HERSHEY CO - Annual Report: 2019 (Form 10-K)

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Item 1.	BUSINESS

•	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.

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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.

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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 ready-to-eat SkinnyPop popcorn, baked and trans fat free Pirate's Booty snacks and other better-for-you snack brands such as Oatmega, Paqui and ONE Bar, 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, and Krave meat snack products.

•	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.

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Item 1A.	RISK FACTORS

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•	Commodity market fluctuations;

•	Currency exchanges rates;

•	Imbalances between supply and demand;

•	The effect of weather on crop yield and quality;

•	Speculative influences;

•	Trade agreements among producing and consuming nations;

•	Supplier compliance with commitments;

•	Import/export requirements for raw materials and finished goods;

•	Political unrest in producing countries; and

•	Changes in governmental agricultural programs and energy policies.

•	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.

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•	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.

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•	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.

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Item 1B.	UNRESOLVED STAFF COMMENTS

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Item 2.	PROPERTIES

Item 3.	LEGAL PROCEEDINGS

Item 4.	MINE SAFETY DISCLOSURES

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(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)	On December 18, 2019, the Company announced the planned retirement of Mr. O'Day, to be effective March 31, 2020.

(3)	Mr. Voskuil was elected Senior Vice President, Chief Financial Officer effective May 13, 2019. Prior to joining our Company he was Senior Vice President and Chief Financial Officer at Avanos Medical, Inc. (November 2014).

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

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Item 6.	SELECTED FINANCIAL DATA

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

•	Business Model and Growth Strategy

•	Overview

•	Consolidated Results of Operations

•	Segment Results

•	Financial Condition

•	Liquidity and Capital Resources

•	Critical Accounting Policies and Estimates

•	Undisputed Leader in US Confection and Capturing Incremental Snacking Occasions. We are taking actions to deepen our consumer connections, utilize our beloved brands to 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.

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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 ONE Brands in September 2019, Pirate Brands in October 2018 and Amplify in January 2018, respectively.

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•	Driving Profitable Growth, Allocating Capital Resources and Optimizing Cost Structure. 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.

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Expanding Competitive Advantage Through Differentiated Capabilities. 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, including digital transformation and new media models. In addition, we are in the process of transforming our enterprise resource planning system, which will enable employees to work more efficiently and effectively.

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(1)

During the fourth quarter of 2019, we recorded impairment charges to write down customer relationship and trademark intangible assets associated with KRAVE Pure Foods, Inc. (“Krave”). These charges were determined by comparing the fair value of the asset group to its carrying value. We used various valuation techniques to determine fair value, with the primary techniques being discounted cash flow analysis and relief-from-royalty valuation approaches, which use significant unobservable inputs, or Level 3 inputs, as defined by the fair value hierarchy.

(2)	During 2019, we recorded impairment charges predominantly comprised of select long-lived assets that had not yet met the held for sale criteria. The fair value of these assets was supported by potential sales prices with third-party buyers and market analysis.

(3)	In connection with our disposal group classified as held for sale, during 2019, we recorded impairment charges to adjust long-lived asset values. The fair value of the disposal group was supported by potential sales prices with third-party buyers. We expect the sale of the disposal group to be completed in the first half of 2020.

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(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 13 to the Consolidated Financial Statements.

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Net working capital (comprised of trade accounts receivable, inventory, accounts payable and accrued liabilities), generated cash of $60 million in 2019 and consumed cash of $104 million in 2018. This $164 million fluctuation was mainly driven by higher cash receipts prior to year-end 2019, the timing of vendor and supplier payments, as well as higher accrued incentive compensation related to annual performance that will be paid in the first quarter of 2020.

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Prepaid expenses and other current assets generated cash of $14 million in 2019, compared to a use of cash of $40 million in 2018. This $54 million fluctuation was mainly driven by the timing of payments on commodity futures. In addition, in 2019, the volume of commodity futures held, which require margin deposits, was lower compared to 2018. We utilize commodity futures contracts to economically manage the risk of future price fluctuations associated with our purchase of raw materials.

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•	The increase in cash provided by operating activities was partially offset by the following net cash outflows:

◦	Incomes taxes used cash of $9 million in 2019, compared to cash generated of $76 million in 2018. This $85 million fluctuation was mainly due to the variance in actual tax expense for 2019 relative to the timing of quarterly estimated tax payments, which resulted in a lower taxes payable position at the end of 2019 compared to 2018.

◦	Net income adjusted for non-cash charges to operations (including depreciation, amortization, stock-based compensation, deferred income taxes, long-lived and intangible asset charges, write-down of equity investments and other charges) resulted in $2 million of lower cash flow in 2019 relative to 2018.

•	Net income adjusted for non-cash charges to operations (including depreciation, amortization, stock-based compensation, deferred income taxes, long-lived and intangible 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:

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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.

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Capital spending. Capital expenditures, including capitalized software, primarily to support our enterprise resource planning ("ERP") system implementation, capacity expansion, innovation and cost savings, were $318.2 million in 2019, $328.6 million in 2018 and $257.7 million in 2017. Our 2019 expenditures were relatively in line with 2018 expenditures. The increase in 2018 compared to 2017 was a result of increased U.S. core chocolate brand capacity expansion and investments in our multi-year ERP system implementation. We expect 2020 capital

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Proceeds from sales of property, plant and equipment and other long-lived assets. During 2019, we generated $28.1 million of proceeds from the sale of property, plant and equipment and other long-lived assets. This included the sale of select Pennsylvania facilities and land for sales proceeds of approximately $27.6 million, resulting in a gain on the sale of $11.3 million. 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 2019 or 2017 periods.

•	Business acquisitions. In 2019, we spent $402.2 million to acquire ONE Brands. In 2018, we spent $915 million to acquire Amplify and $423 million to acquire Pirate Brands. We had no acquisition activity in 2017.

•	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 $80.2 million in 2019, $52.6 million in 2018 and $78.6 million in 2017 in projects qualifying for tax credits.

•	Other investing activities. In 2019, we made minority investments in emerging snacking businesses that qualify as cost method investments.

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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 2019, we used $1.2 billion to reduce short-term commercial paper borrowings and short-term foreign borrowings. We utilized the proceeds from the issuance of long-term debt in October 2019 to repay outstanding commercial paper used to fund the ONE Brands acquisition. 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.

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Long-term debt borrowings and repayments.  In October 2019, we issued $300 million of 2.05% Notes due in 2024, $300 million of 2.45% Notes due in 2029 and $400 million of 3.125% Notes due in 2049. Proceeds from the issuance of the Notes, net of discounts and issuance costs, totaled $990.3 million. In May 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 August

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•	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.

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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. In 2019, we used cash for total share repurchases of $527.2 million that included purchases pursuant to authorized programs; this included $150.0 million to purchase 1.4 million shares. In 2018, we used cash for total share repurchases of $247.5 million, 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. In 2017, we used cash for total share repurchases of $300.3 million, 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. In October 2017, our Board of Directors approved a $100 million share repurchase authorization.  This program was completed in the first quarter of 2019. In July 2018, our Board of Directors approved an additional $500 million share repurchase authorization. As of December 31, 2019, approximately $410 million remained available for repurchases of our Common Stock under this program. The share repurchase program does not have an expiration date.

•	Dividend payments. Total dividend payments to holders of our Common Stock and Class B Common Stock were $610.3 million in 2019, $562.5 million in 2018 and $526.3 million in 2017. Dividends per share of Common Stock increased 8.5% to $2.990 per share in 2019 compared to $2.756 per share in 2018, while dividends per share of Class B Common Stock increased 8.5% in 2019.

•	Proceeds from the exercise of stock options, including tax benefits. We received $240.8 million from employee exercises of stock options, net of employee taxes withheld from share-based awards in 2019. We received $63.3 million in 2018 and 2017, respectively. Variances are driven primarily by the number of shares exercised and the share price at the date of grant.

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•	Accrued Liabilities for Trade Promotion Activities

•	Pension and Other Post-Retirement Benefits Plans

•	Business Acquisitions, Valuation and Impairment of Goodwill and Other Intangible Assets

•	Income Taxes

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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 decreased the expected return on plan assets assumption to 5.3% from the 6.0% assumption used during 2018. The historical average return (compounded annually) over the 20 years prior to December 31, 2019 was approximately 6.8%.

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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.

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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, 2019 benefit liability would increase by approximately $25 million or decrease by approximately $21 million, respectively.

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Item 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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•	Commodity market fluctuations;

•	Foreign currency exchange rates;

•	Imbalances between supply and demand;

•	The effect of weather on crop yield and quality;

•	Speculative influences;

•	Trade agreements among producing and consuming nations;

•	Supplier compliance with commitments;

•	Import/export requirements for raw materials and finished goods;

•	Political unrest in producing countries; and

•	Changes in governmental agricultural programs and energy policies.

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Item 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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•	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.

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(1)	As reported in the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 29, 2019.

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(1)

In October 2019, we issued $300,000 of 2.05% Notes due in 2024, $300,000 of 2.45% Notes due in 2029 and $400,000 of 3.125% Notes due in 2049 (the "2019 Notes"). Proceeds from the issuance of the 2019 Notes, net of discounts and issuance costs, totaled $990,337. The 2019 Notes were issued under a shelf registration statement on Form S-3 filed in May 2018 that registered an indeterminate amount of debt securities.

(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.

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

(2)

As of December 31, 2019, amounts reflected on a net basis in assets were assets of $46,075 and liabilities of $37,606, which are associated with cash transfers receivable or payable on commodities futures contracts reflecting the change in quoted market prices on the last trading day for the period. The comparable amounts reflected on a net basis in assets at December 31, 2018 were assets of $63,978 and liabilities of $57,351. At

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(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 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.

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(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.

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(1)

During the fourth quarter of 2019, as discussed in Note 3, we recorded impairment charges to write down customer relationship and trademark intangible assets associated with Krave. These charges were determined by comparing the fair value of the asset group to its carrying value. We used various valuation techniques to determine fair value, with the primary techniques being discounted cash flow analysis and relief-from-royalty valuation approaches, which use significant unobservable inputs, or Level 3 inputs, as defined by the fair value hierarchy.

(2)	During 2019, we recorded impairment charges predominantly comprised of select long-lived assets that had not yet met the held for sale criteria. The fair value of these assets was supported by potential sales prices with third-party buyers and market analysis.

(3)	In connection with our disposal group classified as held for sale, as discussed in Note 8, during 2019, we recorded impairment charges to adjust long-lived asset values. The fair value of the disposal group was supported by potential sales prices with third-party buyers. We expect the sale of the disposal group to be completed in the first half of 2020.

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(1)	Supply chain-related amounts were included in cost of sales.

(2)	Net lease cost does not include short-term leases, variable lease costs or sublease income, all of which are immaterial.

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(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 and 2017 was $34,157 and $25,525, 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.

•	The LSFC joint venture and other select assets, which were 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 in the first half of 2020.

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•	In December 2019, we sold select Pennsylvania facilities and land for sales proceeds of approximately $27,613, resulting in a gain on the sale of $11,289, which is recorded in the selling, marketing and administrative expense caption within the Consolidated Statements of Income.

•	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 in a gain on the sale of $2,658, which is recorded in the selling, marketing and administrative expense caption within the Consolidated Statements of Income.

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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 Income.

•	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 $171,950. We recorded impairment charges of $28,817 to adjust the book values of the disposal groups to the sales value less costs to sell.

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(1)	The costs reflected in the liability roll-forward represent employee-related and certain third-party service provider charges.

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(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.

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•	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.

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•	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.

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•	"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 on historical data.

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•	"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 recently 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.

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•	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.

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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.

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(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.

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(1)	Corporate includes non-cash asset-related accelerated depreciation and amortization related to business realignment activities, as discussed in Note 9. Such amounts are not included within our measure of segment income.

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(a)	Quarterly income per share amounts do not total to the annual amount due to changes in weighted-average shares outstanding during the year.

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Item 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Item 9A.	CONTROLS AND PROCEDURES

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Item 9B.	OTHER INFORMATION

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Item 10.	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

Item 11.	EXECUTIVE COMPENSATION.

Item 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

Item 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

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Item 14.	PRINCIPAL ACCOUNTING FEES AND SERVICES.

Item 15.	EXHIBITS, FINANCIAL STATEMENT SCHEDULES

Item 16.	FORM 10-K SUMMARY

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