BUSINESS REALIGNMENT ACTIVITIES

We are currently executing upon several business realignment initiatives designed to increase our efficiency and focus our business in support of our key growth strategies. Costs recorded during the three and six months ended July 1, 2018 and July 2, 2017 related to these activities are as follows:



	Three Months Ended				Six Months Ended
	July 1, 2018		July 2, 2017		July 1, 2018		July 2, 2017
Margin for Growth Program:
Severance	$	3,014	$	888	$	7,062	$	30,455
Accelerated depreciation	6,527		6,873		7,244		6,873
Other program costs	5,117		6,381		15,205		11,203
Operational Optimization Program:
Severance	—		—		—		13,828
Other program costs	638		312		1,736		(917		)
Total	$	15,296	$	14,454	$	31,247	$	61,442

Margin for Growth Program

In the first quarter 2017, the Company's Board of Directors 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.

The Company estimates that the “Margin for Growth” program will result in total pre-tax charges of $375,000 to $425,000 from 2017 to 2019. This estimate includes plant and office closure expenses of $100,000 to $115,000, net intangible asset impairment charges of $100,000 to $110,000, employee separation costs of $80,000 to $100,000, contract termination costs of approximately $25,000, and other business realignment costs of $70,000 to $75,000. The cash portion of the total charge is estimated to be $150,000 to $175,000. The Company expects that implementation of the program will reduce its global workforce by approximately 15%, with a majority of the reductions coming from hourly headcount positions outside of the United States.

For the three and six months ended July 1, 2018, we recognized total costs associated with the Margin for Growth Program of $14,658 and $29,511, respectively. These charges include employee severance and relate largely to our initiative to improve the cost structure of our China business, as well as our initiative to further streamline our corporate operating model. We also recognized 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. For the three and six months ended July 2, 2017, we recognized total costs associated with the Margin for Growth Program of $14,142 and $48,531, respectively. The 2017 charges are consistent in nature to our 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 includes 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.

For the three and six months ended July 1, 2018, we incurred pre-tax costs totaling $638 and $1,736, respectively, relating primarily to third-party charges in support of our initiative to optimize our production and supply chain network. For the three and six months ended July 2, 2017, we incurred pre-tax costs totaling $312 and $12,911, respectively, primarily related to employee severance associated with the workforce planning efforts within North America. We currently expect to incur additional cash costs of approximately $7,000 over the next six months to complete the remaining facility consolidation efforts relating to this program.

Costs associated with business realignment activities are classified in our Consolidated Statements of Income for the three and six months ended July 1, 2018 and July 2, 2017 as follows:



	Three Months Ended				Six Months Ended
	July 1, 2018		July 2, 2017		July 1, 2018		July 2, 2017
Cost of sales	$	7,322	$	5,772	$	9,536	$	6,262
Selling, marketing and administrative expense	6,994		6,701		12,507		9,182
Business realignment costs	980		1,981		9,204		45,998
Costs associated with business realignment activities	$	15,296	$	14,454	$	31,247	$	61,442

On a cumulative program to date basis, the costs and related benefits of the Margin for Growth Program are approximately 60% to the North America segment and 40% to the International and Other segment. In addition, the costs and related benefits of the Operational Optimization Program relate approximately 35% to the North America segment and 65% to the International and Other segment. However, segment operating results do not include these business realignment expenses because we evaluate segment performance excluding such costs.

The following table presents the liability activity for costs qualifying as exit and disposal costs for the six months ended July 1, 2018:



	Total
Liability balance at December 31, 2017	$	38,992
2018 business realignment charges (1)	14,265
Cash payments	(32,955		)
Other, net	669
Liability balance at July 1, 2018 (reported within accrued and other long-term liabilities)	$	20,971

(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.