SEGMENT INFORMATION

6 Months Ended

Jul. 02, 2017

Segment Reporting [Abstract]

Segment Information

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, Shanghai, Niagara Falls (Ontario), Dubai, 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 integration costs, the non-service related portion of pension expense and other unusual gains or losses that are not part of our measurement of segment performance. These components 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 to the Consolidated Financial Statements included in our 2016 Annual Report on Form 10-K.

As discussed in Note 5, derivatives used to manage commodity price risk are not designated for hedge accounting treatment. These derivatives are recognized at fair market value with the resulting realized and unrealized losses recognized in unallocated derivative (gains) losses outside of the reporting segment results until the related inventory is sold, at which time the related gains and losses are reallocated to segment income. This enables us 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.

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:

	Three Months Ended					Six Months Ended
	July 2, 2017		July 3, 2016			July 2, 2017			July 3, 2016
Net sales:
North America	$	1,477,014	$	1,444,841		$	3,154,160		$	3,078,312
International and Other	185,977		192,830			388,509			388,171
Total	$	1,662,991	$	1,637,671		$	3,542,669		$	3,466,483
Segment income (loss):
North America	$	460,382	$	425,723		$	1,013,520		$	955,113
International and Other	8,368		(3,462		)	10,091			(16,695		)
Total segment income	468,750		422,261			1,023,611			938,418
Unallocated corporate expense (1)	123,173		126,623			242,823			248,794
Unallocated mark-to-market losses (gains) on commodity derivatives	11,556		(39,886		)	(5,532		)	(4,940		)
Long-lived asset impairment charges	—		—			208,712			—
Costs associated with business realignment activities	14,454		62,095			61,442			76,525
Non-service related pension expense	4,215		9,205			8,583			14,306
Acquisition and integration costs	11		1,462			311			1,462
Operating profit	315,341		262,762			507,272			602,271
Interest expense, net	24,126		21,338			47,867			42,343
Other (income) expense, net	10,098		8,128			9,927			(13,097		)
Income before income taxes	$	281,117	$	233,296		$	449,478		$	573,025

(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:

	Three Months Ended					Six Months Ended
	July 2, 2017		July 3, 2016			July 2, 2017			July 3, 2016
Net losses (gains) on mark-to-market valuation of commodity derivative positions	$	32,519	$	(39,011	)	$	38,055		$	(70	)
Net losses on commodity derivative positions allocated to segment income	20,963		875			43,587			4,870
Net losses (gains) on mark-to-market valuation of commodity derivative positions remaining in unallocated derivative losses (gains)	$	11,556	$	(39,886	)	$	(5,532	)	$	(4,940	)

As of July 2, 2017, the cumulative amount of mark-to-market losses on commodity derivatives that have been recognized in our consolidated cost of sales and not yet allocated to reportable segments was $157,492. Based on our forecasts of the timing of the recognition of the underlying hedged items, we expect to reclassify net pre-tax losses on commodity derivatives of $91,119 to segment operating results in the next twelve months.

Depreciation and amortization expense included within segment income presented above is as follows:

	Three Months Ended				Six Months Ended
	July 2, 2017		July 3, 2016		July 2, 2017		July 3, 2016
North America	$	41,751	$	39,844	$	82,988	$	78,786
International and Other	9,747		13,085		22,713		24,008
Corporate (1)	15,629		43,937		26,378		53,985
Total	$	67,127	$	96,866	$	132,079	$	156,779

(1) Corporate includes non-cash asset-related accelerated depreciation and amortization related to business realignment activities, as discussed in Note 7. Such amounts are not included within our measure of segment income.