—
Tri-US, Inc. asset impairment charges	—		7,457		—

Total business realignment and impairment charges (credits), net	18,665		44,938		(886		)

Total net charges associated with business realignment initiatives and impairment	$	19,085	$	83,767	$	49,171

Next Century Program

Plant closure expenses of $16.4 million were recorded during 2013, primarily related to costs associated with the demolition of a former manufacturing facility.

The charge of $36.4 million recorded in cost of sales during 2012 related primarily to start-up costs and accelerated depreciation of fixed assets over a reduced estimated remaining useful life associated with the Next Century program. A charge of $2.4 million was recorded in selling, marketing and administrative expenses during 2012 for project administration related to the Next Century program. The level of lump sum withdrawals during 2012 from one of the Company's pension plans by employees retiring or leaving the Company, primarily under the Next Century program, resulted in a non-cash pension settlement loss of $15.8 million. Expenses of $20.8 million were recorded in 2012 primarily related to costs associated with the closure of a manufacturing facility and the relocation of production lines.

The charge of $39.3 million recorded in cost of sales during 2011 related primarily to accelerated depreciation of fixed assets over a reduced estimated remaining useful life associated with the Next Century program. A charge of $5.0 million was recorded in selling, marketing and administrative expenses during 2011 for project administration related to the Next Century program. Plant closure expenses of $8.6 million were recorded in 2011 primarily related to costs associated with the relocation of production lines. Employee separation costs were reduced by $9.5 million during 2011, which consisted of an $11.2 million credit reflecting lower expected costs related to voluntary and involuntary terminations at the two manufacturing facilities and a net benefits curtailment loss of $1.7 million also related to the employee terminations.

Global Supply Chain Transformation Program

The charge of $5.8 million recorded in 2011 was due to a decline in the estimated net realizable value of two properties being held for sale.

Tri-US, Inc. Impairment Charges

In February 2011, we acquired a 49% interest in Tri-US, Inc. of Boulder, Colorado, a company that manufactured, marketed and sold nutritional beverages under the “mix1” brand name. We invested $5.8 million and accounted for this investment using the equity method until January 2012. In January 2012, we made an additional investment of $6.0 million in Tri-US, Inc., resulting in a controlling ownership interest of approximately 69%. In December 2012, the Board of Directors of Tri-US, Inc. decided to immediately cease operations and dissolve the company as a result of operational difficulties, quality issues and competitive constraints. It was determined that investments necessary to continue the business would not generate a sufficient return. Accordingly, in December 2012, the Company recorded non-cash asset impairment charges of approximately $7.5 million, primarily associated with the write off of goodwill and other intangible assets. These charges excluded the portion of the losses attributable to the noncontrolling interests.

Liabilities Associated with Business Realignment Initiatives

As of December 31, 2013, there was no remaining liability balance relating to the Next Century program. We made payments against the liabilities recorded for the Next Century program of $7.6 million in 2013 and $12.8 million in 2012 related to employee separation and project administration costs.

Income Before Interest and Income Taxes and EBIT Margin

2013 compared with 2012

EBIT increased in 2013 compared with 2012 as a result of higher gross profit and lower business realignment charges, partially offset by higher selling, marketing and administrative expenses. Pre-tax net business realignment and impairment charges of $19.1 million were recorded in 2013 compared with $83.8 million recorded in 2012.

EBIT margin increased from 16.7% in 2012 to 18.7% in 2013 as a result of higher gross margin and lower business realignment charges, partially offset by higher selling, marketing and administrative expenses as a percent of sales. The net impact of business realignment, impairment and acquisition charges recorded in 2013 reduced EBIT margin by 0.3 percentage points. Net business realignment and impairment charges recorded in 2012 reduced EBIT margin by 1.3 percentage points.

2012 compared with 2011

EBIT increased in 2012 compared with 2011 as a result of higher gross profit, substantially offset by higher selling, marketing and administrative expenses, and business realignment and impairment charges. Pre-tax net business realignment and impairment charges of $83.8 million were recorded in 2012 compared with $49.2 million recorded in 2011.

EBIT margin decreased from 17.4% in 2011 to 16.7% in 2012 primarily as a result of higher selling, marketing and administrative expenses as a percent of sales and the impact of higher business realignment and impairment costs which more than offset the increase in gross margin. EBIT margin in 2012 was reduced by 0.3 percentage points compared with 2011 as a result of the gain on the sale of trademark licensing rights recorded in 2011. The net impact of business realignment, impairment and acquisition charges recorded in 2012 reduced EBIT margin by 1.3 percentage points. Net business realignment and impairment charges recorded in 2011 reduced EBIT margin by 0.8 percentage points.

Interest Expense, Net

2013 compared with 2012

Net interest expense in 2013 was lower than in 2012 primarily as a result of lower short-term borrowings, partially offset by a decrease in capitalized interest and higher interest expense on long-term debt.

2012 compared with 2011

Net interest expense in 2012 was higher than in 2011 primarily as a result of higher short-term borrowings and a decrease in capitalized interest, partially offset by lower interest expense on long-term debt.

Income Taxes and Effective Tax Rate

2013 compared with 2012

Our effective income tax rate was 34.4% for 2013 compared with 34.9% for 2012. The decrease in the effective income tax rate in 2013 reflected lower state income taxes, which were higher in 2012 as a result of the impact of certain state tax legislation, and an increase in deductions associated with certain foreign tax jurisdictions, partially offset by a higher benefit in 2012 resulting from the completion of tax audits.

2012 compared with 2011

Our effective income tax rate was 34.9% for 2012 compared with 34.7% for 2011. The effective income tax rate was slightly higher in 2012 primarily reflecting the impact of tax rates associated with business realignment and impairment charges recorded in 2012 compared with 2011 and the mix of the Company's income among various tax jurisdictions.

Net Income and Net Income Per Share

2013 compared with 2012

Earnings per share-diluted increased $0.72, or 24.9% in 2013 compared with 2012. Net income in 2013 was reduced by $11.8 million, or $0.05 per share-diluted, as a result of net business realignment and impairment charges and, in 2012, was reduced by $57.2 million, or $0.25 per share-diluted. In 2013, net income was reduced by $6.6 million, or $0.03 per share-diluted, as a result of non-service-related pension expenses. Non-service-related pension expenses reduced net income by $12.7 million, or $0.06 per share-diluted in 2012. Excluding the impact of business realignment and impairment charges and non-service-related pension expenses from both periods and the acquisition closing, integration and transaction costs of $5.4 million, or $0.03 per share-diluted, in 2013, and $9.2 million, or $0.04 per share-diluted, in 2012, adjusted earnings per share-diluted increased $0.48 per share, or 14.8% in 2013 compared with 2012.

2012 compared with 2011

Earnings per share-diluted increased $0.15, or 5.5% in 2012 compared with 2011. Net income in 2012 was reduced by $57.2 million, or $0.25 per share-diluted, as a result of net business realignment and impairment charges. Net income was reduced by $9.2 million, or $0.04 per share-diluted, in 2012 as a result of closing and integration costs for the Brookside acquisition and by $12.7 million or $0.06 per share-diluted related to non-service-related pension expenses in 2012. In 2011, net income was increased by $11.1 million, or $0.05 per share-diluted, as a result of the gain on sale of trademark licensing rights and reduced by $30.9 million, or $0.13 per share-diluted, as a result of net business realignment and impairment charges. Non-service-related pension expenses reduced net income by $2.0 million, or $0.01 per share-diluted in 2011. Excluding the impact of business realignment and impairment charges and non-service-related pension expenses from both periods, the acquisition closing and integration costs in 2012 and the gain on the sale of trademark licensing rights in 2011, adjusted earnings per share-diluted increased $0.41 per share, or 14.5% in 2012 compared with 2011.

FINANCIAL CONDITION

Our financial condition remained strong during 2013 reflecting strong cash flow from operations.

Business Acquisitions

Acquisitions of businesses are accounted for as purchases and, accordingly, their results of operations have been included in the consolidated financial statements since the respective dates of the acquisitions. The purchase price for each acquisition is allocated to the assets acquired and liabilities assumed.

Our financial statements reflect the final accounting for the Brookside acquisition. The purchase price for the acquisition was approximately $172.9 million. The purchase price allocation of the Brookside acquisition is as follows:



In thousands of dollars	Purchase Price Allocation			Estimated Useful Life in Years
Goodwill	$	67,974		Indefinite
Trademarks	60,253			25
Other intangibles⁽¹⁾	51,057			6	to	17
Other assets, net of liabilities assumed of $18.7 million	21,673
Non-current deferred tax liabilities	(28,101		)
Purchase Price	$	172,856


(1)	Includes customer relationships, patents and covenants not to compete.

The excess purchase price over the estimated value of the net tangible and identifiable intangible assets was recorded to goodwill. The goodwill is not expected to be deductible for tax purposes.

We included results subsequent to the acquisition date in the consolidated financial statements. If we had included the results of the acquisition in the consolidated financial statements for each of the periods presented, the effect would not have been material.

Assets

A summary of our assets is as follows:



December 31,	2013		2012
In thousands of dollars

Current assets	$	2,487,334	$	2,113,485
Property, plant and equipment, net	1,805,345		1,674,071
Goodwill and other intangibles	771,805		802,716
Deferred income taxes	—		12,448
Other assets	293,004		152,119

Total assets	$	5,357,488	$	4,754,839



l	The change in current assets from 2012 to 2013 was primarily due to the following:
	Ÿ	Higher cash and cash equivalents in 2013 reflecting strong cash flow from operations;
	Ÿ	An increase in accounts receivable reflecting higher sales in December 2013 compared with December 2012;
	Ÿ	An increase in total inventories primarily reflecting higher finished goods inventories necessary to support anticipated sales levels of everyday items and the introduction of new products; and
	Ÿ	A decrease in current deferred income tax assets primarily reflecting the impact of the change in value of derivative instruments, particularly interest rate swap agreements.
l	Higher property, plant and equipment in 2013, reflecting capital additions of $323.6 million, partly offset by depreciation expense of $166.5 million.
l	A decrease in non-current deferred tax assets as a result of the change in the funded status of our pension plans.
l	A decrease in goodwill and other intangibles primarily due to the effect of foreign currency translation.
l	An increase in other assets primarily due to a receivable for an anticipated U.S. and Canada Competent Authority resolution of various proposed tax adjustments, the improvement in the funded status of our pension plans and the value of interest rate swap agreements at the end of the year.

Liabilities

A summary of our liabilities is as follows:



December 31,	2013		2012
In thousands of dollars

Current liabilities	$	1,408,022	$	1,471,110
Long-term debt	1,795,142		1,530,967
Other long-term liabilities	434,068		668,732
Deferred income taxes	104,204		35,657

Total liabilities	$	3,741,436	$	3,706,466



l	Changes in current liabilities from 2012 to 2013 were primarily the result of the following:
	Ÿ	Higher accounts payable reflecting an increase in amounts payable for marketing programs as well as capital expenditures, partially offset by the timing of payments associated with inventory deliveries to support manufacturing requirements;
	Ÿ	Higher accrued liabilities related to marketing and trade promotion programs, partially offset by lower liabilities associated with the Next Century program;
	Ÿ	An increase in accrued income taxes reflecting the impact of proposed tax adjustments in Canada associated with business realignment charges and transfer pricing;
	Ÿ	An increase in short-term debt primarily associated with an increase in short-term borrowings for Canada and Mexico, partially offset by the repayment of short-term debt in India; and
	Ÿ	A decrease in the current portion of long-term debt reflecting the repayment of $250 million of 5.0% Notes in 2013.
l	An increase in long-term debt reflecting the issuance of $250 million of 2.625% Notes due in May 2023.
l	A decrease in other long-term liabilities primarily due to the change in the funded status of our pension plans.
l	An increase in deferred income taxes primarily reflecting the tax effect of the change in the funded status of our pension plans.

Capital Structure

We have two classes of stock outstanding, Common Stock and Class B Stock. Holders of the Common Stock and the Class B Stock generally vote together without regard to class on matters submitted to stockholders, including the election of directors. Holders of the Common Stock have 1 vote per share. Holders of the Class B Stock have 10 votes per share. Holders of the Common Stock, voting separately as a class, are entitled to elect one-sixth of our Board of Directors. With respect to dividend rights, holders of the Common Stock are entitled to cash dividends 10% higher than those declared and paid on the Class B Stock.

Hershey Trust Company, as trustee for the benefit of Milton Hershey School maintains voting control over The Hershey Company. In this section, we refer to Hershey Trust Company, in its capacity as trustee for the benefit of Milton Hershey School, as the “Milton Hershey School Trust” or the “Trust.” In addition, the Milton Hershey School Trust currently has three representatives who are members of the Board of Directors of the Company, one of whom is the Chairman of the Board. These representatives, from time to time in performing their responsibilities on the Company’s Board, may exercise influence with regard to the ongoing business decisions of our Board of Directors or management. The Trust has indicated that, in its role as controlling stockholder of the Company, it intends to retain its controlling interest in The Hershey Company and that the Company Board, and not the Trust Board, is solely responsible and accountable for the Company’s management and performance.

Pennsylvania law requires that the Office of Attorney General be provided advance notice of any transaction that would result in the Milton Hershey School Trust no longer having voting control of the Company. The law provides specific statutory authority for the Attorney General to intercede and petition the Court having jurisdiction over the Milton Hershey School Trust to stop such a transaction if the Attorney General can prove that the transaction is unnecessary for the future economic viability of the Company and is inconsistent with investment and management considerations under fiduciary obligations. This legislation makes it more difficult for a third party to acquire a majority of our outstanding voting stock and thereby may delay or prevent a change in control of the Company.

Noncontrolling Interests in Subsidiaries

In May 2007, we entered into an agreement with Godrej Beverages and Foods, Ltd., a consumer goods, confectionery and food company, to manufacture and distribute confectionery products, snacks and beverages across India. Under the agreement, we owned a 51% controlling interest in Godrej Hershey Ltd. The noncontrolling interests in Godrej Hershey Ltd. were included in the equity section of the Consolidated Balance Sheets. In September 2012, we acquired the remaining 49% interest in Godrej Hershey Ltd. for approximately $15.8 million. Since the Company had a controlling interest in Godrej Hershey Ltd., the difference between the amount paid and the carrying amount of the noncontrolling interest of $10.3 million was recorded as a reduction to additional paid-in capital and the noncontrolling interest in Godrej Hershey Ltd. was eliminated as of September 30, 2012.

We own a 51% controlling interest in Hershey do Brasil under a cooperative agreement with Pandurata Netherlands B.V. (“Bauducco”), a leading manufacturer of baked goods in Brazil whose primary brand is Bauducco. During 2013 and 2012, the Company contributed cash of approximately $3.1 million to Hershey do Brasil and Bauducco contributed approximately $2.9 million. The noncontrolling interest in Hershey do Brasil is included in the equity section of the Consolidated Balance Sheets.

The decrease in noncontrolling interests in subsidiaries from $11.6 million as of December 31, 2012 to $11.2 million as of December 31, 2013 reflected the impact of the noncontrolling interests’ share of losses of these entities and currency translation adjustments, partially offset by the impact of the cash contributed by Bauducco. The share of losses pertaining to the noncontrolling interests in subsidiaries was $1.7 million for the year ended December 31, 2013, $9.6 million for the year ended December 31, 2012 and $7.4 million for the year ended December 31, 2011. This was reflected in selling, marketing and administrative expenses.

LIQUIDITY AND CAPITAL RESOURCES

Our principal source of liquidity is operating cash flows. Our net income and, consequently, our cash provided from operations are impacted by: sales volume, seasonal sales patterns, timing of new product introductions, profit margins and price changes. Sales are typically higher during the third and fourth quarters of the year due to seasonal and holiday-related sales patterns. Generally, working capital needs peak during the summer months. We meet these needs primarily by utilizing cash on hand or by issuing commercial paper.

Cash Flows from Operating Activities

Our cash flows provided from (used by) operating activities were as follows:



For the years ended December 31,	2013			2012			2011
In thousands of dollars

Net income	$	820,470		$	660,931		$	628,962
Depreciation and amortization	201,033			210,037			215,763
Stock-based compensation and excess tax benefits	5,571			16,606			29,471
Deferred income taxes	7,457			13,785			33,611
Gain on sale of trademark licensing rights, net of tax	—			—			(11,072		)
Non-cash business realignment and impairment charges	—			38,144			34,660
Contributions to pension and other benefit plans	(57,213		)	(44,208		)	(31,671		)
Working capital	(29,391		)	(2,133		)	(116,909		)
Changes in other assets and liabilities	240,478			201,665			(194,948		)

Net cash provided from operating activities	$	1,188,405		$	1,094,827		$	587,867



l	Over the past three years, total cash provided from operating activities was approximately $2.9 billion.
l	Depreciation and amortization expenses decreased in 2013, in comparison with 2012, primarily due to lower accelerated depreciation charges related to the Next Century program, offset somewhat by higher capital additions in 2013. Depreciation and amortization expenses decreased in 2012, as compared with 2011, principally as the result of lower accelerated depreciation charges related to the Next Century program, somewhat offset by higher depreciation and amortization charges related to the Brookside acquisition. No significant accelerated depreciation expense was recorded in 2013 compared with approximately $15.3 million recorded in 2012 and $33.0 million recorded in 2011. Depreciation and amortization expenses represent non-cash items that impacted net income and are reflected in the consolidated statements of cash flows to reconcile cash flows from operating activities.
l	The deferred income tax provision in 2013 was lower than in 2012 primarily as a result of a foreign deferred income tax benefit in 2013 reflecting higher deferred tax assets related to advertising and promotion reserves, partially offset by an increase in the federal deferred income tax provision associated principally with higher deferred tax liabilities related to inventories. The deferred income tax provision was lower in 2012 than in 2011 primarily as a result of the lower tax impact associated with bonus depreciation resulting from reduced capital expenditures in 2012 for the Next Century program. Deferred income taxes represent non-cash items that impacted net income and are reflected in the consolidated statements of cash flows to reconcile cash flows from operating activities.
l	During the third quarter of 2011, we recorded an $11.1 million gain, net of tax, on the sale of certain non-core trademark licensing rights.
l	We contributed $133.1 million to our pension and other benefit plans over the past three years to improve the funded status of our domestic plans and to pay benefits under our non-funded pension plans and other benefit plans.



l	Over the three-year period, cash provided from working capital tended to fluctuate due to the timing of sales and cash collections during December of each year and working capital management practices, including initiatives implemented to reduce working capital. The decrease in cash used by accounts receivable in 2013 was associated with timing of sales and cash collections during December 2013 compared with December 2012. Cash used by changes in inventories in 2013 primarily resulted from higher finished goods inventory levels at the end of 2013 to support anticipated sales levels of everyday items and the introduction of new products, along with the impact of the lower adjustment to LIFO. Cash provided from changes in accounts payable in 2013 were associated with the timing of payments for inventory deliveries and marketing programs. Cash provided from changes in inventories in 2012 resulted from lower inventory levels which were higher at the end of 2011 in anticipation of the transition of production under the Next Century program. Changes in cash used by inventories in 2011 was primarily associated with increases in inventory levels in anticipation of the transition of production under the Next Century program, along with higher inventories to support seasonal sales.
l	During the three-year period, cash provided from or used by changes in other assets and liabilities reflected the effect of hedging transactions and the impact of business realignment initiatives, along with the related tax effects. Cash provided from changes in other assets and liabilities in 2013 compared with 2012 was primarily associated with the effect of business realignment and impairment charges and the timing of payments associated with selling and marketing programs of $92.5 million, partially offset by the impact of changes in various accrued liabilities and hedging transactions of $53.7 million. Cash provided from changes in other assets and liabilities in 2012 compared with cash used by changes in other assets and liabilities in 2011 primarily reflected the effect of hedging transactions of $304.2 million, the effect of changes in deferred and accrued income taxes of $44.1 million and business realignment initiatives of $46.8 million.
l	Taxable income and related tax payments in 2013 reflected the increase in income for the year. Taxable income and related tax payments in 2012 and 2011 were reduced primarily by bonus depreciation tax deductions driven by capital expenditures associated with the Next Century program. This was offset somewhat by increases in income taxes paid associated with higher income.

Cash Flows from Investing Activities

Our cash flows provided from (used by) investing activities were as follows:



For the years ended December 31,	2013			2012			2011
In thousands of dollars

Capital additions	$	(323,551	)	$	(258,727	)	$	(323,961	)
Capitalized software additions	(27,360		)	(19,239		)	(23,606		)
Proceeds from sales of property, plant and equipment	15,331			453			312
Proceeds from sale of trademark licensing rights	—			—			20,000
Loan to affiliate	(16,000		)	(23,000		)	(7,000		)
Business acquisitions	—			(172,856		)	(5,750		)

Net cash used by investing activities	$	(351,580	)	$	(473,369	)	$	(340,005	)



l	Capital additions in 2013 for the construction of a new manufacturing facility in Malaysia totaled $40.0 million. Capital additions associated with our Next Century program in 2013 were $11.8 million, in 2012 were $74.7 million, and in 2011 were $179.4 million. Other capital additions were primarily related to purchases of manufacturing equipment for new products and the improvement of manufacturing efficiency.
l	Capitalized software additions were primarily for ongoing enhancement of our information systems.
l	We anticipate total capital expenditures, including capitalized software, of approximately $355 million to $375 million in 2014 of which $120 million to $130 million is associated with the construction of the manufacturing facility in Malaysia.
l	The loans to affiliate during the three-year period were associated with financing the expansion of manufacturing capacity under our manufacturing agreement in China with Lotte Confectionery Company LTD.
l	In January 2012, the Company acquired Brookside for approximately $172.9 million.

Cash Flows from Financing Activities

Our cash flows provided from (used by) financing activities were as follows:



For the years ended December 31,	2013			2012			2011
In thousands of dollars

Net change in short-term borrowings	$	54,351		$	77,698		$	10,834
Long-term borrowings	250,595			4,025			249,126
Repayment of long-term debt	(250,761		)	(99,381		)	(256,189		)
Proceeds from lease financing agreement	—			—			47,601
Cash dividends paid	(393,801		)	(341,206		)	(304,083		)
Exercise of stock options and excess tax benefits	195,651			295,473			198,408
Net contributions from (payments to) noncontrolling interests	2,940			(12,851		)	—
Repurchase of Common Stock	(305,564		)	(510,630		)	(384,515		)

Net cash used by financing activities	$	(446,589	)	$	(586,872	)	$	(438,818	)



l	In addition to utilizing cash on hand, we use short-term borrowings (commercial paper and bank borrowings) to fund seasonal working capital requirements and ongoing business needs. The reduction in short-term borrowings in 2013 was associated with our international businesses. The increase in short-term borrowings in 2012 was primarily associated with the Brookside acquisition and our international businesses, partially offset by repayments of Godrej Hershey debt. Additional information on short-term borrowings is included under Borrowing Arrangements below.
l	In May 2013, we issued $250 million of 2.625% Notes due in 2023 and, in November 2011, we issued $250 million of 1.5% Notes due in 2016. The long-term borrowings in 2013 and 2011 were issued under shelf registration statements on Form S-3 described under Registration Statements below.
l	In April 2013, we repaid $250 million of 5.0% Notes due in 2013 and, in August 2012, we repaid $92.5 million of 6.95% Notes due in 2012. Additionally, in September 2011, we repaid $250.0 million of 5.3% Notes due in 2011.
l	In September 2011, we entered into a sale and leasing agreement for the 19 East Chocolate Avenue manufacturing facility. Based on the leasing agreement, we are deemed to be the owner of the property for accounting purposes. We received net proceeds of $47.6 million and recorded a lease financing obligation of $50.0 million under the leasing agreement.



l	Equity contributions of $2.9 million were received from the noncontrolling interests in Hershey do Brasil in 2013. In May 2007, we entered into an agreement with Godrej Beverages and Foods, Ltd., a consumer goods, confectionery and food company, to manufacture and distribute confectionery products, snacks and beverages across India. Under the agreement, we owned a 51% controlling interest in Godrej Hershey Ltd. In September 2012, we acquired the remaining 49% interest in Godrej Hershey Ltd. for approximately $15.8 million. Payments to noncontrolling interests associated with Godrej Hershey Ltd. in 2012 were partially offset by equity contributions of $2.9 million by the noncontrolling interests in Hershey do Brasil in 2012.
l	We paid cash dividends of $295.0 million on our Common Stock and $98.8 million on our Class B Stock in 2013.
l	Cash used for the repurchase of Common Stock was partially offset by cash received from the exercise of stock options and the impact of excess tax benefits from stock-based compensation.

Repurchases and Issuances of Common Stock



For the years ended December 31,	2013					2012					2011
In thousands	Shares		Dollars			Shares		Dollars			Shares		Dollars
Shares repurchased under authorized programs:
Open market repurchases	—		$	—		2,054		$	124,931		1,903		$	100,015
Shares repurchased to replace reissued shares	3,656		305,564			5,599		385,699			5,179		284,500

Total share repurchases	3,656		305,564			7,653		510,630			7,082		384,515
Shares issued for stock-based compensation programs	(3,765	)	(156,502		)	(6,233	)	(210,924		)	(5,258	)	(177,654		)

Net change	(109	)	$	149,062		1,420		$	299,706		1,824		$	206,861



l	We intend to repurchase shares of Common Stock in order to replace Treasury Stock shares issued for exercised stock options and other stock-based compensation. The value of shares purchased in a given period will vary based on stock options exercised over time and market conditions.
l	In April 2011, our Board of Directors approved a $250 million authorization to repurchase shares of our Common Stock. As of December 31, 2013, $125.1 million remained available for repurchases of our Common Stock.

Cumulative Share Repurchases and Issuances

A summary of cumulative share repurchases and issuances is as follows:



	Shares		Dollars
	In thousands
Shares repurchased under authorized programs:
Open market repurchases	61,393		$	2,209,377
Repurchases from the Milton Hershey School Trust	11,918		245,550
Shares retired	(1,056	)	(12,820		)

Total repurchases under authorized programs	72,255		2,442,107
Privately negotiated purchases from the Milton Hershey School Trust	67,282		1,501,373
Shares repurchased to replace reissued shares	44,995		2,208,116
Shares issued for stock-based compensation programs and employee benefits	(48,525	)	(1,443,866		)

Total held as Treasury Stock as of December 31, 2013	136,007		$	4,707,730

Borrowing Arrangements

We maintain debt levels we consider prudent based on our cash flow, interest coverage ratio and percentage of debt to capital. We use debt financing to lower our overall cost of capital which increases our return on stockholders’ equity.



l	In October 2011, we entered into a new five-year agreement establishing an unsecured revolving credit facility to borrow up to $1.1 billion, with an option to increase borrowings by an additional $400 million with the consent of the lenders.
l	In November 2013, the five-year agreement entered into in October 2011 was amended. The amendment reduced the amount of borrowings available under the unsecured revolving credit facility to $1.0 billion, with an option to increase borrowings by an additional $400 million with the consent of the lenders, and extended the termination date to November 2018. As of December 31, 2013, $1.0 billion was available to borrow under the agreement and no borrowings were outstanding. The unsecured revolving credit agreement contains certain financial and other covenants, customary representations, warranties and events of default. As of December 31, 2013, we complied with all of these covenants. We may use these funds for general corporate purposes, including commercial paper backstop and business acquisitions.
l	In addition to the revolving credit facility, we maintain lines of credit with domestic and international commercial banks. As of December 31, 2013, we could borrow up to approximately $290.3 million in various currencies under the lines of credit and as of December 31, 2012, we could borrow up to $176.7 million.

Registration Statements



l	In May 2009, we filed a shelf registration statement on Form S-3 that registered an indeterminate amount of debt securities. This registration statement was effective immediately upon filing under Securities and Exchange Commission regulations governing “well-known seasoned issuers” (the “2009 WKSI Registration Statement”).
l	In November 2011, we issued $250 million of 1.50% Notes due November 1, 2016 and, in December 2010, we issued $350 million of 4.125% Notes due December 1, 2020. The Notes were issued under the 2009 WKSI Registration Statement.
l	The 2009 WKSI Registration Statement expired in May 2012. Accordingly, in May 2012, we filed a new registration statement on Form S-3 (the “2012 WKSI Registration Statement”) to replace the 2009 WKSI Registration Statement. The registration statement filed in May 2012 registered an indeterminate amount of debt securities effective immediately.
l	In May 2013, we issued $250 million of 2.625% Notes due May 1, 2023. The Notes were issued under the 2012 WKSI Registration Statement.
l	Proceeds from the debt issuances and any other offerings under the the 2012 WKSI Registration Statement may be used for general corporate requirements. These may include reducing existing borrowings, financing capital additions, and funding contributions to our pension plans, future business acquisitions and working capital requirements.

OFF-BALANCE SHEET ARRANGEMENTS, CONTRACTUAL OBLIGATIONS AND CONTINGENT LIABILITIES AND COMMITMENTS

As of December 31, 2013, our contractual cash obligations by year were as follows:



	Payments Due by Year
	In thousands of dollars
Contractual Obligations	2014		2015		2016		2017		2018		Thereafter		Total
Unconditional Purchase Obligations	$	1,381,600	$	651,900	$	48,300	$	6,400	$	—	$	—	$	2,088,200
Lease Obligations	36,669		11,521		10,819		7,563		2,184		1,580		70,336
Minimum Pension Plan Funding Obligations	3,559		2,746		2,712		2,782		2,556		2,433		16,788
Long-term Debt	914		251,433		501,331		878		411		1,041,089		1,796,056

Total Obligations	$	1,422,742	$	917,600	$	563,162	$	17,623	$	5,151	$	1,045,102	$	3,971,380

In entering into contractual obligations, 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 performing financial assessments prior to contract execution, conducting periodic evaluations of counterparty performance and maintaining a diverse portfolio of qualified counterparties. Our risk is limited to replacing the contracts at prevailing market rates. We do not expect any significant losses resulting from counterparty defaults.

Purchase Obligations

We enter into certain obligations for the purchase of raw materials. These obligations are primarily in the form of forward contracts for the purchase of raw materials from third-party brokers and dealers. These contracts minimize the effect of future price fluctuations by fixing the price of part or all of these purchase obligations. Total obligations for each year presented above consisted of fixed price contracts for the purchase of commodities and unpriced contracts that were valued using market prices as of December 31, 2013.

The cost of commodities associated with the unpriced contracts is variable as market prices change over future periods. We mitigate the variability of these costs to the extent we have entered into commodities futures contracts or other commodity derivative instruments to hedge our costs for those periods. Increases or decreases in market prices

are offset by gains or losses on commodities futures contracts or other commodity derivative instruments. This applies to the extent that we have hedged the unpriced contracts as of December 31, 2013 and in future periods by entering into commodities futures contracts. Taking delivery of and making payments for the specific commodities for use in the manufacture of finished goods satisfies our obligations under the forward purchase contracts. For each of the three years in the period ended December 31, 2013, we satisfied these obligations by taking delivery of and making payment for the specific commodities.

Lease Obligations

Lease obligations include the minimum rental commitments under non-cancelable operating leases primarily for offices, retail stores, warehouse and distribution facilities, and certain equipment.

In September 2013, we entered into an agreement to lease land for the construction of the new confectionery manufacturing plant in Johor, Malaysia. The lease term is 99 years and obligations under the terms of the lease require a payment of approximately $24.0 million in 2014, which is included in Lease Obligations in the Contractual Obligations table.

Minimum Pension Plan Funding Obligations

Our policy is to fund domestic pension liabilities in accordance with the minimum and maximum limits imposed by the Employee Retirement Income Security Act of 1974 (“ERISA”), federal income tax laws and the funding requirements of the Pension Protection Act of 2006. We fund non-domestic pension liabilities in accordance with laws and regulations applicable to those plans. Minimum pension plan funding obligations include our current assumptions and estimates of the minimum required contributions to our defined benefit pension plans through 2019. For more information, see Note 14, Pension and Other Post-Retirement Benefit Plans.

Long-term Debt

Long-term debt is comprised primarily of obligations associated with the issuance of unsecured long-term debt instruments. Additional information with regard to long-term debt is contained in Note 12, Long-Term Debt.

In February 2012, we entered into agreements with the Ferrero Group (“Ferrero”), an international packaged goods company, forming an alliance to mutually benefit from various warehousing, co-packing, transportation and procurement services in North America. The initial terms of the agreements are 10 years, with three renewal periods, each with a term of 10 years. The agreements include the construction of a warehouse and distribution facility in Brantford, Ontario, Canada for the mutual use of the Company and Ferrero. Ferrero was responsible for construction of the warehouse and we were responsible for development and implementation of related information systems. Over the term of the agreements, costs associated with the warehouse construction and the information systems will essentially be shared equally.

During 2012, Ferrero made payments of approximately $36.0 million and we made payments of approximately $5.1 million for construction of the facility. During 2013, Ferrero made payments of approximately $5.6 million and we made payments of approximately $6.3 million for the construction of the facility. Because we were involved with the design of the facility and made payments during the construction period, the Company has been deemed to be the owner of the warehouse and distribution facility for accounting purposes. As a result, we recorded a total of $41.1 million in construction in progress as of December 31, 2012, including the payments made by Ferrero, the legal owner of the facility. A corresponding financing obligation of $36.0 million was recorded as of December 31, 2012, reflecting the amount paid by Ferrero. As of December 31, 2013, our property, plant and equipment, net included $53.0 million related to this facility and our long-term debt included $42.6 million related to the financing obligation.

Plant Construction Obligations

In December 2013, we entered into an agreement for the construction of the new confectionery manufacturing plant in Malaysia. The total cost of construction is expected to be approximately $240 million. The plant is expected to begin operations during the second quarter of 2015.

Asset Retirement Obligations

We have a number of facilities that contain varying amounts of asbestos in certain locations within the facilities. Our asbestos management program is compliant with current applicable regulations. Current regulations require that we handle or dispose of asbestos in a special manner if such facilities undergo major renovations or are demolished. Costs associated with the removal of asbestos related to the closure of a manufacturing facility under the Next Century program were recorded primarily in 2012 and included in business realignment and impairment charges. The costs associated with the removal of asbestos from the facility were not material. With regard to other facilities, we believe we do not have sufficient information to estimate the fair value of any asset retirement obligations related to these facilities. We cannot specify the settlement date or range of potential settlement dates and, therefore, sufficient information is not available to apply an expected present value technique. We expect to maintain the facilities with repairs and maintenance activities that would not involve or require the removal of significant quantities of asbestos.

Income Tax Obligations

We base our deferred income taxes, accrued income taxes and provision for income taxes upon income, statutory tax rates, the legal structure of our Company and interpretation of tax laws. We are regularly audited by federal, state and foreign tax authorities. From time to time, these audits result in assessments of additional tax. We maintain reserves for such assessments. We adjust the reserves based upon changing facts and circumstances, such as receiving audit assessments or clearing of an item for which a reserve has been established. Assessments of additional tax require cash payments. For more information, see Income Taxes beginning on page 47 under Use of Estimates and Other Critical Accounting Policies. The amount of tax obligations is not included in the table of contractual cash obligations by year on page 34 because we are unable to reasonably predict the ultimate amount or timing of settlement of our reserves for income taxes.

Acquisition Agreement

In December 2013, we entered into an agreement to acquire all of the outstanding shares of Shanghai Golden Monkey Food Joint Stock Co., Ltd. (“SGM”), a privately held confectionery company based in Shanghai, China. SGM manufactures, markets and distributes Golden Monkey branded products, including candy, chocolates, protein-based products and snack foods, in China. The purchase price of approximately $584 million will be paid in cash of approximately $498 million and the assumption of approximately $86 million of net debt. Eighty percent of the purchase price will be paid in mid-2014, with the remaining twenty percent to be paid one year from the date of the initial payment. The acquisition is subject to government and regulatory approvals and customary closing conditions.

ACCOUNTING POLICIES AND MARKET RISKS ASSOCIATED WITH DERIVATIVE INSTRUMENTS

We use certain derivative instruments to manage risks. These include interest rate swaps to manage interest rate risk; foreign currency forward exchange contracts and options to manage foreign currency exchange rate risk; and commodities futures and options contracts to manage commodity market price risk exposures.

We enter into interest rate swap agreements and foreign exchange forward contracts and options for periods consistent with related underlying exposures. These derivative instruments do not constitute positions independent of those exposures.

We enter into commodities futures and options contracts and other derivative instruments for varying periods. These commodity derivative instruments are intended to be, and are effective as, hedges of market price risks associated with anticipated raw material purchases, energy requirements and transportation costs. We do not hold or issue derivative instruments for trading purposes and are not a party to any instruments with leverage or prepayment features.

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 exchange-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.

Accounting Policies Associated with Derivative Instruments

We report the effective portion of the gain or loss on a derivative instrument designated and qualifying as a cash flow hedging instrument as a component of other comprehensive income. We reclassify the effective portion of the gain or loss on these derivative instruments into income in the same period or periods during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instrument resulting from hedge ineffectiveness, if any, must be recognized currently in earnings.

Fair value hedges pertain to derivative instruments that qualify as a hedge of exposures to changes in the fair value of a firm commitment or assets and liabilities recognized on the balance sheet. For fair value hedges, our policy is to record the gain or loss on the derivative instrument in earnings in the period of change together with the offsetting loss or gain on the hedged item. The effect of that accounting is to reflect in earnings the extent to which the hedge is not effective in achieving offsetting changes in fair value.

As of December 31, 2013, we designated and accounted for all derivative instruments as cash flow hedges, except for out of the money options contracts on certain commodities. These included interest rate swap agreements, foreign exchange forward contracts and options, commodities futures and options contracts, and other commodity derivative instruments. Additional information regarding accounting policies associated with derivative instruments is contained in Note 6, Derivative Instruments and Hedging Activities.

The information below summarizes our market risks associated with long-term debt and derivative instruments outstanding as of December 31, 2013. Note 1, Note 6 and Note 7 to the Consolidated Financial Statements provide additional information.

Long-term Debt

The table below presents the principal cash flows and related interest rates by maturity date for long-term debt, including the current portion, as of December 31, 2013. We determined the fair value of long-term debt based upon quoted market prices for the same or similar debt issues.



	Maturity Date
	2014		2015		2016		2017		2018		Thereafter		Total		Fair Value
In thousands of dollars except for rates

Long-term Debt	$914		$251,433		$501,331		$878		$411		$1,041,089		$1,796,056		$1,947,023
Interest Rate	7.7	%	4.9	%	3.5	%	6.9	%	5.1	%	5.1	%	4.6	%

We calculated the interest rates on variable rate obligations using the rates in effect as of December 31, 2013.

Interest Rate Swaps

In order to manage interest rate exposure, the Company, from time to time, enters into interest rate swap agreements. In April 2012, the Company entered into forward starting interest rate swap agreements to hedge interest rate exposure related to the anticipated $250 million of term financing expected to be executed during 2013 to repay $250 million of 5.0% Notes maturing in April 2013. The weighted-average fixed rate on these forward starting swap agreements was 2.4%. In May 2012, the Company entered into forward starting interest rate swap agreements to hedge interest rate exposure related to the anticipated $250 million of term financing expected to be executed during 2015 to repay $250 million of 4.85% Notes maturing in August 2015. The weighted-average fixed rate on these forward starting swap agreements is 2.7%.

The forward starting swap agreements entered into in April 2012 matured in March 2013, resulting in a realized loss of approximately $9.5 million. Also, in March 2013, we entered into forward starting swap agreements to continue to hedge interest rate exposure related to the term financing expected to be executed in 2013. The weighted-average fixed rate on the forward starting swap agreements was 2.1%.

In May 2013, we terminated the forward starting swap agreements which were entered into in March 2013 to

hedge the anticipated execution of term financing. The swap agreements were terminated upon the issuance of the 2.625% Notes due May 1, 2023, resulting in cash payments of $0.2 million in May 2013. Losses on these swap agreements are included in accumulated other comprehensive loss and are being amortized as an increase to interest expense over the term of the Notes.

The fair value of interest rate swap agreements was an asset of $22.7 million as of December 31, 2013. Our risk related to interest rate swap agreements is limited to the cost of replacing such agreements at prevailing market rates. As of December 31, 2013, the potential net loss associated with interest rate swap agreements resulting from a hypothetical near-term adverse change in interest rates of ten percent was approximately $8.0 million.

In March 2009, we entered into forward starting interest rate swap agreements to hedge interest rate exposure related to the anticipated $250 million of term financing expected to be executed during 2011. In September 2011, the forward starting interest rate swap agreements which were entered into in March 2009 matured, resulting in cash payments by the Company of approximately $26.8 million. Also in September 2011, we entered into forward starting swap agreements to continue to hedge interest rate exposure related to the term financing. These swap agreements were terminated upon the issuance of the 1.5% Notes due November 1, 2016, resulting in cash payments by the Company of $2.3 million in November 2011. The losses on these swap agreements are being amortized as an increase to interest expense over the term of the Notes.

For more information see Note 6, Derivative Instruments and Hedging Activities.

Foreign Exchange Forward Contracts and Options

We enter into foreign currency forward exchange contracts and options to hedge transactions denominated in foreign currencies. These transactions are primarily purchase commitments or forecasted purchases associated with the construction of a manufacturing facility, equipment, raw materials and finished goods denominated in foreign currencies. We also may hedge payment of forecasted intercompany transactions with our subsidiaries outside of the United States. These contracts reduce currency risk from exchange rate movements. We generally hedge foreign currency price risks for periods from 3 to 24 months.

Foreign exchange forward contracts and options are effective as hedges of identifiable foreign currency commitments or forecasted transactions. We designate our foreign exchange forward contracts as cash flow hedging derivatives. The fair value of these contracts is classified as either an asset or liability on the Consolidated Balance Sheets. We record gains and losses on these contracts as a component of other comprehensive income and reclassify them into earnings in the same period during which the hedged transaction affects earnings.

A summary of foreign exchange forward contracts and the corresponding amounts at contracted forward rates is as follows:



December 31,	2013			2012
	Contract Amount		Primary Currencies	Contract Amount		Primary Currencies
In millions of dollars

Foreign exchange forward contracts to purchase foreign currencies	$	158.4	Malaysian ringgits Swiss francs Euros	$	17.1	Euros British pound sterling
Foreign exchange forward contracts to sell foreign currencies	$	2.8	Japanese yen	$	57.8	Canadian dollars

Foreign exchange forward contracts for the purchase of Malaysian ringgits and certain other currencies are associated with the construction of the manufacturing facility in Malaysia.

The fair value of foreign exchange forward contracts is the amount of the difference between the contracted and current market foreign currency exchange rates at the end of the period. We estimate the fair value of foreign exchange forward contracts on a quarterly basis by obtaining market quotes of spot and forward rates for contracts with similar terms, adjusted where necessary for maturity differences.

A summary of the fair value and market risk associated with foreign exchange forward contracts is as follows:



December 31,	2013		2012
In millions of dollars

Fair value of foreign exchange forward contracts, net — asset	$	3.2	$	1.2

Potential net loss associated with foreign exchange forward contracts resulting from a hypothetical near-term adverse change in market rates of ten percent	$	12.9	$	7.9

Our risk related to foreign exchange forward contracts is limited to the cost of replacing the contracts at prevailing market rates.

Commodities—Price Risk Management and Futures Contracts

Our most significant raw material requirements include cocoa products, sugar, dairy products, peanuts and almonds. For more information on our major raw material requirements, see Raw Materials on page 5. The cost of cocoa products and prices for related futures contracts and costs for certain other raw materials historically have been subject to wide fluctuations attributable to a variety of factors. These factors include:



l	Commodity market fluctuations;
l	Foreign currency exchange rates;
l	Imbalances between supply and demand;
l	The effect of weather on crop yield;
l	Speculative influences;
l	Trade agreements among producing and consuming nations;
l	Political unrest in producing countries; and
l	Changes in governmental agricultural programs and energy policies.

We use futures and options contracts and other commodity derivative instruments in combination with forward purchasing of cocoa products, sugar, corn sweeteners, natural gas and certain dairy products primarily to reduce the risk of future price increases and provide visibility to future costs. Currently, active futures contracts are not available for use in pricing our other major raw material requirements, primarily peanuts and almonds. We attempt to minimize the effect of future price fluctuations related to the purchase of raw materials by using forward purchasing to cover future manufacturing requirements generally for 3 to 24 months. However, the dairy futures markets are not as developed as many of the other commodities futures markets and, therefore, it is difficult to hedge our costs for dairy products by entering into futures contracts or other derivative instruments to extend coverage for long periods of time. We use diesel swap futures contracts to minimize price fluctuations associated with our transportation costs. Our commodity procurement practices are intended to reduce the risk of future price increases and provide visibility to future costs, but also may potentially limit our ability to benefit from possible price decreases. Our costs for major raw materials will not necessarily reflect market price fluctuations primarily because of our forward purchasing and hedging practices.

During 2013, the average cocoa futures contract prices decreased compared with 2012 and traded in a range between $0.97 and $1.26 per pound, based on the IntercontinentalExchange futures contract. Cocoa production was moderately lower in 2013 and global demand was slightly higher which produced a small deficit in cocoa supplies over the past year. Despite the small reduction in global cocoa inventories, the global stocks to use ratio remains above 40% and is considered normal.