The Hershey Company
Annual Report 2018

Plain-text annual report

NOTICE(cid:3)OF(cid:3)201(cid:891)(cid:3)ANNUAL(cid:3)MEETING(cid:3) AND(cid:3)PROXY(cid:3)STATEMENT 201(cid:890)(cid:3)ANNUAL(cid:3)REPORT(cid:3) TO(cid:3)STOCKHOLDERS May 2(cid:883), 201(cid:891) 10:00 a.m., Eastern Daylight Time GIANT Center 550 West Hersheypark Drive Hershey, Pennsylvania Michele Buck President and Chief Executive Officer Dear Stockholder: April 11, 2019 I am pleased to invite you to The Hershey Company’s 2019 Annual Meeting of Stockholders. Our meeting will be held on Tuesday, May 21, 2019, at 10:00 a.m. Eastern Standard Time. Detailed instructions for attending the meeting and how to vote your Hershey shares prior to the meeting are included in the proxy materials that accompany this letter. Your vote is extremely important to us, and I encourage you to review the materials and submit your vote today. This year we are celebrating the company’s 125th anniversary. We are one of the few Fortune 500 companies that are connecting with consumers as strongly today as we were more than a century ago and that is because, quite simply, we love making the brands that our consumers love. As we celebrate this extraordinary milestone, I am honored to lead a company with teams of people who care about one another and their communities, have deep pride in our incredible portfolio of brands and recognize that as the stewards of this incredible legacy, we are entrusted to build for the future and make the strategic decisions that ensure Hershey is well-positioned for generations to come. As I look back on 2018, the marketplace continues to be dynamic and fast-moving. We have amazing brands in categories that are growing. Consumers continue to snack throughout the day and Hershey is offering more snacking options to satisfy their needs by broadening our product portfolio beyond confection to reflect the changing way people want to snack. In 2018, we again delivered our earnings per share commitment and outpaced our peer set relative to total shareholder return while continuing to invest for future growth. With a 3.7% net sales increase for the full year, our commercial strategies to deliver are working. Our core confection sales and margin trends are improving. We remain the #1 manufacturer in the U.S. confection category from a sales standpoint, but as importantly we have a portfolio of iconic brands that are loved by consumers. Hershey owns 6 out of the top 10 brands in the category, all greater than a half billion dollars in sales. We also rank #2 on the list of the 100 most powerful brands. Our recently acquired snacking businesses – Amplify and Pirate Brands – are growing and delivering against our financial objectives. These two high-growth, high-margin, better-for-you snacking assets demonstrate our M&A capabilities, complement our existing portfolio and enable us to capture incremental consumer occasions. We are confident that we can further build on this momentum in 2019. Last year, we reduced our general administrative costs to enable investment in growth-generating assets and capabilities. We made difficult decisions to reallocate resources to our highest priorities and reorganized every function to achieve greater focus on our commercial objectives. Our SKU rationalization program and pricing actions also are assisting in improving our margins and position us well to make additional progress in 2019. Hershey’s strong cash flow and healthy balance sheet give us the on-going flexibility to invest and deliver long-term shareholder value. In 2018, we continued to invest in additional capacity for our core brands with new Reese’s and Kit Kat® production lines, as well as expanded capacity for IceBreakers Gum and within our distribution network. And our multi-year Enterprise Resource Planning (ERP) initiative is on track and rolling out, enabling our broader digital transformation efforts. We made great progress in our international business this year, which has undergone a broad transformation and delivered strong top and bottom line results that exceeded our growth expectations for 2018. International operating income hit a historic high that beat our previous full-year International record set in 2012. And our transformation in China is moving ahead of expectations and contributing to our strong gross margin improvement. Our International strategy, with a “Hershey’s First” focus on our iconic flagship brand, is working and resulted in solid share gains in our key focus markets. We expect to make continued progress in International in 2019, but at a slower pace given the considerable gains we achieved last year. Foundational to the progress we made in 2018 are the remarkable employees and culture of Hershey – they are the key to our ability to execute and quickly move resources to areas that will have the greatest commercial impact. As the marketplace around us changes, we are making changes with the launch of new behaviors that define how our teams work together to win. We are moving faster, experimenting more and expanding employees’ freedom to operate while retaining our collaborative spirit. We launched our ‘Heartwarming the World’ campaign for the Hershey’s brand, which reminds people how this iconic brand can melt the distance between people. And I am incredibly proud of the launch of our new sustainability strategy, Shared Goodness Promise, and our cocoa strategy called Cocoa For Good, a set of new commitments to sustainable and responsible cocoa. This work will improve lives in communities worldwide. Looking ahead to 2019, we are confident in the plans we are executing. We remain focused on driving long-term shareholder value by delivering balanced top and bottom line growth while investing in differentiated capabilities that will expand our competitive advantage in the future. Thank you for your continued trust in The Hershey Company. We look forward to sharing more details about the year we had, where we are heading in 2019 and celebrating our 125th anniversary together when we see you at the meeting. Michele Buck Safe Harbor Statement ____________________ Please refer to the 2018 Annual Report to Stockholders that accompanies this letter for a discussion of Risk Factors that could cause future results to differ materially from the forward-looking statements, expectations and assumptions expressed or implied in this letter to stockholders or elsewhere. This letter to stockholders is not part of our proxy solicitating material. Charles A. Davis Chairman of the Board April 11, 2019 After more than a decade serving as an independent director for The Hershey Company, it was my great honor last year to take on the role of Chairman of the Board. In this role, I am privileged to work with the company’s talented leadership team and our highly seasoned Board of Directors as we continue to guide Hershey’s future success. During my time on the Hershey Board of Directors, I have witnessed the evolution taking place at the company from a U.S.-based chocolate company to a more diversified snacking company with operations in key markets around the world. Since becoming Chief Executive Officer in 2017, Michele Buck has led a broad transformation of the company, focusing the organization against business strategies that address the changing dynamics of consumer eating and shopping habits while investing in the iconic brands that have always made Hershey great. The company’s results in 2018 show that this strategic approach is working. Our core confection exited the year with momentum and the recent acquisitions of Amplify and Pirate Brands are contributing to top and bottom line growth for the company. The success of the international business in 2018 demonstrates that making focused investments and executing solid growth strategies in growing markets play a critical role in delivering strong returns for the company and our investors. The company continues to deliver financial success while living its values and doing business the right way. Last year, Hershey made a number of sustainability commitments and implemented programs that benefit our communities around the world and trace directly to the rich history of Milton S. Hershey and his belief in operating with integrity and for the benefit of society. It is a privilege to serve as Chairman of this great company as we celebrate 125 years of leadership in confection and snacking and bring these beloved brands to markets around the world. I feel good about the progress in 2018 and am confident that the strategic initiatives now in place set up the company for many more years of growth. On behalf of The Hershey Company Board of Directors, I want to thank all of our stockholders for the trust you have put in this iconic company and its leadership. We are in a good position to continue to be a snacking leader that the world looks to with respect and admiration for another 125 years. Charles A. Davis TABLE OF CONTENTS Page NOTICE OF 2019 ANNUAL MEETING OF STOCKHOLDERS PROXY STATEMENT SUMMARY 2019 Annual Meeting of Stockholders ............................................................................................... 1 Voting Matters and Board Recommendations ................................................................................... 1 Our Director Nominees ...................................................................................................................... 2 Governance Highlights ....................................................................................................................... 3 Company Strategy and 2018 Business Highlights ............................................................................. 5 Executive Compensation Highlights .................................................................................................. 6 PROXY STATEMENT Questions and Answers about the Annual Meeting ........................................................................... 7 Corporate Governance ...................................................................................................................... 12 The Board of Directors ..................................................................................................................... 15 Meetings and Committees of the Board ........................................................................................... 18 Proposal No. 1 – Election of Directors .......................................................................................... 21 Non-Employee Director Compensation .......................................................................................... 26 Share Ownership of Directors, Management and Certain Beneficial Owners ................................. 30 Audit Committee Report .................................................................................................................. 34 Information about our Independent Auditors ................................................................................... 36 Proposal No. 2 – Ratification of Appointment of Ernst & Young LLP as Independent Auditors ................................................................................................................. 37 Compensation Discussion & Analysis .......................................................................................... 38 Executive Compensation .................................................................................................................. 38 Executive Summary ................................................................................................................ 38 The Role of the Compensation Committee ............................................................................. 43 Compensation Components ..................................................................................................... 44 Setting Compensation ............................................................................................................. 45 Base Salary .............................................................................................................................. 46 Annual Incentives .................................................................................................................... 46 Long-Term Incentives ............................................................................................................. 49 Perquisites ............................................................................................................................... 52 Retirement Plans ..................................................................................................................... 52 Employment Agreements ........................................................................................................ 53 Severance and Change in Control Plans ................................................................................. 53 Stock Ownership Guidelines ................................................................................................... 54 Other Compensation Policies and Practices ............................................................................ 54 Compensation Committee Report .................................................................................................... 56 2018 Summary Compensation Table ...................................................................................... 57 2018 Grants of Plan-Based Awards Table .............................................................................. 60 i Outstanding Equity Awards at 2018 Fiscal-Year End Table .................................................. 61 2018 Option Exercises and Stock Vested Table ..................................................................... 63 2018 Pension Benefits Table ................................................................................................... 64 2018 Non-Qualified Deferred Compensation Table ............................................................... 65 Potential Payments upon Termination or Change in Control ................................................. 67 Separation Payments under Confidential Separation Agreement and General Release ......... 74 CEO Pay Ratio Disclosure ...................................................................................................... 75 Equity Compensation Plan Information .................................................................................. 75 Proposal No. 3 – Advise on Named Executive Officer Compensation ...................................... 76 Section 16(a) Beneficial Ownership Reporting Compliance ........................................................... 77 Certain Transactions and Relationships ........................................................................................... 77 Compensation Committee Interlocks and Insider Participation ....................................................... 78 Other Matters .................................................................................................................................... 79 2018 ANNUAL REPORT TO STOCKHOLDERS Item 1. Business ................................................................................................................................. 1 Item 1A. Risk Factors ......................................................................................................................... 6 Item 1B. Unresolved Staff Comments ............................................................................................. 11 Item 2. Properties ............................................................................................................................. 11 Item 3. Legal Proceedings ................................................................................................................ 12 Item 4. Mine Safety Disclosures ...................................................................................................... 12 Supplemental Item. Executive Officers of the Registrant ................................................................ 13 Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities .................................................................................... 14 Item 6. Selected Financial Data ........................................................................................................ 16 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations ................................................................................................................... 17 Item 7A. Quantitative and Qualitative Disclosures about Market Risk ........................................... 43 Item 8. Financial Statements and Supplementary Data .................................................................... 47 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ................................................................................................................... 101 Item 9A. Controls and Procedures ................................................................................................. 101 Item 9B. Other Information ............................................................................................................ 103 Item 10. Directors, Executive Officers and Corporate Governance............................................... 104 Item 11. Executive Compensation ................................................................................................. 104 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ...................................................................................................... 104 Item 13. Certain Relationships and Related Transactions, and Director Independence ................ 105 Item 14. Principal Accountant Fees and Services .......................................................................... 105 Item 15. Exhibits, Financial Statement Schedules ......................................................................... 106 Item 16. Form 10-K Summary ....................................................................................................... 106 Signatures ....................................................................................................................................... 107 Schedule II ...................................................................................................................................... 108 Exhibit Index .................................................................................................................................. 109 Certifications .................................................................................................................................. 113 ii Notice of 2019 Annual Meeting of Stockholders Tuesday, May 21, 2019 10:00 a.m., Eastern Daylight Time GIANT Center The 2019 Annual Meeting of Stockholders (the “Annual Meeting”) of The Hershey Company (the “Company”) will be held on Tuesday, May 21, 2019, beginning at 10:00 a.m., Eastern Daylight Time, at GIANT Center, 550 West Hersheypark Drive, Hershey, Pennsylvania. The purposes of the meeting are as follows: 1. 2. 3. 4. To elect the 12 nominees named in the Proxy Statement to serve as directors of the Company until the 2020 Annual Meeting of Stockholders; To ratify the appointment of Ernst & Young LLP as the Company’s independent auditors for the fiscal year ending December 31, 2019; To conduct an advisory vote regarding the compensation of the Company’s named executive officers; and To discuss and take action on any other business that is properly brought before the Annual Meeting. The Proxy Statement accompanying this Notice of 2019 Annual Meeting of Stockholders describes each of these items in detail. The Proxy Statement contains other important information that you should read and consider before you vote. The Board of Directors of the Company has established the close of business on March 22, 2019 as the record date for determining the stockholders who are entitled to notice of, and to vote at, the Annual Meeting and any adjournment or postponement thereof. The Company is furnishing proxy materials to its stockholders through the Internet as permitted under the rules of the Securities and Exchange Commission. Under these rules, many of the Company’s stockholders will receive a Notice of Internet Availability of Proxy Materials instead of a paper copy of the Notice of 2019 Annual Meeting of Stockholders and Proxy Statement, our proxy card, and our Annual Report on Form 10-K. We believe this process gives us the opportunity to serve you more efficiently by making the proxy materials available quickly online and reducing costs associated with printing and postage. Stockholders who do not receive a Notice of Internet Availability of Proxy Materials will receive a paper copy of the proxy materials by mail. By order of the Board of Directors, Damien Atkins Senior Vice President, General Counsel and Secretary April 11, 2019 Your vote is important. Instructions on how to vote are contained in our Proxy Statement and in the Notice of Internet Availability of Proxy Materials. Please cast your vote by telephone or over the Internet as described in those materials. Alternatively, if you requested a copy of the proxy/voting instruction card by mail, you may mark, sign, date and return the proxy/voting instruction card in the envelope provided. Proxy Statement Summary 2019 ANNUAL MEETING OF STOCKHOLDERS Date and Time: Tuesday, May 21, 2019 10:00 a.m., Eastern Daylight Time Place: GIANT Center 550 West Hersheypark Drive Hershey, Pennsylvania 17033 Record Date: March 22, 2019 VOTING MATTERS AND BOARD RECOMMENDATIONS Voting Matter Board Vote Recommendation Page Number with More Information Proposal 1: Election of Directors FOR each nominee Proposal 2: Ratification of Appointment of Independent Auditors Proposal 3: Advise on Named Executive Officer Compensation FOR FOR 21 37 76 This Proxy Statement Summary contains highlights of certain information in this Proxy Statement. Because it is only a summary, it does not contain all the information that you should consider prior to voting. Please review the complete Proxy Statement and the Company’s 2018 Annual Report on Form 10-K that accompanies the Proxy Statement for additional information. 1 OUR DIRECTOR NOMINEES You have the opportunity to vote on the election of the following 12 nominees for director. Additional information regarding each director nominee’s experience, skills and qualifications to serve as a member of the Company’s Board of Directors (the “Board”) can be found in the Proxy Statement under Proposal No. 1 – Election of Directors. Name Age Years on Board Position Independent Pamela M. Arway James W. Brown Michele G. Buck 65 67 57 9 2 2 Former President, Japan/Asia Pacific/ Australia Region, American Express International, Inc. Director, Hershey Trust Company; Member, Board of Managers, Milton Hershey School President and Chief Executive Officer, The Hershey Company Charles A. Davis** 70 12 Chief Executive Officer, Stone Point Capital LLC Mary Kay Haben James C. Katzman M. Diane Koken Robert M. Malcolm Anthony J. Palmer Juan R. Perez Wendy L. Schoppert David L. Shedlarz ____________________ 62 51 66 66 59 52 52 70 6 1 2 8 8 0 2 Former President, North America, Wm. Wrigley Jr. Company Director, Hershey Trust Company; Member, Board of Managers, Milton Hershey School Director, Hershey Trust Company; Member, Board of Managers, Milton Hershey School Former President, Global Marketing, Sales & Innovation, Diageo PLC Chief Executive Officer, TropicSport Chief Information and Engineering Officer, United Parcel Service, Inc. Former Executive Vice President and Chief Financial Officer, Sleep Number Corporation 11 Former Vice Chairman, Pfizer Inc. Yes Yes No Yes Yes Yes Yes Yes Yes Yes Yes Yes Committee Memberships* Compensation Finance & Risk Audit Governance None Audit*** Compensation*** Executive+ Finance & Risk*** Governance Compensation Executive Governance+ Finance & Risk Audit Compensation Audit Executive Finance & Risk+ Compensation+ Executive Governance None Audit Finance & Risk Audit+ Executive Finance & Risk * ** *** + Compensation = Compensation and Executive Organization Committee Finance & Risk = Finance and Risk Management Committee Chairman of the Board Mr. Davis, as our Chairman of the Board, is an ex-officio member of the Audit Committee, the Compensation and Executive Organization Committee and the Finance and Risk Management Committee Committee Chair 2 GOVERNANCE HIGHLIGHTS Composition of Directors and Director Nominees Average Tenure 5 Years Average Age 61 Years 11+ (2) 7-10 (3) 0-2 (6) 3-6 (1) 70s (2) 50s (5) 60s (5) Gender Diversity Independent Directors Men (7) Independent (11) Women (5) Non-Independent (1) 3 Board Meetings and Attendance 2018 Board and Committee Meetings Average Director Attendance Governance (5) Finance & Risk (7) Board (11) 95% Compensation (6) Audit (6) Corporate Governance Board Structure Ensures Strong Oversight 4 standing independent Board committees Separate Chairman of the Board and CEO positions Independent directors meet separately at each regularly-scheduled Board meeting Frequent Board and committee meetings to ensure awareness and alignment Policies and Practices Align to High Corporate Governance Standards All directors elected annually Highly qualified directors reflect broad mix of skills, experiences and attributes Generally, committee chairs required to step down after 4 consecutive years as chair Directors generally not nominated for re- election after 72nd birthday Active role in risk oversight, including separate risk management committee Strong Alignment with Stockholders' Interests Strong clawback and anti-hedging policies Significant stock ownership requirements Annual advisory vote on executive compensation Approximately 95% stockholder approval every year 4 COMPANY STRATEGY AND 2018 BUSINESS HIGHLIGHTS 16,420 $7.8B EMPLOYEES GLOBALLY IN ANNUAL REVENUES 80+ BRANDS Our vision is to be an innovative snacking powerhouse We are focused on three strategic imperatives to ensure the Company's success now and in the future: Reignite our core confection business and broaden participation in snacking Reallocate resources to enable margin expansion and fuel growth Invest to strengthen our capabilities and leverage technology for commercial advantage and growth 2018 Performance Highlights 3.7% NET SALES GROWTH 14.3% ADJUSTED EARNINGS PER SHARE-DILUTED GROWTH(1) Over the last three years, we have delivered peer-leading Total Shareholder Return Total Shareholder Return December 31, 2015 through December 31, 2018 Hershey 2016 Peer Group (Median) (9.5)% S&P 500 29.5% 30.4% (1) While we report our financial results in accordance with U.S. generally accepted accounting principles (“GAAP”), we also use non-GAAP financial measures within Management’s Discussion and Analysis in the 2018 Annual Report on Form 10-K that accompanies this Proxy Statement in order to provide additional information to investors to facilitate the comparison of past and present performance. Some of the financial targets under our short- and long-term incentive programs are also based on non-GAAP financial measures. Non-GAAP financial measures are used by management in evaluating results of operations internally and in assessing the impact of known trends and uncertainties on our business, but they are not intended to replace the presentation of financial results in accordance with GAAP. Adjusted earnings per share-diluted is a non-GAAP financial measure. We define adjusted earnings per share-diluted as diluted earnings per share of the Company’s common stock (“Common Stock”), excluding costs associated with business realignment activities, costs relating to the integration of acquisitions, long-lived and intangible asset impairment charges, unallocated gains and losses associated with mark-to-market commodity derivatives, pension settlement charges relating to Company-directed initiatives, the one-time impact of U.S. tax reform and the gain realized on the sale of certain licensing rights. 5 EXECUTIVE COMPENSATION HIGHLIGHTS Our strategic plan and the financial metrics we establish to help achieve and measure success against that plan, serve as the foundation of our executive compensation program. Our executive compensation program is intended to provide competitive compensation based on performance and contributions to the Company, to incentivize, attract and retain key executives, to align the interests of our executive officers and our stockholders and to drive stockholder value over the long term. To achieve these objectives, our executive compensation program includes the following key features: • We Pay for Performance by aligning our short- and long-term incentive compensation plans with business strategies to reward executives who achieve or exceed applicable Company and business division goals. • The target total direct compensation mix in 2018 for our Chief Executive Officer (“CEO”) and our other named executive officers (“NEOs”), excluding Leslie M. Turner, our former Senior Vice President, General Counsel and Corporate Secretary, who retired from the Company on April 1, 2018, reflects this philosophy. Target Total Direct Compensation CEO Average Target Total Direct Compensation Other NEOs Performance Stock Units 33% Annual Cash Incentive 20% Salary 13% Stock Options 17% Restricted Stock Units 17% Performance Stock Units 26% Salary 26% Stock Options 13% Restricted Stock Units 13% Annual Cash Incentive 22% At-Risk Compensation= 87% At-Risk Compensation= 74% • • Payouts under our annual cash incentive program for 2018 were 100% performance based. 50% of the equity awards granted to our NEOs in 2018 took the form of performance stock units, which will be earned based on achievement of pre-determined performance goals. • We Pay Competitively by targeting total direct compensation for our executive officers, in aggregate, at competitive pay levels using the median of our peer group for reference. • We regularly review and, as appropriate, make changes to our peer group to ensure it is representative of our market for talent, our business portfolio, our overall size and our global footprint. • We do not provide excessive benefits and perquisites to our executives. • We Align Our Compensation Program with Stockholder Interests by providing a significant amount of each NEO’s compensation opportunity in the form of equity and requiring executive stock ownership. • Equity grants represented 67% of our CEO’s 2018 target total direct compensation and, on average, 52% of the • 2018 target total direct compensation for our other NEOs, excluding Ms. Turner. Stock ownership requirements for our NEOs range from 6x salary (for our CEO) to 3x salary (for NEOs other than our CEO). 6 Proxy Statement The Board of Directors (the “Board”) of The Hershey Company (the “Company,” “we,” or “us”) is furnishing this Proxy Statement and the accompanying form of proxy in connection with the solicitation of proxies for the 2019 Annual Meeting of Stockholders of the Company (the “Annual Meeting”). The Annual Meeting will be held on May 21, 2019, beginning at 10:00 a.m., Eastern Daylight Time (“EDT”), at GIANT Center, 550 West Hersheypark Drive, Hershey, Pennsylvania 17033. Important Notice Regarding the Availability of Proxy Materials for the 2019 Annual Meeting of Stockholders to be held on May 21, 2019 The Notice of 2019 Annual Meeting of Stockholders and Proxy Statement, our proxy card, our Annual Report on Form 10-K and other annual meeting materials are available free of charge on the Internet at www.proxyvote.com. We intend to begin mailing our Notice of Internet Availability of Proxy Materials to stockholders on or about April 11, 2019. At that time, we also will begin mailing paper copies of our proxy materials to stockholders who requested them. QUESTIONS AND ANSWERS ABOUT THE ANNUAL MEETING Q: Who is entitled to attend and vote at the Annual Meeting? A: You can attend and vote at the Annual Meeting if, as of the close of business on March 22, 2019 (the “Record Date”), you were a stockholder of record of the Company’s common stock (“Common Stock”) or Class B common stock (“Class B Common Stock”). As of the Record Date, there were 147,913,263 shares of our Common Stock and 60,613,777 shares of our Class B Common Stock outstanding. Q: How do I gain admission to the Annual Meeting? A: If you are a registered stockholder, you must bring with you the Notice of Internet Availability of Proxy Materials and a government-issued photo identification (such as a valid driver’s license or passport) to gain admission to the Annual Meeting. If you did not receive a Notice of Internet Availability of Proxy Materials because you elected to receive a paper copy of the proxy materials, please bring the admission ticket printed on the top half of the proxy card supplied with those materials, together with your government-issued photo identification. If you receive your proxy materials by email, please call our Investor Relations Department at (800) 539-0261 and request an admission ticket for the meeting. If you hold your shares in street name and want to attend the Annual Meeting, you must bring your government-issued photo identification, together with: • The Notice of Internet Availability of Proxy Materials you received from your broker, bank or other holder of record; or • A letter from your broker, bank or other holder of record indicating that you were the beneficial owner of Company stock as of the Record Date; or • Your most recent account statement indicating that you were the beneficial owner of Company stock as of the Record Date. Q: What is the difference between a registered stockholder and a stockholder who owns stock in street name? A: If you hold shares of Common Stock or Class B Common Stock directly in your name on the books of the Company’s transfer agent, you are a registered stockholder. If you own your Company shares indirectly through a broker, bank or other holder of record, then you are a beneficial owner and those shares are held in street name. 7 Q: What are the voting rights of each class of stock? A: Stockholders are entitled to cast one vote for each share of Common Stock held as of the Record Date, and 10 votes for each share of Class B Common Stock held as of the Record Date. There are no cumulative voting rights. Q: Can I vote my shares before the Annual Meeting? A: Yes. If you are a registered stockholder, there are three ways to vote your shares before the Annual Meeting: By Internet (www.proxyvote.com) – Use the Internet to transmit your voting instructions until 11:59 p.m. EDT on May 20, 2019. Have your Notice of Internet Availability of Proxy Materials or proxy card available and follow the instructions on the website to vote your shares. By telephone (800-690-6903) – Submit your vote by telephone until 11:59 p.m. EDT on May 20, 2019. Have your Notice of Internet Availability of Proxy Materials or proxy card available and follow the instructions provided by the recorded message to vote your shares. By mail – If you received a paper copy of the proxy materials, you can vote by mail by filling out the proxy card enclosed with those materials and returning it pursuant to the instructions set forth on the card. To be valid, proxy cards must be received before the start of the Annual Meeting. If your shares are held in street name, your broker, bank or other holder of record may provide you with a Notice of Internet Availability of Proxy Materials that contains instructions on how to access our proxy materials and vote online or to request a paper or email copy of our proxy materials. If you received these materials in paper form, the materials included a voting instruction card so you can instruct your broker, bank or other holder of record how to vote your shares. Please see the Notice of Internet Availability of Proxy Materials or the information your bank, broker or other holder of record provided you for more information on these voting options. Q: Can I vote in person at the Annual Meeting instead of by proxy? A: If you are a registered stockholder, you can vote at the Annual Meeting any shares that were registered in your name as the stockholder of record as of the Record Date. If your shares are held in street name, you cannot vote those shares at the Annual Meeting unless you have a legal proxy from the holder of record. If you plan to attend and vote your street-name shares at the Annual Meeting, you should request a legal proxy from your broker, bank or other holder of record and bring it with you to the Annual Meeting. If you plan to vote at the Annual Meeting, please pick up a ballot at the designated voting booth upon your arrival. You may then either deposit your ballot in any of the designated ballot boxes located inside the meeting room before the meeting begins or submit your ballot to a meeting usher at the time designated during the meeting. Ballots will not be distributed during the meeting. Shares may not be voted after the polls close. Whether or not you plan to attend the Annual Meeting, we strongly encourage you to vote your shares by proxy prior to the Annual Meeting. 8 Q: Can I revoke my proxy or change my voting instructions once submitted? A: If you are a registered stockholder, you can revoke your proxy and change your vote prior to the Annual Meeting by: • Sending a written notice of revocation to our Secretary at 19 East Chocolate Avenue, Hershey, Pennsylvania 17033 (the notification must be received by the close of business on May 20, 2019); • Voting again by Internet or telephone prior to 11:59 p.m. EDT on May 20, 2019 (only the latest vote you submit • will be counted); or Submitting a new properly signed and dated paper proxy card with a later date (your proxy card must be received before the start of the Annual Meeting). If your shares are held in street name, you should contact your broker, bank or other holder of record about revoking your voting instructions and changing your vote prior to the Annual Meeting. If you are eligible to vote at the Annual Meeting, you also can revoke your proxy or voting instructions and change your vote at the Annual Meeting by submitting a written ballot before the polls close. Q: What will happen if I submit my proxy but do not vote on a proposal? A: If you submit a valid proxy but fail to provide instructions on how you want your shares to be voted, your proxy will be voted in the manner recommended by the Board on all matters presented in this Proxy Statement, which is as follows: • • • “FOR” the election of all director nominees; “FOR” the ratification of the appointment of Ernst & Young LLP as our independent auditors; and “FOR” the approval of the compensation of the Company’s named executive officers (“NEOs”). If any other item is properly presented for a vote at the Annual Meeting, the shares represented by your properly submitted proxy will be voted at the discretion of the proxies. Q: What will happen if I neither submit my proxy nor vote my shares in person at the Annual Meeting? A: If you are a registered stockholder, your shares will not be voted. If your shares are held in street name, your broker, bank or other holder of record may vote your shares on certain “routine” matters. The ratification of independent auditors is currently considered to be a routine matter. On this matter, your broker, bank or other holder of record can: • Vote your street-name shares even though you have not provided voting instructions; or • Choose not to vote your shares. The other matters you are being asked to vote on are not routine and cannot be voted by your broker, bank or other holder of record without your instructions. When a broker, bank or other holder of record is unable to vote shares for this reason, it is called a “broker non-vote.” Q: How do I vote my shares in the Company’s Automatic Dividend Reinvestment Service Plan? A: Computershare, our transfer agent, has arranged for any shares that you hold in the Automatic Dividend Reinvestment Service Plan to be included in the total registered shares of Common Stock shown on the Notice of Internet Availability of Proxy Materials or proxy card we have provided you. By voting these shares, you also will be voting your shares in the Automatic Dividend Reinvestment Service Plan. 9 Q: What does it mean if I received more than one Notice of Internet Availability of Proxy Materials or proxy card? A: You probably have multiple accounts with us and/or brokers, banks or other holders of record. You should vote all of the shares represented by these Notices/proxy cards. Certain brokers, banks and other holders of record have procedures in place to discontinue duplicate mailings upon a stockholder’s request. You should contact your broker, bank or other holder of record for more information. Additionally, Computershare can assist you if you want to consolidate multiple registered accounts existing in your name. To contact Computershare, visit their website at www.computershare.com/investor; or write to P.O. Box 505000, Louisville, KY 40233-5000; or for overnight delivery, to Computershare, 462 South 4th Street, Suite 1600, Louisville, KY 40202; or call: • • • • (800) 851-4216 Domestic Holders (201) 680-6578 Foreign Holders (800) 952-9245 Domestic TDD line for hearing impaired (312) 588-4110 Foreign TDD line for hearing impaired Q: How many shares must be present to conduct business at the Annual Meeting? A: To carry on the business of the Annual Meeting, a minimum number of shares, constituting a quorum, must be present, either in person or by proxy. On most matters, the votes of the holders of the Common Stock and Class B Common Stock are counted together. However, there are some matters that must be voted on only by the holders of one class of stock. We will have a quorum for all matters to be voted on at the Annual Meeting if the following number of votes is present, in person or by proxy: • For any matter requiring the vote of the Common Stock voting separately: a majority of the votes of the Common Stock outstanding on the Record Date. • For any matter requiring the vote of the Class B Common Stock voting separately: a majority of the votes of the Class B Common Stock outstanding on the Record Date. • For any matter requiring the vote of the Common Stock and Class B Common Stock voting together without regard to class: a majority of the votes of the Common Stock and Class B Common Stock outstanding on the Record Date. It is possible that we could have a quorum for certain items of business to be voted on at the Annual Meeting and not have a quorum for other matters. If that occurs, we will proceed with a vote only on the matters for which a quorum is present. Q: What vote is required to approve each proposal? A: Assuming that a quorum is present: • Proposal No. 1: Election of Directors – the two nominees to be elected by holders of our Common Stock voting separately as a class who receive the greatest number of votes cast “FOR,” and the 10 nominees to be elected by holders of our Common Stock and Class B Common Stock voting together who receive the greatest number of votes cast “FOR,” will be elected as directors. • Proposal No. 2: Ratification of the Appointment of Ernst & Young LLP as Independent Auditors – the affirmative vote of the holders of at least a majority of the shares of Common Stock and Class B Common Stock (voting together as a class) represented at the Annual Meeting. • Proposal No. 3: Advise on Named Executive Officer Compensation – the affirmative vote of the holders of at least a majority of the shares of Common Stock and Class B Common Stock (voting together as a class) represented at the Annual Meeting. 10 Q: Are abstentions and broker non-votes counted in the vote totals? A: Abstentions are counted as being present and entitled to vote in determining whether a quorum is present. Shares as to which broker non-votes exist will be counted as present and entitled to vote in determining whether a quorum is present for any matter requiring the vote of the Common Stock and Class B Common Stock voting together as a class, but they will not be counted as present and entitled to vote in determining whether a quorum is present for any matter requiring the vote of the Common Stock or Class B Common Stock voting separately as a class. If you mark or vote “abstain” on Proposal Nos. 2 or 3, the abstention will have the effect of being counted as a vote “AGAINST” the proposal. Broker non-votes with respect to Proposal Nos. 1-3 are not included in vote totals and will not affect the outcome of the vote on those proposals. Q: Who will pay the cost of soliciting votes for the Annual Meeting? A: We will pay the cost of preparing, assembling and furnishing proxy solicitation and other required Annual Meeting materials. We do not use a third-party solicitor. It is possible that our directors, officers and employees might solicit proxies by mail, telephone, telefax, electronically over the Internet or by personal contact, without receiving additional compensation. We will reimburse brokers, banks and other nominees, fiduciaries and custodians who nominally hold shares of our stock as of the Record Date for the reasonable costs they incur furnishing proxy solicitation and other required Annual Meeting materials to street-name holders who beneficially own those shares on the Record Date. 11 CORPORATE GOVERNANCE We have a long-standing commitment to good corporate governance practices. Our corporate governance policies and other documents establish the high standards of professional and personal conduct we expect of our Board, members of senior management and all employees, and promote compliance with various financial, ethical, legal and other obligations and responsibilities. The business activities of the Company are carried out by our employees under the direction and supervision of our President and Chief Executive Officer (“CEO”). The Board is responsible for overseeing these activities. In doing so, each director is required to use his or her business judgment in the best interests of the Company. The Board’s responsibilities include: • Reviewing the Company’s performance, strategies and major decisions; • Overseeing the Company’s compliance with legal and regulatory requirements and the integrity of its financial statements; • Overseeing the Company’s policies and practices for identifying, managing and mitigating key enterprise risks; • Overseeing management, including reviewing the CEO’s performance and succession planning for key management roles; and • Overseeing executive and director compensation, and our compensation program and policies. Corporate Governance Guidelines The Board has adopted Corporate Governance Guidelines that, along with the charters of the Board committees, provide the basic framework for the Board’s operation and role in the governance of the Company. The guidelines include the Board’s policies regarding director independence, qualifications and responsibilities, access to management and outside advisors, compensation, continuing education, oversight of management succession and stockholding requirements. They also provide a process for directors to annually evaluate the performance of the Board. The Governance Committee is responsible for overseeing and reviewing the Board’s Corporate Governance Guidelines at least annually and recommending any proposed changes to the Board for approval. The Corporate Governance Guidelines are available on the Investors section of our website at www.thehersheycompany.com. Code of Conduct The Board has adopted a Code of Conduct that applies to all of our directors, officers and employees worldwide. Adherence to this Code of Conduct assures that our directors, officers and employees are held to the highest standards of integrity. The Code of Conduct covers areas such as conflicts of interest, insider trading and compliance with laws and regulations. The Audit Committee oversees the Company’s communication of, and compliance with, the Code of Conduct. The Code of Conduct, including amendments thereto or waivers granted to a director or officer, if any, can be viewed on the Investors section of our website at www.thehersheycompany.com. Stockholder and Interested Party Communications with Directors Stockholders and other interested parties may communicate with our directors in several ways. Communications regarding accounting, internal accounting controls or auditing matters may be emailed to the Audit Committee at auditcommittee@hersheys.com or addressed to the Audit Committee at the following address: Audit Committee c/o Secretary The Hershey Company 19 East Chocolate Avenue P.O. Box 819 Hershey, PA 17033-0819 Stockholders and other interested parties also can submit comments, confidentially and anonymously if desired, to the Audit Committee by calling the Hershey Concern Line at (800) 362-8321 or by accessing the Hershey Concern Line website at www.HersheysConcern.com. 12 Stockholders and other interested parties may contact any of the independent directors, including the Chairman of the Board, as well as the independent directors as a group, by writing to the specified party at the address set forth above or by emailing the independent directors (or a specific independent director, including the Chairman of the Board) at independentdirectors@hersheys.com. Stockholders and other interested parties may also contact any of the independent directors using the Hershey Concern Line telephone number or website noted above. Communications to the Audit Committee, any of the independent directors and the Hershey Concern Line are processed by the Office of General Counsel. The Office of General Counsel reviews and summarizes these communications and provides reports to the applicable party on a periodic basis. Communications regarding any accounting, internal control or auditing matter are reported immediately to the Audit Committee, as are allegations about our officers. The Audit Committee will address communications from any interested party in accordance with our Board-approved Procedures for Submission and Handling of Complaints Regarding Compliance Matters, which are available for viewing on the Investors section of our website at www.thehersheycompany.com. Solicitations, junk mail and obviously frivolous or inappropriate communications are not forwarded to the Audit Committee or the independent directors, but copies are retained and made available to any director who wishes to review them. Director Independence The Board, in consultation with the Governance Committee, determines which of our directors are independent. The Board has adopted categorical standards for independence that the Board uses in determining which directors are independent. The Board bases its determination of independence for each director on the more stringent independence standards applicable to Audit Committee members regardless of whether such director serves on the Audit Committee. These standards are contained in the Board’s Corporate Governance Guidelines. Applying these categorical standards for independence, as well as the independence requirements set forth in the listing standards of the New York Stock Exchange (the “NYSE Rules”) and the rules and regulations of the Securities and Exchange Commission (“SEC”), the Board determined that the following directors and director nominees recommended for election at the Annual Meeting are independent: Pamela M. Arway, James W. Brown, Charles A. Davis, Mary Kay Haben, James C. Katzman, M. Diane Koken, Robert M. Malcolm, Anthony J. Palmer, Juan R. Perez, Wendy L. Schoppert and David L. Shedlarz. In addition, the Board determined the following directors who served in 2018 were independent: James M. Mead and Thomas J. Ridge. The Board determined that John P. Bilbrey, who served as a director in 2018, was not independent because he served as an executive officer of the Company until March 1, 2017, and that Michele G. Buck is not independent because she is an executive officer of the Company. In making its independence determinations, the Board, in consultation with the Governance Committee, reviewed the direct and indirect relationships between each director and the Company and its subsidiaries, as well as the compensation and other payments each director received from or made to the Company and its subsidiaries. In making its independence determinations with respect to Ms. Koken and Messrs. Brown and Katzman, the Board considered their roles as current members of the board of directors of Hershey Trust Company and the board of managers (governing body) of Milton Hershey School, as well as certain transactions the Company had or may have with these entities. Hershey Trust Company, as trustee for the trust established by Milton S. and Catherine S. Hershey that has as its sole beneficiary Milton Hershey School (such trust, the “Milton Hershey School Trust”), is our controlling stockholder. Hershey Trust Company is in turn owned by the Milton Hershey School Trust. As such, Hershey Trust Company, Milton Hershey School, the Milton Hershey School Trust and companies owned by the Milton Hershey School Trust are considered affiliates of the Company under SEC rules. During 2018, we had a number of transactions with Hershey Trust Company, Milton Hershey School and companies owned by the Milton Hershey School Trust involving the purchase and sale of goods and services in the ordinary course of business and the leasing of real estate at market rates. We have outlined these transactions in greater detail in the section entitled “Certain Transactions and Relationships.” We have provided information about Company stock owned by Hershey Trust Company, as trustee for the Milton Hershey School Trust, and by Hershey Trust Company for its own investment purposes in the section entitled “Information Regarding Our Controlling Stockholder.” Ms. Koken and Messrs. Brown and Katzman do not receive any compensation from The Hershey Company, from Hershey Trust Company or from Milton Hershey School other than compensation they receive or will receive in the ordinary course as members of the board of directors or board of managers of each of those entities, as applicable. In addition, Ms. Koken and Messrs. Brown and Katzman do not vote on Board decisions in connection with the Company’s transactions with Hershey Trust Company, Milton Hershey School and companies owned by the Milton Hershey School Trust. The Board therefore concluded that the positions Ms. Koken and Messrs. Brown and Katzman have as members of the board of directors of Hershey Trust Company and the board of managers of Milton Hershey School do not impact their independence. 13 Director Nominations The Governance Committee is responsible for identifying and recommending to the Board candidates for Board membership. As our controlling stockholder, Hershey Trust Company, as trustee for the Milton Hershey School Trust, also may from time to time recommend to the Governance Committee, or elect outright, individuals to serve on our Board. In administering its responsibilities, the Governance Committee has not adopted formal selection procedures, but instead utilizes general guidelines that allow it to adjust the selection process to best satisfy the objectives established for any director search. The Governance Committee considers director candidates recommended by any reasonable source, including current directors, management, stockholders (including Hershey Trust Company, as trustee for the Milton Hershey School Trust) and other sources. The Governance Committee evaluates all director candidates in the same manner, regardless of the source of the recommendation. Occasionally, the Governance Committee engages a paid third-party consultant to assist in identifying and evaluating director candidates. The Governance Committee has sole authority under its charter to retain, compensate and terminate these consultants. In 2018, the Governance Committee retained Egon Zehnder to assist in identifying potential future director candidates. Stockholders desiring to recommend or nominate a director candidate must comply with certain procedures. If you are a stockholder and desire to nominate a director candidate at the 2020 Annual Meeting of Stockholders of the Company, you must comply with the procedures for nomination set forth in the section entitled “Information Regarding the 2020 Annual Meeting of Stockholders.” Stockholders who do not intend to nominate a director at an annual meeting may recommend a director candidate to the Governance Committee for consideration at any time. Stockholders desiring to do so must submit their recommendation in writing to The Hershey Company, c/o Secretary, 19 East Chocolate Avenue, Hershey, Pennsylvania 17033, and include in the submission all of the information that would be required if the stockholder nominated the candidate at an annual meeting. The Governance Committee may require the nominating stockholder to submit additional information before considering the candidate. There were no changes to the procedures relating to stockholder nominations during 2018, and there have been no changes to such procedures to date in 2019. These procedural requirements are intended to ensure the Governance Committee has sufficient time and a basis on which to assess potential director candidates and are not intended to discourage or interfere with appropriate stockholder nominations. The Governance Committee does not believe that these procedural requirements subject any stockholder or proposed nominee to unreasonable burdens. The Governance Committee and the Board reserve the right to change the procedural requirements from time to time and/or to waive some or all of the requirements with respect to certain nominees, but any such waiver shall not preclude the Governance Committee from insisting upon compliance with any and all of the above requirements by any other recommending stockholder or proposed nominees. 14 THE BOARD OF DIRECTORS General Oversight The Board has general oversight responsibility for the Company’s affairs. Although the Board does not have responsibility for day-to-day management of the Company, Board members stay informed about the Company’s business through regular meetings, site visits and other periodic interactions with management. The Board is deeply involved in the Company’s strategic planning process. The Board also plays an important oversight role in the Company’s leadership development, succession planning and risk management processes. Composition The Board is currently comprised of 11 members, each serving a one-year term that expires at the Annual Meeting. Eleven of the 12 director nominees are considered independent under the NYSE Rules and the Board’s Corporate Governance Guidelines. Leadership Structure The Company’s governance documents provide the Board with flexibility to select the leadership structure that is most appropriate for the Company and its stockholders. The Board regularly evaluates its governance structure and has concluded that the Company and its stockholders are best served by not having a formal policy regarding whether the same individual should serve as both Chairman of the Board and CEO. This approach allows the Board to exercise its business judgment in determining the most appropriate leadership structure in light of the current facts and circumstances facing the Company, including the composition and tenure of the Board, the tenure of the CEO, the strength of the Company’s management team, the Company’s recent financial performance, the Company’s current strategic plan and the current economic environment, among other factors. At various times during the Company's history, the roles of Chairman of the Board and CEO have been combined. At this time, the roles are held by separate individuals. Currently, Michele G. Buck serves as our President and CEO, a position she has held since March 1, 2017. In this role, Ms. Buck is responsible for managing the day-to-day operations of the Company and for planning, formulating and coordinating the development and execution of our corporate strategy, policies, goals and objectives. She also serves as the primary liaison between the Board and Company management. Ms. Buck is responsible for Company performance and reports directly to the Board. Charles A. Davis currently serves as our Chairman of the Board, a position he has held since May 2, 2018. The Board has determined that Mr. Davis is an independent member of the Board under the NYSE Rules and the Board’s Corporate Governance Guidelines. As our Chairman of the Board, Mr. Davis’s responsibilities include the following: Presiding at all Board and stockholder meetings; • • Approving Board meeting agendas and schedules to assure there is sufficient time for discussion of all agenda items; • Approving Board meeting materials and other information sent to the Board; • Reviewing committee agenda topics and time allotted for discussion (based on recommendations from the committee chairs); • Evaluating the quality and timeliness of information sent to the Board by the CEO and other members of management; • Calling meetings of the independent directors of the Board, in addition to the executive sessions of independent directors held during each Board meeting; • Establishing the agenda and presiding at all executive sessions and other meetings of the independent directors of the Board; • Communicating with the independent directors of the Board between meetings as necessary or appropriate; • Ensuring that all orders, resolutions and policies adopted or established by the Board are carried into effect; • Serving as a liaison between the Board and the CEO, ensuring Board consensus is communicated to the CEO and communicating the results of meetings of the independent directors to the CEO; Implementing and overseeing the Board succession planning process; • • Overseeing the Board’s role in crisis management; • Overseeing the evaluation of the CEO; • Assisting the Chair of the Governance Committee with Board and individual evaluations; and • Being available for consultation and direct communication at the request of major stockholders. 15 The Board has established five standing committees to assist with its oversight responsibilities: (1) Audit Committee; (2) Compensation and Executive Organization Committee (“Compensation Committee”); (3) Finance and Risk Management Committee; (4) Governance Committee; and (5) Executive Committee. Each of the Audit Committee, the Compensation Committee, the Finance and Risk Management Committee, and the Governance Committee is comprised entirely of independent directors. Finally, Ms. Koken and Messrs. Brown and Katzman are direct representatives of the Company’s largest stockholder. This composition of our Board helps to ensure that boardroom discussions reflect the views of management, our independent directors and our stockholders. Board Role in Risk Oversight Our Board takes an active role in risk oversight. While management is responsible for identifying, evaluating, managing and mitigating the Company’s exposure to risk, it is the Board’s responsibility to oversee the Company’s risk management process and to ensure that management is taking appropriate action to identify, manage and mitigate key risks. The Board administers its risk oversight responsibilities both through active review and discussion of key risks facing the Company and by delegating certain risk oversight responsibilities to committees for further consideration and evaluation. The following table summarizes the role of the Board and each of its committees in overseeing risk: Governing Body Board Role in Risk Oversight • Regularly reviews and evaluates the Company’s strategic plans and associated risks. • Oversees the Company’s enterprise risk management (“ERM”) framework and the overall ERM process. • Conducts annual succession plan reviews to ensure the Company maintains appropriate succession plans for members of senior management. Audit Committee • Oversees compliance with legal and regulatory requirements and the Company’s Code of Conduct. • Oversees risks relating to key accounting policies. • Reviews internal controls with the Principal Financial Officer, Principal Accounting Officer and internal auditors. • Meets regularly with representatives of the Company’s independent auditors. Compensation and Executive Organization Committee • Oversees risks relating to the Company’s compensation program and policies. • Oversees the process for conducting annual risk assessments of the Company’s compensation policies and practices. • Employs independent compensation consultants to assist in reviewing the Company’s compensation program, including the potential risks created by such program. • Oversees the Company’s succession planning and talent processes and programs. Finance and Risk Management Committee • Reviews enterprise-level and other key risks identified through the Company’s ERM process as well as management’s plans to mitigate those risks. • Oversees key financial risks. • Oversees and approves proposed merger and acquisition activities and related risks. • Chair meets at least annually with the Audit Committee to discuss the Company’s risk management programs. Governance Committee • Oversees risks relating to the Company’s governance structure and other corporate governance matters and processes. • Oversees compliance with key corporate governance documents, including the Corporate Governance Guidelines and the Insider Trading Policy. Executive Committee • Independent, disinterested members approve any related party transactions between the Company and entities affiliated with the Company and certain of its directors. The decision to administer the Board’s oversight responsibilities in this manner has an important effect on the Board’s leadership and committee structure, described in more detail above. The Board believes that its structure – including a strong, independent Chairman of the Board, 11 of 12 independent directors and key committees comprised entirely of independent directors – helps to ensure that key strategic decisions made by senior management, up to and including the CEO, are reviewed and overseen by independent directors of the Board. 16 Experiences, Skills and Qualifications The Governance Committee works with the Board to determine the appropriate skills, experiences and attributes that should be possessed by the Board as a whole as well as its individual members. While the Governance Committee has not established minimum criteria for director candidates, in general, the Board seeks individuals with skills and backgrounds that will complement those of other directors and maximize the diversity and effectiveness of the Board as a whole. The Board also seeks individuals who bring unique and varied perspectives and life experiences to the Board. As such, the Governance Committee assists the Board by recommending prospective director candidates who will enhance the overall diversity of the Board. The Board views diversity broadly, taking into consideration the age, professional experience, race, education, gender and other attributes of its members. In addition, the Board’s Corporate Governance Guidelines describe the general experiences, qualifications, attributes and skills sought by the Board of any director nominee, including: Qualifications, Attributes and Skills Knowledge and Experience Integrity Judgment Skill Diversity Finance Emerging Markets Marketing Retail Ability to express informed, useful and constructive views Mergers and acquisitions Experience with businesses and other organizations of comparable size Risk management Ability to commit the time necessary to learn our business and to prepare for and participate actively in committee meetings and in Board meetings Innovation Interplay of skills, experiences and attributes with those of the other Board members Digital technology Overall desirability as an addition to the Board and its committees Data analytics Supply chain Information technology Consumer products Government, public policy and regulatory affairs In addition to evaluating new director candidates, the Governance Committee regularly assesses the composition of the Board in order to ensure it reflects an appropriate balance of knowledge, skills, expertise, diversity and independence. As part of this assessment, each director is asked to identify and assess the particular experiences, skills and other attributes that qualify him or her to serve as a member of the Board. Based on the most recent assessment of the Board’s composition completed in February 2019, the Governance Committee and the Board have determined that, in light of the Company’s current business structure and strategies, the Board has an appropriate mix of director experiences, skills, qualifications and backgrounds. A description of the most relevant experiences, skills and attributes that qualify each director nominee to serve as a member of the Board is included in his or her biography. 17 MEETINGS AND COMMITTEES OF THE BOARD Meetings of the Board of Directors and Director Attendance at Annual Meeting The Board held 11 meetings in 2018. Each incumbent director attended at least 88% of all of the meetings of the Board and committees of the Board on which he or she served in 2018. Average director attendance for all meetings equaled 95%. In addition, the independent directors meet regularly in executive session at every Board meeting and at other times as the independent directors deem necessary. These meetings allow the independent directors to discuss important issues, including the business and affairs of the Company as well as matters concerning management, without any member of management present. Each executive session is chaired by the Chairman of the Board. In the absence of the Chairman of the Board, executive sessions are chaired by an independent director assigned on a rotating basis. Members of the Audit Committee, Compensation Committee, Finance and Risk Management Committee, and Governance Committee also meet regularly in executive session. Directors are expected to attend our annual meetings of stockholders. All of the directors standing for election at the 2018 Annual Meeting of Stockholders of the Company attended that meeting. Committees of the Board The Board has established five standing committees. Membership on each of these committees, as of March 22, 2019, is shown in the following chart: Name Audit Compensation and Executive Organization Finance and Risk Management Governance Executive Pamela M. Arway James W. Brown Charles A. Davis Mary Kay Haben James C. Katzman M. Diane Koken Robert M. Malcolm Anthony J. Palmer Wendy L. Schoppert David L. Shedlarz ____________________ Committee Member * Ex-Officio * * * Chair Chair Chair Chair Chair The Board’s Corporate Governance Guidelines require that every member of the Audit Committee, Compensation Committee, Finance and Risk Management Committee, and Governance Committee be independent. The Board may also from time to time establish committees of limited duration for a special purpose. No such committees were established in 2018. 18 The table below identifies the number of meetings held by each standing committee in 2018, provides a brief description of the duties and responsibilities of each committee, and provides general information regarding the location of each committee’s charter: Committee Audit Meetings Duties and Responsibilities 6 • Oversee the Company’s financial reporting processes and the integrity of the Company’s financial statements. • Oversee the Company’s compliance with legal and regulatory requirements. • Oversee the performance of the Company’s independent auditors and the internal audit function. • Approve all audit and non-audit services and fees. • Oversee (in consultation with the Finance and Risk Management Committee) the Company’s risk management processes and policies. • Review the adequacy of internal controls. • Review and discuss with management Quarterly Reports on Form 10-Q and Annual Report on Form 10-K prior to filing with the SEC. • Review and discuss with management earnings releases. • Administer the Company’s Procedures for Submission and Handling of Complaints Regarding Compliance Matters. General Information • The Board has determined that all directors on the Audit Committee are financially literate. The Board has also determined that Ms. Schoppert and Mr. Shedlarz qualify as “audit committee financial experts” as defined in SEC regulations and that each has accounting or related financial management expertise. • Charter can be viewed on the Investors section of our website at www.thehersheycompany.com. • Charter prohibits any member of the Audit Committee from serving on the audit committees of more than two other public companies unless the Board determines that such simultaneous service would not impair the ability of the director to effectively serve on the Committee. Committee Compensation and Executive Organization Meetings Duties and Responsibilities 6 • Establish executive officer compensation (other than CEO compensation) and oversee the compensation program and policies for all executive officers. • Evaluate the performance of the CEO and make recommendations to the independent directors of the Board regarding CEO compensation. • Review and recommend to the Board the form and amount of director compensation. • Make equity grants under and administer the Company’s Equity and Incentive Compensation Plan (the “EICP”). • Establish target award levels and make awards under the annual cash incentive component of the EICP. • Monitor executive compensation arrangements for consistency with corporate objectives and stockholders’ interests. • Review the executive organization of the Company. • Monitor the development of personnel available to fill key executive positions as part of the succession planning process. General Information • Charter can be viewed on the Investors section of our website at www.thehersheycompany.com. Committee Finance and Risk Management Meetings Duties and Responsibilities 7 • Oversee management of the Company’s assets, liabilities and risks. • Review and make recommendations regarding capital projects, acquisitions and dispositions of assets and changes in capital structure. • Review the annual budget and monitor performance against operational plans. • Recommend to the Board the terms of the Company’s principal banking relationships, credit facilities and commercial paper programs. • Oversee (in consultation with the Audit Committee) the Company’s risk management processes and policies. General Information • Charter can be viewed on the Investors section of our website at www.thehersheycompany.com. 19 Committee Governance Meetings Duties and Responsibilities 5 • Review and make recommendations on the composition of the Board and its committees. • Identify, evaluate and recommend candidates for election to the Board consistent with the Board’s membership qualifications. • Review and make recommendations to the Board on corporate governance matters and policies, including the Board’s Corporate Governance Guidelines. • Administer the Company’s Related Person Transaction Policy as directed by the Board. • Evaluate the performance of the Board, its independent committees and each director. General Information • Charter can be viewed on the Investors section of our website at www.thehersheycompany.com. Committee Executive Meetings Duties and Responsibilities 0 • Manage the business and affairs of the Company, to the extent permitted by the Delaware General Corporation Law, when the Board is not in session. • Review, and approve through a subcommittee consisting of the independent directors on the Executive Committee who are not affiliated with Hershey Trust Company, Hershey Entertainment & Resorts Company and/or Milton Hershey School, or any of their affiliates, any transaction not in the ordinary course of business between the Company and any of these entities, unless otherwise provided by the Board or the Corporate Governance Guidelines. General Information • Charter can be viewed on the Investors section of our website at www.thehersheycompany.com. • For more information regarding the review, approval or ratification of related-party transactions, please refer to the section entitled “Certain Transactions and Relationships.” 20 PROPOSAL NO. 1 – ELECTION OF DIRECTORS The Board of Directors unanimously recommends that stockholders vote FOR each of the nominees for director at the 2019 Annual Meeting The first proposal to be voted on at the Annual Meeting is the election of 12 directors. If elected, the directors will hold office until the 2020 Annual Meeting of Stockholders of the Company or until their successors are elected and qualified. Election Procedures We have two classes of common stock outstanding: Common Stock and Class B Common Stock. Under our certificate of incorporation and by-laws: • One-sixth of the total number of our directors (which equates presently to two directors) will be elected by the holders of our Common Stock voting separately as a class. For the 2019 Annual Meeting, the Board has nominated Juan R. Perez and Wendy L. Schoppert for election by the holders of our Common Stock voting separately as a class. • The remaining 10 directors will be elected by the holders of our Common Stock and Class B Common Stock voting together without regard to class. With respect to the nominees to be elected by the holders of the Common Stock and the Class B Common Stock voting together, the 10 nominees receiving the greatest number of votes of the Common Stock and Class B Common Stock will be elected as directors. With respect to the nominees to be elected by the holders of the Common Stock voting separately as a class, the two nominees receiving the greatest number of votes of the Common Stock will be elected as directors. The Board’s Corporate Governance Guidelines provide that directors will generally not be nominated for re-election after their 72nd birthday. All of the directors standing for election at the 2019 Annual Meeting satisfied the applicable age requirement at the time of their nomination. All nominees for election as director have indicated their willingness to serve if elected. If a nominee becomes unavailable for election for any reason, the proxies will have discretionary authority to vote for a substitute. Nominees for Director The Board unanimously recommends the following nominees for election at the 2019 Annual Meeting. These nominees were recommended to the Board by the Governance Committee. In making its recommendation, the Governance Committee considered the experience, qualifications, attributes and skills of each nominee, as well as each director’s past performance on our Board, as reflected in the Governance Committee’s annual evaluation of Board and committee performance. This evaluation considers, among other things, each director’s individual contributions to the Board, the director’s ability to work collaboratively with other directors and the effectiveness of the Board as a whole. On the following pages, we provide certain biographical information about each nominee for director, as well as information regarding the nominee’s specific experience, qualifications, attributes and skills that qualify him or her to serve as a director and as a member of the committee(s) of the Board on which the nominee serves. 21  Pamela M. Arway Former President, Japan/Asia Pacific/Australia Region, American Express International, Inc., a global payments, network and travel company, and its subsidiaries (October 2005 to January 2008) QUALIFICATIONS, ATTRIBUTES AND SKILLS Throughout her 21-year career with American Express Company, Inc., Ms. Arway gained experience in the areas of finance, marketing, international business, government affairs, consumer products and human resources. She is a significant contributor to the Board in each of these areas. PREVIOUS BUSINESS EXPERIENCE • Spent 21 years in positions of increasing responsibility at American Express Company, Inc. and its subsidiaries CURRENT PUBLIC AND OTHER KEY DIRECTORSHIPS • Iron Mountain Incorporated (May 2014 to present) • DaVita Inc. (July 2009 to present) EDUCATION • Bachelor’s degree in languages from Memorial University of Newfoundland • Masters of Business Administration degree from Queen’s University, Kingston, Ontario, Canada Director since May 2010 Age 65 Board Committees • Compensation • Finance and Risk Management James W. Brown Director, Hershey Trust Company; Member, Board of Managers, Milton Hershey School (February 2016 to present) QUALIFICATIONS, ATTRIBUTES AND SKILLS One of three representatives of Hershey Trust Company and Milton Hershey School currently serving on the Board, Mr. Brown provides valuable perspectives not only as a representative of our largest stockholder, but also of the school that is its sole beneficiary. In addition, Mr. Brown has significant experience in government relations, finance and private equity/venture capital. His familiarity with policy and operations of both Pennsylvania State and U.S. Federal Government and his experience as an investor in and director of both public and private companies make him an important addition to the Board on matters of strategy and risk management. Director since May 2017 Age 67 Board Committees • Audit • Governance PREVIOUS BUSINESS EXPERIENCE • Chief of Staff, United States Senator Robert P. Casey, Jr. (January 2007 to February 2016) • Partner, SCP Private Equity Partners (January 1996 to December 2006) • Chief of Staff, Pennsylvania Governor Robert P. Casey (January 1989 to December 1994) CURRENT PUBLIC AND OTHER KEY DIRECTORSHIPS • FS Multi-Strategy Alternatives Fund/FS Series Trust (August 2017 to present) PAST PUBLIC COMPANY BOARDS • FS Investment Corporation III (February 2016 to December 2018) EDUCATION • Bachelor’s degree, magna cum laude, from Villanova University • Juris Doctor degree from the University of Virginia Law School Michele G. Buck President and Chief Executive Officer, The Hershey Company (March 2017 to present) QUALIFICATIONS, ATTRIBUTES AND SKILLS As the President and Chief Executive Officer, Ms. Buck is responsible for all day-to-day global operations and commercial activities of the Company. Having served at the Company for more than 13 years and as an executive in the consumer packaged goods industry for more than 25 years, Ms. Buck is a valuable contributor to the Board in the areas of marketing, consumer products, strategy, supply chain management and mergers and acquisitions. Her presence in the boardroom also ensures efficient communication between the Board and Company management. Director since March 2017 Age 57 Board Committees • None PREVIOUS BUSINESS EXPERIENCE • Executive Vice President, Chief Operating Officer, The Hershey Company (June 2016 to March 2017) • President, North America, The Hershey Company (May 2013 to June 2016) • Senior Vice President, Chief Growth Officer, The Hershey Company (September 2011 to May 2013) • Senior Vice President, Global Chief Marketing Officer, The Hershey Company (December 2007 to September 2011) CURRENT PUBLIC AND OTHER KEY DIRECTORSHIPS • New York Life Insurance (November 2013 to present) EDUCATION • Bachelor’s degree from Shippensburg University of Pennsylvania • Master’s degree from the University of North Carolina 22  Charles A. Davis Chief Executive Officer, Stone Point Capital LLC, a global private equity firm (June 2005 to present) QUALIFICATIONS, ATTRIBUTES AND SKILLS Having served in the fields of investment banking and private equity for more than 40 years, Mr. Davis brings extensive experience in finance, investment banking and real estate to the Board. His experience as a leader in international business allows him to bring important insights to the Board as the Company continues to focus on its international footprint. PREVIOUS BUSINESS EXPERIENCE • MMC Capital, Inc., the private equity business of Marsh & McLennan Companies, Inc.: Chairman (January 2002 to May 2005) Chief Executive Officer (January 1999 to May 2005) President (April 1998 to December 2002) CURRENT PUBLIC AND OTHER KEY DIRECTORSHIPS • AXIS Capital Holdings Limited (November 2001 to present) • The Progressive Corporation (October 1996 to present) EDUCATION • Bachelor’s degree from the University of Vermont • Masters of Business Administration degree from Columbia University Graduate School of Business Director since November 2007 Age 70 Board Committees • Executive (Chair) • Audit (ex-officio) • Compensation (ex-of ficio) • Finance and Risk Management (ex-of ficio) • Governance Chairman of the Board since May 2018 Mary Kay Haben Former President, North America, Wm. Wrigley Jr. Company, a leading confectionery company (October 2008 to February 2011) QUALIFICATIONS, ATTRIBUTES AND SKILLS Throughout Ms. Haben’s 33-year career, she gained extensive experience managing businesses in the consumer packaged goods industry and developed a track record of growing brands and developing new products. Her knowledge of and ability to analyze the overall consumer packaged goods industry, evolving market dynamics and consumers’ relationships with brands make her a valuable contributor to the Board and the Company. PREVIOUS BUSINESS EXPERIENCE • Group Vice President and Managing Director, North America, Wm. Wrigley Jr. Company (April 2007 to October 2008) • Held several key positions during 27-year career with Kraft Foods, Inc., a grocery manufacturing and processing conglomerate Director since August 2013 Age 62 Board Committees • Governance (Chair) • Compensation • Executive CURRENT PUBLIC AND OTHER KEY DIRECTORSHIPS • Trustee of Equity Residential (July 2011 to present); currently serves as Chair of the Compensation Committee EDUCATION • Bachelor's degree, magna cum laude, in business administration from the University of Illinois • Masters of Business Administration degree in marketing from the University of Michigan, Ross School of Business James C. Katzman Director, Hershey Trust Company; Member, Board of Managers, Milton Hershey School (April 2017 to present) QUALIFICATIONS, ATTRIBUTES AND SKILLS One of three representatives of Hershey Trust Company and Milton Hershey School currently serving on the Board, Mr. Katzman provides the Board with valuable perspectives of our largest stockholder and the school that is its sole beneficiary. In addition, he has extensive experience in corporate financial matters and merger transactions, developed throughout his career in investment banking, which further adds to the Board as it oversees the Company’s financial stewardship and transformation into an innovative snacking powerhouse. Director since May 2018 Age 51 Board Committees • Finance and Risk Management PREVIOUS BUSINESS EXPERIENCE • Partner, Goldman Sachs Group, Inc. (December 2004 to March 2015) CURRENT PUBLIC AND OTHER KEY DIRECTORSHIPS • Brinker International, Inc. (January 2018 to present) EDUCATION • Bachelor’s degree, cum laude, from Dartmouth College • Masters of Business Administration degree from Columbia University Graduate School of Business 23 M. Diane Koken Director, Hershey Trust Company; Member, Board of Managers, Milton Hershey School (December 2015 to present) QUALIFICATIONS, ATTRIBUTES AND SKILLS One of three representatives of Hershey Trust Company and Milton Hershey School currently serving on the Board, Ms. Koken brings to the Board valuable insights from our largest stockholder. Having served as Insurance Commissioner of Pennsylvania for three governors and as President of the National Association of Insurance Commissioners, Ms. Koken has considerable expertise in the areas of insurance, risk management and regulatory affairs. Her experience in the areas of legal operations and corporate governance, developed throughout her 22-year career at a national life insurer that culminated in her serving as Vice President, General Counsel and Corporate Secretary, further adds to the Board. Director since May 2017 Age 66 Board Committees • Audit • Compensation PREVIOUS BUSINESS EXPERIENCE • Commissioner of Insurance in Pennsylvania (August 1997 to February 2007) • Provident Mutual Life Insurance Company (October 1975 to July 1997) CURRENT PUBLIC AND OTHER KEY DIRECTORSHIPS • Capital BlueCross (December 2011 to present) • NORCAL Mutual (January 2009 to present) • Nationwide Corporation; Nationwide Mutual Insurance Company; Nationwide Mutual Fire Insurance Company (April 2007 to present) • Nationwide Mutual Funds (April 2019 to present) EDUCATION • Bachelor’s degree, magna cum laude, in education from Millersville University • Juris Doctor degree from Villanova University School of Law Robert M. Malcolm Former President, Global Marketing, Sales & Innovation, Diageo PLC, a leading premium drinks company (June 2002 to December 2008) QUALIFICATIONS, ATTRIBUTES AND SKILLS Mr. Malcolm is a globally recognized expert in strategic marketing and is currently Executive in Residence, Center for Customer Insight and Marketing Solutions, McCombs School of Business, University of Texas. He brings to the Board significant experience in emerging markets and in the marketing and sales of consumer products, including consumer packaged goods and fast-moving consumer goods. PREVIOUS BUSINESS EXPERIENCE • Spent 24 years at The Procter & Gamble Company in positions of increasing responsibility CURRENT PUBLIC AND OTHER KEY DIRECTORSHIPS • Boston Consulting Group (senior advisor) EDUCATION • Bachelor’s degree in marketing from the University of Southern California • Masters of Business Administration degree in marketing from the University of Southern California Director since December 2011 Age 66 Board Committees • Finance and Risk Management (Chair) • Audit • Executive Anthony J. Palmer Chief Executive Officer, TropicSport, a natural suncare and skincare products company (April 2019 to present) QUALIFICATIONS, ATTRIBUTES AND SKILLS Having spent most of his professional career in the consumer packaged goods industry, Mr. Palmer brings to the Board substantial experience and insight in several key strategic areas for the Company, including fast-moving consumer packaged goods, emerging markets, marketing and human resources. EDUCATION • Bachelor’s degree in business marketing from Monash University in Melbourne, Australia • Masters of Business Administration degree, with distinction, from the International Management Institute, Geneva, Switzerland o Director since April 2011 Age 59 Board Committees • Compensation (Chair) • Executive • Governance PREVIOUS BUSINESS EXPERIENCE • Kimberly-Clark Corporation o President, Global Brands and Innovation (April 2012 to April 2019) Senior Vice President and Chief Marketing Officer (October 2006 to March 2012) 24 Juan R. Perez Chief Information and Engineering Officer, United Parcel Service, Inc., a multinational package delivery and supply chain management company (April 2017 to present) QUALIFICATIONS, ATTRIBUTES AND SKILLS During his nearly 30-year career at United Parcel Service, Inc., Mr. Perez has developed a broad range of commercial, operational and technological expertise. In addition to his overall leadership experience, Mr. Perez will bring significant strength in the areas of supply chain management and logistics, digital technology, innovation and data analytics to the Board. Mr. Perez was identified as a potential director nominee by Egon Zehnder as part of the Governance Committee’s director succession planning process. PREVIOUS BUSINESS EXPERIENCE • Chief Information Officer, United Parcel Service, Inc. (March 2016 to April 2017) • Vice President, Technology, United Parcel Service, Inc. (August 2012 to March 2016) EDUCATION • Bachelor of Science in industrial and systems engineering from the University of Southern California • Masters of Science in computer and manufacturing engineering from the University of Southern California One of two directors nominated for election by the holders of the Common Stock voting separately as a class. Director Nominee Age 52 Board Committees • None Wendy L. Schoppert Former Executive Vice President and Chief Financial Officer, Sleep Number Corporation, a bedding manufacturer, marketer and retailer (June 2011 to February 2014) QUALIFICATIONS, ATTRIBUTES AND SKILLS As Chief Financial Officer for Sleep Number Corporation, Ms. Schoppert gained extensive experience leading all finance functions including financial planning and analysis, accounting, tax, treasury, investor relations, decision support and IT. She began her career in the airline industry, serving in various financial, strategic, and general management leadership positions at American Airlines, Northwest Airlines and America West Airlines. Director since December 2017 Age 52 Board Committees • Audit • Finance and Risk Management PREVIOUS BUSINESS EXPERIENCE • Senior Vice President and Chief Information Officer, Sleep Number Corporation (March 2008 to June 2011) • Senior Vice President, International and New Channel Development, Sleep Number Corporation (April 2005 to March 2008) CURRENT PUBLIC AND OTHER KEY DIRECTORSHIPS • Bremer Financial Corporation (May 2017 to present) • Big Lots, Inc. (May 2015 to present) PAST PUBLIC COMPANY BOARDS • Gaia, Inc. (October 2013 to December 2018) EDUCATION • Bachelor of Arts in mathematics and operations research from Cornell University • Masters of Business Administration in finance and general management from Cornell University One of two directors nominated for election by the holders of the Common Stock voting separately as a class. David L. Shedlarz Former Vice Chairman, Pfizer Inc., a pharmaceutical, consumer and animal products health company (July 2005 to December 2007) QUALIFICATIONS, ATTRIBUTES AND SKILLS Mr. Shedlarz spent the majority of his professional career with Pfizer. At the time of his retirement in 2007, Mr. Shedlarz was responsible for operations including the animal health business, finance, accounting, strategic planning, business development, global sourcing, manufacturing, information systems and human resources, skills that are particularly valuable to the Board given his role as chair of the Audit Committee and a member of the Finance and Risk Management Committee. Mr. Shedlarz also brings to the Board considerable international business and leadership experience he gained while at Pfizer. Director since August 2008 Age 70 Board Committees • Audit (Chair) • Executive • Finance and Risk Management PREVIOUS BUSINESS EXPERIENCE • Executive Vice President and Chief Financial Officer, Pfizer Inc. (January 1999 to July 2005) CURRENT PUBLIC AND OTHER KEY DIRECTORSHIPS • Teladoc Health, Inc. (September 2016 to present) • Pitney Bowes, Inc. (May 2001 to present) • Teachers Insurance and Annuity Association Board of Trustees (March 2007 to present) EDUCATION • Bachelor’s degree in economics and mathematics from Oakland/Michigan State University • Masters of Business Administration degree in finance and accounting from the New York University, Leonard N. Stern School of Business 25 NON-EMPLOYEE DIRECTOR COMPENSATION The Hershey Company Directors’ Compensation Plan We maintain a Directors’ Compensation Plan that is designed to: • Attract and retain highly qualified, non-employee directors; and • Align the interests of non-employee directors with those of our stockholders by paying a portion of non-employee compensation in units representing shares of our Common Stock. Directors who are employees of the Company receive no additional compensation for their service on our Board. Ms. Buck is the only employee of the Company who also served as a director during 2018 and thus received no additional compensation for her Board service. The Board targets non-employee director compensation at the 50th percentile of compensation paid to directors at a peer group of companies we call the 2018 Peer Group. Information about the 2018 Peer Group is included in the section entitled “Setting Compensation” in the Compensation Discussion & Analysis. Each year, with the assistance of the Compensation Committee and the Compensation Committee’s compensation consultant, the Board reviews the compensation paid to directors at companies in the current peer group to determine whether any changes to non-employee director compensation are warranted. As a result of its review in December 2017, the Board increased the annual restricted stock unit (“RSU”) award from $150,000 to $155,000 and increased the annual Audit Committee Chair retainer from $15,000 to $20,000. Accordingly, compensation paid to non-employee directors in 2018 was as follows: Form of Compensation Annual retainer for Chairman of the Board(1) (2) Annual retainer for other non-employee directors Annual RSU award Annual fee for Lead Independent Director(2) (3) Annual fee for chair of Audit Committee(2) Annual fees for chairs of Compensation, Finance and Risk Management, and Governance Committees(2) ____________________ (1) Applies only when Chairman of the Board is a non-employee director. (2) Paid in addition to $100,000 annual retainer for non-employee directors. (3) A Lead Independent Director is appointed if the Chairman of the Board is not independent. Payment ($) 150,000 100,000 155,000 25,000 20,000 15,000 The Board completed its annual review of non-employee director compensation in December 2018 and determined that no changes to any of the compensation elements were warranted for 2019. Payment of Annual Retainer, Lead Independent Director Fee and Committee Chair Fees The annual retainer (including the annual retainer for the Chairman of the Board, when applicable) and any applicable Lead Independent Director or committee chair fees for all non-employee directors are paid in quarterly installments on the 15th day of March, June, September and December, or the prior business day if the 15th is not a business day. Non-employee directors may elect to receive all or a portion of the annual retainer (including the annual retainer for the Chairman of the Board, when applicable) in cash or in Common Stock. Non-employee directors may also elect to defer receipt of all or a portion of the retainer, (including the annual retainer for the Chairman of the Board, when applicable) any applicable Lead Independent Director fee or committee chair fees until the date their membership on the Board ends. Lead Independent Director and committee chair fees that are not deferred are paid only in cash. 26 Non-employee directors choosing to defer all or a portion of their retainer, any applicable Lead Independent Director fee or committee chair fees may invest the deferred amounts in two ways: • • In a cash account that values the performance of the investment based upon the performance of one or more third-party investment funds selected by the director from among the mutual funds or other investment options available to all employees participating in our 401(k) Plan. Amounts invested in the cash account are paid only in cash. In a deferred common stock unit account that we value according to the performance of our Common Stock, including reinvested dividends. Amounts invested in the deferred common stock unit account are paid in shares of Common Stock. Restricted Stock Units RSUs are granted quarterly to non-employee directors on the first day of January, April, July and October. In 2018, the number of RSUs granted in each quarter was determined by dividing $38,750 by the average closing price of a share of our Common Stock on the New York Stock Exchange (“NYSE”) on the last three trading days preceding the grant date. RSUs awarded to non-employee directors vest one year after the date of grant, or earlier upon termination of the director’s membership on the Board by reason of retirement (termination of service from the Board after the director’s 60th birthday), death or disability, for any reason after a Change in Control as defined in our Executive Benefits Protection Plan (Group 3A) (“EBPP 3A”), or under such other circumstances as the Board may determine. Vested RSUs are payable to directors in shares of Common Stock or, at the option of the director, can be deferred as common stock units under the Directors’ Compensation Plan until the director’s membership on the Board ends. Dividend equivalent units are credited at regular rates on the RSUs during the restriction period and, upon vesting of the RSUs, are payable in shares of Common Stock or deferred as common stock units together with any RSUs the director has deferred. As of March 22, 2019, Messrs. Brown, Davis, Malcolm and Shedlarz and Mmes. Arway, Haben and Koken had attained retirement age for purposes of the vesting of RSUs. Other Compensation, Reimbursements and Programs The Board occasionally establishes committees of limited duration for special purposes. When a special committee is established, the Board will determine whether to provide non-employee directors with additional compensation for service on such committee based on the expected duties of the committee, the anticipated number and length of any committee meetings, and other factors the Board, in its discretion, may deem relevant. No such committees were established in 2018. We reimburse our directors for travel and other out-of-pocket expenses they incur when attending Board and committee meetings and for minor incidental expenses they incur when performing directors’ services. We also provide reimbursement for at least one director continuing education program each year. Directors receive travel accident insurance while traveling on the Company’s business and receive discounts on the purchase of our products to the same extent and on the same terms as our employees. Directors also are eligible to participate in the Company’s Gift Matching Program. Under the Gift Matching Program, the Company will match, upon a director’s request, contributions made by the director to one or more charitable organizations, on a dollar-for-dollar basis up to a maximum aggregate contribution of $5,000 annually. Stock Ownership Guidelines Pursuant to the Board’s Corporate Governance Guidelines, non-employee directors are expected to own shares of Common Stock having a value equal to at least five times the annual retainer. Each non-employee director has until January 1 of the year following his or her fifth anniversary of becoming a director to satisfy the guideline. The Compensation Committee reviews the stock ownership guidelines annually to ensure they are aligned with external market comparisons. 27 2018 Director Compensation The following table and explanatory footnotes provide information with respect to the compensation paid or provided to non- employee directors during 2018: Name Pamela M. Arway John P. Bilbrey(1) James W. Brown Charles A. Davis(2) Mary Kay Haben James C. Katzman M. Diane Koken Robert M. Malcolm James M. Mead(1) Anthony J. Palmer Thomas J. Ridge(1) Wendy L. Schoppert David L. Shedlarz ___________________ Fees Earned or Paid in Cash(3) ($) Stock Awards(4) ($) All Other Compensation(5) ($) Total ($) 100,000 84,478 100,000 207,761 115,000 66,209 100,000 115,000 38,860 109,931 33,792 100,000 120,000 155,000 52,376 155,000 155,000 155,000 102,624 155,000 155,000 52,376 155,000 52,376 166,005 155,000 5,000 1,500 5,000 5,000 5,000 5,000 500 5,000 5,000 5,000 2,500 5,000 — 260,000 138,354 260,000 367,761 275,000 173,833 255,500 275,000 96,236 269,931 88,668 271,005 275,000 (1) Messrs. Bilbrey, Mead and Ridge retired from the Board on May 2, 2018. (2) During 2018, Mr. Davis served as Lead Independent Director until May 2, 2018, when he was appointed Chairman of the Board. (3) Includes amounts earned or paid in cash or shares of Common Stock at the election of the director or deferred by the director under the Directors’ Compensation Plan. Amounts credited as earnings on amounts deferred under the Directors’ Compensation Plan are based on investment options available to all participants in our 401(k) Plan or our Common Stock and, accordingly, the earnings credited during 2018 were not considered “above market” or “preferential” earnings. The following table sets forth the portion of fees earned or paid in cash or Common Stock, and the portion deferred with respect to retainers and fees earned during 2018: Immediate Payment Deferred and Investment Election Cash Paid ($) Value Paid in Shares of Common Stock ($) Number of Shares of Common Stock (#) Value Deferred to a Cash Account ($) Value Deferred to a Common Stock Unit Account ($) Number of Deferred Common Stock Units (#) 100,000 — 100,000 207,761 115,000 — 100,000 115,000 38,860 9,931 16,896 100,000 120,000 — — — — — — — — — 100,000 16,896 — — — — — — — — — — — 992 162 — — — 84,478 — — — — — — — — — — — — — — — — 66,209 — — — — — — — — — — — — 669 — — — — — — — Name Pamela M. Arway John P. Bilbrey James W. Brown Charles A. Davis Mary Kay Haben James C. Katzman M. Diane Koken Robert M. Malcolm James M. Mead Anthony J. Palmer Thomas J. Ridge Wendy L. Schoppert David L. Shedlarz (4) Represents the dollar amount recognized as expense during 2018 for financial statement reporting purposes with respect to RSUs awarded to the directors during 2018. RSUs awarded to directors are charged to expense in the Company’s financial statements at the grant date fair value on each quarterly grant date. With the exception of Ms. Schoppert, the target annual grant date fair value of the RSUs for each director during 2018 was $155,000. The target annual grant date fair value of Ms. Schoppert's 2018 RSUs was $166,005, which includes pro-rated RSUs related to her service in the final quarter of 2017 as she joined the Board in December 2017. 28 The following table provides information with respect to the number and market value of deferred common stock units and RSUs held as of December 31, 2018, based on the $107.18 closing price of our Common Stock as reported by NYSE on December 31, 2018, the last trading day of 2018. The information presented includes the accumulated value of each director’s deferred common stock units and RSUs. Balances shown below include dividend equivalent units credited in the form of additional common stock units on retainers and committee chair fees that have been deferred as common stock units and dividend equivalent units credited in the form of additional common stock units on RSUs. Number of Deferred Common Stock Units (#) Market Value of Retainers and Committee Chair Fees Deferred to the Common Stock Unit Account as of December 31, 2018 ($) Number of RSUs (#) Market Value of RSUs as of December 31, 2018 ($) — — 952 — 6,649 673 952 — — — 4,939 — — — — 102,035 — 712,640 72,132 102,035 — — — 529,362 — — 1,553 — 1,553 1,553 1,553 1,061 1,553 1,553 — 1,553 — 1,657 1,553 166,451 — 166,451 166,451 166,451 113,718 166,451 166,451 — 166,451 — 177,597 166,451 Name Pamela M. Arway John P. Bilbrey James W. Brown Charles A. Davis Mary Kay Haben James C. Katzman M. Diane Koken Robert M. Malcolm James M. Mead Anthony J. Palmer Thomas J. Ridge Wendy L. Schoppert David L. Shedlarz (5) Represents the Company match for contributions made by the director to one or more charitable organizations during 2018 under the Gift Matching Program. 29 SHARE OWNERSHIP OF DIRECTORS, MANAGEMENT AND CERTAIN BENEFICIAL OWNERS The following table sets forth information with respect to the beneficial ownership of our outstanding voting securities and stock options by: • Stockholders who we believe owned more than 5% of our outstanding Common Stock or Class B Common Stock, as of March 22, 2019; and • Our directors, director nominees, NEOs and all directors and executive officers as a group, as of March 22, 2019. Holder Hershey Trust Company, as trustee for the Milton Hershey School Trust(5) 100 Mansion Road Hershey, PA 17033 Milton Hershey School(5) Founders Hall Hershey, PA 17033 Hershey Trust Company(6) BlackRock, Inc.(7) 55 East 52nd Street New York, NY 10055 Vanguard Group, Inc.(8) 100 Vanguard Blvd. Malvern, PA 19355 Pamela M. Arway* James W. Brown* Michele G. Buck* Charles A. Davis* Mary Kay Haben* James C. Katzman* M. Diane Koken* Patricia A. Little Robert M. Malcolm* Terence L. O’Day Anthony J. Palmer* Juan R. Perez* Wendy L. Schoppert* David L. Shedlarz* Todd W. Tillemans Leslie M. Turner Mary Beth West All directors and executive officers as a group (20 persons) ____________________ * ** Director Less than 1% Common Stock(1) Exercisable Stock Options(2) Percent of Common Stock(3) Class B Common Stock Percent of Class B Common Stock(4) 2.6 60,612,012 99.9 ** 9.2 7.5 ** ** ** ** ** ** ** ** ** ** ** ** ** ** ** ** ** ** — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 3,800,791 102,330 13,764,673 11,174,446 14,013 — 51,815 21,992 — — 600 — 9,950 36,298 13,502 — — 12,080 6,463 — 23,083 — — — — — — 211,288 — — — — 12,641 — 172,931 — — — — 11,653 118,238 21,666 208,590 655,739 30 (1) Amounts listed also include the following RSUs that will vest and be paid to the following holders within 60 days of March 22, 2019: Name Pamela M. Arway Charles A. Davis Robert M. Malcolm Anthony J. Palmer David L. Shedlarz Todd W. Tillemans Mary Beth West RSUs (#) 405 405 405 405 405 2,200 13,236 Amounts listed also include shares for which certain of the directors share voting and/or investment power with one or more other persons as follows: Ms. Arway, 13,608 shares owned jointly with her spouse; Ms. Koken, 600 shares held at Glenmede Trust Company; Mr. Malcolm, 9,545 shares owned jointly with his spouse; and Mr. Palmer, 13,097 shares owned jointly with his spouse. (2) This column reflects stock options that were exercisable by the NEOs and the executive officers as a group on March 22, 2019. For Mmes. Little and West and Mr. Tillemans, the column reflects stock options that will become exercisable within 60 days of March 22, 2019. (3) Based upon 147,913,263 shares of Common Stock outstanding on March 22, 2019. (4) Based upon 60,613,777 shares of Class B Common Stock outstanding on March 22, 2019. (5) Hershey Trust Company, as trustee for the Milton Hershey School Trust, has the right at any time to convert its Class B Common Stock into Common Stock on a share-for-share basis. If on March 22, 2019, Hershey Trust Company, as trustee for the Milton Hershey School Trust, converted all of its Class B Common Stock into Common Stock, Hershey Trust Company, as trustee for the Milton Hershey School Trust, would own beneficially 64,412,803 shares of our Common Stock (3,800,791 Common Stock shares plus 60,612,012 converted Class B Common Stock shares), or 30.9% of the 208,525,275 shares of Common Stock outstanding following the conversion (calculated as 147,913,263 Common Stock shares outstanding prior to the conversion plus 60,612,012 converted Class B Common Stock shares). For more information about the Milton Hershey School Trust, Hershey Trust Company, Milton Hershey School and the ownership and voting of these securities, please see the section entitled “Information Regarding Our Controlling Stockholder.” (6) Please see the section entitled “Information Regarding Our Controlling Stockholder” for more information about shares of Common Stock held by Hershey Trust Company as investments. (7) (8) Information regarding BlackRock, Inc. and its beneficial holdings was obtained from a Schedule 13G/A filed with the SEC on February 4, 2019. The filing indicated that, as of December 31, 2018, BlackRock, Inc. had sole voting and investment power over 13,764,673 shares of Common Stock. The filing indicated that BlackRock, Inc. is a parent holding company or control person in accordance with Rule 13d-1(b)(1)(ii)(G) and that various persons have the right to receive or the power to direct the receipt of dividends from, or the proceeds from the sale of, our Common Stock. Information regarding Vanguard Group, Inc. and its beneficial holdings was obtained from a Schedule 13G/A filed with the SEC on February 11, 2019. The filing indicated that, as of December 31, 2018, Vanguard Group, Inc. had sole voting and investment power over 11,174,446 shares of Common Stock. The filing indicated that Vanguard Group, Inc. is a parent holding company or control person in accordance with Rule 13d-1(b)(1)(ii)(G) and that various persons have the right to receive or the power to direct the receipt of dividends from, or the proceeds from the sale of, our Common Stock. Ownership of Other Company Securities Certain directors and NEOs hold Company securities not reflected in the beneficial ownership table above because they will not convert, or cannot be converted, to shares of Common Stock within 60 days of our March 22, 2019 Record Date. These securities include: • Certain unvested RSUs or deferred common stock units held by our directors and NEOs; and • Certain unvested stock options held by our NEOs. 31 The table below shows these holdings as of March 22, 2019. You can find additional information about RSUs and deferred common stock units held by directors in the Non-Employee Director Compensation section of this Proxy Statement. You can find additional information about stock options, RSUs and deferred common stock units held by the NEOs in the Executive Compensation section of this Proxy Statement. Holder Shares Underlying RSUs and Common Stock Units Not Beneficially Owned Shares Underlying Stock Options Not Beneficially Owned Pamela M. Arway* James W. Brown* Michele G. Buck* Charles A. Davis* Mary Kay Haben* James C. Katzman* M. Diane Koken* Patricia A. Little Robert M. Malcolm* Terence L. O’Day Anthony J. Palmer* Juan R. Perez* Wendy L. Schoppert* David L. Shedlarz* Todd W. Tillemans Leslie M. Turner Mary Beth West ____________________ * Director 1,163 2,869 111,114 1,163 8,565 2,331 2,869 49,158 1,163 7,128 1,163 — 2,021 1,163 7,960 38,195 23,336 — — 114,562 — — — — 35,590 — 30,409 — — — — 21,042 — 40,469 Information Regarding Our Controlling Stockholder In 1909, Milton S. and Catherine S. Hershey established a trust having as its sole beneficiary Milton Hershey School, a non- profit school for the full-time care and education of disadvantaged children located in Hershey, Pennsylvania. Hershey Trust Company, a state-chartered trust company, is trustee of the Milton Hershey School Trust. In its capacity as trustee for the Milton Hershey School Trust, Hershey Trust Company is our controlling stockholder. In this capacity, it will have the right to cast 2.6% of all of the votes entitled to be cast on matters requiring the vote of the Common Stock voting separately and 80.9% of all of the votes entitled to be cast on matters requiring the vote of the Common Stock and Class B Common Stock voting together. The board of directors of Hershey Trust Company, with the approval of the board of managers (governing body) of Milton Hershey School, decides how funds held by Hershey Trust Company, as trustee for the Milton Hershey School Trust, will be invested. The board of directors of Hershey Trust Company generally decides how shares of The Hershey Company held by Hershey Trust Company, as trustee for the Milton Hershey School Trust, will be voted. As of the Record Date, Hershey Trust Company also held 102,330 shares of our Common Stock as investments. The board of directors or management of Hershey Trust Company decides how these shares will be voted. In all, Hershey Trust Company, as trustee for the Milton Hershey School Trust and as direct owner of investment shares, will be entitled to vote 3,903,121 shares of our Common Stock and 60,612,012 shares of our Class B Common Stock at the Annual Meeting. Stated in terms of voting power, Hershey Trust Company will have the right to cast 2.6% of all of the votes entitled to be cast on matters requiring the vote of the Common Stock voting separately and 80.9% of all of the votes entitled to be cast on matters requiring the vote of the Common Stock and Class B Common Stock voting together at the Annual Meeting. 32 Our certificate of incorporation contains the following important provisions regarding our Class B Common Stock: • All holders of Class B Common Stock, including Hershey Trust Company, as trustee for Milton Hershey School Trust, may convert any of their Class B Common Stock shares into shares of our Common Stock at any time on a share-for- share basis. • All shares of Class B Common Stock will automatically be converted to shares of Common Stock on a share-for-share basis if Hershey Trust Company, as trustee for Milton Hershey School Trust, or any successor trustee, or Milton Hershey School, as appropriate, ceases to hold more than 50% of the total Class B Common Stock shares outstanding and at least 15% of the total Common Stock and Class B Common Stock shares outstanding. • We must obtain the approval of Hershey Trust Company, as trustee for Milton Hershey School Trust, or any successor trustee, or Milton Hershey School, as appropriate, before we issue any Common Stock or take any other action that would deprive Hershey Trust Company, as trustee for Milton Hershey School Trust, or any successor trustee, or Milton Hershey School, as appropriate, of the ability to cast a majority of the votes on any matter where the Class B Common Stock is entitled to vote, either separately as a class or together with any other class. 33 AUDIT COMMITTEE REPORT To Our Stockholders: The Audit Committee is currently comprised of five directors, each of whom is considered independent under the NYSE Rules and the rules and regulations of the SEC. The Board has determined that each member of the Audit Committee is financially literate and that each of Ms. Schoppert and Mr. Shedlarz qualifies as an “audit committee financial expert,” as that term is defined under the rules promulgated by the SEC. Our role as the Audit Committee is to assist the Board in its oversight of: • The integrity of the Company’s financial statements; • The Company’s compliance with legal and regulatory requirements; • The independent auditors’ qualifications and independence; and • The performance of the independent auditors and the Company’s internal audit function. The Audit Committee operates under a written charter that was last reviewed by the Audit Committee on December 12, 2018. Our duties as an Audit Committee include overseeing the Company’s management, internal auditors and independent auditors in their performance of the following functions, for which they are responsible: Management Preparing the Company’s financial statements; • • Establishing effective financial reporting systems and internal controls and procedures; and • Reporting on the effectiveness of the Company’s internal control over financial reporting. Internal Audit Department Independently assessing management’s system of internal controls and procedures; and • • Reporting on the effectiveness of that system. Independent Auditors • Auditing the Company’s financial statements; • Expressing an opinion about the financial statements’ conformity with U.S. generally accepted accounting principles; and • Annually auditing the effectiveness of the Company’s internal control over financial reporting. We meet periodically with management, the internal auditors and independent auditors, independently and collectively, to discuss the quality of the Company’s financial reporting process and the adequacy and effectiveness of the Company’s internal controls. Prior to the Company filing its Annual Report on Form 10-K for the year ended December 31, 2018 with the SEC, we also: • Reviewed and discussed the audited financial statements with management and the independent auditors; • Discussed with the independent auditors the matters required to be discussed by applicable requirements of the Public Company Accounting Oversight Board; • Received the written disclosures and the letter from the independent auditors in accordance with applicable requirements of the Public Company Accounting Oversight Board regarding the independent auditors’ communications with the Audit Committee concerning independence; and • Discussed with the independent auditors their independence from the Company. We are not employees of the Company and are not performing the functions of auditors or accountants. We are not responsible as an Audit Committee or individually to conduct “field work” or other types of auditing or accounting reviews or procedures or to set auditor independence standards. In carrying out our duties as Audit Committee members, we have relied on the information provided to us by management and the independent auditors. Consequently, we do not assure that the audit of the Company’s financial statements has been carried out in accordance with generally accepted auditing standards, that the financial statements are presented in accordance with U.S. generally accepted accounting principles or that the Company’s auditors are in fact “independent.” 34 Based on the reports and discussions described in this report, and subject to the limitations on our role and responsibilities as an Audit Committee referred to above and in our charter, we recommended to the Board that the audited financial statements be included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on February 22, 2019. Submitted by the Audit Committee: David L. Shedlarz, Chair James W. Brown M. Diane Koken Robert M. Malcolm Wendy L. Schoppert 35 INFORMATION ABOUT OUR INDEPENDENT AUDITORS The following table sets forth the amount of audit fees, audit-related fees, tax fees and all other fees billed or expected to be billed by Ernst & Young LLP, our independent auditors for the fiscal years ended December 31, 2018 and December 31, 2017: Nature of Fees Audit Fees Audit-Related Fees(1) Tax Fees(2) All Other Fees(3) Total Fees ____________________ 2018 ($) 5,224,136 1,186,311 593,707 2,000 7,006,154 2017 ($) 4,745,504 1,204,499 1,820,281 1,995 7,772,279 (1) Fees associated primarily with services related to due diligence for potential business acquisitions. (2) Fees pertaining primarily to tax consultation and tax compliance services. (3) Fees for other permissible services that do not meet the above category descriptions, including subscription programs. The Audit Committee pre-approves all audit, audit-related and non-audit services performed by the independent auditors. The Audit Committee is authorized by its charter to delegate to one or more of its members the authority to pre-approve any audit, audit-related or non-audit services, provided that the approval is presented to the Audit Committee at its next scheduled meeting. The Audit Committee pre-approved all services provided by Ernst & Young LLP in 2018. 36 PROPOSAL NO. 2 – RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS The Board of Directors unanimously recommends that stockholders vote FOR ratification of the Audit Committee's appointment of Ernst & Young LLP as the Company's independent auditors for 2019 The Audit Committee has appointed Ernst & Young LLP as the Company’s independent auditors for 2019. Although not required to do so, the Board, upon the Audit Committee’s recommendation, has determined to submit the Audit Committee’s appointment of Ernst & Young LLP as our independent auditors to stockholders for ratification as a matter of good corporate governance. The Audit Committee’s appointment of Ernst & Young LLP as the Company’s independent auditors for 2019 will be considered ratified if a majority of the shares of the Common Stock and Class B Common Stock (voting together without regard to class) present and entitled to vote at the Annual Meeting are voted for the proposal. If stockholders do not ratify the appointment of Ernst & Young LLP as the Company’s independent auditors for 2019, the Audit Committee will reconsider its appointment. Representatives of Ernst & Young LLP will attend the Annual Meeting, will have the opportunity to make a statement, if they so desire, and will be available to respond to questions. 37 COMPENSATION DISCUSSION & ANALYSIS EXECUTIVE COMPENSATION This section discusses and analyzes the decisions we made concerning the compensation of our named executive officers (“NEOs”) for 2018. It also describes the process for determining executive compensation and the factors considered in determining the amount of compensation awarded to our NEOs. Our NEOs for 2018 are: Name Michele G. Buck Patricia A. Little Terence L. O’Day Todd W. Tillemans Mary Beth West Leslie M. Turner (1) President and Chief Executive Officer (“CEO”) Senior Vice President, Chief Financial Officer (“CFO”) Title Senior Vice President, Chief Product Supply and Technology Officer President, U.S. Senior Vice President, Chief Growth Officer Former Senior Vice President, General Counsel and Corporate Secretary ____________________ (1) Ms. Turner retired on April 1, 2018. Executive Summary Strategic Plan The Hershey Company (the “Company”), headquartered in Hershey, Pa., is a global confectionery leader known for bringing goodness to the world through its chocolate, sweets, mints, gum and other great-tasting snacks. We have approximately 16,420 employees around the world who work every day to deliver delicious, quality products. We have more than 80 brands that drive approximately $7.8 billion in annual revenues. Our vision is to be an innovative snacking powerhouse. We are currently the number two snacking manufacturer in the United States with leading edge capabilities. We aspire to be a leader in meeting consumers' evolving snacking needs while strengthening the capabilities that drive our growth. We are focused on three strategic imperatives to ensure the Company's success now and in the future: • Reignite our core confection business and broaden participation in snacking; • Reallocate resources to enable margin expansion and fuel growth; and • Invest to strengthen our capabilities and leverage technology for commercial advantage and growth. Our strategic plan and the financial metrics we establish to help achieve and measure success against that plan, serve as the foundation of our executive compensation program. In February 2018, we announced the following Company financial expectations: • • Increase net sales between 5% and 7% from 2017; and Increase adjusted earnings per share-diluted(1) between 12% and 14% from 2017. See the section entitled "Annual Incentives" for more information regarding our 2018 annual incentive targets and related results. (1) While we report our financial results in accordance with U.S. generally accepted accounting principles (“GAAP”), we also use non-GAAP financial measures within Management’s Discussion and Analysis in the 2018 Annual Report on Form 10-K that accompanies this Proxy Statement in order to provide additional information to investors to facilitate the comparison of past and present performance. Some of the financial targets under our short- and long-term incentive programs are also based on non-GAAP financial measures. Non-GAAP financial measures are used by management in evaluating results of operations internally and in assessing the impact of known trends and uncertainties on our business, but they are not intended to replace the presentation of financial results in accordance with GAAP. Adjusted earnings per share-diluted is a non-GAAP financial measure. We define adjusted earnings per share-diluted as diluted earnings per share of the Company’s common stock (“Common Stock”), excluding costs associated with business realignment activities, costs relating to the integration of acquisitions, long-lived and intangible asset impairment charges, unallocated gains and losses associated with mark-to-market commodity derivatives, pension settlement charges relating to Company-directed initiatives, the one-time impact of U.S. tax reform and the gain realized on the sale of certain licensing rights. 38 While our 2018 net sales results did not meet our expectations, we delivered on our adjusted earnings per share-diluted commitment and our financial performance exceeded the median performance of our 2018 Peer Group. Our 2018 Peer Group is described in more detail in the section entitled "Setting Compensation." 2018 Growth in Net Sales In millions of dollars $7,791 $7,515 $8,000 $7,750 $7,500 $7,250 $7,000 2018 Growth in Adjusted Earnings Per Share-Diluted $ $5.36 $4.69 $5.50 $5.25 $5.00 $4.75 $4.50 $4.25 $4.00 $3.75 2017 2018 2017 2018 3.7% Growth 14.3% Growth Executive Compensation Philosophy Our executive compensation philosophy is to provide compelling, dynamic, market-based total compensation tied to performance and aligned with our stockholders’ interests. Our goal is to ensure the Company has the talent it needs to maintain sustained long-term performance for our stockholders, employees and communities. The guiding principles that help us achieve this goal are compensation programs which: Play a key role in ensuring we have the talent needed for long-term strategic success Align payouts with long-term stockholder interests Aligned with Stockholders EXECUTIVE COMPENSATION PHILOSOPHY Reinforce Robust Succession Planning Pay for Performance Tie a significant portion of executives’ compensation to Company’s performance Aligned with Strategy Are market competitive and flexible to recruit and retain top talent Recruit and Retain Data-Driven Decision Making Consider internal and external market data Focus the executives on delivering against the metrics underlying our strategic plan 39 Hershey Has Strong Pay-for-Performance Alignment The Compensation and Executive Organization Committee (the “Compensation Committee”) of our Board of Directors (the “Board”) has oversight responsibility for our executive compensation framework and for aligning our executives’ pay with the Company’s performance. We believe we have strong pay-for-performance alignment because a significant portion of each NEO’s target total direct compensation is tied to the financial performance of the Company as well as stockholder returns. In 2018, approximately 87% of our CEO’s and 74% of our other NEOs’ target total direct compensation, excluding Ms. Turner’s, was at-risk, including a substantial portion tied to stockholder value. Specifically, 34% of our Performance Stock Units ("PSUs") were tied to Total Shareholder Return (“TSR”). Combined with the other financial and strategic metrics that determine our NEOs’ compensation, we have aligned our executive compensation program with the long-term interests of our stockholders. Our Stockholders Strongly Approve of Our Pay Practices Last year, our stockholders overwhelmingly approved our “say-on-pay” resolution, with more than 93% of the votes cast by the holders of Common Stock and more than 99% of the combined votes cast by the holders of the Common Stock and Class B Common Stock voting in favor. Our Compensation Committee believes the results of last year’s “say-on-pay” vote affirmed our stockholders’ support of our Company’s executive compensation program. Consequentially, our approach to executive compensation in 2018 was substantially the same as the approach stockholders approved in 2017. At the 2017 Annual Meeting of Stockholders, our stockholders voted to continue having an annual “say-on-pay” vote as described in Proposal No. 3 – Advise on Named Executive Officer Compensation. We plan to ask stockholders to express a preference for the frequency of the “say-on-pay” vote at our 2023 Annual Meeting of Stockholders. 40 We believe our compensation and governance policies and practices are significant drivers of our stockholder support. These policies and practices include: Pay for performance: A substantial percentage of each NEO's target total direct compensation is at- risk. Performance measures support strategic objectives: The performance measures we use in our compensation programs reflect strategic and operating objectives, creating long-term value for our stockholders. Appropriate risk-taking: We set performance goals that consider our publicly-announced financial expectations, which we believe will encourage appropriate risk taking. Our incentive programs are appropriately capped so as not to encourage excessive risk taking. “Double-trigger” benefits in the event of a change in control: In the event of a change in control, the payment of severance benefits and the acceleration of vesting of long-term incentive awards that are replaced with qualifying awards will not occur unless there is also a qualifying termination of employment upon or within two years following the change in control. Clawbacks and other covenants: We require our NEOs to enter into an Employee Confidentiality and Restrictive Covenant Agreement (“ECRCA”) as a condition of receipt of long-term incentive awards. Failure to comply with the ECRCA may subject the employee to cancellation of awards and a requirement to repay amounts received from awards. Under the Equity and Incentive Compensation Plan (“EICP”), when an individual’s actions result in the filing of financial documents not in compliance with financial reporting requirements, the Company has the right to recoup or require repayment of an award earned or accrued during the 12-month period following the first public issuance or filing with the Securities and Exchange Commission (“SEC”) of the non-compliant document. Significant stock ownership guidelines: Our NEOs and other executives are required to accumulate and hold stock equal to a multiple of base salary. If an executive has not met his or her ownership requirement in a timely manner, the executive is required to retain a portion of shares received under long-term incentive awards until the requirement is met. Provide excessive perquisites: Executive perquisites are kept to a minimal level relative to a NEO’s total compensation and do not play a significant role in our executive compensation program. Tax gross-ups: We generally do not provide tax gross-ups, except for relocation expenses. Provide for the prepayment of dividends on unearned PSUs: Dividends are not paid on PSU awards during the three-year performance cycle. Hedging Company stock: Our NEOs, directors and other insiders are prohibited from entering into hedging transactions related to our stock, including forward sale purchase contracts, equity swaps, collars or exchange fund. Pledging Company stock: Our NEOs, directors and other insiders are prohibited from entering into pledging transactions related to our stock. Re-pricings or exchanges of underwater stock options: Our stockholder-approved EICP prohibits re- pricing or exchange of underwater stock options without stockholder approval. WHAT WE DO WHAT WE DON'T DO 41 2018 Performance Results and Payouts 2018 One Hershey Incentive Program ("OHIP") - Performance Metrics and Results Payouts under the 2018 OHIP reflect our below-target performance in net sales and above-target performance in adjusted earnings per share-diluted and operating cash flow. As a result, 65% of the 2018 OHIP award for each NEO was based on the Company performance score of 99.09%. The remainder of the 2018 OHIP award for each NEO was determined by individual performance as described in more detail in the section entitled "Annual Incentives." Metric 2018 ResultsRe 2018 Awards Net Sales(1) 5.0% growth was below target Adjusted Earnings per Share-Diluted(2) 14.9% growth was above target Company performance score of 99.09% Operating Cash Flow(3) 11.1% growth was above target Individual Performance Metrics ____________________ Described in more detail in the section entitled "Annual Incentives" Individual performance scores ranged from 80% to 130% of target for each NEO (1) For purposes of determining the Company performance score, net sales is measured on a constant currency basis, further adjusted to reflect the impact of divestitures and acquisitions, which is a non-GAAP performance measure. To calculate net sales on a constant currency basis, net sales for the current fiscal year period for entities reporting in currencies other than the U.S. dollar are translated into U.S. dollars at the average rates during the comparable period of the prior fiscal year. For more information on our use of non-GAAP performance measures, please see footnote (1) in the section entitled "Executive Summary." (2) For purposes of determining the Company performance score, adjusted earnings per share-diluted as determined for financial reporting purposes, which is a non-GAAP performance measure, is further adjusted to reflect the impact of divestitures and acquisitions. For more information regarding how we define adjusted earnings per share-diluted, please see footnote (1) in the section entitled “Executive Summary.” (3) Operating cash flow is a non-GAAP performance measure. We define operating cash flow as the average of cash from operations less certain one-time items impacting comparability. For more information regarding our use of non-GAAP performance measures, please see footnote (1) in the section entitled “Executive Summary.” 2016-2018 PSU Cycle - Performance Metrics and Results Our TSR results were significantly above target for the 2016-2018 PSU cycle, therefore our NEOs received a 247% payout for this metric, significantly increasing their overall PSU payout, as shown in the table below and described in more detail in the section entitled “Performance Stock Unit Targets and Results." Metric 2016-2018 ResultsRe 2016-2018 Awards Total Shareholder Return 89th percentile was above target Three-year Compound Annual Growth Rate ("CAGR") in Net Sales Growth(1)(2) Three-year CAGR in Adjusted Earnings per Share-Diluted(1)(3) ____________________ 0.6% CAGR was below threshold 131.08% payout 7.1% CAGR was above target (1) Results for our barkTHINS, Amplify and Pirate Brands businesses were excluded from the following metrics, as applicable, as these acquisitions were made subsequent to the approval of the 2016-2018 PSU cycle metrics: • Three-year CAGR in net sales growth; and • Three-year CAGR in adjusted earnings per share-diluted. (2) Net Sales is measured on a constant currency basis, which is a non-GAAP performance measure. To calculate net sales on a constant currency basis, net sales for the current fiscal year period for entities reporting in currencies other than the U.S. dollar are translated into U.S. dollars at the average rates during the comparable period of the base fiscal year. (3) Adjusted earnings per share-diluted is a non-GAAP performance measure. For more information regarding how we define adjusted earnings per share- diluted, please see footnote (1) in the section entitled “Executive Summary.” 42 The Role of the Compensation Committee The Compensation Committee has primary responsibility for making compensation decisions for our NEOs other than our CEO. Our CEO’s compensation is approved by the independent members of the Board based on the recommendations of the Compensation Committee. The Compensation Committee operates under a charter approved by the Board. The Compensation Committee uses information from its independent executive compensation consultant, input from our CEO (except for matters regarding her own pay) and assistance from our Human Resources Department to make decisions and to conduct its annual review of the Company’s executive compensation program. The Compensation Committee works with a rolling agenda, with its heaviest workload occurring during the first quarter of the year. During this quarter, decisions are made with respect to annual and long-term incentives earned based on the prior year’s performance and target compensation levels are finalized for the current year. The Compensation Committee also reviews and approves this Compensation Discussion & Analysis. During the second and third quarters, the Compensation Committee reviews materials relating to peer group composition, tally sheets, competitive pay analysis and other information that forms the foundation for future decisions. The Compensation Committee uses the third and fourth quarters to finalize decisions relating to the peer group and compensation plan design for use in the upcoming year. The Compensation Committee may, in its discretion, delegate all or a portion of its duties and responsibilities to a subcommittee of the Compensation Committee and, pursuant to the provisions of the EICP, may appoint the CEO as a committee of the Board as necessary for the purpose of making equity grants under the EICP; provided, however, the Compensation Committee may not delegate the approval of certain transactions to a subcommittee or to the CEO if such transactions involve the approval or grant of equity-based compensation to an “officer” for purposes of Rule 16b-3 under the Securities Exchange Act of 1934 (“Exchange Act”) or certification as to the attainment of performance goals for a “covered employee” for purposes of Section 162(m) of the Internal Revenue Code (“IRC”) unless such subcommittee consists solely of members of the Compensation Committee who are (i) “Non-Employee Directors” for the purposes of Rule 16b-3 under the Exchange Act, and (ii) “outside directors” for the purposes of Section 162(m) of the IRC. Compensation Advisor Independence The Compensation Committee retained Frederic W. Cook & Co., Inc. ("F.W. Cook") as its independent executive compensation consultant for fiscal 2018. F.W. Cook advised the Compensation Committee on director and executive compensation, but did no other work for the Company. Mercer (US) Inc. (“Mercer”) served as the Compensation Committee’s independent executive compensation consultant in fiscal 2017 and continued to provide ad-hoc services related to executive and director compensation through February 2018. The Compensation Committee reviews all fees for services related to executive and director compensation provided by F.W. Cook. Because Mercer continued to provide ad-hoc executive and director compensation consultation services to the Compensation Committee through February 2018, as well as other compensation-related products and services to the Company, the Compensation Committee also reviewed fees paid to Mercer in 2018. Fees paid to Mercer and its affiliates for services provided in 2018 related to executive and director compensation and compensation-related products and services totaled $26,706 and $111,231, respectively. The decision to engage Mercer for compensation-related products and services was made by management. The Compensation Committee also received and discussed with F.W. Cook its letter to the Compensation Committee addressing factors relevant under the SEC and New York Stock Exchange (“NYSE”) rules in assessing F.W. Cook’s independence from management and whether F.W. Cook’s work for the Compensation Committee has raised any conflicts of interest, as well as F.W. Cook’s belief that no conflict of interest exists and that it serves as an independent advisor to the Compensation Committee. The factors addressed included the extent of any business or personal relationships with any member of the Compensation Committee or any executive officer of the Company; F.W. Cook’s provision of other services to the Company; the level of fees received from the Company as a percentage of total revenue of F.W. Cook; the policies and procedures employed by F.W. Cook to avoid conflicts of interest; and any ownership of Company stock by individuals employed by F.W. Cook to advise the Compensation Committee. The Compensation Committee considered these factors before selecting or receiving advice from F.W. Cook, and after considering these and other factors in their totality, the Compensation Committee identified no conflicts of interest with respect to F.W. Cook’s advice. 43 In establishing compensation levels and awards for executive officers other than our CEO, the Compensation Committee takes into consideration the recommendations of the independent executive compensation consultant and the Human Resources Department, combined with our CEO's evaluations of each officer’s individual performance and Company performance. The Compensation Committee evaluates director compensation primarily on the basis of peer group data used for benchmarking director compensation provided by the independent executive compensation consultant. Compensation Components Our executive compensation program includes the following key elements: Element Base Salary Design Fixed compensation component. Reviewed annually and adjusted as appropriate. Purpose Intended to attract and retain executives with proven skills and leadership abilities that will enable us to be successful. Annual Incentive Award Long-Term Incentive Awards Variable, performance-based compensation component. Payable based on business results and individual performance. Intended to motivate and reward executives for successful execution of strategic priorities. Variable compensation component. Granted annually as a combination of Restricted Stock Units (“RSUs”), PSUs and stock options. PSUs and stock options are considered to be performance-based; the value of amounts actually earned depend on Company and stock price performance. Intended to motivate and reward executives for long-term Company financial performance and enhanced long-term stockholder value by balancing compensation opportunity and risk, while encouraging sustained performance and retention. Key 2018 Actions With the exception of Ms. Turner, each NEO received an increase at the beginning of the year consistent with how the Company sets compensation as described below. Targets as a percentage of base salary were established at the beginning of 2018 for each NEO. The plan design remained consistent with the previous year. Targets as a percentage of base salary were established at the beginning of 2018 for each NEO. The plan design remained consistent with the previous year. The following charts illustrate the weighting of base salary, annual incentive awards and long-term incentive awards at target for our CEO and our other NEOs, excluding Ms. Turner, during 2018: Target Total Direct Compensation CEO Average Target Total Direct Compensation Other NEOs Performance Stock Units 33% Annual Cash Incentive 20% Salary 13% Stock Options 17% Restricted Stock Units 17% Performance Stock Units 26% Salary 26% Stock Options 13% Restricted Stock Units 13% Annual Cash Incentive 22% At-Risk Compensation= 87% At-Risk Compensation= 74% 44 Setting Compensation The Compensation Committee’s annual compensation review for 2018 included an analysis of data, comparing the Company’s executive compensation levels against a peer group of publicly-held consumer products companies. The independent executive compensation consultant provides the Compensation Committee with advice, counsel and recommendations with respect to the composition of the peer group and competitive data used for benchmarking our compensation program. The Compensation Committee uses this and other information provided by the independent executive compensation consultant to reach an independent recommendation regarding compensation to be paid to our CEO, directors and other officers. The Compensation Committee’s final recommendation with respect to CEO compensation is then given to the independent directors of our Board for review and final approval. Companies in the peer group used to benchmark executive pay levels for 2018 (the “2018 Peer Group”) are: Brown-Forman Corporation Dean Foods Company McCormick & Company, Inc. Campbell Soup Company Dr Pepper Snapple Group, Inc. Molson Coors Brewing Company Colgate-Palmolive Company General Mills, Inc. Mondelez International ConAgra Foods, Inc. Hormel Foods Corporation The Clorox Company Constellation Brands, Inc. Kellogg Company The J. M. Smucker Company The Compensation Committee selected these companies after reviewing publicly-held companies offering products/services similar to ours, with annual revenues within a range of approximately one-half to two and one-half times our annual revenue (with the exception of Mondelez International whom we also consider a peer company for executive talent) and market capitalization within a reasonable range of our market capitalization. The 2018 Peer Group was composed of companies with annual revenues ranging from $3.9 billion to $25.9 billion (trailing twelve months as of August 2017) and market capitalization ranging from $1.8 billion to $65.5 billion (most recent quarter as of August 2017). Hershey’s equivalent 2017 revenue of $7.5 billion and market capitalization of $23.2 billion were at the 45th and 66th percentiles, respectively. All of the companies in our 2018 Peer Group were included in our 2017 peer group. Mead Johnson Nutrition Company, which was also included in our 2017 peer group, was not included in our 2018 Peer Group because it was acquired in 2017. For the purposes of measuring performance in our open PSU cycles only, Dr Pepper Snapple Group, Inc. was removed from our 2018 Peer Group as a result of its merger with Keurig Green Mountain, Inc. in July 2018. Data from the 2018 Peer Group was supplemented by composite data from consumer products companies ranging in size from $3 billion to $17 billion in approximate annual sales. This information was included in three national surveys conducted by Aon Hewitt, Mercer and Willis Towers Watson. The survey composite data provided us with broader, industry-specific information regarding pay levels at consumer products companies for positions similar to those held by our NEOs. The Compensation Committee reviewed a report summarizing target total cash compensation (base salary plus target annual incentive) and target total direct compensation (base salary plus target annual incentive plus target long-term incentive) levels at the 25th, 50th and 75th percentiles of the 2018 Peer Group and the survey composite data for positions comparable to those held by each of our NEOs. Hershey targets total direct compensation for its executive officers, in aggregate, at competitive pay levels using the median of our peer group for reference. Positioning varies by job, and the Compensation Committee considers a number of factors including market competitiveness, specific duties and responsibilities of the executive versus those of peers, experience and succession planning. The Compensation Committee believes it is appropriate to reward the executive management team with compensation above or below the competitive median if the financial targets associated with its variable pay programs are above or below target, respectively. During 2018, the Compensation Committee received detailed tally sheets prepared by management. Each tally sheet captures comprehensive compensation, benefits and stock ownership data. The tally sheets provide the Compensation Committee with a complete picture of each executive’s current and projected compensation and the amount of each element of compensation or other benefit the executive would receive in the event of voluntary or involuntary termination, retirement, disability, death, or upon change in control. The Compensation Committee considers this information, as well as the benchmark information, when making compensation decisions. 45 Base Salary Base salary for each NEO is determined by considering the relative importance of the position, the competitive marketplace and the individual’s performance, responsibilities and experience. Salary reviews are generally conducted annually at the beginning of the year. Each NEO’s base salary is compared to internal and external references. Base salary adjustments, if any, are made after considering market references, Company performance against financial goals and individual performance. CEO performance is evaluated by the Compensation Committee and independent members of the Board. The CEO evaluates the performance of her direct reports, including all NEOs, and reviews her recommendations for salary adjustments with the Compensation Committee prior to its approval of the base salary for each NEO. If a NEO has responsibility for a particular business unit, the business unit’s financial results also will be strongly considered. On the basis of the foregoing considerations, the Compensation Committee, and all independent directors in the case of our CEO, approved base salaries for 2018 as follows: Name 2018 Base Salary ($) Increase from 2017 (%) Ms. Buck Ms. Little Mr. O'Day Mr. Tillemans Ms. West Ms. Turner 1,133,000 658,730 627,300 650,000 679,250 642,680 3.0 2.0 2.0 4.0 4.5 0.0 See Column (c) of the 2018 Summary Compensation Table for information regarding the base salary earned by each of our NEOs during 2018. Annual Incentives Our NEOs are eligible to receive an annual cash incentive award under the OHIP. The OHIP links the NEO’s annual payout opportunity to measures he or she can affect most directly. For 2018, our CEO and all employees reporting directly to her, including the NEOs, had common financial objectives tied to total Company performance consistent with their responsibility to manage the entire Company. Total Company performance targets are established in the context of our announced expectations for financial performance, prior year results and market conditions. For 2018, our NEOs were eligible to earn individual OHIP awards as follows: Name 2018 Target OHIP (% of Base Salary) Ms. Buck Ms. Little Mr. O'Day Mr. Tillemans Ms. West Ms. Turner 150 85 80 80 80 70 In determining the target OHIP percentage for each of the NEOs, the Compensation Committee, and the independent directors in the case of our CEO, considered the value of target total cash compensation against market references. Target total cash compensation levels for each of the NEOs fall within an appropriate range relative to the median for comparable positions given each incumbent’s performance, responsibilities and tenure in the role. In general, the final OHIP award is determined by multiplying the NEO’s base salary, the applicable target percentage and performance scores ranging from 0% to 200% based on Company and individual performance. The Company performance goals are established at the beginning of each year by the Compensation Committee. Individual performance goals also are established at that time, or at the time of hire if later. If performance scores exceed the target objectives, a NEO may receive an OHIP payout greater than his or her target award value. If performance scores are below the target objectives, the NEO’s OHIP payout will be below his or her target award value, subject to no award if performance is below threshold levels. 46 For 2018, Company financial performance metrics accounted for 65% of each NEO’s target award under the program. The remaining 35% was based upon individual performance toward achievement of a common goal as well as individual performance goals focused on strategic priorities applicable to the NEO’s position, but tied to the overall Company’s top priorities for the year. 2018 OHIP Financial Performance Targets and Results (65% of Total OHIP) Our 2018 OHIP financial performance targets, our financial performance results for 2018 and the resulting financial performance scores for OHIP were as follows: 2018 Target 2018 Actual Metric ($) (% growth) ($) (% growth) Target Award (%) Performance Score (%) Net Sales(1) 7.974 billion 6.1 7.892 billion Adjusted Earnings per Share- Diluted(2) 5.37 14.5 5.39 Operating Cash Flow(3) 1.355 billion 9.0 1.381 billion Total OHIP Company Score ____________________ 5.0 14.9 11.1 45.00 40.00 15.00 100.00 42.26 40.95 15.88 99.09 (1) For purposes of determining the Company performance score, net sales is measured on a constant currency basis, further adjusted to reflect the impact of divestitures and acquisitions, which is a non-GAAP performance measure. To calculate net sales on a constant currency basis, net sales for the current fiscal year period for entities reporting in currencies other than the U.S. dollar are translated into U.S. dollars at the average rates during the comparable period of the prior fiscal year. For more information on our use of non-GAAP performance measures, please see footnote (1) in the section entitled "Executive Summary." (2) For purposes of determining the Company performance score, adjusted earnings per share-diluted as determined for financial reporting purposes, which is a non-GAAP performance measure, is further adjusted to reflect the impact of divestitures and acquisitions. For more information regarding how we define adjusted earnings per share-diluted, please see footnote (1) in the section entitled “Executive Summary.” (3) Operating cash flow is a non-GAAP performance measure. We define operating cash flow as the average of cash from operations less certain one-time items impacting comparability. For more information regarding our use of non-GAAP performance measures, please see footnote (1) in the section entitled “Executive Summary.” 2018 OHIP Individual Performance Results (35% of Total OHIP) 2018 Common Goal The NEOs had a common goal to design and implement a new enterprise organizational model to deliver peer leading growth and margin by reallocating resources to commercial capabilities that accelerate growth and improve operational efficiency, our workplace experience and the overall quality of our talent. The new model was installed ahead of schedule and over delivered on all financial and operational objectives. ______________________________________________________________________________________________________ Michele G. Buck, President and CEO Ms. Buck delivered financial performance that solidly outperformed the Consumer Packaged Goods Food Sector peers while making strong progress towards creating an Innovative Snacking Powerhouse. Core brands were strengthened, and new media models were delivered (in house creative studio, new data and analytics for better targeting). Our International and Other Segment business delivered top-line organic growth(2) of 6.0% and over delivered operating income, with a record $74 million in profit. ______________________________________________________________________________________________________ (2) Organic growth, which is a non-GAAP performance measure, excludes the impact of divestitures and acquisitions. For more information on our use of non-GAAP performance measures, please see footnote (1) in the section entitled "Executive Summary." 47 Patricia A. Little, Senior Vice President, CFO Ms. Little led, to a successful completion, the master data and central finance reporting streams of our Enterprise Resource Planning ("ERP") project. Ms. Little developed a 3-year profit and loss statement designed to deliver balanced revenue and margin growth in line with Hershey’s top quartile net sales and earnings before interest and taxes aspirations. ______________________________________________________________________________________________________ Terence L. O’Day, Senior Vice President, Chief Product Supply and Technology Officer Mr. O’Day led the design and implementation of Hershey’s next generation ERP model, providing oversight and governance, delivering the project on time, on budget, and on scope for each workstream. He also activated initiatives to expand manufacturing, improve fulfillment and develop supply chain capabilities intended to further optimize manufacturing and distribution operations. ______________________________________________________________________________________________________ Todd W. Tillemans, President, U.S. Mr. Tillemans designed and deployed growth enabling strategies focused on delivering sustainable, profitable growth and market share gains. Progress was made in strengthening our digital commerce and U.S. commercial planning capabilities, and in sharpening our brand positioning with customers and consumers. ______________________________________________________________________________________________________ Mary Beth West, Senior Vice President, Chief Growth Officer Ms. West designed the enterprise growth strategy, defining the 2019-2021 strategic roadmap and key strategic growth initiatives that will deliver sustainable, profitable growth. She led the successful integration of Amplify Brands, Inc. and the acquisition of Pirate Brands to capture more snacking occasions. ______________________________________________________________________________________________________ Leslie M. Turner, Former Senior Vice President, General Counsel and Corporate Secretary Ms. Turner successfully executed and transitioned all of her general counsel accountabilities. ______________________________________________________________________________________________________ 48 Following the close of 2018, the Compensation Committee provided the independent directors with an assessment of Ms. Buck’s 2018 performance and achievement relative to her individual performance goals. Based upon those assessments, the Compensation Committee recommended, and the Board approved, the individual performance award and total OHIP payout for Ms. Buck as shown in the table below. Ms. Buck provided the Compensation Committee with her assessment of each NEO’s 2018 performance and achievement in relation to their performance goals. Based upon those assessments, Ms. Buck recommended, and the Compensation Committee approved, the individual performance awards and total OHIP payouts as shown in the table below. Based upon a 65% weight for the Company financial score of 99.09% of target and a 35% weight for individual performance, our NEOs earned the following 2018 OHIP awards: Award Target (%) Award Target(1) ($) Company Financial Performance Award (65% Weighting) ($) Individual Performance Award (35% Weighting) ($) 150 1,698,548 1,094,009 85 80 80 80 70 559,709 501,651 519,615 542,950 449,876 360,500 323,106 334,676 349,706 403,776 653,941 195,899 201,914 145,493 247,042 42,392 2018 OHIP Award ($) 1,747,950 556,399 525,020 480,169 596,748 446,168 Name Ms. Buck Ms. Little Mr. O'Day Mr. Tillemans Ms. West Ms. Turner(2) ____________________ (1) Target award is based upon actual salary received in 2018. (2) Per the terms of Ms. Turner's Confidential Separation Agreement and General Release, her 2018 OHIP award was calculated as follows: • From January 1, 2018 through March 31, 2018, Ms. Turner's 2018 OHIP award was based 65% on Company financial performance results and 35% on individual performance. • From April 1, 2018 through December 31, 2018, Ms. Turner's 2018 OHIP award was based 100% on Company financial performance, calculated as the lower of the Company financial performance score or target. The 2018 OHIP payments are included in Column (g) of the 2018 Summary Compensation Table for each NEO. Long-Term Incentives We provide long-term incentive opportunities to motivate, retain and reward our NEOs for their contributions to multi-year performance in achieving strategies and improving long-term share value. In February of each year, the Compensation Committee awards long-term incentive grants, including PSUs, stock options and RSUs, to our NEOs. The Compensation Committee, and the independent directors in the case of our CEO, determines the value of long-term incentive awards made to each NEO by considering the NEO’s target total direct compensation against internal and external references. The target award percentages approved in February 2018, expressed as a percentage of base salary, were: Name Target Long- Term Incentive Award (% of Salary) Ms. Buck Ms. Little Mr. O'Day Mr. Tillemans Ms. West Ms. Turner(1) ____________________ (1) Ms. Turner retired on April 1, 2018. 49 500 210 170 180 230 170 The Compensation Committee values RSUs and PSUs using the closing stock price of the Company’s Common Stock on the NYSE on the date of grant. The Compensation Committee values stock options using the value of the stock options at the date of grant as determined for financial reporting purposes (the Black-Scholes value). Target total direct compensation levels for each of the NEOs fall within an appropriate range relative to the median for comparable positions given each incumbent’s performance, responsibilities and tenure in the role. Performance Stock Unit Targets and Results (50% of long-term incentive mix) PSUs are granted to NEOs and other executives in a position to affect the Company’s long-term results. At the start of each three-year cycle, a contingent target number of PSUs is established for each executive. This target is expressed as a percentage of the executive’s base salary and is determined as part of a total compensation package based on the peer group and survey composite benchmarks. The PSU award generally represents approximately one-half of the recipient’s long-term incentive compensation target award. Dividends are not paid on PSU awards during the three-year performance cycle. 2016-2018 PSU Cycle Award The performance objectives for the 2016-2018 performance cycle awarded in 2016 were based upon the following metrics: • Three-year relative TSR versus the 2016 peer group described below; • Three-year CAGR in total Company net sales; and • Three-year CAGR in adjusted earnings per share-diluted measured against an internal target. The Compensation Committee selected these metrics to measure performance against internal targets aligned with our stockholders’ interests and investment returns offered by our peer companies. The 2016 peer group originally included 16 companies with median revenues of $6.2 billion. Mead Johnson Nutrition Company and Dr Pepper Snapple Group, Inc. were subsequently removed from the 2016 peer group as a result of corporate transactions, which occurred in June 2017 and July 2018, respectively. Therefore, 14 companies remained in the 2016-2018 cycle for use in assessing our Company's 2016-2018 TSR. Companies included in the 2016 peer group for the 2016-2018 PSU cycle award were: Brown-Forman Corporation Dean Foods Company Molson Coors Brewing Company Campbell Soup Company General Mills, Inc. Mondelez International Colgate-Palmolive Company Hormel Foods Corporation The Clorox Company ConAgra Foods, Inc. Kellogg Company The J. M. Smucker Company Constellation Brands, Inc. McCormick & Company, Inc. Payment of any amounts earned is made in shares of Common Stock at the conclusion of the three-year performance cycle. The maximum award for any participant in a performance cycle is 250% of the contingent target award. 50 Targets and results for the 2016-2018 performance cycle were as follows: Metric Target Actual Performance Total Shareholder Return Three-year CAGR in Net Sales Growth(1)(2) Three-year CAGR in Adjusted Earnings per Share-Diluted(1)(3) Total ____________________ 50th Percentile 89th Percentile 3.0% CAGR 0.6% CAGR 6.0% CAGR 7.1% CAGR Target Award Weighting (%) Final Performance Score (%) 34.00 33.00 33.00 100.00 83.87 — 47.21 131.08 (1) Results for our barkTHINS, Amplify and Pirate Brands businesses were excluded from the following metrics, as applicable, as these acquisitions were made in April 2016, January 2018 and October 2018, respectively: • Three-year CAGR in net sales growth; and • Three-year CAGR in adjusted earnings per share-diluted. (2) Net Sales is measured on a constant currency basis, which is a non-GAAP performance measure. To calculate net sales on a constant currency basis, net sales for the current fiscal year period for entities reporting in currencies other than the U.S. dollar are translated into U.S. dollars at the average rates during the comparable period of the base fiscal year. (3) Adjusted earnings per share-diluted is a non-GAAP performance measure. For more information regarding how we define adjusted earnings per share- diluted, please see footnote (1) in the section entitled “Executive Summary.” At the conclusion of each three-year, the Compensation Committee reviews the level of performance achieved and the percentage, if any, of the applicable portion of the target number of PSUs earned. In determining the final performance cycle score, negative adjustments may be made by the Compensation Committee to the Company’s performance score to take into account extraordinary or unusual items occurring during the period. No adjustments were made in determining the 131.08% performance score or the number of PSUs earned by our NEOs for the 2016-2018 performance cycle. 2017-2019 and 2018-2020 PSU Awards The performance metrics and weightings for the 2017-2019 and the 2018-2020 performance cycles are the same as the 2016-2018 performance cycle. The three-year relative TSR metric for the 2017-2019 performance cycle is based on our 2017 peer group, which was unchanged from the 2016 peer group. As describe above, Mead Johnson Nutrition Company and Dr Pepper Snapple Group, Inc. were subsequently removed from the 2017 peer group as a result of corporate transactions. The three-year relative TSR metric for the 2018-2020 performance cycle is based on our 2018 Peer Group, which is further described in the section entitled “Setting Compensation.” Dr Pepper Snapple Group, Inc. was subsequently removed from the 2018 Peer Group as a result of a corporate transaction. See Column (e) of the 2018 Summary Compensation Table, Columns (f) through (h) of the 2018 Grants of Plan-Based Awards Table, Columns (i) and (j) of the Outstanding Equity Awards at 2018 Fiscal-Year End Table and Columns (d) and (e) of the 2018 Option Exercises and Stock Vested Table for more information about PSUs awarded to the NEOs. Stock Options (25% of long-term incentive mix) In general, stock options are awarded annually to the Company’s executives as well as to other key managerial employees. Stock options entitle the holder to purchase a fixed number of shares of Common Stock at a set price during a specified period of time. The right to exercise the options is subject to a vesting schedule. Because stock options vest over time and only have value if the price of our Common Stock increases, they encourage efforts to enhance long-term stockholder value. The Compensation Committee sets guidelines for the value of stock options to be awarded based on competitive compensation data. The stock option award represents approximately one-quarter of the NEO’s long-term incentive compensation target award. In 2018, the target number of stock options awarded to each NEO was determined by multiplying the NEO’s base salary by one-quarter of his or her target long-term incentive award percentage divided by the Black-Scholes value of each option on the grant date. The Black-Scholes option-pricing model is described in Note 11 to the Consolidated Financial Statements contained in the 2018 Annual Report on Form 10-K that accompanies this Proxy Statement. The actual number of options awarded may vary from the target level based on each NEO’s individual performance evaluation. 51 Stock options vest in equal increments over four years and have a 10-year term. As required by the EICP, the options have an exercise price equal to the closing market price of the Common Stock on the NYSE on the date of the award. See Column (f) of the 2018 Summary Compensation Table, Columns (j) through (l) of the 2018 Grants of Plan-Based Awards Table, Columns (b) through (f) of the Outstanding Equity Awards at 2018 Fiscal-Year End Table and Columns (b) and (c) of the 2018 Option Exercises and Stock Vested Table for more information on stock options awarded to the NEOs. Restricted Stock Units (25% of long-term incentive mix) The Compensation Committee sets guidelines for the value of the annual RSUs to be awarded based on competitive compensation data. These RSU awards represent approximately one-quarter of the NEO’s long-term incentive compensation target award. In 2018, the target number of RSUs awarded to each NEO was determined by multiplying the NEO’s base salary by one-quarter of his or her target long-term incentive award percentage divided by the closing price of the Company’s Common Stock on the NYSE on the grant date. The actual number of RSUs awarded may vary from the target level based on each NEO’s individual performance evaluation. Annual RSUs vest in equal increments over three years. The Compensation Committee also awards RSUs to NEOs and other executives from time to time as special incentives. RSUs also are awarded by the Compensation Committee to replace compensation forfeited by newly-hired executive officers. See Column (e) of the 2018 Summary Compensation Table, Column (i) of the 2018 Grants of Plan-Based Awards Table, Columns (g) and (h) of the Outstanding Equity Awards at 2018 Fiscal-Year End Table and Columns (d) and (e) of the 2018 Option Exercises and Stock Vested Table for more information about RSUs awarded to the NEOs. Perquisites Executive perquisites are kept to a minimal level relative to a NEO’s total compensation and do not play a significant role in our executive compensation program. The perquisites that we provide include personal use of Company aircraft and financial counseling and tax preparation reimbursement. See the footnotes to Column (i) of the 2018 Summary Compensation Table for information regarding the perquisites received by our NEOs. Our CEO and the other NEOs are eligible to participate in our Gift Matching Program on the same basis as other employees, retirees or their spouses. Through the Gift Matching Program, we match contributions made to one or more non-profit organizations on a dollar-for-dollar basis up to a maximum aggregate contribution of $5,000 per employee annually. These matching contributions are not considered compensation and are not included in Column (i) of the 2018 Summary Compensation Table. Retirement Plans NEOs are eligible to participate in our tax-qualified defined benefit pension plan (“pension plan”) and tax-qualified defined contribution 401(k) plan (“401(k) plan”) on the same basis as other salaried employees of the Company. IRC regulations do not permit the Company to use base salary and other compensation paid above certain limits to determine the benefits earned by the NEOs under tax-qualified plans. The Company maintains a defined benefit Supplemental Executive Retirement Plan (“DB SERP”), a defined contribution Supplemental Executive Retirement Plan (“DC SERP”) and a Deferred Compensation Plan to provide these and additional benefits that are comparable to those offered by our peers. Under the provisions of the Deferred Compensation Plan, our NEOs may elect to defer payments from the OHIP, PSU and RSU awards, but not stock options or base salary. The DB SERP was closed to new participants in 2006. No new participants have been or will be added to the DB SERP. NEOs and other senior executives reporting to the CEO not eligible for the DB SERP are considered by the Compensation Committee for participation in the DC SERP. In comparison, the DC SERP typically yields a lower benefit than the DB SERP upon retirement. The Company believes that the DB SERP, DC SERP and Deferred Compensation Plan help, in the aggregate, to attract and retain executive talent, as similar plans are often components of the executive compensation programs within our peer group. The DC SERP was established as part of our Deferred Compensation Plan and is not a separate plan. See the 2018 Pension Benefits Table and accompanying narrative and the 2018 Non-Qualified Deferred Compensation Table and accompanying narrative for more information regarding the DB SERP, DC SERP and other retirement benefits. 52 Employment Agreements The Company entered into an employment agreement with Ms. Buck in February 2017, which provides for Ms. Buck’s continued employment as President and CEO and continued nomination as a member of the Board of Directors. The employment agreement does not have a specified term. Under the terms of the employment agreement, in the event Ms. Buck’s employment is terminated by the Company without Cause or she resigns for Good Reason (in each case as defined in the employment agreement), Ms. Buck will be entitled to certain severance benefits. In the event of her termination after a change in control, Ms. Buck will be eligible to receive benefits under the Executive Benefits Protection Plan (Group 3A) (“EBPP 3A”). She is not entitled to an excise tax gross-up. The employment agreement subjects Ms. Buck to certain non-competition and non-solicitation covenants under the ECRCA and to compensation recovery (clawback) to the extent required by applicable law and regulations. See the section entitled “Potential Payments upon Termination or Change in Control” for information regarding the payments Ms. Buck would receive in the event of an applicable termination or change in control occurring on December 31, 2018. Other than as set forth above, we have not entered into employment agreements with any NEO. Severance and Change in Control Plans All of the NEOs are covered by our EBPP 3A. The EBPP 3A is intended to help us attract and retain executive talent and maintain a stable work environment in the event of activity that could potentially result in a Change in Control. The severance protection provided under the EBPP 3A upon a Change in Control is based upon a “double trigger.” The terms of the plan generally provide that a covered NEO whose employment with the Company terminates in qualifying circumstances within two years after a Change in Control of the Company is entitled to certain severance payments and benefits. The EBPP 3A also provides severance benefits in the event of involuntary termination without Cause unrelated to a Change in Control or voluntary termination for Good Reason within two years after election of a new CEO. Change in Control, Cause and Good Reason are defined in the EBPP 3A. See the discussion in the section entitled “Potential Payments upon Termination or Change in Control” for information regarding the payments that would be due to our NEOs under the EBPP 3A in the event of an applicable termination of employment or a Change in Control. 53 Stock Ownership Guidelines The Compensation Committee believes that requiring NEOs and other executive officers to hold significant amounts of our Common Stock strengthens their alignment with the interest of our stockholders and promotes achievement of long-term business objectives. Our executive stock ownership policy has been in place for more than 20 years. The Compensation Committee reviews ownership requirements annually to ensure they are aligned with external market comparisons. As a result of its review in May 2018, the Compensation Committee increased the CEO's stock ownership guideline level from 5 times base salary to 6 times base salary. Executives with stock ownership requirements have five years from their initial election to their position to accumulate and hold the minimum number of shares required. For purposes of this requirement, “shares” include shares of our Common Stock that are owned by the executive, unvested time-based RSUs and vested RSUs and PSUs that have been deferred by the executive as Common Stock units under our Deferred Compensation Plan. It is anticipated that executives will hold a significant number of the shares earned from PSU and RSU awards and the exercise of stock options to satisfy their obligations. Minimum stockholding requirements for the CEO and the other executives are as follows: Position CEO CFO and Senior Vice Presidents Other executives subject to stockholding requirements Stock Ownership Level 6 times base salary 3 times base salary 1 times base salary The dollar value of shares which must be acquired and held equals a multiple of the individual executive’s base salary. Stockholding requirements are updated whenever a change in base salary occurs. Failure to reach the minimum holding requirement within the five-year period results in a notification letter to the executive, with a copy to the CEO, and a requirement that future stock option exercises, RSU distributions and PSU payments be settled by retaining at least 50% of the shares of Common Stock received until the minimum ownership level is attained. The Compensation Committee receives an annual summary of each individual executive’s ownership status to monitor compliance. Other Compensation Policies and Practices Clawbacks Under the EICP, when an individual’s actions result in the filing of financial documents not in compliance with financial reporting requirements, the Company has the right to recoup or require repayment of an award earned or accrued during the twelve-month period following the first public issuance or filing with the SEC of the non compliant financial document. Repayment or clawback occurs where the material noncompliance results from misconduct, the participant’s knowledge or gross negligence in engaging in the misconduct or failing to prevent the misconduct, or if the participant is one of the individuals subject to automatic forfeiture under Section 304 of the Sarbanes-Oxley Act of 2002. In 2008, the Company initiated the execution of the ECRCA by executive officers as a condition for the receipt of long-term incentive awards and, for new executive officers, also as a condition of employment. The purpose of the ECRCA is to protect the Company and further align the interests of the executive officer with those of the Company. The terms of the ECRCA prohibit the executive from misusing or disclosing the Company’s confidential information, competing with the Company in specific categories for a period of 12 months following separation from employment, recruiting or soliciting the Company’s employees, or disparaging the Company’s reputation in any way. For those officers or employees based outside the U.S., the restrictive covenants and terms may be modified to comply with local laws. Failure to comply with the provisions of the ECRCA may result in cancellation of the unvested portion of PSU and RSU awards, cancellation of any unexercised stock options and a requirement for repayment of amounts received from equity awards during the last year of employment, as well as any amounts received from the DB SERP or DC SERP. 54 Tax Considerations As in effect through December 31, 2017, Section 162(m) of the IRC generally disallowed the Company’s ability to deduct compensation in excess of $1.0 million paid to our CEO or to our other NEOs who were employed on the last day of the fiscal year (other than officers who served as CFO during the year), but did not disallow a deduction for compensation that qualifies as “performance-based” under applicable Internal Revenue Service (“IRS”) regulations or that was paid after termination of employment. As a result of changes to Section 162(m) of the IRC resulting from federal legislation referred to as the Tax Cuts and Jobs Act, the $1.0 million deduction limitation described above has been expanded to disallow the deduction for compensation payable to a larger group of employees, effective for tax years beginning after December 31, 2017. Performance- based compensation, including equity awards, is no longer exempt from the Section 162(m) deduction limitation, subject to a transition rule. The employees (referred to as “covered employees”) to whom the deduction limitation applies include the CEO and CFO (in each case, whether or not serving as executive officers as of the end of the fiscal year) and the three other most highly compensated executive officers. In addition, once considered a “covered employee” for a given year, the individual will be treated as a “covered employee” for all subsequent years. The Compensation Committee has considered the effect of Section 162(m) of the IRC on the Company’s executive compensation program. The Compensation Committee exercises discretion in setting base salaries, structuring incentive compensation awards and in determining payments in relation to levels of achievement of performance goals. The Compensation Committee believes that the total compensation program for NEOs should be managed in accordance with the objectives outlined in the Company’s compensation philosophy and in the best overall interests of the Company’s stockholders. Accordingly, compensation paid by the Company may not be deductible because such compensation exceeds the limitations for deductibility under Section 162(m) of the IRC. Section 409A of the IRC specifies certain rules and limitations regarding the operation of our Deferred Compensation Plan and other retirement programs. Failure to comply with these rules could subject participants in those plans and programs to additional income tax and interest penalties. We believe our plans and programs comply with Section 409A of the IRC. 55 COMPENSATION COMMITTEE REPORT To Our Stockholders: We have reviewed and discussed with management the Compensation Discussion & Analysis. Based on that review and discussion, we have recommended to the Board of Directors that the Compensation Discussion & Analysis be included in this Proxy Statement. Submitted by the Compensation and Executive Organization Committee of the Board of Directors: Anthony J. Palmer, Chair Pamela M. Arway Mary Kay Haben M. Diane Koken The independent members of the Board of Directors who are not members of the Compensation and Executive Organization Committee join in the Compensation Committee Report with respect to the approval of Ms. Buck’s compensation. James W. Brown Charles A. Davis James C. Katzman Robert M. Malcolm Wendy L. Schoppert David L. Shedlarz 56 2018 Summary Compensation Table The following table and explanatory footnotes provide information regarding compensation earned by, held by, or paid to, individuals holding the positions of Chief (Principal) Executive Officer and Chief (Principal) Financial Officer during 2018, the three most highly compensated of our other executive officers and one additional executive officer who separated from service during the year, but whose compensation would have been among the highest of those who served as executive officers during 2018. These individuals collectively comprise our NEOs. The table provides information with respect to 2018, as well as 2017 and 2016 compensation where required. 2016 information is not provided for Mr. Tillemans and Ms. West and 2017 information is not provided for Ms. Turner because they were not NEOs in those years. Change in Pension Value and Non- Qualified Deferred Compen- sation Earnings (7) ($) (h) Non- Equity Incentive Plan Compen- (6) sation ($) (g) All Other Compen- (8) sation ($) (i) Total ($) (j) (2) Salary (3) Bonus Stock Awards (4) Option Awards (5) ($) (d) ($) (e) ($) (f) — 4,112,889 1,416,300 1,747,950 2,988,474 315,402 11,718,372 — 3,986,306 1,243,048 1,307,941 2,491,271 202,573 10,274,601 — 6,208,007 — 1,004,362 — 1,114,210 — 2,067,059 — 774,315 — 2,326,600 — 1,354,674 — 849,427 438,000 1,197,508 — 1,329,645 1,350,000 5,068,455 356,418 345,876 342,326 368,695 266,652 379,181 252,782 292,515 218,822 585,886 377,026 713,907 556,399 531,541 559,457 525,020 463,975 466,330 480,169 373,163 596,748 394,840 832,570 67,490 8,898,744 — — — — — — — — — — 248,961 251,353 194,425 228,413 218,867 188,577 613,549 593,371 977,954 277,918 2,816,862 2,885,239 3,819,048 2,424,112 3,994,626 2,852,424 2,888,160 3,289,614 4,172,096 7,905,739 — 793,362 273,195 446,168 — 6,028,885 7,702,280 — 3,959,690 323,586 497,201 — 210,647 5,620,536 Name and Principal Position (a) Year (b) Ms. Buck President and CEO Ms. Little Senior Vice President, Chief Financial Officer Mr. O'Day Senior Vice President, Chief Product Supply and Technology Officer Mr. Tillemans President, U.S. Ms. West Senior Vice President, Chief Growth Officer Ms. Turner(1) Former Senior Vice President, General Counsel and Corporate Secretary 2018 2017 2016 2018 2017 2016 2018 2017 2016 2018 2017 2018 2017 2018 2016 ____________________ (1) Ms. Turner retired on April 1, 2018. ($) (c) 1,137,357 1,043,462 720,352 661,264 645,809 629,412 629,712 606,003 590,061 652,500 468,750 681,863 437,500 160,670 629,412 (2) Column (c) reflects base salary earned, on an accrual basis, for the years indicated and includes IRC Section 125 deductions pursuant to The Hershey Company Flexible Benefits Plan and amounts deferred by the NEOs in accordance with the provisions of the 401(k) plan. (3) With the exception of Mr. Tillemans and Ms. West, Column (d) indicates that no discretionary bonuses were paid to the NEOs in 2018, 2017 or 2016. Mr. Tillemans and Ms. West, who joined the Company in April 2017 and May 2017, respectively, each received a cash sign-on bonus in 2017 to replace awards forfeited at their prior employers. (4) Column (e) shows the aggregate grant date fair value of RSUs and contingent target PSU awards granted to the NEOs in the years indicated. The assumptions used to determine the grant date fair value of awards listed in Column (e) are set forth in Note 11 to the Company’s Consolidated Financial Statements included in our 2018 Annual Report on Form 10-K that accompanies this Proxy Statement. The amounts in Column (e) do not reflect the value of shares actually received or which may be received in the future with respect to such awards. 57 The number of contingent target PSUs awarded in 2018 to each NEO is shown on the 2018 Grants of Plan-Based Awards Table in Column (g). Assuming the highest level of performance is achieved for each of the PSU awards included in Column (e), the value of the awards at grant date for each of the NEOs would be as follows: Name Year Maximum Value at Grant Date ($) Ms. Buck Ms. Little Mr. O’Day Mr. Tillemans Ms. West Ms. Turner 2018 2017 2016 2018 2017 2016 2018 2017 2016 2018 2017 2018 2017 2018 2016 7,081,412 6,305,597 1,968,242 1,729,269 1,786,573 1,612,558 1,333,166 2,831,634 1,393,633 1,462,536 1,093,884 1,953,045 1,868,879 1,365,933 1,475,165 The unvested portion of RSU awards is included in the amounts presented in Columns (g) and (h) of the Outstanding Equity Awards at 2018 Fiscal-Year End Table. The number of shares acquired and value received by the NEOs with respect to PSU and RSU awards that vested in 2018 is included in Columns (d) and (e) of the 2018 Option Exercises and Stock Vested Table. As a result of her retirement on April 1, 2018, Ms. Turner forfeited a prorated portion of her outstanding PSU awards, including those shown in Column (e) of the 2018 Summary Compensation Table. She also forfeited a prorated portion of her 2018 RSU grant, the value of which is included in Column (e) of the 2018 Summary Compensation Table. (5) Column (f) presents the grant date fair value of stock options awarded to the NEOs for the years indicated and does not reflect the value of shares actually received or which may be received in the future with respect to such stock options. The assumptions we made to determine the value of these awards are set forth in Note 11 to the Company’s Consolidated Financial Statements included in our 2018 Annual Report on Form 10-K that accompanies this Proxy Statement. The number of stock options awarded to each NEO during 2018 appears in Column (j) of the 2018 Grants of Plan-Based Awards Table. As a result of her retirement on April 1, 2018, Ms. Turner forfeited a prorated portion of her 2018 stock option grant, the value of which is included in Column (e) of the 2018 Summary Compensation Table. (6) Column (g) reflects the OHIP payments made to each NEO based upon actual salary received in 2018. (7) Column (h) reflects the aggregate change in the actuarial present value of the NEO’s retirement benefit under the Company’s pension plan and the DB SERP. The change in value calculation uses the same discount rate and mortality rate assumptions as the 2018 and 2017 audited financial statements, as applicable, and measures the change in value between the pension plan measurement date in the 2018 and 2017 audited financial statements. The change in value during a year is primarily driven by three factors: 1) changes in valuation assumptions; 2) changes in the NEO’s pensionable earnings; and 3) an additional year of service and age. During 2018, changes in valuation assumptions caused a minor decrease in pension value, while changes in the NEO's pensionable earnings and an additional year of service and age caused a relatively larger increase in the pension value. During 2017, each of the three factors driving change caused an increase to the pension value. The amounts in Column (h) do not reflect amounts paid or that might be paid to the NEO. Mmes. Little, Turner and West and Messrs. O’Day and Tillemans participate in the DC SERP rather than the DB SERP. The DC SERP is established under the Company’s Deferred Compensation Plan. DC SERP contributions for Mmes. Little, Turner and West and Messrs. O’Day and Tillemans are included in Column (i) as explained in more detail in footnote (8) below. The NEOs also participate in our non-qualified, non-funded Deferred Compensation Plan under which deferred amounts are credited with notional earnings based on the performance of one or more third-party investment options available to all participants in our 401(k) plan. No portion of the notional earnings credited during 2018 was “above market” or “preferential.” Consequently, no Deferred Compensation Plan earnings are included in amounts reported in Column (h) above. See the 2018 Pension Benefits Table and the 2018 Non-Qualified Deferred Compensation Table for more information on the benefits payable to the NEOs under the pension plan, DB SERP and Deferred Compensation Plan. 58 (8) All other compensation includes amounts as described below: Retirement Income Perquisites and Other Benefits Supple- mental 401(k) Match(a) ($) Supple- mental Retirement Contri- bution ($) DC SERP Contribution ($) Core Retirement Contri- bution(b) ($) 401(k) Match ($) Name Year Supple- mental Core Retirement Contri- bution(b) ($) Personal Use of Company Aircraft(c) ($) Company- Paid Financial Counseling ($) Reimburse- ment of Personal Tax Return Preparation Fee ($) Relocation Expenses and Related Taxes(d) ($) Separation Benefits(e) ($) Ms. Buck Ms. Little Mr. O’Day Mr. Tillemans Ms. West Ms. Turner 2018 2017 2016 2018 2017 2016 2018 2017 2016 2018 2017 2018 2017 2018 2016 12,375 12,150 11,925 12,375 12,150 11,925 12,375 12,150 11,925 12,375 12,150 12,375 12,150 7,786 11,925 97,663 66,932 38,627 41,301 42,087 29,395 36,841 35,205 26,752 33,780 8,944 36,077 7,538 14,814 31,760 1,021 967 913 — — — — — — — — — — — — — — — 149,101 150,658 114,777 136,711 131,542 107,437 128,208 58,594 134,588 54,688 75,525 121,348 — — — 8,250 8,100 7,950 8,250 8,100 7,950 8,250 8,100 8,250 8,100 8,250 7,950 — — — 27,534 28,058 19,596 24,561 23,470 17,835 22,520 5,963 24,051 5,025 9,876 21,174 192,443 100,455 4,325 — — — — — — — — — — — — 10,400 10,300 10,200 10,400 10,300 10,782 8,400 8,400 8,400 10,760 5,027 10,400 6,914 15,000 15,000 1,500 1,500 1,500 — — — 1,275 — — — — — — 1,500 1,490 — — — — — — — — 8,278 397,656 494,593 752,213 183,503 — — — — — — — — — — — — — — 5,896,134 — (a) Employees who earn over the IRS compensation limit and/or defer any portion of their OHIP award are eligible for the Supplemental 401(k) Match, contingent on the employee contributing an amount to the 401(k) plan equal to the annual pre-tax limit established by the IRS. Mmes. Buck, Little, Turner and West and Messrs. O’Day and Tillemans are eligible to receive a Supplemental 401(k) Match Contribution equal to 4.5% of the amount by which their eligible earnings (salary and OHIP) exceeds the IRS compensation limit. (b) As are all new hires of the Company since January 1, 2007, Mmes. Little, Turner and West and Messrs. O’Day and Tillemans are eligible to receive a contribution to their 401(k) plan account equal to 3% of base salary and OHIP up to the maximum amount permitted by the IRS. We call this contribution the Core Retirement Contribution (“CRC”). They also are eligible to receive a Supplemental Core Retirement Contribution (“Supplemental CRC”) equal to 3% of the amount by which their eligible earnings (salary and OHIP) exceeds the IRS compensation limit. (c) The value of any personal use of Company aircraft by the NEOs is based on the Company’s aggregate incremental per-flight hour cost for the aircraft used and flight time of the applicable flight. The incremental per-flight hour cost is calculated by reference to fuel, maintenance (labor and parts), crew, landing and parking expenses. (d) Mr. Tillemans and Ms. West received Company relocation benefits totaling $384,773 and $702,093, respectively, for shipment of household goods and assistance in selling a former residence. Mr. Tillemans and Ms. West also each received a net tax gross up totaling $12,883 and $50,120, respectively, to offset the amounts imputed to their income as a result of these benefits. (e) Includes the following benefits paid under the terms of EBPP 3A in connection with Ms. Turner's retirement on April 1, 2018: cash separation payment of $964,020, pro-rated vesting of 2016-2018 PSUs ($635,943), pro-rated vesting of 2018 Annual RSUs ($75,269), full vesting of 2017 and 2016 Annual RSUs ($359,886), health and welfare benefit continuation ($4,054) and outplacement services ($35,000). In addition, Ms. Turner received full vesting of her retention RSUs granted in February 2016 ($3,821,961). 59 2018 Grants of Plan-Based Awards Table The following table and explanatory footnotes provide information with regard to the potential cash award that each NEO had the opportunity to earn during 2018 under the OHIP, and with regard to PSUs, RSUs and stock options awarded to each NEO during 2018, as applicable. The amounts that were actually earned under the OHIP during 2018 by the NEOs are set forth in Column (g) of the 2018 Summary Compensation Table. Estimated Future Payouts Under Non-Equity Incentive Plan Awards(2) Estimated Future Payouts Under Equity Incentive Plan Awards(3) Name (a) Grant Date(1) (b) Thresh- old ($) (c) Target ($) (d) Maximum ($) Thresh- old (#) (e) (f) Target (#) (g) Maxi- mum (#) (h) All Other Stock Awards: Number of Shares of Stock or Units(4) (#) All Other Option Awards: Number of Securities Under- lying Options(5) (#) (i) (j) Exercise or Base Price of Option Awards(6) ($) (k) Ms. Buck 2/20/2018 5,945 1,698,548 3,397,096 28 28,354 70,885 14,177 Ms. Little 2/20/2018 1,959 559,709 1,119,418 Mr. O'Day 2/20/2018 1,756 501,651 1,003,302 Mr. Tillemans 2/20/2018 1,819 519,615 1,039,230 Ms. West 2/20/2018 1,900 542,950 1,085,900 Ms. Turner 2/20/2018 1,575 449,876 899,752 ____________________ 7 5 6 8 5 6,924 17,310 5,338 13,345 5,856 14,640 7,820 19,550 5,469 13,673 3,462 2,669 2,928 5,865 2,735 90,905 22,200 17,115 18,775 37,605 17,535 99.90 99.90 99.90 99.90 99.90 99.90 Grant Date Fair Value of Stock and Option Awards(7) ($) (l) 5,529,189 1,350,238 1,040,967 1,141,942 1,915,531 1,066,557 (1) Column (b) represents the grant date for the PSUs reflected in Columns (f), (g) and (h), the RSUs reflected in Column (i) and the stock options reflected in Column (j). All awards were made under the EICP. (2) Columns (c), (d) and (e) represent the threshold, target and maximum potential amounts each NEO had the opportunity to earn based on the OHIP targets approved for the NEOs in February 2018. All amounts shown in Columns (c), (d) and (e) are based upon actual salary received in 2018. The threshold amount is the amount that would have been payable had the minimum individual performance score been achieved and the Company performance score been zero. The target amount is the amount that would have been payable had the Company and individual performance scores been 100% on all metrics. The maximum amount is the amount that would have been payable had the maximum score been achieved on all metrics. (3) Columns (f), (g) and (h) represent the number of threshold, target and maximum potential PSUs that can be earned for the 2018-2020 performance cycle. Each PSU represents the value of one share of our Common Stock. The number of PSUs earned for the 2018-2020 performance cycle will depend upon achievement against the metrics explained in the Compensation Discussion & Analysis in the section entitled “Performance Stock Unit Targets and Results.” Payment, if any, will be made in shares of the Company’s Common Stock at the conclusion of the three-year performance cycle. The minimum award as shown in Column (f) is the number of shares payable for achievement of the threshold level of performance on one of the metrics and the maximum award as shown in Column (h) is the number of shares payable for achievement of the maximum level of performance on all metrics. More information regarding PSUs and the 2018 awards can be found in the Compensation Discussion & Analysis and the Outstanding Equity Awards at 2018 Fiscal-Year End Table. (4) For each NEO, Column (i) represents the number of annual RSUs granted on February 20, 2018. Target RSU awards were determined by multiplying one-quarter of the executive’s long-term incentive target percentage times his or her 2018 base salary, divided by the closing price of the Company’s Common Stock on the NYSE on the award date as shown in Column (k). The actual number of RSUs awarded varied from the target level based on the executive’s performance evaluation for the year ended December 31, 2017. Annual RSU awards vest in thirds over three years. Information on the treatment of RSUs upon retirement, death, disability, termination, or Change in Control can be found in the section entitled “Potential Payments upon Termination or Change in Control.” (5) Column (j) represents the number of options awarded to each NEO. Target option awards were determined by multiplying one-quarter of the executive’s long-term incentive target percentage times his or her 2018 base salary, divided by the Black-Scholes value of $15.58 per option. The Black-Scholes value is based on the option exercise price, which is equal to the closing price of the Company’s Common Stock on the NYSE on the award date. The actual number of options awarded varied from the target level based on the executive’s performance evaluation for the year ended December 31, 2017. Stock option awards vest in 25% increments over four years and have a 10-year term. Information on the treatment of stock options upon retirement, death, disability, termination, or Change in Control can be found in the section entitled “Potential Payments upon Termination or Change in Control.” (6) Column (k) presents the exercise price for each option award based upon the closing price of the Company’s Common Stock on the NYSE on the award date shown in Column (b). (7) Column (l) presents the aggregate grant date fair value of (1) the target number of PSUs reported in Column (g), (2) the number of RSUs reported in Column (i) and (3) the number of stock options reported in Column (j), in each case as determined in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718. The assumptions used in determining these amounts are set forth in Note 11 to the Company’s Consolidated Financial Statements included in our 2018 Annual Report on Form 10-K that accompanies this Proxy Statement. 60 Outstanding Equity Awards at 2018 Fiscal-Year End Table The following table and explanatory footnotes provide information regarding unexercised stock options and unvested stock awards held by our NEOs as of December 31, 2018: Option Awards(1) Stock Awards Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) Number of Securities Underlying Unexercised Options- Exercisable(2) (#) Number of Securities Underlying Unexercised Options- Unexercisable(3) (#) (b) (c) (d) — 19,290 15,605 26,625 46,755 42,320 2,000 152,595 — 5,433 — — 5,433 — 6,018 11,067 18,840 26,735 38,270 49,890 150,820 — 3,480 3,480 — 6,132 6,132 4,383 21,060 28,335 39,620 24,840 118,238 90,905 57,870 15,605 8,875 — — — 173,255 22,200 16,302 16,143 7,208 61,853 17,115 18,057 11,068 6,280 — — — 52,520 18,775 10,440 29,215 37,605 18,398 56,003 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — Option Exercise Price ($) Option Expiration Date (e) 99.90 (f) 2/19/2028 109.40 2/28/2027 90.39 2/15/2026 105.91 2/16/2025 105.96 2/17/2024 81.73 60.68 — 99.90 2/18/2023 2/20/2022 — 2/19/2028 107.95 2/21/2027 90.39 2/15/2026 100.65 — 4/14/2025 — 99.90 2/19/2028 107.95 2/21/2027 90.39 2/15/2026 105.91 2/16/2025 105.96 2/17/2024 81.73 60.68 — 99.90 108.92 — 2/18/2023 2/20/2022 — 2/19/2028 4/2/2027 — 99.90 2/19/2028 107.05 — 4/30/2027 — 99.90 2/19/2028 107.95 2/21/2027 90.39 2/15/2026 105.91 2/16/2025 105.96 — 2/17/2024 — Name (a) Ms. Buck Total Ms. Little Total Mr. O'Day Total Mr. Tillemans Total Ms. West Total Ms. Turner Total Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested(5) (#) Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested(5) ($) (i) 70,885 56,560 (j) 7,597,454 6,062,101 — — — — — 127,445 17,310 15,705 — — 33,015 13,345 11,573 14,012 — — — — 38,930 14,640 10,043 24,683 19,550 17,458 37,008 1,135 5,268 — — — 6,403 — — — — — 13,659,555 1,855,286 1,683,262 — — 3,538,548 1,430,317 1,240,394 1,501,806 — — — — 4,172,517 1,569,115 1,076,409 2,645,524 2,095,369 1,871,148 3,966,517 121,649 564,624 — — — 686,273 Number of Shares or Units of Stock That Have Not Vested(4) (#) (g) 78,291 — — — — — — 78,291 22,068 — — — 22,068 5,868 — — — — — — 5,868 7,329 — 7,329 32,338 — 32,338 — — — — — — Market Value of Shares or Units of Stock That Have Not Vested(4) ($) (h) 8,901,689 — — — — — — 8,901,689 2,520,219 — — — 2,520,219 655,444 — — — — — — 655,444 814,215 — 814,215 3,606,203 — 3,606,203 — — — — — — ____________________ (1) Columns (b) through (f) represent information about stock options awarded to each NEO under the EICP. Stock option awards vest in 25% increments over four years and have a ten-year term. Information on the treatment of stock options upon retirement, death, disability, termination, or Change in Control can be found in the section entitled “Potential Payments upon Termination or Change in Control.” (2) Options listed in Column (b) are vested and may be exercised by the NEO at any time subject to the terms of the stock option. 61 (3) Options listed in Column (c) were not vested as of December 31, 2018. The following table provides information with respect to the dates on which these options vested or are scheduled to vest, subject to continued employment (or retirement, death or disability), and subject further to proration in the event of severance and possible acceleration in the event of a Change in Control: Grant Date 2/20/2018 5/1/2017 4/3/2017 3/1/2017 2/22/2017 2/16/2016 4/15/2015 2/17/2015 Total per NEO Future Vesting Dates 2/20/2019 2/20/2020 2/20/2021 2/20/2022 5/1/2019 5/1/2020 5/1/2021 4/3/2019 4/3/2020 4/3/2021 3/1/2019 3/1/2020 3/1/2021 2/22/2019 2/22/2020 2/22/2021 2/16/2019 2/16/2020 4/15/2019 2/17/2019 Number of Options Vesting Ms. Buck Ms. Little Mr. O’Day Mr. Tillemans Ms. West Ms. Turner 22,726 22,726 22,726 22,727 — — — — — — 19,290 19,290 19,290 — — — 7,802 7,803 — 8,875 173,255 5,550 5,550 5,550 5,550 — — — — — — — — — 5,434 5,434 5,434 8,071 8,072 7,208 — 61,853 4,278 4,279 4,279 4,279 — — — — — — — — — 6,019 6,019 6,019 5,534 5,534 — 6,280 52,520 4,693 4,694 4,694 4,694 — — — 3,480 3,480 3,480 — — — — — — — — — 9,401 9,401 9,401 9,402 6,133 6,132 6,133 — — — — — — — — — — — — — 29,215 — 56,003 — — — — — — — — — — — — — — — — — — — — — (4) For Ms. Buck, Column (g) includes unvested annual RSUs awarded in February 2016, March 2017 and February 2018, which vest ratably over 3 years and unvested retention RSUs granted in February 2016, which cliff vest after 3 years. For Ms. Little, Column (g) includes unvested annual RSUs awarded in February 2016, February 2017 and February 2018, which vest ratably over 3 years, unvested retention RSUs granted in February 2016, which cliff vest after 3 years and unvested new hire RSUs granted in April 2015, which vest ratably over 4 years. For Mr. O’Day, Column (g) includes unvested annual RSUs awarded in February 2016, February 2017 and February 2018, which vest ratably over 3 years. For Mr. Tillemans and Ms. West, Column (g) includes unvested new hire and replacement RSUs granted in April 2017 and May 2017, respectively, which vest ratably over 3 years and unvested annual RSUs awarded in February 2018, which vest ratably over 3 years. Column (h) sets forth the value of the RSUs reported in Column (g) using the $107.18 closing price per share of our Common Stock on the NYSE on December 31, 2018, the last trading day of 2018. Column (h) also includes the value of dividend equivalents accrued through December 31, 2018, on the RSUs included in Column (g). (5) Based on progress to date against the performance metrics established for open PSU performance cycles, the first number in Column (i) for each NEO is the maximum number of PSUs potentially payable for the 2018-2020 performance cycle ending on December 31, 2020 and the second number in Column (i) for each NEO is the maximum number of PSUs potentially payable for the 2017-2019 performance cycle ending on December 31, 2019. For Mr. O’Day only, the third number in Column (i) is the target number of PSUs potentially payable for the special PSU award granted to him on May 2, 2017, with a performance cycle ending on May 2, 2019. The actual number of PSUs earned, if any, will be determined at the end of each performance cycle and may be fewer than the number reflected in Column (i). Column (j) sets forth the value of PSUs reported in Column (i) using the $107.18 closing price per share of our Common Stock on the NYSE on December 31, 2018, the last trading day of 2018. 62 2018 Option Exercises and Stock Vested Table The following table and explanatory footnotes provide information with regard to amounts paid to or received by our NEOs during 2018 as a result of the exercise of stock options or the vesting of stock awards: Option Awards(1) Stock Awards(2) (3) Number of Shares Acquired on Exercise (#) (b) Value Realized on Exercise ($) (c) — — — — 37,764 318,366 — — — — — — — — — — — — — — Number of Shares Acquired on Vesting (#) (d) Value Realized on Vesting ($) (e) 10,237 1,123,408 5,044 8,912 6,505 7,247 2,054 2,199 13,234 5,795 39,206 510,297 978,003 675,289 795,286 210,847 202,937 1,234,097 635,943 4,480,571 Name (a) Ms. Buck Ms. Little(4) Mr. O'Day Mr. Tillemans(5) Ms. West(6) Ms. Turner(7) ____________________ (1) Column (b) represents the number of stock options exercised by the NEO during 2018, and Column (c) represents the market value at the time of exercise of the shares purchased less the exercise price paid. (2) For Mmes. Buck, Little and Turner and Mr. O’Day, the first number in Column (d) includes the number of PSUs earned from the 2016-2018 performance cycle that ended on December 31, 2018, as determined by the Compensation Committee, or, in the case of Ms. Buck, by the independent members of our Board. The number of PSUs included in Column (d) reflects payment of the 2016-2018 PSU cycle at 131.08% of target. All of the applicable NEOs received payment of the award in Common Stock in February 2019. In accordance with the terms of the PSU award agreement, each PSU represents one share of our Common Stock valued in Column (e) at $109.74, the closing price of our Common Stock on the NYSE on February 26, 2019, the date the Compensation Committee approved the PSU payment. Ms. Turner elected to defer 100% of the PSUs earned from the 2016-2018 performance cycle. As a result, on the award payment date, 266 shares were liquidated to cover the associated tax liability and the remaining 5,529 shares were credited to Ms. Turner's Deferred Compensation account. (3) For Mmes. Buck, Little and Turner and Mr. O’Day, the second number in Column (d) reflects annual RSUs that were distributed in 2018 from the 2016 and 2017 awards and the number in Column (e) sets forth the value of such RSUs at vesting on February 16, 2018 and March 22, 2018, respectively, and cash credits equivalent to dividends accrued during the vesting period. Ms. Little elected to defer 100% of her 2016 annual award. As a result, on the vesting date of these RSUs, because the cash credits earned for the shares deferred exceeded the tax liability associated with those shares, all of the 1,332 shares were credited to Ms. Little’s Deferred Compensation account and she received a cash payment for the remaining dividend value (less cash withheld to meet tax obligations). Ms. Turner elected to defer 100% of her 2016 and 2017 annual awards. As a result, on the vesting date of these RSUs, because the cash credits earned for the 1,166 and 1,000 shares deferred, respectively, exceeded the tax liability associated with those shares, a total of 2,166 shares were credited to Ms. Turner’s Deferred Compensation account and she received a cash payment for the remaining dividend value (less cash withheld to meet tax obligations). (4) For Ms. Little, the second number in Column (d) also reflects RSUs that were distributed in 2018 from a 2015 award and the number in Column (e) sets forth the value of such RSUs at vesting on April 15, 2018 and cash credits equivalent to dividends accrued during the vesting period. Ms. Little elected to defer 100% of this award. Because the cash credits earned for the shares deferred exceeded the tax liability associated with those shares, all of the 4,136 shares were credited to Ms. Little’s Deferred Compensation account and she received a cash payment for the remaining dividend value (less cash withheld to meet tax obligations). (5) For Mr. Tillemans, the number in Column (d) reflects RSUs that were distributed in 2018 from 2017 awards and the number in Column (e) sets forth the value of such RSUs at vesting on May 3, 2018 and cash credits equivalent to dividends accrued during the vesting period. (6) For Ms. West, the number in Column (d) reflects RSUs that were distributed in 2018 from 2017 awards and the number in Column (e) sets forth the value of such RSUs at vesting on June 1, 2018 and cash credits equivalent to dividends accrued during the vesting period. 63 (7) For Ms. Turner, the second number in Column (d) also reflects RSUs that were distributed in 2018 in connection with her retirement and the number in Column (e) sets forth the value of such RSUs at vesting on October 24, 2018 and cash credits equivalent to dividends accrued during the vesting period. These amounts are further described in the section entitled “Separation Payments under Confidential Separation Agreement and Release.” Ms. Turner elected to defer 100% of her 2016 and 2017 annual awards. As a result, on the vesting date of the portion of these RSU awards that received accelerated vesting treatment in connection with Ms. Turner's retirement, because the cash credits earned for the 1,166 and 2,001 shares deferred, respectively, exceeded the tax liability associated with those shares, a total of 3,167 shares were credited to Ms. Turner’s Deferred Compensation account and she received a cash payment for the remaining dividend value (less cash withheld to meet tax obligations). 2018 Pension Benefits Table Ms. Buck is a participant in our pension plan and is fully vested in benefits under that plan. Ms. Buck is also eligible to participate in our non-qualified DB SERP. No benefit is payable under the DB SERP if the executive officer terminates employment prior to age 55 or if he or she does not have five years of service with the Company. As of December 31, 2018, Ms. Buck had attained age 55 with five years of service and therefore was fully vested in her DB SERP benefit. The combination of the pension and DB SERP plans was designed to provide a benefit upon retirement at or after reaching age 60 based on a joint and survivor annuity equal to 55% of final average compensation for an executive with 15 or more years of service (reduced pro rata for each year of service under 15). Effective January 1, 2007, the benefit payable under the DB SERP to an executive who was age 50 or over as of January 1, 2007, was reduced by 10%, and the benefit payable to an executive who had not attained age 50 as of January 1, 2007, was reduced by 20%. As a result, the benefit payable to Ms. Buck was reduced by 20%. Under the terms of the DB SERP, final average compensation is calculated as the sum of (i) the average of the highest three calendar years of base salary paid over the last five years of employment with the Company and (ii) the average of the highest three OHIP awards, paid or deferred, for the last five years of employment with the Company. The benefit accrued under the DB SERP is payable upon retirement (subject to the provisions of Section 409A of the IRC) as a lump sum or a life annuity with 50% benefit continuation to the participant’s surviving spouse, or payment may be deferred in accordance with the provisions of the Company’s Deferred Compensation Plan. The lump sum is equal to the actuarial present value of the joint and survivor pension earned, reduced by the lump sum value of the benefits to be paid under the pension plan and the value of the executive’s Social Security benefits. If the executive terminates employment after age 55 but before age 60, the benefit is reduced for early retirement at a rate of 5% per year for the period until the executive would have turned 60. 64 The following table and explanatory footnote provide information regarding the present value of benefits accrued under the pension plan and the DB SERP, as applicable, for each NEO as of December 31, 2018. The amounts shown for the DB SERP reflect the reduction for the present value of the benefits under the pension plan and Social Security benefits. Name (a) Plan Name (b) Ms. Buck Ms. Little Mr. O’Day Mr. Tillemans Ms. West Ms. Turner ____________________ Pension Plan DB SERP — — — — — Number of Years Credited Service (#) (c) Present Value of Accumulated Benefit(1) ($) Payments During Last Fiscal Year ($) (d) (e) 14 14 — — — — — 169,528 10,859,612 — — — — — — — — — — — — (1) These amounts have been calculated using discount rate, mortality and other assumptions consistent with those used for financial reporting purposes as set forth in Note 10 to the Company’s Consolidated Financial Statements included in our 2018 Annual Report on Form 10-K which accompanies this Proxy Statement. The actual payments would differ due to plan assumptions. The estimated vested DB SERP benefit, as of December 31, 2018, for Ms. Buck was $11,002,231. The amount is based on Ms. Buck’s final average compensation under the terms of the DB SERP, as of December 31, 2018, as shown below: Ms. Buck Ms. Little Mr. O’Day Mr. Tillemans Ms. West Ms. Turner Name Final Average Compensation ($) 1,857,532 — — — — — 2018 Non-Qualified Deferred Compensation Table Our NEOs are eligible to participate in the Company’s Deferred Compensation Plan. The Deferred Compensation Plan is a non-qualified, non-funded plan that permits participants to defer compensation that would otherwise be paid to them currently. The Deferred Compensation Plan is intended to secure the goodwill and loyalty of participants by enabling them to defer compensation when the participants deem it beneficial to do so and by providing a vehicle for the Company to make, on a non- qualified basis, contributions that could not be made on the participants’ behalf to the 401(k) plan. The Company credits the Deferred Compensation Plan with a specified percentage of compensation for NEOs participating in the non-qualified DC SERP. Our NEOs may elect to defer payments to be received from the OHIP, PSU and RSU awards, but not stock options or base salary. Amounts deferred under the DB SERP, DC SERP, OHIP, PSU and RSU awards are fully vested and are credited to the individual’s account under the Deferred Compensation Plan. Participants elect to receive payment at termination of employment or some other future date. DB SERP payments designated for deferral into the Deferred Compensation Plan are not credited as earned but are credited in full upon the participant’s retirement. Payments are distributed in a lump sum or in annual installments for up to 15 years. All amounts are payable in a lump sum following a Change in Control (as such terms is defined in the EICP). All elections and payments under the Deferred Compensation Plan are subject to compliance with Section 409A of the IRC, which may limit elections and require a delay in payment of benefits in certain circumstances. 65 While deferred, amounts are credited with notional earnings as if they were invested by the participant in one or more investment options offered by the Deferred Compensation Plan. The investment options under the Deferred Compensation Plan consist of investment in a deferred common stock unit account that we value according to the performance of our Common Stock (for awards paid in stock) or in mutual funds or other investments available to participants in our 401(k) plan (for awards paid in cash). The participants’ accounts under the Deferred Compensation Plan fluctuate daily, depending upon performance of the investment options elected. Effective January 1, 2007, we began crediting the deferred compensation accounts of all employees, including the NEOs, with the amount of employer matching contributions that exceed the limits established by the IRS for contribution to the 401(k) plan. These amounts are credited in the first quarter of the year after they are earned. As shown in the footnotes to the 2018 Summary Compensation Table, these amounts are designated as “Supplemental 401(k) Match” and are included as “All Other Compensation” in the year earned. These amounts also are included in Column (c) of the 2018 Non-Qualified Deferred Compensation Table in the year earned. All of our NEOs are eligible for a Supplemental 401(k) Match credit for 2018. With the exception of Mr. Tillemans and Ms. West, all of the NEOs are fully vested in the Supplemental 401(k) Match credits presented and will be paid at a future date or at termination of employment, as elected by the executive subject to the provisions of Section 409A of the IRC. Mr. Tillemans and Ms. West will vest in this benefit upon completion of two years of employment. If vested, they will receive payment for this benefit at termination of employment subject to the provisions of Section 409A of the IRC. Effective January 1, 2007, we began crediting the deferred compensation accounts of all employees hired on or after January 1, 2007, including eligible NEOs, with the amount of Core Retirement Contributions that exceed the limits established by the IRS for contribution to the 401(k) plan. These amounts are credited in the first quarter of the year after they are earned. As shown in the footnotes to the 2018 Summary Compensation Table, these amounts are designated as “Supplemental Core Retirement Contribution” and are included as “All Other Compensation” in the year earned. These amounts also are included in Column (c) of the 2018 Non-Qualified Deferred Compensation Table in the year earned. Mmes. Little, Turner and West and Messrs. O’Day and Tillemans are eligible for a Supplemental CRC credit for 2018. Ms. Little and Mr. O’Day are fully vested in this benefit and will receive payment at termination of employment subject to the provisions of Section 409A of the IRC. Mr. Tillemans and Ms. West will vest in this benefit upon completion of two years of employment. If vested, they will receive payment for this benefit at termination of employment subject to the provisions of Section 409A of the IRC. Ms. Turner was fully vested in this benefit upon her retirement. Mmes. Little and West and Messrs. O’Day and Tillemans are also eligible to participate in our DC SERP, a part of the Deferred Compensation Plan. The DC SERP provides annual allocations to the Deferred Compensation Plan equal to a percentage of compensation determined by the Compensation Committee in its sole discretion. In order to receive the annual DC SERP allocation, an executive must (i) defer into the 401(k) plan the maximum amount allowed by the Company or the IRS and (ii) be employed on the last day of the plan year, unless the executive terminates employment after age 55 and completion of five years of continuous employment preceding termination, dies or becomes disabled. After completing five years of service with the Company, an executive is vested in 10% increments based on his or her age. An executive age 46 with five years of service is 10% vested and an executive age 55 with five years of service is 100% vested. The annual DC SERP allocation for Mmes. Little and West and Messrs. O’Day and Tillemans is equal to 12.5% of base salary and OHIP award for the calendar year, whether paid or deferred. Mr. O’Day is 100% vested in his DC SERP benefit, while Mmes. Little and West and Mr. Tillemans are 0% vested because they have not yet completed five years of continuous employment with the Company. Ms. Turner was eligible to participate in our DC SERP benefit prior to her retirement and she was fully vested at retirement. 66 The following table and explanatory footnotes provide information relating to the activity in the Deferred Compensation Plan accounts of the NEOs during 2018 and the aggregate balance of the accounts as of December 31, 2018: Executive Contributions in Last Fiscal Year(1) ($) Registrant Contributions in Last Fiscal Year(2) ($) (b) (c) Aggregate Earnings in Last Fiscal Year(3) ($) (d) Aggregate Withdrawals/ Distributions(4) ($) (e) — 534,511 — — — 861,496 97,439 217,380 197,583 183,911 194,081 102,687 (241,511) 2,927 (58,435) (4,458) (7,060) (157,767) — — — — — 1,867,601 Aggregate Balance at Last Fiscal Year-End(5) ($) (f) 10,126,110 2,365,723 2,076,715 250,549 251,771 4,316,421 Name (a) Ms. Buck Ms. Little Mr. O'Day Mr. Tillemans Ms. West Ms. Turner ____________________ (1) Column (b) reflects the value of RSU awards that otherwise would have been received by Mmes. Little and Turner during 2018 and the value of PSU awards that otherwise would have been received by Ms. Turner during 2018 had they not been deferred under the Deferred Compensation Plan. (2) For Ms. Buck, Column (c) reflects the Supplemental 401(k) Match contributions earned for 2018. For Mmes. Little, Turner and West and Messrs. O’Day and Tillemans, Column (c) reflects the DC SERP, the Supplemental 401(k) Match contributions and the Supplemental CRC earned for 2018. These contributions are included in Column (i) of the 2018 Summary Compensation Table. (3) Column (d) reflects the adjustment made to each NEO’s account during 2018 to reflect the performance of the investment options chosen by the executive. Amounts reported in Column (d) were not required to be reported as compensation in the 2018 Summary Compensation Table. (4) Column (e) reflects the aggregate value of vested amounts under the Deferred Compensation Plan paid to Ms. Turner in connection with her retirement in 2018. In accordance with section 409A of the IRC, these payments were delayed for six months following Ms. Turner’s separation from service. (5) Column (f) reflects the aggregate balance credited to each NEO as of December 31, 2018, including the 2018 amounts reflected in Columns (b), (c) and (d). The following table indicates the portion of the Column (f) balance that reflects amounts disclosed in a Summary Compensation Table included in proxy statements for years prior to 2018: Name Ms. Buck Ms. Little Mr. O'Day Mr. Tillemans Ms. West Ms. Turner Amounts Reported in Previous Years(a) ($) 3,852,805 2,148,342 1,870,940 66,638 57,690 4,187,286 (a) This amount reflects the fair market value as of December 31, 2018, of vested PSU, RSU and OHIP awards as well as DC SERP, Supplemental 401(k) Match and Supplemental CRC credits. The amounts disclosed in the Summary Compensation Table included in proxy statements for years prior to 2018 reflect the grant date value of such awards, rather than the fair market value as of December 31, 2018. Potential Payments upon Termination or Change in Control We maintain plans covering our NEOs that will require us to provide incremental compensation in the event of termination of employment or a Change in Control (as such term is defined in the applicable governing document), provided certain conditions are met. The following narrative takes each hypothetical termination of employment situation – voluntary resignation, termination for Cause, death, disability, retirement, termination without Cause, and resignation for Good Reason – and a Change in Control of the Company, and describes the additional amounts, if any, that the Company would pay or provide to the NEOs, or their beneficiaries, as a result. This narrative regarding hypothetical termination events does not include information on benefits the Company would pay or provide to Ms. Turner upon the occurrence of such events as she was no longer an employee of the Company on December 31, 2018. Instead, the actual payments made to Ms. Turner upon her retirement are described below under the section entitled “Separation Payments under Confidential Separation Agreement and General Release.” 67 The narrative below and the amounts shown reflect certain assumptions we have made in accordance with SEC rules. We have assumed that the termination of employment or Change in Control occurred on December 31, 2018, and that the value of a share of our Common Stock on that day was $107.18, the closing price on the NYSE on December 31, 2018, the last trading day of 2018. In addition, in keeping with SEC rules, the following narrative and amounts do not include payments and benefits which are not enhanced by a qualifying termination of employment or Change in Control. These payments and benefits are referred to as “vested benefits” and include: • Vested benefits accrued under the 401(k) and pension plans; • Accrued vacation pay, health plan continuation and other similar amounts payable when employment terminates under programs generally applicable to the Company’s salaried employees; • Vested Supplemental 401(k) Match and Supplemental CRC provided to the NEOs on the same basis as all other employees eligible for Supplemental 401(k) Match and Supplemental CRC; • Vested benefits accrued under the DB SERP and account balances held under the Deferred Compensation Plan as previously described in the sections entitled “2018 Pension Benefits Table” and “2018 Non-Qualified Deferred Compensation Table”; and Stock options which have vested and become exercisable prior to termination of employment or Change in Control. • Voluntary Resignation (other than a Resignation for Good Reason) We are not obligated to pay amounts over and above vested benefits to a NEO who voluntarily resigns. Vested stock options may not be exercised after the NEO’s resignation date unless the executive meets retirement eligibility requirements (separation after attainment of age 55 with at least five years of continuous service). Termination for Cause If we terminate a NEO’s employment for Cause, we are not obligated to pay the executive any amounts over and above vested benefits. The NEO’s right to exercise vested stock options expires upon termination for Cause, and amounts otherwise payable under the DB SERP are subject to forfeiture at the Company’s discretion. In general, a termination will be for Cause if the executive has been convicted of a felony or has engaged in gross negligence or willful misconduct in the performance of duties, material dishonesty or a material violation of Company policies, including our Code of Conduct, or bad faith actions in the performance of duties not in the best interests of the Company. Death or Disability If a NEO dies prior to meeting the vesting requirements under the DB SERP, no benefits are paid. As of December 31, 2018, Ms. Buck was fully vested in her DB SERP benefit and her estate would therefore be entitled to a payout of such benefits in the event of her death. If a NEO dies or becomes disabled prior to meeting the vesting requirements under the 401(k) plan or for the Supplemental 401(k) Match, Supplemental CRC or DC SERP benefits, the accrued amounts under those plans become vested. Mr. Tillemans and Ms. West are not fully vested in these benefits. In the event of death or disability, Mr. Tillemans and Ms. West would have received $290,375 and $289,656, respectively, as a result of vesting. Ms. Little is not fully vested in her DC SERP benefit. In the event of death or disability, Ms. Little would have received $482,697 as a result of vesting. 68 In the event of termination due to disability, long-term disability (“LTD”) benefits are generally payable until age 65, but may extend longer if disability benefits begin after age 60, and are offset by other benefits such as Social Security. The maximum amount of the monthly LTD payments from all sources, assuming LTD began on December 31, 2018, is set forth in the table below: Long-Term Disability Benefit Maximum Monthly Amount ($) 35,000 25,000 25,000 25,000 25,000 Years and Months Until End of LTD Benefits (#) 7 years 9 months 6 years 5 months 1 year 7 years 3 months 8 years 9 months Total of Payments ($) Lump Sum Benefit(1) ($) 3,255,000 1,925,000 300,000 2,175,000 2,625,000 317,566 851,681 169,148 607,556 622,624 Name Ms. Buck Ms. Little Mr. O'Day Mr. Tillemans Ms. West ____________________ (1) For Ms. Buck, the amount reflects additional DB SERP and pension plan benefits payable at age 65 that are attributable to benefit service credited during the disability period, along with additional SRC contributions through the year prior to which she reaches age 65. For Mr. O’Day, the amount reflects 12 additional months of CRC, Supplemental CRC and DC SERP credit upon disability. For Ms. Little, the amount reflects two additional years of CRC, Supplemental CRC and DC SERP credit and vesting in the DC SERP upon disability. For Mr. Tillemans and Ms. West, amounts reflect an additional two years of CRC, Supplemental CRC and DC SERP credits and vesting in their respective 401(k) Match, CRC, Supplemental 401(k) Match, Supplemental CRC and DC SERP upon disability. Treatment of Stock Options upon Retirement, Death or Disability In the event of retirement, death or disability, vested stock options remain exercisable for a period of three or five years, not to exceed the option expiration date. The exercise period is based upon the terms and conditions of the individual grant. Retirement is defined as separation after attainment of age 55 with at least five years of continuous service. Options that are not vested at the time of retirement, death or disability will generally vest in full (subject to the exception described in the following sentence) and the options will remain exercisable for three or five years following termination, depending on the terms and conditions of the grant. Options granted in the year of retirement are prorated based upon the number of full calendar months worked in that year. The following table provides the number of unvested stock options that would have become vested and remained exercisable during the three-year or five-year periods following death or disability, or retirement if applicable, on December 31, 2018, and the value of those options based on the excess of the fair market value of our Common Stock on December 31, 2018, the last trading day of 2018, over the applicable option exercise price. As of December 31, 2018, Ms. Buck and Mr. O’Day were considered retirement eligible based on the provisions of all outstanding option awards. Because Mmes. Little and West and Mr. Tillemans were not considered retirement eligible as of December 31, 2018, they would have forfeited 61,853 stock options, 56,003 stock options and 29,215 stock options, respectively, upon voluntary separation. Name Ms. Buck Ms. Little Mr. O'Day Mr. Tillemans Ms. West Stock Options Number(1) (#) Value(2) ($) 173,255 61,853 52,520 29,215 56,003 935,068 479,725 318,405 136,682 276,156 ____________________ (1) Represents the total number of unvested options as of December 31, 2018. (2) Reflects the difference between $107.18, the closing price for our Common Stock on the NYSE on December 31, 2018, the last trading day of 2018, and the exercise price for each option. Options for which the exercise price exceeds $107.18 are not included in the calculations. 69 Treatment of RSUs upon Retirement, Death or Disability In the event of retirement, death or disability, RSUs that are not vested will generally vest in full (subject to the exception described in the following sentence). RSUs granted in the year of retirement are prorated based upon the number of full calendar months worked in that year. The retention RSU awards granted to Ms. Buck and Ms. Little in 2016 were subject to forfeiture in the event of retirement. The following table provides the number of unvested RSUs that would have vested on December 31, 2018, if the executive’s employment terminated that day due to death or disability. Mmes. Little and West and Mr. Tillemans were not considered retirement eligible as of December 31, 2018 and they would have forfeited 22,068 RSUs, 32,338 RSUs and 7,329 RSUs, respectively, upon voluntary separation. Ms. Buck's retention RSU award was subject to forfeiture in the event of retirement and she would have forfeited 55,316 RSUs upon a voluntary separation. Name Ms. Buck Ms. Little Mr. O'Day Mr. Tillemans Ms. West ____________________ (1) Represents the total number of unvested RSUs as of December 31, 2018. Restricted Stock Units Number(1) (#) Value(2) ($) 78,291 22,068 5,868 7,329 32,338 8,901,689 2,520,219 655,444 814,215 3,606,203 (2) Based on the closing price of $107.18 for our Common Stock on the NYSE on December 31, 2018, the last trading day of 2018, plus accrued dividend equivalents. Treatment of PSUs upon Retirement, Death or Disability In general, in the event of retirement, death or disability, any unvested contingent PSUs are prorated based on the number of full or partial months worked in each of the open PSU cycles. Any remaining unvested contingent PSUs not prorated are forfeited. The special PSU award granted to Mr. O’Day in 2017 is subject to forfeiture in the event of his retirement. The following table provides the total number of contingent PSUs each NEO would be entitled to if the executive’s employment ended on December 31, 2018 due to death or disability, or retirement if applicable. As of December 31, 2018, Ms. Buck and Mr. O’Day were considered retirement eligible based on the provisions of all open PSU cycles, with the exception of Mr. O’Day’s special PSU award. Mmes. Little and West and Mr. Tillemans were not considered retirement eligible as of December 31, 2018 and they would have forfeited all of their contingent PSUs upon voluntary separation. Mr. O’Day would have forfeited 9,341 contingent PSUs upon voluntary separation per the provisions of his special PSU award agreement. Name Ms. Buck Ms. Little Mr. O'Day Mr. Tillemans Ms. West ____________________ Performance Stock Units Number(1) (#) Value(2) ($) 34,771 15,408 19,896 4,630 7,262 3,726,756 1,651,429 2,132,453 496,243 778,341 (1) For the 2016-2018 PSU cycle, amount reflects the total number of contingent PSUs calculated by multiplying the number of contingent target PSUs by 131.08%, the final performance score for that cycle. For the 2017-2019 and 2018-2020 PSU cycles and Mr. O’Day’s special PSU award, amount reflects the total number of contingent PSUs at target. (2) Based on the closing price of $107.18 for our Common Stock on the NYSE on December 31, 2018, the last trading day of 2018. 70 Termination without Cause; Resignation for Good Reason Under Ms. Buck’s employment agreement and the EBPP 3A, as applicable, we have agreed to pay severance benefits if we terminate a NEO’s active employment without Cause or if the NEO resigns from active employment for Good Reason, in each case as defined in the applicable document. Severance benefits consist of a lump sum payment calculated as a multiple of base salary as well as continued OHIP eligibility, calculated as the lower of target or actual Company performance, for a set period of time, as shown in the table below. Additionally, all NEOs would be entitled to receive a pro rata payment of the OHIP award, if any, earned for the year in which termination occurs, continuation of health and welfare benefits and financial planning and tax preparation benefits for a set period of time, as shown in the table below as well as outplacement services up to $35,000. Plan Ms. Buck’s employment agreement and participants in EBPP 3A on or before February 22, 2011 Participants in EBPP 3A after February 22, 2011 Benefit Entitlement Severance Multiple OHIP Continuation Health and Welfare Benefits Financial Planning and Tax Preparation Benefits 2 times 24 months 24 months 24 months 1.5 times 18 months 18 months 18 months If a NEO has not met retirement eligibility requirements and his or her employment is terminated for reasons other than for Cause, or if the NEO terminates for Good Reason, he or she will be eligible to exercise all vested stock options and a prorated portion of his or her unvested stock options held on the date of separation from service for a period of 120 days following separation. If the NEO is age 55 or older with five or more years of continuous service and his or her employment is terminated for reasons other than for Cause, or if the NEO terminates for Good Reason, the NEO will be entitled to exercise any vested stock options until the earlier of three or five years (based on the provisions of the individual grant) from the date of termination or the expiration of the options. In addition, if a NEO has not met retirement eligibility requirements and his or her employment is terminated for reasons other than for Cause, or if the NEO terminates for Good Reason, the NEO will vest in a prorated portion of any unvested RSUs held on the date of separation from service. The following table provides the incremental amounts that would have vested and become payable to each NEO had his or her employment terminated on December 31, 2018, under circumstances entitling the NEO to severance benefits as described above: Name Ms. Buck Ms. Little Mr. O'Day Mr. Tillemans Ms. West Salary ($) OHIP at Target ($) PSU Related Payments(1) ($) 2,266,000 3,399,000 988,095 839,881 1,254,600 1,003,680 975,000 1,018,875 780,000 815,100 ____________________ Vesting of Stock Options(1) ($) Vesting of Restricted Stock Units(1) ($) Value of Benefits Continuation(2) ($) Value of Financial Planning and Outplacement(3) ($) — — — — — — 343,048 — 61,210 122,617 6,082,409 2,199,100 — 520,011 2,383,293 41,444 28,006 27,124 2,796 28,105 68,000 59,750 68,000 59,750 59,750 Total ($) 11,856,853 4,457,880 2,353,404 2,398,767 4,427,740 (1) Reflects the value of equity awards that would have vested and become payable to each NEO over and above amounts they would have received upon a voluntary termination. (2) Reflects projected medical, dental, vision and life insurance continuation premiums paid by the Company during the applicable time period following termination. (3) Value of maximum payment for financial planning and tax preparation continuation during the applicable time period following termination plus outplacement services of $35,000. For information with respect to stock options, RSUs and PSUs held by each NEO as of December 31, 2018, refer to the Outstanding Equity Awards at 2018 Fiscal-Year End Table. 71 Change in Control The EBPP 3A and the terms of the applicable award agreements provide for the vesting and payment of the following benefits to each of the NEOs upon a Change in Control: • An OHIP payment for the year in which the Change in Control occurs, calculated as the greater of target or the estimated payment based on actual performance through the date of the Change in Control; • • • To the extent not vested, full vesting of benefits accrued under the DB SERP and the Deferred Compensation Plan; • To the extent not vested, full vesting of benefits under the 401(k) and pension plans; • If not replaced with awards that qualify as Replacement Awards (as defined in the EICP), full vesting of all outstanding RSUs and stock options; If not replaced with awards that qualify as Replacement Awards (as defined in the EICP), a vested and non-forfeitable right to receive a lump sum cash payment equal to the target PSU grant for the performance cycle ending in the year of the Change in Control, determined based upon the greater of target or actual performance through the date of the Change in Control, with each PSU valued at the higher of (a) the highest closing price for our Common Stock during the 60 days prior to (and including the date of) the Change in Control and (b) the price at which an offer is made to purchase shares of our Common Stock from the Company’s stockholders, if applicable (the higher of (a) and (b), the “Transaction Value”); and If not replaced with awards that qualify as Replacement Awards (as defined in the EICP), a vested and non-forfeitable right to receive a lump sum cash payment equal to the target PSU grant for the second year of the performance cycle and a prorated portion of the target PSU grant for the first year of the performance cycle at the time of the Change in Control, with each PSU valued at the higher of the Transaction Value and the highest closing price of our Common Stock from the date of the Change of Control until the earlier of the end of the applicable grant cycle or the NEO’s separation from service. Under our EICP and the terms of the applicable award agreements, awards that are continued as Replacement Awards after a Change in Control are not subject to accelerated vesting or payment upon the Change in Control. In the event of termination of employment within two years following the Change in Control for any reason other than termination for Cause or resignation without Good Reason, the replacement awards will vest and become payable as described below. The following table and explanatory footnotes provide information with respect to the incremental amounts that would have vested and become payable on December 31, 2018, if a Change in Control occurred on that date. OHIP Related Payment(1) ($) — 3,310 — 39,446 — PSU Related Payments(2) ($) 927,986 970,207 1,231,625 656,650 1,054,996 Vesting of Stock Options(3) ($) — 479,725 — 136,682 276,156 Vesting of Restricted Stock Units(3) ($) 6,355,034 2,520,219 — 814,215 3,606,203 Retirement and Deferred Compensation Benefits(4) ($) — 482,697 — 290,375 289,656 Total(5) ($) 7,283,020 4,456,158 1,231,625 1,937,368 5,227,011 Name Ms. Buck Ms. Little Mr. O'Day Mr. Tillemans Ms. West ____________________ (1) With the exception of Ms. Little and Mr. Tillemans, the amount of the OHIP award earned for 2018 was greater than target. Therefore, no incremental amount attributable to that program would have been payable upon a Change in Control. For Ms. Little and Mr. Tillemans, reflects the difference between the target amount and the actual amount earned. (2) Amounts reflect vesting of PSUs awarded, as follows: • For the performance cycle which ended on December 31, 2018, the difference between a value per PSU of $110.01, the highest closing price for our Common Stock on the NYSE during the last 60 days of 2018, and a value per PSU of $107.18, the closing price of our Common Stock on the NYSE on December 31, 2018, the last trading day of 2018; • For the performance cycle ending December 31, 2019, and for Mr. O’Day’s special PSU award, at target performance, with a value per PSU of $110.01, the highest closing price for our Common Stock on the NYSE during the last 60 days of 2018; and • For the performance cycle ending December 31, 2020, one-third of the contingent target units awarded, at target performance, with a value per PSU of $110.01, the highest closing price for our Common Stock on the NYSE during the last 60 days of 2018. 72 Because Mr. O’Day and Ms. Buck were retirement eligible as of December 31, 2018, as of that date they had already vested in a portion of the PSU awards for the performance cycles ending December 31, 2019 and December 31, 2020. Accordingly, with respect to these NEOs, the amount for the performance cycle ending December 31, 2019, reflects only (i) an incremental payment of the portion of the PSU award that would vest upon ta Change in Control if the awards were not continued as Replacement Awards (i.e., 1/3 of the total award) and (ii) an incremental benefit equal to the difference between a value per PSU of $110.01, the highest closing price of our Common Stock on the NYSE during the last 60 days of 2018, and a value per PSU of $107.18, the closing price of our Common Stock on the NYSE on December 31, 2018, the last trading day of 2018, while the amount for the performance cycle ending December 31, 2020, reflects only an incremental benefit equal to the difference between a value per PSU of $110.01 and a value per PSU of $107.18. (3) Reflects the value of equity awards that would have vested and become payable to each NEO over and above amounts that would have already vested. (4) Reflects the full vesting value of DB SERP benefits and more favorable early retirement discount factors as provided under the EBPP 3A. Ms. Buck is fully vested in her DB SERP benefit and the more favorable early retirement factors do not apply to the CEO, so no additional benefit is applicable. For Ms. West and Mr. Tillemans, the amount includes the vesting of their respective DC SERP benefit, 401(k), Supplemental 401(k) Match, CRC and Supplemental CRC. For Ms. Little, the amount includes the vesting of her DC SERP benefit. Mr. O’Day is fully vested in his DC SERP benefit so no additional benefit is applicable. (5) For any given executive, the total payments made in the event of a Change in Control would be reduced to the “safe harbor” limit under IRC Section 280G if such reduction would result in a greater after-tax benefit for the executive. Termination without Cause or Resignation for Good Reason after Change in Control If a NEO’s employment is terminated by the Company without Cause or by the NEO for Good Reason within two years after a Change in Control, we pay severance benefits under the EBPP 3A to assist the NEO in transitioning to new employment. These severance benefits as of December 31, 2018, consist of: • A lump sum cash payment equal to two (or, if less, the number of full and fractional years from the date of termination to the executive’s 65th birthday, but not less than one) times: • The executive’s base salary; and • The highest OHIP award payment paid or payable during the three years preceding the year of the Change in Control (but not less than the OHIP target award for the year of the termination) ("Highest OHIP"); • • • For replacement PSU awards, a lump sum cash payment equal to the target PSU grant for the performance cycle ending in the year of the Change in Control, determined based upon the greater of target or actual performance through the date of the Change in Control, with each PSU valued at the Transaction Value; For replacement PSU awards, a lump sum cash payment equal to the target PSU grant for the second year of the performance cycle and a prorated portion of the target PSU grant for the first year of the performance cycle at the time of the Change in Control, with each PSU valued at the higher of the Transaction Value and the highest closing price of our Common Stock from the date of the Change of Control until the NEO’s separation from service; For replacement stock options and RSU awards (including accrued cash credits equivalent to dividends that would have been earned had the executive held Common Stock instead of RSUs), full vesting of all unvested stock options and RSUs; • Continuation of medical, dental, vision and life benefits for 24 months (or, if less, the number of months until the • executive attains age 65, but not less than 12 months), or payment of the value of such benefits if continuation is not permitted under the terms of the applicable plan; For executives who do not participate in the pension plan, a lump sum equal to the CRC rate times the sum of their base salary and Highest OHIP times the number of years in their severance period (two, or, if less, the number of full and fractional years from the date of termination to the executive’s 65th birthday, but not less than one). IRS limitations imposed on the 401(k) and pension plans will not apply for this purpose; • Outplacement services up to $35,000 and reimbursement for financial counseling and tax preparation services for two years; • An enhanced matching contribution cash payment equal to the 401(k) matching contribution rate of 4.5% multiplied by the executive’s base salary and Highest OHIP calculated as if such amounts were paid during the years in the executive’s severance period. For this purpose, the IRS limitations imposed on the 401(k) plan do not apply; For executives who participate in the DB SERP, an enhanced benefit reflecting an additional two years of credit; and For executives who participate in the DC SERP, an enhanced benefit reflecting a cash payment equal to the applicable percentage rate multiplied by his or her base salary and Highest OHIP calculated as if such amounts were paid during the years in the executive’s severance period. • • 73 The following table provides amounts that would have vested and become payable to each NEO over and above amounts they would have received upon a termination by the Company without Cause or by the NEO for Good Reason, assuming a Change in Control occurred and the executive’s employment terminated on December 31, 2018: Lump Sum Cash Severance Payment ($) PSU Related Payments(1) ($) Vesting of Stock Options ($) — 609,325 — 585,000 611,325 927,986 970,207 1,231,625 656,650 1,054,996 — 136,677 — 75,472 153,539 Vesting of RSUs ($) 272,625 321,119 — 294,204 1,222,910 Name Ms. Buck Ms. Little Mr. O'Day Mr. Tillemans Ms. West Value of Medical and Other Benefits Continuation ($) Value of Financial Planning and Outplace- ment ($) Value of Enhanced DB SERP/ DC SERP and 401(k) Benefit(2) ($) — 9,678 — 946 9,712 — 8,250 — 8,250 8,250 6,756,963 487,460 225,828 468,000 489,060 Total(3) ($) 7,957,574 2,542,716 1,457,453 2,088,522 3,549,792 ____________________ (1) Amounts reflect vesting of PSUs awarded as described in footnote (2) to the Change in Control table. (2) For Ms. Buck, this value reflects the amounts of enhanced DB SERP, 401(k) Match and Supplemental 401(k) Match over a 24-month period. For Mmes. Little and West and Mr. Tillemans, the value reflects the amounts of DC SERP, CRC, Supplemental CRC, 401(k) Match and Supplemental 401(k) Match that would have been paid had they remained employees for 24 months after their termination. For Mr. O’Day, the value reflects the amounts of DC SERP, CRC, Supplemental CRC, 401(k) Match and Supplemental 401(k) Match that would have been paid had he remained an employee for 12 months after his termination. (3) For any given executive the total payments made in the event of termination after a Change in Control would be reduced to the “safe harbor” limit under IRC Section 280G if such reduction would result in a greater after-tax benefit for the executive. Separation Payments under Confidential Separation Agreement and General Release On January 18, 2018, we announced that Ms. Turner, then Senior Vice President, General Counsel and Corporate Secretary, had informed the Company of her intention to retire effective March 31, 2018. In connection with her retirement, Ms. Turner entered into a Confidential Separation Agreement and General Release pursuant to which she received or will receive certain payments and benefits, including the following: • A lump sum cash separation payment equal to $964,020; • Payment of her 2018 OHIP award ($446,168) and eligibility to receive a pro rata 2019 OHIP award, depending on Company performance; • Retirement treatment for stock options, RSUs and PSUs, which resulted in accelerated vesting of 44,251 stock options, accelerated vesting and distribution of 3,850 RSUs and a non-forfeitable right to receive 6,982 contingent target PSUs; • Accelerated vesting and distribution of 33,190 retention RSUs granted in February 2016; • Health and welfare benefit continuation for 18 months; • A lump sum distribution of vested amounts under the Deferred Compensation Plan, including the DC SERP, equal to $1,867,601; • Reimbursement for financial counseling and tax preparation for a maximum of 24 months following her retirement (maximum reimbursement of $15,000 for financial counseling and $1,500 for tax preparation in 2018 and 2019, and $3,750 for financial counseling and $375 for tax preparation in 2020); and • Outplacement services equal to $35,000. Under the terms of the Confidential Separation Agreement and General Release, Ms. Turner remains subject to all of the terms and conditions of her ECRCA with the Company, dated as of June 8, 2012, that survive the termination of her employment with the Company. In consideration of the payments and benefits provided to Ms. Turner under the Confidential Separation Agreement and General Release, she executed a release of all claims against the Company. 74 CEO Pay Ratio Disclosure The annual total compensation of our CEO for fiscal year 2018 was $11,718,372. The median of the annual total compensation for all employees, excluding the CEO, for fiscal year 2018 was $29,270. As a result, we estimate that the ratio of the annual total compensation of our CEO to the annual total compensation of the median employee for fiscal year 2018 was 400 to 1. We identified the median employee using base salary, including overtime, earned in the first nine months of 2018 for all employees, excluding our CEO, as of October 9, 2018, the second Tuesday in October in 2018. After identifying the median employee, we calculated annual total compensation for such employee using the same methodology used for calculating the total compensation of our NEOs as set forth in the Summary Compensation Table. Equity Compensation Plan Information The following table provides information about all of the Company's equity compensation plans as of December 31, 2018: Number of securities to be issued upon exercise of outstanding options, warrants and rights (#) Weighted-average exercise price of outstanding options, warrants and rights ($) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (#) Plan Category (a) (b) (c) Equity compensation plans approved by security holders(1) Stock Options Performance Stock Units and Restricted Stock Units Subtotal Equity compensation plans not approved by security holders Total ____________________ 5,394,382 999,018 6,393,400 N/A 6,393,400 94.28 N/A 94.28 N/A 94.28(2) 9,949,523 N/A 9,949,523 (1) Includes amounts earned or paid in cash or shares of Common Stock at the election of the director or deferred by the director under the Directors' Compensation Plan. Column (a) includes stock options, PSUs and RSUs granted under the EICP. Of the securities available for future issuances under the EICP in column (c), 5,201,978 were available for awards of stock options and 4,747,545 were available for full-value awards such as PSUs, performance stock, RSUs, restricted stock and other stock-based awards. Securities available for future issuance of full-value awards may also be used for stock option awards. (2) Weighted-average exercise price of outstanding stock options only. 75 PROPOSAL NO. 3 – ADVISE ON NAMED EXECUTIVE OFFICER COMPENSATION The Board of Directors unanimously recommends that stockholders vote FOR approval, on a non-binding advisory basis, of the compensation of the Company's named executive officers In accordance with the Dodd-Frank Wall Street Reform and Consumer Protection Act and related SEC rules, and as required under Section 14A of the Exchange Act, we are providing stockholders an opportunity to conduct an advisory vote regarding the compensation of our NEOs as disclosed in this Proxy Statement. Prior to submitting your vote, we encourage you to read our Compensation Discussion & Analysis and the accompanying executive compensation tables for details about our executive compensation program, including information about the 2018 compensation of our NEOs. As discussed in more detail in the Compensation Discussion & Analysis, we believe our executive compensation program is competitive and governed by pay-for-performance principles. We emphasize compensation opportunities that reward results. Our stock ownership requirements and use of stock-based incentives reinforce the alignment of the interests of our executives with those of our long-term stockholders. In doing so, our executive compensation program supports our strategic objectives and mission. Accordingly, we ask you to approve the following resolution at the Annual Meeting: “RESOLVED, that the stockholders of The Hershey Company approve, on an advisory basis, the compensation paid to the Company’s named executive officers, as disclosed in the Proxy Statement for the 2019 Annual Meeting of Stockholders pursuant to the SEC’s compensation disclosure rules, including the Compensation Discussion & Analysis, the Executive Compensation Tables and the related narrative discussion.” Because your vote is advisory, it will not be binding upon the Board. However, as noted in the Compensation Discussion & Analysis, the Compensation Committee and the Board will, as deemed appropriate, take into account the outcome of the vote when considering future decisions affecting executive compensation. The affirmative vote of the holders of at least a majority of the shares of Common Stock and Class B Common Stock (voting together as a class) represented at the Annual Meeting, in person or by proxy, is required to approve this proposal. 76 SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Exchange Act requires our directors and executive officers, as well as any person who is the beneficial owner of more than 10% of our outstanding Common Stock, to file reports with the SEC and NYSE showing their ownership and changes in ownership of the Company’s securities. Copies of these reports also must be furnished to us. Based on an examination of these reports and on written representations provided to us, it is our opinion that all reports for 2018 were timely filed. CERTAIN TRANSACTIONS AND RELATIONSHIPS Item 404 of SEC Regulation S-K requires that we disclose any transaction or series of similar transactions, or any currently proposed transaction(s), in which (i) the Company was or is to be a participant, (ii) the amount involved exceeds $120,000 and (iii) any of the following persons had or will have a direct or indirect material interest: • Our directors or nominees for director; • Our executive officers; • • The immediate family members of any of the persons identified in the preceding three bullets. Persons owning more than 5% of any class of our outstanding voting securities; or Policies and Procedures Regarding Transactions with Related Persons The Board has adopted a written Related Person Transaction Policy that governs the review, approval or ratification of related person transactions. The Related Person Transaction Policy may be viewed on the Investors section of our website at www.thehersheycompany.com. Under the Related Person Transaction Policy, each related person transaction, and any significant amendment or modification to a related person transaction, must be reviewed and approved or ratified by a committee of our Board composed solely of independent directors who have no interest in the transaction. We refer to each such committee as a Reviewing Committee. The Related Person Transaction Policy also permits the disinterested members of the full Board to act as a Reviewing Committee. The Board has designated the Governance Committee as the Reviewing Committee primarily responsible for the administration of the Related Person Transaction Policy. In addition, the Board has designated a special Reviewing Committee to oversee certain transactions involving the Company and Hershey Trust Company, Milton Hershey School, the Milton Hershey School Trust and companies owned by or affiliated with any of the foregoing. Finally, the Related Person Transaction Policy provides that the Compensation Committee will review and approve, or review and recommend to the Board for approval, any employment relationship or transaction involving an executive officer of the Company and any related compensation. When reviewing, approving or ratifying a related person transaction, the Reviewing Committee will examine all material facts about the related person’s interest in, or relationship to, the transaction, including the approximate dollar value of the transaction. If the related person transaction involves an outside director or nominee for director, the Reviewing Committee also may consider whether the transaction would compromise the director’s status as an “independent director,” “outside director” or “non-employee director” under the Board’s Corporate Governance Guidelines, the NYSE Rules, the IRC or the Exchange Act. Transactions with Hershey Trust Company, Milton Hershey School and the Milton Hershey School Trust During 2018, there were no transactions with the Company in which any executive officer, director or nominee for director, or any of their immediate family members, had a direct or indirect material interest that would need to be disclosed pursuant to Item 404 of SEC Regulation S-K, nor were any such transactions planned. 77 In any given year, we may engage in certain transactions with Hershey Trust Company, Milton Hershey School, the Milton Hershey School Trust and companies owned by or affiliated with any of the foregoing. These transactions are typically immaterial, ordinary-course transactions that do not constitute related person transactions. However, from time to time we may also engage in related person transactions with Hershey Trust Company, Milton Hershey School, the Milton Hershey School Trust and/or their subsidiaries and affiliates. Under the Board’s Corporate Governance Guidelines, a special Reviewing Committee composed of the independent, disinterested members of the Executive Committee must approve these transactions. Effective November 7, 2018, the Company entered into a Stock Purchase Agreement with Hershey Trust Company, as trustee for the Milton Hershey School Trust, pursuant to which the Company agreed to purchase 450,000 shares of the Company’s common stock from Milton Hershey School Trust at a price equal to $106.30 per share, for a total purchase price of $47,835,000. The transaction was approved by the independent directors of the Company’s Board having no affiliation with Hershey Trust Company, Milton Hershey School, the Milton Hershey School Trust or their affiliates. The Company was not a participant in any other transactions in 2018, and does not currently contemplate being a participant in any transactions in 2019, with any stockholder owning more than 5% of any class of the Company’s outstanding voting securities that would need to be disclosed pursuant to Item 404 of SEC Regulation S-K. During 2018, we engaged in transactions in the ordinary course of our business with Hershey Trust Company, Milton Hershey School and companies affiliated with Hershey Trust Company, Milton Hershey School and the Milton Hershey School Trust. These transactions involved the sale and purchase of goods and services as well as the leasing of real estate at market rates. The transactions were primarily with Hershey Entertainment & Resorts Company, a company that is owned by the Milton Hershey School Trust. All sales and purchases were made on terms and at prices we believe were generally available in the marketplace and were in amounts that were not material to us or to Hershey Entertainment & Resorts Company. Therefore, these transactions did not require approval under our Related Person Transaction Policy. Although our transactions with Hershey Trust Company, Milton Hershey School and the companies affiliated with each of the foregoing and with the Milton Hershey School Trust (including Hershey Entertainment & Resorts Company) are either immaterial or otherwise not required to be disclosed under Item 404 of SEC Regulation S-K, because of our relationship with these entities, we have elected to disclose the aggregate amounts of our purchase and sale transactions with these entities for your information. In this regard: • Our total sales to these entities in 2018 were approximately $1.5 million; and • Our total purchases from these entities in 2018 were approximately $1.7 million. We do not expect the types of transactions or the amount of payments to change materially in 2019. Effective June 1, 2017, the Company entered into a lease with Hershey Entertainment & Resorts Company for a portion of a building owned and occupied by the Company in Hershey, Pennsylvania. The leased area consists of approximately 17,660 square feet of storage space in the building that is not being utilized currently by the Company. The lease permits Hershey Entertainment & Resorts Company to renew the lease for subsequent one-year terms and, if space is available, to request an increase in the area occupied. The lease is on terms we believe are generally available in the marketplace and is not material to us or Hershey Entertainment & Resorts Company. Rent during 2018 was $66,850, which included a pro rata allocation of utilities, insurance, maintenance and other operating costs. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Mmes. Arway, Haben and Koken and Messrs. Mead, Palmer and Ridge served as members of our Compensation Committee at various times during 2018. None of the members of our Compensation Committee served as one of our officers or employees during 2018 or at any time in the past, and neither they nor any other director served as an executive officer of any entity for which any of our executive officers served as a director or member of its compensation committee. None of the members of our Compensation Committee has a relationship with us that is required to be disclosed under Item 404 of SEC Regulation S-K. 78 Householding of Proxy Materials OTHER MATTERS The SEC has adopted rules that allow us to send in a single envelope our Notice of Internet Availability of Proxy Materials or a single copy of our proxy solicitation and other required annual meeting materials to two or more stockholders sharing the same address. We may do this only if the stockholders at that address share the same last name or if we reasonably believe that the stockholders are members of the same family. If we are sending a Notice of Internet Availability of Proxy Materials, the envelope must contain a separate notice for each stockholder at the shared address. Each Notice of Internet Availability of Proxy Materials must contain a unique control number that each stockholder will use to gain access to our proxy materials and vote online. If we are mailing a paper copy of our proxy materials, the rules require us to send each stockholder at the shared address a separate proxy card. We believe this rule is beneficial both to our stockholders and to the Company. Our printing and postage costs are lowered anytime we eliminate duplicate mailings to the same household. However, stockholders at a shared address may revoke their consent to the householding program and receive their Notice of Internet Availability of Proxy Materials in a separate envelope, or, if they have elected to receive a full copy of our proxy materials in the mail, receive a separate copy of these materials. If you have elected to receive paper copies of our proxy materials and want to receive a separate copy of these materials for our 2019 Annual Meeting, please call our Investor Relations Department, toll free, at (800) 539-0261. If you consented to the householding program and wish to revoke your consent for future years, simply call, toll free, (866) 540-7095, or write to Broadridge, Householding Department, 51 Mercedes Way, Edgewood, New York 11717. Information Regarding the 2020 Annual Meeting of Stockholders The 2020 Annual Meeting of Stockholders is expected to be held on May 12, 2020. To be eligible for inclusion in the proxy materials for the 2020 Annual Meeting of Stockholders, a stockholder proposal must be received by our Secretary by no later than December 13, 2019, and must comply in all respects with applicable rules of the SEC. Stockholder proposals should be addressed to The Hershey Company, c/o Secretary, 19 East Chocolate Avenue, Hershey, Pennsylvania 17033. A stockholder may present a proposal not included in our proxy materials from the floor of the 2020 Annual Meeting of Stockholders only if our Secretary receives notice of the proposal, along with additional information required by our by-laws, between January 22, 2020 and February 21, 2020. Notice should be addressed to The Hershey Company, c/o Secretary, 19 East Chocolate Avenue, Hershey, Pennsylvania 17033. The notice must contain the following additional information: • The stockholder’s name and address; • The stockholder’s shareholdings; • A brief description of the proposal; • A brief description of any financial or other interest the stockholder has in the proposal; and • Any additional information that the SEC would require if the proposal were presented in a proxy statement. 79 A stockholder may nominate a director from the floor of the 2020 Annual Meeting of Stockholders only if our Secretary receives notice of the nomination, along with additional information required by our by-laws, between January 22, 2020 and February 21, 2020. The notice must contain the following additional information: • The stockholder’s name and address; • A representation that the stockholder is a holder of record of any class of our equity securities; • A representation that the stockholder intends to make the nomination in person or by proxy at the meeting; • A description of any arrangement the stockholder has with the individual the stockholder plans to nominate and the reason for making the nomination; • The nominee’s name, address and biographical information; • The written consent of the nominee to serve as a director if elected; • Any additional information regarding the nominee that the SEC would require if the nomination were included in a proxy statement regardless of whether the nomination may be included in such proxy statement; and • Any stockholder holding 25% or more of the votes entitled to be cast at the 2020 Annual Meeting of Stockholders is not required to comply with these pre-notification requirements. By order of the Board of Directors, Damien Atkins Senior Vice President, General Counsel and Secretary April 11, 2019 80 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2018 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 (State or other jurisdiction of incorporation or organization) 19 East Chocolate Avenue, Hershey, PA (Address of principal executive offices) 23-0691590 (I.R.S. Employer Identification No.) 17033 (Zip Code) Registrant’s telephone number, including area code: (717) 534-4200 Securities registered pursuant to Section 12(b) of the Act: Title of each class Common Stock, one dollar par value Name of each exchange on which registered New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: Title of class Class B Common Stock, one dollar par value No No Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes 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 Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes No No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth 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 Accelerated filer Non-accelerated filer 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 As of June 29, 2018 (the last business day of the registrant’s most recently completed second fiscal quarter), the aggregate market value of the voting and non-voting common equity held by non-affiliates was $13,038,400,227. Class B Common Stock is not listed for public trading on any exchange or market system. However, Class B shares are convertible into shares of Common Stock at any time on a share-for-share basis. Determination of aggregate market value assumes all outstanding shares of Class B Common Stock were converted to Common Stock as of June 29, 2018. The market value indicated is calculated based on the closing price of the Common Stock on the New York Stock Exchange on June 29, 2018 ($93.06 per share). 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—147,906,017 shares, as of February 15, 2019. Class B Common Stock, one dollar par value—60,613,777 shares, as of February 15, 2019. Portions of the Proxy Statement for the 2019 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K. DOCUMENTS INCORPORATED BY REFERENCE THE HERSHEY COMPANY Annual Report on Form 10-K For the Fiscal Year Ended December 31, 2018 TABLE OF CONTENTS PART I Item 1. Item 1A. Item 1B. Item 2. Item 3. Item 4. Supplemental Item Executive Officers of the Registrants Business Risk Factors Unresolved Staff Comments Properties Legal Proceedings Mine Safety Disclosures PART II Item 5. Item 6. Item 7. Item 7A. Item 8. Item 9. Item 9A. Item 9B. PART III Item 10. Item 11. Item 12. Item 13. Item 14. PART IV Item 15. Item 16. Signatures Schedule II Exhibit Index Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Selected Financial Data Management's Discussion and Analysis of Financial Condition and Results of Operations Quantitative and Qualitative Disclosures About Market Risk Financial Statements and Supplementary Data Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Controls and Procedures Other Information Directors, Executive Officers and Corporate Governance Executive Compensation Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Certain Relationships and Related Transactions, and Director Independence Principal Accountant Fees and Services Exhibits, Financial Statement Schedules Form 10-K Summary 1 6 11 11 12 12 13 14 16 17 43 47 101 101 103 104 104 104 105 105 106 106 107 108 109 Item 1. BUSINESS PART I The Hershey Company was incorporated under the laws of the State of Delaware on October 24, 1927 as a successor to a business founded in 1894 by Milton S. Hershey. In this report, the terms “Hershey,” “Company,” “we,” “us” or “our” mean The Hershey Company and its wholly-owned subsidiaries and entities in which it has a controlling financial interest, unless the context indicates otherwise. Hershey is a global confectionery leader known for bringing goodness to the world through chocolate, sweets, mints, gum and other great tasting snacks. We are the largest producer of quality chocolate in North America, a leading snack maker in the United States and a global leader in chocolate and non-chocolate confectionery. We market, sell and distribute our products under more than 80 brand names in approximately 90 countries worldwide. Reportable Segments Our organizational structure is designed to ensure continued focus on North America, coupled with an emphasis on profitable growth in our focus international markets. Our business is organized around geographic regions, which enables us to build processes for repeatable success in our global markets. As a result, we have defined our operating segments on a geographic basis, as this aligns with how our Chief Operating Decision Maker (“CODM”) manages our business, including resource allocation and performance assessment. Our North America business, which generates approximately 89% of our consolidated revenue, is our only reportable segment. None of our other operating segments meet the quantitative thresholds to qualify as reportable segments; therefore, these operating segments are combined and disclosed below as International and Other. • North America - This segment is responsible for our traditional chocolate and non-chocolate confectionery market position, as well as our grocery and growing snacks market positions, in the United States and Canada. This includes developing and growing our business in chocolate and non-chocolate confectionery, pantry, food service and other snacking product lines. • International and Other - International and Other is a combination of all other operating segments that are not individually material, including those geographic regions where we operate outside of North America. We currently have operations and manufacture product in China, Mexico, Brazil, India and Malaysia, primarily for consumers in these regions, and also distribute and sell confectionery products in export markets of Asia, Latin America, Middle East, Europe, Africa and other regions. This segment also includes our global retail operations, including Hershey's Chocolate World stores in Hershey, Pennsylvania, New York City, Las Vegas, Niagara Falls (Ontario) and Singapore, as well as operations associated with licensing the use of certain of the Company's trademarks and products to third parties around the world. Financial and other information regarding our reportable segments is provided in our Management’s Discussion and Analysis and Note 12 to the Consolidated Financial Statements. Business Acquisitions In October 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. In January 2018, we completed the acquisition of all of the outstanding shares of Amplify Snack Brands, Inc. ("Amplify"), a publicly traded company based in Austin, Texas that owns several popular better-for-you snack brands such as SkinnyPop, Oatmega and Paqui. The acquisition enables us to capture more consumer snacking occasions by creating a broader portfolio of brands. In April 2016, we completed the acquisition of all of the outstanding shares of Ripple Brand Collective, LLC, a privately held company based in Congers, New York that owns the barkTHINS mass premium chocolate snacking brand. The acquisition was undertaken in order to broaden our product offerings in the premium and portable snacking categories. 1 Products and Brands Our principal product offerings include chocolate and non-chocolate confectionery products; gum and mint refreshment products; pantry items, such as baking ingredients, toppings and beverages; and snack items such as spreads, meat snacks, bars and snack bites and mixes, popcorn and protein bars and cookies. • Within our North America markets, our product portfolio includes a wide variety of chocolate offerings marketed and sold under the renowned brands of Hershey’s, Reese’s and Kisses, along with other popular chocolate and non-chocolate confectionery brands such as Jolly Rancher, Almond Joy, Brookside, barkTHINS, Cadbury, Good & Plenty, Heath, Kit Kat®, Lancaster, Payday, Rolo®, Twizzlers, Whoppers and York. We also offer premium chocolate products, primarily in the United States, through the Scharffen Berger and Dagoba brands. Our gum and mint products include Ice Breakers mints and chewing gum, Breathsavers mints and Bubble Yum bubble gum. Our pantry and snack items that are principally sold in North America include baking products, toppings and sundae syrups sold under the Hershey’s, Reese’s and Heath brands, as well as Hershey’s and Reese’s chocolate spreads, snack bites and mixes, Krave meat snack products, Popwell half-popped corn snacks, ready-to-eat SkinnyPop popcorn, baked and trans fat free Pirate's Booty snacks and other better-for-you snack brands such as Oatmega and Paqui. • Within our International and Other markets, we manufacture, market and sell many of these same brands, as well as other brands that are marketed regionally, such as Pelon Pelo Rico confectionery products in Mexico, IO-IO snack products in Brazil, and Nutrine and Maha Lacto confectionery products and Jumpin and Sofit beverage products in India. Principal Customers and Marketing Strategy Our customers are mainly wholesale distributors, chain grocery stores, mass merchandisers, chain drug stores, vending companies, wholesale clubs, convenience stores, dollar stores, concessionaires and department stores. The majority of our customers, with the exception of wholesale distributors, resell our products to end-consumers in retail outlets in North America and other locations worldwide. In 2018, approximately 28% of our consolidated net sales were made to McLane Company, Inc., one of the largest wholesale distributors in the United States to convenience stores, drug stores, wholesale clubs and mass merchandisers and the primary distributor of our products to Wal-Mart Stores, Inc. The foundation of our marketing strategy is our strong brand equities, product innovation and the consistently superior quality of our products. We devote considerable resources to the identification, development, testing, manufacturing and marketing of new products. We utilize a variety of promotional programs directed towards our customers, as well as advertising and promotional programs for consumers of our products, to stimulate sales of certain products at various times throughout the year. In conjunction with our sales and marketing efforts, our efficient product distribution network helps us maintain sales growth and provide superior customer service by facilitating the shipment of our products from our manufacturing plants to strategically located distribution centers. We primarily use common carriers to deliver our products from these distribution points to our customers. Raw Materials and Pricing Cocoa products, including cocoa liquor, cocoa butter and cocoa powder processed from cocoa beans, are the most significant raw materials we use to produce our chocolate products. These cocoa products are purchased directly from third-party suppliers, who source cocoa beans that are grown principally in Far Eastern, West African, Central and South American regions. West Africa accounts for approximately 70% of the world’s supply of cocoa beans. Adverse weather, crop disease, political unrest and other problems in cocoa-producing countries have caused price fluctuations in the past, but have never resulted in the total loss of a particular producing country’s cocoa crop and/or exports. In the event that a significant disruption occurs in any given country, we believe cocoa from other producing countries and from current physical cocoa stocks in consuming countries would provide a significant supply buffer. 2 In 2016, we established a trading company in Switzerland that performs all aspects of cocoa procurement, including price risk management, physical supply procurement and sustainable sourcing oversight. The trading company was implemented to optimize the supply chain for our cocoa requirements, with a strategic focus on gaining real time access to cocoa market intelligence. It also provides us with the ability to recruit and retain world class commodities traders and procurement professionals and enables enhanced collaboration with commodities trade groups, the global cocoa community and sustainable sourcing resources. We also use substantial quantities of sugar, Class II and IV dairy products, peanuts, almonds and energy in our production process. Most of these inputs for our domestic and Canadian operations are purchased from suppliers in the United States. For our international operations, inputs not locally available may be imported from other countries. We change prices and weights of our products when necessary to accommodate changes in input costs, the competitive environment and profit objectives, while at the same time maintaining consumer value. Price increases and weight changes help to offset increases in our input costs, including raw and packaging materials, fuel, utilities, transportation costs and employee benefits. When we implement price increases, there is usually a time lag between the effective date of the list price increases and the impact of the price increases on net sales, in part because we typically honor previous commitments to planned consumer and customer promotions and merchandising events subsequent to the effective date of the price increases. In addition, promotional allowances may be increased subsequent to the effective date, delaying or partially offsetting the impact of price increases on net sales. Competition Many of our confectionery brands enjoy wide consumer acceptance and are among the leading brands sold in the marketplace in North America and certain markets in Latin America. We sell our brands in highly competitive markets with many other global multinational, national, regional and local firms. Some of our competitors are large companies with significant resources and substantial international operations. Competition in our product categories is based on product innovation, product quality, price, brand recognition and loyalty, effectiveness of marketing and promotional activity, the ability to identify and satisfy consumer preferences, as well as convenience and service. In recent years, we have also experienced increased competition from other snack items, which has pressured confectionery category growth. Working Capital, Seasonality and Backlog Our sales are typically higher during the third and fourth quarters of the year, representing seasonal and holiday-related sales patterns. We manufacture primarily for stock and typically fill customer orders within a few days of receipt. Therefore, the backlog of any unfilled orders is not material to our total annual sales. Additional information relating to our cash flows from operations and working capital practices is provided in our Management’s Discussion and Analysis. Trademarks, Service Marks and License Agreements We own various registered and unregistered trademarks and service marks. The trademarks covering our key product brands are of material importance to our business. We follow a practice of seeking trademark protection in the United States and other key international markets where our products are sold. We also grant trademark licenses to third parties to produce and sell pantry items, flavored milks and various other products primarily under the Hershey’s and Reese’s brand names. 3 Furthermore, we have rights under license agreements with several companies to manufacture and/or sell and distribute certain products. Our rights under these agreements are extendible on a long-term basis at our option. Our most significant licensing agreements are as follows: Company Brand Location Requirements Kraft Foods Ireland Intellectual Property Limited/Cadbury UK Limited York Peter Paul Almond Joy Peter Paul Mounds Worldwide None Cadbury UK Limited Société des Produits Nestlé SA Iconic IP Interests, LLC Research and Development Cadbury Caramello Kit Kat® Rolo® Good & Plenty Heath Jolly Rancher Milk Duds Payday Whoppers United States United States Minimum sales requirement exceeded in 2018 Minimum unit volume sales exceeded in 2018 Worldwide None We engage in a variety of research and development activities in a number of countries, including the United States, Mexico, Brazil, India and China. We develop new products, improve the quality of existing products, improve and modernize production processes, and develop and implement new technologies to enhance the quality and value of both current and proposed product lines. Information concerning our research and development expense is contained in Note 1 to the Consolidated Financial Statements. Food Quality and Safety Regulation The manufacture and sale of consumer food products is highly regulated. In the United States, our activities are subject to regulation by various government agencies, including the Food and Drug Administration, the Department of Agriculture, the Federal Trade Commission, the Department of Commerce and the Environmental Protection Agency, as well as various state and local agencies. Similar agencies also regulate our businesses outside of the United States. We believe our Product Excellence Program provides us with an effective product quality and safety program. This program is integral to our global supply chain platform and is intended to ensure that all products we purchase, manufacture and distribute are safe, are of high quality and comply with applicable laws and regulations. Through our Product Excellence Program, we evaluate our supply chain including ingredients, packaging, processes, products, distribution and the environment to determine where product quality and safety controls are necessary. We identify risks and establish controls intended to ensure product quality and safety. Various government agencies and third-party firms as well as our quality assurance staff conduct audits of all facilities that manufacture our products to assure effectiveness and compliance with our program and applicable laws and regulations. Environmental Considerations Beyond ordinary course operating and capital expenditures we make to comply with environmental laws and regulations, we have made a number of commitments to protect and reduce our impact on the environment in recent years, including efforts to protect forests and forested habitats and reduce emissions across our supply chain. The annual operating and capital expenditures associated with these ordinary course payments and additional commitments are not material with respect to our results of operations, capital expenditures or competitive position. 4 Employees As of December 31, 2018, we employed approximately 14,930 full-time and 1,490 part-time employees worldwide. Collective bargaining agreements covered approximately 5,780 employees. During 2019, agreements will be negotiated for certain employees at three facilities outside of the United States, comprising approximately 67% of total employees under collective bargaining agreements. We believe that our employee relations are generally good. Financial Information by Geographic Area Our principal operations and markets are located in the United States. The percentage of total consolidated net sales for our businesses outside of the United States was 16.1% for 2018, 16.7% for 2017 and 16.7% for 2016. The percentage of total long-lived assets outside of the United States was 21.7% as of December 31, 2018 and 25.2% as of December 31, 2017. Sustainability The Hershey Company’s commitment to sustainability started with our founder’s belief in responsible citizenship. He was a purpose-driven leader who believed we could use chocolate to create goodness in the world. This belief resulted in strong investment in local communities and the establishment of the Milton Hershey School for disadvantaged kids. We continue that legacy today through our sustainability strategy “The Shared Goodness Promise” by operating the business with sustainable practices, sourcing ingredients responsibly, protecting our environment, making a difference in our communities and helping kids globally reach their full potential. To learn more about our sustainability goals, progress and initiatives, you can access our full Sustainability Report at https://www.thehersheycompany.com/en_us/ shared-goodness/csr-reports.html. Available Information The Company's website address is www.thehersheycompany.com. We file or furnish annual, quarterly and current reports, proxy statements and other information with the United States Securities and Exchange Commission (“SEC”). You may obtain a copy of any of these reports, free of charge, from the Investors section of our website as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The SEC maintains an Internet site that also contains these reports at: www.sec.gov. In addition, copies of the Company's annual report will be made available, free of charge, on written request to the Company. We have a Code of Conduct that applies to our Board of Directors (“Board”) and all Company officers and employees, including, without limitation, our Chief Executive Officer and “senior financial officers” (including the Chief Financial Officer, Chief Accounting Officer and persons performing similar functions). You can obtain a copy of our Code of Conduct, as well as our Corporate Governance Guidelines and charters for each of the Board’s standing committees, from the Investors section of our website. If we change or waive any portion of the Code of Conduct that applies to any of our directors, executive officers or senior financial officers, we will post that information on our website. 5 Item 1A. RISK FACTORS Cautionary Note Regarding Forward-Looking Statements This Annual Report on Form 10-K, including the exhibits hereto and the information incorporated by reference herein, contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are subject to risks and uncertainties. Other than statements of historical fact, information regarding activities, events and developments that we expect or anticipate will or may occur in the future, including, but not limited to, information relating to our future growth and profitability targets and strategies designed to increase total shareholder value, are forward-looking statements based on management’s estimates, assumptions and projections. Forward-looking statements also include, but are not limited to, statements regarding our future economic and financial condition and results of operations, the plans and objectives of management and our assumptions regarding our performance and such plans and objectives. Many of the forward-looking statements contained in this document may be identified by the use of words such as “intend,” “believe,” “expect,” “anticipate,” “should,” “planned,” “projected,” “estimated” and “potential,” among others. Forward-looking statements contained in this Annual Report on Form 10-K are predictions only and actual results could differ materially from management’s expectations due to a variety of factors, including those described below. All forward-looking statements attributable to us or persons working on our behalf are expressly qualified in their entirety by such risk factors. The forward-looking statements that we make in this Annual Report on Form 10-K are based on management’s current views and assumptions regarding future events and speak only as of their dates. We assume no obligation to update developments of these risk factors or to announce publicly any revisions to any of the forward-looking statements that we make, or to make corrections to reflect future events or developments, except as required by the federal securities laws. Issues or concerns related to the quality and safety of our products, ingredients or packaging could cause a product recall and/or result in harm to the Company’s reputation, negatively impacting our operating results. In order to sell our iconic, branded products, we need to maintain a good reputation with our customers and consumers. Issues related to the quality and safety of our products, ingredients or packaging could jeopardize our Company’s image and reputation. Negative publicity related to these types of concerns, or related to product contamination or product tampering, whether valid or not, could decrease demand for our products or cause production and delivery disruptions. We may need to recall products if any of our products become unfit for consumption. In addition, we could potentially be subject to litigation or government actions, which could result in payments of fines or damages. Costs associated with these potential actions could negatively affect our operating results. Increases in raw material and energy costs along with the availability of adequate supplies of raw materials could affect future financial results. We use many different commodities for our business, including cocoa products, sugar, dairy products, peanuts, almonds, corn sweeteners, natural gas and fuel oil. Commodities are subject to price volatility and changes in supply caused by numerous factors, including: Commodity market fluctuations; Currency exchange rates; Imbalances between supply and demand; The effect of weather on crop yield; Speculative influences; Trade agreements among producing and consuming nations; Supplier compliance with commitments; Political unrest in producing countries; and Changes in governmental agricultural programs and energy policies. 6 Although we use forward contracts and commodity futures and options contracts where possible to hedge commodity prices, commodity price increases ultimately result in corresponding increases in our raw material and energy costs. If we are unable to offset cost increases for major raw materials and energy, there could be a negative impact on our financial condition and results of operations. Price increases may not be sufficient to offset cost increases and maintain profitability or may result in sales volume declines associated with pricing elasticity. We may be able to pass some or all raw material, energy and other input cost increases to customers by increasing the selling prices of our products or decreasing the size of our products; however, higher product prices or decreased product sizes may also result in a reduction in sales volume and/or consumption. If we are not able to increase our selling prices or reduce product sizes sufficiently, or in a timely manner, to offset increased raw material, energy or other input costs, including packaging, freight, direct labor, overhead and employee benefits, or if our sales volume decreases significantly, there could be a negative impact on our financial condition and results of operations. Market demand for new and existing products could decline. We operate in highly competitive markets and rely on continued demand for our products. To generate revenues and profits, we must sell products that appeal to our customers and to consumers. Our continued success is impacted by many factors, including the following: Effective retail execution; Appropriate advertising campaigns and marketing programs; Our ability to secure adequate shelf space at retail locations; Our ability to drive sustainable innovation and maintain a strong pipeline of new products in the confectionery and broader snacking categories; Changes in product category consumption; Our response to consumer demographics and trends, including but not limited to, trends relating to store trips and the impact of the growing digital commerce channel; and Consumer health concerns, including obesity and the consumption of certain ingredients. There continues to be competitive product and pricing pressures in the markets where we operate, as well as challenges in maintaining profit margins. We must maintain mutually beneficial relationships with our key customers, including retailers and distributors, to compete effectively. Our largest customer, McLane Company, Inc., accounted for approximately 28% of our total net sales in 2018. McLane Company, Inc. is one of the largest wholesale distributors in the United States to convenience stores, drug stores, wholesale clubs and mass merchandisers, including Wal-Mart Stores, Inc. Increased marketplace competition could hurt our business. The global confectionery packaged goods industry is intensely competitive and consolidation in this industry continues. Some of our competitors are large companies that have significant resources and substantial international operations. We continue to experience increased levels of in-store activity for other snack items, which has pressured confectionery category growth. In order to protect our existing market share or capture increased market share in this highly competitive retail environment, we may be required to increase expenditures for promotions and advertising, and must continue to introduce and establish new products. Due to inherent risks in the marketplace associated with advertising and new product introductions, including uncertainties about trade and consumer acceptance, increased expenditures may not prove successful in maintaining or enhancing our market share and could result in lower sales and profits. In addition, we may incur increased credit and other business risks because we operate in a highly competitive retail environment. 7 Disruption to our manufacturing operations or supply chain could impair our ability to produce or deliver finished products, resulting in a negative impact on our operating results. Approximately 71% of our manufacturing capacity is located in the United States. Disruption to our global manufacturing operations or our supply chain could result from, among other factors, the following: Natural disaster; Pandemic outbreak of disease; Weather; Fire or explosion; Terrorism or other acts of violence; Labor strikes or other labor activities; Unavailability of raw or packaging materials; Operational and/or financial instability of key suppliers, and other vendors or service providers; and Suboptimal production planning which could impact our ability to cost-effectively meet product demand. We believe that we take adequate precautions to mitigate the impact of possible disruptions. We have strategies and plans in place to manage disruptive events if they were to occur, including our global supply chain strategies and our principle-based global labor relations strategy. If we are unable, or find that it is not financially feasible, to effectively plan for or mitigate the potential impacts of such disruptive events on our manufacturing operations or supply chain, our financial condition and results of operations could be negatively impacted if such events were to occur. Our financial results may be adversely impacted by the failure to successfully execute or integrate acquisitions, divestitures and joint ventures. From time to time, we may evaluate potential acquisitions, divestitures or joint ventures that align with our strategic objectives. The success of such activity depends, in part, upon our ability to identify suitable buyers, sellers or business partners; perform effective assessments prior to contract execution; negotiate contract terms; and, if applicable, obtain government approval. These activities may present certain financial, managerial, staffing and talent, and operational risks, including diversion of management’s attention from existing core businesses; difficulties integrating or separating businesses from existing operations; and challenges presented by acquisitions or joint ventures which may not achieve sales levels and profitability that justify the investments made. If the acquisitions, divestitures or joint ventures are not successfully implemented or completed, there could be a negative impact on our financial condition, results of operations and cash flows. We completed the acquisitions of Amplify Snack Brands, Inc. and Pirate Brands in January 2018 and October 2018, respectively. While we believe significant operating synergies can be obtained in connection with these acquisitions, achievement of these synergies will be driven by our ability to successfully leverage Hershey's resources, expertise, capability-building, distribution locations and customer base. In addition, the acquisitions of Amplify and Pirate Brands are important steps in our journey to expand our breadth in snacking, as they should enable us to bring scale and category management capabilities to a key sub-segment of the warehouse snack aisle. If we are unable to successfully couple Hershey’s scale and expertise in brand building with Amplify and Pirate Brands' existing operations, it may impact our ability to expand our snacking footprint at our desired pace. Changes in governmental laws and regulations could increase our costs and liabilities or impact demand for our products. Changes in laws and regulations and the manner in which they are interpreted or applied may alter our business environment. These negative impacts could result from changes in food and drug laws, laws related to advertising and marketing practices, accounting standards, taxation requirements, competition laws, employment laws and environmental laws, among others. It is possible that we could become subject to additional liabilities in the future resulting from changes in laws and regulations that could result in an adverse effect on our financial condition and results of operations. 8 Political, economic and/or financial market conditions could negatively impact our financial results. Our operations are impacted by consumer spending levels and impulse purchases which are affected by general macroeconomic conditions, consumer confidence, employment levels, the availability of consumer credit and interest rates on that credit, consumer debt levels, energy costs and other factors. Volatility in food and energy costs, sustained global recessions, broad political instability, rising unemployment and declines in personal spending could adversely impact our revenues, profitability and financial condition. Changes in financial market conditions may make it difficult to access credit markets on commercially acceptable terms, which may reduce liquidity or increase borrowing costs for our Company, our customers and our suppliers. A significant reduction in liquidity could increase counterparty risk associated with certain suppliers and service providers, resulting in disruption to our supply chain and/or higher costs, and could impact our customers, resulting in a reduction in our revenue, or a possible increase in bad debt expense. Our international operations may not achieve projected growth objectives, which could adversely impact our overall business and results of operations. In 2018, 2017 and 2016, respectively, we derived approximately 16%, 17% and 17% of our net sales from customers located outside of the United States. Additionally, approximately 22% of our total long-lived assets were located outside of the United States as of December 31, 2018. As part of our strategy, we have made investments outside of the United States, particularly in Canada, China, Malaysia, Mexico, Brazil and India. As a result, we are subject to risks and uncertainties relating to international sales and operations, including: Unforeseen global economic and environmental changes resulting in business interruption, supply constraints, inflation, deflation or decreased demand; Inability to establish, develop and achieve market acceptance of our global brands in international markets; Difficulties and costs associated with compliance and enforcement of remedies under a wide variety of complex laws, treaties and regulations; Unexpected changes in regulatory environments; Political and economic instability, including the possibility of civil unrest, terrorism, mass violence or armed conflict; Nationalization of our properties by foreign governments; Tax rates that may exceed those in the United States and earnings that may be subject to withholding requirements and incremental taxes upon repatriation; Potentially negative consequences from changes in tax laws; The imposition of tariffs, quotas, trade barriers, other trade protection measures and import or export licensing requirements; Increased costs, disruptions in shipping or reduced availability of freight transportation; The impact of currency exchange rate fluctuations between the U.S. dollar and foreign currencies; Failure to gain sufficient profitable scale in certain international markets resulting in an inability to cover manufacturing fixed costs or resulting in losses from impairment or sale of assets; and Failure to recruit, retain and build a talented and engaged global workforce. If we are not able to achieve our projected international growth objectives and mitigate the numerous risks and uncertainties associated with our international operations, there could be a negative impact on our financial condition and results of operations. Disruptions, failures or security breaches of our information technology infrastructure could have a negative impact on our operations. Information technology is critically important to our business operations. We use information technology to manage all business processes including manufacturing, financial, logistics, sales, marketing and administrative functions. These processes collect, interpret and distribute business data and communicate internally and externally with employees, suppliers, customers and others. 9 We are regularly the target of attempted cyber and other security threats. Therefore, we continuously monitor and update our information technology networks and infrastructure to prevent, detect, address and mitigate the risk of unauthorized access, misuse, computer viruses and other events that could have a security impact. We invest in industry standard security technology to protect the Company’s data and business processes against risk of data security breach and cyber attack. Our data security management program includes identity, trust, vulnerability and threat management business processes as well as adoption of standard data protection policies. We measure our data security effectiveness through industry accepted methods and remediate significant findings. Additionally, we certify our major technology suppliers and any outsourced services through accepted security certification standards. We maintain and routinely test backup systems and disaster recovery, along with external network security penetration testing by an independent third party as part of our business continuity preparedness. We also have processes in place to prevent disruptions resulting from the implementation of new software and systems of the latest technology. While we have been subject to cyber attacks and other security breaches, these incidents did not have a significant impact on our business operations. We believe our security technology tools and processes provide adequate measures of protection against security breaches and in reducing cybersecurity risks. Nevertheless, despite continued vigilance in these areas, disruptions in or failures of information technology systems are possible and could have a negative impact on our operations or business reputation. Failure of our systems, including failures due to cyber attacks that would prevent the ability of systems to function as intended, could cause transaction errors, loss of customers and sales, and could have negative consequences to our Company, our employees and those with whom we do business. This in turn could have a negative impact on our financial condition and results or operations. In addition, the cost to remediate any damages to our information technology systems suffered as a result of a cyber attack could be significant. We might not be able to hire, engage and retain the talented global workforce we need to drive our growth strategies. Our future success depends upon our ability to identify, hire, develop, engage and retain talented personnel across the globe. Competition for global talent is intense, and we might not be able to identify and hire the personnel we need to continue to evolve and grow our business. In particular, if we are unable to hire the right individuals to fill new or existing senior management positions as vacancies arise, our business performance may be impacted. Activities related to identifying, recruiting, hiring and integrating qualified individuals require significant time and attention. We may also need to invest significant amounts of cash and equity to attract talented new employees, and we may never realize returns on these investments. In addition to hiring new employees, we must continue to focus on retaining and engaging the talented individuals we need to sustain our core business and lead our developing businesses into new markets, channels and categories. This may require significant investments in training, coaching and other career development and retention activities. If we are not able to effectively retain and grow our talent, our ability to achieve our strategic objectives will be adversely affected, which may impact our financial condition and results of operations. We may not fully realize the expected costs savings and/or operating efficiencies associated with our strategic initiatives or restructuring programs, which may have an adverse impact on our business. We depend on our ability to evolve and grow, and as changes in our business environment occur, we may adjust our business plans by introducing new strategic initiatives or restructuring programs to meet these changes. Recently introduced strategic initiatives include our efforts to continue to expand our presence in digital commerce, to transform our manufacturing, commercial and corporate operations through digital technologies and to enhance our data analytics capabilities to develop new commercial insights. If we are not able to capture our share of the expanding digital commerce market, if we do not adequately leverage technology to improve operating efficiencies or if we are unable to develop the data analytics capabilities needed to generate actionable commercial insights, our business performance may be impacted, which may negatively impact our financial condition and results of operations. Additionally, from time to time we implement business realignment activities to support key strategic initiatives designed to maintain long-term sustainable growth, such as the Margin for Growth Program we commenced in the first quarter of 2017. These programs are intended to increase our operating effectiveness and efficiency, to reduce our costs and/or to generate savings that can be reinvested in other areas of our business. We cannot guarantee that we will 10 be able to successfully implement these strategic initiatives and restructuring programs, that we will achieve or sustain the intended benefits under these programs, or that the benefits, even if achieved, will be adequate to meet our long- term growth and profitability expectations, which could in turn adversely affect our business. Complications with the design or implementation of our new enterprise resource planning system could adversely impact our business and operations. We rely extensively on information systems and technology to manage our business and summarize operating results. We are in the process of a multi-year implementation of a new global enterprise resource planning (“ERP”) system. This ERP system will replace our existing operating and financial systems. The ERP system is designed to accurately maintain the Company’s financial records, enhance operational functionality and provide timely information to the Company’s management team related to the operation of the business. The ERP system implementation process has required, and will continue to require, the investment of significant personnel and financial resources. We may not be able to successfully implement the ERP system without experiencing delays, increased costs and other difficulties. If we are unable to successfully design and implement the new ERP system as planned, our financial positions, results of operations and cash flows could be negatively impacted. Additionally, if we do not effectively implement the ERP system as planned or the ERP system does not operate as intended, the effectiveness of our internal control over financial reporting could be adversely affected or our ability to assess those controls adequately could be delayed. Item 1B. UNRESOLVED STAFF COMMENTS None. Item 2. PROPERTIES Our principal properties include the following: Country United States Location Hershey, Pennsylvania (2 principal plants) Type Manufacturing—confectionery products and pantry items Status (Own/Lease) Own Lancaster, Pennsylvania Manufacturing—confectionery products Hazleton, Pennsylvania Manufacturing—confectionery products Robinson, Illinois Manufacturing—confectionery products and pantry items Stuarts Draft, Virginia Manufacturing—confectionery products and pantry items Edwardsville, Illinois Distribution Palmyra, Pennsylvania Distribution Ogden, Utah Kennesaw, Georgia Distribution Distribution New York, New York Retail Brantford, Ontario Distribution Monterrey, Mexico Manufacturing—confectionery products El Salto, Mexico Manufacturing—confectionery products and pantry items Canada Mexico Malaysia Johor, Malaysia Manufacturing—confectionery products Own Own Own Own Own Own Own Lease Lease Own (1) Own Own Own (1) We have an agreement with the Ferrero Group for the use of a warehouse and distribution facility of which the Company has been deemed to be the owner for accounting purposes. In addition to the locations indicated above, we also own or lease several other properties and buildings worldwide which we use for manufacturing, sales, distribution and administrative functions. Our facilities are well maintained and generally have adequate capacity to accommodate seasonal demands, changing product mixes and certain additional growth. We regularly improve our facilities to incorporate the latest technologies. The largest facilities are located in Hershey, Lancaster and Hazleton, Pennsylvania; Monterrey and El Salto, Mexico; and Stuarts Draft, 11 Virginia. The U.S., Canada and Mexico facilities in the table above primarily support our North America segment, while the Malaysia facility primarily serve our International and Other segment. As discussed in Note 12 to the Consolidated Financial Statements, we do not manage our assets on a segment basis given the integration of certain manufacturing, warehousing, distribution and other activities in support of our global operations. Item 3. LEGAL PROCEEDINGS The Company is subject to certain legal proceedings and claims arising out of the ordinary course of our business, which cover a wide range of matters including trade regulation, product liability, advertising, contracts, environmental issues, patent and trademark matters, labor and employment matters and tax. While it is not feasible to predict or determine the outcome of such proceedings and claims with certainty, in our opinion these matters, both individually and in the aggregate, are not expected to have a material effect on our financial condition, results of operations or cash flows. Item 4. MINE SAFETY DISCLOSURES Not applicable. 12 SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the Company, their positions and, as of February 15, 2019, their ages are set forth below. Name Damien Atkins (1) Michele G. Buck Javier H. Idrovo Patricia A. Little (2) Terence L. O’Day Todd W. Tillemans (3) Kevin R. Walling Mary Beth West (4) Age 48 57 51 58 69 57 53 56 Positions Held During the Last Five Years Senior Vice President, General Counsel and Secretary (August 2018) President and Chief Executive Officer (March 2017); Executive Vice President, Chief Operating Officer (June 2016); President, North America (May 2013); Senior Vice President, Chief Growth Officer (September 2011) Chief Accounting Officer (August 2015); Senior Vice President, Finance and Planning (September 2011) Senior Vice President, Chief Financial Officer (March 2015) Senior Vice President, Chief Product Supply and Technology Officer (March 2017); Senior Vice President, Chief Supply Chain Officer (May 2013); Senior Vice President, Global Operations (December 2008) President, U.S. (April 2017) Senior Vice President, Chief Human Resources Officer (June 2011) Senior Vice President, Chief Growth Officer (May 2017) There are no family relationships among any of the above-named officers of our Company. (1) Mr. Atkins was elected Senior Vice President, General Counsel and Secretary effective August 13, 2018. Prior to joining our Company he was General Counsel and Corporate Secretary at Panasonic Corporation of North America, Inc. (May 2015) and Senior Vice President, Deputy General Counsel (Corporate) and Chief Compliance Officer at AOL, Inc. (July 2010). (2) Ms. Little was elected Senior Vice President, Chief Financial Officer effective March 16, 2015. Prior to joining our Company she was Executive Vice President and Chief Financial Officer at Kelly Services, Inc. (July 2008). On August 16, 2018, Ms. Little informed the Company of her intention to retire on a date to be determined in spring 2019. The Company has initiated a search to identify Ms. Little's replacement. (3) Mr. Tillemans was elected President, U.S. effective April 3, 2017. Prior to joining our Company he was President, Customer Development U.S. at Unilever N.V. (December 2012). (4) Ms. West was elected Senior Vice President, Chief Growth Officer effective May 1, 2017. Prior to joining our Company she was Executive Vice President, Chief Customer and Marketing Officer at J.C. Penney (June 2015) and Executive Vice President, Chief Category and Marketing Officer at Mondelez Global Inc. (October 2012). Our Executive Officers are generally elected each year at the organization meeting of the Board in May. 13 PART II Item 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Our Common Stock is listed and traded principally on the New York Stock Exchange under the ticker symbol “HSY.” The Class B Common Stock (“Class B Stock”) is not publicly traded. The closing price of our Common Stock on December 31, 2018, was $107.18. There were 26,532 stockholders of record of our Common Stock and 6 stockholders of record of our Class B Stock as of December 31, 2018. We paid $562.5 million in cash dividends on our Common Stock and Class B Stock in 2018 and $526.3 million in 2017. The annual dividend rate on our Common Stock in 2018 was $2.756 per share. Information regarding dividends paid and the quarterly high and low market prices for our Common Stock and dividends paid for our Class B Stock for the two most recent fiscal years is disclosed in Note 18 to the Consolidated Financial Statements. On January 29, 2019, our Board declared a quarterly dividend of $0.722 per share of Common Stock payable on March 15, 2019, to stockholders of record as of February 22, 2019. It is the Company’s 357th consecutive quarterly Common Stock dividend. A quarterly dividend of $0.656 per share of Class B Stock also was declared. Unregistered Sales of Equity Securities and Use of Proceeds None. Issuer Purchases of Equity Securities In January 2016, our Board approved a $500 million share repurchase authorization. This program was completed in the first quarter of 2018. In October 2017, our Board approved an additional $100 million share repurchase authorization, to commence after the existing 2016 authorization was completed. As of December 31, 2018, approximately $60 million remained available for repurchases of our Common Stock under this program. The share repurchase program does not have an expiration date. In July 2018, our Board approved an additional $500 million share repurchase authorization (excluded from amount above). This program is to commence after the existing 2017 authorization is completed and is to be utilized at management's discretion. In August 2017, the Company entered into a Stock Purchase Agreement with Hershey Trust Company, as trustee for the Milton Hershey School Trust (the “Trust”), pursuant to which the Company agreed to purchase 1,500,000 shares of the Company’s common stock from the Trust at a price equal to $106.01 per share, for a total purchase price of $159 million. In November 2018, the Company entered into a Stock Purchase Agreement with Hershey Trust Company, as trustee for the Trust, pursuant to which the Company agreed to purchase 450,000 shares of the Company’s common stock from the Trust at a price equal to $106.30 per share, for a total purchase price of $47.8 million. 14 Stockholder Return Performance Graph The following graph compares our cumulative total stockholder return (Common Stock price appreciation plus dividends, on a reinvested basis) over the last five fiscal years with the Standard & Poor’s 500 Index and the Standard & Poor’s Packaged Foods Index. Comparison of 5 Year Cumulative Total Return* Among The Hershey Company, the S&P 500 Index, and the S&P Packaged Foods Index *$100 invested on December 31, 2013 in stock or index, including reinvestment of dividends. Company/Index The Hershey Company S&P 500 Index S&P 500 Packaged Foods Index 2013 2014 2015 2016 2017 2018 $ $ $ 100 100 100 $ $ $ 109 114 112 $ $ $ 96 115 131 $ $ $ 114 129 143 $ $ $ 128 157 145 $ $ $ 124 150 118 December 31, The stock price performance included in this graph is not necessarily indicative of future stock price performance. 15 Item 6. SELECTED FINANCIAL DATA FIVE-YEAR CONSOLIDATED FINANCIAL SUMMARY (All dollar and share amounts in thousands except market price and per share statistics) 2018 2017 2016 2015 2014 Summary of Operations Net Sales Cost of Sales (1) Selling, Marketing and Administrative (1) Goodwill, Long-Lived & Intangible Asset Impairment Charges Business Realignment Costs (1) Interest Expense, Net Provision for Income Taxes $ 7,791,069 $ 4,215,744 $ 1,874,829 $ $ $ $ 57,729 19,103 138,837 239,010 Net Income Attributable to The Hershey Company $ 1,177,562 7,515,426 4,060,050 1,885,492 208,712 47,763 98,282 354,131 782,981 3.79 3.66 3.44 3.44 151,625 60,620 213,742 387,466 2.548 140,394 2.316 211,592 50,261 541,293 7,440,181 4,270,642 1,891,305 4,204 18.857 90,143 379,437 720,044 3.45 3.34 3.15 3.14 153,519 60,620 215,304 369.292 2.402 132,394 2.184 231,735 70,102 521,479 7,386,626 4,000,071 1,945,361 280,802 84.628 105,773 388,896 512,951 2.40 2.32 2.19 2.19 158,471 60,620 220,651 352,953 2.236 123,179 2.032 197,054 47,874 561,644 7,421,768 4,085,602 1,900,970 15,900 29,721 83,532 459,131 846,912 3.91 3.77 3.54 3.52 161,935 60,620 224,837 328,752 2.040 111,662 1.842 176,312 35,220 570,223 5.76 5.58 5.24 5.22 149,379 60,614 210,989 412,491 2.756 151,789 2.504 231,012 64,132 479,908 $ $ $ $ $ $ $ $ $ $ $ $ Net Income Per Share: —Basic—Common Stock —Diluted—Common Stock —Basic—Class B Stock —Diluted—Class B Stock Weighted-Average Shares Outstanding: —Basic—Common Stock —Basic—Class B Stock —Diluted—Common Stock Dividends Paid on Common Stock Per Share Dividends Paid on Class B Stock Per Share Depreciation Amortization Advertising Year-End Position and Statistics Capital Additions (including software) Total Assets 328,601 257,675 269,476 356,810 370,789 $ 7,703,020 5,553,726 5,524,333 5,344,371 5,622,870 Short-term Debt and Current Portion of Long-term Debt $ 1,203,316 859,457 632,714 Long-term Portion of Debt Stockholders’ Equity Full-time Employees Stockholders’ Data $ 3,254,280 2,061,023 2,347,455 $ 1,407,266 14,930 931,565 15,360 827,687 16,300 863,436 1,557,091 1,047,462 19,060 635,501 1,542,317 1,519,530 20,800 Outstanding Shares of Common Stock and Class B Stock at Year-end Market Price of Common Stock at Year-end Price Range During Year (high) Price Range During Year (low) 209,729 210,861 212,260 216,777 221,045 $ $ $ 107.18 114.06 89.54 113.51 115.96 102.87 103.43 113.89 83.32 89.27 110.78 83.58 103.93 108.07 88.15 (1) In accordance with ASU No. 2017-07, the non-service cost components of net periodic benefit cost relating to the Company's pension and other post retirement benefit plans have been reclassified to the Other (income) expense, net caption for the years ended December 31, 2017, 2016 and 2015 to conform to the 2018 presentation. Other (income) expense, net is not presented above. 16 Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Management's Discussion and Analysis (“MD&A”) is intended to provide an understanding of Hershey's financial condition, results of operations and cash flows by focusing on changes in certain key measures from year to year. The MD&A should be read in conjunction with our Consolidated Financial Statements and accompanying Notes included in Item 8 of this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward- looking statements as a result of various factors, including those discussed elsewhere in this Annual Report on Form 10-K, particularly in Item 1A. “Risk Factors.” The MD&A is organized in the following sections: • Business Model and Growth Strategy • Overview • Non-GAAP Information • Consolidated Results of Operations • • Segment Results Financial Condition • Critical Accounting Policies and Estimates BUSINESS MODEL AND GROWTH STRATEGY We are the largest producer of quality chocolate in North America, a leading snack maker in the United States and a global leader in chocolate and non-chocolate confectionery known for bringing goodness to the world through chocolate, sweets, mints, gum and other great tasting snacks. We market, sell and distribute our products under more than 80 brand names in approximately 90 countries worldwide. We report our operations through two segments: North America and International and Other. We believe we have a set of differentiated capabilities that when integrated, can create advantage in the marketplace. Our focus on the following key elements of our strategy should enable us to deliver top-tier growth and industry- leading shareholder returns. • Reignite Core Confection and Expand Breadth in Snacking. We are taking actions to deepen our consumer connections, deliver meaningful innovation and reinvent the shopping experience, while also pursuing opportunities to diversify our portfolio and establish a strong presence across the broader snacking continuum. Our products frequently play an important role in special meaningful moments among family and friends. Seasons are an important part of our business model and for consumers, they are highly anticipated, cherished special times, centered around traditions. For us, it’s an opportunity for our brands to be part of many connections during the year when family and friends gather. Innovation is an important lever in this variety seeking category and we are leveraging work from our proprietary demand landscape analytical tool to shape our future innovation and make it more impactful. We are becoming more disciplined in our focus on platform innovation, which should enable sustainable growth over time and significant extensions to our core. Through our shopper insights work, we are currently collaborating with our retail partners on in-aisle strategies that we believe will breathe life into the center of the store and transform the shopping experience by improving paths to purchase, stopping power, navigation, engagement and conversion. We have also responded to the changing retail environment by investing in digital commerce capabilities. To expand our breadth in snacking, we are focused on expanding the boundaries of our core confection brands to capture new snacking occasions and increasing our exposure into new snack categories through acquisitions. Our expansion into snacking is being fueled by the recent acquisitions of Amplify and Pirate Brands in January 2018 and October 2018, respectively. 17 • Reallocate Resources to Expand Margins and Fuel Growth. We are focused on ensuring that we efficiently allocate our resources to the areas with the highest potential for profitable growth. We believe this will enable margin expansion and position us within the top quartile of operating income margin relative to our peers. We have reset our international investment, while holding fast to our belief that our targeted emerging market strategy will deliver long-term, profitable growth. The uncertain macroeconomic environment in many of these markets is expected to continue and we aim to ensure our investments in these international markets are appropriate relative to the size of the opportunity. We have heightened our selling, marketing and administrative expense discipline in an effort to make improvements to our cost structure without jeopardizing topline growth. Our expectation is that advertising and related marketing expense will grow roughly in line with sales. We will continue to optimize our cost of goods sold through pricing activities and programs like network supply chain optimization and lean manufacturing. • Strengthen Capabilities & Leverage Technology for Commercial Advantage. In order to generate actionable insights, we must acquire, integrate, access and utilize vast sources of the right data in an effective manner. We are working to leverage our advanced analytical techniques to gain a deep understanding of consumers, our customers, our shoppers, our end-to-end supply chain, our retail environment and key economic drivers at both a macro and precision level. In addition, we are in the process of transforming our enterprise resource planning system, which will enable employees to work more efficiently and effectively. OVERVIEW The Overview presented below is an executive-level summary highlighting the key trends and measures on which the Company’s management focuses in evaluating its financial condition and operating performance. Certain earnings and performance measures within the Overview include financial information determined on a non-GAAP basis, which aligns with how management internally evaluates the Company's results of operations, determines incentive compensation, and assesses the impact of known trends and uncertainties on the business. A detailed reconciliation of the non-GAAP financial measures referenced herein to their nearest comparable GAAP financial measures follows this summary. For a detailed analysis of the Company's operations prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"), referred to as "reported" herein, refer to the discussion and analysis in the Consolidated Results of Operations. In 2018, we made strong progress on our strategic initiatives, including strengthening our U.S. core confection business, expanding our snacks portfolio to capture incremental consumer occasions and optimizing the product portfolio across various international markets. We continued to generate solid operating cash flow, totaling approximately $1.6 billion in 2018, which affords the Company significant financial flexibility. In January 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, Paqui and Tyrrells. 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. The business enables us to capture more consumer snacking occasions by contributing a new portfolio of brands. On July 5, 2018, we sold the Tyrrells business in order to focus on the U.S. growth opportunities. In October 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. Our full year 2018 net sales totaled $7,791.1 million, an increase of 3.7%, versus $7,515.4 million for the comparable period of 2017. Excluding a 0.2% impact from unfavorable foreign exchange rates, our net sales increased 3.9%. Net sales growth was driven primarily by the revenue contributions from Amplify and Pirate Brands. Our reported gross margin was 45.9% for the full year 2018, a decrease of 10 basis points compared to the full year 2017. Our 2018 non-GAAP gross margin was 44.0%, a decrease of 160 basis points compared to the full year 2017 due to higher freight and logistics costs, unfavorable mix and additional plant costs related to new production lines. 18 Our full year 2018 reported operating profit and reported operating profit margin totaled $1,623.7 million and 20.8%, respectively, compared to full year 2017 reported operating profit and reported operating profit margin of $1,313.4 million and 17.5%, respectively. From a non-GAAP perspective, full year 2018 adjusted operating profit and adjusted operating profit margin totaled $1,607.1 million and 20.6%, respectively, compared to full year 2017 adjusted operating profit and adjusted operating profit margin of $1,556.5 million and 20.7%, respectively. The decrease in our adjusted operating profit margin was primarily due to lower non-GAAP gross margin. Our full year 2018 reported net income and reported EPS-diluted totaled $1,177.6 million and $5.58, respectively, compared to full year 2017 reported net income and reported EPS-diluted of $783.0 million and $3.66, respectively. From a non-GAAP perspective, full year 2018 adjusted net income was $1,130.1 million, an increase of 12.8% versus adjusted net income of $1,001.5 million in 2017. Our adjusted EPS-diluted for the full year 2018 was $5.36 compared to $4.69 for the same period of 2017, an increase of 14.3%. The increases in our adjusted net income and adjusted EPS-diluted in 2018 compared to 2017 were primarily due to slightly lower selling, marketing and administrative expenses, as well as a lower 2018 tax rate as a result of U.S. tax reform, partially offset by unfavorable gross profit. NON-GAAP INFORMATION Comparability of Certain Financial Measures The comparability of certain of our financial measures is impacted by unallocated mark-to-market (gains) losses on commodity derivatives, pension settlement charges relating to company-directed initiatives, costs associated with business realignment activities, costs relating to the integration of acquisitions, impairment of long-lived assets, the one-time impact of U.S. tax reform, the gain realized on the sale of a trademark and the gain recorded upon settlement of a liability in conjunction with the purchase of the remaining 20% of the outstanding shares of Shanghai Golden Monkey Food Joint Stock Co., Ltd. ("SGM"). To provide additional information to investors to facilitate the comparison of past and present performance, we use non-GAAP financial measures within MD&A that exclude the financial impact of these activities. These non-GAAP financial measures are used internally by management in evaluating results of operations and determining incentive compensation, and in assessing the impact of known trends and uncertainties on our business, but they are not intended to replace the presentation of financial results in accordance with GAAP. A reconciliation of the non-GAAP financial measures referenced in MD&A to their nearest comparable GAAP financial measures as presented in the Consolidated Statements of Income is provided below. Explanatory Note In conjunction with the adoption of ASU 2017-07, Compensation-Retirement Benefits (Topic 715), in the first quarter of 2018, the Company elected to discontinue its practice of excluding the non-service related components of its net periodic benefit cost in deriving its non-GAAP financial measures, with a minor exception. Historically, the Company excluded from its non-GAAP results the following components relating to its pension benefit plans: interest cost, expected return on plan assets, amortization of net loss (gain), and settlement and curtailment charges. The Company did not historically exclude from its non-GAAP results the non-service related components relating to its other post retirement benefit plans. Starting with the first quarter of 2018, the Company will continue to exclude from its non- GAAP results the portion of pension settlement and/or curtailment charges relating to Company-directed initiatives, such as significant business realignment events and benefit plan terminations or amendments. As a result of this change, the non-GAAP reconciliations presented for the years ended December 31, 2017 and 2016 that follow have been revised to conform to this updated presentation. The revision in the Company’s determination of non-GAAP earnings resulted in a reduction of $0.07 to adjusted earnings per share-diluted from $4.76 to $4.69 for 2017 and a reduction of $0.08 to adjusted earnings per share-diluted from $4.41 to $4.33 for 2016. 19 Reconciliation of Certain Non-GAAP Financial Measures Consolidated results In thousands except per share data Reported gross profit Derivative mark-to-market (gains) losses Business realignment activities Acquisition-related costs Non-GAAP gross profit Reported operating profit Derivative mark-to-market (gains) losses Business realignment activities Acquisition-related costs Long-lived and intangible asset impairment charges Gain on sale of licensing rights Non-GAAP operating profit Reported provision for income taxes Derivative mark-to-market (gains) losses* Business realignment activities* Acquisition-related costs* Pension settlement charges relating to Company-directed initiatives* Long-lived and intangible asset impairment charges* Impact of U.S. tax reform Gain on sale of licensing rights* Non-GAAP provision for income taxes Reported net income Derivative mark-to-market (gains) losses Business realignment activities Acquisition-related costs Pension settlement charges relating to Company-directed initiatives Long-lived and intangible asset impairment charges Impact of U.S. tax reform Noncontrolling interest share of business realignment and impairment charges Settlement of SGM liability Gain on sale of licensing rights Non-GAAP net income For the years ended December 31, 2017 2018 2016 $ $ $ $ $ $ $ 3,575,325 (168,263) 11,323 6,194 3,424,579 1,623,664 (168,263) 51,827 44,829 57,729 (2,658) 1,607,128 239,010 (15,778) 12,961 9,105 1,347 15,875 7,754 (1,203) 269,071 1,177,562 (152,485) 38,866 35,724 4,108 41,854 (7,754) $ $ $ $ $ $ $ 3,455,376 (35,292) 5,147 — 3,425,231 1,313,409 (35,292) 69,359 311 208,712 — 1,556,499 354,131 (4,746) 18,337 118 4,148 23,292 (32,467) — 362,813 782,981 (30,546) 51,022 193 6,796 185,420 32,467 (6,348) — (1,455) 1,130,072 $ (26,795) — — 1,001,538 $ 3,169,539 163,238 58,106 — 3,390,883 1,255,173 163,238 93,902 6,480 4,204 — 1,522,997 379,437 20,500 13,957 2,456 5,181 1,157 — — 422,688 720,044 142,738 79,945 4,024 8,488 3,047 — — (26,650) — 931,636 $ $ $ $ $ $ $ $ 20 For the years ended December 31, 2017 2018 2016 Reported EPS - Diluted Derivative mark-to-market (gains) losses Business realignment activities Acquisition-related costs Pension settlement charges relating to Company-directed initiatives Long-lived and intangible asset impairment charges Impact of U.S. tax reform Noncontrolling interest share of business realignment and impairment charges Settlement of SGM liability Gain on sale of licensing rights Non-GAAP EPS - Diluted $ $ 5.58 (0.72) 0.18 0.18 0.02 0.20 (0.04) (0.03) — (0.01) 5.36 $ $ $ 3.66 (0.14) 0.25 — 0.02 0.87 0.15 (0.12) — — 4.69 $ 3.34 0.66 0.38 0.02 0.04 0.01 — — (0.12) — 4.33 * The tax effect for each adjustment is determined by calculating the tax impact of the adjustment on the Company's quarterly effective tax rate. In the assessment of our results, we review and discuss the following financial metrics that are derived from the reported and non-GAAP financial measures presented above: As reported gross margin Non-GAAP gross margin (1) As reported operating profit margin Non-GAAP operating profit margin (2) As reported effective tax rate Non-GAAP effective tax rate (3) For the years ended December 31, 2018 2017 2016 45.9% 44.0% 20.8% 20.6% 17.0% 19.2% 46.0% 45.6% 17.5% 20.7% 31.9% 26.7% 42.6% 45.6% 16.9% 20.5% 34.5% 31.3% (1) Calculated as non-GAAP gross profit as a percentage of net sales for each period presented. (2) Calculated as non-GAAP operating profit as a percentage of net sales for each period presented. (3) Calculated as non-GAAP provision for income taxes as a percentage of non-GAAP income before taxes (calculated as non-GAAP operating profit minus non-GAAP interest expense, net plus or minus non-GAAP other (income) expense, net). Details of the activities impacting comparability that are presented as reconciling items to derive the non-GAAP financial measures in the tables above are as follows: Mark-to-market (gains) losses on commodity derivatives The mark-to-market (gains) losses on commodity derivatives are recorded as unallocated and excluded from adjusted results until such time as the related inventory is sold, at which time the corresponding (gains) losses are reclassified from unallocated to segment income. Since we often purchase commodity contracts to price inventory requirements in future years, we make this adjustment to facilitate the year-over-year comparison of cost of sales on a basis that matches the derivative gains and losses with the underlying economic exposure being hedged for the period. For the years ended December 31, 2018, 2017 and 2016, the net adjustment recognized within unallocated was a gain of $168.3 million, a gain of $35.3 million and a loss of $163.2 million, respectively. See Note 12 to the Consolidated Financial Statements for more information. 21 Business realignment activities We periodically undertake restructuring and cost reduction activities as part of ongoing efforts to enhance long-term profitability. For the years ended December 31, 2018, 2017 and 2016, we incurred $51.8 million, $69.4 million and $93.9 million, respectively, of pre-tax costs related to business realignment activities. See Note 8 to the Consolidated Financial Statements for more information. Acquisition-related costs For the year ended December 31, 2018, we incurred expenses totaling $44.8 million related to the acquisitions of Amplify and Pirate Brands. This primarily includes legal and consultant fees, as well as severance and other costs relating to the integration of the businesses. For the years ended December 31, 2017 and 2016, we incurred expenses totaling $0.3 million and $6.5 million, respectively, related to integration of the 2016 acquisition of Ripple Brand Collective, LLC, as we incorporated this business into our operating practices and information systems. Pension settlement charges related to Company-directed initiatives In 2018, settlement charges in our hourly defined benefit plan were triggered by lump sum withdrawals by employees retiring or leaving the Company under a voluntary separation plan included within the Operational Optimization Program (as defined below). In 2017, settlement charges were triggered in the pension plan benefiting our employees in Puerto Rico as a result of lump sum distributions and the purchase of annuity contracts relating to the termination of this plan. In 2016, settlement charges in our hourly defined benefit plan were triggered by lump sum withdrawals by employees retiring or leaving the Company under a voluntary separation plan included within the 2015 Productivity Initiative (as defined below). Long-lived and intangible asset impairment charges For the year ended December 31, 2018, we incurred $57.7 million of pre-tax long-lived asset impairment charges to adjust the long-lived asset values of certain disposal groups, including the SGM and Tyrrells businesses, the Lotte Shanghai Foods Co., Ltd. joint venture and other assets. These charges represent the excess of the disposal groups' carrying values, including the related currency translation adjustment amounts realized or to be realized upon completion of the sales, over the sales values less costs to sell for the respective businesses. The fair values of the disposal groups were supported by the sales prices paid by third-party buyers or estimated sales prices based on marketing of the disposal group, when the sale has not yet been completed. For the year ended December 31, 2017, we incurred $208.7 million of pre-tax long-lived asset impairment charges related to certain business realignment activities. This included a write-down of certain intangible assets that had been recognized in connection with the 2014 SGM acquisition and a write-down of property, plant and equipment. For the year ended December 31, 2016, in connection with our 2016 annual impairment testing of other indefinite lived assets, we recognized a trademark impairment charge of $4.2 million primarily resulting from plans to discontinue a brand sold in India. Impact of U.S. tax reform During the fourth quarter of 2018, we recorded a net benefit of $7.8 million as a measurement period adjustment to the one-time mandatory tax on previously deferred earnings of non-U.S. subsidiaries, recorded in connection with the enactment of U.S. tax reform in December 2017. During the fourth quarter of 2017, we recorded a net charge of $32.5 million, which included the estimated impact of the one-time mandatory tax on previously deferred earnings of non- U.S. subsidiaries offset in part by the benefit from revaluation of net deferred tax liabilities based on the new lower corporate income tax rate. Noncontrolling interest share of business realignment and impairment charges Certain of the business realignment and impairment charges recorded in connection with the Margin for Growth Program related to Lotte Shanghai Foods Co., Ltd., a joint venture in which we own a 50% controlling interest. Therefore, we have also adjusted for the portion of these charges included within the loss attributed to the non- controlling interest. 22 Settlement of SGM liability In the fourth quarter of 2015, we reached an agreement with the SGM selling shareholders to reduce the originally- agreed purchase price for the remaining 20% of SGM, and we completed the purchase on February 3, 2016. In the first quarter of 2016, we recorded a $26.7 million gain relating to the settlement of the SGM liability, representing the net carrying amount of the recorded liability in excess of the cash paid to settle the obligation for the remaining 20% of the outstanding shares. Gain on sale of licensing rights During the second quarter of 2018, we recorded a $2.7 million gain on the sale of licensing rights for a non-core trademark relating to a brand marketed outside of the U.S. Constant Currency Net Sales Growth We present certain percentage changes in net sales on a constant currency basis, which excludes the impact of foreign currency exchange. This measure is used internally by management in evaluating results of operations and determining incentive compensation. We believe that this measure provides useful information to investors because it provides transparency to underlying performance in our net sales by excluding the effect that foreign currency exchange rate fluctuations have on the year-to-year comparability given volatility in foreign currency exchange markets. To present this information for historical periods, current period net sales for entities reporting in other than the U.S. dollar are translated into U.S. dollars at the average monthly exchange rates in effect during the comparable period of the prior fiscal year, rather than at the actual average monthly exchange rates in effect during the current period of the current fiscal year. As a result, the foreign currency impact is equal to the current year results in local currencies multiplied by the change in average foreign currency exchange rate between the current fiscal period and the comparable period of the prior fiscal year. The following tables set forth a reconciliation between reported and constant currency growth rates for the years ended December 31, 2018 and 2017: For the Year Ended December 31, 2018 Percentage Change as Reported Impact of Foreign Currency Exchange Percentage Change on Constant Currency Basis North America segment Canada Total North America segment International and Other segment Mexico Brazil India China Total International and Other segment Total Company (0.3)% (0.1)% (1.9)% (13.1)% (4.8)% 1.0 % (1.8)% (0.2)% 2.7 % 4.3 % 6.2 % 8.4 % 26.3 % (21.5)% 1.3 % 3.9 % 2.4 % 4.2 % 4.3 % (4.7)% 21.5 % (20.5)% (0.5)% 3.7 % 23 North America segment Canada Total North America segment International and Other segment Mexico Brazil India China Total International and Other segment Total Company For the Year Ended December 31, 2017 Percentage Change as Reported Impact of Foreign Currency Exchange Percentage Change on Constant Currency Basis 6.3 % 1.3 % 9.7 % 19.9 % 17.0 % (18.1)% (1.4)% 1.0 % 2.1 % 0.1 % (1.1)% 9.4 % 3.2 % (0.8)% 0.6 % 0.2 % 4.2 % 1.2 % 10.8 % 10.5 % 13.8 % (17.3)% (2.0)% 0.8 % 24 CONSOLIDATED RESULTS OF OPERATIONS For the years ended December 31, 2018 2017 2016 2018 vs 2017 2017 vs 2016 In millions of dollars except per share amounts Percent Change Net Sales Cost of Sales Gross Profit Gross Margin SM&A Expense $ 7,791.1 $ 7,515.4 $ 7,440.2 4,215.7 3,575.4 4,060.0 3,455.4 4,270.6 3,169.6 45.9% 46.0% 42.6% 3.7 % 3.8 % 3.5 % 1.0 % (4.9)% 9.0 % 1,874.8 1,885.5 1,891.3 (0.6)% (0.3)% SM&A Expense as a percent of net sales 24.1% 25.1% 25.4% Long-Lived and Intangible Asset Impairment Charges Business Realignment Costs Operating Profit Operating Profit Margin Interest Expense, Net Other (Income) Expense, Net Provision for Income Taxes Effective Income Tax Rate 57.7 19.1 208.7 47.8 4.2 18.9 1,623.8 1,313.4 1,255.2 20.8% 17.5% 16.9% 138.8 74.8 239.0 17.0% 98.3 104.4 354.1 31.9% 756.6 90.2 65.6 379.4 34.5% 720.0 — 720.0 3.34 (72.3)% (60.0)% 23.6 % 41.3 % (28.4)% (32.5)% NM 153.3 % 4.6 % 9.0 % 59.4 % (6.7)% 54.8 % 5.1 % NM 50.4 % 52.5 % NM 8.7 % 9.6 % Net Income Including Noncontrolling Interest 1,171.2 Less: Net Loss Attributable to Noncontrolling Interest Net Income Attributable to The Hershey Company Net Income Per Share—Diluted (6.5) (26.4) $ $ 1,177.7 5.58 $ $ 783.0 3.66 $ $ Note: Percentage changes may not compute directly as shown due to rounding of amounts presented above. NM = not meaningful. Net Sales 2018 compared with 2017 Net sales increased 3.7% in 2018 compared with 2017, reflecting a benefit from the recent Amplify and Pirate Brands acquisitions of 3.6% and a volume increase of 1.3%, partially offset by unfavorable price realization of 1.0% and an unfavorable impact from foreign currency exchange rates of 0.2%. Excluding the unfavorable impact from foreign currency exchange rates, our net sales increased 3.9%. Consolidated volumes increased due to the acquisitions of Amplify and Pirate Brands, as well as solid performance in select international markets, which more than offset the volume reduction resulting from the sale of SGM in July 2018. The net increase in volume was partially offset by unfavorable net price realization, which was primarily attributed to incremental trade promotional expense in the North America segment in support of 2018 programming. 2017 compared with 2016 Net sales increased 1.0% in 2017 compared with 2016, reflecting favorable price realization of 0.7%, a benefit from acquisitions of 0.3%, and a favorable impact from foreign currency exchange rates of 0.2%, partially offset by a volume decrease of 0.2%. Excluding foreign currency, our net sales increased 0.8% in 2017. The favorable net price realization was attributed to lower levels of trade promotional spending in both the North America and International and Other segments versus the prior year. Consolidated volume decreased as a result of lower sales volume in the International and Other segment, primarily attributed to our China business and the softness in the modern trade channel coupled with a focus on optimizing our product offerings. These volume decreases were partially offset by 25 higher sales volume in North America, specifically from 2017 innovation and new launches, including Hershey's Cookie Layer Crunch, Hershey's Gold and Hershey's and Reese's Popped Snack Mix and Chocolate Dipped Pretzels. Key U.S. Marketplace Metrics For the full year 2018, our total U.S. retail takeaway, including Amplify, increased 0.3% in the expanded multi-outlet combined plus convenience store channels (IRI MULO + C-Stores), which includes candy, mint, gum, salty snacks, snack bars, meat snacks and grocery items. Our U.S. candy, mint and gum ("CMG") consumer takeaway was in line with prior year, resulting in a CMG market share loss of approximately 36 basis points due to the timing of innovation and promotional activity relative to our competitors. The CMG consumer takeaway and market share information reflect measured channels of distribution accounting for approximately 90% of our U.S. confectionery retail business. These channels of distribution primarily include food, drug, mass merchandisers, and convenience store channels, plus Wal-Mart Stores, Inc., partial dollar, club and military channels. These metrics are based on measured market scanned purchases as reported by Information Resources, Incorporated ("IRI"), the Company's market insights and analytics provider, and provide a means to assess our retail takeaway and market position relative to the overall category. Cost of Sales and Gross Margin 2018 compared with 2017 Cost of sales increased 3.8% in 2018 compared with 2017. The increase was driven by higher sales volume, higher freight and logistics costs and additional plant costs. These drivers were partially offset by an incremental $125.1 million favorable impact from marking-to-market our commodity derivative instruments intended to economically hedge future years' commodity purchases and supply chain productivity, Gross margin decreased by 10 basis points in 2018 compared with 2017. The decrease was primarily due to the higher freight and logistics costs, unfavorable product mix, additional plant costs related to new production lines, and incremental trade promotional expense. These factors were partially offset by the favorable year-over-year mark-to- market impact from commodity derivative instruments and supply chain productivity. 2017 compared with 2016 Cost of sales decreased 4.9% in 2017 compared with 2016. The reduction was driven by lower commodity costs coupled with an incremental $116.0 million favorable impact from marking-to-market our commodity derivative instruments intended to economically hedge future years' commodity purchases, a $53.0 million decrease in business realignment costs, and supply chain productivity and cost savings initiatives. These benefits were offset in part by higher freight and warehousing costs and unfavorable manufacturing variances. Gross margin increased by 340 basis points in 2017 compared with 2016. Lower commodity costs coupled with the favorable year-over-year mark-to-market impact from commodity derivative instruments, lower business realignment costs, and supply chain productivity contributed to the improvement in gross margin. However, higher supply chain costs and unfavorable product mix partially offset the increase in gross margin. Selling, Marketing and Administrative 2018 compared with 2017 Selling, marketing and administrative (“SM&A”) expenses decreased $10.7 million or 0.6% in 2018. Total advertising and related consumer marketing expenses declined 10.9% due mainly to spend optimization and shifts relating to our emerging brands, as well as reductions in agency and production fees. Selling, marketing and administrative expenses, excluding advertising and related consumer marketing, increased approximately 6.2% in 2018 due to incremental expenses from Amplify and Pirate Brands and higher expenses related to the multi-year implementation of our enterprise resource planning system, which more than offset reductions in our base spending from the Margin for Growth Program. 26 2017 compared with 2016 SM&A expenses decreased $5.8 million or 0.3% in 2017. Advertising and related consumer marketing expense remaining consistent with 2016 levels, as higher spending by the North America segment was offset by reduced spending by the International and Other segment. While 2017 SM&A benefited from costs savings and efficiency initiatives, lower business realignment costs, and lower acquisition integration costs, these savings were offset in part by higher costs related to acquisition due diligence activities and the implementation of our new enterprise resource planning system. Long-Lived and Intangible Asset Impairment Charges In 2018, we recorded impairment charges totaling $57.7 million to adjust the long-lived asset values within certain disposal groups, including the SGM and Tyrrells businesses, the Lotte Shanghai Foods Co., Ltd. joint venture and other assets. These charges represent the excess of the disposal groups' carrying values, including the related currency translation adjustment amounts realized or to be realized upon completion of the sales, over the sales values less costs to sell for the respective businesses. The fair values of the disposal groups were supported by the sales prices paid by third-party buyers or estimated sales prices based on marketing of the disposal group, when the sale has not yet been completed. The sales of SGM and Tyrrells were both completed in July 2018. In 2017, in connection with the Margin for Growth Program and our initiative to optimize the manufacturing operations supporting our China business, we tested our China long-lived asset group for impairment. Our assessment indicated that the carrying value of the asset group was not recoverable, and as a result, the impairment loss was allocated to the asset group's long-lived assets. We recorded long-lived asset impairment charges totaling $106.0 million to write-down distributor relationship and trademark intangible assets that had been recognized in connection with the 2014 SGM acquisition and wrote-down property, plant and equipment by $102.7 million. In 2016, in connection with the annual impairment testing of indefinite lived intangible assets, we recognized a trademark impairment charge of $4.2 million, primarily resulting from plans to discontinue a brand sold in India. The assessment of the valuation of goodwill and other long-lived assets is based on management estimates and assumptions, as discussed in our critical accounting policies included in Item 7 of this Annual Report on Form 10-K. These estimates and assumptions are subject to change due to changing economic and competitive conditions. Business Realignment Activities We are currently pursuing several business realignment activities designed to increase our efficiency and focus our business behind key growth strategies. Costs recorded for business realignment activities during 2018, 2017 and 2016 are as follows: For the years ended December 31, In millions of dollars Margin for Growth Program: Severance Accelerated depreciation Other program costs Operational Optimization Program: Severance Gain on sale of facilities Accelerated depreciation Other program costs 2015 Productivity Initiative: Other program costs Total 2018 2017 2016 $ 15.4 $ 32.6 $ 9.1 30.9 — (6.6) — 2.9 6.9 16.4 13.8 — — (0.3) — 51.8 $ — 69.4 $ $ 27 — — — 17.9 — 48.6 21.8 5.6 93.9 Costs associated with business realignment activities are classified in our Consolidated Statements of Income as described in Note 8 to the Consolidated Financial Statements. Margin for Growth Program In the first quarter 2017, the Company's Board of Directors ("Board") unanimously approved several initiatives under a single program designed to drive continued net sales, operating income and earnings per-share diluted growth over the next several years. This program is focused on improving global efficiency and effectiveness, optimizing the Company’s supply chain, streamlining the Company’s operating model and reducing administrative expenses to generate long-term savings. We originally estimated that the Margin for Growth Program would result in total pre-tax charges of $375 million to $425 million, to be incurred from 2017 to 2019. The majority of the initiatives relating to the program have been executed, with the final initiatives to be completed over approximately the next nine months. To date, we have incurred pre-tax charges to execute the program totaling $336 million. This includes long-lived asset impairment charges of $209 million related to the operations supporting our China business as noted below, as well as the $16 million incremental impairment charge resulting from the sale of SGM (see Note 7). In addition to the impairment charges, we have incurred employee separation costs of $48 million and other business realignment costs of $63 million. We expect the remaining spending on this program to be minimal in 2019, bringing total estimated project costs to approximately $340 million to $355 million. The cash portion of the total program charges is estimated to be $97 million to $110 million. The Company reduced its global workforce by approximately 15% as a result of this program, with a majority of the reductions coming from hourly headcount positions outside of the United States. During 2018, we recognized total costs associated with the Margin for Growth Program of $55 million. These charges included employee severance, largely relating to initiatives to improve the cost structure of our China business and to further streamline our corporate operating model, as well as non-cash, asset-related incremental depreciation expense as part of optimizing the global supply chain. In addition, we incurred other program costs, which relate primarily to third-party charges in support of our initiative to improve global efficiency and effectiveness. During 2017, we recognized total costs associated with the Margin for Growth Program of $56 million. The 2017 charges are consistent in nature to the 2018 activity. The program included an initiative to optimize the manufacturing operations supporting our China business. When the program was approved in 2017, we deemed this to be a triggering event requiring us to test our China long-lived asset group for impairment by first determining whether the carrying value of the asset group was recovered by our current estimates of future cash flows associated with the asset group. Because this assessment indicated that the carrying value was not recoverable, we calculated an impairment loss as the excess of the asset group's carrying value over its fair value. The resulting impairment loss was allocated to the asset group's long-lived assets. Therefore, as a result of this testing, during the first quarter of 2017, we recorded impairment charges totaling $209 million, with $106 million representing the portion of the impairment loss that was allocated to the distributor relationship and trademark intangible assets that had been recognized in connection with the 2014 SGM acquisition and $103 million representing the portion of the impairment loss that was allocated to property, plant and equipment. These impairment charges are recorded in the long-lived asset impairment charges caption within the Consolidated Statements of Operations. Operational Optimization Program In the second quarter of 2016, we commenced a program (the “Operational Optimization Program”) to optimize our production and supply chain network, which included select facility consolidations. The program encompassed the transition of our China chocolate and SGM operations into a united Golden Hershey platform, including the integration of the China sales force, as well as workforce planning efforts and the consolidation of production within certain facilities in China and North America. During 2018, we incurred pre-tax costs totaling $3 million, relating primarily to third-party charges in support of our initiative to optimize our production and supply chain network. In addition, we completed the sale of select China facilities in 2018 that had been taken out of service in connection with the Operational Optimization Program resulting in a gain of $7 million. During 2017 and 2016, we incurred pre-tax costs totaling $14 million and $88 million respectively, including non-cash asset-related incremental depreciation costs in 2016, employee related costs, costs to consolidate and relocate production, and third party costs incurred to execute these activities. This program was completed in 2018. 28 2015 Productivity Initiative In mid-2015, we initiated a productivity initiative (the “2015 Productivity 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 Productivity Initiative was undertaken 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 Productivity Initiative was executed throughout the third and fourth quarters of 2015, resulting in a net reduction of approximately 300 positions, with the majority of the departures taking place by the end of 2015. The 2015 Productivity Initiative was completed during the third quarter 2016. Final costs incurred in 2016 relating to this program totaled $5,609. Operating Profit and Operating Profit Margin 2018 compared with 2017 Operating profit increased 23.6% in 2018 compared with 2017 due primarily to higher gross profit, lower impairment charges and business realignment costs, and lower SM&A in the 2018 period. Operating profit margin increased to 20.8% in 2018 from 17.5% in 2017 driven by these same factors. 2017 compared with 2016 Operating profit increased 4.6% in 2017 compared with 2016 due primarily to higher gross profit and slightly lower SM&A expenses, as discussed previously. Operating profit margin increased to 17.5% in 2017 from 16.9% in 2016 driven by the improvement in gross margin. Interest Expense, Net 2018 compared with 2017 Net interest expense was $40.6 million higher in 2018 than in 2017. The increase was due to higher levels of commercial paper issued to fund the Amplify acquisition and higher interest rates on our short-term debt, as well as incremental interest on $1.2 billion of notes issued in May 2018. 2017 compared with 2016 Net interest expense was $8.1 million higher in 2017 than in 2016. The increase was due to higher levels of long-term debt outstanding and higher interest rates on commercial paper during the 2017 period, as well as a decreased benefit from the fixed to floating swaps. Other (Income) Expense, Net 2018 compared with 2017 Other (income) expense, net totaled expense of $74.8 million in 2018 versus expense of $104.4 million 2017. The decrease in the net expense was primarily due to lower non-service cost components of net periodic benefit cost relating to pension and other post-retirement benefit plans during 2018, as well as lower write-downs on equity investments qualifying for federal historic and energy tax credits. 2017 compared with 2016 Other (income) expense, net totaled expense of $104.4 million in 2017 versus expense of $65.6 million in 2016. In 2017 we recognized a $66.2 million write-down on equity investments qualifying for federal historic and energy tax credits, compared to a $43.5 million write down in 2016. In 2017, the non-service cost components of net periodic benefit cost relating to pension and other post-retirement benefit plans totaled $38.8 million compared to $49.4 million in 2016. Additionally, 2016 was offset by an extinguishment gain of $26.7 million related to the settlement of the SGM liability. 29 Income Taxes and Effective Tax Rate 2018 compared with 2017 Our effective income tax rate was 17.0% for 2018 compared with 31.9% for 2017. Relative to the 21% statutory rate, the 2018 effective tax rate was impacted by a favorable foreign rate differential and investment tax credits, which were partially offset by the impact of state taxes. The 2017 effective rate, relative to the previous statutory rate of 35%, benefited from a favorable foreign rate differential, investment tax credits and the benefit of ASU 2016-09 for the accounting of employee share-based payments, which were partially offset by the impact of U.S. tax reform and non- benefited costs resulting from the Margin for Growth Program. 2017 compared with 2016 Our effective income tax rate was 31.9% for 2017 compared with 34.5% for 2016. Relative to the statutory rate, the 2017 effective tax rate was impacted by a favorable foreign rate differential relating to foreign operations and cocoa procurement, investment tax credits and the benefit of ASU 2016-09 for the accounting of employee share-based payments, which were partially offset by the impact of U.S. tax reform and non-benefited costs resulting from the Margin for Growth Program. The 2016 effective rate benefited from the impact of non-taxable income related to the settlement of the SGM liability and investment tax credits. Net Income attributable to The Hershey Company and Earnings Per Share-diluted 2018 compared with 2017 Net income increased $394.6 million, or 50.4%, while EPS-diluted increased $1.92, or 52.5%, in 2018 compared with 2017. The increase in both net income and EPS-diluted was driven primarily by 2018 higher gross profit, lower impairment charges and business realignment costs, lower SM&A, and lower income taxes, which were partly offset by higher interest expense, as noted above. Our 2018 EPS-diluted also benefited from lower weighted-average shares outstanding as a result of share repurchases, including both current year and prior year repurchases from the Milton Hershey School Trust (the "Trust"), as well as current year repurchases pursuant to our Board-approved repurchase programs. 2017 compared with 2016 Net income increased $62.9 million, or 8.7%, while EPS-diluted increased $0.32, or 9.6%, in 2017 compared with 2016. The increase in both net income and EPS-diluted were driven by higher gross profit, lower SM&A and lower income taxes, partly offset by the long-lived asset impairment charges and higher write-downs relating to tax credit investments, as noted above. Our 2017 EPS-diluted also benefited from lower weighted-average shares outstanding as a result of share repurchases, including a current year repurchase from the Trust and prior year repurchases pursuant to our Board-approved repurchase programs. SEGMENT RESULTS The summary that follows provides a discussion of the results of operations of our two reportable segments: North America and International and Other. The segments reflect our operations on a geographic basis. For segment reporting purposes, we use “segment income” to evaluate segment performance and allocate resources. Segment income excludes unallocated general corporate administrative expenses, unallocated mark-to-market gains and losses on commodity derivatives, business realignment and impairment charges, acquisition-related costs and other unusual gains or losses that are not part of our measurement of segment performance. These items of our operating income are largely managed centrally at the corporate level and are excluded from the measure of segment income reviewed by the CODM and used for resource allocation and internal management reporting and performance evaluation. Segment income and segment income margin, which are presented in the segment discussion that follows, are non-GAAP measures and do not purport to be alternatives to operating income as a measure of operating performance. We believe that these measures are useful to investors and other users of our financial information in evaluating ongoing operating profitability as well as in evaluating operating performance in relation to our competitors, as they exclude the activities that are not directly attributable to our ongoing segment operations. For further information, see the Non-GAAP Information section of this MD&A. 30 Our segment results, including a reconciliation to our consolidated results, were as follows: For the years ended December 31, 2018 2017 2016 In millions of dollars Net Sales: North America International and Other Total Segment Income (Loss): North America International and Other Total segment income Unallocated corporate expense (1) Unallocated mark-to-market (gains) losses on commodity derivatives (2) Long-lived and intangible asset impairment charges Costs associated with business realignment activities Acquisition-related costs Gain on sale of licensing costs Operating profit Interest expense, net Other (income) expense, net Income before income taxes $ $ $ 6,901.6 889.5 7,791.1 $ $ 6,621.2 894.3 7,515.4 $ $ 6,533.0 907.2 7,440.2 2,020.1 $ 2,044.2 $ 73.8 2,093.9 486.8 (168.3) 57.8 51.8 44.8 (2.7) 1,623.7 138.8 74.8 11.5 2,055.7 499.2 (35.3) 208.7 69.4 0.3 — 1,313.4 98.3 104.4 2,040.5 (29.1) 2,011.4 488.3 163.2 4.2 93.9 6.5 — 1,255.3 90.2 65.6 $ 1,410.1 $ 1,110.7 $ 1,099.5 (1) Includes centrally-managed (a) corporate functional costs relating to legal, treasury, finance and human resources, (b) expenses associated with the oversight and administration of our global operations, including warehousing, distribution and manufacturing, information systems and global shared services, (c) non-cash stock-based compensation expense and (d) other gains or losses that are not integral to segment performance. (2) Net (gains) losses on mark-to-market valuation of commodity derivative positions recognized in unallocated derivative (gains) losses. See Note 12 to the Consolidated Financial Statements. 31 North America The North America segment is responsible for our chocolate and non-chocolate confectionery market position, as well as our grocery and growing snacks market positions, in the United States and Canada. This includes developing and growing our business in chocolate and non-chocolate confectionery, pantry, food service and other snacking product lines. North America accounted for 88.6%, 88.1% and 87.8% of our net sales in 2018, 2017 and 2016, respectively. North America results for the years ended December 31, 2018, 2017 and 2016 were as follows: For the years ended December 31, 2018 2017 2016 2018 vs 2017 2017 vs 2016 Percent Change In millions of dollars Net sales Segment income Segment margin 2018 compared with 2017 $ 6,901.6 $ 6,621.2 $ 6,533.0 2,020.1 2,044.2 2,040.5 4.2 % (1.2)% 1.3% 0.2% 29.3% 30.9% 31.2% Net sales of our North America segment increased $280.4 million or 4.2% in 2018 compared to 2017, which includes a 4.6% benefit from the Amplify and Pirate Brands acquisitions. Excluding the Amplify and Pirate Brands acquisitions, our North America segment net sales decreased 0.4%. Net price realization declined 1.3% due to incremental trade promotional expense in support of 2018 programming, partially offset by volume increases of 0.9% due to innovation, specifically driven by Reese's Outrageous bars and Hershey's Gold. Our North America segment income decreased $24.1 million or 1.2% in 2018 compared to 2017, primarily due to higher trade promotional expense, higher logistics costs, unfavorable sales mix and additional plant costs, as well as incremental SM&A expense, including amortization expense, from the Amplify and Pirate Brands acquisitions. These higher expenses more than offset reductions in advertising and related consumer marketing expense, which declined 11.2% versus the 2017 period, with the reduction driven by spend optimization and shifts relating to our emerging brands, as advertising and related consumer marketing on our core U.S. brands increased during the year. 2017 compared with 2016 Net sales of our North America segment increased $88.2 million or 1.3% in 2017 compared to 2016, driven by increased volume of 0.5% due to a longer Easter season, as well as 2017 innovation, specifically, Hershey's Cookie Layer Crunch, and the launch of Hershey's Gold and Hershey's and Reese's Popped Snack Mix and Chocolate Dipped Pretzels. Additionally, the barkTHINS brand acquisition contributed 0.3%. Net price realization increased by 0.4% due to decreased levels of trade promotional spending. Excluding the favorable impact of foreign currency exchange rates of 0.1%, the net sales of our North America segment increased by approximately 1.2%. Our North America segment income increased $3.7 million or 0.2% in 2017 compared to 2016, driven by higher gross profit, partially offset by investments in greater levels of advertising expense and go-to-market capabilities, as well as unfavorable manufacturing variances and higher freight and warehousing costs. 32 International and Other The International and Other segment includes all other countries where we currently manufacture, import, market, sell or distribute chocolate and non-chocolate confectionery and other products. Currently, this includes our operations in China and other Asia markets, Latin America, Europe, Africa and the Middle East, along with exports to these regions. While a less significant component, this segment also includes our global retail operations, including Hershey’s Chocolate World stores in Hershey, Pennsylvania, New York City, Las Vegas, Niagara Falls (Ontario) and Singapore, as well as operations associated with licensing the use of certain trademarks and products to third parties around the world. International and Other accounted for 11.4%, 11.9% and 12.2% of our net sales in 2018, 2017 and 2016, respectively. International and Other results for the years ended December 31, 2018, 2017 and 2016 were as follows: For the years ended December 31, 2018 2017 2016 2018 vs 2017 2017 vs 2016 Percent Change In millions of dollars Net sales Segment income (loss) Segment margin 2018 compared with 2017 $ 889.5 $ 894.3 $ 907.2 73.8 8.3% 11.5 1.3% (29.1) (3.2)% (0.5)% NM (1.4)% NM Net sales of our International and Other segment decreased $4.8 million or 0.5% in 2018 compared to 2017, reflecting a 4.4% reduction in net sales from the divestiture of SGM and an unfavorable impact from foreign currency exchange rates of 1.8%, partially offset by volume increases of 4.7% and favorable price realization of 1.0%. Excluding the sale of SGM and unfavorable foreign currency exchange rates, our International and Other segment net sales increased 5.7%. The volume increase was primarily attributed to solid marketplace growth in India, Brazil and Mexico, where constant currency net sales increased by 26.3%, 8.4%, and 6.2%, respectively. The favorable net price realization was driven by decreased levels of trade promotional spending compared to the prior year. Our International and Other segment generated income of $73.8 million in 2018 compared to $11.5 million in 2017, with the improvement primarily resulting from our efforts to drive sustainable gross margin improvements as we executed our Margin for Growth program and optimize the product portfolio across various international markets. Additionally, segment income benefited from continued growth across Mexico, Brazil, India and regional markets. 2017 compared with 2016 Net sales of our International and Other segment decreased $12.9 million or 1.4% in 2017 compared to 2016, reflecting volume declines of 4.7%, partially offset by favorable price realization of 2.7% and a favorable impact from foreign currency exchange rates of 0.6%. Excluding the unfavorable impact of foreign currency exchange rates, the net sales of our International and Other segment decreased by approximately 2.0%. The volume decrease is primarily attributed to our China business, driven by softness in the modern trade channel coupled with a focus on optimizing our product offerings. The favorable net price realization was driven by higher prices in select markets, as well as reduced levels of trade promotional spending, which declined significantly compared to the prior year. Constant currency net sales in Mexico and Brazil increased by 10.8% and 10.5%, respectively, driven by solid chocolate marketplace performance. India also experienced constant currency net sales growth of 13.8%. Our International and Other segment generated income of $11.5 million in 2017 compared to a loss of $29.1 million in 2016 due to benefits from reduced trade promotional spending and lower operating expenses in China as a result of our Margin for Growth Program. Additionally, segment income benefited from the improved combined income in Latin America and export markets versus the prior year. 33 Unallocated Corporate Expense Unallocated corporate expense includes centrally-managed (a) corporate functional costs relating to legal, treasury, finance and human resources, (b) expenses associated with the oversight and administration of our global operations, including warehousing, distribution and manufacturing, information systems and global shared services, (c) non-cash stock-based compensation expense and (d) other gains or losses that are not integral to segment performance. Unallocated corporate expense totaled $486.8 million in 2018 as compared to $499.2 million in 2017 primarily driven by savings from our productivity and cost savings initiatives, partially offset by spending on the multi-year implementation of our enterprise resource planning system. In 2017, unallocated corporate expense increased $10.9 million from $488.3 million in 2016. While we realized savings in 2017 from our productivity and cost savings initiatives, these savings were more than offset by higher costs related to the multi-year implementation of our enterprise resource planning system, as well as higher due diligence costs related to merger and acquisition activity. FINANCIAL CONDITION We assess our liquidity in terms of our ability to generate cash to fund our operating, investing and financing activities. Significant factors affecting liquidity include cash flows generated from operating activities, capital expenditures, acquisitions, dividends, repurchases of outstanding shares, the adequacy of available commercial paper and bank lines of credit, and the ability to attract long-term capital with satisfactory terms. We generate substantial cash from operations and remain in a strong financial position, with sufficient liquidity available for capital reinvestment, strategic acquisitions and the payment of dividends. Cash Flow Summary The following table is derived from our Consolidated Statement of Cash Flows: In millions of dollars Net cash provided by (used in): Operating activities Investing activities Financing activities Effect of exchange rate changes on cash and cash equivalents Increase (decrease) in cash and cash equivalents Operating activities 2018 2017 2016 $ $ $ 1,599.9 (1,502.9) 116.1 (5.3) 207.8 1,249.5 (328.6) (843.8) 6.1 83.2 1,013.4 (595.4) (464.4) (3.1) (49.5) Our principal source of liquidity is cash flow from operations. Our net income and, consequently, our cash provided by operations are impacted by sales volume, seasonal sales patterns, timing of new product introductions, profit margins and price changes. Sales are typically higher during the third and fourth quarters of the year due to seasonal and holiday-related sales patterns. Generally, working capital needs peak during the summer months. We meet these needs primarily with cash on hand, bank borrowings or the issuance of commercial paper. Cash provided by operating activities in 2018 increased $350.4 million relative to 2017. This increase was driven by the following factors: • Net income adjusted for non-cash charges to operations (including depreciation, amortization, stock-based compensation, deferred income taxes, goodwill, indefinite and long-lived asset charges, write-down of equity investments and other charges) contributed $257 million of additional cash flow in 2018 relative to 2017. • Incomes taxes generated cash of $76 million in 2018, compared to a use of cash of $71 million in 2017. This $147 million fluctuation was mainly due to the variance in actual tax expense for 2018 relative to the timing of quarterly estimated tax payments, which resulted in a higher taxes payable position at the end of 2018 compared to 2017. • The increase in cash provided by operating activities was partially offset by the following net cash outflows: 34 Prepaid expenses and other current assets used cash of $40 million in 2018, compared to cash generated of $18 million in 2017. This $58 million fluctuation was mainly driven by the timing of payments on commodity futures. In addition, in 2018, the volume of commodity futures held, which require margin deposits, was higher compared to 2017. We utilize commodity futures contracts to economically manage the risk of future price fluctuations associated with our purchase of raw materials. Cash provided by operating activities in 2017 increased $236.1 million relative to 2016. This increase was driven by the following factors: • Net income adjusted for non-cash charges to operations (including depreciation, amortization, stock-based compensation, deferred income taxes, goodwill, indefinite and long-lived asset charges, write-down of equity investments, the gain on settlement of the SGM liability and other charges) contributed $329 million of additional cash flow in 2017 relative to 2016. • Prepaid expenses and other current assets generated cash of $18 million in 2017, compared to a use of cash of $43 million in 2016. This $61 million fluctuation was mainly driven by the timing of payments on commodity futures. In addition, in 2017, the volume of commodity futures held, which require margin deposits, was lower compared to 2016. We utilize commodity futures contracts to economically manage the risk of future price fluctuations associated with our purchase of raw materials. • The increase in cash provided by operating activities was partially offset by the following net cash outflows: Working capital (comprised of trade accounts receivable, inventory, accounts payable and accrued liabilities) consumed cash of $131 million in 2017 and $28 million in 2016. This $103 million fluctuation was mainly due to a higher year-over-year build up of U.S. inventories to satisfy product requirements and maintain sufficient levels to accommodate customer requirements, coupled with a higher investment in inventory in Mexico and India, driven by volume growth in those markets. The use of cash for income taxes increased $70 million, mainly due to the variance in actual tax expense for 2017 relative to the timing of quarterly estimated tax payments, which resulted in a higher prepaid tax position at the end of 2017 compared to 2016. Pension and Post-Retirement Activity. We recorded net periodic benefit costs of $42.1 million, $59.7 million and $72.8 million in 2018, 2017 and 2016, respectively, relating to our benefit plans (including our defined benefit and other post retirement plans). The main drivers of fluctuations in expense from year to year are assumptions in formulating our long-term estimates, including discount rates used to value plan obligations, expected returns on plan assets, the service and interest costs and the amortization of actuarial gains and losses. The funded status of our qualified defined benefit pension plans is dependent upon many factors, including returns on invested assets, the level of market interest rates and the level of funding. We contribute cash to our plans at our discretion, subject to applicable regulations and minimum contribution requirements. Cash contributions to our pension and post retirement plans totaled $25.9 million, $56.4 million and $41.7 million in 2018, 2017 and 2016, respectively. Investing activities Our principal uses of cash for investment purposes relate to purchases of property, plant and equipment and capitalized software, as well as acquisitions of businesses, partially offset by proceeds from sales of property, plant and equipment. We used cash of $1,502.9 million for investing activities in 2018 compared to $328.6 million in 2017, with the increase driven by two business acquisitions in 2018 compared to no business acquisition activity in 2017. We used cash of $595.4 million for investing activities in 2016, with the increases versus 2017 primarily driven by a business acquisition in 2016. 35 Primary investing activities include the following: • Capital spending. Capital expenditures, including capitalized software, primarily to support capacity expansion, innovation and cost savings, were $328.6 million in 2018, $257.7 million in 2017 and $269.5 million in 2016. Our 2018 expenditures were higher compared to 2017 and 2016 as a result of increased U.S. core chocolate brand capacity expansion and investments in our enterprise resource planning system implementation. We expect 2019 capital expenditures, including capitalized software, to approximate $330 million to $350 million. • Proceeds from sales of property, plant and equipment and other long-lived assets. During 2018, we generated $49.8 million of proceeds from the sale of property, plant and equipment and other long-lived assets. This included sales of select China facilities that were taken out of operation in connection with the Operational Optimization Program. Proceeds from the sale of these facilities totaled $27.5 million, resulting in a gain of $6.6 million. Additionally, we sold licensing rights for a non-core trademark relating to a brand marketed outside of the U.S. for $13.0 million, resulting in a gain of $2.7 million. • Proceeds from the sales of businesses. In July 2018, we sold the Tyrrells and SGM businesses. Collectively, the proceeds from the sales of these businesses, net of cash divested, totaled approximately $167.0 million. We had no divestiture activity in the comparable 2017 or 2016 periods. • Business acquisitions. In 2018, we spent $915 million to acquire Amplify and $423 million to acquire Pirate Brands. We had no acquisition activity in 2017. In 2016, we spent $285.4 million to acquire Ripple Brand Collective, LLC. • Investments in partnerships qualifying for tax credits. We make investments in partnership entities that in turn make equity investments in projects eligible to receive federal historic and energy tax credits. We invested approximately $52.6 million in 2018, $78.6 million in 2017 and $44.3 million in 2016 in projects qualifying for tax credits. Financing activities Our cash flow from financing activities generally relates to the use of cash for purchases of our Common Stock and payment of dividends, offset by net borrowing activity and proceeds from the exercise of stock options. Financing activities in 2018 increased cash by $116.1 million, compared to cash used of $843.8 million in 2017. We used cash of $464.4 million for financing activities in 2016, primarily to fund dividend payments and share repurchases, partially offset by incremental borrowings. The majority of our financing activity was attributed to the following: • • Short-term borrowings, net. In addition to utilizing cash on hand, we use short-term borrowings (commercial paper and bank borrowings) to fund seasonal working capital requirements and ongoing business needs. In 2018, we generated cash flow of $645.8 million through the issuance of short-term commercial paper, partially offset by a reduction in short-term foreign bank borrowings. We utilized the proceeds from the issuance of commercial paper to fund the Amplify acquisition and repay Amplify's outstanding debt owed under its existing credit agreement. A portion of the commercial paper borrowings used to fund the Amplify acquisition were subsequently refinanced with the proceeds of new notes issued during the second quarter of 2018, as discussed below. In 2017, we used $81.4 million to reduce commercial paper borrowings and short-term foreign borrowings. In 2016, we generated cash flow of $275.6 million through short-term commercial paper borrowings, partially offset by payments in short-term foreign borrowings. Long-term debt borrowings and repayments. In 2018, we issued $350 million of 2.90% Notes due in 2020, $350 million of 3.10% Notes due in 2021 and $500 million of 3.375% Notes due in 2023. Proceeds from the issuance of the Notes, net of discounts and issuance costs, totaled $1,193.8 million. In 2018, we repaid $300 million of 1.60% Notes due in 2018 upon their maturity. Additionally, in 2018, we repaid a portion of the commercial paper borrowings that had been used to fund the Amplify acquisition. In 2017, we had minimal incremental long-term borrowings and no repayment activity. In 2016, we used $500 million to repay long-term debt. Additionally, in 2016, we issued $500 million of 2.30% Notes due in 2026 and $300 million of 3.375% Notes due in 2046. 36 • • Tax receivable obligation. In connection with the Amplify acquisition, the Company agreed to make payments to the counterparty of a tax receivable agreement. In 2018, we paid $72.0 million to settle the tax receivable obligation. Share repurchases. We repurchase shares of Common Stock to offset the dilutive impact of treasury shares issued under our equity compensation plans. The value of these share repurchases in a given period varies based on the volume of stock options exercised and our market price. In addition, we periodically repurchase shares of Common Stock pursuant to Board-authorized programs intended to drive additional stockholder value. We used cash for total share repurchases of $247.5 million in 2018, which included a privately negotiated repurchase transaction with Hershey Trust Company, as trustee for the Trust, to purchase 450 thousand shares for $47.8 million. We used cash for total share repurchases of $300.3 million in 2017, which included a privately negotiated repurchase transaction with Hershey Trust Company, as trustee for the Trust, to purchase 1.5 million shares for $159.0 million. We used cash for total share repurchases of $592.6 million in 2016, which included purchases pursuant to authorized programs of $420.2 million to purchase 4.6 million shares. As of December 31, 2018, approximately $60 million remained available under the $100 million share repurchase authorization approved by the Board in October 2017. In July 2018, our Board approved an additional $500 million share repurchase authorization, which is to commence after the existing 2017 authorization is completed and is to be utilized at management's discretion. • Dividend payments. Total dividend payments to holders of our Common Stock and Class B Common Stock were $562.5 million in 2018, $526.3 million in 2017 and $499.5 million in 2016. Dividends per share of Common Stock increased 8.2% to $2.756 per share in 2018 compared to $2.548 per share in 2017, while dividends per share of Class B Common Stock increased 8.1% in 2018. • Proceeds from the exercise of stock options, including tax benefits. We received $63.3 million from employee exercises of stock options, net of employee taxes withheld from share-based awards in 2018 and 2017, respectively, and $94.8 million in 2016. Variances are driven primarily by the number of shares exercised and the share price at the date of grant. • Other. In February 2016, we used $35.8 million to purchase the remaining 20% of the outstanding shares of SGM. Liquidity and Capital Resources At December 31, 2018, our cash and cash equivalents totaled $588.0 million. At December 31, 2017, our cash and cash equivalents totaled $380.2 million. Our cash and cash equivalents at the end of 2018 increased $207.8 million compared to the 2017 year-end balance as a result of the sources of net cash outlined in the previous discussion. Approximately 75% of the balance of our cash and cash equivalents at December 31, 2018 was held by subsidiaries domiciled outside of the United States. The Company recognized the one-time U.S. repatriation tax due under U.S. tax reform and, as a result, repatriation of these amounts would not be subject to additional U.S. federal income tax but would be subject to applicable withholding taxes in the relevant jurisdiction. Our intent is to reinvest funds earned outside of the United States to finance foreign operations and investments, and our current plans do not demonstrate a need to repatriate them to fund our U.S. operations. We believe we have sufficient liquidity to satisfy our cash needs, including our cash needs in the United States. We maintain debt levels we consider prudent based on our cash flow, interest coverage ratio and percentage of debt to capital. We use debt financing to lower our overall cost of capital which increases our return on stockholders’ equity. Our total debt was $4.5 billion at December 31, 2018 and $2.9 billion at December 31, 2017. Our total debt increased in 2018 mainly due to the additional Notes issued mid-year, which were used to repay a portion of the commercial paper borrowings that had been used to fund the Amplify acquisition and repay Amplify's outstanding debt owed under its existing credit agreement. As a source of short-term financing, we maintain a $1.4 billion unsecured revolving credit facility. As of December 31, 2018, the termination date of this agreement is November 2020. We may use these funds for general corporate purposes, including commercial paper backstop and business acquisitions. As of December 31, 2018, we had $315 million of available capacity under the agreement. The unsecured revolving credit agreement contains 37 certain financial and other covenants, customary representations, warranties and events of default. We were in compliance with all covenants as of December 31, 2018. In addition to the revolving credit facility, we maintain lines of credit in various currencies with domestic and international commercial banks. As of December 31, 2018, we had available capacity of $273 million under these lines of credit. Furthermore, we have a current shelf registration statement filed with the SEC that allows for the issuance of an indeterminate amount of debt securities. Proceeds from the debt issuances and any other offerings under the current registration statement may be used for general corporate requirements, including reducing existing borrowings, financing capital additions and funding contributions to our pension plans, future business acquisitions and working capital requirements. Our ability to obtain debt financing at comparable risk-based interest rates is partly a function of our existing cash- flow-to-debt and debt-to-capitalization levels as well as our current credit standing. We believe that our existing sources of liquidity are adequate to meet anticipated funding needs at comparable risk- based interest rates for the foreseeable future. Acquisition spending and/or share repurchases could potentially increase our debt. Operating cash flow and access to capital markets are expected to satisfy our various cash flow requirements, including acquisitions and capital expenditures. Equity Structure We have two classes of stock outstanding – Common Stock and Class B Stock. Holders of the Common Stock and the Class B Stock generally vote together without regard to class on matters submitted to stockholders, including the election of directors. Holders of the Common Stock have 1 vote per share. Holders of the Class B Stock have 10 votes per share. Holders of the Common Stock, voting separately as a class, are entitled to elect one-sixth of our Board. With respect to dividend rights, holders of the Common Stock are entitled to cash dividends 10% higher than those declared and paid on the Class B Stock. Hershey Trust Company, as trustee for the trust established by Milton S. and Catherine S. Hershey that has as its sole beneficiary Milton Hershey School, maintains voting control over The Hershey Company. In addition, three representatives of Hershey Trust Company currently serve as members of the Company's Board. In performing their responsibilities on the Company’s Board, these representatives may from time to time exercise influence with regard to the ongoing business decisions of our Board or management. Hershey Trust Company, as trustee for the Trust, in its role as controlling stockholder of the Company, has indicated it intends to retain its controlling interest in The Hershey Company. The Company's Board, and not the Hershey Trust Company board, is solely responsible and accountable for the Company’s management and performance. Pennsylvania law requires that the Office of Attorney General be provided advance notice of any transaction that would result in Hershey Trust Company, as trustee for the Trust, no longer having voting control of the Company. The law provides specific statutory authority for the Attorney General to intercede and petition the court having jurisdiction over Hershey Trust Company, as trustee for the Trust, to stop such a transaction if the Attorney General can prove that the transaction is unnecessary for the future economic viability of the Company and is inconsistent with investment and management considerations under fiduciary obligations. This legislation makes it more difficult for a third party to acquire a majority of our outstanding voting stock and thereby may delay or prevent a change in control of the Company. Guarantees and Other Off-Balance Sheet Arrangements We do not have guarantees or other off-balance sheet financing arrangements, including variable interest entities, that we believe could have a material impact on our financial condition or liquidity. 38 Contractual Obligations The following table summarizes our contractual obligations at December 31, 2018: Payments due by Period In millions of dollars Contractual Obligations Total Less than 1 year 1-3 years 3-5 years More than 5 years Long-term notes (excluding capital leases obligations) $ 3,178.3 $ — $ 1,134.7 $ 750.0 $ 1,293.6 Interest expense (1) Operating lease obligations (2) Capital lease obligations (3) Minimum pension plan funding obligations (4) 763.5 293.4 194.8 8.8 114.9 38.0 7.0 1.4 Unconditional purchase obligations (5) 2,375.0 1,495.9 180.8 40.9 9.2 2.9 878.4 125.5 28.9 8.9 3.0 0.7 342.3 185.6 169.7 1.5 — Total obligations $ 6,813.8 $ 1,657.2 $ 2,246.9 $ 917.0 $ 1,992.7 (1) Includes the net interest payments on fixed rate debt associated with long-term notes. (2) Includes the minimum rental commitments under non-cancelable operating leases primarily for offices, retail stores, warehouses and distribution facilities. (3) Includes the minimum rental commitments (including interest expense) under non-cancelable capital leases primarily for offices and warehouse facilities, as well as vehicles. (4) Represents future pension payments to comply with local funding requirements. Our policy is to fund domestic pension liabilities in accordance with the minimum and maximum limits imposed by the Employee Retirement Income Security Act of 1974 (“ERISA”), federal income tax laws and the funding requirements of the Pension Protection Act of 2006. We fund non-domestic pension liabilities in accordance with laws and regulations applicable to those plans. For more information, see Note 10 to the Consolidated Financial Statements. (5) Purchase obligations consist primarily of fixed commitments for the purchase of raw materials to be utilized in the normal course of business. Amounts presented included fixed price forward contracts and unpriced contracts that were valued using market prices as of December 31, 2018. The amounts presented in the table do not include items already recorded in accounts payable or accrued liabilities at year-end 2018, nor does the table reflect cash flows we are likely to incur based on our plans, but are not obligated to incur. Such amounts are part of normal operations and are reflected in historical operating cash flow trends. We do not believe such purchase obligations will adversely affect our liquidity position. In entering into contractual obligations, we have assumed the risk that might arise from the possible inability of counterparties to meet the terms of their contracts. We mitigate this risk by performing financial assessments prior to contract execution, conducting periodic evaluations of counterparty performance and maintaining a diverse portfolio of qualified counterparties. Our risk is limited to replacing the contracts at prevailing market rates. We do not expect any significant losses resulting from counterparty defaults. Asset Retirement Obligations We have a number of facilities that contain varying amounts of asbestos in certain locations within the facilities. Our asbestos management program is compliant with current applicable regulations, which require that we handle or dispose of asbestos in a specified manner if such facilities undergo major renovations or are demolished. We do not have sufficient information to estimate the fair value of any asset retirement obligations related to these facilities. We cannot specify the settlement date or range of potential settlement dates and, therefore, sufficient information is not available to apply an expected present value technique. We expect to maintain the facilities with repairs and maintenance activities that would not involve or require the removal of significant quantities of asbestos. Income Tax Obligations Liabilities for unrecognized income tax benefits are excluded from the table above as we are unable to reasonably predict the ultimate amount or timing of a settlement of these potential liabilities. See Note 9 to the Consolidated Financial Statements for more information. 39 Recent Accounting Pronouncements Information on recently adopted and issued accounting standards is included in Note 1 to the Consolidated Financial Statements. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The preparation of financial statements requires management to use judgment and make estimates and assumptions. We believe that our most critical accounting policies and estimates relate to the following: Accrued Liabilities for Trade Promotion Activities Pension and Other Post-Retirement Benefits Plans Goodwill and Other Intangible Assets Income Taxes Management has discussed the development, selection and disclosure of critical accounting policies and estimates with the Audit Committee of our Board. While we base estimates and assumptions on our knowledge of current events and actions we may undertake in the future, actual results may ultimately differ from these estimates and assumptions. Other significant accounting policies are outlined in Note 1 to the Consolidated Financial Statements. Accrued Liabilities for Trade Promotion Activities We promote our products with advertising, trade promotions and consumer incentives. These programs include, but are not limited to, discounts, coupons, rebates, in-store display incentives and volume-based incentives. We expense advertising costs and other direct marketing expenses as incurred. We recognize the costs of trade promotion and consumer incentive activities as a reduction to net sales along with a corresponding accrued liability based on estimates at the time of revenue recognition. These estimates are based on our analysis of the programs offered, historical trends, expectations regarding customer and consumer participation, sales and payment trends and our experience with payment patterns associated with similar programs offered in the past. The estimated costs of these programs are reasonably likely to change in future periods due to changes in trends with regard to customer and consumer participation, particularly for new programs and for programs related to the introduction of new products. Differences between estimated expense and actual program performance are recognized as a change in estimate in a subsequent period and are normally not significant. During 2018, 2017, and 2016, actual annual promotional costs have not deviated from the estimated amount by more than 3%. Our trade promotion and consumer incentive accrued liabilities totaled $171.4 million and $173.7 million at December 31, 2018 and 2017, respectively. Pension and Other Post-Retirement Benefits Plans We sponsor various defined benefit pension plans. The primary plans are The Hershey Company Retirement Plan and The Hershey Company Retirement Plan for Hourly Employees, which are cash balance plans that provide pension benefits for most U.S. employees hired prior to January 1, 2007. We also sponsor two primary other post-employment benefit (“OPEB”) plans, consisting of a health care plan and life insurance plan for retirees. The health care plan is contributory, with participants’ contributions adjusted annually, and the life insurance plan is non-contributory. For accounting purposes, the defined benefit pension and OPEB plans require assumptions to estimate the projected and accumulated benefit obligations, including the following variables: discount rate; expected salary increases; certain employee-related factors, such as turnover, retirement age and mortality; expected return on assets; and health care cost trend rates. These and other assumptions affect the annual expense and obligations recognized for the underlying plans. Our assumptions reflect our historical experiences and management's best judgment regarding future expectations. Our related accounting policies, accounting balances and plan assumptions are discussed in Note 10 to the Consolidated Financial Statements. Pension Plans Changes in certain assumptions could significantly affect pension expense and benefit obligations, particularly the estimated long-term rate of return on plan assets and the discount rates used to calculate such obligations: 40 • Long-term rate of return on plan assets. The expected long-term rate of return is evaluated on an annual basis. We consider a number of factors when setting assumptions with respect to the long-term rate of return, including current and expected asset allocation and historical and expected returns on the plan asset categories. Actual asset allocations are regularly reviewed and periodically rebalanced to the targeted allocations when considered appropriate. Investment gains or losses represent the difference between the expected return estimated using the long-term rate of return and the actual return realized. For 2019, we increased the expected return on plan assets assumption to 6.0% from the 5.8% assumption used during 2018. The historical average return (compounded annually) over the 20 years prior to December 31, 2018 was approximately 6.0%. As of December 31, 2018, our primary plans had cumulative unrecognized investment and actuarial losses of approximately $348 million. We amortize the unrecognized net actuarial gains and losses in excess of the corridor amount, which is the greater of 10% of a respective plan’s projected benefit obligation or the fair market value of plan assets. These unrecognized net losses may increase future pension expense if not offset by (i) actual investment returns that exceed the expected long-term rate of investment returns, (ii) other factors, including reduced pension liabilities arising from higher discount rates used to calculate pension obligations or (iii) other actuarial gains when actual plan experience is favorable as compared to the assumed experience. A 100 basis point decrease or increase in the long-term rate of return on pension assets would correspondingly increase or decrease annual net periodic pension benefit expense by approximately $10 million. • Discount rate. Prior to December 31, 2017, the service and interest cost components of net periodic benefit cost were determined utilizing a single weighted-average discount rate derived from the yield curve used to measure the plan obligations. Beginning in 2018, we elected to utilize a full yield curve approach in the estimation of service and interest costs by applying the specific spot rates along the yield curve used in the determination of the benefit obligation to the relevant projected cash flows. We made this change to provide a more precise measurement of service and interest costs by improving the correlation between the projected cash flows to the corresponding spot rates along the yield curve. This change does not affect the measurement of our pension and other post-retirement benefit liabilities but generally results in lower benefit expense in periods when the yield curve is upward sloping, which was the case in 2018. We accounted for this change as a change in accounting estimate and, accordingly, accounted for it on a prospective basis starting in 2018. A 100 basis point decrease (increase) in the weighted-average pension discount rate would increase (decrease) annual net periodic pension benefit expense by approximately $5 million and the December 31, 2018 pension liability would increase by approximately $87 million or decrease by approximately $75 million, respectively. Pension expense for defined benefit pension plans is expected to be approximately $30 million in 2019. Pension expense beyond 2019 will depend on future investment performance, our contributions to the pension trusts, changes in discount rates and various other factors related to the covered employees in the plans. Other Post-Employment Benefit Plans Changes in significant assumptions could affect consolidated expense and benefit obligations, particularly the discount rates used to calculate such obligations and the healthcare cost trend rate: • Discount rate. The determination of the discount rate used to calculate the benefit obligations of the OPEB plans is discussed in the pension plans section above. A 100 basis point decrease (increase) in the discount rate assumption for these plans would not be material to the OPEB plans' consolidated expense and the December 31, 2018 benefit liability would increase by approximately $22 million or decrease by approximately $19 million, respectively. • Healthcare cost trend rate. The healthcare cost trend rate is based on a combination of inputs including our recent claims history and insights from external advisers regarding recent developments in the healthcare marketplace, as well as projections of future trends in the marketplace. See Note 10 to the Consolidated Financial Statements for disclosure of the effects of a one percentage point change in the healthcare cost trend rate. 41 Goodwill and Other Intangible Assets Goodwill and indefinite-lived intangible assets are not amortized, but are evaluated for impairment annually or more often if indicators of a potential impairment are present. Our annual impairment tests are conducted at the beginning of the fourth quarter. We test goodwill for impairment by performing either a qualitative or quantitative assessment. If we choose to perform a qualitative assessment, we evaluate economic, industry and company-specific factors in assessing the fair value of the related reporting unit. If we determine that it is more likely than not that the fair value of the reporting unit is less than its carrying value, a quantitative test is then performed. Otherwise, no further testing is required. For those reporting units tested using a quantitative approach, we compare the fair value of each reporting unit with the carrying amount of the reporting unit, including goodwill. If the estimated fair value of the reporting unit is less than the carrying amount of the reporting unit, impairment is indicated, requiring recognition of a goodwill impairment charge for the differential (up to the carrying value of goodwill). We test individual indefinite-lived intangible assets by comparing the estimated fair values with the book values of each asset. We determine the fair value of our reporting units and indefinite-lived intangible assets using an income approach. Under the income approach, we calculate the fair value of our reporting units and indefinite-lived intangible assets based on the present value of estimated future cash flows. Considerable management judgment is necessary to evaluate the impact of operating and macroeconomic changes and to estimate the future cash flows used to measure fair value. Our estimates of future cash flows consider past performance, current and anticipated market conditions and internal projections and operating plans which incorporate estimates for sales growth and profitability, and cash flows associated with taxes and capital spending. Additional assumptions include forecasted growth rates, estimated discount rates, which may be risk-adjusted for the operating market of the reporting unit, and estimated royalty rates that would be charged for comparable branded licenses. We believe such assumptions also reflect current and anticipated market conditions and are consistent with those that would be used by other marketplace participants for similar valuation purposes. Such assumptions are subject to change due to changing economic and competitive conditions. We also have intangible assets, consisting primarily of certain trademarks, customer-related intangible assets and patents obtained through business acquisitions, that are expected to have determinable useful lives. The costs of finite- lived intangible assets are amortized to expense over their estimated lives. Our estimates of the useful lives of finite- lived intangible assets consider judgments regarding the future effects of obsolescence, demand, competition and other economic factors. We conduct impairment tests when events or changes in circumstances indicate that the carrying value of these finite-lived assets may not be recoverable. Undiscounted cash flow analyses are used to determine if an impairment exists. If an impairment is determined to exist, the loss is calculated based on the estimated fair value of the assets. At December 31, 2018, the net book value of our goodwill totaled $1,801.1 million and related to four reporting units. Based on our most recent quantitative testing, all of our reporting units had a percentage of excess fair value over carrying value of 100% or more. Therefore, as it relates to our 2018 annual testing performed at the beginning of the fourth quarter, we tested all four reporting units using a qualitative assessment and determined that no quantitative testing was deemed necessary. There were no other events or circumstances that would indicate that impairment may exist. In February 2017, we commenced the Margin for Growth Program which includes an initiative to optimize the manufacturing operations supporting our China business. We deemed this to be a triggering event requiring us to test our China long-lived asset group for impairment by first determining whether the carrying value of the asset group was recovered by our current estimates of future cash flows associated with the asset group. Because this assessment indicated that the carrying value was not recoverable, we calculated an impairment loss as the excess of the asset group's carrying value over its fair value. The resulting impairment loss was allocated to the asset group's long-lived assets. Therefore, as a result of this testing, during the first quarter of 2017, we recorded an impairment charge totaling $105.9 million representing the portion of the impairment loss that was allocated to the distributor relationship and trademark intangible assets that had been recognized in connection with the 2014 SGM acquisition. In 2016, in connection with our annual impairment testing of indefinite lived intangible assets, we recognized a trademark impairment charge of $4.2 million, primarily resulting from plans to discontinue a brand sold in India. 42 Income Taxes We base our deferred income taxes, accrued income taxes and provision for income taxes upon income, statutory tax rates, the legal structure of our Company, interpretation of tax laws and tax planning opportunities available to us in the various jurisdictions in which we operate. We file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. We are regularly audited by federal, state and foreign tax authorities, but a number of years may elapse before an uncertain tax position, for which we have unrecognized tax benefits, is audited and finally resolved. From time to time, these audits result in assessments of additional tax. We maintain reserves for such assessments. We apply a more-likely-than-not threshold to the recognition and derecognition of uncertain tax positions. Accordingly, we recognize the amount of tax benefit that has a greater than 50% likelihood of being ultimately realized upon settlement. Future changes in judgments and estimates related to the expected ultimate resolution of uncertain tax positions will affect income in the quarter of such change. While it is often difficult to predict the final outcome or the timing of resolution of any particular uncertain tax position, we believe that our unrecognized tax benefits reflect the most likely outcome. Accrued interest and penalties related to unrecognized tax benefits are included in income tax expense. We adjust these unrecognized tax benefits, as well as the related interest, in light of changing facts and circumstances, such as receiving audit assessments or clearing of an item for which a reserve has been established. Settlement of any particular position could require the use of cash. Favorable resolution would be recognized as a reduction to our effective income tax rate in the period of resolution. We believe it is more likely than not that the results of future operations will generate sufficient taxable income to realize the deferred tax assets, net of valuation allowances. Our valuation allowances are primarily related to U.S. capital loss carryforwards and various foreign jurisdictions' net operating loss carryforwards and other deferred tax assets for which we do not expect to realize a benefit. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We use certain derivative instruments to manage our interest rate, foreign currency exchange rate and commodity price risks. We monitor and manage these exposures as part of our overall risk management program. We enter into interest rate swap agreements and foreign currency forward exchange contracts for periods consistent with related underlying exposures. We enter into commodities futures and options contracts and other derivative instruments for varying periods. These commodity derivative instruments are intended to be, and are effective as, economic hedges of market price risks associated with anticipated raw material purchases, energy requirements and transportation costs. We do not hold or issue derivative instruments for trading purposes and are not a party to any instruments with leverage or prepayment features. In entering into these contracts, we have assumed the risk that might arise from the possible inability of counterparties to meet the terms of their contracts. We mitigate this risk by entering into exchange-traded contracts with collateral posting requirements and/or by performing financial assessments prior to contract execution, conducting periodic evaluations of counterparty performance and maintaining a diverse portfolio of qualified counterparties. We do not expect any significant losses from counterparty defaults. Refer to Note 1 and Note 5 to the Consolidated Financial Statements for further discussion of these derivative instruments and our hedging policies. Interest Rate Risk The total notional amount of interest rate swaps outstanding at December 31, 2018 and 2017 was $350 million. The notional amount relates to fixed-to-floating interest rate swaps which convert a comparable amount of fixed-rate debt to variable rate debt at December 31, 2018 and 2017. A hypothetical 100 basis point increase in interest rates applied to this now variable-rate debt as of December 31, 2018 would have increased interest expense by approximately $3.5 million for the full year 2018 and 2017, respectively. We consider our current risk related to market fluctuations in interest rates on our remaining debt portfolio, excluding fixed-rate debt converted to variable rates with fixed-to-floating instruments, to be minimal since this debt is largely long-term and fixed-rate in nature. Generally, the fair market value of fixed-rate debt will increase as interest rates fall 43 and decrease as interest rates rise. A 100 basis point increase in market interest rates would decrease the fair value of our fixed-rate long-term debt at December 31, 2018 and December 31, 2017 by approximately $121 million and $134 million, respectively. However, since we currently have no plans to repurchase our outstanding fixed-rate instruments before their maturities, the impact of market interest rate fluctuations on our long-term debt does not affect our results of operations or financial position. 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. During 2016, we had one interest rate swap agreement in a cash flow hedging relationship with a notional amount of $500 million, which was settled in connection with the issuance of debt in August 2016, resulting in a payment of approximately $87 million which is reflected as an operating cash flow within the Consolidated Statement of Cash Flows. Foreign Currency Exchange Rate Risk We are exposed to currency fluctuations related to manufacturing or selling products in currencies other than the U.S. dollar. We may enter into foreign currency forward exchange contracts to reduce fluctuations in our long or short currency positions relating primarily to purchase commitments or forecasted purchases for equipment, raw materials and finished goods denominated in foreign currencies. We also may hedge payment of forecasted intercompany transactions with our subsidiaries outside of the United States. We generally hedge foreign currency price risks for periods from 3 to 12 months. A summary of foreign currency forward exchange contracts and the corresponding amounts at contracted forward rates is as follows: December 31, 2018 2017 Contract Amount Primary Currencies Contract Amount Primary Currencies In millions of dollars Foreign currency forward exchange contracts to purchase foreign currencies Foreign currency forward exchange contracts to sell foreign currencies $ 33.4 $ 51.8 Euros British pound Canadian dollars Brazilian reals Japanese yen $ 19.5 Euros Canadian dollars Brazilian reals Japanese yen $ 158.2 The fair value of foreign currency forward exchange contracts represents the difference between the contracted and current market foreign currency exchange rates at the end of the period. We estimate the fair value of foreign 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. At December 31, 2018 and 2017, the net fair value of these instruments was an asset of $2.5 million and a liability of $1.0 million, respectively. Assuming an unfavorable 10% change in year-end foreign currency exchange rates, the fair value of these instruments would have declined by $4.5 million and $19.7 million, respectively. 44 Commodities—Price Risk Management and Futures Contracts Our most significant raw material requirements include cocoa products, sugar, dairy products, peanuts and almonds. The cost of cocoa products and prices for related futures contracts and costs for certain other raw materials historically have been subject to wide fluctuations attributable to a variety of factors. These factors include: Commodity market fluctuations; Foreign currency exchange rates; Imbalances between supply and demand; The effect of weather on crop yield; Speculative influences; Trade agreements among producing and consuming nations; Supplier compliance with commitments; Political unrest in producing countries; and Changes in governmental agricultural programs and energy policies. We use futures and options contracts and other commodity derivative instruments in combination with forward purchasing of cocoa products, sugar, corn sweeteners, natural gas and certain dairy products primarily to reduce the risk of future price increases and provide visibility to future costs. Currently, active futures contracts are not available for use in pricing our other major raw material requirements, primarily peanuts and almonds. We attempt to minimize the effect of future price fluctuations related to the purchase of raw materials by using forward purchasing to cover future manufacturing requirements generally for 3 to 24 months. However, dairy futures liquidity is not as developed as many of the other commodities futures markets and, therefore, it can be difficult to hedge our costs for dairy products by entering into futures contracts or other derivative instruments to extend coverage for long periods of time. We use diesel swap futures contracts to minimize price fluctuations associated with our transportation costs. Our commodity procurement practices are intended to reduce the risk of future price increases and provide visibility to future costs, but also may potentially limit our ability to benefit from possible price decreases. Our costs for major raw materials will not necessarily reflect market price fluctuations primarily because of our forward purchasing and hedging practices. During 2018, average cocoa futures contract prices increased compared with 2017 and traded in a range between $0.88 and $1.23 per pound, based on the Intercontinental Exchange futures contract. Cocoa production was higher during the 2017 to 2018 crop year and slightly outpaced the increase in global demand, which led to a small rebuild in global cocoa stocks over the past year. At the beginning of the year, cocoa prices rallied sharply before declining in the second half due to increased supply relative to demand. The table below shows annual average cocoa futures prices and the highest and lowest monthly averages for each of the calendar years indicated. The prices reflect the monthly averages of the quotations at noon of the three active futures trading contracts closest to maturity on the Intercontinental Exchange. Annual Average High Low Cocoa Futures Contract Prices (dollars per pound) 2018 2017 2016 2015 2014 $ $ $ 1.06 1.23 0.88 0.91 0.99 0.87 $ $ 1.29 1.38 1.03 1.40 1.53 1.28 1.36 1.45 1.25 Source: International Cocoa Organization Quarterly Bulletin of Cocoa Statistics Our costs for cocoa products will not necessarily reflect market price fluctuations because of our forward purchasing and hedging practices, premiums and discounts reflective of varying delivery times, and supply and demand for our specific varieties and grades of cocoa liquor, cocoa butter and cocoa powder. As a result, the average futures contract prices are not necessarily indicative of our average costs. During 2018, prices for fluid dairy milk ranged from a low of $0.13 per pound to a high of $0.15 per pound, on a Class IV milk basis. Fluid dairy milk prices were lower than 2017, driven by higher U.S. inventories. 45 The price of sugar is subject to price supports under U.S. farm legislation. Such legislation establishes import quotas and duties to support the price of sugar. As a result, sugar prices paid by users in the United States are currently higher than prices on the world sugar market. United States delivered east coast refined sugar prices traded in a range from $0.38 to $0.40 per pound during 2018. Peanut prices in the United States ranged from a from a low of $0.45 per pound to a high of $0.50 per pound. Lower planted acreage and unfavorable weather conditions during harvest in the key U.S. peanut growing regions resulted in an estimated 26% smaller crop versus the 2017 crop. Almond prices began the year at $2.89 per pound and closed the year at $2.98 per pound, driven by record shipments and lower than expected yields for the 2018 crop. We make or receive cash transfers to or from commodity futures brokers on a daily basis reflecting changes in the value of futures contracts on the Intercontinental Exchange or various other exchanges. These changes in value represent unrealized gains and losses. The cash transfers offset higher or lower cash requirements for the payment of future invoice prices of raw materials, energy requirements and transportation costs. Commodity Sensitivity Analysis Our open commodity derivative contracts had a notional value of $693.5 million as of December 31, 2018 and $405.3 million as of December 31, 2017. At the end of 2018, the potential change in fair value of commodity derivative instruments, assuming a 10% decrease in the underlying commodity price, would have increased our net unrealized losses in 2018 by $71.6 million, generally offset by a reduction in the cost of the underlying commodity purchases. 46 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Responsibility for Financial Statements Report of Independent Registered Public Accounting Firm Consolidated Statements of Income for the years ended December 31, 2018, 2017 and 2016 Consolidated Statements of Comprehensive Income for the years ended December 31, 2018, 2017 and 2016 Consolidated Balance Sheets as of December 31, 2018 and 2017 Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 and 2016 Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2018, 2017 and 2016 Notes to Consolidated Financial Statements 48 49 53 54 55 56 57 58 47 RESPONSIBILITY FOR FINANCIAL STATEMENTS The Hershey Company is responsible for the financial statements and other financial information contained in this report. We believe that the financial statements have been prepared in conformity with U.S. generally accepted accounting principles appropriate under the circumstances to reflect in all material respects the substance of applicable events and transactions. In preparing the financial statements, it is necessary that management make informed estimates and judgments. The other financial information in this annual report is consistent with the financial statements. We maintain a system of internal accounting controls designed to provide reasonable assurance that financial records are reliable for purposes of preparing financial statements and that assets are properly accounted for and safeguarded. The concept of reasonable assurance is based on the recognition that the cost of the system must be related to the benefits to be derived. We believe our system provides an appropriate balance in this regard. We maintain an Internal Audit Department which reviews the adequacy and tests the application of internal accounting controls. The 2018 and 2017 financial statements have been audited by Ernst & Young LLP, an independent registered public accounting firm. The 2016 financial statements have been audited by KPMG LLP, an independent registered public accounting firm. Ernst & Young LLP's reports on our financial statements and internal controls over financial reporting as of December 31, 2018 are included herein. The Audit Committee of the Board of Directors of the Company, consisting solely of independent, non-management directors, meets regularly with the independent auditors, internal auditors and management to discuss, among other things, the audit scope and results. Ernst & Young LLP and the internal auditors both have full and free access to the Audit Committee, with and without the presence of management. /s/ MICHELE G. BUCK Michele G. Buck Chief Executive Officer (Principal Executive Officer) /s/ PATRICIA A. LITTLE Patricia A. Little Chief Financial Officer (Principal Financial Officer) 48 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and the Board of Directors of The Hershey Company Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of The Hershey Company (the Company) as of December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, cash flows, and stockholders' equity for the years ended December 31, 2018 and 2017, and the related notes and financial statement schedule listed in the Index at Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2018 and 2017, and the results of its operations and its cash flows for the years ended December 31, 2018 and 2017, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 22, 2019 expressed an unqualified opinion thereon. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ ERNST & YOUNG LLP We have served as the Company‘s auditor since 2016. Philadelphia, Pennsylvania February 22, 2019 49 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and the Board of Directors of The Hershey Company Opinion on Internal Control over Financial Reporting We have audited The Hershey Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, The Hershey Company (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on the COSO criteria. As indicated in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Amplify Snack Brands, Inc. or Pirate Brands (collectively, “the Acquired Companies”) which are included in the 2018 consolidated financial statements of the Company and constituted 28.2% of total assets as of December 31, 2018 and 4.0% of net sales for the year then ended. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of the Acquired Companies. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, cash flows, and stockholders' equity for the years ended December 31, 2018 and 2017, and the related notes and financial statement schedule listed in the Index at Item 15(a) (2) and our report dated February 22, 2019 expressed an unqualified opinion thereon. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. 50 Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ ERNST & YOUNG LLP Philadelphia, Pennsylvania February 22, 2019 51 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders The Hershey Company: We have audited the accompanying consolidated statements of income, comprehensive income, cash flows and stockholders’ equity of The Hershey Company and subsidiaries (the “Company”) for the year ended December 31, 2016. In connection with our audit of the consolidated financial statements, we also have audited the related consolidated financial statement schedule for the year ended December 31, 2016. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and the cash flows of The Hershey Company and subsidiaries for the year ended December 31, 2016, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related consolidated financial statement schedule for the year ended December 31, 2016, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ KPMG LLP New York, New York February 21, 2017, except for the classification adjustments to the Consolidated Statements of Cash Flows related to the adoption of Accounting Standards Update 2016-09, Compensation --Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, described in Note 1, as to which the date is February 27, 2018 and the classification adjustments related to the adoption of Accounting Standards Update 2017-07, Compensation-Retirement Benefits (Topic 715), described in Note 1, as to which the date is May 25, 2018. 52 THE HERSHEY COMPANY CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share amounts) For the years ended December 31, 2018 2017 Net sales Cost of sales Gross profit Selling, marketing and administrative expense Long-lived and intangible asset impairment charges Business realignment costs Operating profit Interest expense, net Other (income) expense, net Income before income taxes Provision for income taxes Net income including noncontrolling interest Less: Net loss attributable to noncontrolling interest Net income attributable to The Hershey Company Net income per share—basic: Common stock Class B common stock Net income per share—diluted: Common stock Class B common stock Dividends paid per share: Common stock Class B common stock $ 7,791,069 $ 7,515,426 $ 4,215,744 3,575,325 1,874,829 57,729 19,103 4,060,050 3,455,376 1,885,492 208,712 47,763 2016 7,440,181 4,270,642 3,169,539 1,891,305 4,204 18,857 1,623,664 1,313,409 1,255,173 138,837 74,766 1,410,061 239,010 1,171,051 (6,511) 1,177,562 5.76 5.24 5.58 5.22 2.756 2.504 $ $ $ $ $ $ $ 98,282 104,459 1,110,668 354,131 756,537 (26,444) 782,981 3.79 3.44 3.66 3.44 2.548 2.316 $ $ $ $ $ $ $ 90,143 65,549 1,099,481 379,437 720,044 — 720,044 3.45 3.15 3.34 3.14 2.402 2.184 $ $ $ $ $ $ $ See Notes to Consolidated Financial Statements. 53 6 1 0 2 x a T , 1 3 r e b m e c e D d e d n e s r a e y e h t r o F 7 1 0 2 x a T 8 1 0 2 x a T 4 4 0 , 0 2 7 $ 7 3 5 , 6 5 7 $ 1 5 0 , 1 7 1 , 1 $ x a T - r e t f A t n u o m A ) e s n e p x E ( t i f e n e B x a T - e r P t n u o m A x a T - r e t f A t n u o m A ) e s n e p x E ( t i f e n e B x a T - e r P t n u o m A x a T - r e t f A t n u o m A ) e s n e p x E ( t i f e n e B x a T - e r P t n u o m A Y N A P M O C Y E H S R E H E H T E M O C N I E V I S N E H E R P M O C F O S T N E M E T A T S D E T A D I L O S N O C ) s d n a s u o h t n i ( : x a t f o t e n , ) s s o l ( e m o c n i e v i s n e h e r p m o c r e h t O t s e r e t n i g n i l l o r t n o c n o n g n i d u l c n i e m o c n i t e N : s t n e m t s u j d a n o i t a l s n a r t y c n e r r u c n g i e r o F — ) 1 4 0 , 3 1 ( — — $ ) 1 4 0 , 3 1 ( $ 6 1 6 , 9 1 — — — — $ 6 1 6 , 9 1 $ ) 3 4 1 , 1 3 ( — 1 3 1 , 5 2 — — $ ) 3 4 1 , 1 3 ( $ 1 3 1 , 5 2 d o i r e p g n i r u d ) s e s s o l ( s n i a g n o i t a l s n a r t y c n e r r u c n g i e r o F s e s s e n i s u b f o e l a s e h t o t e u d s g n i n r a e o t n o i t a c i f i s s a l c e R — — 8 2 5 , 2 1 ) 6 7 7 , 7 ( — 4 0 3 , 0 2 — — — 5 3 8 , 7 1 ) 3 8 8 , 0 1 ( 8 1 7 , 8 2 1 5 9 , 4 3 ) 3 5 6 , 1 2 ( 4 0 6 , 6 5 8 0 8 , 9 1 ) 7 9 4 , 6 2 ( 5 0 3 , 6 4 ) 7 0 0 , 4 3 ( — ) 8 5 9 , 8 ( ) 7 2 5 , 8 ( ) 4 6 6 , 3 ( 7 1 5 , 1 1 7 1 8 1 , 5 1 7 $ $ 1 0 7 , 8 1 — 4 2 5 , 7 ) 8 0 7 , 2 5 ( — ) 2 8 4 , 6 1 ( ) 4 0 2 , 3 ( $ ) 3 2 3 , 5 ( $ ) 8 5 8 , 4 ( — 1 8 5 , 0 1 2 8 9 , 2 6 9 1 5 , 9 1 8 ) 4 0 6 , 5 2 ( 3 2 1 , 5 4 8 $ $ 3 7 — ) 3 5 8 , 3 ( ) 1 3 9 , 4 ( — 4 3 4 , 4 1 4 5 . s t n e m e t a t S i l a i c n a n F d e t a d i l o s n o C o t s e t o N e e S ) 0 6 1 , 1 4 ( $ 2 4 1 , 4 0 1 $ ) 5 0 2 , 4 4 ( ) 5 8 2 , 0 5 ( $ 0 8 0 , 6 $ x a t f o t e n , ) s s o l ( e m o c n i e v i s n e h e r p m o c r e h t o l a t o T 6 4 8 , 6 2 1 , 1 $ ) 2 8 6 , 7 ( 8 2 5 , 4 3 1 , 1 $ t s e r e t n i g n i l l o r t n o c n o n g n i d u l c n i e m o c n i e v i s n e h e r p m o c l a t o T t s e r e t n i g n i l l o r t n o c n o n o t e l b a t u b i r t t a s s o l e v i s n e h e r p m o C y n a p m o C y e h s r e H e h T o t e l b a t u b i r t t a e m o c n i e v i s n e h e r p m o C ) 4 0 6 , 9 2 ( ) 5 3 5 , 6 3 ( 5 3 4 , 0 3 6 3 7 , 5 ) 1 2 1 , 1 1 ( 6 9 8 , 2 0 2 1 , 0 1 ) 5 3 5 , 6 3 ( ) 6 8 9 , 9 ( ) 6 8 ( ) 1 2 1 , 1 1 ( ) 7 7 6 , 2 ( ) 4 2 7 , 9 3 ( — 1 2 4 , 0 4 — 2 2 8 , 5 3 7 5 , 5 m r o f e r x a t . . S U o t g n i t a l e r s t c e f f e x a t f o n o i t a c i f i s s a l c e R t s o c e c i v r e s r o i r p d n a ) s s o l ( n i a g l a i r a u t c a t e N : s n a l p t i f e n e b t n e m e r i t e r - t s o p d n a n o i s n e P s g n i n r a e o t n o i t a c i f i s s a l c e R : s e g d e h w o l f h s a C m r o f e r x a t . . S U o t g n i t a l e r s t c e f f e x a t f o n o i t a c i f i s s a l c e R s e v i t a v i r e d g n i g d e h w o l f h s a c n o ) s e s s o l ( s n i a G s g n i n r a e o t n o i t a c i f i s s a l c e R THE HERSHEY COMPANY CONSOLIDATED BALANCE SHEETS (in thousands, except share data) December 31, ASSETS Current assets: Cash and cash equivalents Accounts receivable—trade, net Inventories Prepaid expenses and other Total current assets Property, plant and equipment, net Goodwill Other intangibles Other assets Deferred income taxes Total assets LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable Accrued liabilities Accrued income taxes Short-term debt Current portion of long-term debt Total current liabilities Long-term debt Other long-term liabilities Deferred income taxes Total liabilities Stockholders’ equity: The Hershey Company stockholders’ equity Preferred stock, shares issued: none in 2018 and 2017 Common stock, shares issued: 299,287,967 in 2018 and 299,281,967 in 2017 Class B common stock, shares issued: 60,613,777 in 2018 and 60,619,777 in 2017 Additional paid-in capital Retained earnings Treasury—common stock shares, at cost: 150,172,840 in 2018 and 149,040,927 in 2017 Accumulated other comprehensive loss Total—The Hershey Company stockholders’ equity Noncontrolling interest in subsidiary Total stockholders’ equity Total liabilities and stockholders’ equity See Notes to Consolidated Financial Statements. 55 2018 2017 $ 587,998 594,145 784,879 272,159 2,239,181 2,130,294 1,801,103 1,278,292 252,984 1,166 $ 7,703,020 $ 380,179 588,262 752,836 280,633 2,001,910 2,106,697 821,061 369,156 251,879 3,023 $ 5,553,726 $ 502,314 679,163 33,773 1,197,929 5,387 2,418,566 3,254,280 446,048 176,860 6,295,754 $ 523,229 676,134 17,723 559,359 300,098 2,076,543 2,061,023 438,939 45,656 4,622,161 — 299,287 60,614 982,205 — 299,281 60,620 924,978 7,032,020 6,371,082 (6,618,625) (356,780) 1,398,721 8,545 1,407,266 $ 7,703,020 (6,426,877) (313,746) 915,338 16,227 931,565 $ 5,553,726 THE HERSHEY COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) For the years ended December 31, Operating Activities 2018 2017 2016 Net income including noncontrolling interest $ 1,171,051 $ 756,537 $ 720,044 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Stock-based compensation expense Deferred income taxes Impairment of long-lived and intangible assets (see Notes 3 and 7) Write-down of equity investments Gain on settlement of SGM liability (see Note 2) Other Changes in assets and liabilities, net of business acquisitions and divestitures: Accounts receivable—trade, net Inventories Prepaid expenses and other current assets Accounts payable and accrued liabilities Accrued income taxes Contributions to pension and other benefit plans Other assets and liabilities Net cash provided by operating activities Investing Activities Capital additions (including software) Proceeds from sales of property, plant and equipment and other long-lived assets Proceeds from sales of businesses, net of cash and cash equivalents divested Equity investments in tax credit qualifying partnerships Business acquisitions, net of cash and cash equivalents acquired Net cash used in investing activities Financing Activities Net increase (decrease) in short-term debt Long-term borrowings Repayment of long-term debt Repayment of tax receivable obligation Payment of SGM liability (see Note 2) Cash dividends paid Repurchase of common stock Exercise of stock options Net cash provided by (used in) financing activities Effect of exchange rate changes on cash and cash equivalents Increase (decrease) in cash and cash equivalents Cash and cash equivalents, beginning of period Cash and cash equivalents, end of period Supplemental Disclosure Interest paid Income taxes paid 295,144 49,286 36,255 57,729 50,329 — 37,278 8,585 (12,746) (39,899) (100,252) 75,568 (25,864) (2,471) 261,853 51,061 18,582 208,712 66,209 — 77,291 (6,881) (71,404) 18,214 (52,960) (71,027) (56,433) 49,761 301,837 54,785 (38,097) 4,204 43,482 (26,650) 51,375 21,096 13,965 (42,955) (63,467) (937) (41,697) 16,443 1,599,993 1,249,515 1,013,428 (328,601) 49,759 167,048 (52,641) (1,338,459) (1,502,894) 645,805 1,199,845 (910,844) (72,000) — (562,521) (247,500) 63,323 116,108 (5,388) 207,819 380,179 587,998 132,486 118,842 $ $ $ $ (257,675) (269,476) 7,609 — (78,598) — (328,664) (81,426) 954 — — — (526,272) (300,312) 63,288 (843,768) 6,129 83,212 296,967 380,179 101,874 351,832 $ $ 3,651 — (44,255) (285,374) (595,454) 275,607 792,953 (500,000) — (35,762) (499,475) (592,550) 94,831 (464,396) (3,140) (49,562) 346,529 296,967 90,951 425,539 See Notes to Consolidated Financial Statements. 56 ’ s r e d l o h k c o t S y t i u q E n i s t s e r e t n I s e i r a i d i s b u S e v i s n e h e r p m o C ) s s o L ( e m o c n I l a t o T g n i l l o r t n o c n o N r e h t O d e t a l u m u c c A y r u s a e r T n o m m o C k c o t S d e n i a t e R s g n i n r a E l a n o i t i d d A n i - d i a P l a t i p a C B s s a l C n o m m o C k c o t S n o m m o C k c o t S d e r r e f e r P k c o t S 2 6 4 , 7 4 0 , 1 $ 5 6 4 , 9 4 $ ) 5 2 0 , 1 7 3 ( $ ) 9 5 3 , 2 7 6 , 5 ( $ 3 0 6 , 7 9 8 , 5 $ 7 7 8 , 3 8 7 $ 0 2 6 , 0 6 $ 1 8 2 , 9 9 2 $ — $ Y T I U Q E ’ S R E D L O H K C O T S F O S T N E M E T A T S D E T A D I L O S N O C Y N A P M O C Y E H S R E H E H T ) s d n a s u o h t n i ( ) 7 2 5 , 8 ( 4 4 0 , 0 2 7 ) 2 9 2 , 9 6 3 ( ) 4 9 3 , 2 3 1 ( 9 2 4 , 4 5 5 8 4 , 2 1 1 ) 0 7 9 , 3 ( ) 0 5 5 , 2 9 5 ( 7 8 6 , 7 2 8 7 3 5 , 6 5 7 2 8 9 , 2 6 ) 6 6 4 , 7 8 3 ( ) 4 9 3 , 0 4 1 ( 3 4 2 , 9 4 8 8 2 , 3 6 1 5 4 , 3 ) 2 1 3 , 0 0 3 ( 5 6 5 , 1 3 9 1 5 0 , 1 7 1 , 1 ) 1 9 4 , 2 1 4 ( ) 9 8 7 , 1 5 1 ( — 6 5 6 , 9 4 3 2 3 , 3 6 — ) 0 0 5 , 7 4 2 ( 6 6 2 , 7 0 4 , 1 $ 5 4 5 , 8 ) 4 6 6 , 3 ( ) 3 6 8 , 4 ( ) 0 7 9 , 3 ( 1 3 8 , 1 4 ) 4 4 4 , 6 2 ( 0 4 8 2 4 1 , 2 6 ) 8 8 8 , 5 7 3 ( ) 5 7 9 , 3 8 1 , 6 ( 4 3 9 , 0 8 ) 0 5 5 , 2 9 5 ( ) 1 1 5 , 6 ( ) 1 7 1 , 1 ( 7 2 2 , 6 1 2 2 6 , 4 ) 6 4 7 , 3 1 3 ( 0 1 4 , 7 5 ) 2 1 3 , 0 0 3 ( ) 7 7 8 , 6 2 4 , 6 ( 4 4 0 , 0 2 7 ) 2 9 2 , 9 6 3 ( ) 4 9 3 , 2 3 1 ( 1 8 9 , 2 8 7 1 6 9 , 5 1 1 , 6 ) 6 6 4 , 7 8 3 ( ) 4 9 3 , 0 4 1 ( 2 8 0 , 1 7 3 , 6 2 6 5 , 7 7 1 , 1 ) 1 9 4 , 2 1 4 ( ) 9 8 7 , 1 5 1 ( 9 2 4 , 4 5 1 5 5 , 1 3 7 5 8 , 9 6 8 0 2 6 , 0 6 1 8 2 , 9 9 2 — 8 7 8 , 5 3 4 2 , 9 4 8 7 9 , 4 2 9 0 2 6 , 0 6 1 8 2 , 9 9 2 — s n o i t c a s n a r t d e s a b - e v i t n e c n i d n a s n o i t p o k c o t s f o e s i c r e x E e r a h s r e p 4 8 1 . 2 $ , k c o t S n o m m o C B s s a l C e r a h s r e p 2 0 4 . 2 $ , k c o t S n o m m o C : ) s t n e l a v i u q e d n e d i v i d g n i d u l c n i ( s d n e d i v i D n o i t a s n e p m o c d e s a b - k c o t S 6 1 0 2 , 1 y r a u n a J , e c n a l a B s s o l e v i s n e h e r p m o c r e h t O e m o c n i t e N s t s e r e t n i g n i l l o r t n o c n o n f o s s o L 6 1 0 2 , 1 3 r e b m e c e D , e c n a l a B k c o t s n o m m o c f o e s a h c r u p e R e m o c n i e v i s n e h e r p m o c r e h t O ) s s o l ( e m o c n i t e N s n o i t c a s n a r t d e s a b - e v i t n e c n i d n a s n o i t p o k c o t s f o e s i c r e x E e r a h s r e p 6 1 3 . 2 $ , k c o t S n o m m o C B s s a l C e r a h s r e p 8 4 5 . 2 $ , k c o t S n o m m o C : ) s t n e l a v i u q e d n e d i v i d g n i d u l c n i ( s d n e d i v i D n o i t a s n e p m o c d e s a b - k c o t S e r a h s r e p 4 0 5 . 2 $ , k c o t S n o m m o C B s s a l C e r a h s r e p 6 5 7 . 2 $ , k c o t S n o m m o C : ) s t n e l a v i u q e d n e d i v i d g n i d u l c n i ( s d n e d i v i D ) s s o l ( e m o c n i e v i s n e h e r p m o c r e h t O k c o t s n o m m o c f o e s a h c r u p e R 7 1 0 2 , 1 3 r e b m e c e D , e c n a l a B ) s s o l ( e m o c n i t e N 7 5 . s t n e m e t a t S i l a i c n a n F d e t a d i l o s n o C o t s e t o N e e S $ ) 0 8 7 , 6 5 3 ( ) 6 5 6 , 7 4 ( 2 5 7 , 5 5 ) 0 0 5 , 7 4 2 ( 6 5 6 , 7 4 1 7 5 , 7 6 5 6 , 9 4 ) 6 ( 6 k c o t S n o m m o C o t n i k c o t S n o m m o C B s s a l C f o n o i s r e v n o C s n o i t c a s n a r t d e s a b - e v i t n e c n i d n a s n o i t p o k c o t s f o e s i c r e x E m r o f e r x a t . . S U o t g n i t a l e r s t c e f f e x a t f o n o i t a c i f i s s a l c e R k c o t s n o m m o c f o e s a h c r u p e R n o i t a s n e p m o c d e s a b - k c o t S $ ) 5 2 6 , 8 1 6 , 6 ( $ 0 2 0 , 2 3 0 , 7 $ 5 0 2 , 2 8 9 $ 4 1 6 , 0 6 $ 7 8 2 , 9 9 2 $ — $ 8 1 0 2 , 1 3 r e b m e c e D , e c n a l a B THE HERSHEY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (amounts in thousands, except share data or if otherwise indicated) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Business The Hershey Company together with its wholly-owned subsidiaries and entities in which it has a controlling interest, (the “Company,” “Hershey,” “we” or “us”) is a global confectionery leader known for its branded portfolio of chocolate, sweets, mints and other great-tasting snacks. The Company has more than 80 brands worldwide including such iconic brand names as Hershey’s, Reese’s, Kisses, Jolly Rancher and Ice Breakers, which are marketed, sold and distributed in approximately 90 countries worldwide. Hershey's structure is designed to ensure continued focus on North America, coupled with an emphasis on profitable growth in our focus international markets. The Company currently operates through two reportable segments that are aligned with its management structure and the key markets it serves: North America and International and Other. For additional information on our segment presentation, see Note 12. Basis of Presentation Our consolidated financial statements include the accounts of The Hershey Company and its majority-owned or controlled subsidiaries. Intercompany transactions and balances have been eliminated. We have a controlling financial interest if we own a majority of the outstanding voting common stock and minority shareholders do not have substantive participating rights, we have significant control through contractual or economic interests in which we are the primary beneficiary or we have the power to direct the activities that most significantly impact the entity's economic performance. Net income (loss) attributable to noncontrolling interests in 2016 was not considered significant and was recorded within selling, marketing and administrative expense in the Consolidated Statements of Income. See Note 13 for additional information on our noncontrolling interest. We use the equity method of accounting when we have a 20% to 50% interest in other companies and exercise significant influence. In addition, we use the equity method of accounting for our investments in partnership entities which make equity investments in projects eligible to receive federal historic and energy tax credits. See Note 9 for additional information on our equity investments in partnership entities qualifying for tax credits. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying disclosures. Our significant estimates and assumptions include, among others, pension and other post-retirement benefit plan assumptions, valuation assumptions of goodwill and other intangible assets, useful lives of long-lived assets, marketing and trade promotion accruals and income taxes. These estimates and assumptions are based on management’s best judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, and the effects of any revisions are reflected in the consolidated financial statements in the period that they are determined. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Revenue Recognition The majority of our revenue contracts represent a single performance obligation related to the fulfillment of customer orders for the purchase of our products, including chocolate, sweets, mints and other grocery and snack offerings. Net sales reflect the transaction prices for these contracts based on our selling list price which is then reduced by estimated costs for trade promotional programs, consumer incentives, and allowances and discounts associated with aged or potentially unsaleable products. We recognize revenue at the point in time that control of the ordered product(s) is transferred to the customer, which is typically upon delivery to the customer or other customer-designated delivery point. Amounts billed and due from our customers are classified as accounts receivables on the balance sheet and require payment on a short-term basis. Our trade promotional programs and consumer incentives are used to promote our products and include, but are not limited to, discounts, coupons, rebates, in-store display incentives, and volume-based incentives. The estimated costs 58 THE HERSHEY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) associated with these programs and incentives are based upon our analysis of the programs offered, expectations regarding customer and consumer participation, historical sales and payment trends, and our experience with payment patterns associated with similar programs offered in the past. The estimated costs of these programs are reasonably likely to change in future periods due to changes in trends with regard to customer and consumer participation, particularly for new programs and for programs related to the introduction of new products. Differences between estimated expense and actual program performance are recognized as a change in estimate in a subsequent period and are normally not significant. During 2018, 2017 and 2016, actual promotional costs have not deviated from the estimated amount by more than 3%. The Company’s unsettled portion remaining in accrued liabilities at year-end for these activities was $171,449 and $173,669 at December 31, 2018 and 2017, respectively. We also recognize a minor amount of royalty income (less than 1% of our consolidated net sales) from sales-based licensing arrangements, pursuant to which revenue is recognized as the third-party licensee sales occur. Shipping and handling costs incurred to deliver product to the customer are recorded within cost of sales. Sales, value add, and other taxes we collect concurrent with revenue producing activities are excluded from revenue. The majority of our products are confectionery or confectionery-based and, therefore, exhibit similar economic characteristics, as they are based on similar ingredients and are marketed and sold through the same channels to the same customers. In connection with our recent acquisitions, we have expanded our portfolio of snacking products, which also exhibit similar economic characteristics to our confectionery products and are sold through the same channels to the same customers. See Note 12 for revenues reported by geographic segment, which is consistent with how we organize and manage our operations, as well as product line net sales information. In 2018, 2017 and 2016, approximately 28%, 29% and 25%, respectively, of our consolidated net sales were made to McLane Company, Inc., one of the largest wholesale distributors in the United States to convenience stores, drug stores, wholesale clubs and mass merchandisers and the primary distributor of our products to Wal-Mart Stores, Inc. Cost of Sales Cost of sales represents costs directly related to the manufacture and distribution of our products. Primary costs include raw materials, packaging, direct labor, overhead, shipping and handling, warehousing and the depreciation of manufacturing, warehousing and distribution facilities. Manufacturing overhead and related expenses include salaries, wages, employee benefits, utilities, maintenance and property taxes. Selling, Marketing and Administrative Expense Selling, marketing and administrative expense (“SM&A”) represents costs incurred in generating revenues and in managing our business. Such costs include advertising and other marketing expenses, selling expenses, research and development costs, administrative and other indirect overhead costs, amortization of capitalized software and intangible assets and depreciation of administrative facilities. Research and development costs, charged to expense as incurred, totaled $38,521 in 2018, $45,850 in 2017 and $47,268 in 2016. Advertising expense is also charged to expense as incurred and totaled $479,908 in 2018, $541,293 in 2017 and $521,479 in 2016. Prepaid advertising expense was $594 and $56 as of December 31, 2018 and 2017, respectively. Cash Equivalents Cash equivalents consist of highly liquid debt instruments, time deposits and money market funds with original maturities of three months or less. The fair value of cash and cash equivalents approximates the carrying amount. Short-term Investments Short-term investments consist of bank term deposits that have original maturity dates ranging from greater than three months to twelve months. Short-term investments are carried at cost, which approximates fair value. 59 THE HERSHEY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) Accounts Receivable—Trade In the normal course of business, we extend credit to customers that satisfy pre-defined credit criteria, based upon the results of our recurring financial account reviews and our evaluation of current and projected economic conditions. Our primary concentrations of credit risk are associated with McLane Company, Inc. and Target Corporation, two customers served principally by our North America segment. As of December 31, 2018, McLane Company, Inc. accounted for approximately 26% of our total accounts receivable. No other customer accounted for more than 10% of our year-end accounts receivable. We believe that we have little concentration of credit risk associated with the remainder of our customer base. Accounts receivable-trade in the Consolidated Balance Sheets is presented net of allowances for bad debts and anticipated discounts of $24,610 and $41,792 at December 31, 2018 and 2017, respectively. Inventories Inventories are valued at the lower of cost or market value, adjusted for the value of inventory that is estimated to be excess, obsolete or otherwise unsaleable. As of December 31, 2018, approximately 60% of our inventories, representing the majority of our U.S. inventories, were valued under the last-in, first-out (“LIFO”) method. The remainder of our inventories in the U.S. and inventories for our international businesses were valued at the lower of first-in, first-out (“FIFO”) cost or net realizable value. LIFO cost of inventories valued using the LIFO method was $466,911 as of December 31, 2018 and $443,492 as of December 31, 2017. The adjustment to LIFO, as shown in Note 17, approximates the excess of replacement cost over the stated LIFO inventory value. The net impact of LIFO acquisitions and liquidations was not material to 2018, 2017 or 2016. Property, Plant and Equipment Property, plant and equipment is stated at cost and depreciated on a straight-line basis over the estimated useful lives of the assets, as follows: 3 to 15 years for machinery and equipment; and 25 to 40 years for buildings and related improvements. At December 31, 2018 and December 31, 2017, property, plant and equipment included assets under capital lease arrangements with net book values totaling $110,249 and $116,843, respectively. Total depreciation expense for the years ended December 31, 2018, 2017 and 2016 was $231,012, $211,592 and $231,735, respectively, and included depreciation on assets recorded under capital lease arrangements. Maintenance and repairs are expensed as incurred. We capitalize applicable interest charges incurred during the construction of new facilities and production lines and amortize these costs over the assets’ estimated useful lives. We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. We measure the recoverability of assets to be held and used by a comparison of the carrying amount of long-lived assets to future undiscounted net cash flows expected to be generated. If these assets are considered to be impaired, we measure impairment as the amount by which the carrying amount of the assets exceeds the fair value of the assets. We report assets held for sale or disposal at the lower of the carrying amount or fair value less cost to sell. We assess asset retirement obligations on a periodic basis and recognize the fair value of a liability for an asset retirement obligation in the period in which it is incurred if a reasonable estimate of fair value can be made. We capitalize associated asset retirement costs as part of the carrying amount of the long-lived asset. Computer Software We capitalize costs associated with software developed or obtained for internal use when both the preliminary project stage is completed and it is probable the software being developed will be completed and placed in service. Capitalized costs include only (i) external direct costs of materials and services consumed in developing or obtaining internal-use software, (ii) payroll and other related costs for employees who are directly associated with and who devote time to the internal-use software project and (iii) interest costs incurred, when material, while developing internal-use software. We cease capitalization of such costs no later than the point at which the project is substantially complete and ready for its intended purpose. The unamortized amount of capitalized software totaled $126,379 and $104,881 at December 31, 2018 and 2017, respectively. We amortize software costs using the straight-line method over the expected life of the software, generally 3 to 7 years. Accumulated amortization of capitalized software was $316,710 and $296,042 as of 60 THE HERSHEY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) December 31, 2018 and 2017, respectively. Such amounts are recorded within other assets in the Consolidated Balance Sheets. We review the carrying value of software and development costs for impairment in accordance with our policy pertaining to the impairment of long-lived assets. Goodwill and Other Intangible Assets Goodwill and indefinite-lived intangible assets are not amortized, but are evaluated for impairment annually or more often if indicators of a potential impairment are present. Our annual impairment tests are conducted at the beginning of the fourth quarter. We test goodwill for impairment by performing either a qualitative or quantitative assessment. If we choose to perform a qualitative assessment, we evaluate economic, industry and company-specific factors in assessing the fair value of the related reporting unit. If we determine that it is more likely than not that the fair value of the reporting unit is less than its carrying value, a quantitative test is then performed. Otherwise, no further testing is required. For those reporting units tested using a quantitative approach, we compare the fair value of each reporting unit with the carrying amount of the reporting unit, including goodwill. If the estimated fair value of the reporting unit is less than the carrying amount of the reporting unit, impairment is indicated, requiring recognition of a goodwill impairment charge for the differential (up to the carrying value of goodwill). We test individual indefinite-lived intangible assets by comparing the estimated fair values with the book values of each asset. We determine the fair value of our reporting units and indefinite-lived intangible assets using an income approach. Under the income approach, we calculate the fair value of our reporting units and indefinite-lived intangible assets based on the present value of estimated future cash flows. Considerable management judgment is necessary to evaluate the impact of operating and macroeconomic changes and to estimate the future cash flows used to measure fair value. Our estimates of future cash flows consider past performance, current and anticipated market conditions and internal projections and operating plans which incorporate estimates for sales growth and profitability, and cash flows associated with taxes and capital spending. Additional assumptions include forecasted growth rates, estimated discount rates, which may be risk-adjusted for the operating market of the reporting unit, and estimated royalty rates that would be charged for comparable branded licenses. We believe such assumptions also reflect current and anticipated market conditions and are consistent with those that would be used by other marketplace participants for similar valuation purposes. Such assumptions are subject to change due to changing economic and competitive conditions. See Note 3 for additional information regarding the results of impairment tests. The cost of intangible assets with finite useful lives is amortized on a straight-line basis. Our finite-lived intangible assets consist primarily of certain trademarks, customer-related intangible assets and patents obtained through business acquisitions. The weighted-average amortization period for our finite-lived intangible assets is approximately 27 years, which is primarily driven by recently acquired trademarks. If certain events or changes in operating conditions indicate that the carrying value of these assets, or related asset groups, may not be recoverable, we perform an impairment assessment and may adjust the remaining useful lives. Currency Translation The financial statements of our foreign entities with functional currencies other than the U.S. dollar are translated into U.S. dollars, with the resulting translation adjustments recorded as a component of other comprehensive income (loss). Assets and liabilities are translated into U.S. dollars using the exchange rates in effect at the balance sheet date, while income and expense items are translated using the average exchange rates during the period. Derivative Instruments We use derivative instruments principally to offset exposure to market risks arising from changes in commodity prices, foreign currency exchange rates and interest rates. See Note 5 for additional information on our risk management strategy and the types of instruments we use. Derivative instruments are recognized on the balance sheet at their fair values. When we become party to a derivative instrument and intend to apply hedge accounting, we designate the instrument for financial reporting purposes as a cash flow or fair value hedge. The accounting for changes in fair value (gains or losses) of a derivative instrument depends on whether we have designated it and it qualified as part of a hedging relationship, as noted below: 61 THE HERSHEY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) • Changes in the fair value of a derivative that is designated as a cash flow hedge are recorded in accumulated other comprehensive income (“AOCI”) to the extent effective and reclassified into earnings in the same period or periods during which the transaction hedged by that derivative also affects earnings. • Changes in the fair value of a derivative that is designated as a fair value hedge, along with the offsetting loss or gain on the hedged asset or liability that is attributable to the risk being hedged, are recorded in earnings, thereby reflecting in earnings the net extent to which the hedge is not effective in achieving offsetting changes in fair value. • Changes in the fair value of a derivative not designated as a hedging instrument are recognized in earnings in cost of sales or SM&A, consistent with the related exposure. For derivatives designated as hedges, we assess, both at the hedge's inception and on an ongoing basis, whether they are highly effective in offsetting changes in fair values or cash flows of hedged items. The ineffective portion, if any, is recorded directly in earnings. In addition, if we determine that a derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge, we discontinue hedge accounting prospectively. We do not hold or issue derivative instruments for trading or speculative purposes and are not a party to any instruments with leverage or prepayment features. Cash flows related to the derivative instruments we use to manage interest, commodity or other currency exposures are classified as operating activities. Recent Accounting Pronouncements Recently Adopted Accounting Pronouncements In February 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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. In March 2017, the FASB issued ASU No. 2017-07, Compensation-Retirement Benefits (Topic 715). This ASU requires an employer to report the service cost component of net benefit cost in the same line item as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if presented, or disclosed separately. In addition, only the service cost component may be eligible for capitalization where applicable. The amendments should be applied on a retrospective basis. We adopted the provisions of this ASU in the first quarter of 2018, with retrospective adjustment to the comparative periods determined using the previously disclosed service cost and other costs from our prior year pension and other post-retirement benefit plan footnote. As a result, the following amounts were reclassified for the the years ended December 31, 2017 and 2016 to correspond to the current year presentation: Reclassified from: Cost of sales Selling, marketing and administrative expense Business realignment costs Reclassified to Other (income) expense, net 2017 2016 $ $ 10,857 $ 27,911 — 38,768 $ 11,648 24,073 13,669 49,390 The adoption of this ASU had no impact on our consolidated balance sheets or statements of cash flows. 62 THE HERSHEY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (ASC Topic 606), which replaces numerous requirements in U.S. GAAP, including industry-specific requirements, and provides companies with a single revenue recognition model for recognizing revenue from contracts with customers. On January 1, 2018, we adopted the requirements of ASC Topic 606 and the amendments related thereto and applied the new requirements to all of our contracts using the modified retrospective method. Upon completing our implementation assessment of ASC Topic 606, we concluded that no adjustment was required to the opening balance of retained earnings at the date of initial application. The comparative information was not restated and continues to be reported under the accounting standards in effect for those periods. Additional disclosures required by ASC Topic 606 are presented within the aforementioned Revenue Recognition policy disclosure. In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. This ASU requires the income tax consequences of intra-entity transfers of assets other than inventory to be recognized when the intra-entity transfer occurs rather than deferring recognition of income tax consequences until the transfer was made with an outside party. We adopted the provisions of this ASU in the first quarter of 2018. Adoption of the new standard did not have a material impact on our consolidated financial statements. In March 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. We adopted the provisions of this ASU in the first quarter of 2017. This update principally affects the recognition of excess tax benefits and deficiencies and the cash flow classification of share-based compensation-related transactions. These classification requirements were adopted retrospectively to the Consolidated Statement of Cash Flows. As a result, for the year ended December 31, 2017, the impact resulted in a $24,901 increase in net cash flow from operating activities and a corresponding $24,901 decrease in net cash flow from financing activities. For the year ended December 31, 2016, the impact resulted in a $29,953 increase in net cash flow from operating activities and a corresponding $29,953 decrease in net cash flow from financing activities. Recently Issued Accounting Pronouncements Not Yet Adopted In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This ASU will require lessees to recognize most leases on their balance sheets as lease liabilities with corresponding right-of-use (“ROU”) assets. Recognition, measurement and presentation of expenses will depend on classification as a finance or operating lease. 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 elected to combine the lease and non-lease components for the asset categories comprising the majority of our leases and are making an accounting policy election to exclude from balance sheet reporting those leases with initial terms of 12 months or less. We have implemented new controls and processes, as well as new software functionality, to enable the preparation of financial information as necessitated by the new standard. We estimate that adoption of the standard will result in recognition of operating lease ROU assets and lease liabilities of approximately $230,000 and $220,000, respectively, with the difference largely due to prepaid and deferred rent that will be reclassified to the ROU asset value. In addition, we expect to derecognize a build-to-suit arrangement in accordance with the transition requirements, which will result in an adjustment to retained earnings of approximately $7,000. We do not expect adoption of the standard to materially affect our consolidated net income or cash flows. 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. The amendment should be applied using the modified retrospective transition method. ASU 2017-12 is effective for annual periods beginning after December 15, 2018 and interim periods within those annual periods, with early adoption permitted. We intend to adopt the provisions of this ASU in the first quarter of 2019. We believe the adoption of the new standard will not have a material impact on our consolidated financial statements. 63 THE HERSHEY COMPANY NOTES TO 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. ASU 2018-07 is effective for annual periods beginning after December 15, 2018 and interim periods within those annual periods, with early adoption permitted but no earlier than an entity’s adoption date of ASC Topic 606. The new guidance is required to be applied retrospectively with the cumulative effect recognized at the date of initial application. We will adopt the provisions of this ASU in the first quarter of 2019. Adoption of the new standard is not expected to have a material impact on our consolidated financial statements. 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. 2. BUSINESS ACQUISITIONS Acquisitions of businesses are accounted for as purchases and, accordingly, the results of operations of the businesses acquired have been included in the consolidated financial statements since the respective dates of the acquisitions. The purchase price for each acquisition is allocated to the assets acquired and liabilities assumed. In conjunction with acquisitions noted below, we used various valuation techniques to determine fair value of the assets acquired, with the primary techniques being discounted cash flow analysis, relief-from-royalty, and a form of the multi-period excess earnings valuation approaches, which use significant unobservable inputs, or Level 3 inputs, as defined by the fair value hierarchy. Under these valuation approaches, we are required to make estimates and assumptions about sales, operating margins, growth rates, royalty rates and discount rates based on budgets, business plans, economic projections, anticipated future cash flows and marketplace data. 64 THE HERSHEY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) 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. Pirate Brands is expected to generate annualized net sales of approximately $90,000 in 2019. 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 consideration was allocated to assets acquired and liabilities assumed based on their respective fair values as follows: Inventories Plant, property and equipment, net Goodwill Other intangible assets Accrued liabilities Net assets acquired $ $ 4,663 48 129,991 289,300 (1,000) 423,002 The purchase price allocation presented above has been finalized as of the end of the fourth quarter of 2018. 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. 65 THE HERSHEY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) 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 consideration, net of cash acquired totaling $53,324, was allocated to assets acquired and liabilities assumed based on their respective fair values as follows: Accounts receivable Other current assets Plant, property and equipment, net Goodwill Other intangible assets Other non-current assets Accounts payable Accrued liabilities Current debt Other current liabilities Non-current deferred income taxes Non-current liabilities Net assets acquired $ $ 41,152 35,509 71,093 939,388 682,000 1,049 (32,394) (109,565) (610,836) (2,931) (93,859) (5,149) 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. During 2018, we recorded measurement period adjustments totaling $27,001, the majority of which related to an increase in the final valuation of the assumed tax receivable obligation. The purchase price allocation has been finalized as of the end of the fourth quarter of 2018. 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. 66 THE HERSHEY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) 2016 Activity Ripple Brand Collective, LLC On April 26, 2016, we completed the acquisition of all of the outstanding shares of Ripple Brand Collective, LLC, a privately held company that owned the barkTHINS mass premium chocolate snacking brand. The barkTHINS brand is largely sold in the United States in take-home resealable packages and is available in the club channel, as well as select natural and conventional grocers. The purchase consideration was allocated to assets acquired and liabilities assumed based on their respective fair values as follows: Goodwill Trademarks Other intangible assets Other assets, primarily current assets, net of cash acquired totaling $674 Current liabilities Net assets acquired $ 128,110 91,200 60,900 12,375 (7,211) 285,374 $ Goodwill was 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 barkTHINS products. Acquired trademarks were assigned estimated useful lives of 27 years, while other intangibles, including customer relationships and covenants not to compete, were assigned estimated useful lives ranging from 2 to 14 years. The recorded goodwill, trademarks and other intangibles are expected to be deductible for tax purposes. Shanghai Golden Monkey In September 2014, we completed the acquisition of 80% of the outstanding shares of Shanghai Golden Monkey Food Joint Stock Co., Ltd. (“SGM”), a confectionery company based in Shanghai, China, whose product line is primarily sold through traditional trade channels. The acquisition was undertaken in order to leverage these traditional trade channels, which complemented our traditional China chocolate business that has historically been primarily distributed through Tier 1 or hypermarket channels. On February 3, 2016, we completed the purchase of the remaining 20% of the outstanding shares of SGM for cash consideration totaling $35,762, pursuant to a new agreement entered into during the fourth quarter of 2015 with the selling SGM shareholders which revised the originally-agreed purchase price for these shares. For accounting purposes, we treated the acquisition as if we had acquired 100% at the initial acquisition date in 2014 and financed the payment for the remaining 20% of the outstanding shares. Therefore, the cash settlement of the liability for the purchase of these remaining shares is reflected within the financing section of the Consolidated Statements of Cash Flows. The final settlement also resulted in an extinguishment gain of $26,650 representing the net carrying amount of the recorded liability in excess of the cash paid to settle the obligation for the remaining 20% of the outstanding shares. This gain is recorded within non-operating other (income) expense, net within the Consolidated Statements of Income. In July 2018, we sold the SGM business. Refer to Note 6 and Note 7 for further discussion regarding the divestiture of SGM. 67 THE HERSHEY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) 3. GOODWILL AND INTANGIBLE ASSETS The changes in the carrying value of goodwill by reportable segment for the years ended December 31, 2018 and 2017 are as follows: Goodwill Accumulated impairment loss Balance at January 1, 2017 Foreign currency translation Balance at December 31, 2017 Acquired during the period (see Note 2) Purchase price allocation adjustments (see Note 2) Divested during the period (see Note 7) Foreign currency translation Balance at December 31, 2018 North America International and Other Total $ $ 797,163 (4,973) 792,190 7,739 799,929 1,069,379 27,001 (98,379) (15,085) 1,782,845 $ $ $ 377,529 (357,375) 20,154 978 21,132 — — — (2,874) 18,258 $ 1,174,692 (362,348) 812,344 8,717 821,061 1,069,379 27,001 (98,379) (17,959) 1,801,103 We had no goodwill impairment charges in 2018, 2017 or 2016. The following table provides the gross carrying amount and accumulated amortization for each major class of intangible asset: December 31, 2018 2017 Intangible assets subject to amortization: Trademarks Customer-related Patents Total Gross Carrying Amount Accumulated Amortization Gross Carrying Amount Accumulated Amortization $ 1,173,770 $ 163,860 16,306 1,353,936 (60,995) $ (33,516) (15,772) (110,283) 277,473 $ 128,182 17,009 422,664 (37,510) (34,659) (15,975) (88,144) Intangible assets not subject to amortization: Trademarks Total other intangible assets 34,639 1,278,292 $ 34,636 369,156 $ As discussed in Note 8, in February 2017, we commenced the Margin for Growth Program which included an initiative to optimize the manufacturing operations supporting our China business. We deemed this to be a triggering event requiring us to test our China long-lived asset group for impairment by first determining whether the carrying value of the asset group was recovered by our current estimates of future cash flows associated with the asset group. Because this assessment indicated that the carrying value was not recoverable, we calculated an impairment loss as the excess of the asset group's carrying value over its fair value. The resulting impairment loss was allocated to the asset group's long-lived assets. Therefore, as a result of this testing, during the first quarter of 2017, we recorded an impairment charge totaling $105,992 representing the portion of the impairment loss that was allocated to the distributor relationship and trademark intangible assets that had been recognized in connection with the 2014 SGM acquisition. In connection with our annual impairment testing of indefinite lived intangible assets for 2016, we recognized a trademark impairment charge of $4,204, primarily resulting from plans to discontinue a brand sold in India. 68 THE HERSHEY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) Total amortization expense for the years ended December 31, 2018, 2017 and 2016 was $38,555, $23,376 and $26,687, respectively. Amortization expense for the next five years, based on current intangible asset balances, is estimated to be as follows: Year ending December 31, Amortization expense 2019 2020 2021 2022 2023 $ 44,565 $ 43,986 $ 43,971 $ 43,971 $ 43,971 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 unsecured committed revolving credit agreement contains a financial covenant whereby the ratio of (a) pre-tax income from operations from the most recent four fiscal quarters to (b) consolidated interest expense for the most recent four fiscal quarters may not be less than 2.0 to 1.0 at the end of each fiscal quarter. The credit agreement also contains customary representations, warranties and events of default. Payment of outstanding advances may be accelerated, at the option of the lenders, should we default in our obligation under the credit agreement. As of December 31, 2018, we are in compliance with all customary affirmative and negative covenants and the financial covenant pertaining to our credit agreement. There were no significant compensating balance agreements that legally restricted these funds. In addition to the revolving credit facility, we maintain lines of credit with domestic and international commercial banks. Our credit limit in various currencies was $386,590 at December 31, 2018 and $440,148 at December 31, 2017. These lines permit us to borrow at the respective banks’ prime commercial interest rates, or lower. We had short-term foreign bank loans against these lines of credit for $113,189 at December 31, 2018 and $110,684 at December 31, 2017. Commitment fees relating to our revolving credit facility and lines of credit are not material. At December 31, 2018, we had outstanding commercial paper totaling $1,084,740, at a weighted average interest rate of 2.4%. At December 31, 2017, we had outstanding commercial paper totaling $448,675, at a weighted average interest rate of 1.4%. The maximum amount of short-term borrowings outstanding during 2018 and 2017 was $2,246,485 and $815,588, respectively. The weighted-average interest rate on short-term borrowings outstanding was 2.5% as of December 31, 2018 and 1.7% as of December 31, 2017. 69 THE HERSHEY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) Long-term Debt Long-term debt consisted of the following: December 31, 1.60% Notes due 2018 (1) 2.90% Notes due 2020 (2) 4.125% Notes due 2020 3.10% Notes due 2021 (2) 8.8% Debentures due 2021 3.375% Notes due 2023 (2) 2.625% Notes due 2023 3.20% Notes due 2025 2.30% Notes due 2026 (3) 7.2% Debentures due 2027 3.375% Notes due 2046 (3) Capital lease obligations Net impact of interest rate swaps, debt issuance costs and unamortized debt discounts Total long-term debt Less—current portion Long-term portion 2018 2017 $ — $ 300,000 350,000 350,000 350,000 84,715 500,000 250,000 300,000 500,000 193,639 300,000 101,980 — 350,000 — 84,715 — 250,000 300,000 500,000 193,639 300,000 99,194 (20,667) 3,259,667 5,387 (16,427) 2,361,121 300,098 $ 3,254,280 $ 2,061,023 (1) In August 2018, we repaid $300,000 of 1.60% Notes due in 2018 upon their maturity. (2) In May 2018, we issued $350,000 of 2.90% Notes due in 2020, $350,000 of 3.10% Notes due in 2021 and $500,000 of 3.375% Notes due in 2023 (the "2018 Notes"). Proceeds from the issuance of the 2018 Notes, net of discounts and issuance costs, totaled $1,193,830. The 2018 Notes were issued under a shelf registration statement on Form S-3 filed in June 2015 that registered an indeterminate amount of debt securities. (3) In August 2016, we issued $500,000 of 2.30% Notes due in 2026 and $300,000 of 3.375% Notes due in 2046 (the "2016 Notes"). Proceeds from the issuance of the 2016 Notes, net of discounts and issuance costs, totaled $792,953. The 2016 Notes were issued under a shelf registration statement on Form S-3 filed in June 2015 that registered an indeterminate amount of debt securities. Additionally, in September 2016, we repaid $250,000 of 5.45% Notes due in 2016 upon their maturity. In November 2016, we repaid $250,000 of 1.50% Notes due in 2016 upon their maturity Aggregate annual maturities of our long-term Notes (excluding capital lease obligations and net impact of interest rate swaps, debt issuance costs and unamortized debt discounts) are as follows for the years ending December 31: 2019 2020 2021 2022 2023 Thereafter $ — 700,000 434,715 — 750,000 1,293,639 Our debt is principally unsecured and of equal priority. None of our debt is convertible into our Common Stock. 70 THE HERSHEY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) Interest Expense Net interest expense consists of the following: For the years ended December 31, Interest expense Capitalized interest Interest expense Interest income Interest expense, net 5. DERIVATIVE INSTRUMENTS 2018 151,950 (5,092) 146,858 (8,021) 138,837 $ $ 2017 104,232 (4,166) 100,066 (1,784) 98,282 $ $ 2016 97,851 (5,903) 91,948 (1,805) 90,143 $ $ 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 transportation services. We generally hedge commodity price risks for 3- to 24-month periods. Our open commodity derivative contracts had a notional value of $693,463 as of December 31, 2018 and $405,288 as of December 31, 2017. 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 12, 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 $29,458 at December 31, 2018 and $135,962 at December 31, 2017. 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 $11,072 at December 31, 2018 and $2,791 at December 31, 2017. 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. 71 THE HERSHEY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) 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 December 31, 2018 and 2017. 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. During 2016, we had one interest rate swap agreement in a cash flow hedging relationship with a notional amount of $500,000, which was settled in connection with the issuance of debt in August 2016, resulting in a payment of approximately $87,000 which is reflected as an operating cash flow within the Consolidated Statement of Cash Flows. 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 December 31, 2018 and 2017 was $33,168 and $25,246, respectively. The following table presents the classification of derivative assets and liabilities within the Consolidated Balance Sheets as of December 31, 2018 and 2017: December 31, 2018 2017 Assets (1) Liabilities (1) Assets (1) Liabilities (1) Derivatives designated as cash flow hedging instruments: Foreign exchange contracts $ 3,394 $ 485 $ 423 $ 1,427 Derivatives designated as fair value hedging instruments: Interest rate swap agreements — 4,832 — 1,897 Derivatives not designated as hedging instruments: Commodities futures and options (2) Deferred compensation derivatives Foreign exchange contracts 7,230 — 70 7,300 262 4,736 484 5,482 390 1,581 31 2,002 Total $ 10,694 $ 10,799 $ 2,425 $ 3,054 — — 3,054 6,378 (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 December 31, 2018, amounts reflected on a net basis in assets were assets of $63,978 and liabilities of $57,351, 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 72 THE HERSHEY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) reflected on a net basis in liabilities at December 31, 2017 were assets of $48,505 and liabilities of $50,179. At December 31, 2018 and 2017, 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 years ended December 31, 2018 and December 31, 2017 was as follows: Non-designated Hedges Cash Flow Hedges Gains (losses) recognized in income (a) Gains (losses) recognized in other comprehensive income (“OCI”) (effective portion) Gains (losses) reclassified from accumulated OCI into income (effective portion) (b) 2018 2017 2018 2017 2018 2017 Commodities futures and options Foreign exchange contracts $ Interest rate swap agreements Deferred compensation derivatives 69,379 972 — (2,173) Total $ 68,178 $ (55,734) $ — $ — $ (23) — 4,497 $ (51,260) $ 5,822 — — 5,822 $ (4,931) — — (4,931) $ — $ (1,774) (3,180) (9,480) — (5,573) $ (14,434) 3,906 (9,479) — (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 AOCI 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 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 $6,570 as of December 31, 2018. This amount is primarily associated with interest rate swap agreements. Fair Value Hedges For the years ended December 31, 2018 and 2017, we recognized net incremental interest expense of $748 and a net benefit to interest expense of $2,660 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. 73 THE HERSHEY COMPANY NOTES TO 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 December 31, 2018 and 2017: Assets (Liabilities) Level 1 Level 2 Level 3 Total December 31, 2018: Derivative Instruments: Assets: Foreign exchange contracts (1) $ — $ 3,464 $ — $ Commodities futures and options (4) 7,230 Liabilities: Foreign exchange contracts (1) Interest rate swap agreements (2) Deferred compensation derivatives (3) Commodities futures and options (4) December 31, 2017: Assets: — — — 262 — 969 4,832 4,736 — — — — — — Foreign exchange contracts (1) $ — $ 454 $ — $ Deferred compensation derivatives (3) Commodities futures and options (4) Liabilities: Foreign exchange contracts (1) Interest rate swap agreements (2) Commodities futures and options (4) — 390 — — 3,054 1,581 — 1,427 1,897 — — — — — — 3,464 7,230 969 4,832 4,736 262 454 1,581 390 1,427 1,897 3,054 (1) 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. (2) 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. (3) The fair value of deferred compensation derivatives is based on quoted prices for market interest rates and a broad market equity index. (4) The fair value of commodities futures and options contracts is based on quoted market prices. Other Financial Instruments The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and short-term debt approximated fair values as of December 31, 2018 and December 31, 2017 because of the relatively short maturity of these instruments. The estimated fair value of our long-term debt is based on quoted market prices for similar debt issues and is, therefore, classified as Level 2 within the valuation hierarchy. The fair values and carrying values of long-term debt, including the current portion, were as follows: 74 THE HERSHEY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) At December 31, Current portion of long-term debt Long-term debt Total Other Fair Value Measurements Fair Value Carrying Value 2018 5,387 3,228,877 3,234,264 $ $ 2017 299,430 2,113,296 2,412,726 $ $ 2018 5,387 3,254,280 3,259,667 $ $ 2017 300,098 2,061,023 2,361,121 $ $ In addition to assets and liabilities that are recorded at fair value on a recurring basis, GAAP requires that, under certain circumstances, we also record assets and liabilities at fair value on a nonrecurring basis. In connection with the acquisitions of Amplify in the first quarter of 2018 and Pirate Brands in the fourth quarter of 2018, as discussed in Note 2, we used various valuation techniques to determine fair value, with the primary techniques being discounted cash flow analysis, relief-from-royalty, and a form of the multi-period excess earnings valuation approaches, which use significant unobservable inputs, or Level 3 inputs, as defined by the fair value hierarchy. In connection with disposal groups classified as held for sale, as discussed in Note 7, during 2018, we recorded impairment charges totaling $57,729 to adjust the long-lived asset values within certain disposal groups, including the SGM and Tyrrells businesses, the Lotte Shanghai Foods Co., Ltd. joint venture and other assets. These charges represent the excess of the disposal groups' carrying values, including the related currency translation adjustment amounts realized or to be realized upon completion of the sales, over the sales values less costs to sell for the respective businesses. The fair values of the disposal groups were supported by the sales prices paid by third-party buyers or estimated sales prices based on marketing of the disposal group, when the sale has not yet been completed. The sales of SGM and Tyrrells were both completed in July 2018. During the first quarter of 2017, as discussed in Note 8, we recorded impairment charges totaling $105,992 to write down distributor relationship and trademark intangible assets that had been recognized in connection with the 2014 SGM acquisition and wrote down property, plant and equipment by $102,720. These charges were determined by comparing the fair value of the assets to their carrying value. The fair value of the assets was derived using a combination of an estimated market liquidation approach and discounted cash flow analyses based on Level 3 inputs. 7. ASSETS AND LIABILITIES HELD FOR SALE As of December 31, 2018, the following disposal groups have been classified as held for sale, in each case stated at the lower of net book value or estimated sales value less costs to sell: • The Lotte Shanghai Foods Co., Ltd. joint venture, which was taken out of operation and classified as held for sale during the second quarter of 2018. We sold a portion of the joint venture's equipment in the third and fourth quarters of 2018, and expect the sale of the remaining business to be completed by mid-2019. • Other assets, which are predominantly comprised of select Pennsylvania facilities and land that met the held for sale criteria in the third quarter of 2018. We expect these long-lived assets to be sold by the end of 2019. The amounts classified as assets and liabilities held for sale at December 31, 2018 include the following: Assets held for sale, included in prepaid expenses and other assets Property, plant and equipment, net Other assets Liabilities held for sale, included in accrued liabilities Accounts payable and accrued liabilities 75 $ $ $ $ 20,905 2,516 23,421 596 596 THE HERSHEY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) During 2018, we completed the sale of other disposal groups that had been previously classified as assets and liabilities held for sale, as follows: • In April 2018, we sold the licensing rights for a non-core trademark relating to a brand marketed outside of the United States for sale proceeds of approximately $13,000, realizing a gain on the sale of $2,658, which is recorded in the selling, marketing and administrative expense caption within the Consolidated Statements of Operations. • During the second and third quarters of 2018, we sold select China facilities that were taken out of operation and classified as assets held for sale during the first quarter of 2017 in connection with the Operational Optimization Program (as defined in Note 8). Proceeds from the sale of these facilities totaled $27,468, resulting in a gain on the sale of $6,562, which is recorded in the business realignment costs caption within the Consolidated Statements of Operations. • In July 2018, we sold the Tyrrells and SGM businesses, both of which were previously classified as held for sale. Total proceeds from the sale of Tyrrells and SGM, net of cash divested, were approximately $167,048. We recorded impairment charges of $33,729 to adjust the book values of the disposal groups to the sales value less costs to sell. 8. BUSINESS REALIGNMENT ACTIVITIES We periodically undertake business realignment activities designed to increase our efficiency and focus our business in support of our key growth strategies. Costs recorded in 2018, 2017 and 2016 related to these activities were as follows: For the years ended December 31, Margin for Growth Program: Severance Accelerated depreciation Other program costs Operational Optimization Program: Severance Gain on sale of facilities Accelerated depreciation Other program costs 2015 Productivity Initiative: Other program costs Total 2018 2017 2016 $ 15,378 $ 32,554 $ 9,131 30,940 — (6,562) — 2,940 — 6,873 16,407 13,828 — — (303) — $ 51,827 $ 69,359 $ — — — 17,872 — 48,590 21,831 5,609 93,902 The costs and related benefits of the Margin for Growth Program relate approximately 60% to the North America segment and 40% to the International and Other segment. The costs and related benefits of the Operational Optimization Program relate approximately 40% to the North America segment and 60% to the International and Other segment. The costs and related benefits to be derived from the 2015 Productivity Initiative relate primarily to the North America segment. However, segment operating results do not include these business realignment expenses because we evaluate segment performance excluding such costs. Margin for Growth Program In the first quarter 2017, the Company's Board of Directors ("Board") unanimously approved several initiatives under a single program designed to drive continued net sales, operating income and earnings per-share diluted growth over the next several years. This program is focused on improving global efficiency and effectiveness, optimizing the Company’s supply chain, streamlining the Company’s operating model and reducing administrative expenses to generate long-term savings. 76 THE HERSHEY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) We originally estimated that the Margin for Growth Program would result in total pre-tax charges of $375,000 to $425,000, to be incurred from 2017 to 2019. The majority of the initiatives relating to the program have been executed, with the final initiatives to be completed over approximately the next nine months. To date, we have incurred pre-tax charges to execute the program totaling $336,295. This includes long-lived asset impairment charges of $208,712 related to the operations supporting our China business as noted below, as well as the $16,300 incremental impairment charge resulting from the sale of SGM (see Note 7). In addition to the impairment charges, we have incurred employee separation costs of $47,932 and other business realignment costs of $63,351. We expect the remaining spending on this program to be minimal in 2019, bringing total estimated project costs to approximately $340,000 to $355,000. The cash portion of the total program charges is estimated to be $97,000 to $110,000. The Company reduced its global workforce by approximately 15% as a result of this program, with a majority of the reductions coming from hourly headcount positions outside of the United States. During 2018, we recognized total costs associated with the Margin for Growth Program of $55,449. These charges include employee severance, largely relating to initiatives to improve the cost structure of our China business and to further streamline our corporate operating model, as well as non-cash, asset-related incremental depreciation expense as part of optimizing the global supply chain. In addition, we incurred other program costs, which relate primarily to third-party charges in support of our initiative to improve global efficiency and effectiveness. During 2017, we recognized total costs associated with the Margin for Growth Program of $55,834. The 2017 charges are consistent in nature to the 2018 activity. The program included an initiative to optimize the manufacturing operations supporting our China business. When the program was approved in 2017, we deemed this to be a triggering event requiring us to test our China long-lived asset group for impairment by first determining whether the carrying value of the asset group was recovered by our current estimates of future cash flows associated with the asset group. Because this assessment indicated that the carrying value was not recoverable, we calculated an impairment loss as the excess of the asset group's carrying value over its fair value. The resulting impairment loss was allocated to the asset group's long-lived assets. Therefore, as a result of this testing, during the first quarter of 2017, we recorded impairment charges totaling $208,712, with $105,992 representing the portion of the impairment loss that was allocated to the distributor relationship and trademark intangible assets that had been recognized in connection with the 2014 SGM acquisition and $102,720 representing the portion of the impairment loss that was allocated to property, plant and equipment. These impairment charges are recorded in the long-lived asset impairment charges caption within the Consolidated Statements of Operations. 2016 Operational Optimization Program In the second quarter of 2016, we commenced a program (the “Operational Optimization Program”) to optimize our production and supply chain network, which included select facility consolidations. The program encompassed the transition of our China chocolate and SGM operations into a united Golden Hershey platform, including the integration of the China sales force, as well as workforce planning efforts and the consolidation of production within certain facilities in China and North America. During 2018, we incurred pre-tax costs totaling $2,940, relating primarily to third-party charges in support of our initiative to optimize our production and supply chain network. In addition, we completed the sale of select China facilities in 2018 that had been taken out of service in connection with the Operational Optimization Program resulting in a gain of $6,562. During 2017 and 2016, we incurred pre-tax costs totaling $13,525 and $88,293, respectively, including non-cash asset-related incremental depreciation costs in 2016, employee related costs, costs to consolidate, and relocate production, and third party costs incurred to execute these activities. This program was completed in 2018. 2015 Productivity Initiative In mid-2015, we initiated a productivity initiative (the “2015 Productivity 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 Productivity Initiative was undertaken to simplify the organizational structure to enhance the Company's ability to rapidly anticipate and respond to the changing demands of the global consumer. 77 THE HERSHEY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) The 2015 Productivity Initiative was executed throughout the third and fourth quarters of 2015, resulting in a net reduction of approximately 300 positions, with the majority of the departures taking place by the end of 2015. The 2015 Productivity Initiative was completed during the third quarter 2016. Final costs incurred in 2016 relating to this program totaled $5,609. Costs associated with business realignment activities are classified in our Consolidated Statements of Income as follows: For the years ended December 31, Cost of sales Selling, marketing and administrative expense Business realignment costs Costs associated with business realignment activities 2018 2017 2016 $ $ 11,323 $ 5,147 $ 21,401 19,103 16,449 47,763 51,827 $ 69,359 $ 58,106 16,939 18,857 93,902 The following table presents the liability activity for costs qualifying as exit and disposal costs for the year ended December 31, 2018: Liability balance at December 31, 2017 2018 business realignment charges (1) Cash payments Other, net Liability balance at December 31, 2018 (reported within accrued liabilities) Total 38,992 25,940 (50,996) 669 14,605 $ $ (1) The costs reflected in the liability roll-forward represent employee-related and certain third-party service provider charges. These costs do not include items charged directly to expense, such as accelerated depreciation and amortization and certain of the third-party charges associated with various programs, as those items are not reflected in the business realignment liability in our Consolidated Balance Sheets. 9. INCOME TAXES The components of income (loss) before income taxes were as follows: For the years ended December 31, Domestic Foreign Income before income taxes 2018 1,195,645 214,416 1,410,061 $ $ 2017 1,187,825 (77,157) 1,110,668 $ $ 2016 1,395,440 (295,959) 1,099,481 $ $ 78 THE HERSHEY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) The components of our provision for income taxes were as follows: For the years ended December 31, Current: Federal State Foreign Deferred: Federal State Foreign 2018 2017 2016 $ 151,107 $ 314,277 $ 391,705 38,243 13,405 202,755 35,035 7,572 (6,352) 36,255 37,628 (16,356) 335,549 19,204 7,573 (8,195) 18,582 51,706 (25,877) 417,534 (7,706) (452) (29,939) (38,097) 379,437 Total provision for income taxes $ 239,010 $ 354,131 $ U.S. Tax Cuts and Jobs Act of 2017 The U.S. Tax Cuts and Jobs Act, enacted in December 2017 (“U.S. tax reform”), significantly changed U.S. corporate income tax laws by, among other things, reducing the U.S. corporate income tax rate to 21% starting in 2018 and creating a territorial tax system with a one-time mandatory tax on previously deferred foreign earnings of U.S. subsidiaries. Under GAAP (specifically, ASC Topic 740), the effects of changes in tax rates and laws on deferred tax balances are recognized in the period in which the new legislation is enacted. During the fourth quarter of 2017, we recorded a net provisional charge of $32.5 million, which included the estimated impact of the one-time mandatory tax on previously deferred earnings of non-U.S. subsidiaries offset in part by the benefit from revaluation of net deferred tax liabilities based on the new lower corporate income tax rate. During 2018, we recorded net benefits totaling $19.5 million as measurement period adjustments to the net provisional charge. The accounting for income tax effects of U.S. tax reform is complete based on additional tax regulations available as of December 31, 2018. Amounts recorded during 2018 and 2017 are reflected within the respective provision for income taxes in the Consolidated Statements of Income. Additionally, U.S. tax reform subjects a U.S. shareholder to current tax on global intangible low-taxed income ("GILTI") earned by certain foreign subsidiaries. We have elected to not recognize deferred taxes for temporary differences until such differences reverse as GILTI in future years. 79 THE HERSHEY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) Deferred taxes reflect temporary differences between the tax basis and financial statement carrying value of assets and liabilities. The significant temporary differences that comprised the deferred tax assets and liabilities are as follows: December 31, Deferred tax assets: Post-retirement benefit obligations Accrued expenses and other reserves Stock-based compensation Derivative instruments Pension Lease financing obligation Accrued trade promotion reserves Net operating loss carryforwards Capital loss carryforwards Other Gross deferred tax assets Valuation allowance Total deferred tax assets Deferred tax liabilities: Property, plant and equipment, net Acquired intangibles Inventories Pension Other Total deferred tax liabilities Net deferred tax (liabilities) assets Included in: Non-current deferred tax assets, net Non-current deferred tax liabilities, net Net deferred tax (liabilities) assets 2018 2017 $ $ 52,915 85,180 30,448 17,423 8,921 12,284 13,670 161,242 26,670 9,969 418,722 (239,959) 178,763 144,044 161,003 21,366 — 28,044 354,457 (175,694) $ 1,166 (176,860) (175,694) $ $ $ 58,306 103,769 31,364 27,109 — 12,310 26,028 226,142 23,215 7,748 515,991 (312,148) 203,843 132,443 68,476 20,769 969 23,819 246,476 (42,633) 3,023 (45,656) (42,633) Changes in deferred tax assets for net operating loss carryforwards resulted primarily from the sale of SGM in July 2018. Changes in the valuation allowance resulted primarily from the sale of SGM and the realization of U.S. capital loss carryforwards for which there was previously a valuation allowance. Changes in the deferred tax liabilities for acquired intangibles resulted primarily from the acquisition of Amplify in January 2018. The valuation allowances as of December 31, 2018 and 2017 were primarily related to U.S. capital loss carryforwards and various foreign jurisdictions' net operating loss carryforwards and other deferred tax assets that we do not expect to realize. 80 THE HERSHEY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) The following table reconciles the federal statutory income tax rate with our effective income tax rate: For the years ended December 31, Federal statutory income tax rate Increase (reduction) resulting from: State income taxes, net of Federal income tax benefits Qualified production income deduction Business realignment and impairment charges Foreign rate differences Historic and solar tax credits U.S. tax reform Tax contingencies Other, net Effective income tax rate 2018 2017 2016 21.0% 35.0% 35.0% 2.7 — 0.6 (2.0 ) (3.5) (1.4 ) 0.5 (0.9 ) 17.0% 2.6 (2.9 ) 4.3 (4.3 ) (4.8) 2.9 0.5 (1.4 ) 31.9% 3.4 (3.8) 0.4 3.6 (3.3) — 0.1 (0.9) 34.5% A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: December 31, Balance at beginning of year Additions for tax positions taken during prior years Reductions for tax positions taken during prior years Additions for tax positions taken during the current year Settlements Expiration of statutes of limitations Balance at end of year 2018 2017 $ 42,082 $ 1,174 (2,581) 61,627 — (4,772) 97,530 $ $ 36,002 2,492 (1,689) 10,018 (1,481) (3,260) 42,082 The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $93,507 as of December 31, 2018 and $37,587 as of December 31, 2017. We report accrued interest and penalties related to unrecognized tax benefits in income tax expense. We recognized a net tax expense of $1,785 in 2018, a net tax expense of $795 in 2017 and a net tax benefit of $75 in 2016 for interest and penalties. Accrued net interest and penalties were $6,154 as of December 31, 2018 and $4,966 as of December 31, 2017. We file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. A number of years may elapse before an uncertain tax position, for which we have unrecognized tax benefits, is audited and finally resolved. While it is often difficult to predict the final outcome or the timing of resolution of any particular uncertain tax position, we believe that our unrecognized tax benefits reflect the most likely outcome. We adjust these unrecognized tax benefits, as well as the related interest, in light of changing facts and circumstances. Settlement of any particular position could require the use of cash. Favorable resolution would be recognized as a reduction to our effective income tax rate in the period of resolution. The Company’s major taxing jurisdictions currently include the United States (federal and state), as well as various foreign jurisdictions such as Canada, China, Mexico, Brazil, India, Malaysia and Switzerland. The number of years with open tax audits varies depending on the tax jurisdiction, with 2010 representing the earliest tax year that remains open for examination by certain taxing authorities. The U.S. Internal Revenue Service is examining our U.S. federal income tax returns for 2013, 2014 and 2016. We reasonably expect reductions in the liability for unrecognized tax benefits of approximately $9,637 within the next 12 months because of the expiration of statutes of limitations and settlements of tax audits. As of December 31, 2018, we had approximately $550,591 of undistributed earnings of our international subsidiaries. We intend to continue to reinvest earnings outside of the United States for the foreseeable future and, therefore, have 81 THE HERSHEY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) not recognized additional tax expense (e.g., foreign withholding taxes due upon repatriation) on these earnings beyond the one-time U.S. repatriation tax due under the 2017 Tax Cuts and Jobs Act. Investments in Partnerships Qualifying for Tax Credits We invest in partnerships which make equity investments in projects eligible to receive federal historic and energy tax credits. The investments are accounted for under the equity method and reported within other assets in our Consolidated Balance Sheets. The tax credits, when realized, are recognized as a reduction of tax expense, at which time the corresponding equity investment is written-down to reflect the remaining value of the future benefits to be realized. For the years ended December 31, 2018 and 2017, we recognized investment tax credits and related outside basis difference benefits totaling $60,111 and $74,600, respectively, and we wrote-down the equity investment by $50,329 and $66,209, respectively, to reflect the realization of these benefits. The equity investment write-down is reflected within other (income) expense, net in the Consolidated Statements of Income. 10. PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS We sponsor a number of defined benefit pension plans. The primary plans are The Hershey Company Retirement Plan and The Hershey Company Retirement Plan for Hourly Employees. These are cash balance plans that provide pension benefits for most domestic employees hired prior to January 1, 2007. We also sponsor two post-retirement benefit plans: health care and life insurance. The health care plan is contributory, with participants’ contributions adjusted annually. The life insurance plan is non-contributory. 82 THE HERSHEY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) Obligations and Funded Status A summary of the changes in benefit obligations, plan assets and funded status of these plans is as follows: December 31, Change in benefit obligation Projected benefit obligation at beginning of year Service cost Interest cost Plan amendments Actuarial (gain) loss Curtailment Settlement Currency translation and other Benefits paid Projected benefit obligation at end of year Change in plan assets Fair value of plan assets at beginning of year Actual return on plan assets Employer contributions Settlement Currency translation and other Benefits paid Fair value of plan assets at end of year Funded status at end of year Amounts recognized in the Consolidated Balance Sheets: Other assets Accrued liabilities Other long-term liabilities Total Amounts recognized in Accumulated Other Comprehensive Income (Loss), net of tax: Actuarial net (loss) gain Net prior service credit (cost) Net amounts recognized in AOCI Pension Benefits Other Benefits 2018 2017 2018 2017 $ 1,117,564 21,223 31,943 — $ 1,118,318 20,657 40,996 (8,473) $ 236,112 230 6,923 — $ 242,846 263 8,837 — (50,432) (16) (61,268) (4,674) (23,134) 1,031,206 1,086,226 (43,118) 9,233 (61,268) (4,078) (23,134) 963,861 (67,345) 40,768 — (44,978) 6,749 (56,473) 1,117,564 1,023,676 121,241 37,503 (44,978) 5,257 (56,473) 1,086,226 (31,338) $ (10,842) — — (1,073) (16,631) 214,719 2,207 — — 889 (18,930) 236,112 — — 16,631 — — (16,631) — $ (214,719) — — 18,930 — — (18,930) — $ (236,112) $ 332 (1,298) (66,379) (67,345) $ 14,988 (6,916) (39,410) (31,338) $ — $ — (20,792) (215,320) $ (214,719) $ (236,112) (19,553) (195,166) $ $ $ $ (254,735) $ (207,659) 30,994 $ (222,385) $ (176,665) 32,350 $ $ 17,967 (812) 17,155 $ $ 8,313 (1,174) 7,139 The accumulated benefit obligation for all defined benefit pension plans was $994,278 as of December 31, 2018 and $1,077,112 as of December 31, 2017. 83 THE HERSHEY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) Plans with accumulated benefit obligations in excess of plan assets were as follows: December 31, Projected benefit obligation Accumulated benefit obligation Fair value of plan assets Net Periodic Benefit Cost 2018 1,030,382 $ $ 993,892 962,705 2017 711,767 675,660 665,441 The components of net periodic benefit cost were as follows: For the years ended December 31, Amounts recognized in net periodic benefit cost Service cost Interest cost Expected return on plan assets Amortization of prior service (credit) cost Amortization of net loss (gain) Curtailment credit Settlement loss Pension Benefits Other Benefits 2018 2017 2016 2018 2017 2016 $ 21,223 $ 20,657 $ 23,075 $ 230 $ 263 $ 299 31,943 (58,612) 40,996 (57,370) 41,875 (58,820) 6,923 — 8,837 — 9,731 — (7,202) 26,875 (299) 20,211 (5,822) 33,648 — (1,555) 34,940 — 17,732 22,657 836 — — — 748 (1) — — 575 (13) — — Total net periodic benefit cost $ 34,139 $ 49,841 $ 62,172 $ 7,989 $ 9,847 $ 10,592 Change in plan assets and benefit obligations recognized in AOCI, pre-tax Actuarial net (gain) loss Prior service (credit) cost $ 3,715 7,198 $ (73,768) $ (2,650) (31,772) (41,517) $ (10,771) (838) $ 2,139 (744) $ (3,047) (572) Total recognized in other comprehensive (income) loss, pre- tax Net amounts recognized in periodic benefit cost and AOCI $ 10,913 $ (76,418) $ (73,289) $ (11,609) $ 1,395 $ (3,619) $ 45,052 $ (26,577) $ (11,117) $ (3,620) $ 11,242 $ 6,973 Amounts expected to be amortized from AOCI into net periodic benefit cost during 2019 are as follows: Amortization of net actuarial loss Amortization of prior service (credit) cost $ $ 33,695 $ (7,235) $ Pension Plans Post-Retirement Benefit Plans 811 (384) Assumptions The weighted-average assumptions used in computing the year end benefit obligations were as follows: December 31, Discount rate Rate of increase in compensation levels Pension Benefits Other Benefits 2018 2017 2018 2017 4.1% 3.6% 3.4% 3.8% 4.2% N/A 3.5% N/A 84 THE HERSHEY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) The weighted-average assumptions used in computing net periodic benefit cost were as follows: For the years ended December 31, Discount rate Expected long-term return on plan assets Rate of compensation increase Pension Benefits Other Benefits 2018 2017 2016 2018 2017 2016 3.4% 5.8% 3.8% 3.8% 5.8% 3.8% 4.0% 6.1% 3.8% 3.5% N/A N/A 3.8% N/A N/A 4.0% N/A N/A The Company’s discount rate assumption is determined by developing a yield curve based on high quality corporate bonds with maturities matching the plans’ expected benefit payment streams. The plans’ expected cash flows are then discounted by the resulting year-by-year spot rates. We base the asset return assumption on current and expected asset allocations, as well as historical and expected returns on the plan asset categories. Prior to December 31, 2017, the service and interest cost components of net periodic benefit cost were determined utilizing a single weighted-average discount rate derived from the yield curve used to measure the plan obligations. Beginning in 2018, we elected to utilize a full yield curve approach in the estimation of service and interest costs by applying the specific spot rates along the yield curve used in the determination of the benefit obligation to the relevant projected cash flows. We made this change to provide a more precise measurement of service and interest costs by improving the correlation between the projected cash flows to the corresponding spot rates along the yield curve. This change does not affect the measurement of our pension and other post-retirement benefit liabilities but generally results in lower benefit expense in periods when the yield curve is upward sloping, which was the case in 2018. We accounted for this change as a change in accounting estimate and, accordingly, accounted for it on a prospective basis starting in 2018. For purposes of measuring our post-retirement benefit obligation at December 31, 2018 and December 31, 2017, we assumed a 7.0% annual rate of increase in the per capita cost of covered health care benefits for 2019 and 2018, grading down to 5.0% by 2023. Assumed health care cost trend rates could have a significant effect on the amounts reported for the post-retirement health care plans. A one-percentage point change in assumed health care cost trend rates would have the following effects: Impact of assumed health care cost trend rates Effect on total service and interest cost components Effect on accumulated post-retirement benefit obligation One-Percentage Point Increase One-Percentage Point Decrease $ 94 $ 3,213 (82) (2,833) The valuations and assumptions reflect adoption of the Society of Actuaries updated RP-2014 mortality tables with MP-2018 generational projection scales, which we adopted as of December 31, 2018. Adoption of the updated scale did not have a significant impact on our current pension obligations or net period benefit cost since our primary plans are cash balance plans and most participants take lump-sum settlements upon retirement. Plan Assets We broadly diversify our pension plan assets across public equity, fixed income, diversified credit strategies and diversified alternative strategies asset classes. Our target asset allocation for our major domestic pension plans as of December 31, 2018 was as follows: Asset Class Cash Equity securities Fixed income securities Alternative investments, including real estate, listed infrastructure and other Target Asset Allocation 1% 25% 49% 25% As of December 31, 2018, actual allocations were consistent with the targets and within our allowable ranges. We expect the level of volatility in pension plan asset returns to be in line with the overall volatility of the markets within 85 THE HERSHEY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) each asset class. The following table sets forth by level, within the fair value hierarchy (as defined in Note 6), pension plan assets at their fair values as of December 31, 2018: Quoted prices in active markets of identical assets (Level 1) Significant other observable inputs (Level 2) Significant other unobservable inputs (Level 3) Investments Using NAV as a Practical Expedient (1) 664 Total 19,561 $ Cash and cash equivalents $ 1,040 $ 17,857 $ — $ Equity securities: Global all-cap (a) Fixed income securities: U.S. government/agency Corporate bonds (b) International government/corporate bonds (d) Diversified credit (e) Alternative investments: Global diversified assets (f) Global real estate investment trusts (g) Global infrastructure (h) — — — — — — — — — — — — — — — — — — — — — — — — 210,850 210,850 242,618 117,656 29,115 94,008 147,661 57,854 44,538 242,618 117,656 29,115 94,008 147,661 57,854 44,538 Total pension plan assets $ 1,040 $ 17,857 $ — $ 944,964 $ 963,861 The following table sets forth by level, within the fair value hierarchy, pension plan assets at their fair values as of December 31, 2017: Quoted prices in active markets of identical assets (Level 1) Significant other observable inputs (Level 2) Significant other unobservable inputs (Level 3) Investments Using NAV as a Practical Expedient (1) 730 Total 20,070 $ Cash and cash equivalents $ 1,179 $ 18,161 $ — $ Equity securities: Global all-cap (a) Fixed income securities: U.S. government/agency Corporate bonds (b) Collateralized obligations (c) International government/corporate bonds (d) Alternative investments: Global diversified assets (f) Global real estate investment trusts (g) Global infrastructure (h) — — — — — — — — — — 33,019 40,350 — — — — — — — — — — — — 276,825 276,825 239,686 162,633 34,538 239,686 195,652 74,888 32,447 32,447 149,030 149,030 50,213 47,415 50,213 47,415 Total pension plan assets $ 1,179 $ 91,530 $ — $ 993,517 $ 1,086,226 86 THE HERSHEY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) (1) Certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been categorized in the fair value hierarchy but are included to reconcile to the amounts presented in our Obligations and Funded Status table. This category comprises equity funds that primarily track the MSCI World Index or MSCI All Country World Index. (a) (b) This category comprises fixed income funds primarily invested in investment grade and high yield bonds. This category comprises fixed income funds primarily invested in high quality mortgage-backed securities and other asset-backed obligations. (c) (d) This category comprises fixed income funds primarily invested in Canadian and other international bonds. This category comprises fixed income funds primarily invested in high yield bonds, loans, securitized debt, and emerging market debt. (e) (f) This category comprises diversified funds invested across alternative asset classes. (g) This category comprises equity funds primarily invested in publicly traded real estate securities. (h) This category comprises equity funds primarily invested in publicly traded listed infrastructure securities. The fair value of the Level 1 assets was based on quoted prices in active markets for the identical assets. The fair value of the Level 2 assets was determined by management based on an assessment of valuations provided by asset management entities and was calculated by aggregating market prices for all underlying securities. Investment objectives for our domestic plan assets are: To ensure high correlation between the value of plan assets and liabilities; To maintain careful control of the risk level within each asset class; and To focus on a long-term return objective. We believe that there are no significant concentrations of risk within our plan assets as of December 31, 2018. We comply with the rules and regulations promulgated under the Employee Retirement Income Security Act of 1974 (“ERISA”) and we prohibit investments and investment strategies not allowed by ERISA. We do not permit direct purchases of our Company’s securities or the use of derivatives for the purpose of speculation. We invest the assets of non-domestic plans in compliance with laws and regulations applicable to those plans. Cash Flows and Plan Termination Our policy is to fund domestic pension liabilities in accordance with the limits imposed by the ERISA, federal income tax laws and the funding requirements of the Pension Protection Act of 2006. We fund non-domestic pension liabilities in accordance with laws and regulations applicable to those plans. We made total contributions to the pension plans of $9,233 during 2018. In 2017, we made total contributions of $37,503 to the pension plans. These included contributions totaling $29,201 to fund payouts from the unfunded supplemental retirement plans and $6,461 to complete the termination of The Hershey Company Puerto Rico Hourly Pension Plan, which was approved in 2016 by the Compensation and Executive Organization Committee of the Board. For 2019, minimum funding requirements for our pension plans are approximately $1,445. Total benefit payments expected to be paid to plan participants, including pension benefits funded from the plans and other benefits funded from Company assets, are as follows: Pension Benefits Other Benefits $ 2019 113,395 19,582 $ 2020 95,461 18,573 $ 2021 92,790 17,407 $ 2022 115,509 16,595 $ 2023 92,411 15,841 2024-2028 $ 396,875 68,234 Expected Benefit Payments 87 THE HERSHEY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) Multiemployer Pension Plan During 2016, we exited a facility as part of the Operational Optimization Program (see Note 7) and no longer participate in the BCTGM Union and Industry Canadian Pension Plan, a trustee-managed multiemployer defined benefit pension plan. Our obligation during the term of the collective bargaining agreement was limited to remitting the required contributions to the plan and contributions made were not significant during 2015 through 2016. Savings Plans The Company sponsors several defined contribution plans to provide retirement benefits to employees. Contributions to The Hershey Company 401(k) Plan and similar plans for non-domestic employees are based on a portion of eligible pay up to a defined maximum. All matching contributions were made in cash. Expense associated with the defined contribution plans was $47,959 in 2018, $46,154 in 2017 and $43,545 in 2016. 11. STOCK COMPENSATION PLANS Share-based grants for compensation and incentive purposes are made pursuant to the Equity and Incentive Compensation Plan (“EICP”). The EICP provides for grants of one or more of the following stock-based compensation awards to employees, non-employee directors and certain service providers upon whom the successful conduct of our business is dependent: Non-qualified stock options (“stock options”); Performance stock units (“PSUs”) and performance stock; Stock appreciation rights; Restricted stock units (“RSUs”) and restricted stock; and Other stock-based awards. As of December 31, 2018, 65.8 million shares were authorized and approved by our stockholders for grants under the EICP. The EICP also provides for the deferral of stock-based compensation awards by participants if approved by the Compensation and Executive Organization Committee of our Board and if in accordance with an applicable deferred compensation plan of the Company. Currently, the Compensation and Executive Organization Committee has authorized the deferral of PSU and RSU awards by certain eligible employees under the Company’s Deferred Compensation Plan. Our Board has authorized our non-employee directors to defer any portion of their cash retainer, committee chair fees and RSUs awarded that they elect to convert into deferred stock units under our Directors’ Compensation Plan. At the time stock options are exercised or RSUs and PSUs become payable, common stock is issued from our accumulated treasury shares. Dividend equivalents are credited on RSUs on the same date and at the same rate as dividends are paid on Hershey’s common stock. These dividend equivalents are charged to retained earnings. For the periods presented, compensation expense for all types of stock-based compensation programs and the related income tax benefit recognized were as follows: For the years ended December 31, Pre-tax compensation expense Related income tax benefit 2018 $ 49,286 2017 $ 51,061 2016 $ 54,785 9,463 13,684 17,148 Compensation costs for stock compensation plans are primarily included in selling, marketing and administrative expense. As of December 31, 2018, total stock-based compensation cost related to non-vested awards not yet recognized was $56,547 and the weighted-average period over which this amount is expected to be recognized was approximately 2.1 years. 88 THE HERSHEY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) Stock Options The exercise price of each stock option awarded under the EICP equals the closing price of our Common Stock on the New York Stock Exchange on the date of grant. Each stock option has a maximum term of 10 years. Grants of stock options provide for pro-rated vesting, typically over a four-year period. Expense for stock options is based on grant date fair value and recognized on a straight-line method over the vesting period, net of estimated forfeitures. A summary of activity relating to grants of stock options for the year ended December 31, 2018 is as follows: Stock Options Outstanding at beginning of the period Granted Exercised Forfeited Outstanding as of December 31, 2018 Options exercisable as of December 31, 2018 Weighted- Average Exercise Price (per share) $89.06 $99.93 $68.69 $102.20 $94.28 $90.77 Shares 5,921,062 945,220 (1,110,712) (361,188) 5,394,382 3,506,304 Weighted- Average Remaining Contractual Term 5.8 years Aggregate Intrinsic Value 5.6 years 4.1 years $ $ 70,398 57,789 The weighted-average fair value of options granted was $15.58, $15.76 and $11.46 per share in 2018, 2017 and 2016, respectively. The fair value was estimated on the date of grant using a Black-Scholes option-pricing model and the following weighted-average assumptions: For the years ended December 31, Dividend yields Expected volatility Risk-free interest rates Expected term in years 2018 2017 2016 2.4% 16.6% 2.8% 6.6 2.4% 17.2% 2.2% 6.8 2.4% 16.8% 1.5% 6.8 “Dividend yields” means the sum of dividends declared for the four most recent quarterly periods, divided by the average price of our Common Stock for the comparable periods; “Expected volatility” means the historical volatility of our Common Stock over the expected term of each grant; “Risk-free interest rates” means the U.S. Treasury yield curve rate in effect at the time of grant for periods within the contractual life of the stock option; and “Expected term” means the period of time that stock options granted are expected to be outstanding based primarily on historical data. The total intrinsic value of options exercised was $38,382, $45,998 and $73,944 in 2018, 2017 and 2016, respectively. As of December 31, 2018, there was $13,902 of total unrecognized compensation cost related to non-vested stock option awards granted under the EICP, which we expect to recognize over a weighted-average period of 2.4 years. 89 THE HERSHEY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) The following table summarizes information about stock options outstanding as of December 31, 2018: Options Outstanding Options Exercisable Weighted- Average Remaining Contractual Life in Years 4.2 Weighted- Average Exercise Price $77.54 Number Exercisable as of 12/31/18 1,704,705 Weighted- Average Exercise Price $74.72 7.0 5.8 5.6 $102.54 $107.06 $94.28 711,683 1,089,916 3,506,304 $105.12 $106.52 $90.77 Number Outstanding as of 12/31/18 2,079,250 1,676,763 1,638,369 5,394,382 Range of Exercise Prices $33.40 - $90.39 $90.40 - $105.91 $105.92 - $111.76 $33.40 - $111.76 Performance Stock Units and Restricted Stock Units Under the EICP, we grant PSUs to selected executives and other key employees. Vesting is contingent upon the achievement of certain performance objectives. We grant PSUs over 3-year performance cycles. If we meet targets for financial measures at the end of the applicable 3-year performance cycle, we award a resulting number of shares of our Common Stock to the participants. For PSUs granted, the target award is a combination of a market-based total shareholder return and performance-based components. The performance scores for 2016 through 2018 grants of PSUs can range from 0% to 250% of the targeted amounts. We recognize the compensation cost associated with PSUs ratably over the 3-year term. Compensation cost is based on the grant date fair value because the grants can only be settled in shares of our Common Stock. The grant date fair value of PSUs is determined based on the Monte Carlo simulation model for the market-based total shareholder return component and the closing market price of the Company’s Common Stock on the date of grant for performance-based components. In 2018, 2017 and 2016, we awarded RSUs to certain executive officers and other key employees under the EICP. We also awarded RSUs quarterly to non-employee directors. We recognize the compensation cost associated with employee RSUs over a specified award vesting period based on the grant date fair value of our Common Stock. We recognize expense for employee RSUs based on the straight-line method. We recognize the compensation cost associated with non-employee director RSUs ratably over the vesting period, net of estimated forfeitures. A summary of activity relating to grants of PSUs and RSUs for the period ended December 31, 2018 is as follows: Performance Stock Units and Restricted Stock Units Outstanding at beginning of year Number of units 923,364 Granted Performance assumption change Vested Forfeited Outstanding at end of year 457,315 16,961 (287,101) (111,521) 999,018 Weighted-average grant date fair value for equity awards (per unit) $103.11 $97.86 $102.71 $103.59 $103.48 $101.57 The following table sets forth information about the fair value of the PSUs and RSUs granted for potential future distribution to employees and non-employee directors. In addition, the table provides assumptions used to determine the fair value of the market-based total shareholder return component using the Monte Carlo simulation model on the date of grant. 90 THE HERSHEY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) For the years ended December 31, Units granted Weighted-average fair value at date of grant Monte Carlo simulation assumptions: Estimated values Dividend yields Expected volatility $ $ 2018 457,315 97.86 29.17 2.6% 20.4% $ $ 2017 478,044 110.97 46.85 2.3% 20.4% $ $ 2016 545,750 93.55 38.02 2.5% 17.0% “Estimated values” means the fair value for the market-based total shareholder return component of each PSU at the date of grant using a Monte Carlo simulation model; “Dividend yields” means the sum of dividends declared for the four most recent quarterly periods, divided by the average price of our Common Stock for the comparable periods; “Expected volatility” means the historical volatility of our Common Stock over the expected term of each grant. The fair value of shares vested totaled $28,752, $29,981 and $22,062 in 2018, 2017 and 2016, respectively. Deferred PSUs, deferred RSUs and deferred stock units representing directors’ fees totaled 303,855 units as of December 31, 2018. Each unit is equivalent to one share of the Company’s Common Stock. 12. SEGMENT INFORMATION Our organizational structure is designed to ensure continued focus on North America, coupled with an emphasis on profitable growth in our focus international markets. Our business is organized around geographic regions, which enables us to build processes for repeatable success in our global markets. As a result, we have defined our operating segments on a geographic basis, as this aligns with how our Chief Operating Decision Maker (“CODM”) manages our business, including resource allocation and performance assessment. Our North America business, which generates approximately 89% of our consolidated revenue, is our only reportable segment. None of our other operating segments meet the quantitative thresholds to qualify as reportable segments; therefore, these operating segments are combined and disclosed below as International and Other. • North America - This segment is responsible for our traditional chocolate and non-chocolate confectionery market position, as well as our grocery and growing snacks market positions, in the United States and Canada. This includes developing and growing our business in chocolate and non-chocolate confectionery, pantry, food service and other snacking product lines. • International and Other - International and Other is a combination of all other operating segments that are not individually material, including those geographic regions where we operate outside of North America. We currently have operations and manufacture product in China, Mexico, Brazil, India and Malaysia, primarily for consumers in these regions, and also distribute and sell confectionery products in export markets of Asia, Latin America, Middle East, Europe, Africa and other regions. This segment also includes our global retail operations, including Hershey's Chocolate World stores in Hershey, Pennsylvania, New York City, Las Vegas, Niagara Falls (Ontario) and Singapore, as well as operations associated with licensing the use of certain of the Company's trademarks and products to third parties around the world. For segment reporting purposes, we use “segment income” to evaluate segment performance and allocate resources. Segment income excludes unallocated general corporate administrative expenses, unallocated mark-to-market gains and losses on commodity derivatives, business realignment and impairment charges, acquisition-related costs and other unusual gains or losses that are not part of our measurement of segment performance. These items of our operating income are managed centrally at the corporate level and are excluded from the measure of segment income reviewed by the CODM as well the measure of segment performance used for incentive compensation purposes. Accounting policies associated with our operating segments are generally the same as those described in Note 1. 91 THE HERSHEY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) Certain manufacturing, warehousing, distribution and other activities supporting our global operations are integrated to maximize efficiency and productivity. As a result, assets and capital expenditures are not managed on a segment basis and are not included in the information reported to the CODM for the purpose of evaluating performance or allocating resources. We disclose depreciation and amortization that is generated by segment-specific assets, since these amounts are included within the measure of segment income reported to the CODM. Our segment net sales and earnings were as follows: For the years ended December 31, Net sales: North America International and Other Total Segment income (loss): North America International and Other Total segment income Unallocated corporate expense (1) Unallocated mark-to-market (gains) losses on commodity derivatives Long-lived and intangible asset impairment charges Costs associated with business realignment activities Acquisition-related costs Gain on sale of licensing costs Operating profit Interest expense, net Other (income) expense, net Income before income taxes 2018 2017 2016 6,901,607 889,462 7,791,069 $ $ 6,621,173 894,253 7,515,426 $ $ 6,532,988 907,193 7,440,181 2,020,082 $ 2,044,218 $ $ $ $ 11,532 2,055,750 499,251 (35,292) 208,712 69,359 311 — 2,040,454 (29,139) 2,011,315 488,318 163,238 4,204 93,902 6,480 — 73,762 2,093,844 486,716 (168,263) 57,729 51,827 44,829 (2,658) 1,623,664 138,837 74,766 1,313,409 1,255,173 98,282 104,459 90,143 65,549 $ 1,410,061 $ 1,110,668 $ 1,099,481 (1) Includes centrally-managed (a) corporate functional costs relating to legal, treasury, finance, and human resources, (b) expenses associated with the oversight and administration of our global operations, including warehousing, distribution and manufacturing, information systems and global shared services, (c) non-cash stock-based compensation expense, and (d) other gains or losses that are not integral to segment performance. Activity within the unallocated mark-to-market (gains) losses on commodity derivatives is as follows: For the years ended December 31, Net (gains) losses on mark-to-market valuation of commodity derivative positions recognized in income Net losses on commodity derivative positions reclassified from unallocated to segment income 2018 2017 2016 $ (69,379) $ 55,734 $ 171,753 (98,884) (91,026) (8,515) Net (gains) losses on mark-to-market valuation of commodity derivative positions recognized in unallocated derivative (gains) losses $ (168,263) $ (35,292) $ 163,238 As of December 31, 2018, the cumulative amount of mark-to-market gains on commodity derivatives that have been recognized in our consolidated cost of sales and not yet allocated to reportable segments was $40,318. Based on our forecasts of the timing of the recognition of the underlying hedged items, we expect to reclassify net pretax losses on commodity derivatives of $409 to segment operating results in the next twelve months. 92 THE HERSHEY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) Depreciation and amortization expense included within segment income presented above is as follows: For the years ended December 31, North America International and Other Corporate (1) Total 2018 2017 2016 $ $ 205,340 $ 171,265 $ 35,656 54,148 42,542 48,046 295,144 $ 261,853 $ 162,211 50,753 88,873 301,837 (1) Corporate includes non-cash asset-related accelerated depreciation and amortization related to business realignment activities, as discussed in Note 8. Such amounts are not included within our measure of segment income. Additional geographic information is as follows: For the years ended December 31, Net sales: United States Other Total Long-lived assets: United States Other Total 2018 2017 2016 $ $ $ $ 6,535,675 1,255,394 7,791,069 1,668,186 462,108 2,130,294 $ $ $ $ 6,263,703 1,251,723 7,515,426 1,575,496 531,201 2,106,697 $ $ $ $ 6,196,723 1,243,458 7,440,181 1,528,255 648,993 2,177,248 In conjunction with recent acquisitions, in 2018 we introduced our snacks portfolio, an additional product line represented by ready-to-eat popcorn, baked snacks, meat snack products and other better-for-you snacks. Net sales related to our snacks portfolio in 2017 and 2016, respectively, were immaterial. Additional product line information is as follows: For the year ended December 31, Net sales: Confectionery and confectionery-based portfolio Snacks portfolio Total 2018 $ $ 7,453,364 337,705 7,791,069 13. EQUITY AND NONCONTROLLING INTEREST We had 1,055,000,000 authorized shares of capital stock as of December 31, 2018. Of this total, 900,000,000 shares were designated as Common Stock, 150,000,000 shares were designated as Class B Stock and 5,000,000 shares were designated as Preferred Stock. Each class has a par value of one dollar per share. Holders of the Common Stock and the Class B Stock generally vote together without regard to class on matters submitted to stockholders, including the election of directors. The holders of Common Stock have 1 vote per share and the holders of Class B Stock have 10 votes per share. However, the Common Stock holders, voting separately as a class, are entitled to elect one-sixth of the Board. With respect to dividend rights, the Common Stock holders are entitled to cash dividends 10% higher than those declared and paid on the Class B Stock. Class B Stock can be converted into Common Stock on a share-for-share basis at any time. During 2018, 6,000 shares of Class B Stock were converted into Common Stock. During 2017 and 2016 no shares of Class B Stock were converted into Common Stock. 93 THE HERSHEY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) Changes in the outstanding shares of Common Stock for the past three years were as follows: For the years ended December 31, Shares issued Treasury shares at beginning of year Stock repurchases: 2018 359,901,744 (149,040,927) 2017 359,901,744 (147,642,009) 2016 359,901,744 (143,124,384) Shares repurchased in the open market under pre- approved share repurchase programs Shares repurchased directly from the Milton Hershey School Trust Shares repurchased to replace Treasury Stock issued for stock options and incentive compensation (1,406,093) — (4,640,964) (450,000) (1,500,000) — (615,719) (1,278,675) (1,820,766) Stock issuances: Shares issued for stock options and incentive compensation Treasury shares at end of year Net shares outstanding at end of year 1,339,899 (150,172,840) 209,728,904 1,379,757 (149,040,927) 210,860,817 1,944,105 (147,642,009) 212,259,735 We are authorized to purchase our outstanding shares in open market and privately negotiated transactions. The programs have no expiration date and acquired shares of Common Stock will be held as treasury shares. Purchases under approved share repurchase authorizations are in addition to our practice of buying back shares sufficient to offset those issued under incentive compensation plans. Hershey Trust Company Hershey Trust Company, as trustee for the Milton Hershey School Trust (the "Trust") and as direct owner of investment shares, held 3,903,121 shares of our Common Stock as of December 31, 2018. As trustee for the Trust, Hershey Trust Company held 60,612,012 shares of the Class B Stock as of December 31, 2018, and was entitled to cast approximately 80% of all of the votes entitled to be cast on matters requiring the vote of both classes of our common stock voting together. Hershey Trust Company, as trustee for the Trust, or any successor trustee, or Milton Hershey School, as appropriate, must approve any issuance of shares of Common Stock or other action that would result in it not continuing to have voting control of our Company. In November 2018, the Company entered into a Stock Purchase Agreement with Hershey Trust Company, as trustee for the Trust, pursuant to which the Company agreed to purchase 450,000 shares of the Company’s common stock from the Trust at a price equal to $106.30 per share, for a total purchase price of $47,835. In August 2017, the Company entered into a Stock Purchase Agreement with Hershey Trust Company, as trustee for the Trust, pursuant to which the Company agreed to purchase 1,500,000 shares of the Company’s common stock from the Trust at a price equal to $106.01 per share, for a total purchase price of $159,015. Noncontrolling Interest in Subsidiary We currently own a 50% controlling interest in Lotte Shanghai Foods Co., Ltd. (“LSFC”), a joint venture established in 2007 in China for the purpose of manufacturing and selling product to the joint venture partners. A roll-forward showing the 2018 activity relating to the noncontrolling interest follows: Balance, December 31, 2017 Net loss attributable to noncontrolling interest Other comprehensive loss - foreign currency translation adjustments Balance, December 31, 2018 94 Noncontrolling Interest $ $ 16,227 (6,511) (1,171) 8,545 THE HERSHEY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) The 2018 net loss attributable to the noncontrolling interest reflects the 50% allocation of LSFC-related business realignment and impairment costs (see Note 8). 14. COMMITMENTS AND CONTINGENCIES Purchase obligations We enter into certain obligations for the purchase of raw materials. These obligations are primarily in the form of forward contracts for the purchase of raw materials from third-party brokers and dealers. These contracts minimize the effect of future price fluctuations by fixing the price of part or all of these purchase obligations. Total obligations consisted of fixed price contracts for the purchase of commodities and unpriced contracts that were valued using market prices as of December 31, 2018. The cost of commodities associated with the unpriced contracts is variable as market prices change over future periods. We mitigate the variability of these costs to the extent that we have entered into commodities futures contracts or other commodity derivative instruments to hedge our costs for those periods. Increases or decreases in market prices are offset by gains or losses on commodities futures contracts or other commodity derivative instruments. Taking delivery of and making payments for the specific commodities for use in the manufacture of finished goods satisfies our obligations under the forward purchase contracts. For each of the three years in the period ended December 31, 2018, we satisfied these obligations by taking delivery of and making payment for the specific commodities. As of December 31, 2018, we had entered into agreements for the purchase of raw materials with various suppliers. Subject to meeting our quality standards, the purchase obligations covered by these agreements were as follows as of December 31, 2018: in millions Purchase obligations Lease commitments 2019 1,495.9 $ 2020 2021 2022 2023 $ 870.9 $ 7.5 $ 0.7 $ — We also have commitments under various operating and capital lease arrangements. Future minimum payments under lease arrangements with a remaining term in excess of one year were as follows as of December 31, 2018: 2019 2020 2021 2022 2023 Thereafter Operating leases (1) Capital leases (2) $ 38,041 $ 24,047 16,883 15,424 13,494 185,608 6,980 5,272 3,901 4,399 4,577 169,686 (1) Future minimum rental payments reflect commitments under non-cancelable operating leases primarily for offices, retail stores, warehouse and distribution facilities. Total rent expense for the years ended December 31, 2018, 2017 and 2016 was $34,157, $25,525 and $20,330, respectively, including short-term rentals. (2) Future minimum rental payments reflect commitments under non-cancelable capital leases primarily for offices and warehouse facilities, as well as vehicles. Environmental contingencies We have a number of facilities that contain varying amounts of asbestos in certain locations within the facilities. Our asbestos management program is compliant with current applicable regulations, which require that we handle or dispose of asbestos in a special manner if such facilities undergo major renovations or are demolished. We do not have sufficient information to estimate the fair value of any asset retirement obligations related to these facilities. We cannot specify the settlement date or range of potential settlement dates and, therefore, sufficient information is not available to apply an expected present value technique. We expect to maintain the facilities with repairs and maintenance activities that would not involve or require the removal of significant quantities of asbestos. 95 THE HERSHEY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) Legal contingencies We are subject to various pending or threatened legal proceedings and claims that arise in the ordinary course of our business. While it is not feasible to predict or determine the outcome of such proceedings and claims with certainty, in our opinion these matters, both individually and in the aggregate, are not expected to have a material effect on our financial condition, results of operations or cash flows. Collective Bargaining As of December 31, 2018, the Company employed approximately 14,930 full-time and 1,490 part-time employees worldwide. Collective bargaining agreements covered approximately 5,780 employees, or approximately 35% of the Company’s employees worldwide. During 2019, agreements will be negotiated for certain employees at three facilities outside of the United States, comprising approximately 67% of total employees under collective bargaining agreements. We currently expect that we will be able to renegotiate such agreements on satisfactory terms when they expire. 96 THE HERSHEY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) 15. EARNINGS PER SHARE We compute basic earnings per share for Common Stock and Class B common stock using the two-class method. The Class B common stock is convertible into Common Stock on a share-for-share basis at any time. The computation of diluted earnings per share for Common Stock assumes the conversion of Class B common stock using the if-converted method, while the diluted earnings per share of Class B common stock does not assume the conversion of those shares. 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: For the years ended December 31, 2018 2017 2016 Common Stock Class B Common Stock Common Stock Class B Common Stock Common Stock Class B Common Stock Basic earnings per share: Numerator: Allocation of distributed earnings (cash dividends paid) $ 410,732 $ 151,789 $ 385,878 $ 140,394 $ 367,081 $ 132,394 Allocation of undistributed earnings 449,372 165,669 188,286 68,423 162,299 58,270 Total earnings—basic $ 860,104 $ 317,458 $ 574,164 $ 208,817 $ 529,380 $ 190,664 Denominator (shares in thousands): Total weighted-average shares—basic 149,379 60,614 151,625 60,620 153,519 60,620 Earnings Per Share—basic $ 5.76 $ 5.24 $ 3.79 $ 3.44 $ 3.45 $ 3.15 Diluted earnings per share: Numerator: Allocation of total earnings used in basic computation Reallocation of total earnings as a result of conversion of Class B common stock to Common stock Reallocation of undistributed earnings $ 860,104 $ 317,458 $ 574,164 $ 208,817 $ 529,380 $ 190,664 317,458 — — (803) 208,817 — — (492) 190,664 — — (324) Total earnings—diluted $1,177,562 $ 316,655 $ 782,981 $ 208,325 $ 720,044 $ 190,340 Denominator (shares in thousands): Number of shares used in basic computation Weighted-average effect of dilutive securities: Conversion of Class B common stock to Common shares outstanding Employee stock options Performance and restricted stock units 149,379 60,614 151,625 60,620 153,519 60,620 60,614 651 345 — — — 60,620 1,144 353 — — — 60,620 964 201 — — — Total weighted-average shares—diluted 210,989 60,614 213,742 60,620 215,304 60,620 Earnings Per Share—diluted $ 5.58 $ 5.22 $ 3.66 $ 3.44 $ 3.34 $ 3.14 The earnings per share calculations for the years ended December 31, 2018, 2017 and 2016 excluded 4,196, 2,374 and 3,680 stock options (in thousands), respectively, that would have been antidilutive. 97 THE HERSHEY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) 16. OTHER (INCOME) EXPENSE, NET Other (income) expense, net reports certain gains and losses associated with activities not directly related to our core operations. A summary of the components of other (income) expense, net is as follows: For the years ended December 31, Write-down of equity investments in partnerships qualifying for tax credits Non-service cost components of net periodic benefit cost relating to pension and other post-retirement benefit plans Settlement of SGM liability (see Note 2) Other (income) expense, net Total 2018 2017 2016 $ 50,329 $ 66,209 $ 43,482 20,672 — 3,765 $ 74,766 $ 38,768 — (518) 104,459 $ 49,390 (26,650) (673) 65,549 98 THE HERSHEY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) 17. SUPPLEMENTAL BALANCE SHEET INFORMATION The components of certain Consolidated Balance Sheet accounts are as follows: December 31, Inventories: Raw materials Goods in process Finished goods Inventories at FIFO Adjustment to LIFO Total inventories Prepaid expenses and other: Prepaid expenses Assets held for sale Other current assets Total prepaid expenses and other Property, plant and equipment: Land Buildings Machinery and equipment Construction in progress Property, plant and equipment, gross Accumulated depreciation Property, plant and equipment, net Other assets: Capitalized software, net Other non-current assets Total other assets Accrued liabilities: Payroll, compensation and benefits Advertising, promotion and product allowances Liabilities held for sale Other Total accrued liabilities Other long-term liabilities: Post-retirement benefits liabilities Pension benefits liabilities Other Total other long-term liabilities Accumulated other comprehensive loss: Foreign currency translation adjustments Pension and post-retirement benefit plans, net of tax Cash flow hedges, net of tax Total accumulated other comprehensive loss 99 2018 2017 237,086 $ 107,139 618,798 963,023 (178,144) 784,879 $ 68,490 $ 23,421 180,248 272,159 $ 102,074 $ 1,211,011 2,988,027 280,559 4,581,671 (2,451,377) 2,130,294 126,379 126,605 $ $ 252,984 $ 180,546 $ 293,642 596 204,379 679,163 $ 195,166 $ 66,379 184,503 446,048 $ (96,678) $ (205,230) (54,872) (356,780) $ 224,940 93,627 614,945 933,512 (180,676) 752,836 128,735 21,124 130,774 280,633 108,300 1,214,158 2,925,353 212,912 4,460,723 (2,354,026) 2,106,697 104,881 146,998 251,879 190,863 305,107 — 180,164 676,134 215,320 39,410 184,209 438,939 (91,837) (169,526) (52,383) (313,746) $ $ $ $ $ $ $ $ $ $ $ $ $ $ THE HERSHEY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) 18. QUARTERLY DATA (Unaudited) Summary quarterly results were as follows: Year 2018 Net sales Gross profit Net income attributable to The Hershey Company First 1,971,959 $ Second 1,751,615 $ Third 2,079,593 $ Fourth 1,987,902 $ 974,060 350,203 793,420 226,855 863,493 263,713 944,352 336,791 Common stock: Net income per share—Basic(a) Net income per share—Diluted(a) Dividends paid per share Class B common stock: Net income per share—Basic(a) Net income per share—Diluted(a) Dividends paid per share Market price—common stock: High Low Year 2017 Net sales Gross profit Net income attributable to The Hershey Company Common stock: Net income per share—Basic(a) Net income per share—Diluted(a) Dividends paid per share Class B common stock: Net income per share—Basic(a) Net income per share—Diluted(a) Dividends paid per share Market price—common stock: High Low 1.71 1.65 0.656 1.55 1.55 0.596 1.11 1.08 0.656 1.01 1.01 0.596 1.29 1.25 0.722 1.17 1.17 0.656 1.65 1.60 0.722 1.50 1.49 0.656 114.06 96.06 100.60 89.54 106.60 91.04 110.01 101.64 First $ 1,879,678 $ Second 1,662,991 $ Third 2,033,121 $ Fourth 1,939,636 909,352 125,044 765,847 203,501 942,936 273,303 837,241 181,133 0.60 0.58 0.618 0.55 0.55 0.562 0.98 0.95 0.618 0.89 0.89 0.562 1.32 1.28 0.656 1.20 1.20 0.596 0.88 0.85 0.656 0.80 0.80 0.596 109.61 103.45 115.96 106.41 110.50 104.06 115.45 102.87 (a) Quarterly income per share amounts do not total to the annual amount due to changes in weighted-average shares outstanding during the year. 100 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. Item 9A. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”), as of December 31, 2018. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2018. We rely extensively on information systems and technology to manage our business and summarize operating results. We are in the process of a multi-year implementation of a new global enterprise resource planning (“ERP”) system, which will replace our existing operating and financial systems. The ERP system is designed to accurately maintain the Company’s financial records, enhance operational functionality and provide timely information to the Company’s management team related to the operation of the business. The implementation is expected to occur in phases over the next several years. The initial changes to our consolidated financial reporting took place in the second quarter of 2018. The transition to the new financial reporting platform did not result in significant changes in our internal control over financial reporting. However, as the next phases of the updated processes are rolled out in connection with the ERP implementation, we will give appropriate consideration to whether these process changes necessitate changes in the design of and testing for effectiveness of internal controls over financial reporting. Design and Evaluation of Internal Control Over Financial Reporting Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in the Company’s reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the Company’s reports filed under the Exchange Act is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Changes in Internal Control Over Financial Reporting Management's report on the Company's internal control over financial reporting appears on the following page. There were no changes in the Company’s internal control over financial reporting during the fourth quarter of 2018 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. 101 MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING The management of The Hershey Company is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). The Company’s internal control system was designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. The Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2018. In making this assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control–Integrated Framework (2013 edition). Based on this assessment, management concluded that, as of December 31, 2018, the Company’s internal control over financial reporting was effective based on those criteria. Management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Amplify Snack Brands, Inc. or Pirate Brands which were acquired on January 31, 2018 and October 17, 2018, respectively, and are included in the 2018 consolidated financial statements of the Company and constituted 28.2% of total assets as of December 31, 2018 and 4.0% of net sales for the year then ended. The Company’s independent auditors have audited, and reported on, the Company’s internal control over financial reporting as of December 31, 2018. /s/ MICHELE G. BUCK Michele G. Buck Chief Executive Officer (Principal Executive Officer) /s/ PATRICIA A. LITTLE Patricia A. Little Chief Financial Officer (Principal Financial Officer) 102 Item 9B. OTHER INFORMATION None. 103 PART III Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE The information regarding executive officers of the Company required by Item 401 of SEC Regulation S-K is incorporated herein by reference from the disclosure included under the caption “Supplemental Item. Executive Officers of the Registrant” at the end of Part I of this Annual Report on Form 10-K. The information required by Item 401 of SEC Regulation S-K concerning the directors and nominees for director of the Company, together with a discussion of the specific experience, qualifications, attributes and skills that led the Board to conclude that the director or nominee should serve as a director at this time, will be located in the Proxy Statement in the section entitled “Proposal No. 1 – Election of Directors,” which information is incorporated herein by reference. Information regarding the identification of the Audit Committee as a separately-designated standing committee of the Board and information regarding the status of one or more members of the Audit Committee as an “audit committee financial expert” will be located in the Proxy Statement in the section entitled “Meetings and Committees of the Board – Committees of the Board,” which information is incorporated herein by reference. Reporting of any inadvertent late filings under Section 16(a) of the Securities Exchange Act of 1934, as amended, will be located in the Proxy Statement in the section entitled “Section 16(a) Beneficial Ownership Reporting Compliance,” which information is incorporated herein by reference. Information regarding our Code of Conduct applicable to our directors, officers and employees is located in Part I of this Annual Report on Form 10-K, under the heading “Available Information.” Item 11. EXECUTIVE COMPENSATION Information regarding the compensation of each of our named executive officers, including our Chief Executive Officer, will be located in the Proxy Statement in the section entitled “Compensation Discussion & Analysis,” which information is incorporated herein by reference. Information regarding the compensation of our directors will be located in the Proxy Statement in the section entitled “Non-Employee Director Compensation,” which information is incorporated herein by reference. The information required by Item 407(e)(4) of SEC Regulation S-K will be located in the Proxy Statement in the section entitled “Compensation Committee Interlocks and Insider Participation,” which information is incorporated herein by reference. The information required by Item 407(e)(5) of SEC Regulation S-K will be located in the Proxy Statement in the section entitled “Compensation Committee Report,” which information is incorporated herein by reference. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Information concerning ownership of our voting securities by certain beneficial owners, individual nominees for director, the named executive officers, including persons serving as our Chief Executive Officer and Chief Financial Officer, and directors and executive officers as a group, will be located in the Proxy Statement in the section entitled “Share Ownership of Directors, Management and Certain Beneficial Owners,” which information is incorporated herein by reference. Information regarding all of the Company’s equity compensation plans will be located in the Proxy Statement in the section entitled “Equity Compensation Plan Information,” which information is incorporated herein by reference. 104 Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE Information regarding transactions with related persons will be located in the Proxy Statement in the section entitled “Certain Transactions and Relationships,” which information is incorporated herein by reference. Information regarding director independence will be located in the Proxy Statement in the section entitled “Corporate Governance – Director Independence,” which information is incorporated herein by reference. Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES Information regarding “Principal Accounting Fees and Services,” including the policy regarding pre-approval of audit and non-audit services performed by our Company’s independent auditors, will be located in the Proxy Statement in the section entitled “Information about our Independent Auditors,” which information is incorporated herein by reference. 105 PART IV Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES Item 15(a)(1): Financial Statements The audited consolidated financial statements of The Hershey Company and its subsidiaries and the Report of Independent Registered Public Accounting Firm thereon, as required to be filed, are located under Item 8 of this Annual Report on Form 10-K. Item 15(a)(2): Financial Statement Schedule Schedule II—Valuation and Qualifying Accounts for The Hershey Company and its subsidiaries for the years ended December 31, 2018, 2017 and 2016 is filed as part of this Annual Report on Form 10-K as required by Item 15(c). We omitted other schedules because they are not applicable or the required information is set forth in the consolidated financial statements or notes thereto. Item 15(a)(3): Exhibits The information called for by this Item is incorporated by reference from the Exhibit Index included in this Annual Report on Form 10-K. Item 16. FORM 10-K SUMMARY None. 106 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, this 22nd day of February, 2019. SIGNATURES By: THE HERSHEY COMPANY (Registrant) /s/ PATRICIA A. LITTLE Patricia A. Little Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the date indicated. Signature Title Date /s/ MICHELE G. BUCK Chief Executive Officer and Director February 22, 2019 Michele G. Buck (Principal Executive Officer) /s/ PATRICIA A. LITTLE Chief Financial Officer February 22, 2019 Patricia A. Little (Principal Financial Officer) /s/ JAVIER H. IDROVO Chief Accounting Officer February 22, 2019 Javier H. Idrovo (Principal Accounting Officer) /s/ CHARLES A. DAVIS Chairman of the Board February 22, 2019 Charles A. Davis /s/ PAMELA M. ARWAY Director Pamela M. Arway /s/ JAMES W. BROWN Director James W. Brown /s/ MARY KAY HABEN Director Mary Kay Haben /s/ JAMES C. KATZMAN Director James C. Katzman /s/ M. DIANE KOKEN Director M. Diane Koken /s/ ROBERT M. MALCOLM Director Robert M. Malcolm /s/ ANTHONY J. PALMER Director Anthony J. Palmer /s/ WENDY L. SCHOPPERT Director Wendy L. Schoppert /s/ DAVID L. SHEDLARZ Director David L. Shedlarz 107 February 22, 2019 February 22, 2019 February 22, 2019 February 22, 2019 February 22, 2019 February 22, 2019 February 22, 2019 February 22, 2019 February 22, 2019 THE HERSHEY COMPANY AND SUBSIDIARIES SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS For the Years Ended December 31, 2018, 2017 and 2016 Schedule II Additions Balance at Beginning of Period Charged to Costs and Expenses Charged to Other Accounts Deductions from Reserves Balance at End of Period Description In thousands of dollars For the year ended December 31, 2018 Allowances deducted from assets Accounts receivable—trade, net (a) $ 41,792 $ 222,819 $ Valuation allowance on net deferred taxes (b) Inventory obsolescence reserve (c) 312,148 19,348 18,413 32,379 Total allowances deducted from assets $ 373,288 $ 273,611 $ For the year ended December 31, 2017 Allowances deducted from assets Accounts receivable—trade, net (a) $ 40,153 $ 166,993 $ Valuation allowance on net deferred taxes (b) Inventory obsolescence reserve (c) 235,485 20,043 92,139 35,666 Total allowances deducted from assets $ 295,681 $ 294,798 $ For the year ended December 31, 2016 Allowances deducted from assets Accounts receivable—trade, net (a) $ 32,638 $ 174,314 $ Valuation allowance on net deferred taxes (b) Inventory obsolescence reserve (c) 207,055 22,632 28,430 30,053 Total allowances deducted from assets $ 262,325 $ 232,797 $ — $ (240,001) $ — 24,610 239,959 — 20,136 — $ (362,194) $ 284,705 (90,602) (31,591) — $ (165,354) $ — 41,792 312,148 — 19,348 — $ (217,191) $ 373,288 (15,476) (36,361) — $ (166,799) $ — 40,153 235,485 — 20,043 — $ (199,441) $ 295,681 — (32,642) (a) Includes allowances for doubtful accounts, anticipated discounts and write-offs of uncollectible accounts receivable. (b) Includes adjustments to the valuation allowance for deferred tax assets that we do not expect to realize. The 2017 deductions from reserves reflects the change in valuation allowance due to the remeasurement of corresponding U.S. deferred tax assets at the lower enacted corporate tax rates resulting from the U.S. tax reform. (c) Includes adjustments to the inventory reserve, transfers, disposals and write-offs of obsolete inventory. 108 Exhibit Number 2.1 2.2 3.1 3.2 4.1 EXHIBIT INDEX Description Agreement and Plan of Merger, dated as of December 17, 2017, among the Company, Alphabet Merger Sub Inc. and Amplify Snack Brands, Inc. is incorporated by reference from Exhibit 2.1 to the Company’s Current Report on Form 8-K filed December 18, 2017. Asset Purchase Agreement, dated as of September 12, 2018, among the Company, B&G Foods, Inc. and the Selling Subsidiaries (as named therein) is incorporated by reference from Exhibit 2.1 to the Company's Current Report on Form 8-K filed September 13, 2018. The Company’s Restated Certificate of Incorporation, as amended, is incorporated by reference from Exhibit 3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended April 3, 2005. The Company's By-laws, as amended and restated as of February 21, 2017.* The Company has issued certain long-term debt instruments, no one class of which creates indebtedness exceeding 10% of the total assets of the Company and its subsidiaries on a consolidated basis. These classes consist of the following: 1) 2.900% Notes due 2020 2) 4.125% Notes due 2020 3) 3.100% Notes due 2021 4) 8.8% Debentures due 2021# 5) 3.375% Notes due 2023 6) 2.625% Notes due 2023 7) 3.200% Notes due 2025 8) 2.300% Notes due 2026 9) 7.2% Debentures due 2027 10) 3.375% Notes due 2046 11) Other Obligations 10.1(a) 10.1(b) 10.1(c) 10.2 10.3 10.4(a) 10.4(b) The Company undertakes to furnish copies of the agreements governing these debt instruments to the Securities and Exchange Commission upon its request. Kit Kat® and Rolo® License Agreement (the “License Agreement”) between the Company and Rowntree Mackintosh Confectionery Limited is incorporated by reference from Exhibit 10(a) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1980.# Amendment to the License Agreement is incorporated by reference from Exhibit 19 to the Company’s Quarterly Report on Form 10-Q for the quarter ended July 3, 1988.# Assignment of the License Agreement by Rowntree Mackintosh Confectionery Limited to Société des Produits Nestlé SA as of January 1, 1990 is incorporated by reference from Exhibit 19 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1990.# Peter Paul/York Domestic Trademark & Technology License Agreement between the Company and Cadbury Schweppes Inc. (now Kraft Foods Ireland Intellectual Property Limited) dated August 25, 1988, is incorporated by reference from Exhibit 2(a) to the Company’s Current Report on Form 8-K dated September 8, 1988.# Cadbury Trademark & Technology License Agreement between the Company and Cadbury Limited (now Cadbury UK Limited) dated August 25, 1988, is incorporated by reference from Exhibit 2(a) to the Company’s Current Report on Form 8-K dated September 8, 1988.# Trademark and Technology License Agreement between Huhtamäki (now Iconic IP Interests, LLC) and the Company dated December 30, 1996, is incorporated by reference from Exhibit 10 to the Company’s Current Report on Form 8-K filed February 26, 1997. Amended and Restated Trademark and Technology License Agreement between Huhtamäki (now Iconic IP Interests, LLC) and the Company is incorporated by reference from Exhibit 10.2 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1999. 109 10.5(a) 10.5(b) 10.6(a) 10.6(b) 10.7(a) 10.7(b) 10.8 10.9(a) 10.9(b) 10.10 10.11(a) 10.11(b) 10.11(c) 10.12(a) 10.12(b) 10.12(c) 10.12(d) 10.12(e) 10.13(a) Five Year Credit Agreement dated as of October 14, 2011, among the Company and the banks, financial institutions and other institutional lenders listed on the respective signature pages thereof (“Lenders”), Bank of America, N.A., as administrative agent for the Lenders, JPMorgan Chase Bank, N.A., as syndication agent, Citibank, N.A. and PNC Bank, National Association, as documentation agents, and Bank of America Merrill Lynch, J.P. Morgan Securities LLC, Citigroup Global Markets, Inc. and PNC Capital Markets LLC, as joint lead arrangers and joint book managers, is incorporated by reference from Exhibit 10.1 to the Company's Current Report on Form 8-K filed October 20, 2011. Amendment No. 1 to Credit Agreement dated as of November 12, 2013, among the Company, the banks, financial institutions and other institutional lenders who are parties to the Five Year Credit Agreement and Bank of America, N.A., as agent, is incorporated by reference from Exhibit 10.6 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013. 364 Day Credit Agreement, dated as of January 8, 2018, among the Company, Citibank, N.A., Bank of America N.A. and Royal Bank of Canada, is incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed January 9, 2018. Letter Agreement, by and between the Company and Citibank, N.A., terminating the 364 Day Credit Agreement effective October 24, 2018 is incorporated by reference from Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2018. Master Innovation and Supply Agreement between the Company and Barry Callebaut, AG, dated July 13, 2007, is incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed July 19, 2007. First Amendment to Master Innovation and Supply Agreement between the Company and Barry Callebaut, AG, dated April 14, 2011, is incorporated by reference from Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarter ended July 3, 2011. Supply Agreement for Monterrey, Mexico, between the Company and Barry Callebaut, AG, dated July 13, 2007, is incorporated by reference from Exhibit 10.2 to the Company’s Current Report on Form 8-K filed July 19, 2007. Stock Purchase Agreement, dated August 24, 2017, between Milton Hershey School Trust, by its trustee, Hershey Trust Company, and the Company is incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed August 28, 2017. Stock Purchase Agreement, dated November 7, 2018, between Milton Hershey School Trust, by its trustee, Hershey Trust Company, and the Company is incorporated by reference from Exhibit 10.1 to the Company's Current Report on Form 8-K filed November 8, 2018. The Company’s Equity and Incentive Compensation Plan, amended and restated February 22, 2011, and approved by our stockholders on April 28, 2011, is incorporated by reference from Appendix B to the Company’s proxy statement filed March 15, 2011.+ Form of Notice of Award of Restricted Stock Units (pre-February 15, 2016 version) is incorporated by reference from Exhibit 10.9 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015.+ Form of Notice of Award of Restricted Stock Units (effective February 15, 2016 - February 21, 2017 version) is incorporated by reference from Exhibit 10.10(b) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016.+ Form of Notice of Award of Restricted Stock Units (effective February 22, 2017) is incorporated by reference from Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended April 2, 2017.+ Form of Notice of Special Award of Restricted Stock Units (pro-rata vest, pre-February 15, 2016 version) is incorporated by reference from Exhibit 10.2 to the Company’s Current Report on Form 8-K filed June 16, 2011.+ Form of Notice of Special Award of Restricted Stock Units (pro-rata vest, effective February 15, 2016 - February 21, 2017 version) is incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed June 17, 2016.+ Form of Notice of Special Award of Restricted Stock Units (pro-rata vest, effective February 22, 2017) is incorporated by reference from Exhibit 10.2(a) to the Company’s Quarterly Report on Form 10-Q for the quarter ended April 2, 2017.+ Form of Notice of Special Award of Restricted Stock Units (3-year cliff vest, pre-February 22, 2017 version) is incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed February 18, 2016.+ Form of Notice of Special Award of Restricted Stock Units (3-year cliff vest, effective February 22, 2017) is incorporated by reference from Exhibit 10.2(b) to the Company’s Quarterly Report on Form 10-Q for the quarter ended April 2, 2017.+ Terms and Conditions of Nonqualified Stock Option Awards under the Equity and Incentive Compensation Plan (pre-February 15, 2016 version) is incorporated by reference from Exhibit 10.2 to the Company’s Current Report on Form 8-K filed February 24, 2012.+ 110 10.13(b) 10.13(c) 10.14(a) 10.14(b) 10.14(c) 10.15 10.16 10.17 10.18(a) 10.18(b) 10.19 10.20 10.21 10.22 10.23(a) 10.23(b) 10.24(a) 10.24(b) 10.24(c) 10.25 10.26 Terms and Conditions of Nonqualified Stock Option Awards under the Equity and Incentive Compensation Plan (effective February 15, 2016 - February 21, 2017 version) is incorporated by reference from Exhibit 10.12(b) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016.+ Terms and Conditions of Nonqualified Stock Option Awards under the Equity and Incentive Compensation Plan (effective February 22, 2017) is incorporated by reference from Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended April 2, 2017.+ Form of Notice of Award of Performance Stock Units (pre-February 15, 2016 version) is incorporated by reference from Exhibit 10.1 to the Company's Current Report on Form 8-K filed February 24, 2012.+ Form of Notice of Award of Performance Stock Units (effective February 15, 2016 - February 21, 2017 version) is incorporated by reference from Exhibit 10.13(b) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016.+ Form of Notice of Award of Performance Stock Units (effective February 22, 2017) is incorporated by reference from Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarter ended April 2, 2017.+ Form of Notice of Special Award of Performance Stock Units is incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed May 5, 2017.+ The Long-Term Incentive Program Participation Agreement is incorporated by reference from Exhibit 10.2 to the Company's Current Report on Form 8-K filed February 18, 2005.+ The Company’s Deferred Compensation Plan, Amended and Restated as of June 27, 2012, is incorporated by reference from Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended July 1, 2012.+ The Company’s Supplemental Executive Retirement Plan, Amended and Restated as of October 2, 2007, is incorporated by reference from Exhibit 10.6 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007.+ First Amendment to the Company’s Supplemental Executive Retirement Plan, Amended and Restated as of October 2, 2007, is incorporated by reference from Exhibit 10.5 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.+ The Company’s Compensation Limit Replacement Plan, Amended and Restated as of January 1, 2009, is incorporated by reference from Exhibit 10.6 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.+ The Company’s Executive Benefits Protection Plan (Group 3A), Amended and Restated as of June 27, 2012, is incorporated by reference from Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended July 1, 2012.+ The Company's Executive Benefits Protection Plan (Group 3), Amended and Restated as of June 27, 2012, is incorporated by reference from Exhibit 10.18 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015.+ Executive Confidentiality and Restrictive Covenant Agreement, adopted as of February 16, 2009, is incorporated by reference from Exhibit 10.4 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.+ Employee Confidentiality and Restrictive Covenant Agreement, amended as of February 18, 2013, is incorporated by reference from Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2013.+ Employee Confidentiality and Restrictive Covenant Agreement, amended as of October 10, 2016, is incorporated by reference from Exhibit 10.21(b) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016.+ Executive Employment Agreement with John P. Bilbrey, dated as of August 7, 2012, is incorporated by reference from Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended July 1, 2012.+ First Amendment to Executive Employment Agreement, dated as of November 16, 2015, by and between the Company and John P. Bilbrey is incorporated by reference from Exhibit 10.1 to the Company's Current Report on Form 8-K filed November 19, 2015.+ Retirement Agreement, dated as of February 22, 2017, by and between the Company and John P. Bilbrey is incorporated by reference from Exhibit 10.2 to the Company’s Current Report on Form 8-K/A filed February 24, 2017.+ Executive Employment Agreement, effective as of March 1, 2017, by and between the Company and Michele G. Buck is incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K/A filed February 24, 2017.+ The Company’s Directors’ Compensation Plan, Amended and Restated as of December 2, 2008, is incorporated by reference from Exhibit 10.8 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008. 111 21.1 23.1 23.2 31.1 31.2 32.1 101.INS 101.SCH Subsidiaries of the Registrant.* Consent of Ernst & Young LLP.* ` Consent of KPMG LLP.* Certification of Michele G. Buck, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* Certification of Patricia A. Little, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* Certification of Michele G. Buck, Chief Executive Officer, and Patricia A. Little, Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.** XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. XBRL Taxonomy Extension Schema 101.CAL XBRL Taxonomy Extension Calculation Linkbase 101.LAB XBRL Taxonomy Extension Label Linkbase 101.PRE XBRL Taxonomy Extension Presentation Linkbase 101.DEF XBRL Taxonomy Extension Definition Linkbase * ** + # Filed herewith Furnished herewith Management contract, compensatory plan or arrangement Pursuant to Instruction 1 to Regulation S-T Rule 105(d), no hyperlink is required for any exhibit incorporated by reference that has not been filed with the SEC in electronic format 112 Exhibit 31.1 I, Michele G. Buck, certify that: CERTIFICATION 1. 2. 3. 4. I have reviewed this Annual Report on Form 10-K of The Hershey Company; Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. /s/ MICHELE G. BUCK Michele G. Buck Chief Executive Officer February 22, 2019 11(cid:22) Exhibit 31.2 I, Patricia A. Little, certify that: CERTIFICATION 1. 2. 3. 4. I have reviewed this Annual Report on Form 10-K of The Hershey Company; Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. /S/ PATRICIA A. LITTLE Patricia A. Little Chief Financial Officer February 22, 2019 11(cid:23) CERTIFICATION Exhibit 32.1 Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officers of The Hershey Company (the “Company”) hereby certify that the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: February 22, 2019 /s/ MICHELE G. BUCK Michele G. Buck Chief Executive Officer Date: February 22, 2019 /s/ PATRICIA A. LITTLE Patricia A. Little Chief Financial Officer A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. 11(cid:24) Directors and Officers as of April 11, 2019 Charles A. Davis Chairman of the Board The Hershey Company Chief Executive Officer Stone Point Capital LLC Greenwich, CT Pamela M. Arway Former Executive American Express Company, Inc. New York, NY James W. Brown Director, Hershey Trust Company; Member, Board of Managers Milton Hershey School Michele G. Buck President and Chief Executive Officer The Hershey Company Directors C. Katzman Mary Kay Haben Former President, North America Wm. Wrigley Jr. Company Chicago, IL James Director, Hershey Trust Company; Member, Board of Managers Milton Hershey School M. Diane Koken Director, Hershey Trust Company; Member, Board of Managers Milton Hershey School Robert M. Malcolm Former President, Global Marketing, Sales & Innovation Diageo PLC London, UK Anthony J. Palmer Chief Executive Officer TropicSport Dallas, TX Wendy L. Schoppert Former Executive Vice President and Chief Financial Officer Sleep Number Corporation Minneapolis, MN David L. Shedlarz Former Vice Chairman Pfizer Inc. New York, NY Audit David L. Shedlarz* James W. Brown Charles A. Davis** M. Diane Koken Robert M. Malcolm Wendy L. Schoppert * Committee Chair ** Ex-Officio Compensation and Executive Organization Anthony J. Palmer* Pamela M. Arway Charles A. Davis** Mary Kay Haben M. Diane Koken Committees Finance and Risk Management Robert M. Malcolm* Pamela M. Arway Charles A. Davis** James C. Katzman Wendy L. Schoppert David L. Shedlarz Governance Mary Kay Haben* James W. Brown Charles A. Davis Anthony J. Palmer Executive Charles A. Davis* Mary Kay Haben Robert M. Malcolm Anthony J. Palmer David L. Shedlarz Michele G. Buck President and Chief Executive Officer Damien Atkins Senior Vice President General Counsel and Secretary Javier H. Idrovo Vice President Chief Accounting Officer Officers Patricia A. Little Senior Vice President Chief Financial Officer Terence L. O’Day Senior Vice President Chief Product Supply and Technology Officer Steven C. Schiller President, International Stockholder Information Todd W. Tillemans President, U.S. Kevin R. Walling Senior Vice President Chief Human Resources Officer Mary Beth West Senior Vice President Chief Growth Officer Transfer Agent and Registrar Computershare Standard Delivery: P.O. Box 505000, Louisville, KY 40233-5000 Overnight Delivery: 462 South 4th Street, Suite 1600, Louisville, KY 40202 Domestic Holders: (800) 851-4216 Foreign Holders: (201) 680-6578 Hearing Impaired (Domestic): (800) 952-9245 Hearing Impaired (Foreign): (312) 588-4110 www.computershare.com/investor Investor Relations Contact / Financial Information Melissa Poole Vice President, Investor Relations 19 East Chocolate Avenue P. O. Box 819 Hershey, PA 17033-0819 (800) 539-0261 www.thehersheycompany.com DIRECTIONS AND GENERAL INFORMATION REGARDING ANNUAL MEETING May 21, 2019 10:00 a.m. Eastern Daylight Time GIANT Center 550 West Hersheypark Drive Hershey, PA The doors to GIANT Center will open at 8:30 a.m. Please note the only entrance to the meeting will be at the rear entrance of GIANT Center and transportation from the parking area will be available. There will be designated seating for those using wheelchairs or requiring special assistance. Scranton Wilkes-Barre • Traveling South on I-81 Take exit 80 and follow Route 743 South to Hershey. Follow Route 743 South / Hersheypark Drive to GIANT Center. Follow signs for parking. 78 • Traveling North on I-81 Allentown Reading Hershey, PA Harrisburg Gettysburg Lancaster 76 322 N Philadelphia Wilmington 83 MD 95 Baltimore Washington, DC DE Take exit 77 and follow Route 39 East to Hershey. Continue to GIANT Center. Follow signs for parking. • Traveling West on the PA Turnpike (I-76) Take exit 266. Turn left on Route 72 North. Follow Route 72 North to Route 322 West. Follow Route 322 West into Hershey. Stay straight as Route 322 West becomes Hersheypark Drive / Route 39 West. Continue to GIANT Center. Follow signs for parking. • Traveling East on PA Turnpike (I-76) Take exit 247. Take I-283 North to exit 3 and follow Route 322 East to Hershey. Take the Hersheypark Drive / Route 39 West exit. Follow Route 39 to GIANT Center. Follow signs for parking. • Traveling North on I-83 Approaching Harrisburg, follow signs to continue on I-83 North. Follow I-83 North to Route 322 East to Hershey. Take the Hersheypark Drive / Route 39 West exit. Follow Route 39 to GIANT Center. Follow signs for parking. Everyone will walk through a magnetometer and is subject to further inspection. All handbags and packages will be inspected. Weapons and sharp objects (such as pocketknives and scissors), cell phones, pagers, cameras and recording devices will not be permitted inside the meeting room. HERSHEY’S CHOCOLATE WORLD Attraction will be open from 9:00 a.m. to 6:00 p.m. on the day of the Annual Meeting and we are offering stockholders a special 25% discount on selected items on that date. You will need to show your admission ticket at HERSHEY’S CHOCOLATE WORLD Attraction on the day of the meeting to receive the special discount. 

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