Edgar Filing: HERSHEY CO

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period

from ______to_______

Commission file number 1-183

THE HERSHEY COMPANY

(Exact name of registrant as specified in its charter)



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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer	x		Accelerated filer	¨	Smaller reporting company	¨

Non-accelerated filer	¨	(Do not check if a smaller reporting company)			Emerging growth company	¨

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

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

Indicate the number of shares outstanding of each of the registrant’s classes of common stock as of the latest practicable date.

Common Stock, one dollar par value—148,185,733 shares, as of April 19, 2019.

Class B Common Stock, one dollar par value—60,613,777 shares, as of April 19, 2019.

THE HERSHEY COMPANY

Quarterly Report on Form 10-Q

For the Period Ended March 31, 2019

TABLE OF CONTENTS



PART I. FINANCIAL INFORMATION		3
Item 1. Financial Statements		3
Consolidated Statements of Income for the Three Months Ended March 31, 2019 and April 1, 2018		3
Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2019 and April 1, 2018		4
Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018		5
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2019 and April 1, 2018		6
Consolidated Statement of Stockholders' Equity for the Three Months Ended March 31, 2019 and April 1, 2018		7
Notes to Unaudited Consolidated Financial Statements		8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		31
Item 3. Quantitative and Qualitative Disclosures About Market Risk		43
Item 4. Controls and Procedures		44

PART II. OTHER INFORMATION		45
Item1. Legal Proceedings		45
Item 1A. Risk Factors		45
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		45
Item 3. Defaults Upon Senior Securities		45
Item 4. Mine Safety Disclosures		45
Item 5. Other Information		45
Item 6. Exhibits		46

Signatures		47

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

THE HERSHEY COMPANY

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share amounts)

(unaudited)



	Three Months Ended
	March 31, 2019			April 1, 2018
Net sales	$	2,016,488		$	1,971,959
Cost of sales	1,123,984			997,899
Gross profit	892,504			974,060
Selling, marketing and administrative expense	453,573			485,324
Business realignment costs	62			8,224
Operating profit	438,869			480,512
Interest expense, net	37,458			29,339
Other (income) expense, net	5,477			1,942
Income before income taxes	395,934			449,231
Provision for income taxes	92,053			98,512
Net income including noncontrolling interest	303,881			350,719
Less: Net (loss) income attributable to noncontrolling interest	(477		)	516
Net income attributable to The Hershey Company	$	304,358		$	350,203

Net income per share—basic:
Common stock	$	1.49		$	1.71
Class B common stock	$	1.36		$	1.55

Net income per share—diluted:
Common stock	$	1.45		$	1.65
Class B common stock	$	1.36		$	1.55

Dividends paid per share:
Common stock	$	0.722		$	0.656
Class B common stock	$	0.656		$	0.596

See Notes to Unaudited Consolidated Financial Statements.

THE HERSHEY COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)



	For the three months ended
	March 31, 2019									April 1, 2018
	Pre-Tax Amount			Tax (Expense) Benefit			After-Tax Amount			Pre-Tax Amount			Tax (Expense) Benefit			After-Tax Amount
Net income including noncontrolling interest							$	303,881								$	350,719
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments:
Foreign currency translation gains (losses) during period	$	3,428		$	—		3,428			$	(1,267	)	$	—		(1,267		)
Pension and post-retirement benefit plans:
Reclassification of tax effects relating to U.S. tax reform	—			—			—			—			(36,535		)	(36,535		)
Reclassification to earnings	6,718			(1,807		)	4,911			5,097			(1,025		)	4,072
Cash flow hedges:
Gains (losses) on cash flow hedging derivatives	(789		)	718			(71		)	4,245			(990		)	3,255
Reclassification of tax effects relating to U.S. tax reform	—			—			—			—			(11,121		)	(11,121		)
Reclassification to earnings	1,438			(891		)	547			2,260			(609		)	1,651
Total other comprehensive income (loss), net of tax	$	10,795		$	(1,980	)	8,815			$	10,335		$	(50,280	)	(39,945		)
Total comprehensive income including noncontrolling interest							$	312,696								$	310,774
Comprehensive income attributable to noncontrolling interest							78									1,300
Comprehensive income attributable to The Hershey Company							$	312,618								$	309,474

See Notes to Unaudited Consolidated Financial Statements.

THE HERSHEY COMPANY

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)



	March 31, 2019			December 31, 2018
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	465,965		$	587,998
Accounts receivable—trade, net	694,136			594,145
Inventories	791,289			784,879
Prepaid expenses and other	265,539			272,159
Total current assets	2,216,929			2,239,181
Property, plant and equipment, net	2,108,075			2,130,294
Goodwill	1,803,601			1,801,103
Other intangibles	1,267,833			1,278,292
Other assets	459,754			252,984
Deferred income taxes	1,184			1,166
Total assets	$	7,857,376		$	7,703,020
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	500,633		$	502,314
Accrued liabilities	650,657			679,163
Accrued income taxes	74,562			33,773
Short-term debt	1,168,780			1,197,929
Current portion of long-term debt	3,553			5,387
Total current liabilities	2,398,185			2,418,566
Long-term debt	3,236,317			3,254,280
Other long-term liabilities	618,133			446,048
Deferred income taxes	181,381			176,860
Total liabilities	6,434,016			6,295,754

Stockholders’ equity:
The Hershey Company stockholders’ equity
Preferred stock, shares issued: none in 2019 and 2018	—			—
Common stock, shares issued: 299,287,967 at March 31, 2019 and December 31, 2018	299,287			299,287
Class B common stock, shares issued: 60,613,777 at March 31, 2019 and December 31, 2018	60,614			60,614
Additional paid-in capital	996,181			982,205
Retained earnings	7,193,240			7,032,020
Treasury—common stock shares, at cost: 151,275,897 at March 31, 2019 and 150,172,840 at December 31, 2018	(6,786,065		)	(6,618,625		)
Accumulated other comprehensive loss	(348,520		)	(356,780		)
Total—The Hershey Company stockholders’ equity	1,414,737			1,398,721
Noncontrolling interest in subsidiary	8,623			8,545
Total stockholders’ equity	1,423,360			1,407,266
Total liabilities and stockholders’ equity	$	7,857,376		$	7,703,020

See Notes to Unaudited Consolidated Financial Statements.

THE HERSHEY COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)



	Three Months Ended
	March 31, 2019			April 1, 2018
Operating Activities
Net income including noncontrolling interest	$	303,881		$	350,719
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	72,329			74,416
Stock-based compensation expense	10,556			10,458
Deferred income taxes	1,300			2,521
Write-down of equity investments	1,152			434
Other	8,497			9,055
Changes in assets and liabilities, net of business acquisitions and divestitures:
Accounts receivable—trade, net	(99,991		)	(9,882		)
Inventories	(6,410		)	(11,266		)
Prepaid expenses and other current assets	(8,740		)	7,309
Accounts payable and accrued liabilities	(2,798		)	(146,623		)
Accrued income taxes	56,282			82,231
Contributions to pension and other benefit plans	(4,661		)	(7,449		)
Other assets and liabilities	(1,437		)	(9,866		)
Net cash provided by operating activities	329,960			352,057
Investing Activities
Capital additions (including software)	(92,814		)	(60,133		)
Proceeds from sales of property, plant and equipment and other long-lived assets	75			112
Equity investments in tax credit qualifying partnerships	(18,884		)	(6,281		)
Business acquisitions, net of cash and cash equivalents acquired	—			(915,457		)
Net cash used in investing activities	(111,623		)	(981,759		)
Financing Activities
Net (decrease) increase in short-term debt	(28,990		)	1,686,816
Long-term borrowings	1,370			—
Repayment of long-term debt and finance leases	(3,135		)	(607,922		)
Repayment of tax receivable obligation	—			(42,500		)
Cash dividends paid	(146,463		)	(134,300		)
Repurchase of common stock	(198,500		)	(178,073		)
Exercise of stock options	34,573			1,884
Net cash (used in) provided by financing activities	(341,145		)	725,905
Effect of exchange rate changes on cash and cash equivalents	775			52
(Decrease) Increase in cash and cash equivalents	(122,033		)	96,255
Cash and cash equivalents, beginning of period	587,998			380,179
Cash and cash equivalents, end of period	$	465,965		$	476,434
Supplemental Disclosure
Interest paid	$	35,271		$	38,323
Income taxes paid	28,733			12,817

See Notes to Unaudited Consolidated Financial Statements.

THE HERSHEY COMPANY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

(unaudited)



	Preferred Stock		Common Stock		Class B Common Stock		Additional Paid-in Capital		Retained Earnings			Treasury Common Stock			Accumulated Other Comprehensive Income (Loss)			Noncontrolling Interests in Subsidiaries			Total Stockholders’ Equity
Balance, December 31, 2018	—		299,287		60,614		982,205		7,032,020			(6,618,625		)	(356,780		)	8,545			1,407,266
Net income (loss)									304,358									(477		)	303,881
Other comprehensive income															8,260			555			8,815
Dividends (including dividend equivalents):
Common Stock, $0.722 per share									(107,288		)										(107,288		)
Class B Common Stock, $0.656 per share									(39,763		)										(39,763		)
Stock-based compensation							10,463														10,463
Exercise of stock options and incentive-based transactions							3,513					31,060									34,573
Repurchase of common stock												(198,500		)							(198,500		)
Impact of ASU 2016-02 related to leases									3,913												3,913
Balance, March 31, 2019	$	—	$	299,287	$	60,614	$	996,181	$	7,193,240		$	(6,786,065	)	$	(348,520	)	$	8,623		$	1,423,360



	Preferred Stock		Common Stock		Class B Common Stock		Additional Paid-in Capital			Retained Earnings			Treasury Common Stock			Accumulated Other Comprehensive Income (Loss)			Noncontrolling Interests in Subsidiaries		Total Stockholders’ Equity
Balance, December 31, 2017	—		299,281		60,620		924,978			6,371,082			(6,426,877		)	(313,746		)	16,227		931,565
Net income										350,203									516		350,719
Other comprehensive income																6,927			784		7,711
Dividends (including dividend equivalents):
Common Stock, $0.656 per share										(98,495		)									(98,495		)
Class B Common Stock, $0.596 per share										(36,130		)									(36,130		)
Stock-based compensation							10,474														10,474
Exercise of stock options and incentive-based transactions							(9,487		)				11,371								1,884
Repurchase of common stock													(178,073		)						(178,073		)
Reclassification of tax effects relating to U.S. tax reform										47,656						(47,656		)			—
Balance, April 1, 2018	$	—	$	299,281	$	60,620	$	925,965		$	6,634,316		$	(6,593,579	)	$	(354,475	)	$	17,527	$	989,655

See Notes to Unaudited Consolidated Financial Statements.

THE HERSHEY COMPANY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(amounts in thousands, except share data or if otherwise indicated)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The unaudited consolidated financial statements provided in this report include the accounts of The Hershey Company (the “Company,” “Hershey,” “we” or “us”) and our majority-owned subsidiaries and entities in which we have a controlling financial interest after the elimination of intercompany accounts and transactions. We have a controlling financial interest if we own a majority of the outstanding voting common stock and the noncontrolling shareholders do not have substantive participating rights, or we have significant control over an entity through contractual or economic interests in which we are the primary beneficiary.

The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial reporting and with the rules and regulations for reporting on Form 10-Q. Accordingly, they do not contain certain information and disclosures required by GAAP for comprehensive financial statements. The financial statements reflect all adjustments which are, in our opinion, necessary for a fair presentation of the results of operations, financial position, and cash flows for the indicated periods.

Operating results for the quarter ended March 31, 2019 may not be indicative of the results that may be expected for the year ending December 31, 2019 because of seasonal effects on our business. These financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2018 (our “2018 Annual Report on Form 10-K”), which provides a more complete understanding of our accounting policies, financial position, operating results and other matters.

Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842). This ASU requires lessees to recognize most leases on their balance sheets as lease liabilities with corresponding right-of-use ("ROU") assets. The Company adopted the standard as of January 1, 2019, using a modified retrospective approach and applying the standard’s transition provisions at January 1, 2019, the effective date.

We elected the package of practical expedients permitted under the transition guidance, which among other things, allows us to carryforward the historical lease classification. In addition, we made accounting policy elections to combine the lease and non-lease components for asset categories that support selling, marketing and general administrative activities. These asset categories comprise the majority of our leases. Finally, we made elections to exclude from balance sheet reporting those leases with initial terms of 12 months or less.

Adoption of the new standard resulted in the recording of operating lease ROU assets and lease liabilities of $227,258 and $216,966, respectively, with the difference largely due to prepaid and deferred rent that were reclassified to the ROU asset value. In addition, we derecognized a build-to-suit arrangement in accordance with the transition requirements, which resulted in an adjustment to retained earnings of $3,913. The standard did not materially affect our consolidated net income or cash flows. See Note 7 for further details.

In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which amends ASC 815. The purpose of this ASU is to better align accounting rules with a company’s risk management activities and financial reporting for hedging relationships, better reflect economic results of hedging in financial statements, simplify hedge accounting requirements and improve the disclosures of hedging arrangements. We adopted the provisions of this ASU in the first quarter of 2019 using a modified retrospective approach. Adoption of the new standard did not have a material impact on our consolidated financial statements.

THE HERSHEY COMPANY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(amounts in thousands, except share data or if otherwise indicated)

In June 2018, the FASB issued ASU No. 2018-07, Compensation – Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting. This ASU is intended to simplify aspects of share-based compensation issued to non-employees by making the guidance consistent with accounting for employee share-based compensation. We adopted the provisions of this ASU in the first quarter of 2019. Adoption of the new standard did not have a material impact on our consolidated financial statements.

In February 2018, the FASB issued ASU No. 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This ASU permits a company to reclassify the income tax effects of the 2017 Tax Cuts and Jobs Act (“U.S. tax reform”) on items within AOCI to retained earnings. We adopted the provisions of this ASU in the first quarter of 2018. We elected to reclassify the income tax effects of U.S. tax reform from items in AOCI as of January 1, 2018 so that the tax effects of items within AOCI are reflected at the appropriate tax rate. The impact of the reclassification resulted in a $47,656 decrease to AOCI and a corresponding increase to retained earnings.

Recently Issued Accounting Pronouncements Not Yet Adopted

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU modifies the measurement of expected credit losses of certain financial instruments. ASU 2016-13 is effective for annual periods beginning after December 15, 2019 and interim periods within those annual periods. The amendments in this ASU should be applied on a modified retrospective basis to all periods presented. We are currently evaluating the effect that ASU 2016-13 will have on our consolidated financial statements and related disclosures.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. This ASU modifies the disclosure requirements for fair value measurements by removing, modifying or adding certain disclosures. ASU 2018-13 is effective for annual periods beginning after December 15, 2019 and interim periods within those annual periods, with early adoption permitted. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. We are currently evaluating the effect that ASU 2018-13 will have on our consolidated financial statements and related disclosures.

In August 2018, the FASB issued ASU No. 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General (Topic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans, which modifies the disclosure requirements for defined benefit pension plans and other post-retirement plans. ASU 2018-14 is effective for annual periods beginning after December 15, 2020, with early adoption permitted. The amendments in this ASU should be applied on a retrospective basis to all periods presented. We are currently evaluating the effect that ASU 2018-14 will have on our consolidated financial statements and related disclosures.

In August 2018, the FASB issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40), Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). ASU 2018-15 is effective for annual periods beginning after December 15, 2019 and interim periods within those annual periods, with early adoption permitted. The amendments in this ASU should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. We are currently evaluating the effect that ASU 2018-15 will have on our consolidated financial statements and related disclosures.

No other new accounting pronouncement issued or effective during the fiscal year had or is expected to have a material impact on our consolidated financial statements or disclosures.

THE HERSHEY COMPANY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(amounts in thousands, except share data or if otherwise indicated)

2. BUSINESS ACQUISITIONS

2018 Activity

Pirate Brands

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

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



Inventories	$	4,663
Plant, property and equipment, net	48
Goodwill	129,991
Other intangible assets	289,300
Accrued liabilities	(1,000		)
Net assets acquired	$	423,002

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

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

Amplify Snack Brands, Inc.

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

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

THE HERSHEY COMPANY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(amounts in thousands, except share data or if otherwise indicated)



Accounts receivable	$	40,763
Other current assets	34,593
Plant, property and equipment, net	67,989
Goodwill	966,389
Other intangible assets	682,000
Other non-current assets	1,049
Accounts payable	(32,394		)
Accrued liabilities	(132,519		)
Current debt	(610,844		)
Other current liabilities	(2,931		)
Non-current deferred income taxes	(93,489		)
Non-current liabilities	(5,149		)
Net assets acquired	$	915,457

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

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

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

The Company incurred acquisition-related costs of $20,577 related to the acquisition of Amplify, the majority of which were incurred during the first quarter of 2018. Acquisition-related costs consisted primarily of legal fees, consultant fees, valuation fees and other deal costs and are recorded in the selling, marketing and administrative expense caption within the Consolidated Statements of Operations.

3. GOODWILL AND INTANGIBLE ASSETS

The changes in the carrying value of goodwill by reportable segment for the three months ended March 31, 2019 are as follows:



	North America		International and Other		Total
Balance at December 31, 2018	1,782,845		18,258		1,801,103
Foreign currency translation	2,286		212		2,498
Balance at March 31, 2019	$	1,785,131	$	18,470	$	1,803,601

THE HERSHEY COMPANY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(amounts in thousands, except share data or if otherwise indicated)

The following table provides the gross carrying amount and accumulated amortization for each major class of intangible asset:



	March 31, 2019					December 31, 2018
	Gross Carrying Amount		Accumulated Amortization			Gross Carrying Amount		Accumulated Amortization
Intangible assets subject to amortization:
Trademarks	$	1,174,817	$	(70,271	)	$	1,173,770	$	(60,995	)
Customer-related	164,606		(36,485		)	163,860		(33,516		)
Patents	16,478		(16,027		)	16,306		(15,772		)
Total	1,355,901		(122,783		)	1,353,936		(110,283		)

Intangible assets not subject to amortization:
Trademarks	34,715					34,639
Total other intangible assets	$	1,267,833				$	1,278,292

Total amortization expense for the three months ended March 31, 2019 and April 1, 2018 was $12,238 and $8,451, respectively.

4. SHORT AND LONG-TERM DEBT

Short-term Debt

As a source of short-term financing, we utilize cash on hand and commercial paper or bank loans with an original maturity of three months or less. We maintain a $1.4 billion unsecured revolving credit facility, which currently expires in November 2020.

The credit agreement contains certain financial and other covenants, customary representations, warranties and events of default. As of March 31, 2019, we were in compliance with all covenants pertaining to the credit agreement, and we had no significant compensating balance agreements that legally restricted these funds. For more information, refer to the Consolidated Financial Statements included in our 2018 Annual Report on Form 10-K.

In addition to the revolving credit facility, we maintain lines of credit with domestic and international commercial banks. We had short-term foreign bank loans against these lines of credit for $125,226 at March 31, 2019 and $113,189 at December 31, 2018. Commitment fees relating to our revolving credit facility and lines of credit are not material.

At March 31, 2019, we had outstanding commercial paper totaling $1,043,554, at a weighted average interest rate of 2.5%. At December 31, 2018, we had outstanding commercial paper totaling $1,084,740, at a weighted average interest rate of 2.4%.

THE HERSHEY COMPANY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(amounts in thousands, except share data or if otherwise indicated)

Long-term Debt

Long-term debt consisted of the following:



	March 31, 2019			December 31, 2018
2.90% Notes due 2020	$	350,000		$	350,000
4.125% Notes due 2020	350,000			350,000
3.10% Notes due 2021	350,000			350,000
8.8% Debentures due 2021	84,715			84,715
3.375% Notes due 2023	500,000			500,000
2.625% Notes due 2023	250,000			250,000
3.20% Notes due 2025	300,000			300,000
2.30% Notes due 2026	500,000			500,000
7.2% Debentures due 2027	193,639			193,639
3.375% Notes due 2046	300,000			300,000
Finance lease liabilities	78,185			101,980
Net impact of interest rate swaps, debt issuance costs and unamortized debt discounts	(16,669		)	(20,667		)
Total long-term debt	3,239,870			3,259,667
Less—current portion	3,553			5,387
Long-term portion	$	3,236,317		$	3,254,280

Interest Expense

Net interest expense consists of the following:



	Three Months Ended
	March 31, 2019			April 1, 2018
Interest expense	$	40,663		$	32,853
Capitalized interest	(1,257		)	(1,299		)
Interest expense	39,406			31,554
Interest income	(1,948		)	(2,215		)
Interest expense, net	$	37,458		$	29,339

5. DERIVATIVE INSTRUMENTS

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

In entering into these contracts, we have assumed the risk that might arise from the possible inability of counterparties to meet the terms of their contracts. We mitigate this risk by entering into exchanged-traded contracts with collateral posting requirements and/or by performing financial assessments prior to contract execution, conducting periodic evaluations of counterparty performance and maintaining a diverse portfolio of qualified counterparties. We do not expect any significant losses from counterparty defaults.

Commodity Price Risk

We enter into commodities futures and options contracts and other commodity derivative instruments to reduce the effect of future price fluctuations associated with the purchase of raw materials, energy requirements and

THE HERSHEY COMPANY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(amounts in thousands, except share data or if otherwise indicated)

transportation services. We generally hedge commodity price risks for 3- to 24-month periods. Our open commodity derivative contracts had a notional value of $1,166,051 as of March 31, 2019 and $693,463 as of December 31, 2018.

Derivatives used to manage commodity price risk are not designated for hedge accounting treatment. Therefore, the changes in fair value of these derivatives are recorded as incurred within cost of sales. As discussed in Note 13, we define our segment income to exclude gains and losses on commodity derivatives until the related inventory is sold, at which time the related gains and losses are reflected within segment income. This enables us to continue to align the derivative gains and losses with the underlying economic exposure being hedged and thereby eliminate the mark-to-market volatility within our reported segment income.

Foreign Exchange Price Risk

We are exposed to foreign currency exchange rate risk related to our international operations, including non-functional currency intercompany debt and other non-functional currency transactions of certain subsidiaries. Principal currencies hedged include the euro, Canadian dollar, Japanese yen, British pound, and Brazilian real. We typically utilize foreign currency forward exchange contracts to hedge these exposures for periods ranging from 3 to 12 months. The contracts are either designated as cash flow hedges or are undesignated. The net notional amount of foreign exchange contracts accounted for as cash flow hedges was $66,330 at March 31, 2019 and $29,458 at December 31, 2018. The effective portion of the changes in fair value on these contracts is recorded in other comprehensive income and reclassified into earnings in the same period in which the hedged transactions affect earnings. The net notional amount of foreign exchange contracts that are not designated as accounting hedges was $7,933 at March 31, 2019 and $11,072 at December 31, 2018. The change in fair value on these instruments is recorded directly in cost of sales or selling, marketing and administrative expense, depending on the nature of the underlying exposure.

Interest Rate Risk

We manage our targeted mix of fixed and floating rate debt with debt issuances and by entering into fixed-to-floating interest rate swaps in order to mitigate fluctuations in earnings and cash flows that may result from interest rate volatility. These swaps are designated as fair value hedges, for which the gain or loss on the derivative and the offsetting loss or gain on the hedged item are recognized in current earnings as interest expense (income), net. We had one interest rate derivative instrument in a fair value hedging relationship with a notional amount of $350,000 at March 31, 2019 and December 31, 2018.

In order to manage interest rate exposure, in previous years we utilized interest rate swap agreements to protect against unfavorable interest rate changes relating to forecasted debt transactions. These swaps, which were settled upon issuance of the related debt, were designated as cash flow hedges and the gains and losses that were deferred in other comprehensive income are being recognized as an adjustment to interest expense over the same period that the hedged interest payments affect earnings.

Equity Price Risk

We are exposed to market price changes in certain broad market indices related to our deferred compensation obligations to our employees. To mitigate this risk, we use equity swap contracts to hedge the portion of the exposure that is linked to market-level equity returns. These contracts are not designated as hedges for accounting purposes and are entered into for periods of 3 to 12 months. The change in fair value of these derivatives is recorded in selling, marketing and administrative expense, together with the change in the related liabilities. The notional amount of the contracts outstanding at March 31, 2019 and December 31, 2018 was $23,501 and $33,168, respectively.

THE HERSHEY COMPANY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(amounts in thousands, except share data or if otherwise indicated)

The following table presents the classification of derivative assets and liabilities within the Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018:



	March 31, 2019				December 31, 2018
	Assets (1)		Liabilities (1)		Assets (1)		Liabilities (1)
Derivatives designated as cash flow hedging instruments:
Foreign exchange contracts	$	2,065	$	786	$	3,394	$	485

Derivatives designated as fair value hedging instruments:
Interest rate swap agreements	504		—		—		4,832

Derivatives not designated as hedging instruments:
Commodities futures and options (2)	5,862		552		7,230		262
Deferred compensation derivatives	3,043		—		—		4,736
Foreign exchange contracts	44		169		70		484
	8,949		721		7,300		5,482
Total	$	11,518	$	1,507	$	10,694	$	10,799


(1)	Derivatives assets are classified on our balance sheet within prepaid expenses and other as well as other assets. Derivative liabilities are classified on our balance sheet within accrued liabilities and other long-term liabilities.

(2)

As of March 31, 2019, amounts reflected on a net basis in assets were assets of $94,078 and liabilities of $89,233, which are associated with cash transfers receivable or payable on commodities futures contracts reflecting the change in quoted market prices on the last trading day for the period. The comparable amounts reflected on a net basis in assets at December 31, 2018 were assets of $63,978 and liabilities of $57,351. At March 31, 2019 and December 31, 2018, the remaining amount reflected in assets and liabilities related to the fair value of other non-exchange traded derivative instruments, respectively.

Income Statement Impact of Derivative Instruments

The effect of derivative instruments on the Consolidated Statements of Income for the three months ended March 31, 2019 and April 1, 2018 was as follows:



	Non-designated Hedges						Cash Flow Hedges
	Non-designated Hedges						Cash Flow Hedges
	Gains (losses) recognized in income (a)						Gains (losses) recognized in other comprehensive income (“OCI”)					Gains (losses) reclassified from accumulated OCI into income (b)

	2019			2018			2019			2018		2019			2018
Commodities futures and options	$	(26,641	)	$	66,590		$	—		$	—	$	—		$	—
Foreign exchange contracts	215			(152		)	(789		)	4,245		931			136
Interest rate swap agreements	—			—			—			—		(2,369		)	(2,396		)
Deferred compensation derivatives	3,043			(393		)	—			—		—			—
Total	$	(23,383	)	$	66,045		$	(789	)	$	4,245	$	(1,438	)	$	(2,260	)


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

THE HERSHEY COMPANY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(amounts in thousands, except share data or if otherwise indicated)


(b)	Gains (losses) reclassified from AOCI into income for foreign currency forward exchange contracts were included in selling, marketing and administrative expenses. Losses reclassified from AOCI into income for interest rate swap agreements were included in interest expense.

The amount of pretax net losses on derivative instruments, including interest rate swap agreements and foreign currency forward exchange contracts expected to be reclassified into earnings in the next 12 months was approximately $8,287 as of March 31, 2019. This amount is primarily associated with interest rate swap agreements.

Fair Value Hedging Relationships

The following table presents amounts that were recorded on the balance sheet related to cumulative basis adjustments for interest rate swap derivatives designated as fair value accounting hedges as of March 31, 2019 and December 31, 2018.



Line Item in the Consolidated Balance Sheet in Which the Hedged Item is Included	Carrying Amount of the Hedged Asset/(Liability)						Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount Assets/(Liabilities)
	March 31, 2019			December 31, 2018			March 31, 2019		December 31, 2018
Long-term debt	$	(349,496	)	$	(354,832	)	$	504	$	(4,832	)

For the three months ended March 31, 2019 and April 1, 2018, we recognized net incremental interest expense of $630 and a net pretax benefit to interest expense of $278 relating to our fixed-to-floating interest swap arrangements.

6. FAIR VALUE MEASUREMENTS

Accounting guidance on fair value measurements requires that financial assets and liabilities be classified and disclosed in one of the following categories of the fair value hierarchy:

Level 1 – Based on unadjusted quoted prices for identical assets or liabilities in an active market.

Level 2 – Based on observable market-based inputs or unobservable inputs that are corroborated by market data.

Level 3 – Based on unobservable inputs that reflect the entity's own assumptions about the assumptions that a market participant would use in pricing the asset or liability.

We did not have any level 3 financial assets or liabilities, nor were there any transfers between levels during the periods presented.

THE HERSHEY COMPANY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(amounts in thousands, except share data or if otherwise indicated)

The following table presents assets and liabilities that were measured at fair value in the Consolidated Balance Sheet on a recurring basis as of March 31, 2019 and December 31, 2018:



	Assets (Liabilities)
	Level 1		Level 2		Level 3		Total
March 31, 2019:
Derivative Instruments:
Assets:
Foreign exchange contracts (1)	$	—	$	2,109	$	—	$	2,109
Interest rate swap agreements (2)	—