Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm (PCAOB ID: 42)						48
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting						51
Consolidated Statements of Income for the years ended December 31, 2021, 2020 and 2019						53
Consolidated Statements of Comprehensive Income for the years ended December 31, 2021, 2020 and 2019						54
Consolidated Balance Sheets as of December 31, 2021 and 2020						55
Consolidated Statements of Cash Flows for the years ended December 31, 2021, 2020 and 2019						56
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2021, 2020 and 2019						57
Notes to Consolidated Financial Statements						58
Note 1 - Summary of Significant Accounting Policies						58
Note 2 - Business Acquisitions and Divestitures						64
Note 3 - Goodwill and Intangible Assets						68
Note 4 - Short and Long-Term Debt						69
Note 5 - Derivative Instruments						71
Note 6 - Fair Value Measurements						73
Note 7 - Leases						76
Note 8 - Investments in Unconsolidated Affiliates						78
Note 9 - Business Realignment Activities						78
Note 10 - Income Taxes						80
Note 11 - Pension and Other Post-Retirement Benefit Plans						83
Note 12 - Stock Compensation Plans						89
Note 13 - Segment Information						92
Note 14 - Equity and Noncontrolling Interest						94
Note 15 - Commitments and Contingencies						96
Note 16 - Earnings Per Share						97
Note 17 - Other (Income) Expense, Net						99
Note 18 - Supplemental Balance Sheet Information						100

Table of Contents			The Hershey Company | 2021 Form 10-K | Page 47

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, 2021 and 2020, the related consolidated statements of income, comprehensive income, cash flows, and stockholders’ equity for each of the three years in the period ended December 31, 2021, 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, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, 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, 2021, 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 18, 2022 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.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Table of Contents			The Hershey Company | 2021 Form 10-K | Page 48

Valuation of Accrued Liabilities for Trade Promotion Activities
Description of the Matter						The unsettled portion of the Company’s obligation for trade promotion activities at December 31, 2021 was $174.0 million. As discussed in Note 1 of the consolidated financial statements, the Company promotes its products through programs such as, but not limited to, discounts, coupons, rebates, in-store display incentives, and volume-based incentives. The Company recognizes the estimated costs of these trade promotion activities as a component of variable consideration when determining the transaction price. The unsettled portion of the Company’s obligation for trade promotion activities is included in accrued liabilities in the consolidated balance sheet. Auditing management’s calculation of the unsettled portion of the Company’s obligation for trade promotion activities was highly subjective and required significant judgment as a result of the nature of the required estimates and assumptions. In particular, the estimates required an analysis of the programs offered, expectations regarding customer and consumer participation, historical sales and payment trends, and experience with payment patterns associated with similar programs offered in the past. The estimated cost of these programs is sensitive 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.
How We Addressed the Matter in Our Audit						We obtained an understanding, evaluated the design, and tested the operating effectiveness of the controls related to the Company’s calculation of the accrued liabilities for trade promotion activities. For example, we tested controls over management’s review of the completeness of the promotional activities as well as the significant assumptions and the data inputs utilized in the calculations. To test the unsettled portion of the Company’s obligation for trade promotion activities, we performed audit procedures that included, among others, assessing (1) the expected value estimation methodology used by management, (2) whether all material trade promotion activities were properly included in management’s estimate, and (3) the significant assumptions discussed above and the underlying data used in its analyses. Specifically, when evaluating the significant assumptions, we compared them to historical trends, third party data, and assumptions used in prior periods, and inspected management’s retrospective review of actual trade promotion activities compared to previous estimates. We also performed sensitivity analyses of significant assumptions to evaluate the changes in the estimate that would result from changes in the assumptions.

Table of Contents			The Hershey Company | 2021 Form 10-K | Page 49

Valuation of Identifiable Intangible Assets in Business Acquisitions
Description of the Matter						As discussed in Note 2 of the consolidated financial statements, the Company completed the acquisitions of Lily’s Sweets, LLC on June 25, 2021 for net consideration of $427.2 million, Dot’s Pretzels, LLC on December 13, 2021 for net consideration of $894.2 million, and Pretzels Inc. on December 14, 2021 for net consideration of $304.5 million in transactions that were accounted for as business combinations (collectively, “the Business Acquisitions”). Auditing the Company’s accounting for the Business Acquisitions was complex due to the significant estimation uncertainty in the Company’s determination of the fair value of acquired identifiable intangible assets, which principally consisted of trademarks with an estimated fair value of $493.9 million in aggregate and customer relationships with an estimated fair value of $300.3 million in aggregate. The significant estimation uncertainty was primarily due to the sensitivity of the respective fair values to underlying assumptions about the future performance of the Business Acquisitions and due to the limited historical data on which those assumptions were based. The Company used a discounted cash flow model to measure these acquired identifiable intangible assets. The significant assumptions used to estimate the fair value of the trademarks and customer relationships included discount rates, royalty rates, customer attrition rates, and certain significant assumptions that formed the basis of projected cash flows, including forecasted revenue growth rates and operating margins. These significant assumptions are forward-looking and could be affected by future economic and market conditions.
How We Addressed the Matter in Our Audit						We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over the Company’s valuation of the acquired identifiable intangible assets. For example, we tested controls over the recognition and measurement of these intangible assets, including management’s review of the significant assumptions and methods discussed above. To test the estimated fair value of the acquired trademarks and customer relationships, we performed audit procedures that included, among others, evaluating the Company’s selection of valuation methods and testing the models and significant assumptions discussed above, including the completeness and accuracy of the underlying data. For example, we compared the significant assumptions to current industry, market, and economic trends and to the historical results of the Business Acquisitions. We also performed sensitivity analyses of these significant assumptions to evaluate the changes in the fair value of the acquired identifiable intangible assets that would result from changes in the assumptions. We involved our valuation specialists to assist in evaluating the significant assumptions and methodologies used by the Company.

/s/ ERNST & YOUNG LLP
We have served as the Company’s auditor since 2016.
Philadelphia, Pennsylvania
February 18, 2022

.

Table of Contents			The Hershey Company | 2021 Form 10-K | Page 50

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, 2021, 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, 2021, 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 Lily’s Sweets, LLC, Dot’s Pretzels, LLC, or Pretzels Inc. (collectively, “the Acquired Companies”) which are included in the 2021 consolidated financial statements of the Company and constituted 17.1% of total assets as of December 31, 2021 and 0.9% 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, 2021 and 2020, the related consolidated statements of income, comprehensive income, cash flows, and stockholders' equity for each of the three years in the period ended December 31, 2021, and the related notes and financial statement schedule listed in the Index at Item 15(a)(2) and our report dated February 18, 2022 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.

Table of Contents			The Hershey Company | 2021 Form 10-K | Page 51

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.

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 18, 2022

Table of Contents			The Hershey Company | 2021 Form 10-K | Page 52

THE HERSHEY COMPANY

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share amounts)

For the years ended December 31,						2021						2020						2019
Net sales						$	8,971,337					$	8,149,719					$	7,986,252
Cost of sales						4,922,739						4,448,450						4,363,774
Gross profit						4,048,598						3,701,269						3,622,478
Selling, marketing and administrative expense						2,001,351						1,890,925						1,905,929
Long-lived and intangible asset impairment charges						—						9,143						112,485
Business realignment costs						3,525						18,503						8,112
Operating profit						2,043,722						1,782,698						1,595,952
Interest expense, net						127,417						149,374						144,125
Other (income) expense, net						119,081						138,327						71,043
Income before income taxes						1,797,224						1,494,997						1,380,784
Provision for income taxes						314,405						219,584						234,032
Net income including noncontrolling interest						1,482,819						1,275,413						1,146,752
Less: Net gain (loss) attributable to noncontrolling interest						5,307						(3,295)						(2,940)
Net income attributable to The Hershey Company						$	1,477,512					$	1,278,708					$	1,149,692
Net income per share—basic:
Common stock						$	7.34					$	6.30					$	5.64
Class B common stock						$	6.68					$	5.72					$	5.12
Net income per share—diluted:
Common stock						$	7.11					$	6.11					$	5.46
Class B common stock						$	6.66					$	5.71					$	5.10
Dividends paid per share:
Common stock						$	3.410					$	3.154					$	2.990
Class B common stock						$	3.100					$	2.866					$	2.716

See Notes to Consolidated Financial Statements.

Table of Contents			The Hershey Company | 2021 Form 10-K | Page 53

THE HERSHEY COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

						For the years ended December 31,
						2021																		2020																		2019
						Pre-Tax Amount						Tax (Expense) Benefit						After-Tax Amount						Pre-Tax Amount						Tax (Expense) Benefit						After-Tax Amount						Pre-Tax Amount						Tax (Expense) Benefit						After-Tax Amount
Net income including noncontrolling interest																		$	1,482,819																	$	1,275,413																	$	1,146,752
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments:
Foreign currency translation (losses) gains during period						$	(1,500)					$	—					(1,500)						$	(13,767)					$	—					(13,767)						$	13,141					$	—					13,141
Reclassification to earnings due to the sale of businesses						5,249						—						5,249						—						—						—						—						—						—
Pension and post-retirement benefit plans:
Net actuarial gain (loss)						67,728						(13,929)						53,799						(39,455)						9,351						(30,104)						(9,315)						2,273						(7,042)
Reclassification to earnings						32,092						(8,067)						24,025						33,326						(8,240)						25,086						31,341						(8,256)						23,085
Cash flow hedges:
(Losses) gains on cash flow hedging derivatives						(1,551)						(2,989)						(4,540)						(780)						1,880						1,100						(2,515)						857						(1,658)
Reclassification to earnings						18,117						(1,034)						17,083						7,779						(3,156)						4,623						8,404						(2,949)						5,455
Total other comprehensive income (loss), net of tax						$	120,135					$	(26,019)					94,116						$	(12,897)					$	(165)					(13,062)						$	41,056					$	(8,075)					32,981
Total comprehensive income including noncontrolling interest																		$	1,576,935																	$	1,262,351																	$	1,179,733
Comprehensive gain (loss) attributable to noncontrolling interest																		10,556																		(2,241)																		(2,773)
Comprehensive income attributable to The Hershey Company																		$	1,566,379																	$	1,264,592																	$	1,182,506

See Notes to Consolidated Financial Statements.

Table of Contents			The Hershey Company | 2021 Form 10-K | Page 54

THE HERSHEY COMPANY

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

December 31,						2021						2020
ASSETS
Current assets:
Cash and cash equivalents						$	329,266					$	1,143,987
Accounts receivable—trade, net						671,464						615,233
Inventories						988,511						964,207
Prepaid expenses and other						256,965						254,478
Total current assets						2,246,206						2,977,905
Property, plant and equipment, net						2,586,187						2,285,255
Goodwill						2,633,174						1,988,215
Other intangibles						2,037,588						1,295,214
Other non-current assets						868,203						555,887
Deferred income taxes						40,873						29,369
Total assets						$	10,412,231					$	9,131,845
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable						$	692,338					$	580,058
Accrued liabilities						855,638						781,766
Accrued income taxes						3,070						17,051
Short-term debt						939,423						74,041
Current portion of long-term debt						2,844						438,829
Total current liabilities						2,493,313						1,891,745
Long-term debt						4,086,627						4,089,755
Other long-term liabilities						787,058						683,434
Deferred income taxes						288,004						229,028
Total liabilities						7,655,002						6,893,962
Stockholders’ equity:
The Hershey Company stockholders’ equity
Preferred stock, shares issued: none in 2021 and 2020						—						—
Common stock, shares issued: 160,939,248 in 2021 and 2020						160,939						160,939
Class B common stock, shares issued: 60,613,777 in 2021 and 2020						60,614						60,614
Additional paid-in capital						1,260,331						1,191,200
Retained earnings						2,719,936						1,928,673
Treasury—common stock shares, at cost: 15,444,011 in 2021 and 13,325,898 in 2020						(1,195,376)						(768,992)
Accumulated other comprehensive loss						(249,215)						(338,082)
Total—The Hershey Company stockholders’ equity						2,757,229						2,234,352
Noncontrolling interest in subsidiary						—						3,531
Total stockholders’ equity						2,757,229						2,237,883
Total liabilities and stockholders’ equity						$	10,412,231					$	9,131,845

See Notes to Consolidated Financial Statements.

Table of Contents			The Hershey Company | 2021 Form 10-K | Page 55

THE HERSHEY COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

For the years ended December 31,						2021						2020						2019
Operating Activities
Net income including noncontrolling interest						$	1,482,819					$	1,275,413					$	1,146,752
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization						315,002						294,907						291,544
Stock-based compensation expense						66,711						57,584						51,899
Deferred income taxes						13,374						26,880						(15,072)
Impairment of long-lived and intangible assets (see Note 6)						—						9,143						112,485
Write-down of equity investments						113,756						125,579						50,457
Other						96,016						113,470						57,426
Changes in assets and liabilities, net of business acquisitions and divestitures:
Accounts receivable—trade, net						(14,642)						(55,537)						40,252
Inventories						21,457						(151,918)						(21,194)
Prepaid expenses and other current assets						8,619						2,493						13,593
Accounts payable and accrued liabilities						39,732						41,470						41,101
Accrued income taxes						(29,682)						(16,158)						(9,544)
Contributions to pension and other benefit plans						(51,100)						(11,671)						(20,134)
Other assets and liabilities						20,822						(11,998)						24,308
Net cash provided by operating activities						2,082,884						1,699,657						1,763,873
Investing Activities
Capital additions (including software)						(495,877)						(441,626)						(318,192)
Equity investments in tax credit qualifying partnerships						(128,417)						(87,211)						(80,230)
Business acquisitions, net of cash and cash equivalents acquired						(1,601,073)						—						(402,160)
Other investing activities						2,539						(2,443)						20,102
Net cash used in investing activities						(2,222,828)						(531,280)						(780,480)
Financing Activities
Net increase (decrease) in short-term debt						869,030						41,759						(1,168,205)
Long-term borrowings, net of debt issuance costs						—						989,876						989,618
Repayment of long-term debt and finance leases						(439,444)						(704,467)						(6,151)
Cash dividends paid						(685,987)						(640,732)						(610,312)
Repurchase of common stock						(457,946)						(211,196)						(527,211)
Exercise of stock options						33,211						25,532						240,806
Net cash used in financing activities						(681,136)						(499,228)						(1,081,455)
Effect of exchange rate changes on cash and cash equivalents						(5,075)						(6,990)						3,326
(Decrease) increase in cash and cash equivalents, including cash classified as held for sale						(826,155)						662,159						(94,736)
Less: Decrease (increase) in cash and cash equivalents classified as held for sale						11,434						(11,434)						—
Net (decrease) increase in cash and cash equivalents						(814,721)						650,725						(94,736)
Cash and cash equivalents, beginning of period						1,143,987						493,262						587,998
Cash and cash equivalents, end of period						$	329,266					$	1,143,987					$	493,262
Supplemental Disclosure
Interest paid						$	127,726					$	150,930					$	139,504
Income taxes paid						275,171						215,491						238,067

See Notes to Consolidated Financial Statements.

Table of Contents			The Hershey Company | 2021 Form 10-K | Page 56

THE HERSHEY COMPANY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

						Preferred Stock						Common Stock						Class B Common Stock						Additional Paid-in Capital						Retained Earnings						Treasury Common Stock						Accumulated Other Comprehensive Income (Loss)						Noncontrolling Interests in Subsidiaries						Total Stockholders’ Equity
Balance, January 1, 2019						$	—					$	299,287					$	60,614					$	982,205					$	7,032,020					$	(6,618,625)					$	(356,780)					$	8,545					$	1,407,266
Net income (loss)																														1,149,692																		(2,940)						1,146,752
Other comprehensive income																																										32,814						167						32,981
Dividends (including dividend equivalents):
Common Stock, $2.990 per share																														(445,618)																								(445,618)
Class B Common Stock, $2.716 per share																														(164,627)																								(164,627)
Stock-based compensation																								50,732																														50,732
Exercise of stock options and incentive-based transactions																								109,273												131,533																		240,806
Repurchase of common stock																																				(527,211)																		(527,211)
Retirement of treasury common stock												(138,348)																		(6,284,919)						6,423,267																		—
Impact of ASU 2016-02 related to leases																														3,913																								3,913
Balance, December 31, 2019						—						160,939						60,614						1,142,210						1,290,461						(591,036)						(323,966)						5,772						1,744,994
Net income (loss)																														1,278,708																		(3,295)						1,275,413
Other comprehensive (loss) income																																										(14,116)						1,054						(13,062)
Dividends (including dividend equivalents):
Common Stock, $3.154 per share																														(466,777)																								(466,777)
Class B Common Stock, $2.866 per share																														(173,719)																								(173,719)
Stock-based compensation																								56,698																														56,698
Exercise of stock options and incentive-based transactions																								(7,708)												33,240																		25,532
Repurchase of common stock																																				(211,196)																		(211,196)
Balance, December 31, 2020						—						160,939						60,614						1,191,200						1,928,673						(768,992)						(338,082)						3,531						2,237,883
Net income																														1,477,512																		5,307						1,482,819
Other comprehensive income																																										88,867						5,249						94,116
Dividends (including dividend equivalents):
Common Stock, $3.410 per share																														(498,346)																								(498,346)
Class B Common Stock, $3.100 per share																														(187,903)																								(187,903)
Stock-based compensation																								67,482																														67,482
Exercise of stock options and incentive-based transactions																								1,649												31,562																		33,211
Repurchase of common stock																																				(457,946)																		(457,946)
Divestiture of noncontrolling interest																																																(1,436)						(1,436)
Distributions to joint venture partner																																																(8,750)						(8,750)
Other																																																(3,901)						(3,901)
Balance, December 31, 2021						$	—					$	160,939					$	60,614					$	1,260,331					$	2,719,936					$	(1,195,376)					$	(249,215)					$	—					$	2,757,229

See Notes to Consolidated Financial Statements.

Table of Contents			The Hershey Company | 2021 Form 10-K | Page 57

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 100 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 80 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. Since December 31, 2014, the Company has reported its operations through two segments: (i) North America and (ii) International and Other. After the completion of the Company’s acquisitions of Dot’s Pretzels, LLC (“Dot’s”) and Pretzels Inc.(“Pretzels”) in December 2021, management of the Company has elected to begin reporting its operations through three reportable segments. Therefore, effective in the fourth quarter of 2021, the Company realigned its former two reportable segments into three reportable segments: (i) North America Confectionery, (ii) North America Salty Snacks and (iii) International. For additional information on our segment presentation, see Note 13.

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. We use the equity method of accounting when we have a 20% to 50% interest in other companies and exercise significant influence. See Note 14 for information on our noncontrolling interest, which was divested in January 2021. 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 10 for additional information on our equity investments in partnership entities qualifying for tax credits. Other investments that are not controlled, and over which we do not have the ability to exercise significant influence, are accounted for under the cost method. Both equity and cost method investments are included as Other non-current assets in the Consolidated Balance Sheets. For additional information on our investments in unconsolidated affiliates, see Note 8.

COVID-19

On March 11, 2020, the World Health Organization designated coronavirus disease 2019 (“COVID-19”) as a global pandemic. We continue to actively monitor COVID-19 and its potential impact on our operations and financial results. Employee health and safety remains our first priority while we continue our efforts to support community food supplies. Since the onset of COVID-19, there has been minimal disruption to our supply chain network, and all our manufacturing plants are currently open. However, during 2021, continued strong demand for consumer goods and the effects of COVID-19 mitigation strategies have led to broad-based supply chain disruptions across the U.S. and globally, including inflation on many consumer products, labor shortages and demand outpacing supply. We are working closely with our business units, contract manufacturers, distributors, contractors and other external business partners to minimize the potential impact on our business.

The ultimate impact that COVID-19 will have on our consolidated financial statements remains uncertain and ultimately will be dictated by the length and severity of the pandemic, including broad-based supply chain disruptions, rising levels of inflation, the spread of COVID-19 variants or resurgences, as well as the economic recovery and actions taken in response by local, state and national governments around the world, including the distribution of vaccinations. We will continue to evaluate the nature and extent of these potential and evolving impacts to our business and consolidated financial statements.

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

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 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 2021, 2020 and 2019, 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 $174,046 and $195,563 at December 31, 2021 and 2020, 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 salty 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 13 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 2021, 2020 and 2019, approximately 30%, 31% and 30%, 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.

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

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 $40,107 in 2021, $37,577 in 2020 and $37,146 in 2019. Advertising expense is also charged to expense as incurred and totaled $511,798 in 2021, $516,936 in 2020 and $513,302 in 2019. There was no prepaid advertising expense as of December 31, 2021 and $705 as of December 31, 2020.

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.

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 concentration of credit risk is associated with McLane Company, Inc., one customer served principally by our North America Confectionery segment. As of December 31, 2021, McLane Company, Inc. accounted for approximately 27% 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 $28,837 and $24,975 at December 31, 2021 and 2020, 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, 2021, approximately 60% of our inventories, representing the majority of our United States (“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 $589,850 as of December 31, 2021 and $606,282 as of December 31, 2020. The adjustment to LIFO, as shown in Note 18, approximates the excess of replacement cost over the stated LIFO inventory value. The net impact of LIFO acquisitions and liquidations was not material to 2021, 2020 or 2019.

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, 2021 and December 31, 2020, property, plant and equipment included assets under finance lease arrangements with net book values totaling $72,496 and $88,065, respectively. Total depreciation expense for the years ended December 31, 2021, 2020 and 2019 was $230,638, $219,021 and $218,096, respectively, and included depreciation on assets recorded under finance 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.

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

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 $260,656 and $187,673 at December 31, 2021 and 2020, 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 $321,939 and $360,579 as of 2021 and 2020, 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.

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 30 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

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

impairment assessment and may adjust the remaining useful lives. See Note 3 for additional information regarding the results of impairment tests.

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 Consolidated Balance Sheets 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:

• 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 August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 elected to early adopt the provisions of this ASU in the fourth quarter of 2019. Adoption of the new standard did not have a material impact on our consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU modifies the measurement of expected credit losses of certain financial instruments. ASU 2016-13 is effective for annual periods beginning after December 15, 2019 and interim

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

periods within those annual periods. The amendments in this ASU should be applied on a modified retrospective basis to all periods presented. We adopted the provisions of this ASU in the first quarter of 2020. Adoption of the new standard did not 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 adopted the provisions of this ASU in the first quarter of 2020. Adoption of the new standard did not have a material impact on our consolidated financial statements.

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 adopted the provisions of this ASU in the first quarter of 2020 on a prospective basis. Adoption of the new standard did not have a material impact on our consolidated financial statements.

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This ASU is intended to simplify various aspects related to accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and clarifying certain aspects of the current guidance to promote consistency among reporting entities. ASU 2019-12 is effective for annual periods beginning after December 15, 2020 and interim periods within those annual periods, with early adoption permitted. An entity that elects early adoption must adopt all the amendments in the same period. Most amendments within this ASU are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. We adopted the provisions of this ASU in the fourth quarter of 2020. Adoption of the new standard did not have a material impact on our consolidated financial statements.

Recently Issued Accounting Pronouncements Not Yet Adopted

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The ASU is intended to provide temporary optional expedients and exceptions to the GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. Entities may apply this ASU upon issuance through December 31, 2022 on a prospective basis. We intend to early adopt the provisions of this ASU in the first quarter of 2022. Adoption of the new standard is not expected to have a material impact on our consolidated financial statements.

In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This ASU requires an acquirer to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Revenue from Contracts with Customers (Topic 606) rather than adjust them to fair value at the acquisition date. ASU 2021-08 is effective for annual periods beginning after December 15, 2022 and interim periods within those annual periods. This ASU should be applied prospectively to business combinations occurring on or after the date of adoption. Evaluation of this new standard is dependent on multiple circumstances including the timing and complexity of completed business combinations. As a result, we intend to adopt the provisions of this ASU in the first quarter of 2023.

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

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 AND DIVESTITURES

Acquisitions of businesses are accounted for as business combinations 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, a form of the multi-period excess earnings and the with-and-without valuation approaches, which use significant unobservable inputs, or Level 3 inputs, as defined by the fair value hierarchy. Inputs to these valuation approaches require significant judgment including: (i) forecasted sales, growth rates and customer attrition rates, (ii) forecasted operating margins, (iii) royalty rates and discount rates used to present value future cash flows, (iv) the amount of synergies expected from the acquisition, (v) the economic useful life of assets and (vi) the evaluation of historical tax positions. In certain acquisitions, historical data is limited, therefore, we base our estimates and assumptions on budgets, business plans, economic projections, anticipated future cash flows and marketplace data.

2021 Activity

Pretzels Inc.

On December 14, 2021, we completed the acquisition of Pretzels Inc. (“Pretzels”), previously a privately held company that manufactures and sells pretzels and other salty snacks for other branded products and private labels in the United States. Pretzels is an industry leader in the pretzel category with a product portfolio that includes filled, gluten free and seasoned pretzels, as well as extruded snacks that complements Hershey’s snacks portfolio. Based in Bluffton, Indiana, Pretzels operates three manufacturing locations in Indiana and Kansas. Pretzels provides Hershey deep pretzel category and product expertise and the manufacturing capabilities to support brand growth and future pretzel innovation. The initial cash consideration paid for Pretzels totaled $304,477 and consisted of cash on hand and short-term borrowings. Acquisition-related costs for the Pretzels acquisition were immaterial.

The acquisition has been accounted for as a business combination and, accordingly, Pretzels has been included within the North America Salty Snacks segments from the date of acquisition. The purchase consideration was allocated to assets acquired and liabilities assumed based on their respective fair values as follows:

			Initial Allocation
Goodwill			$	165,301
Other intangible assets			32,100
Current assets acquired			30,717
Property, plant and equipment, net			96,099
Other non-current assets, primarily operating lease ROU assets			111,787
Deferred income taxes			541
Current liabilities acquired			(22,713)
Other long-term liabilities, primarily operating lease liabilities			(109,355)
Net assets acquired			$	304,477

The purchase price allocation presented above is preliminary. We are in the process of evaluating additional information necessary to finalize the valuation of assets acquired and liabilities assumed as of the acquisition date including, but not limited to, post-closing adjustments to the working capital acquired including certain holdbacks, as well as the valuation and step-up on property, plant and equipment. The final fair value determination could result in material adjustments to the values presented in the preliminary purchase price allocation, including other intangible assets, goodwill and the related tax impact of such adjustments. We expect to finalize the purchase price allocation by mid-2022.

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

Goodwill was determined as the excess of the purchase price over the fair value of the net assets acquired (including the identifiable intangible assets). A portion of goodwill derived from this acquisition is expected to be deductible for tax purposes and reflects the value of leveraging our brand building expertise, supply chain capabilities and retail relationships to accelerate growth and access to the portfolio of Pretzels’ products.

Other intangible assets include trademarks valued at $5,700 and customer relationships valued at $26,400. Trademarks were assigned an estimated useful life of five years and customer relationships were assigned an estimated useful life of 18 years.

Dot's Pretzels, LLC

On December 13, 2021, we completed the acquisition of Dot’s Pretzels, LLC (“Dot’s”), previously a privately held company that produces and sells pretzels and other snack food products to retailers and distributors in the United States, with Dot’s Homestyle Pretzels snacks as its primary product. Dot’s is the fastest-growing scale brand in the pretzel category and complements Hershey’s snacks portfolio. The initial cash consideration paid for Dot’s totaled $894,166 and consisted of cash on hand and short-term borrowings. Acquisition-related costs for the Dot’s acquisition were immaterial.

The acquisition has been accounted for as a business combination and, accordingly, Dot’s has been included within the North America Salty Snacks segment from the date of acquisition. The purchase consideration was allocated to assets acquired and liabilities assumed based on their respective fair values as follows:

			Initial Allocation
Goodwill			$	303,345
Other intangible assets			526,300
Current assets acquired			51,121
Property, plant and equipment, net			39,256
Other non-current assets			2,201
Other liabilities assumed, primarily current liabilities			(28,057)
Net assets acquired			$	894,166

The purchase price allocation presented above is preliminary. We are in the process of evaluating additional information necessary to finalize the valuation of assets acquired and liabilities assumed as of the acquisition date including, but not limited to, post-closing adjustments to the working capital acquired including certain holdbacks, as well as the valuation and step-up on property, plant and equipment. The final fair value determination could result in material adjustments to the values presented in the preliminary purchase price allocation, including other intangible assets and goodwill. We expect to finalize the purchase price allocation by mid-2022.

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 our brand building expertise, supply chain capabilities and retail relationships to accelerate growth and access to the portfolio of Dot’s products.

Other intangible assets include trademarks valued at $336,600 and customer relationships valued at $189,700. Trademarks were assigned an estimated useful life of 33 years and customer relationships were assigned estimated useful lives ranging from 16 to 18 years.

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

Lily's Sweets, LLC

On June 25, 2021, we completed the acquisition of Lily’s Sweets, LLC (“Lily’s”), previously a privately held company that sells a line of sugar-free and low-sugar confectionery foods to retailers and distributors in the United States and Canada. Lily’s products include dark and milk chocolate style bars, baking chips, peanut butter cups and other confection products that complement Hershey’s confectionery and confectionery-based portfolio. The cash consideration paid for Lily’s totaled $422,210 and the Company may be required to pay additional cash consideration if certain defined targets related to net sales and gross margin are exceeded during the period from the closing date through December 31, 2021. As of the acquisition date, the estimated fair value of the contingent consideration obligation was classified as a liability of $5,000 and was determined using a scenario-based analysis on forecasted future results. Based on financial results through December 31, 2021, the fair value was reduced during the fourth quarter of 2021 to $1,250, with the adjustment to fair value recorded in the selling, marketing and administrative (“SM&A”) expense caption within the Consolidated Statements of Income. Acquisition-related costs for the Lily’s acquisition were immaterial.

The acquisition has been accounted for as a business combination and, accordingly, Lily’s has been included within the North America Confectionery segment from the date of acquisition. The purchase consideration, inclusive of the acquisition date fair value of the contingent consideration, was allocated to assets acquired and liabilities assumed based on their respective fair values as follows:

Goodwill			$	175,826
Other intangible assets			235,800
Other assets acquired, primarily current assets			33,092
Other liabilities assumed, primarily current liabilities			(9,620)
Deferred income taxes			(7,888)
Net assets acquired			$	427,210

The purchase price allocation presented above has been finalized as of the fourth quarter of 2021 and includes an immaterial amount of measurement period adjustments. The measurement period adjustments to the initial allocation were based on more detailed information obtained about the specific assets acquired and liabilities assumed.

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 majority of goodwill derived from this acquisition is expected to be deductible for tax purposes and reflects the value of leveraging our brand building expertise, supply chain capabilities and retail relationships to accelerate growth and access to the portfolio of Lily’s products.

Other intangible assets include trademarks valued at $151,600 and customer relationships valued at $84,200. Trademarks were assigned an estimated useful life of 33 years and customer relationships were assigned estimated useful lives ranging from 17 to 18 years.

Lotte Shanghai Foods Co., Ltd.

In January 2021, we completed the divestiture of Lotte Shanghai Foods Co., Ltd. (“LSFC”), which was previously included within the International segment results in our consolidated financial statements. Total proceeds from the divestiture and the impact on our consolidated financial statements were immaterial and were recorded in the SM&A expense caption within the Consolidated Statements of Income.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

2020 Activity

During the second quarter of 2020, we completed the divestitures of KRAVE Pure Foods, Inc. (“Krave”), which was previously included within the North America Salty Snacks segment, and the Scharffen Berger and Dagoba brands, both of which were previously included within the North America Confectionery segment results in our consolidated financial statements. Total proceeds from the divestitures and the impact on our Consolidated Statements of Income, both individually and on an aggregate basis, were immaterial.

2019 Activity

ONE Brands, LLC

On September 23, 2019, we completed the acquisition of ONE Brands, LLC (“ONE Brands”), previously a privately held company that sells a line of low-sugar, high-protein nutrition bars to retailers and distributors in the United States, with the ONE bar as its primary product. The purchase consideration for ONE Brands totaled $402,160 and consisted of cash on hand and short-term borrowings. Acquisition-related costs for the ONE Brands acquisition were immaterial.

The acquisition has been accounted for as a business combination and, accordingly, ONE Brands has been included within the North America Confectionery segment from the date of acquisition. The purchase consideration was allocated to assets acquired and liabilities assumed based on their respective fair values as follows:

Goodwill			$	180,065
Other intangible assets			206,800
Other assets acquired, primarily current assets			25,435
Other liabilities assumed, primarily current liabilities			(10,140)
Net assets acquired			$	402,160

The purchase price allocation presented above has been finalized as of the first quarter of 2020 and includes an immaterial amount of measurement period adjustments. The measurement period adjustments to the initial allocation were based on more detailed information obtained about the specific assets acquired and liabilities assumed.

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 our brand building expertise, supply chain capabilities and retail relationships to accelerate growth and access to the portfolio of ONE Brands products.

Other intangible assets include trademarks valued at $144,900, customer relationships valued at $58,800 and covenants not to compete valued at $3,100. Trademarks were assigned an estimated useful life of 33 years, customer relationships were assigned estimated useful lives ranging from 17 to 19 years and covenants not to compete were assigned an estimated useful life of 4 years.

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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, 2021 and 2020 are as follows:

						North America Confectionery						North America Salty Snacks						International						Total
Goodwill						$	1,851,287					$	121,152					$	375,864					$	2,348,303
Accumulated impairment loss						(4,973)						—						(357,375)						(362,348)
Balance at January 1, 2020						1,846,314						121,152						18,489						1,985,955
Measurement period adjustments						825						—						—						825
Foreign currency translation						2,154						—						(719)						1,435
Balance at December 31, 2020						1,849,293						121,152						17,770						1,988,215
Acquired during the period (see Note 2)						174,516						468,646						—						643,162
Measurement period adjustments (see Note 2)						1,310						—						—						1,310
Foreign currency translation						887						—						(400)						487
Balance at December 31, 2021						$	2,026,006					$	589,798					$	17,370					$	2,633,174

We had no goodwill impairment charges in 2021, 2020 or 2019.

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

December 31,						2021												2020
						Gross Carrying Amount						Accumulated Amortization						Gross Carrying Amount						Accumulated Amortization
Intangible assets subject to amortization:
Trademarks						$	1,705,390					$	(141,760)					$	1,211,086					$	(104,939)
Customer-related						504,667						(65,131)						204,101						(49,616)
Patents						8,623						(8,623)						8,556						(8,542)
Total						2,218,680						(215,514)						1,423,743						(163,097)
Intangible assets not subject to amortization:
Trademarks						34,422												34,568
Total other intangible assets						$	2,037,588											$	1,295,214

In 2019, sales and operating performance associated with our Krave business were below expectations. In the fourth quarter of 2019, as part of a strategic review initiated by our leadership team, we updated our strategic forecast which projected under performance related to the Krave business primarily due to mainstream brands driving category volume and an increase in the overall competitive landscape. We deemed this to be a triggering event requiring us to test our Krave long-lived asset group for impairment. Based on our assessment, we determined that the carrying value was not recoverable and calculated an impairment loss as the excess of the asset group’s carrying value over its fair value. Therefore, as a result of this testing, during the fourth quarter of 2019, we recorded an impairment charge totaling $100,131 to write down the long-lived asset group, which predominantly consisted of customer relationship and trademark intangible assets.

Total amortization expense for the years ended December 31, 2021, 2020 and 2019 was $52,124, $46,472 and $46,690, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

Amortization expense for the next five years, based on current intangible asset balances, is estimated to be as follows:

Year ending December 31,						2022						2023						2024						2025						2026
Amortization expense						$	79,298					$	79,105					$	78,523					$	78,523					$	78,523

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 $1.5 billion unsecured revolving credit facility with the option to increase borrowings by an additional $500 million with the consent of the lenders. This facility is scheduled to expire on July 2, 2024; however, we may extend the termination date for up to two additional one-year periods upon notice to the administrative agent under the facility.

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, 2021, we are in compliance with all 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 $280,650 at December 31, 2021 and $266,935 at December 31, 2020. These lines permit us to borrow at the respective banks’ prime commercial interest rates, or lower. Commitment fees relating to our revolving credit facility and lines of credit are not material. Short-term debt consisted of the following:

			December 31, 2021						December 31, 2020
Short-term foreign bank borrowings against lines of credit			$	119,038					$	74,041
U.S. commercial paper			820,385						—
Total short-term debt			$	939,423					$	74,041
Weighted average interest rate on outstanding commercial paper			0.1		%				N/A

The maximum amount of short-term borrowings outstanding during 2021 and 2020 was $939,423 and $944,944, respectively. The weighted-average interest rate on short-term borrowings outstanding was 0.2% as of December 31, 2021 and 1.2% as of December 31, 2020.

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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,						Maturity Date						2021						2020
8.800% Debentures (1)						February 15, 2021						$	—					$	84,715
3.100% Notes (1)						May 15, 2021						—						350,000
2.625% Notes						May 1, 2023						250,000						250,000
3.375% Notes						May 15, 2023						500,000						500,000
2.050% Notes						November 15, 2024						300,000						300,000
0.900% Notes (2)						June 1, 2025						300,000						300,000
3.200% Notes						August 21, 2025						300,000						300,000
2.300% Notes						August 15, 2026						500,000						500,000
7.200% Debentures						August 15, 2027						193,639						193,639
2.450% Notes						November 15, 2029						300,000						300,000
1.700% Notes (2)						June 1, 2030						350,000						350,000
3.375% Notes						August 15, 2046						300,000						300,000
3.125% Notes						November 15, 2049						400,000						400,000
2.650% Notes (2)						June 1, 2050						350,000						350,000
Finance lease obligations (see Note 7)												69,146						80,755
Net impact of interest rate swaps, debt issuance costs and unamortized debt discounts												(23,314)						(30,525)
Total long-term debt												4,089,471						4,528,584
Less—current portion												2,844						438,829
Long-term portion												$	4,086,627					$	4,089,755

(1)In February 2021, we repaid $84,715 of 8.800% Debentures due upon their maturity. In May 2021, we repaid $350,000 of 3.100% Notes due upon their maturity.

(2)During the second quarter of 2020, we issued $300,000 of 0.900% Notes due in 2025, $350,000 of 1.700% Notes due in 2030 and $350,000 of 2.650% Notes due in 2050 (the “2020 Notes”). Proceeds from the issuance of the 2020 Notes, net of discounts and issuance costs, totaled $989,876. The 2020 Notes were issued under a shelf registration statement on Form S-3 filed in May 2018 that registered an indeterminate amount of debt securities.

Additionally, in May 2020, we repaid $350,000 of 2.900% Notes due upon their maturity, and in December 2020, we repaid $350,000 of 4.125% Notes due upon their maturity.

Aggregate annual maturities of our long-term Notes (excluding finance 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:

2022			$	—
2023			750,000
2024			300,000
2025			600,000
2026			500,000
Thereafter			1,893,639

Our debt is principally unsecured and of equal priority. None of our debt is convertible into our Common Stock.

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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,						2021						2020						2019
Interest expense						$	139,156					$	160,204					$	157,707
Capitalized interest						(9,310)						(6,733)						(5,585)
Interest expense						129,846						153,471						152,122
Interest income						(2,429)						(4,097)						(7,997)
Interest expense, net						$	127,417					$	149,374					$	144,125

5. DERIVATIVE INSTRUMENTS

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

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

Commodity Price Risk

We enter into commodities futures and options contracts and other commodity derivative instruments to reduce the effect of future price fluctuations associated with the purchase of raw materials, energy requirements and transportation services. We generally hedge commodity price risks for 3- to 24-month periods. Our open commodity derivative contracts had a notional value of $313,200 as of December 31, 2021 and $279,843 as of December 31, 2020.

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

Foreign Exchange Price Risk

We are exposed to foreign currency exchange rate risk related to our international operations, including non-functional currency intercompany debt and other non-functional currency transactions of certain subsidiaries. Principal currencies hedged include the euro, Canadian dollar, Japanese yen, British pound, Brazilian real, Malaysian ringgit, Mexican peso and Swiss franc. 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 $94,623 at December 31, 2021 and $130,131 at December 31, 2020. 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 $2,993 at December 31, 2021 and $2,519 at December 31, 2020. 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.

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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. In December 2020, our fixed-to-floating interest rate swap matured in connection with the repayment of certain long-term debt upon its maturity (see Note 4). Therefore, as of December 31, 2021 and December 31, 2020, we had no interest rate swap derivative instruments in a fair value hedging relationship.

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

Equity Price Risk

We are exposed to market price changes in certain broad market indices related to our deferred compensation obligations to our employees. To mitigate this risk, we use equity swap contracts to hedge the portion of the exposure that is linked to market-level equity returns. These contracts are not designated as hedges for accounting purposes and are entered into for periods of 3 to 12 months. The change in fair value of these derivatives is recorded in selling, marketing and administrative expense, together with the change in the related liabilities. The notional amount of the contracts outstanding at December 31, 2021 and 2020 was $24,975 and $30,194, respectively.

The following table presents the classification of derivative assets and liabilities within the Consolidated Balance Sheets as of December 31, 2021 and 2020:

December 31,						2021												2020
						Assets (1)						Liabilities (1)						Assets (1)						Liabilities (1)
Derivatives designated as cash flow hedging instruments:
Foreign exchange contracts						$	2,949					$	711					$	2,388					$	5,522
Derivatives not designated as hedging instruments:
Commodities futures and options (2)						2,423						1,376						3,299						1,648
Deferred compensation derivatives						2,412						—						3,630						—
Foreign exchange contracts						550						—						176						93
						5,385						1,376						7,105						1,741
Total						$	8,334					$	2,087					$	9,493					$	7,263

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

(2)As of December 31, 2021, amounts reflected on a net basis in liabilities were assets of $31,774 and liabilities of $32,701, 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, 2020 were assets of $32,674 and liabilities of $29,376. At December 31, 2021 and 2020, the remaining amount reflected in assets and liabilities related to the fair value of other non-exchange traded derivative instruments, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

Income Statement Impact of Derivative Instruments

The effect of derivative instruments on the Consolidated Statements of Income for the years ended December 31, 2021 and 2020 was as follows:

						Non-designated Hedges												Cash Flow Hedges
						Gains (losses) recognized in income (a)												Gains (losses) recognized in other comprehensive income (“OCI”)												Gains (losses) reclassified from AOCI into income (b)
						2021						2020						2021						2020						2021						2020
Commodities futures and options						$	85,402					$	6,593					$	—					$	—					$	—					$	—
Foreign exchange contracts						547						(1,584)						(1,551)						(780)						(7,145)						1,810
Interest rate swap agreements						—						—						—						—						(10,972)						(9,589)
Deferred compensation derivatives						6,004						4,934						—						—						—						—
Total						$	91,953					$	9,943					$	(1,551)					$	(780)					$	(18,117)					$	(7,779)

(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.

The amount of pretax net losses on derivative instruments, including interest rate swap agreements and foreign currency forward exchange contracts expected to be reclassified into earnings in the next 12 months was approximately $8,734 as of December 31, 2021. This amount is primarily associated with interest rate swap agreements.

Fair Value Hedging Relationships

For the years ended December 31, 2021 and 2020, we had no interest rate swap derivative instruments in a fair value hedging relationship. For the year ended December 31, 2020, we recognized a net pretax benefit to interest expense of $3,186 relating to our fixed-to-floating interest rate 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.

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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 Sheets on a recurring basis as of December 31, 2021 and 2020:

						Assets (Liabilities)
						Level 1						Level 2						Level 3						Total
December 31, 2021:
Derivative Instruments:
Assets:
Foreign exchange contracts (1)						$	—					$	3,499					$	—					$	3,499
Deferred compensation derivatives (2)						—						2,412						—						2,412
Commodities futures and options (3)						2,423						—						—						2,423
Liabilities:
Foreign exchange contracts (1)						—						711						—						711
Commodities futures and options (3)						1,376						—						—						1,376
December 31, 2020:
Assets:
Foreign exchange contracts (1)						$	—					$	2,564					$	—					$	2,564
Deferred compensation derivatives (2)						—						3,630						—						3,630
Commodities futures and options (3)						3,299						—						—						3,299
Liabilities:
Foreign exchange contracts (1)						—						5,615						—						5,615
Commodities futures and options (3)						1,648						—						—						1,648

(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 deferred compensation derivatives is based on quoted prices for market interest rates and a broad market equity index.

(3)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, 2021 and December 31, 2020 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 issuuances 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:

						Fair Value												Carrying Value
At December 31,						2021						2020						2021						2020
Current portion of long-term debt						$	2,844					$	443,215					$	2,844					$	438,829
Long-term debt						4,274,304						4,479,499						4,086,627						4,089,755
Total						$	4,277,148					$	4,922,714					$	4,089,471					$	4,528,584

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

Other Fair Value Measurements

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.

2021 Activity

In connection with the acquisitions of Lily’s, Dot’s and Pretzels during 2021, as discussed in Note 2, we used various valuation techniques to determine fair value, with the primary techniques being discounted cash flow analysis and the relief-from-royalty, a form of the multi-period excess earnings, which use significant unobservable inputs, or Level 3 inputs, as defined by the fair value hierarchy.

2020 Activity

During 2020, we recorded the following impairment charges, which use significant unobservable inputs, or Level 3 inputs, as defined by the fair value hierarchy:

						2020
Adjustment to disposal group (1)						$	6,200
Other asset write-down (2)						2,943
Long-lived asset impairment charges						$	9,143

(1)In connection with the sale of the LSFC joint venture (disposal group previously classified as held for sale), 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. The sale of the LSFC joint venture was completed in January 2021.

(2)In connection with a previous sale, the Company wrote-down certain receivables deemed uncollectible.

2019 Activity

During 2019, we recorded the following impairment charges, which use significant unobservable inputs, or Level 3 inputs, as defined by the fair value hierarchy:

						2019
Customer relationship and trademark intangible assets (1)						$	100,131
Other long-lived assets not held for sale (2)						9,629
Adjustment to disposal group (3)						2,725
Long-lived and intangible asset impairment charges						$	112,485

(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 disposal groups previously classified as held for sale, 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

In connection with the acquisition of ONE Brands in the third quarter of 2019, 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, a form of the multi-period excess earnings and the with-and-without valuation approaches, which use significant unobservable inputs, or Level 3 inputs, as defined by the fair value hierarchy.

7. LEASES

We lease office and retail space, warehouse and distribution facilities, land, vehicles, and equipment. We determine if an agreement is or contains a lease at inception. Leases with an initial term of 12 months or less are not recorded on the balance sheet.

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and liabilities are based on the estimated present value of lease payments over the lease term and are recognized at the lease commencement date.

As most of our leases do not provide an implicit rate, we use our estimated incremental borrowing rate in determining the present value of lease payments. The estimated incremental borrowing rate is derived from information available at the lease commencement date.

Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. A limited number of our lease agreements include rental payments adjusted periodically for inflation. Our lease agreements generally do not contain residual value guarantees or material restrictive covenants.

For real estate, equipment and vehicles that support selling, marketing and general administrative activities the Company accounts for the lease and non-lease components as a single lease component. These asset categories comprise the majority of our leases. The lease and non-lease components of real estate and equipment leases supporting production activities are not accounted for as a single lease component. Consideration for such contracts are allocated to the lease component and non-lease components based upon relative standalone prices either observable or estimated if observable prices are not readily available.

The components of lease expense were as follows:

Lease expense						Classification						2021						2020
Operating lease cost						Cost of sales or SM&A (1)						$	44,444					$	44,547
Finance lease cost:
Amortization of ROU assets						Depreciation and amortization (1)						8,098						8,202
Interest on lease liabilities						Interest expense, net						4,358						4,475
Net lease cost (2)												$	56,900					$	57,224

(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.

Information regarding our lease terms and discount rates were as follows:

						2021						2020
Weighted-average remaining lease term (years)
Operating leases						15.4						12.5
Finance leases						30.0						30.1
Weighted-average discount rate
Operating leases						3.1		%				3.8		%
Finance leases						6.1		%				5.9		%

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

Supplemental balance sheet information related to leases were as follows:

Leases						Classification						2021						2020
Assets
Operating lease ROU assets						Other non-current assets						$	351,712					$	224,268
Finance lease ROU assets, at cost						Property, plant and equipment, gross						89,190						101,426
Accumulated amortization						Accumulated depreciation						(16,694)						(13,361)
Finance lease ROU assets, net						Property, plant and equipment, net						72,496						88,065
Total leased assets												$	424,208					$	312,333
Liabilities
Current
Operating						Accrued liabilities						$	36,292					$	36,578
Finance						Current portion of long-term debt						3,564						4,868
Non-current
Operating						Other long-term liabilities						310,899						181,871
Finance						Long-term debt						65,582						75,887
Total lease liabilities												$	416,337					$	299,204

In 2021, our operating lease ROU assets and corresponding lease liabilities increased due to lease agreements assumed as a result of our 2021 business combination activity (see Note 2).

The maturity of our lease liabilities as of December 31, 2021 were as follows:

			Operating leases						Finance leases						Total
2022			$	46,282					$	7,310					$	53,592
2023			38,709						5,231						43,940
2024			33,884						4,209						38,093
2025			23,021						3,968						26,989
2026			21,710						3,985						25,695
Thereafter			284,367						146,085						430,452
Total lease payments			447,973						170,788						618,761
Less: Imputed interest			100,782						101,642						202,424
Total lease liabilities			$	347,191					$	69,146					$	416,337

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

Supplemental cash flow and other information related to leases were as follows:

						2021						2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases						$	42,584					$	42,568
Operating cash flows from finance leases						$	4,730					$	4,475
Financing cash flows from finance leases						$	4,358					$	4,468
ROU assets obtained in exchange for lease liabilities:
Operating leases						$	164,951					$	38,464
Finance leases						$	(6,424)					$	3,992

8. INVESTMENTS IN UNCONSOLIDATED AFFILIATES

We invest in partnerships that make equity investments in projects eligible to receive federal historic and renewable energy tax credits. The tax credits, when realized, are recognized as a reduction of tax expense under the flow-through method, at which time the corresponding equity investment is written-down to reflect the remaining value of the future benefits to be realized. The equity investment write-down is reflected within other (income) expense, net in the Consolidated Statements of Income (see Note 17).

Additionally, we acquire ownership interests in emerging snacking businesses and startup companies, which vary in method of accounting based on our percentage of ownership and ability to exercise significant influence over decisions relating to operating and financial affairs. These investments afford the Company the rights to distribute brands that the Company does not own to third-party customers primarily in the United States. Net sales and expenses of our equity method investees are not consolidated into our financial statements; rather, our proportionate share of earnings or losses are recorded on a net basis within other (income) expense, net in the Consolidated Statements of Income.

Both equity and cost method investments are reported within other non-current assets in our Consolidated Balance Sheets. We regularly review our investments and adjust accordingly for capital contributions, dividends received and other-than-temporary impairments. Total investments in unconsolidated affiliates was $93,089 and $52,351 as of December 31, 2021 and December 31, 2020, respectively.

9. 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 associated with business realignment activities are classified in our Consolidated Statements of Income as follows:

For the years ended December 31,						2021						2020						2019
Cost of sales						$	5,220					$	2,209					$	—
Selling, marketing and administrative expense						7,854						10,801						1,126
Business realignment costs						3,525						18,503						8,112
Costs associated with business realignment activities						$	16,599					$	31,513					$	9,238

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

Costs recorded by program in 2021, 2020 and 2019 related to these activities were as follows:

For the years ended December 31,						2021						2020						2019
International Optimization Program:
Severance						$	3,982					$	18,977					$	—
Other program costs						12,617						10,366						—
Margin for Growth Program:
Severance						—						(653)						5,178
Other program costs						—						2,823						4,060
Total						$	16,599					$	31,513					$	9,238

The following table presents the liability activity for costs qualifying as exit and disposal costs for the year ended December 31, 2021:

			Total
Liability balance at December 31, 2020 (1)			$	12,748
2021 business realignment charges (2)			8,327
Cash payments			(20,369)
Liability balance at December 31, 2021 (1)			$	706

(1)The liability balances reflected above are reported within accrued liabilities and other long-term liabilities.

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

2020 International Optimization Program

In the fourth quarter of 2020, we commenced a program (“International Optimization Program”) to streamline resources and investments in select international markets, including the optimization of our China operating model that will improve our operational efficiency and provide for a strong, sustainable and simplified base going forward.

The International Optimization Program is expected to be completed in early 2023, with total pre-tax costs anticipated to be $50,000 to $75,000. Cash costs are expected to be $40,000 to $65,000, primarily related to workforce reductions of approximately 350 positions outside of the United States, costs to consolidate and relocate production, and third-party costs incurred to execute these activities. The costs and related benefits of the International Optimization Program relate to the International segment. However, segment operating results do not include these business realignment expenses because we evaluate segment performance excluding such costs.

For the year ended December 31, 2021 and 2020, we recognized total costs associated with the International Optimization Program of $16,599 and $29,343. These charges predominantly included third-party charges in support of our initiative to transform our China operating model, as well as severance and employee benefit costs. Since inception, we have incurred pre-tax charges to execute the program totaling $45,942.

Margin for Growth Program

In the first quarter of 2017, the Company’s Board of Directors (“Board”) unanimously approved several initiatives under a single program 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.

For the years ended December 31, 2020 and 2019, we recognized total costs associated with the Margin for Growth Program of $2,170, and $9,238 respectively. These charges included employee severance, largely relating to initiatives to improve the cost structure of our corporate operating model as part of optimizing our global supply chain. In addition, we incurred other program costs, which related primarily to third-party charges in support of our initiative to improve global efficiency and effectiveness. This project was completed in mid-2020.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

The costs and related benefits of the Margin for Growth Program relate approximately 63% to the North America Confectionery segment and 37% to the International segment. However, segment operating results do not include these business realignment expenses because we evaluate segment performance excluding such costs.

10. INCOME TAXES

The components of income before income taxes were as follows:

For the years ended December 31,						2021						2020						2019
Domestic						$	1,775,361					$	1,405,254					$	1,211,051
Foreign						21,863						89,743						169,733
Income before income taxes						$	1,797,224					$	1,494,997					$	1,380,784

The components of our provision for income taxes were as follows:

For the years ended December 31,						2021						2020						2019
Current:
Federal						$	161,402					$	117,348					$	179,358
State						60,979						46,198						38,232
Foreign						78,650						29,158						31,514
						301,031						192,704						249,104
Deferred:
Federal						26,726						24,486						14,958
State						8,253						3,746						1,865
Foreign						(21,605)						(1,352)						(31,895)
						13,374						26,880						(15,072)
Total provision for income taxes						$	314,405					$	219,584					$	234,032

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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,						2021						2020
Deferred tax assets:
Post-retirement benefit obligations						$	51,026					$	58,059
Accrued expenses and other reserves						81,847						86,412
Stock-based compensation						21,898						18,831
Derivative instruments						—						15,550
Pension						—						8,203
Lease liabilities						95,503						64,192
Accrued trade promotion reserves						25,382						25,877
Net operating loss carryforwards						152,389						154,445
Capital loss carryforwards						2,522						15,401
Other						49,760						10,027
Gross deferred tax assets						480,327						456,997
Valuation allowance						(167,788)						(193,310)
Total deferred tax assets						312,539						263,687
Deferred tax liabilities:
Property, plant and equipment, net						234,474						180,633
Acquired intangibles						168,087						156,439
Lease ROU assets						76,285						46,778
Inventories						20,105						21,086
Derivative instruments						1,352						—
Pension						11,871						—
Other						47,496						58,410
Total deferred tax liabilities						559,670						463,346
Net deferred tax liabilities						$	(247,131)					$	(199,659)
Included in:
Non-current deferred tax assets, net						$	40,873					$	29,369
Non-current deferred tax liabilities, net						(288,004)						(229,028)
Net deferred tax liabilities						$	(247,131)					$	(199,659)

Changes in deferred taxes were primarily due to accelerated tax depreciation on property, plant and equipment and increases in pension and unrealized value of derivatives.

The valuation allowances as of December 31, 2021 and 2020 were primarily related to various foreign jurisdictions' net operating loss carryforwards and other deferred tax assets that we do not expect to realize.

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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,						2021						2020						2019
Federal statutory income tax rate						21.0		%				21.0		%				21.0		%
Increase (reduction) resulting from:
State income taxes, net of Federal income tax benefits						2.8						2.7						1.8
Foreign rate differences						(0.2)						(0.5)						(1.5)
Historic and solar tax credits						(6.2)						(7.7)						(3.4)
Tax contingencies						1.7						0.1						0.9
Stock compensation						(0.5)						(0.6)						(1.3)
Valuation allowance release						—						—						(1.5)
Other, net						(1.1)						(0.3)						0.9
Effective income tax rate						17.5		%				14.7		%				16.9		%

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

December 31,						2021						2020
Balance at beginning of year						$	108,543					$	108,383
Additions for tax positions taken during prior years						40,145						10,641
Reductions for tax positions taken during prior years						(3,601)						(2,496)
Additions for tax positions taken during the current year						14,329						3,354
Settlements						(9,858)						—
Expiration of statutes of limitations						(6,253)						(11,339)
Balance at end of year						$	143,305					$	108,543

The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $117,552 as of December 31, 2021 and $103,213 as of December 31, 2020.

We report accrued interest and penalties related to unrecognized tax benefits in income tax expense. We recognized a net tax expense of $8,924, $1,564 and $3,824 in 2021, 2020 and 2019 , respectively, for interest and penalties. Accrued net interest and penalties were $20,466 as of December 31, 2021 and $11,542 as of December 31, 2020.

The Company and its subsidiaries file tax returns in the United States, including various state and local returns, and in other foreign jurisdictions. We are routinely audited by taxing authorities in our filing jurisdictions, and a number of these disputes are currently underway, including multi-year controversies at various stages of review, negotiation and litigation in Malaysia, Mexico, China, and the United States. The outcome of tax audits cannot be predicted with certainty, including the timing of resolution or potential settlements. If any issues addressed in our tax audits are resolved in a manner not consistent with management’s expectations, we could be required to adjust our provision for income taxes in the period such resolution occurs. Based on our current assessments, we believe adequate provision has been made for all income tax uncertainties.

We reasonably expect reductions in the liability for unrecognized tax benefits of approximately $18,496 within the next 12 months because of the expiration of statutes of limitations and settlements of tax audits.

As of December 31, 2021, we had approximately $679,725 of undistributed earnings of our international subsidiaries. During 2020, previously undistributed earnings of certain international subsidiaries were no longer considered indefinitely reinvested; however, the Company had previously recognized a one-time U.S. repatriation tax due under U.S. tax reform, and as a result, only an immaterial amount of withholding tax was recognized. We intend to continue to reinvest the remainder of the earnings outside of the United States for which there would be a material tax implication to distributing, such as withholding tax, for the foreseeable future and, therefore, have not recognized additional tax expense on these earnings beyond the one-time U.S. repatriation tax due under the 2017 Tax Cuts and Jobs Act.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

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 non-current assets in our Consolidated Balance Sheets. The tax credits, when realized, are recognized as a reduction of tax expense under the flow-through method, 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, 2021, 2020 and 2019 we recognized investment tax credits and related outside basis difference benefits totaling $136,243, $146,021 and $58,798, respectively, and we wrote-down the equity investment by $113,756, $125,579 and $50,457, 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 (see Note 17).

American Rescue Plan Act

On March 11, 2021, the American Rescue Plan Act (“ARPA”) was signed into law. The ARPA strengthens and extends certain federal programs enacted through the Coronavirus Aid, Relief, and Economic Security Act and other COVID-19 relief measures, and establishes new federal programs, including provisions on taxes, healthcare and unemployment benefits. The ARPA did not have a material impact on our consolidated financial statements for the year ended December 31, 2021

Coronavirus Aid, Relief, and Economic Security Act

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was signed into law. The CARES Act provides a substantial stimulus and assistance package intended to address the impact of the COVID-19 pandemic, including tax relief and government loans, grants and investments. The CARES Act did not have a material impact on our consolidated financial statements for the year ended December 31, 2021.

11. 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.

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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:

						Pension Benefits												Other Benefits
December 31,						2021						2020						2021						2020
Change in benefit obligation
Projected benefit obligation at beginning of year						$	1,168,838					$	1,105,206					$	243,308					$	230,457
Service cost						21,361						21,734						1,879						159
Interest cost						18,320						26,112						3,857						6,029
Actuarial (gain) loss						(33,984)						90,140						(14,787)						15,218
Settlement						(75,985)						(52,938)						—						—
Currency translation and other						619						1,822						113						254
Benefits paid						(22,989)						(23,238)						(22,880)						(8,809)
Projected benefit obligation at end of year						1,076,180						1,168,838						211,490						243,308
Change in plan assets
Fair value of plan assets at beginning of year						1,100,245						1,053,438						—						—
Actual return on plan assets						68,361						118,812						—						—
Employer contributions						28,220						2,862						22,880						8,809
Settlement						(75,985)						(52,938)						—						—
Currency translation and other						339						1,309						—						—
Benefits paid						(22,989)						(23,238)						(22,880)						(8,809)
Fair value of plan assets at end of year						1,098,191						1,100,245						—						—
Funded status at end of year						$	22,011					$	(68,593)					$	(211,490)					$	(243,308)
Amounts recognized in the Consolidated Balance Sheets:
Other assets						$	71,618					$	8,308					$	—					$	—
Accrued liabilities						(12,584)						(6,174)						(17,886)						(19,801)
Other long-term liabilities						(37,023)						(70,727)						(193,604)						(223,507)
Total						$	22,011					$	(68,593)					$	(211,490)					$	(243,308)
Amounts recognized in Accumulated Other Comprehensive Income (Loss), net of tax:
Actuarial net (loss) gain						$	(132,917)					$	(205,193)					$	1,137					$	(10,718)
Net prior service credit						15,399						21,706						—						—
Net amounts recognized in AOCI						$	(117,518)					$	(183,487)					$	1,137					$	(10,718)

The project benefit obligation during 2021 was impacted by actuarial gain of $33,984 which was the result of the discount rate assumption increasing from 2.3% at December 31, 2020 to 2.7% at December 31, 2021. The accumulated benefit obligation for all defined benefit pension plans was $1,031,197 as of December 31, 2021 and $1,123,102 as of December 31, 2020.

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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,						2021						2020
Projected benefit obligation						$	108,034					$	759,200
Accumulated benefit obligation						92,462						718,335
Fair value of plan assets						58,427						682,299

Net Periodic Benefit Cost

The components of net periodic benefit cost were as follows:

						Pension Benefits																		Other Benefits
For the years ended December 31,						2021						2020						2019						2021						2020						2019
Amounts recognized in net periodic benefit cost
Service cost						$	21,361					$	21,734					$	20,878					$	1,879					$	159					$	151
Interest cost						18,320						26,112						35,756						3,857						6,029						7,837
Expected return on plan assets						(49,091)						(52,907)						(54,520)						—						—						—
Amortization of prior service (credit) cost						(6,142)						(7,308)						(7,230)						—						300						811
Amortization of net loss						20,556						26,952						32,647						1,593						(39)						(385)
Settlement loss						16,085						13,421						5,498						—						—						—
Total net periodic benefit cost						$	21,089					$	28,004					$	33,029					$	7,329					$	6,449					$	8,414
Change in plan assets and benefit obligations recognized in AOCI, pre-tax
Actuarial net (gain) loss						$	(80,047)					$	(15,606)					$	(52,028)					$	(16,374)					$	15,266					$	23,956
Prior service cost (credit)						6,447						7,310						7,232						—						(300)						(810)
Total recognized in other comprehensive (income) loss, pre-tax						$	(73,600)					$	(8,296)					$	(44,796)					$	(16,374)					$	14,966					$	23,146
Net amounts recognized in periodic benefit cost and AOCI						$	(52,511)					$	19,708					$	(11,767)					$	(9,045)					$	21,415					$	31,560

The non-service cost components of net periodic benefit cost relating to pension and other post-retirement benefit plans is reflected within other (income) expense, net in the Consolidated Statements of Income (see Note 17).

Assumptions

The weighted-average assumptions used in computing the year end benefit obligations were as follows:

						Pension Benefits												Other Benefits
December 31,						2021						2020						2021						2020
Discount rate						2.7		%				2.3		%				2.9		%				2.5		%
Rate of increase in compensation levels						3.5		%				3.5		%				N/A						N/A
Interest crediting rate						4.6		%				4.7		%				N/A						N/A

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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:

						Pension Benefits																		Other Benefits
For the years ended December 31,						2021						2020						2019						2021						2020						2019
Discount rate						2.3		%				3.1		%				4.1		%				2.5		%				3.2		%				4.2		%
Expected long-term return on plan assets						4.8		%				5.3		%				5.9		%				N/A						N/A						N/A
Rate of compensation increase						3.5		%				3.6		%				3.6		%				N/A						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.

We 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. This approach provides 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 approach 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.

For purposes of measuring our post-retirement benefit obligation at December 31, 2021, we assumed a 6.2% annual rate of increase in the per capita cost of covered health care benefits for 2022, grading down to 5.0% by 2025. For purposes of measuring our post-retirement benefit obligation at December 31, 2020, we assumed a 6.1% annual rate of increase in the per capita cost of covered health care benefits for 2021, grading down to 5.0% by 2025.

The valuations and assumptions reflect adoption of the Society of Actuaries updated Pri-2012 mortality tables with MP-2021 and MP-2020 generational projection scales, which we adopted as of December 31, 2021 and 2020, respectively. Adoption of the updated scales 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, 2021 was as follows:

Asset Class						Target Asset Allocation
Cash						1%
Equity securities						27%
Fixed income securities						48%
Alternative investments, including real estate, listed infrastructure and other						24%

As of December 31, 2021, 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 each asset class.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

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, 2021:

						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)						Total
Cash and cash equivalents						$	534					$	23,715					$	—					$	649					$	24,898
Equity securities:
Global all-cap (a)						—						—						—						294,090						294,090
Fixed income securities:
U.S. government/agency						—						—						—						248,579						248,579
Corporate bonds (b)						—						—						—						78,360						78,360
International government/corporate bonds (c)						—						—						—						31,922						31,922
Diversified credit (d)						—						—						—						154,004						154,004
Alternative investments:
Global diversified assets (e)						—						—						—						97,412						97,412
Real assets fund (f)						—						—						—						168,926						168,926
Total pension plan assets						$	534					$	23,715					$	—					$	1,073,942					$	1,098,191

The following table sets forth by level, within the fair value hierarchy, pension plan assets at their fair values as of December 31, 2020:

						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)												Total
Cash and cash equivalents						$	613					$	21,287					$	—					$	576											$	22,476
Equity securities:
Global all-cap (a)						—						—						—						264,909												264,909
Fixed income securities:
U.S. government/agency						—						—						—						215,573												215,573
Corporate bonds (b)						—						—						—						155,648												155,648
International government/corporate bonds (c)						—						—						—						32,586												32,586
Diversified credit (d)						—						—						—						160,829												160,829
Alternative investments:
Global diversified assets (e)						—						—						—						117,290												117,290
Global real estate investment trusts (g)						—						—						—						60,083												60,083
Global infrastructure (h)						—						—						—						70,851												70,851
Total pension plan assets						$	613					$	21,287					$	—					$	1,078,345											$	1,100,245

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

(a)			This category comprises equity funds that primarily track the MSCI World Index or MSCI All Country World Index.
(b)			This category comprises fixed income funds primarily invested in investment grade and high yield bonds.
(c)			This category comprises fixed income funds primarily invested in Canadian and other international bonds.
(d)			This category comprises fixed income funds primarily invested in high yield bonds, loans, securitized debt and emerging market debt.
(e)			This category comprises diversified funds invested across alternative asset classes.
(f)			This category comprises funds primarily invested in publicly traded real estate securities, publicly listed infrastructure securities and real estate debt.
(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, 2021. 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 $28,220 during 2021. In 2020, we made total contributions of $2,862 to the pension plans. For 2022, minimum funding requirements for our pension plans are approximately $1,934.

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:

			Expected Benefit Payments
			2022						2023						2024						2025						2026						2027-2030
Pension Benefits			$	121,976					$	98,120					$	91,557					$	90,301					$	90,898					$	341,696
Other Benefits			17,894						16,626						15,717						14,619						13,600						57,799

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 $58,883 in 2021, $52,793 in 2020 and $47,651 in 2019.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

12. 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, 2021, 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 Human Capital Committee of our Board and if in accordance with an applicable deferred compensation plan of the Company. Currently, the Compensation and Human Capital 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 PSUs and RSUs 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 paid on our Common Stock. Dividend equivalents are charged to retained earnings and included in accrued liabilities until paid.

Awards to employees eligible for retirement prior to the award becoming fully vested are amortized to expense over the period through the date that the employee first becomes eligible to retire and is no longer required to provide service to earn the award. In addition, historical data is used to estimate forfeiture rates and record share-based compensation expense only for those awards that are expected to vest.

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,						2021						2020						2019
Pre-tax compensation expense						$	66,711					$	57,584					$	51,899
Related income tax benefit						11,608						8,580						9,030

Compensation expenses for stock compensation plans are primarily included in SM&A expense. As of December 31, 2021, total stock-based compensation expense related to non-vested awards not yet recognized was $82,114 and the weighted-average period over which this amount is expected to be recognized was approximately 1.9 years.

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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

A summary of activity relating to grants of stock options for the year ended December 31, 2021 is as follows:

Stock Options			Shares			Weighted-Average Exercise Price (per share)			Weighted-Average Remaining Contractual Term			Aggregate Intrinsic Value
Outstanding at beginning of the period			1,839,811			$99.72			4.9 years
Granted			32,155			$147.98
Exercised			(535,151)			$94.98
Forfeited			(3,859)			$101.96
Outstanding as of December 31, 2021			1,332,956			$102.78			4.4 years			$	120,891
Options exercisable as of December 31, 2021			1,152,112			$101.31			4.1 years			$	106,178

The weighted-average fair value of options granted was $24.12, $21.31 and $15.25 per share in 2021, 2020 and 2019, 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,						2021						2020						2019
Dividend yields						2.2		%				2.1		%				2.7		%
Expected volatility						21.8		%				17.5		%				17.0		%
Risk-free interest rates						1.0		%				1.3		%				2.5		%
Expected term in years						6.3						6.7						6.5

• “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.

The total intrinsic value of options exercised was $38,645, $32,121 and $115,786 in 2021, 2020 and 2019, respectively.

As of December 31, 2021, there was $792 of total unrecognized compensation expense related to non-vested stock option awards granted under the EICP, which we expect to recognize over a weighted-average period of 2.1 years.

The following table summarizes information about stock options outstanding as of December 31, 2021:

						Options Outstanding																		Options Exercisable
Range of Exercise Prices						Number Outstanding as of 12/31/21						Weighted-Average Remaining Contractual Life in Years						Weighted-Average Exercise Price						Number Exercisable as of 12/31/21						Weighted-Average Exercise Price
$51.42 - $99.90						656,357						4.8						$95.13						521,242						$93.91
$99.91 - $107.05						316,955						2.6						$105.91						315,648						$105.92
$107.06 - $157.32						359,644						5.3						$113.97						315,222						$108.93
$51.42 - $157.32						1,332,956						4.4						$102.78						1,152,112						$101.31

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

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. The number of shares may be increased to the maximum or reduced to the minimum threshold based on the results of these performance metrics in accordance with the terms established at the time of the award.

For PSUs granted, the target award is a combination of a market-based total shareholder return and performance-based components. For market-based condition components, market volatility and other factors are taken into consideration in determining the grant date fair value and the related compensation expense is recognized regardless of whether the market condition is satisfied, provided that the requisite service has been provided. For performance-based condition components, we estimate the probability that the performance conditions will be achieved each quarter and adjust compensation expenses accordingly. The performance scores of PSUs granted in 2021, 2020, and 2019 can range from 0% to 250% of the targeted amounts.

We recognize the compensation expense associated with PSUs ratably over the 3-year term. Compensation expense 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 2021, 2020 and 2019, 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 expense 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. The compensation expense associated with non-employee director RSUs is recognized 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, 2021 is as follows:

Performance Stock Units and Restricted Stock Units						Number of units						Weighted-average grant date fair value for equity awards (per unit)
Outstanding at beginning of year						1,053,332						$135.11
Granted						404,517						$154.83
Performance assumption change (1)						243,337						$148.18
Vested						(340,744)						$117.17
Forfeited						(56,921)						$151.73
Outstanding at end of year						1,303,521						$146.96

(1)Reflects the net number of PSUs above and below target levels based on the performance metrics.

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.

For the years ended December 31,						2021						2020						2019
Units granted						404,517						353,037						493,828
Weighted-average fair value at date of grant						$	154.83					$	161.30					$	115.94
Monte Carlo simulation assumptions:
Estimated values						$	66.44					$	80.08					$	48.40
Dividend yields						2.2		%				2.0		%				2.6		%
Expected volatility						26.4		%				17.3		%				20.3		%

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

• “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.

The fair value of shares vested totaled $52,008, $56,294 and $51,739 in 2021, 2020 and 2019, respectively.

Deferred PSUs, deferred RSUs and deferred stock units representing directors’ fees totaled 264,226 units as of December 31, 2021. Each unit is equivalent to one share of the Company’s Common Stock.

13. SEGMENT INFORMATION

Since December 31, 2014, the Company has reported its operations through two segments: (i) North America and (ii) International and Other. After the completion of the Company’s acquisitions of Dot’s and Pretzels in December 2021, as described in Note 2, management of the Company has elected to begin reporting its operations through three reportable segments. Therefore, effective in the fourth quarter of 2021, the Company realigned its former two reportable segments into three reportable segments: (i) North America Confectionery, (ii) North America Salty Snacks and (iii) International.

This new organizational structure aligns with how our Chief Operating Decision Maker (“CODM”) manages our business, including resource allocation and performance assessment, and further aligns with our product categories and the key markets we serve. We have retroactively reflected these changes in all historical periods presented.

• North America Confectionery – This segment is responsible for our traditional chocolate and non-chocolate confectionery market position in the United States and Canada. This includes our business in chocolate and non-chocolate confectionery, gum and refreshment products, protein bars, spreads, snack bites and mixes, as well as pantry and food service lines. This segment also includes our 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.

• North America Salty Snacks – This segment is responsible for our salty snacking products in the United States. This includes ready-to-eat popcorn, baked and trans fat free snacks, pretzels and other snacks.

• International – International 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 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.

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.

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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

Our segment net sales and earnings were as follows:

For the years ended December 31,									2021						2020						2019
Net sales:
North America Confectionery									$	7,682,416					$	7,084,860					$	6,815,111
North America Salty Snacks									555,424						438,224						410,005
International									733,497						626,635						761,136
Total									$	8,971,337					$	8,149,719					$	7,986,252
Segment income (loss):
North America Confectionery									$	2,475,873					$	2,274,584					$	2,120,212
North America Salty Snacks									100,777						75,845						50,816
International									74,170						(14)						50,535
Total segment income									2,650,820						2,350,415						2,221,563
Unallocated corporate expense (1)									614,875						520,632						532,539
Unallocated mark-to-market (gains) losses on commodity derivatives									(24,376)						6,429						(28,651)
Long-lived and intangible asset impairment charges (see Note 6)									—						9,143						112,485
Costs associated with business realignment activities (see Note 9)									16,599						31,513						9,238
Operating profit									2,043,722						1,782,698						1,595,952
Interest expense, net (see Note 4)									127,417						149,374						144,125
Other (income) expense, net (see Note 17)									119,081						138,327						71,043
Income before income taxes									$	1,797,224					$	1,494,997					$	1,380,784

(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, (d) acquisition-related costs and (e) other gains or losses that are not integral to segment performance.

Activity within the unallocated mark-to-market losses (gains) on commodity derivatives is as follows:

For the years ended December 31,						2021						2020						2019
Net gains on mark-to-market valuation of commodity derivative positions recognized in income						$	(85,402)					$	(6,593)					$	(35,488)
Net gains on commodity derivative positions reclassified from unallocated to segment income						61,026						13,022						6,837
Net (gains) losses on mark-to-market valuation of commodity derivative positions recognized in unallocated derivative losses (gains)						$	(24,376)					$	6,429					$	(28,651)

As of December 31, 2021, 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 $86,914. Based on our forecasts of the timing of the recognition of the underlying hedged items, we expect to reclassify net pretax gains on commodity derivatives of $76,322 to segment operating results in the next twelve months.

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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,									2021						2020						2019
North America Confectionery									$	213,113					$	198,951					$	195,431
North America Salty Snacks									29,744						27,362						29,544
International									22,754						24,533						24,827
Corporate									49,391						44,061						41,742
Total									$	315,002					$	294,907					$	291,544

Additional information regarding our net sales and long-lived assets disaggregated by geographical region is as follows:

For the years ended December 31,									2021						2020						2019
Net sales:
United States									$	7,807,606					$	7,042,804					$	6,722,617
Other									1,163,731						1,106,915						1,263,635
Total									$	8,971,337					$	8,149,719					$	7,986,252
Long-lived assets:
United States									$	2,099,786					$	1,836,114					$	1,717,606
Other									486,401						449,141						435,533
Total									$	2,586,187					$	2,285,255					$	2,153,139

14. EQUITY AND NONCONTROLLING INTEREST

We had 1,055,000,000 authorized shares of capital stock as of December 31, 2021. Of this total, 900,000,000 shares were designated as Common Stock, 150,000,000 shares were designated as Class B Common Stock (“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 Common 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 Common Stock.

Class B Stock can be converted into Common Stock on a share-for-share basis at any time. During 2021, 2020 and 2019 no shares of Class B Stock were converted into Common Stock.

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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,						2021						2020						2019
Shares issued						221,553,025						221,553,025						359,901,744
Treasury shares at beginning of year						(13,325,898)						(12,723,592)						(150,172,840)
Stock repurchases:
Shares repurchased in the open market under pre-approved share repurchase programs						(871,144)						(951,138)						(1,386,193)
Shares repurchased to replace Treasury Stock issued for stock options and incentive compensation						(2,005,500)						(450,000)						(2,674,349)
Stock issuances:
Shares issued for stock options and incentive compensation						758,531						798,832						3,161,071
Retirement of treasury shares						—						—						138,348,719
Treasury shares at end of year						(15,444,011)						(13,325,898)						(12,723,592)
Change in Common Stock due to retirement of treasury shares						—						—						(138,348,719)
Net shares outstanding at end of year						206,109,014						208,227,127						208,829,433

In July 2018, our Board of Directors approved a $500,000 share repurchase authorization to repurchase shares of our Common Stock. As of December 31, 2021, $109,983 remained available for repurchases of our Common Stock under this program. In May 2021, our Board of Directors approved an additional $500,000 share repurchase authorization. This program is to commence after the existing 2018 authorization is completed and is to be utilized at management’s discretion. We are authorized to purchase our outstanding shares in open market and privately negotiated transactions. The program has 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.

Retirement of Treasury Shares

During 2019, we retired 138,348,719 shares or $6,423,267 of the Company’s treasury shares previously repurchased. Under the applicable state law, these shares resume the status of authorized and unissued shares upon retirement. In accordance with our accounting policy, we record any excess of repurchase price over par value to retained earnings. As a result, our retained earnings were reduced by $6,284,919 during 2019. This transaction was approved by the Board on October 11, 2019.

Hershey Trust Company

Hershey Trust Company, as trustee for the Milton Hershey School Trust (the “Trust”) and as direct owner of investment shares, held 95,400 shares of our Common Stock as of December 31, 2021. As trustee for the Trust, Hershey Trust Company held 60,612,012 shares of the Class B Common Stock as of December 31, 2021, and was entitled to cast approximately 81% 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 February 2022, the Company entered into a Stock Purchase Agreement with Hershey Trust Company, as trustee for the Trust, pursuant to which the Company purchased 1,000,000 shares of the Company’s Common Stock from the Trust at a price equal to $203.35 per share, for a total purchase price of $203,350.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

Noncontrolling Interest in Subsidiary

As discussed in Note 2, in January 2021 we completed the divestiture of LSFC, a joint venture originally established in 2007 in China for the purpose of manufacturing and selling product to the joint venture partners. Prior to the sale, we owned a 50% controlling interest in LSFC.

A roll-forward showing the 2021 activity relating to the noncontrolling interest follows:

			Noncontrolling Interest
Balance, December 31, 2020			$	3,531
Net gain attributable to noncontrolling interest			5,307
Divestiture of noncontrolling interest			(1,436)
Distributions to joint venture partner			(8,750)
Reclassification to accrued liabilities			(3,901)
Other comprehensive income - foreign currency translation adjustments			5,249
Balance, December 31, 2021			$	—

During the fourth quarter of 2021, we obtained certain approvals and satisfied other conditions necessary to commence the distribution of sales proceeds attributable to the joint venture partner. A portion of the distribution was completed in 2021, and we expect the remaining distribution to be completed during 2022.

15. 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, 2021.

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, 2021, we satisfied these obligations by taking delivery of and making payment for the specific commodities.

As of December 31, 2021, 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, 2021:

in millions						2022						2023						2024						2025						2026
Purchase obligations						$	1,742.1					$	405.5					$	32.8					$	12.5					$	12.5

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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

Legal contingencies

On February 12, 2021, Issouf Coubaly, individually and on behalf of proposed class members, filed a complaint (Coubaly v. Nestlé U.S.A. et al., 1:21-cv-00386-DLF (D.D.C. Feb. 12, 2021)) in the District Court of the District of Columbia, seeking injunctive relief and unspecified damages for alleged violations of child labor and human trafficking laws under the Trafficking Victims Protection Reauthorization Act. The Company is among several defendants named in the suit. The Company believes that the suit is without merit and is defending vigorously against the suit.

In addition to the above-referenced matter, 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, human and workplace rights 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.

Collective Bargaining

As of December 31, 2021, the Company employed approximately 16,620 full-time and 2,370 part-time employees worldwide. Collective bargaining agreements covered approximately 6,235 employees, or approximately 33% of the Company’s employees worldwide. During 2022, agreements will be negotiated for certain employees at four facilities outside of the United States, comprising approximately 62% 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

16. 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,						2021												2020												2019
						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)						$	498,084					$	187,903					$	467,013					$	173,719					$	445,685					$	164,627
Allocation of undistributed earnings						574,772						216,753						464,802						173,174						393,731						145,649
Total earnings—basic						$	1,072,856					$	404,656					$	931,815					$	346,893					$	839,416					$	310,276
Denominator (shares in thousands):
Total weighted-average shares—basic						146,120						60,614						147,832						60,614						148,841						60,614
Earnings Per Share—basic						$	7.34					$	6.68					$	6.30					$	5.72					$	5.64					$	5.12
Diluted earnings per share:
Numerator:
Allocation of total earnings used in basic computation						$	1,072,856					$	404,656					$	931,815					$	346,893					$	839,416					$	310,276
Reallocation of total earnings as a result of conversion of Class B common stock to Common stock						404,656						—						346,893						—						310,276						—
Reallocation of undistributed earnings						—						(1,098)						—						(822)						—						(886)
Total earnings—diluted						$	1,477,512					$	403,558					$	1,278,708					$	346,071					$	1,149,692					$	309,390
Denominator (shares in thousands):
Number of shares used in basic computation						146,120						60,614						147,832						60,614						148,841						60,614
Weighted-average effect of dilutive securities:
Conversion of Class B common stock to Common shares outstanding						60,614						—						60,614						—						60,614						—
Employee stock options						609						—						600						—						785						—
Performance and restricted stock units						415						—						368						—						462						—
Total weighted-average shares—diluted						207,758						60,614						209,414						60,614						210,702						60,614
Earnings Per Share—diluted						$	7.11					$	6.66					$	6.11					$	5.71					$	5.46					$	5.10

The earnings per share calculations for the years ended December 31, 2021, 2020 and 2019 excluded 43, 15 and 1,476 stock options (in thousands), respectively, that would have been antidilutive.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

17. 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,						2021						2020						2019
Write-down of equity investments in partnerships qualifying for historic and renewable energy tax credits (see Note 8)						$	113,756					$	125,579					$	50,457
Non-service cost components of net periodic benefit cost relating to pension and other post-retirement benefit plans (see Note 11)						5,177						12,560						20,415
Other (income) expense, net						148						188						171
Total						$	119,081					$	138,327					$	71,043

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

18. SUPPLEMENTAL BALANCE SHEET INFORMATION

The components of certain Consolidated Balance Sheet accounts are as follows:

December 31,						2021						2020
Inventories:
Raw materials						$	395,358					$	388,600
Goods in process						110,008						104,841
Finished goods						649,082						645,664
Inventories at FIFO						1,154,448						1,139,105
Adjustment to LIFO						(165,937)						(174,898)
Total inventories						$	988,511					$	964,207
Prepaid expenses and other:
Prepaid expenses						$	129,287					$	95,669
Other current assets						127,678						158,809
Total prepaid expenses and other						$	256,965					$	254,478
Property, plant and equipment:
Land						$	154,494					$	131,513
Buildings						1,508,139						1,387,106
Machinery and equipment						3,443,500						3,169,754
Construction in progress						294,824						276,514
Property, plant and equipment, gross						5,400,957						4,964,887
Accumulated depreciation						(2,814,770)						(2,679,632)
Property, plant and equipment, net						$	2,586,187					$	2,285,255
Other non-current assets:
Pension						$	71,618					$	8,308
Capitalized software, net						260,656						187,673
Operating lease ROU assets						351,712						224,268
Investments in unconsolidated affiliates						93,089						52,351
Other non-current assets						91,128						83,287
Total other non-current assets						$	868,203					$	555,887
Accrued liabilities:
Payroll, compensation and benefits						$	291,446					$	237,342
Advertising, promotion and product allowances						305,050						309,537
Operating lease liabilities						36,292						36,578
Other						222,850						198,309
Total accrued liabilities						$	855,638					$	781,766
Other long-term liabilities:
Post-retirement benefits liabilities						$	193,604					$	223,507
Pension benefits liabilities						37,023						70,727
Operating lease liabilities						310,899						181,871
Other						245,532						207,329
Total other long-term liabilities						$	787,058					$	683,434
Accumulated other comprehensive loss:
Foreign currency translation adjustments						$	(100,025)					$	(98,525)
Pension and post-retirement benefit plans, net of tax						(116,381)						(194,205)
Cash flow hedges, net of tax						(32,809)						(45,352)
Total accumulated other comprehensive loss						$	(249,215)					$	(338,082)

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