10-Q

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 4, 2015
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period
from ______to_______

Commission file number 1-183

THE HERSHEY COMPANY
(Exact name of registrant as specified in its charter)

Delaware
 
23-0691590
(State or other jurisdiction of incorporation
or organization)
 
(I.R.S. Employer Identification No.)
100 Crystal A Drive, Hershey, PA
17033
(Address of principal executive offices)
(Zip Code)
717-534-4200
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

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

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

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

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Common Stock, $1 par value – 156,173,507 shares, as of October 23, 2015.
Class B Common Stock, $1 par value – 60,619,777 shares, as of October 23, 2015.


THE HERSHEY COMPANY
INDEX
 
 
Page Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2

PART I - FINANCIAL INFORMATION
Item 1. Financial Statements

THE HERSHEY COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share amounts)
(unaudited)
 
Three Months Ended
 
Nine Months Ended
 
October 4,
2015
 
September 28,
2014
 
October 4,
2015
 
September 28,
2014
Net sales
$
1,960,779

 
$
1,961,578

 
$
5,477,404

 
$
5,411,741

Costs and expenses:
 
 
 
 
 
 
 
Cost of sales
1,068,715

 
1,101,441

 
2,949,089

 
2,962,640

Selling, marketing and administrative
500,306

 
485,097

 
1,469,861

 
1,379,843

Goodwill impairment
30,991

 
—

 
280,802

 
—

Business realignment charges
57,753

 
16,372

 
82,972

 
20,544

Total costs and expenses
1,657,765

 
1,602,910

 
4,782,724

 
4,363,027

Operating profit
303,014

 
358,668

 
694,680

 
1,048,714

Interest expense, net
46,967

 
20,773

 
85,046

 
62,792

Other (income) expense, net
9,409

 
(7,528
)
 
4,328

 
1,448

Income before income taxes
246,638

 
345,423

 
605,306

 
984,474

Provision for income taxes
91,867

 
121,682

 
305,739

 
340,070

Net income
$
154,771

 
$
223,741

 
$
299,567

 
$
644,404

 
 
 
 
 
 
 
 
Net income per share – basic:
 
 
 
 
 
 
 
Common stock
$
0.73

 
$
1.03

 
$
1.40

 
$
2.97

Class B common stock
$
0.66

 
$
0.94

 
$
1.27

 
$
2.68

 
 
 
 
 
 
 
 
Net income per share – diluted:
 
 
 
 
 
 
 
Common stock
$
0.70

 
$
1.00

 
$
1.35

 
$
2.86

Class B common stock
$
0.66

 
$
0.94

 
$
1.28

 
$
2.67

 
 
 
 
 
 
 
 
Dividends paid per share:
 
 
 
 
 
 
 
Common stock
$
0.583

 
$
0.535

 
$
1.653

 
$
1.505

Class B common stock
$
0.530

 
$
0.486

 
$
1.502

 
$
1.356

 
 
 
 
 
 
 
 
See Notes to Unaudited Consolidated Financial Statements.


3

THE HERSHEY COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)
 
Three Months Ended
 
Nine Months Ended
 
October 4,
2015
 
September 28,
2014
 
October 4,
2015
 
September 28,
2014
Net income
$
154,771

 
$
223,741

 
$
299,567

 
$
644,404

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments
(26,631
)
 
(17,321
)
 
(51,681
)
 
(12,016
)
Pension and post-retirement benefit plans
9,969

 
3,624

 
20,896

 
10,784

Cash flow hedges:
 
 
 
 
 
 
 
(Losses) gains on cash flow hedging derivatives
(43,914
)
 
(932
)
 
21,023

 
26,849

Reclassification adjustments
(6,214
)
 
(15,544
)
 
(17,711
)
 
(35,566
)
Total other comprehensive loss, net of tax
(66,790
)
 
(30,173
)
 
(27,473
)
 
(9,949
)
Total comprehensive income
$
87,981

 
$
193,568

 
272,094

 
634,455

Comprehensive (gain) loss attributable to noncontrolling interests
(820
)
 
—

 
2,111

 
—

Comprehensive income attributable to The Hershey Company
$
87,161

 
$
193,568

 
$
274,205

 
$
634,455


See Notes to Unaudited Consolidated Financial Statements.



4

THE HERSHEY COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands except share data)
 
 
October 4,
2015
 
December 31,
2014
ASSETS
 
(unaudited)
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
343,913

 
$
374,854

Short-term investments
 
—

 
97,131

Accounts receivable – trade, net
 
760,789

 
596,940

Inventories
 
813,583

 
801,036

Deferred income taxes
 
99,628

 
100,515

Prepaid expenses and other
 
191,417

 
276,571

Total current assets
 
2,209,330

 
2,247,047

Property, plant and equipment, net
 
2,187,736

 
2,151,901

Goodwill
 
689,684

 
792,955

Other intangible assets
 
388,747

 
294,841

Other assets
 
155,123

 
142,772

Total assets
 
$
5,630,620

 
$
5,629,516

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
448,599

 
$
482,017

Accrued liabilities
 
807,621

 
813,513

Accrued income taxes
 
40,619

 
4,616

Short-term debt
 
687,981

 
384,696

Current portion of long-term debt
 
250,421

 
250,805

Total current liabilities
 
2,235,241

 
1,935,647

Long-term debt
 
1,830,186

 
1,548,963

Other long-term liabilities
 
504,972

 
526,003

Deferred income taxes
 
123,095

 
99,373

Total liabilities
 
4,693,494

 
4,109,986

 
 
 
 
 
Stockholders' equity:
 
 
 
 
The Hershey Company stockholders’ equity
 
 
 
 
Preferred stock, shares issued: none at October 4, 2015 and December 31, 2014, respectively
 
—

 
—

Common stock, shares issued: 299,281,967 and
    299,281,967 at October 4, 2015 and December 31, 2014, respectively
 
299,281

 
299,281

Class B common stock, shares issued: 60,619,777 and
    60,619,777 at October 4, 2015 and December 31, 2014, respectively
 
60,620

 
60,620

Additional paid-in capital
 
771,074

 
754,186

Retained earnings
 
5,807,281

 
5,860,784

Treasury – common stock shares, at cost: 143,155,476 and
    138,856,786 at October 4, 2015 and December 31, 2014, respectively
 
(5,665,708
)
 
(5,161,236
)
Accumulated other comprehensive loss
 
(383,935
)
 
(358,573
)
The Hershey Company stockholders’ equity
 
888,613

 
1,455,062

Noncontrolling interests in subsidiaries
 
48,513

 
64,468

Total stockholders' equity
 
937,126

 
1,519,530

Total liabilities and stockholders' equity
 
$
5,630,620

 
$
5,629,516

See Notes to Unaudited Consolidated Financial Statements.

5

THE HERSHEY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
Nine Months Ended
 
October 4,
2015
 
September 28,
2014
Operating Activities
 
 
 
Net income
$
299,567

 
$
644,404

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
182,855

 
153,006

Stock-based compensation expense
39,989

 
41,759

Excess tax benefits from stock-based compensation
(22,966
)
 
(46,222
)
Deferred income taxes
(10,385
)
 
(10,031
)
Non-cash business realignment and impairment charges
283,469

 
13,340

Contributions to pension and other benefit plans
(45,187
)
 
(41,446
)
Loss on early extinguishment of debt
28,326

 
—

Write-down of equity investments
13,895

 
—

Changes in assets and liabilities, net of effects from business acquisitions and divestitures:
 
 
 
Accounts receivable - trade
(186,156
)
 
(217,114
)
Inventories
(2,064
)
 
(165,205
)
Accounts payable and accrued liabilities
(55,890
)
 
(23,053
)
Other assets and liabilities
62,411

 
37,995

Net cash provided by operating activities
587,864

 
387,433

Investing Activities
 
 
 
Capital additions
(220,782
)
 
(214,259
)
Capitalized software additions
(17,111
)
 
(18,007
)
Proceeds from sales of property, plant and equipment
1,184

 
655

Proceeds from sale of business
32,408

 
—

Equity investments in tax credit qualifying partnerships
(3,775
)
 
—

Business acquisitions, net of cash and cash equivalents acquired
(218,654
)
 
(362,447
)
Sale (purchase) of short-term investments
95,316

 
(98,309
)
Net cash used in investing activities
(331,414
)
 
(692,367
)
Financing Activities
 
 
 
Net increase in short-term debt
336,851

 
381,352

Long-term borrowings
599,031

 
1,348

Repayment of long-term debt
(351,042
)
 
(1,075
)
Cash dividends paid
(353,070
)
 
(325,156
)
Exercise of stock options
63,623

 
100,526

Excess tax benefits from stock-based compensation
22,966

 
46,222

Contributions from noncontrolling interest
—

 
2,940

Purchase of noncontrolling interest
(38,270
)
 
—

Repurchase of common stock
(567,480
)
 
(542,643
)
Net cash used in financing activities
(287,391
)
 
(336,486
)
Decrease in cash and cash equivalents
(30,941
)
 
(641,420
)
Cash and cash equivalents, beginning of period
374,854

 
1,118,508

Cash and cash equivalents, end of period
$
343,913

 
$
477,088

Supplemental Disclosure
 
 
 
Interest paid (excluding loss on early extinguishment of debt in 2015)
$
71,124

 
$
73,002

Income taxes paid
$
256,610

 
$
278,775

See Notes to Unaudited Consolidated Financial Statements.

6

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


 
 
Preferred
Stock
 
Common
Stock
 
Class B
Common
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Treasury
Common
Stock
 
Accumulated Other
Comprehensive
Loss
 
Noncontrolling
Interests in
Subsidiaries
 
Total
Stockholders’
Equity
Balance, December 31, 2014
 
$
—

 
$
299,281

 
$
60,620

 
$
754,186

 
$
5,860,784

 
$
(5,161,236
)
 
$
(358,573
)
 
$
64,468

 
$
1,519,530

Net income
 
 
 
 
 
 
 
 
 
299,567

 
 
 
 
 
 
 
299,567

Other comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
 
 
 
(25,362
)
 
(2,111
)
 
(27,473
)
Dividends:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stock, $1.653 per share
 
 
 
 
 
 
 
 
 
(262,019
)
 
 
 
 
 
 
 
(262,019
)
Class B common stock, $1.502 per share
 
 
 
 
 
 
 
 
 
(91,051
)
 
 
 
 
 
 
 
(91,051
)
Stock-based compensation
 
 
 
 
 
 
 
38,227

 
 
 
 
 
 
 
 
 
38,227

Exercise of stock options and incentive-based transactions
 
 
 
 
 
 
 
7,896

 
 
 
63,008

 
 
 
 
 
70,904

Repurchase of common stock
 
 
 
 
 
 
 
 
 
 
 
(567,480
)
 
 
 
 
 
(567,480
)
Impact of reclassification to and purchase of redeemable noncontrolling interest
 
 
 
 
 
 
 
(29,235
)
 
 
 
 
 
 
 
(13,428
)
 
(42,663
)
Income attributed to noncontrolling interest
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(416
)
 
(416
)
Balance, October 4, 2015
 
$
—

 
$
299,281

 
$
60,620

 
$
771,074

 
$
5,807,281

 
$
(5,665,708
)
 
$
(383,935
)
 
$
48,513

 
$
937,126



See Notes to Unaudited Consolidated Financial Statements.



7
THE HERSHEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data or if otherwise indicated)


1. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The unaudited consolidated financial statements provided in this report include the accounts of The Hershey Company (the “Company,” “Hershey,” “we” or “us”) and our majority-owned subsidiaries and entities in which we have a controlling financial interest after the elimination of intercompany accounts and transactions. We have a controlling financial interest if we own a majority of the outstanding voting common stock and the noncontrolling shareholders do not have substantive participating rights, or we have significant control over an entity through contractual or economic interests in which we are the primary beneficiary.
The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial reporting and with the rules and regulations for reporting on Form 10-Q. Accordingly, they do not contain certain information and disclosures required by GAAP for comprehensive financial statements. Our significant interim accounting policies include the recognition of a pro-rata share of certain estimated annual amounts primarily for raw material purchase price variances, advertising expense, incentive compensation expenses and the effective income tax rate. We have included all adjustments (consisting only of normal recurring accruals) that we believe are considered necessary for a fair presentation.
Operating results for the quarter ended October 4, 2015 may not be indicative of the results that may be expected for the year ending December 31, 2015 because of seasonal effects on our business. These financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2014 (our “2014 Annual Report on Form 10-K”), which provides a more complete understanding of our accounting policies, financial position, operating results and other matters.
Other (Income) Expense, net
In the second quarter of 2015, we began presenting a new non-operating "other (income) expense, net" classification to report certain gains and losses associated with activities not directly related to our core operations. For the three and nine month periods ended September 28, 2014, we reclassified from selling, marketing and administrative expenses to other (income) expense, net total net gains of $7,528 and net losses of $1,448, respectively, to conform to the current year presentation. After considering these reclassifications, amounts reflected in other (income) expense, net include the following:
 
Three Months Ended
 
Nine Months Ended
 
October 4,
2015
 
September 28,
2014
 
October 4,
2015
 
September 28,
2014
Gain on sale of non-core trademark
$
—

 
$
—

 
$
(9,950
)
 
$
—

Write-down of equity investments in partnerships qualifying for tax credits (see Note 13)
9,249

 
—

 
13,893

 
—

Foreign currency exchange (gain) loss relating to strategy to cap Shanghai Golden Monkey acquisition price as denominated in U.S. dollars
—

 
(7,565
)
 
—

 
5,544

Gain on acquisition of controlling interest in Lotte Shanghai Food Company
—

 
—

 
—

 
(4,628
)
Other losses, net
160

 
37

 
385

 
532

Total
$
9,409

 
$
(7,528
)
 
$
4,328

 
$
1,448

Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU No. 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard was originally effective for us on January 1, 2017; however, in July 2015 the FASB decided to defer the effective date by one year. Early application is not permitted, but reporting entities may choose to adopt the standard as of the original effective date. The standard permits the use of either the retrospective or cumulative effect transition method. We are currently evaluating the effect that ASU No. 2014-09 will have on our consolidated financial statements and related disclosures, our transition date and transition method.

8
THE HERSHEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data or if otherwise indicated)

In April 2015, the FASB issued ASU No. 2015-03, Interest - Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs.  ASU No. 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the
balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts.  This ASU is effective for fiscal years, and interim periods within those fiscal years beginning after December 15, 2015.  Retrospective application is required and early adoption is permitted.  The adoption of ASU No. 2015-03 is not expected to have a significant impact on our consolidated financial statements or related disclosures.
No other new accounting pronouncement issued or effective during the fiscal year had or is expected to have a material impact on our consolidated financial statements or related disclosures.
2. BUSINESS ACQUISITIONS AND DIVESTITURES
Acquisitions of businesses are accounted for as purchases and, accordingly, their results of operations are included in the consolidated financial statements from the respective dates of the acquisitions. The purchase price for business acquisitions is allocated to the assets acquired and liabilities assumed.
2015 Acquisition
KRAVE Pure Foods
In March 2015, we completed the acquisition of all of the outstanding shares of KRAVE Pure Foods, Inc. (“Krave”), manufacturer of KRAVE jerky, a leading all-natural snack brand of premium jerky products. The transaction was undertaken to allow Hershey to tap into the rapidly growing meat snacks category and further expand into the broader snacks space. Krave is headquartered in Sonoma, California and generated 2014 annual sales of approximately $35 million.
Total purchase consideration includes cash consideration paid to date of $220,016, as well as agreement to pay additional cash consideration of up to $20,000 to the Krave shareholders if certain defined targets related to net sales and gross profit margin are met or exceeded during the twelve-month periods ending December 31, 2015 or March 31, 2016. The fair value of the contingent cash consideration, estimated to be $16,800 as of the acquisition date, was recorded in accrued liabilities in the Consolidated Balance Sheet. During the third quarter of 2015, the fair value of the contingent consideration was reduced to $12,000, with the adjustment to fair value recorded within selling, marketing and administrative expenses.
The purchase consideration was allocated to assets acquired and liabilities assumed based on their respective fair values as follows:
Goodwill
$
147,089

Trademarks
112,000

Other intangible assets
17,000

Other assets, primarily current assets, net of cash acquired totaling $1,362
9,465

Current liabilities
(2,756
)
Non-current deferred tax liabilities
(47,344
)
Net assets acquired
$
235,454

Goodwill is calculated as the excess of the purchase price over the fair value of the net assets acquired. The goodwill resulting from the acquisition is attributable primarily to the value of leveraging our brand building expertise, consumer insights, supply chain capabilities and retail relationships to accelerate growth and access to KRAVE products. The recorded goodwill is not expected to be deductible for tax purposes. The purchase price allocation for KRAVE was concluded in the third quarter of 2015.
Acquired trademarks were assigned estimated useful lives of 22 years, while other intangibles, including customer relationships and covenants not to compete, were assigned estimated useful lives ranging from 5 to 16 years.

9
THE HERSHEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data or if otherwise indicated)

Updates to 2014 Acquisitions
A more complete description of our acquisition activity for the year ended December 31, 2014 can be found in Note 2 to the Consolidated Financial Statements included in our 2014 Annual Report on Form 10-K.
Shanghai Golden Monkey Food Joint Stock Co., Ltd. (“SGM”)
At December 31, 2014, we had recorded a receivable of $37,860, reflecting our best estimate of the amount due from the selling SGM shareholders for the working capital and net debt adjustments. In addition, at December 31, 2014, we had recorded a liability of $100,067, reflecting the value of the future payment to be made to the SGM shareholders for the remaining 20% of the outstanding shares of SGM. Such amounts were recorded in the Consolidated Balance Sheets within prepaid expenses and other and accrued liabilities, respectively.
During the first quarter of 2015, we came to an agreement with the selling SGM shareholders to revise the aforementioned receivable and liability balances to reflect partial settlement of the receivable. As a result, in the first quarter, the receivable was adjusted to $8,685 and the liability was adjusted to $76,815. Additionally, during the first quarter of 2015, goodwill was increased by $6,623 to recognize revisions to the estimated value of assets and liabilities acquired in the acquisition. During the second quarter, based on our ongoing procedures to assess the quality of acquired trade accounts receivable, we recorded an additional adjustment to increase goodwill by $25,898 to reflect bad debt allowance for an additional amount of trade receivables considered to be uncollectible as of the acquisition date.
During the third quarter, we continued our procedures to assess the quality of acquired trade accounts receivable. We also undertook procedures to further evaluate and quantify outstanding pre-acquisition trade promotion commitments to distributors, as well as allowances for returns and discounts related to excess and unsalable inventory held at distributors and sales branches as of the acquisition date. In addition, we concluded on our procedures to estimate the value of pre-acquisition indirect tax contingencies. As a result of these procedures, during the third quarter, we increased the value of acquired goodwill by $16,599, with the corresponding offset principally represented by the establishment of additional opening balance sheet liabilities for the aforementioned commitments and contingencies.
Based on all of the information obtained through the procedures noted previously, we updated our estimates of the acquisition-date fair values of the net assets acquired as of September 26, 2015, the conclusion of the one-year measurement period. Any subsequent revisions to the valuation of net assets will be reflected in current results. A roll-forward of the estimated acquisition-date fair values at December 31, 2014 to the final acquisition-date fair values as of September 26, 2015, the conclusion of the one-year measurement period, is as follows:
 
 Acquisition date purchase price allocation*
In millions of dollars
 At 12/31/14
 
Adjustments
 
 At 9/26/15
Accounts receivable - trade
$
46

 
$
(26
)
 
$
20

Inventories
42

 
(1
)
 
41

Other current assets
37

 
6

 
43

Property, plant and equipment
112

 
2

 
114

Goodwill
235

 
49

 
284

Other intangible assets
145

 
—

 
145

Other non-current assets
35

 
(3
)
 
32

Current liabilities assumed
(54
)
 
(20
)
 
(74
)
Short-term debt assumed
(105
)
 
—

 
(105
)
Other non-current liabilities assumed, principally deferred taxes
(52
)
 
(2
)
 
(54
)
     Net assets acquired
$
441

 
 
 
$
446


*
Note that the final opening balance sheet value of goodwill presented in the schedule above differs from total write-off of $280.8 million due to changes in foreign currency exchange rates since the date of acquisition.

10
THE HERSHEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data or if otherwise indicated)

Goodwill impairment - SGM reporting unit
As discussed in the second quarter, since the initial acquisition in 2014, the SGM business has performed below expectations, with net sales and earnings levels well below pre-acquisition levels. In addition, as part of our ongoing integration process, we continued to assess the quality of SGM’s accounts receivable and existing distributor networks. Based on the declining performance levels and the results of our assessment to date, we determined that an interim impairment test of the SGM reporting unit was required by U.S. generally accepted accounting principles. We performed the first step of this test as of July 5, 2015 using an income approach based on our estimates of future performance scenarios for the business. The results of this test indicated that the fair value of the reporting unit was less than the carrying amount as of the measurement date, suggesting that a goodwill impairment was probable, which required us to perform a second step analysis to confirm that an impairment exists and to determine the amount of the impairment based on our reassessed value of the reporting unit. Although preliminary, as a result of this reassessment, in the second quarter of 2015 we recorded an estimated $249,811 non-cash goodwill impairment charge, representing a write-down of all of the goodwill related to the SGM reporting unit as of July 5, 2015.
As noted above, during the third quarter, we increased the value of acquired goodwill by $16,599, with the corresponding offset principally represented by the establishment of additional opening balance sheet liabilities for the aforementioned commitments and contingencies. We also finalized the impairment test of the goodwill relating to the SGM reporting unit, which resulted in a write-off of this additional goodwill in the third quarter, for a total impairment of $266,409. We also tested the other long-lived assets of SGM for recoverability by comparing the sum of the undiscounted cash flows to the carrying value of the asset group, and no impairment was indicated.
The timing and terms of the acquisition of the remaining 20% of SGM will be informed by the results of our ongoing negotiation, and we are evaluating all potential options to protect the Company's interests. Going forward, we continue to evaluate SGM's cost structure as well as alternative integration scenarios to improve performance to enable us to implement upon our strategy of leveraging the Golden Monkey's sales force and distributor network to expand sales of our Hershey's products in the China marketplace.
Goodwill impairment - China chocolate reporting unit
In connection with the SGM acquisition, we assigned approximately $15 million of goodwill to our existing China chocolate business, as this reporting unit was expected to benefit from acquisition synergies relating to the sale of Golden Monkey-branded product through its Tier 1 and hypermarket distributor networks. As the net sales and earnings of our China business continued to be adversely impacted by macroeconomic challenges and changing consumer shopping behavior through the third quarter, we determined that an interim impairment test of the goodwill in this reporting unit was also required. We performed the first step of this test in the third quarter of 2015 using an income approach based on our estimates of future performance scenarios for the business. The results of this test suggested that a goodwill impairment was probable, and the conclusions of the second step analysis resulted in a write-down of $14,393, representing the full value of goodwill attributed to this reporting unit as of October 4, 2015.
The Allan Candy Company Limited (“Allan”)
During the nine months ended October 4, 2015, we increased goodwill by $1,820 to recognize revisions to the preliminary fair value of net assets acquired. The purchase price allocation for Allan was concluded in the second quarter of 2015.
Pro forma results of operations have not been presented for the above-mentioned acquisitions, as the impact on our consolidated financial statements is not considered to be material.

11
THE HERSHEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data or if otherwise indicated)

2015 Divestiture
Mauna Loa Macadamia Nut Corporation (“Mauna Loa”)
In December 2014, we entered into an agreement to sell Mauna Loa. The transaction closed in the first quarter of 2015, resulting in proceeds, net of selling expenses and an estimated working capital adjustment, of approximately $32,400. The sale of Mauna Loa resulted in the recording of an additional loss on sale of $2,667 in the first quarter of 2015, based on updates to the selling expenses and tax benefits.
Mauna Loa had historically been reported within our North America segment. Its operations were not material to our annual net sales, net income or earnings per share. Amounts classified as assets and liabilities held for sale at December 31, 2014 were presented within prepaid expenses and other assets and accrued liabilities, respectively, and included the following:
Assets held for sale
 
Inventories
$
21,489

Prepaid expenses and other
173

Property, plant and equipment, net
12,691

Other intangibles
12,705

 
$
47,058

Liabilities held for sale
 
Accounts payable and accrued liabilities
$
3,726

Other long-term liabilities
9,029

 
$
12,755

3. GOODWILL AND INTANGIBLE ASSETS
The changes in the carrying value of goodwill by reportable segment for the nine months ended October 4, 2015 are as follows:
 
 
North America
 
    International and Other
 
Total
Balance at December 31, 2014
 
$
533,349

 
$
259,606

 
$
792,955

Acquired during the period
 
147,334

 
—

 
147,334

Purchase price allocation adjustments
 
1,575

 
46,203

 
47,778

Impairment
 
—

 
(280,802
)
 
(280,802
)
Foreign currency translation
 
(15,094
)
 
(2,487
)
 
(17,581
)
Balance at October 4, 2015
 
$
667,164

 
$
22,520

 
$
689,684

The $280,802 impairment charge noted above resulted from our reassessment of the valuation of the SGM business, coupled with the write-down of goodwill attributed to the China chocolate business in connection with the SGM acquisition. See Note 2 for additional information.
The following table provides a summary of the major categories of intangible assets:
 
 
October 4, 2015
 
December 31, 2014
Intangible assets not subject to amortization:
 
 
 
 
Trademarks
 
$
43,962

 
$
45,000

Intangible assets subject to amortization:
 
 
 
 
Trademarks, customer relationships, patents and other finite-lived intangibles
 
395,365

 
295,375

Less: accumulated amortization
 
(50,580
)
 
(45,534
)
Total other intangible assets
 
$
388,747

 
$
294,841

Total amortization expense for the nine months ended October 4, 2015 and September 28, 2014 was $16,469 and $7,586, respectively.

12

4. DEBT AND FINANCING ARRANGEMENTS
Short-term Debt
As a source of short-term financing, we utilize cash on hand and commercial paper or bank loans with an original maturity of three months or less. We maintain a $1.0 billion unsecured revolving credit facility, which expires in November 2019. At October 4, 2015, we had outstanding commercial paper totaling $345,969, at a weighted average interest rate of 0.15%. At December 31, 2014, we had outstanding commercial paper totaling $54,995, at a weighted average interest rate of 0.09%.
The credit agreement contains certain financial and other covenants, customary representations, warranties and events of default. As of October 4, 2015, we were in compliance with all covenants pertaining to the credit agreement, and we had no significant compensating balance agreements that legally restricted these funds. For more information, refer to the Consolidated Financial Statements included in our 2014 Annual Report on Form 10-K.
In addition to the revolving credit facility, we maintain lines of credit with domestic and international commercial banks. We had short-term foreign bank loans against these lines of credit for $342,012 and $329,701 at October 4, 2015 and December 31, 2014, respectively.
Long-term Debt
In August 2015, we repaid $250,000 of 4.85% Notes due in 2015 at maturity with commercial paper. Also in August 2015, we issued $300,000 of 1.60% Notes due in 2018 and $300,000 of 3.20% Notes due in 2025 (the “Notes”), using the proceeds from these Notes to fund the cash tender offer, noted below, and for other general corporate purposes, including the repayment of a portion of our commercial paper borrowings. The Notes were issued under a shelf registration statement on Form S-3 filed in June 2015 that registered an indeterminate amount of debt securities.
In August 2015, we paid $100,165 to repurchase $71,646 of our long-term debt as part of a cash tender offer, consisting of $15,285 of our 8.80% Debentures due in 2021 and $56,361 of our 7.20% Debentures due in 2027. As a result of the repurchase, we recorded within interest expense a pre-tax loss on early extinguishment of debt of $28,326, representing the premiums and fees paid for the tender offer.
In connection with the tender offer, we terminated interest rate swaps with notional amounts totaling $100,000, which were designated as fair value hedges for the $100,000 of 8.80% Debentures due in 2021. The portion of the gain upon termination that related to the tendered bonds, or $278, was recognized currently as a component of the loss on early extinguishment of debt, while the remaining gain of $1,539 will be amortized to interest expense over the remaining term of the outstanding bonds.
Interest Expense
Net interest expense consisted of the following:
 
Three Months Ended
 
Nine Months Ended
 
October 4,
2015
 
September 28,
2014
 
October 4,
2015
 
September 28,
2014
Interest expense
$
22,590

 
$
23,441

 
$
68,874

 
$
69,839

Loss on extinguishment of debt
28,326

 
—

 
28,326

 
—

Interest income
(878
)
 
(1,125
)
 
(2,840
)
 
(3,209
)
Capitalized interest
(3,071
)
 
(1,543
)
 
(9,314
)
 
(3,838
)
Interest expense, net
$
46,967

 
$
20,773

 
$
85,046

 
$
62,792


5. FINANCIAL INSTRUMENTS AND FAIR VALUE
We are exposed to market risks arising principally from changes in foreign currency exchange rates, interest rates and commodity prices. We use certain derivative instruments to manage these risks. These include interest rate swaps to manage interest rate risk, foreign currency forward exchange contracts and options to manage foreign currency exchange rate risk, and commodities futures and options contracts to manage commodity market price risk exposures.

13
THE HERSHEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data or if otherwise indicated)

We also use derivatives that do not qualify for hedge accounting treatment. We account for such derivatives at market value with the resulting gains and losses reflected in the income statement. We do not hold or issue derivative instruments for trading or speculative purposes.
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.
Commodity Price Risk
We enter into commodities futures and options contracts and other commodity derivative instruments to reduce the effect of future price fluctuations associated with the purchase of raw materials, energy requirements and transportation services. We generally hedge commodity price risks for 3- to 24-month periods. The majority of our commodity derivative instruments meet hedge accounting requirements and are designated as cash flow hedges. We account for the effective portion of mark-to-market gains and losses on commodity derivative instruments in other comprehensive income, to be recognized in cost of sales in the same period that we record the hedged raw material requirements in cost of sales. The ineffective portion of gains and losses is recorded currently in cost of sales.
Foreign Exchange Price Risk
We are exposed to foreign currency exchange rate risk related to our international operations, including non-functional currency intercompany debt and other non-functional currency transactions of certain subsidiaries. Principal currencies hedged include the euro, Canadian dollar, Malaysian ringgit, Chinese renminbi, Japanese yen, Mexican peso and Brazilian real. We typically utilize foreign currency forward exchange contracts and options to hedge these exposures for periods ranging from 3 to 24 months. The contracts are either designated as cash flow hedges or are undesignated. The net notional amount of foreign exchange contracts accounted for as cash flow hedges was $14,532 at October 4, 2015 and $22,725 at December 31, 2014. The effective portion of the changes in fair value on these contracts is recorded in other comprehensive income and reclassified into earnings in the same period in which the hedged transactions affect earnings. The net notional amount of foreign exchange contracts that are not designated as accounting hedges was $2,791 at October 4, 2015 and $4,144 at December 31, 2014. The change in fair value on these instruments is recorded directly in cost of sales or selling, marketing and administrative expense, depending on the nature of the underlying exposure.
Interest Rate Risk
In order to manage interest rate exposure, from time to time we enter into interest rate swap agreements that effectively convert variable rate debt to a fixed interest rate. These swaps are designated as cash flow hedges, with gains and losses deferred in other comprehensive income to be recognized as an adjustment to interest expense in the same period that the hedged interest payments affect earnings. The notional amount of interest rate derivative instruments in cash flow hedging relationships was $500,000 at October 4, 2015 and $750,000 at December 31, 2014.
We also manage our targeted mix of fixed and floating rate debt with debt issuances and by entering into fixed-to-floating interest rate swaps in order to mitigate fluctuations in earnings and cash flows that may result from interest rate volatility. These swaps are designated as fair value hedges, for which the gain or loss on the derivative and the offsetting loss or gain on the hedged item are recognized in current earnings as interest expense (income), net. The notional amount, interest rate and maturity date of these swaps generally match the principal, interest payment and maturity date of the related debt, and the swaps are valued using observable benchmark rates (Level 2 valuation). The notional amount of interest rate derivative instruments in fair value hedge relationships was $350,000 at October 4, 2015 and $450,000 at December 31, 2014.
Equity Price Risk
We are exposed to market price changes in certain broad market indices related to our deferred compensation obligations to our employees. We use equity swap contracts to hedge the portion of the exposure that is linked to market-level equity returns. These contracts are not designated as hedges for accounting purposes and are entered into for periods of 3 to 12 months. The change in fair value of these derivatives is recorded in selling, marketing and administrative expense, together with the change in the related liabilities. The notional amount of contracts outstanding was $23,277 and $26,417 at October 4, 2015 and December 31, 2014, respectively.

14
THE HERSHEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data or if otherwise indicated)

Fair Value of Derivative Instruments
The following table presents assets and liabilities that were measured at fair value in the Consolidated Balance Sheet on a recurring basis as of October 4, 2015 and December 31, 2014:
 
 
October 4, 2015
 
December 31, 2014
 
 
Assets (1)
 
Liabilities (1)
 
Assets (1)
 
Liabilities (1)
Derivatives designated as cash flow hedging instruments:
 
 
 
 
 
 
 
 
Commodities futures and options (2)
 
$
—

 
$
767

 
$
—

 
$
9,944

Foreign exchange contracts (3)
 
1,792

 
883

 
2,196

 
2,447

Interest rate swap agreements (4)
 
—

 
46,095

 
—

 
29,505

Cross-currency swap agreement (5)
 
—

 
—

 
2,016

 
—

 
 
1,792

 
47,745

 
4,212

 
41,896

Derivatives designated as fair value hedging instruments:
 
 
 
 
 
 
 
 
Interest rate swap agreements (4)
 
13,952

 
—

 
1,746

 
—

 
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
Deferred compensation derivatives (6)
 
—

 
1,404

 
1,074

 
—

Foreign exchange contracts (3)
 
56

 
—

 
4,049

 
2,334

 
 
56

 
1,404

 
5,123

 
2,334

Total
 
$
15,800

 
$
49,149

 
$
11,081

 
$
44,230


(1)
Derivative assets are classified on our balance sheet within prepaid expenses and other if current and other assets if non-current. Derivative liabilities are classified on our balance sheet within accrued liabilities if current and other long-term liabilities if non-current.
(2)
The fair value of commodities futures and options contracts is based on quoted market prices and is, therefore, categorized as Level 1 within the fair value hierarchy. As of October 4, 2015, accrued liabilities reflects the net of assets of $63,953 and accrued liabilities of $64,720 associated with cash transfers receivable or payable on commodities futures contracts reflecting the change in quoted market prices on the last trading day for the period. The comparable amounts reflected on a net basis in accrued liabilities at December 31, 2014 were assets of $51,225 and accrued liabilities of $56,840. At December 31, 2014, the amount reflected in accrued liabilities also included the fair value of options contracts and other non-exchange traded derivative instruments.
(3)
The fair value of foreign currency forward exchange contracts is the difference between the contract and current market foreign currency exchange rates at the end of the period. We estimate the fair value of foreign currency forward exchange 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. These contracts are classified as Level 2 within the fair value hierarchy.
(4)
The fair value of interest rate swap agreements represents the difference in the present value of cash flows calculated at the contracted interest rates and at current market interest rates at the end of the period. We calculate the fair value of interest rate swap agreements quarterly based on the quoted market price for the same or similar financial instruments. Such contracts are categorized as Level 2 within the fair value hierarchy.
(5)
The fair value of the cross-currency swap agreement is categorized as Level 2 within the fair value hierarchy and is estimated based on the difference between the contract and current market foreign currency exchange rates at the end of the period. The cross-currency swap was settled in the third quarter of 2015, commensurate with our purchase of the noncontrolling interest of Hershey do Brazil.
(6)
The fair value of deferred compensation derivatives is based on quoted prices for market interest rates and a broad market equity index and is, therefore, categorized as Level 2 within the fair value hierarchy.

15
THE HERSHEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data or if otherwise indicated)

Fair Value of Other Financial Instruments
The carrying amounts of cash and cash equivalents, short-term investments, accounts receivable, accounts payable and short-term debt approximated fair value as of October 4, 2015 and December 31, 2014 because of the relatively short maturity of these instruments.
The carrying value of long-term debt, including the current portion, was $2,080,607 as of October 4, 2015, compared with a fair value of $2,231,635. The estimated fair value of long-term debt is based on quoted market prices for similar debt issues and is, therefore, classified as Level 2 within the valuation hierarchy.
Income Statement Impact of Derivative Instruments
The effect of derivative instruments on the Consolidated Statements of Income for the three months ended October 4, 2015 and September 28, 2014 was as follows:
 
 
Non-designated Hedges
 
Cash Flow Hedges
 
 
 
 
 
Gains (losses) recognized in income (a)
 
Gains (losses) recognized in accumulated other comprehensive income (“OCI”) (effective portion)
 
Gains (losses) reclassified from accumulated OCI into income (effective portion) (b)
 
Gains recognized in income (ineffective portion) (c)
 
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
Commodities futures and options
 
$
—

 
$
393

 
$
(34,571
)
 
$
3,256

 
$
11,000

 
$
27,000

 
$
1,288

 
$
2,553

Foreign exchange contracts
 
750

 
7,033

 
662

 
(612
)
 
185

 
(361
)
 
—

 
—

Interest rate swap agreements
 
—

 
—

 
(36,187
)
 
(4,661
)
 
(1,166
)
 
(1,114
)
 
—

 
—

Deferred compensation derivatives
 
(1,403
)
 
371

 
—

 
—

 
—

 
—

 
—

 
—

Total
 
$
(653
)
 
$
7,797

 
$
(70,096
)
 
$
(2,017
)
 
$
10,019

 
$
25,525

 
$
1,288

 
$
2,553

(a)
Gains (losses) recognized in income for non-designated foreign currency forward exchange contracts and deferred compensation derivatives were included in selling, marketing and administrative expenses.
(b)
Gains (losses) reclassified from accumulated OCI into income were included in cost of sales for commodities futures and options contracts and for foreign currency forward exchange contracts designated as hedges of purchases of inventory or other productive assets. Other gains (losses) for foreign currency forward exchange contracts were included in selling, marketing and administrative expenses. Losses reclassified from accumulated OCI into income for interest rate swap agreements were included in interest expense.
(c)
Gains representing hedge ineffectiveness were included in cost of sales for commodities futures and options contracts.

16
THE HERSHEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data or if otherwise indicated)

The effect of derivative instruments on the Consolidated Statements of Income for the nine months ended October 4, 2015 and September 28, 2014 was as follows:
 
 
Non-designated Hedges
 
Cash Flow Hedges
 
 
 
 
 
Gains (losses) recognized in income (a)
 
Gains (losses) recognized in accumulated other comprehensive income (“OCI”) (effective portion)
 
Gains (losses) reclassified from accumulated OCI into income (effective portion) (b)
 
Gains recognized in income (ineffective portion) (c)
 
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
Commodities futures and options
 
$
(2,777
)
 
$
2,732

 
$
62,619

 
$
62,523

 
$
31,300

 
$
55,300

 
$
2,142

 
$
2,461

Foreign exchange contracts
 
474

 
(1,759
)
 
158

 
(301
)
 
273

 
3,536

 
—

 
—

Interest rate swap agreements
 
—

 
—

 
(28,184
)
 
(19,998
)
 
(3,479
)
 
(3,351
)
 
—

 
—

Deferred compensation derivatives
 
(1,024
)
 
1,909

 
—

 
—

 
—

 
—

 
—

 
—

Total
 
$
(3,327
)
 
$
2,882

 
$
34,593

 
$
42,224

 
$
28,094

 
$
55,485

 
$
2,142

 
$
2,461

(a)
Gains (losses) recognized in income for non-designated commodities futures and options contracts were included in cost of sales. Gains (losses) recognized in income for non-designated foreign currency forward exchange contracts and deferred compensation derivatives were included in selling, marketing and administrative expenses.
(b)
Gains (losses) reclassified from accumulated OCI into income were included in cost of sales for commodities futures and options contracts and for foreign currency forward exchange contracts designated as hedges of purchases of inventory or other productive assets. Other gains for foreign currency forward exchange contracts were included in selling, marketing and administrative expenses. Losses reclassified from accumulated OCI into income for interest rate swap agreements were included in interest expense.
(c)
Gains representing hedge ineffectiveness were included in cost of sales for commodities futures and options contracts.
The amount of net gains on cash flow hedging derivatives, including interest rate swap agreements, foreign currency forward exchange contracts, and commodities futures and options contracts, expected to be reclassified into income in the next 12 months was approximately $9,506 after tax as of October 4, 2015. This amount was primarily associated with commodities futures contracts.
Fair Value Hedges
For the nine months ended October 4, 2015, we recognized a net pretax benefit to interest expense of $5,597 relating to our fixed-to-floating interest rate swap arrangements.

17
THE HERSHEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data or if otherwise indicated)

6. NONCONTROLLING INTERESTS IN SUBSIDIARIES
We currently own a 50% controlling interest in Lotte Shanghai Food Company (“LSFC”), a joint venture established in 2007 in China for the purpose of manufacturing and selling product to the venture partners.
At December 31, 2014, we owned 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. At the end of 2014, per the terms of the prevailing quotaholder’s agreement, Bauducco provided notice of its intent to sell its 49% interest to us at an amount equal to fair value.
Because the noncontrolling interest held by Bauducco was redeemable as a result of the put right, the balance sheet presentation of the noncontrolling interest during 2015 was revised to be reflected as a redeemable noncontrolling interest. The balance was increased in the first three quarters of 2015 by a total of $33,915, in order to reflect the balance at its redemption value based on the internal valuation for the business. The offset of this adjustment was recorded to additional paid in capital. We purchased the remaining 49% interest in Hershey do Brasil in September. As a result, the redeemable noncontrolling interest is no longer reported on our balance sheet as of October 4, 2015.
A roll-forward showing the 2015 activity relating to the noncontrolling interests and redeemable noncontrolling interest follows:
 
Noncontrolling Interests
 
Redeemable Noncontrolling Interest
Balance, December 31, 2014
$
64,468

 
$
—

Reclassification from Total Equity to Redeemable Noncontrolling Interest
(13,428
)
 
13,428

Net loss attributable to noncontrolling interests (1)
(416
)
 
(4,393
)
Other comprehensive loss - foreign currency translation adjustments
(2,111
)
 
(2,334
)
Adjustment to redemption value
—

 
33,915

Other
—

 
(2,346
)
Purchase of redeemable noncontrolling interest
—

 
(38,270
)
Balance, October 4, 2015
$
48,513

 
$
—

(1) Amounts are not considered significant and are presented within selling, marketing and administrative expenses.

18
THE HERSHEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data or if otherwise indicated)

7. COMPREHENSIVE INCOME
A summary of the components of comprehensive income is as follows:
 
Three Months Ended
 
Three Months Ended
 
October 4, 2015
 
September 28, 2014
 
Pre-Tax
Amount
 
Tax (Expense)
Benefit
 
After-Tax
Amount
 
Pre-Tax
Amount
 
Tax (Expense)
Benefit
 
After-Tax
Amount
Net income
 
 
 
 
$
154,771

 
 
 
 
 
$
223,741

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
$
(26,631
)
 
$
—

 
(26,631
)
 
$
(17,321
)
 
$
—

 
(17,321
)
Pension and post-retirement benefit plans (a)
15,962

 
(5,993
)
 
9,969

 
5,851

 
(2,227
)
 
3,624

Cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
Losses on cash flow hedging derivatives
(70,096
)
 
26,182

 
(43,914
)
 
(2,017
)
 
1,085

 
(932
)
Reclassification adjustments (b)
(10,019
)
 
3,805

 
(6,214
)
 
(25,525
)
 
9,981

 
(15,544
)
Total other comprehensive loss
$
(90,784
)
 
$
23,994

 
(66,790
)
 
$
(39,012
)
 
$
8,839

 
(30,173
)
Total comprehensive income
 
 
 
 
$
87,981

 
 
 
 
 
$
193,568

Comprehensive gain attributable to noncontrolling interests
 
 
 
 
(820
)
 
 
 
 
 
—

Comprehensive income attributable to The Hershey Company
 
 
 
 
$
87,161

 
 
 
 
 
$
193,568


 
Nine Months Ended
 
Nine Months Ended
 
October 4, 2015
 
September 28, 2014
 
Pre-Tax
Amount
 
Tax (Expense)
Benefit
 
After-Tax
Amount
 
Pre-Tax
Amount
 
Tax (Expense)
Benefit
 
After-Tax
Amount
Net income
 
 
 
 
$
299,567

 
 
 
 
 
$
644,404

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
$
(51,681
)
 
$
—

 
(51,681
)
 
$
(12,016
)
 
$
—

 
(12,016
)
Pension and post-retirement benefit plans (a)
32,776

 
(11,880
)
 
20,896

 
17,386

 
(6,602
)
 
10,784

Cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
Gains on cash flow hedging derivatives
34,593

 
(13,570
)
 
21,023

 
42,224

 
(15,375
)
 
26,849

Reclassification adjustments (b)
(28,094
)
 
10,383

 
(17,711
)
 
(55,485
)
 
19,919

 
(35,566
)
Total other comprehensive loss
$
(12,406
)
 
$
(15,067
)
 
(27,473
)
 
$
(7,891
)
 
$
(2,058
)
 
(9,949
)
Total comprehensive income
 
 
 
 
$
272,094

 
 
 
 
 
$
634,455

Comprehensive loss attributable to noncontrolling interests
 
 
 
 
2,111

 
 
 
 
 
—

Comprehensive income attributable to The Hershey Company
 
 
 
 
$
274,205

 
 
 
 
 
$
634,455


(a)
These amounts are included in the computation of net periodic benefit costs. For more information, see Note 11.
(b)
For information on the presentation of reclassification adjustments for cash flow hedges on the Consolidated Statements of Income, see Note 5.

19
THE HERSHEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data or if otherwise indicated)

The components of accumulated other comprehensive loss as shown on the Consolidated Balance Sheets are as follows:
 
October 4,
2015
 
December 31,
2014
Foreign currency translation adjustments
$
(93,251
)
 
$
(43,681
)
Pension and post-retirement benefit plans, net of tax
(263,754
)
 
(284,650
)
Cash flow hedges, net of tax
(26,930
)
 
(30,242
)
Total accumulated other comprehensive loss
$
(383,935
)
 
$
(358,573
)
8. EARNINGS PER SHARE
We compute basic and diluted earnings per share based on the weighted-average number of shares of Common Stock and Class B Common Stock outstanding as follows:
 
Three Months Ended
 
Nine Months Ended
 
October 4,
2015
 
September 28,
2014
 
October 4,
2015
 
September 28,
2014
Net income
$
154,771

 
$
223,741

 
$
299,567

 
$
644,404

Weighted-average shares – basic:
 
 
 
 
 
 
 
Common stock
158,111

 
161,253

 
159,058

 
162,330

Class B common stock
60,620

 
60,620

 
60,620

 
60,620

Total weighted-average shares – basic:
218,731

 
221,873

 
219,678

 
222,950

Effect of dilutive securities:
 
 
 
 
 
 
 
Employee stock options
1,192

 
1,705

 
1,406

 
1,985

Performance and restricted stock units
152

 
299

 
238

 
358

Weighted-average shares – diluted
220,075

 
223,877

 
221,322

 
225,293

Earnings per share – basic:
 
 
 
 
 
 
 
Common stock
$
0.73

 
$
1.03

 
$
1.40

 
$
2.97

Class B common stock
$
0.66

 
$
0.94

 
$
1.27

 
$
2.68

Earnings per share – diluted:
 
 
 
 
 
 
 
Common stock
$
0.70

 
$
1.00

 
$
1.35

 
$
2.86

Class B common stock
$
0.66

 
$
0.94

 
$
1.28

 
$
2.67

The Class B Common Stock is convertible into Common Stock on a share for share basis at any time. The calculation of earnings per share-diluted for the Class B Common Stock was performed using the two-class method and the calculation of earnings per share-diluted for the Common Stock was performed using the if-converted method.
The earnings per share calculations for the three months ended October 4, 2015 and September 28, 2014 exclude 2,552 and 1,510 stock options, respectively, that would have been antidilutive. The earnings per share calculations for the nine months ended October 4, 2015 and September 28, 2014 exclude 2,660 and 1,510 stock options, respectively, that would have been antidilutive.
9. BUSINESS REALIGNMENT ACTIVITIES
On June 19, 2015, we announced a new productivity initiative (the “2015 Initiative”) intended to move decision making closer to the customer and the consumer, to enable a more enterprise-wide approach to innovation, to more swiftly advance our knowledge agenda, and to provide for a more efficient cost structure, while ensuring that we effectively allocate resources to future growth areas. Overall, the 2015 Initiative is intended to simplify the organizational structure to enhance the Company's ability to rapidly anticipate and respond to the changing demands of the global consumer.
The 2015 Initiative commenced during the third quarter and will result in a net reduction of approximately 300 positions, with the majority of the departures taking place by the end of 2015. During the three and nine months ended October 4, 2015, we incurred charges of $64,268 and $90,322, respectively, representing employee severance and related separation benefits as well as incremental third-party costs related to the design and implementation of the new organizational structure. Total pre-tax charges and costs for this program are expected to be approximately $120 million, the majority of which are

20

cash. This does not include a possible pension settlement loss if substantial lump sum withdrawals by employees retiring or leaving the Company are made during the remainder of the year. Possible pension settlement losses would result in a non-cash charge for the Company. The remaining costs for the 2015 Initiative are expected to be incurred over the next three quarters.
The tables below provide details for charges incurred across all restructuring and cost reduction activities during the three and nine month periods ended October 4, 2015 and September 28, 2014.
 
Three Months Ended
 
Nine Months Ended
 
October 4,
2015
 
September 28,
2014
 
October 4,
2015
 
September 28,
2014
Employee related costs
$
57,753

 
$
—

 
$
80,305

 
$
93

Asset related costs
1,329

 
—

 
5,905

 
—

Other exit costs, including Mauna Loa divestiture
—

 
16,372

 
2,667

 
20,544

Other implementation costs
8,381

 
—

 
12,551

 
—

Total charges associated with business realignment initiatives
$
67,463

 
$
16,372

 
$
101,428

 
$
20,637

Asset related charges presented in the table above represent accelerated depreciation and amortization charges relating to a program commenced in 2014 to rationalize certain non-U.S. manufacturing and distribution activities.
The other exit costs in 2014 include $13,340 relating to the write-down of an indefinite-lived trademark based on the estimated sales value for Mauna Loa, which was divested in 2015, as well as costs relating to the demolition of the Company's former manufacturing facility, representing the final phase of the Project Next Century Program. This program was substantially complete as of December 31, 2014.
Charges relating to our business realignment initiatives are classified in our Consolidated Statements of Income as follows:
 
Three Months Ended
 
Nine Months Ended
 
October 4,
2015
 
September 28,
2014
 
October 4,
2015
 
September 28,
2014
Cost of sales
$
2,529

 
$
—

 
$
5,205

 
$
93

Selling, marketing and administrative
7,181

 
—

 
13,251

 
—

Business realignment charges:
 
 
 
 
 
 
 
Business realignment and productivity initiatives
57,753

 
3,032

 
80,305

 
7,204

Divestiture of Mauna Loa (see Note 2)
—

 
13,340

 
2,667

 
13,340

Total business realignment charges
57,753

 
16,372

 
82,972

 
20,544

Total charges associated with business realignment initiatives
$
67,463

 
$
16,372

 
$
101,428

 
$
20,637

Segment operating results do not include business realignment and related charges because we evaluate segment performance excluding such charges.
The following table summarizes our business realignment activity for the nine months ended October 4, 2015:
 
Employee related costs
 
Other exit costs
 
Other implementation costs
 
Total
Liability balance at December 31, 2014
$
79

 
$
—

 
$
—

 
$
79

2015 business realignment charges
80,305

 
—

 
6,785

 
87,090

Cash payments
(11,106
)
 
—

 
(2,985
)
 
(14,091
)
Other, net
710

 
—

 
—

 
710

Liability balance at October 4, 2015
$
69,988

 
$
—

 
$
3,800

 
$
73,788


21
THE HERSHEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data or if otherwise indicated)

The charges reflected in the liability roll-forward above do not include items charged directly to expense, such as accelerated depreciation and amortization and the loss on the Mauna Loa divestiture and certain of the administrative charges associated with the 2015 initiative, as those items are not reflected in the business realignment liability in our Consolidated Balance Sheets.
10. STOCK COMPENSATION PLANS
We have various stock-based compensation programs under which awards, including stock options, performance stock units (“PSUs”) and performance stock, stock appreciation rights, restricted stock units (“RSUs”) and restricted stock may be granted to employees, non-employee directors and certain service providers upon whom the successful conduct of our business is dependent. These programs and the accounting treatment related thereto are described in Note 10 to the Consolidated Financial Statements included in our 2014 Annual Report on Form 10-K.
For the periods presented, compensation expense for all types of stock-based compensation programs and the related income tax benefit recognized were as follows:
 
Three Months Ended
 
Nine Months Ended

October 4,
2015
 
September 28,
2014
 
October 4,
2015
 
September 28,
2014
Pre-tax compensation expense
$
13,374

 
$
14,062

 
$
39,989

 
$
41,759

Related income tax benefit
$
4,334

 
$
4,907

 
$
13,676

 
$
14,407

As of October 4, 2015, total stock-based compensation cost related to non-vested awards not yet recognized was $67,520 and the weighted-average period over which this amount is expected to be recognized was approximately 2.2 years.
Stock Options
A summary of activity relating to grants of stock options for the period ended October 4, 2015 is as follows:
Stock Options
Shares
Weighted-Average
Exercise Price (per share)
Weighted-Average Remaining
Contractual Term
Aggregate Intrinsic Value
Outstanding at beginning of the period
7,319,377

$66.69
6.3 years
 
Granted
1,315,625

$105.51
 
 
Exercised
(1,275,257
)
$52.28
 
 
Forfeited
(247,868
)
$89.85
 
 
Outstanding as of October 4, 2015
7,111,877

$75.66
6.1 years
$
146,443

Options exercisable as of October 4, 2015
4,135,751

$61.25
4.8 years
130,816

The weighted-average fair value of options granted was $19.18 per share and $21.54 per share for the periods ended October 4, 2015 and September 28, 2014, respectively. The fair value was estimated on the date of grant using a Black-Scholes option-pricing model and the following weighted-average assumptions:
 
Nine Months Ended
 
October 4,
2015
 
September 28,
2014
Dividend yields
2.0
%
 
2.0
%
Expected volatility
20.2
%
 
22.3
%
Risk-free interest rates
1.9
%
 
2.1
%
Expected lives in years
6.6

 
6.7

The total intrinsic value of options exercised was $60,425 and $110,329 for the periods ended October 4, 2015 and September 28, 2014, respectively.

22
THE HERSHEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data or if otherwise indicated)

Performance Stock Units and Restricted Stock Units
A summary of activity relating to grants of PSUs and RSUs for the period ended October 4, 2015 is as follows:
Performance Stock Units and Restricted Stock Units
Number of Units
Weighted-average grant date fair value for equity awards or market value for liability awards (per unit)
Outstanding at beginning of year
904,306

$94.48
Granted
315,443

$107.53
Performance assumption change
(259,577
)
$105.93
Vested
(398,559
)
$73.63
Forfeited
(31,328
)
$112.15
Outstanding as of October 4, 2015
530,285

$106.42
The table above excludes PSU awards for 25,462 units as of December 31, 2014 and 20,993 units as of October 4, 2015 for which the measurement date has not yet occurred for accounting purposes.
The following table sets forth information about the fair value of the PSUs and RSUs granted during the periods indicated for potential future distribution to employees and directors. In addition, the table provides assumptions used to determine the fair value of the market-based total shareholder return component of the PSU grants using a Monte Carlo simulation model on the date of grant:
 
 
Nine Months Ended
 
 
October 4,
2015
 
September 28,
2014
Units granted
 
315,443

 
308,980

Weighted-average fair value at date of grant (per unit)
 
$107.53
 
$116.90
Monte Carlo simulation assumptions:
 
 
 
 
Estimated values (per unit)
 
$61.22
 
$80.95
Dividend yields
 
2.0
%
 
1.8
%
Expected volatility
 
14.9
%
 
15.5
%
The intrinsic value of share-based liabilities paid, combined with the fair value of shares vested, totaled $40,220 and $57,001 for the periods ended October 4, 2015 and September 28, 2014, respectively.
Deferred PSUs, deferred RSUs and deferred stock units representing directors’ fees totaled 503,557 units as of October 4, 2015. Each unit is equivalent to one share of the Company’s Common Stock.

23
THE HERSHEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data or if otherwise indicated)

11. PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS
Components of net periodic benefit cost for the third quarter were as follows:
 
Pension Benefits
 
Other Benefits
 
Three Months Ended
 
Three Months Ended
 
October 4,
2015
 
September 28,
2014
 
October 4,
2015
 
September 28,
2014
Service cost
$
7,068

 
$
6,670

 
$
135

 
$
177

Interest cost
11,025

 
12,218

 
2,516

 
2,927

Expected return on plan assets
(17,146
)
 
(18,519
)
 
—

 
—

Amortization of prior service (credit) cost
(294
)
 
(167
)
 
151

 
154

Amortization of net actuarial loss (gains)
7,595

 
5,838

 
(11
)
 
(36
)
Administrative expenses
229

 
193

 
48

 
23

Net periodic benefit cost
8,477

 
6,233

 
2,839

 
3,245

Settlement loss
2,583

 
—

 
—

 
—

Total amount reflected in earnings
$
11,060

 
$
6,233

 
$
2,839

 
$
3,245

We made contributions of $29,349 and $5,174 to the pension plans and other benefits plans, respectively, during the third quarter of 2015. In the third quarter of 2014, we made contributions of $24,696 and $4,105 to our pension plans and other benefits plans, respectively. These contribution amounts also include benefit payments from our unfunded, non-qualified pension plans and post-retirement benefit plans.
Components of net periodic benefit cost for the year-to-date periods were as follows:
 
Pension Benefits
 
Other Benefits
 
Nine Months Ended
 
Nine Months Ended
 
October 4,
2015
 
September 28,
2014
 
October 4,
2015
 
September 28,
2014
Service cost
$
21,301

 
$
20,003

 
$
406

 
$
530

Interest cost
33,187

 
36,643

 
7,617

 
8,778

Expected return on plan assets
(51,685
)
 
(55,537
)
 
—

 
—

Amortization of prior service (credit) cost
(881
)
 
(501
)
 
457

 
462

Amortization of net actuarial loss (gains)
22,899

 
17,511

 
(40
)
 
(107
)
Administrative expenses
737

 
586

 
92

 
78

Net periodic benefit cost
25,558

 
18,705

 
8,532

 
9,741

Settlement loss
2,583

 
—

 
—

 
—

Total amount reflected in earnings
$
28,141

 
$
18,705

 
$
8,532

 
$
9,741

We made contributions of $30,685 and $14,502 to the pension plans and other benefits plans, respectively, during the first nine months of 2015. In the first nine months of 2014, we made contributions of $26,669 and $14,777 to our pension plans and other benefits plans, respectively. These contribution amounts also include benefit payments from our unfunded, non-qualified pension plans and post-retirement benefit plans.


24
THE HERSHEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data or if otherwise indicated)

12. SEGMENT INFORMATION
Our current reporting structure is designed to ensure continued focus on North America, coupled with an emphasis on accelerating growth in our international markets, as we transform 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. The Presidents of our geographic regions, along with the Senior Vice President responsible for our Global Retail and Licensing business, are accountable for delivering our annual financial plans and report into our Chief Executive Officer, who serves as our Chief Operating Decision Maker (“CODM”), so we have defined our operating segments on a geographic basis. Our North America business currently generates over 85% of our consolidated revenue and none of our other geographic regions are individually significant.
We currently define our reportable segments as follows:
•