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TMCNet:  HERSHEY CO - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

[February 21, 2014]

HERSHEY CO - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Edgar Glimpses Via Acquire Media NewsEdge) EXECUTIVE OVERVIEW Results for the year ended December 31, 2013 were strong with increases in net sales, earnings per share and profitability despite continued macroeconomic challenges. Net sales increased 7.6% compared with 2012 due to sales volume increases in the United States and key international markets as we continued our focus on core brands and innovation. Advertising expense increased 21.3% for the year, supporting core brands along with new product launches. Net income and earnings per share-diluted also increased at greater rates than our long-term growth targets. The investments we have made in both productivity and cost savings resulted in a business model that is more efficient and effective, enabling us to deliver predictable, consistent and achievable marketplace and financial performance. We continue to generate strong cash flow from operations and our financial position remains solid.


Adjusted Non-GAAP Financial Measures Our "Management's Discussion and Analysis of Financial Condition and Results of Operations" section includes certain measures of financial performance that are not defined by U.S. generally accepted accounting principles ("GAAP"). For each of these non-GAAP financial measures, we are providing below (1) the most directly comparable GAAP measure; (2) a reconciliation of the differences between the non-GAAP measure and the most directly comparable GAAP measure; (3) an explanation of why our management believes these non-GAAP measures provide useful information to investors; and (4) additional purposes for which we use these non-GAAP measures.

We believe that the disclosure of these non-GAAP measures provides investors with a better comparison of our year-to-year operating results. We exclude the effects of certain items from Income before Interest and Income Taxes ("EBIT"), EBIT margin, Net Income and Income per Share-Diluted-Common Stock ("EPS") when we evaluate key measures of our performance internally, and in assessing the impact of known trends and uncertainties on our business. We also believe that excluding the effects of these items provides a more balanced view of the underlying dynamics of our business.

Adjusted non-GAAP financial measures exclude the impacts of charges or credits recorded during the last four years associated with our business realignment initiatives and impairment charges. Non-service-related pension expenses also are excluded for each of the last four years, along with acquisition closing, integration and transaction costs, and a gain on the sale of certain non-core trademark licensing rights in 2011.

Non-service-related pension expenses include interest costs, the expected return on pension plan assets, the amortization of actuarial gains and losses, and certain curtailment and settlement losses or credits. Non-service-related pension expenses may be very volatile from year-to-year as a result of changes in interest rates and market returns on pension plan assets. Therefore, we have excluded non-service-related pension expense from our results in accordance with GAAP. We believe that non-GAAP financial results excluding non-service-related pension expenses will provide investors with a better understanding of the underlying profitability of our ongoing business. We believe that the service cost component of our total pension benefit costs closely reflects the operating costs of our business and provides for a better comparison of our operating results from year-to-year. Our most significant defined benefit pension plans were closed to most new participants after 2007, resulting in ongoing service costs that are stable and predictable.

18 -------------------------------------------------------------------------------- For the years ended December 31, 2013 2012 Net Net EBIT Income EPS EBIT Income EPS In millions of dollars except per share amounts Results in accordance with GAAP $ 1,339.7 $ 820.5 $ 3.61 $ 1,111.1 $ 660.9 $ 2.89 Adjustments: Business realignment charges included in cost of sales ("COS") 0.4 0.2 - 36.4 23.7 0.10 Non-service-related pension expense included in COS 5.4 3.3 0.02 8.6 5.3 0.03 Acquisition costs included in COS 0.3 0.2 - 4.1 3.0 0.01 Business realignment charges included in selling, marketing and administrative ("SM&A") - - - 2.4 1.6 0.01 Non-service-related pension expense included in SM&A 5.5 3.3 0.01 12.0 7.4 0.03 Acquisition costs included in SM&A 3.8 5.2 0.03 9.3 6.2 0.03 Business realignment and impairment charges, net 18.6 11.6 0.05 45.0 31.9 0.14 Adjusted non-GAAP results $ 1,373.7 $ 844.3 $ 3.72 $ 1,228.9 $ 740.0 $ 3.24 For the years ended December 31, 2011 2010 Net Net EBIT Income EPS EBIT Income EPS In millions of dollars except per share amounts Results in accordance with GAAP $ 1,055.0 $ 628.9 $ 2.74 $ 905.3 $ 509.8 $ 2.21 Adjustments: Business realignment charges included in COS 45.1 28.4 0.12 13.7 8.4 0.04 Non-service-related pension expense included in COS - - - 0.9 0.6 - Business realignment charges included in SM&A 5.0 3.0 0.01 1.5 0.9 - Non-service-related pension expense included in SM&A 2.8 2.0 0.01 5.0 3.2 0.02 Gain on sale of trademark licensing rights included in SM&A (17.0 ) (11.1 ) (0.05 ) - - - Business realignment and impairment (credits) charges, net (0.9 ) (0.5 ) - 83.4 68.6 0.30 Adjusted non-GAAP results $ 1,090.0 $ 650.7 $ 2.83 $ 1,009.8 $ 591.5 $ 2.57 19-------------------------------------------------------------------------------- Adjusted Non-GAAP Results Key Annual Performance Measures 2013 2012 2011 Increase in Net Sales 7.6 % 9.3 % 7.2 % Increase in adjusted EBIT 11.8 % 12.7 % 7.9 % Improvement in adjusted EBIT Margin in basis points ("bps") 70bps 60bps 10bps Increase in adjusted EPS 14.8 % 14.5 % 10.1 % SUMMARY OF OPERATING RESULTS Analysis of Selected Items from Our GAAP Income Statement Percent Change Increase (Decrease) For the years ended December 31, 2013 2012 2011 2013-2012 2012-2011 In millions of dollars except per share amounts Net Sales $ 7,146.0 $ 6,644.3 $ 6,080.8 7.6 % 9.3 % Cost of Sales 3,865.2 3,784.4 3,548.9 2.1 6.6 Gross Profit 3,280.8 2,859.9 2,531.9 14.7 13.0 Gross Margin 45.9 % 43.0 % 41.6 % SM&A Expense 1,922.5 1,703.8 1,477.8 12.8 15.3 SM&A Expense as a percent of sales 26.9 % 25.6 % 24.3 % Business Realignment and Impairment Charges (Credits), Net 18.6 45.0 (0.9 ) (58.5 ) N/A EBIT 1,339.7 1,111.1 1,055.0 20.6 5.3 EBIT Margin 18.7 % 16.7 % 17.4 % Interest Expense, Net 88.4 95.6 92.2 (7.5 ) 3.7 Provision for Income Taxes 430.8 354.6 333.9 21.5 6.2 Effective Income Tax Rate 34.4 % 34.9 % 34.7 % Net Income $ 820.5 $ 660.9 $ 628.9 24.1 5.1 Net Income Per Share-Diluted $ 3.61 $ 2.89 $ 2.74 24.9 5.5 Net Sales 2013 compared with 2012 Net sales increased 7.6% in 2013 compared with 2012 due primarily to sales volume increases. Sales volume increases of 7.8% reflected core brand sales increases and incremental sales of new products in the U.S. and our international businesses. Higher sales of Brookside products contributed approximately 1.3% to the net sales increase. These increases were partially offset by the unfavorable impact of foreign currency exchange rates which reduced net sales by approximately 0.3%. Net sales in U.S. dollars for our businesses outside of the U.S. and Canada increased approximately 15.7% in 2013 compared with 2012, reflecting sales volume increases primarily in our focus markets of China, Mexico and Brazil. Net sales increases for our international businesses were offset somewhat by the impact of unfavorable foreign currency exchange rates.

20 -------------------------------------------------------------------------------- 2012 compared with 2011 Net sales increased 9.3% in 2012 compared with 2011 due to net price realization and sales volume increases in the U.S. and for our international businesses. Net price realization contributed approximately 5.7% to the net sales increase.

Sales volume increased net sales by approximately 2.2% due primarily to sales of new products in the U.S. The Brookside acquisition contributed approximately 1.9% to the net sales increase. These increases were partially offset by the unfavorable impact of foreign currency exchange rates which reduced net sales by approximately 0.5%.

Excluding incremental sales from the Brookside acquisition, net sales in the U.S. increased approximately 7.1% compared with 2011, primarily reflecting net price realization, along with sales volume increases from the introduction of new products. Net sales in U.S. dollars for our businesses outside of the U.S.

increased approximately 9.1% in 2012 compared with 2011, reflecting sales volume increases and net price realization. Net sales increases for our international businesses were offset somewhat by the impact of unfavorable foreign currency exchange rates.

Key U.S. Marketplace Metrics For the 52 weeks ended December 31, 2013 2012 2011 Consumer Takeaway Increase 6.3 % 5.7 % 7.8 % Market Share Increase 1.1 0.6 0.8 Consumer takeaway and the change in market share for 2013 and 2012 are provided for measured channels of distribution accounting for approximately 90% of our U.S. confectionery retail business. These channels of distribution primarily include food, drug, mass merchandisers, including Wal-Mart Stores, Inc., and convenience stores.

Consumer takeaway for 2011 is provided for channels of distribution accounting for approximately 80% of our U.S. confectionery retail business. These channels of distribution include food, drug, mass merchandisers, including Wal-Mart Stores, Inc., and convenience stores. The change in market share for 2011 is provided for channels measured by syndicated data which include sales in the food, drug, convenience store and mass merchandiser classes of trade, excluding sales of Wal-Mart Stores, Inc.

Cost of Sales and Gross Margin 2013 compared with 2012 Cost of sales increased 2.1% in 2013 compared with 2012. The impact of sales volume increases and supply chain cost inflation together increased cost of sales by approximately 9.4%. Lower input costs, supply chain productivity improvements and a favorable sales mix reduced cost of sales by approximately 6.3%. Business realignment and impairment charges of $0.4 million were included in cost of sales in 2013, compared with $36.4 million in the prior year, reducing cost of sales by 1.0%.

Gross margin increased by 2.9 percentage points in 2013 compared with 2012.

Reduced input costs, supply chain productivity improvements, a favorable sales mix and lower fixed costs as a percent of sales together improved gross margin by 3.9 percentage points. These improvements were partially offset by supply chain cost inflation which reduced gross margin by 1.6 percentage points. The impact of lower business realignment and impairment charges recorded in 2013 compared with 2012 increased gross margin by 0.6 percentage points.

2012 compared with 2011 The cost of sales increase of 6.6% in 2012 compared with 2011 was primarily due to higher input costs, the impact of sales volume increases and higher supply chain costs which together increased cost of sales by approximately 7.1%. The Brookside acquisition further increased cost of sales by approximately 2.0%.

Supply chain productivity improvements reduced cost of sales by approximately 2.5%. Business realignment and impairment charges of $36.4 million were included in cost of sales in 2012, compared with $45.1 million in the prior year.

Gross margin increased by 1.4 percentage points in 2012 compared with 2011, primarily as a result of price realization and supply chain productivity improvements which together improved gross margin by 4.1 percentage points.

These improvements were substantially offset by higher input and supply chain costs which reduced gross margin by a total of 2.9 percentage points. The impact of lower business realignment and impairment charges recorded in 2012 compared with 2011 increased gross margin by 0.2 percentage points.

21 -------------------------------------------------------------------------------- Selling, Marketing and Administrative 2013 compared with 2012 Selling, marketing and administrative expenses increased $218.7 million or 12.8% in 2013. Contributing to the overall increase was a 19.7% increase in advertising, consumer promotions and other marketing expenses to support core brands and the introduction of new products in the U.S. and international markets. Advertising expenses increased 21.3% compared with 2012. Additionally, selling and administrative expenses increased 8.8% primarily as a result of higher employee-related expenses, increased incentive compensation costs, legal fees and increased marketing research expenses, along with the write-off of certain assets associated with the remodeling of increased office space. There were minimal business realignment charges included in SM&A in 2013 compared with $2.5 million in 2012.

2012 compared with 2011 Selling, marketing and administrative expenses increased $226.0 million or 15.3% in 2012. The increase was primarily a result of increased advertising, marketing research and consumer promotion expenses, higher employee-related expenses, increased incentive compensation costs and expenses associated with the Brookside acquisition. In addition, selling, marketing and administrative costs were reduced in 2011 by a $17.0 million gain on the sale of non-core trademark licensing rights. Advertising expense increased approximately 15.9% compared with 2011. Business realignment charges of $2.5 million were included in selling, marketing and administrative expenses in 2012 compared with $5.0 million in 2011.

Business Realignment and Impairment Charges In June 2010, we announced Project Next Century (the "Next Century program") as part of our ongoing efforts to create an advantaged supply chain and competitive cost structure. As part of the program, production was transitioned from the Company's century-old facility at 19 East Chocolate Avenue in Hershey, Pennsylvania, to an expanded West Hershey facility, which was built in 1992.

Production from the 19 East Chocolate Avenue plant, as well as a portion of the workforce, was fully transitioned to the West Hershey facility during 2012.

We estimate that the Next Century program will incur total pre-tax charges and non-recurring project implementation costs of $190 million to $200 million. As of December 31, 2013, total costs of $190.4 million have been recorded over the last four years for the Next Century program. Total costs of $16.8 million were recorded during 2013. Total costs of $76.3 million were recorded in 2012, total costs of $43.4 million were recorded in 2011 and total costs of $53.9 million were recorded in 2010.

During 2009, we completed our comprehensive, supply chain transformation program initiated in 2006 (the "global supply chain transformation program").

In December 2012, the Company recorded non-cash asset impairment charges of approximately $7.5 million, primarily associated with the write off of goodwill and other intangible assets of Tri-US, Inc., a subsidiary in which we held a controlling interest.

22 --------------------------------------------------------------------------------Charges (credits) associated with business realignment initiatives and impairment recorded during 2013, 2012 and 2011 were as follows: For the years ended December 31, 2013 2012 2011 In thousands of dollars Cost of sales Next Century program $ 402 $ 36,383 $ 39,280 Global supply chain transformation program - - 5,816 Total cost of sales 402 36,383 45,096 Selling, marketing and administrative - Next Century program 18 2,446 4,961 Business realignment and impairment charges, net Next Century program: Pension settlement loss - 15,787 - Plant closure expenses 16,387 20,780 8,620 Employee separation costs (credits) - 914 (9,506 ) India voluntary retirement program 2,278 - - Tri-US, Inc. asset impairment charges - 7,457 - Total business realignment and impairment charges (credits), net 18,665 44,938 (886 ) Total net charges associated with business realignment initiatives and impairment $ 19,085 $ 83,767 $ 49,171 Next Century Program Plant closure expenses of $16.4 million were recorded during 2013, primarily related to costs associated with the demolition of a former manufacturing facility.

The charge of $36.4 million recorded in cost of sales during 2012 related primarily to start-up costs and accelerated depreciation of fixed assets over a reduced estimated remaining useful life associated with the Next Century program. A charge of $2.4 million was recorded in selling, marketing and administrative expenses during 2012 for project administration related to the Next Century program. The level of lump sum withdrawals during 2012 from one of the Company's pension plans by employees retiring or leaving the Company, primarily under the Next Century program, resulted in a non-cash pension settlement loss of $15.8 million. Expenses of $20.8 million were recorded in 2012 primarily related to costs associated with the closure of a manufacturing facility and the relocation of production lines.

The charge of $39.3 million recorded in cost of sales during 2011 related primarily to accelerated depreciation of fixed assets over a reduced estimated remaining useful life associated with the Next Century program. A charge of $5.0 million was recorded in selling, marketing and administrative expenses during 2011 for project administration related to the Next Century program.

Plant closure expenses of $8.6 million were recorded in 2011 primarily related to costs associated with the relocation of production lines. Employee separation costs were reduced by $9.5 million during 2011, which consisted of an $11.2 million credit reflecting lower expected costs related to voluntary and involuntary terminations at the two manufacturing facilities and a net benefits curtailment loss of $1.7 million also related to the employee terminations.

Global Supply Chain Transformation Program The charge of $5.8 million recorded in 2011 was due to a decline in the estimated net realizable value of two properties being held for sale.

23 -------------------------------------------------------------------------------- Tri-US, Inc. Impairment Charges In February 2011, we acquired a 49% interest in Tri-US, Inc. of Boulder, Colorado, a company that manufactured, marketed and sold nutritional beverages under the "mix1" brand name. We invested $5.8 million and accounted for this investment using the equity method until January 2012. In January 2012, we made an additional investment of $6.0 million in Tri-US, Inc., resulting in a controlling ownership interest of approximately 69%. In December 2012, the Board of Directors of Tri-US, Inc. decided to immediately cease operations and dissolve the company as a result of operational difficulties, quality issues and competitive constraints. It was determined that investments necessary to continue the business would not generate a sufficient return. Accordingly, in December 2012, the Company recorded non-cash asset impairment charges of approximately $7.5 million, primarily associated with the write off of goodwill and other intangible assets. These charges excluded the portion of the losses attributable to the noncontrolling interests.

Liabilities Associated with Business Realignment Initiatives As of December 31, 2013, there was no remaining liability balance relating to the Next Century program. We made payments against the liabilities recorded for the Next Century program of $7.6 million in 2013 and $12.8 million in 2012 related to employee separation and project administration costs.

Income Before Interest and Income Taxes and EBIT Margin 2013 compared with 2012 EBIT increased in 2013 compared with 2012 as a result of higher gross profit and lower business realignment charges, partially offset by higher selling, marketing and administrative expenses. Pre-tax net business realignment and impairment charges of $19.1 million were recorded in 2013 compared with $83.8 million recorded in 2012.

EBIT margin increased from 16.7% in 2012 to 18.7% in 2013 as a result of higher gross margin and lower business realignment charges, partially offset by higher selling, marketing and administrative expenses as a percent of sales. The net impact of business realignment, impairment and acquisition charges recorded in 2013 reduced EBIT margin by 0.3 percentage points. Net business realignment and impairment charges recorded in 2012 reduced EBIT margin by 1.3 percentage points.

2012 compared with 2011 EBIT increased in 2012 compared with 2011 as a result of higher gross profit, substantially offset by higher selling, marketing and administrative expenses, and business realignment and impairment charges. Pre-tax net business realignment and impairment charges of $83.8 million were recorded in 2012 compared with $49.2 million recorded in 2011.

EBIT margin decreased from 17.4% in 2011 to 16.7% in 2012 primarily as a result of higher selling, marketing and administrative expenses as a percent of sales and the impact of higher business realignment and impairment costs which more than offset the increase in gross margin. EBIT margin in 2012 was reduced by 0.3 percentage points compared with 2011 as a result of the gain on the sale of trademark licensing rights recorded in 2011. The net impact of business realignment, impairment and acquisition charges recorded in 2012 reduced EBIT margin by 1.3 percentage points. Net business realignment and impairment charges recorded in 2011 reduced EBIT margin by 0.8 percentage points.

Interest Expense, Net 2013 compared with 2012 Net interest expense in 2013 was lower than in 2012 primarily as a result of lower short-term borrowings, partially offset by a decrease in capitalized interest and higher interest expense on long-term debt.

2012 compared with 2011 Net interest expense in 2012 was higher than in 2011 primarily as a result of higher short-term borrowings and a decrease in capitalized interest, partially offset by lower interest expense on long-term debt.

24 -------------------------------------------------------------------------------- Income Taxes and Effective Tax Rate 2013 compared with 2012 Our effective income tax rate was 34.4% for 2013 compared with 34.9% for 2012.

The decrease in the effective income tax rate in 2013 reflected lower state income taxes, which were higher in 2012 as a result of the impact of certain state tax legislation, and an increase in deductions associated with certain foreign tax jurisdictions, partially offset by a higher benefit in 2012 resulting from the completion of tax audits.

2012 compared with 2011 Our effective income tax rate was 34.9% for 2012 compared with 34.7% for 2011.

The effective income tax rate was slightly higher in 2012 primarily reflecting the impact of tax rates associated with business realignment and impairment charges recorded in 2012 compared with 2011 and the mix of the Company's income among various tax jurisdictions.

Net Income and Net Income Per Share 2013 compared with 2012 Earnings per share-diluted increased $0.72, or 24.9% in 2013 compared with 2012.

Net income in 2013 was reduced by $11.8 million, or $0.05 per share-diluted, as a result of net business realignment and impairment charges and, in 2012, was reduced by $57.2 million, or $0.25 per share-diluted. In 2013, net income was reduced by $6.6 million, or $0.03 per share-diluted, as a result of non-service-related pension expenses. Non-service-related pension expenses reduced net income by $12.7 million, or $0.06 per share-diluted in 2012.

Excluding the impact of business realignment and impairment charges and non-service-related pension expenses from both periods and the acquisition closing, integration and transaction costs of $5.4 million, or $0.03 per share-diluted, in 2013, and $9.2 million, or $0.04 per share-diluted, in 2012, adjusted earnings per share-diluted increased $0.48 per share, or 14.8% in 2013 compared with 2012.

2012 compared with 2011 Earnings per share-diluted increased $0.15, or 5.5% in 2012 compared with 2011.

Net income in 2012 was reduced by $57.2 million, or $0.25 per share-diluted, as a result of net business realignment and impairment charges. Net income was reduced by $9.2 million, or $0.04 per share-diluted, in 2012 as a result of closing and integration costs for the Brookside acquisition and by $12.7 million or $0.06 per share-diluted related to non-service-related pension expenses in 2012. In 2011, net income was increased by $11.1 million, or $0.05 per share-diluted, as a result of the gain on sale of trademark licensing rights and reduced by $30.9 million, or $0.13 per share-diluted, as a result of net business realignment and impairment charges. Non-service-related pension expenses reduced net income by $2.0 million, or $0.01 per share-diluted in 2011.

Excluding the impact of business realignment and impairment charges and non-service-related pension expenses from both periods, the acquisition closing and integration costs in 2012 and the gain on the sale of trademark licensing rights in 2011, adjusted earnings per share-diluted increased $0.41 per share, or 14.5% in 2012 compared with 2011.

FINANCIAL CONDITION Our financial condition remained strong during 2013 reflecting strong cash flow from operations.

Business Acquisitions Acquisitions of businesses are accounted for as purchases and, accordingly, their results of operations 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 January 2012, we acquired all of the outstanding stock of Brookside Foods Ltd. ("Brookside"), a privately held confectionery company based in Abbottsford, British Columbia, Canada. As part of this transaction, we acquired two production facilities located in British Columbia and Quebec. The Brookside product line is primarily sold in the U.S. and Canada in a take-home re-sealable pack type.

25 -------------------------------------------------------------------------------- Our financial statements reflect the final accounting for the Brookside acquisition. The purchase price for the acquisition was approximately $172.9 million. The purchase price allocation of the Brookside acquisition is as follows: Purchase Price Estimated Useful In thousands of dollars Allocation Life in Years Goodwill $ 67,974 Indefinite Trademarks 60,253 25 Other intangibles(1) 51,057 6 to 17 Other assets, net of liabilities assumed of $18.7 million 21,673 Non-current deferred tax liabilities (28,101 ) Purchase Price $ 172,856 (1) Includes customer relationships, patents and covenants not to compete.

The excess purchase price over the estimated value of the net tangible and identifiable intangible assets was recorded to goodwill. The goodwill is not expected to be deductible for tax purposes.

We included results subsequent to the acquisition date in the consolidated financial statements. If we had included the results of the acquisition in the consolidated financial statements for each of the periods presented, the effect would not have been material.

Assets A summary of our assets is as follows: December 31, 2013 2012 In thousands of dollars Current assets $ 2,487,334 $ 2,113,485 Property, plant and equipment, net 1,805,345 1,674,071 Goodwill and other intangibles 771,805 802,716 Deferred income taxes - 12,448 Other assets 293,004 152,119 Total assets $ 5,357,488 $ 4,754,839 26-------------------------------------------------------------------------------- l The change in current assets from 2012 to 2013 was primarily due to the following: Ÿ Higher cash and cash equivalents in 2013 reflecting strong cash flow from operations; Ÿ An increase in accounts receivable reflecting higher sales in December 2013 compared with December 2012; Ÿ An increase in total inventories primarily reflecting higher finished goods inventories necessary to support anticipated sales levels of everyday items and the introduction of new products; and Ÿ A decrease in current deferred income tax assets primarily reflecting the impact of the change in value of derivative instruments, particularly interest rate swap agreements.

l Higher property, plant and equipment in 2013, reflecting capital additions of $323.6 million, partly offset by depreciation expense of $166.5 million.

l A decrease in non-current deferred tax assets as a result of the change in the funded status of our pension plans.

l A decrease in goodwill and other intangibles primarily due to the effect of foreign currency translation.

l An increase in other assets primarily due to a receivable for an anticipated U.S. and Canada Competent Authority resolution of various proposed tax adjustments, the improvement in the funded status of our pension plans and the value of interest rate swap agreements at the end of the year.

Liabilities A summary of our liabilities is as follows: December 31, 2013 2012 In thousands of dollars Current liabilities $ 1,408,022 $ 1,471,110 Long-term debt 1,795,142 1,530,967 Other long-term liabilities 434,068 668,732 Deferred income taxes 104,204 35,657 Total liabilities $ 3,741,436 $ 3,706,466 l Changes in current liabilities from 2012 to 2013 were primarily the result of the following: Ÿ Higher accounts payable reflecting an increase in amounts payable for marketing programs as well as capital expenditures, partially offset by the timing of payments associated with inventory deliveries to support manufacturing requirements; Ÿ Higher accrued liabilities related to marketing and trade promotion programs, partially offset by lower liabilities associated with the Next Century program; Ÿ An increase in accrued income taxes reflecting the impact of proposed tax adjustments in Canada associated with business realignment charges and transfer pricing; Ÿ An increase in short-term debt primarily associated with an increase in short-term borrowings for Canada and Mexico, partially offset by the repayment of short-term debt in India; and Ÿ A decrease in the current portion of long-term debt reflecting the repayment of $250 million of 5.0% Notes in 2013.

l An increase in long-term debt reflecting the issuance of $250 million of 2.625% Notes due in May 2023.

l A decrease in other long-term liabilities primarily due to the change in the funded status of our pension plans.

l An increase in deferred income taxes primarily reflecting the tax effect of the change in the funded status of our pension plans.

27-------------------------------------------------------------------------------- Capital Structure We have two classes of stock outstanding, Common Stock and Class B Stock.

Holders of the Common Stock and the Class B Stock generally vote together without regard to class on matters submitted to stockholders, including the election of directors. Holders of the Common Stock have 1 vote per share.

Holders of the Class B Stock have 10 votes per share. Holders of the Common Stock, voting separately as a class, are entitled to elect one-sixth of our Board of Directors. With respect to dividend rights, holders of the Common Stock are entitled to cash dividends 10% higher than those declared and paid on the Class B Stock.

Hershey Trust Company, as trustee for the benefit of Milton Hershey School maintains voting control over The Hershey Company. In this section, we refer to Hershey Trust Company, in its capacity as trustee for the benefit of Milton Hershey School, as the "Milton Hershey School Trust" or the "Trust." In addition, the Milton Hershey School Trust currently has three representatives who are members of the Board of Directors of the Company, one of whom is the Chairman of the Board. These representatives, from time to time in performing their responsibilities on the Company's Board, may exercise influence with regard to the ongoing business decisions of our Board of Directors or management. The Trust has indicated that, in its role as controlling stockholder of the Company, it intends to retain its controlling interest in The Hershey Company and that the Company Board, and not the Trust Board, is solely responsible and accountable for the Company's management and performance.

Pennsylvania law requires that the Office of Attorney General be provided advance notice of any transaction that would result in the Milton Hershey School Trust no longer having voting control of the Company. The law provides specific statutory authority for the Attorney General to intercede and petition the Court having jurisdiction over the Milton Hershey School Trust to stop such a transaction if the Attorney General can prove that the transaction is unnecessary for the future economic viability of the Company and is inconsistent with investment and management considerations under fiduciary obligations. This legislation makes it more difficult for a third party to acquire a majority of our outstanding voting stock and thereby may delay or prevent a change in control of the Company.

Noncontrolling Interests in Subsidiaries In May 2007, we entered into an agreement with Godrej Beverages and Foods, Ltd., a consumer goods, confectionery and food company, to manufacture and distribute confectionery products, snacks and beverages across India. Under the agreement, we owned a 51% controlling interest in Godrej Hershey Ltd. The noncontrolling interests in Godrej Hershey Ltd. were included in the equity section of the Consolidated Balance Sheets. In September 2012, we acquired the remaining 49% interest in Godrej Hershey Ltd. for approximately $15.8 million. Since the Company had a controlling interest in Godrej Hershey Ltd., the difference between the amount paid and the carrying amount of the noncontrolling interest of $10.3 million was recorded as a reduction to additional paid-in capital and the noncontrolling interest in Godrej Hershey Ltd. was eliminated as of September 30, 2012.

We own a 51% controlling interest in Hershey do Brasil under a cooperative agreement with Pandurata Netherlands B.V. ("Bauducco"), a leading manufacturer of baked goods in Brazil whose primary brand is Bauducco. During 2013 and 2012, the Company contributed cash of approximately $3.1 million to Hershey do Brasil and Bauducco contributed approximately $2.9 million. The noncontrolling interest in Hershey do Brasil is included in the equity section of the Consolidated Balance Sheets.

The decrease in noncontrolling interests in subsidiaries from $11.6 million as of December 31, 2012 to $11.2 million as of December 31, 2013 reflected the impact of the noncontrolling interests' share of losses of these entities and currency translation adjustments, partially offset by the impact of the cash contributed by Bauducco. The share of losses pertaining to the noncontrolling interests in subsidiaries was $1.7 million for the year ended December 31, 2013, $9.6 million for the year ended December 31, 2012 and $7.4 million for the year ended December 31, 2011. This was reflected in selling, marketing and administrative expenses.

28 -------------------------------------------------------------------------------- LIQUIDITY AND CAPITAL RESOURCES Our principal source of liquidity is operating cash flows. Our net income and, consequently, our cash provided from operations are impacted by: sales volume, seasonal sales patterns, timing of new product introductions, profit margins and price changes. Sales are typically higher during the third and fourth quarters of the year due to seasonal and holiday-related sales patterns. Generally, working capital needs peak during the summer months. We meet these needs primarily by utilizing cash on hand or by issuing commercial paper.

Cash Flows from Operating Activities Our cash flows provided from (used by) operating activities were as follows: For the years ended December 31, 2013 2012 2011 In thousands of dollars Net income $ 820,470 $ 660,931 $ 628,962 Depreciation and amortization 201,033 210,037 215,763 Stock-based compensation and excess tax benefits 5,571 16,606 29,471 Deferred income taxes 7,457 13,785 33,611 Gain on sale of trademark licensing rights, net of tax - - (11,072 ) Non-cash business realignment and impairment charges - 38,144 34,660 Contributions to pension and other benefit plans (57,213 ) (44,208 ) (31,671 ) Working capital (29,391 ) (2,133 ) (116,909 ) Changes in other assets and liabilities 240,478 201,665 (194,948 ) Net cash provided from operating activities $ 1,188,405 $ 1,094,827 $ 587,867 l Over the past three years, total cash provided from operating activities was approximately $2.9 billion.

l Depreciation and amortization expenses decreased in 2013, in comparison with 2012, primarily due to lower accelerated depreciation charges related to the Next Century program, offset somewhat by higher capital additions in 2013. Depreciation and amortization expenses decreased in 2012, as compared with 2011, principally as the result of lower accelerated depreciation charges related to the Next Century program, somewhat offset by higher depreciation and amortization charges related to the Brookside acquisition. No significant accelerated depreciation expense was recorded in 2013 compared with approximately $15.3 million recorded in 2012 and $33.0 million recorded in 2011. Depreciation and amortization expenses represent non-cash items that impacted net income and are reflected in the consolidated statements of cash flows to reconcile cash flows from operating activities.

l The deferred income tax provision in 2013 was lower than in 2012 primarily as a result of a foreign deferred income tax benefit in 2013 reflecting higher deferred tax assets related to advertising and promotion reserves, partially offset by an increase in the federal deferred income tax provision associated principally with higher deferred tax liabilities related to inventories. The deferred income tax provision was lower in 2012 than in 2011 primarily as a result of the lower tax impact associated with bonus depreciation resulting from reduced capital expenditures in 2012 for the Next Century program.

Deferred income taxes represent non-cash items that impacted net income and are reflected in the consolidated statements of cash flows to reconcile cash flows from operating activities.

l During the third quarter of 2011, we recorded an $11.1 million gain, net of tax, on the sale of certain non-core trademark licensing rights.

l We contributed $133.1 million to our pension and other benefit plans over the past three years to improve the funded status of our domestic plans and to pay benefits under our non-funded pension plans and other benefit plans.

29-------------------------------------------------------------------------------- l Over the three-year period, cash provided from working capital tended to fluctuate due to the timing of sales and cash collections during December of each year and working capital management practices, including initiatives implemented to reduce working capital. The decrease in cash used by accounts receivable in 2013 was associated with timing of sales and cash collections during December 2013 compared with December 2012. Cash used by changes in inventories in 2013 primarily resulted from higher finished goods inventory levels at the end of 2013 to support anticipated sales levels of everyday items and the introduction of new products, along with the impact of the lower adjustment to LIFO. Cash provided from changes in accounts payable in 2013 were associated with the timing of payments for inventory deliveries and marketing programs. Cash provided from changes in inventories in 2012 resulted from lower inventory levels which were higher at the end of 2011 in anticipation of the transition of production under the Next Century program. Changes in cash used by inventories in 2011 was primarily associated with increases in inventory levels in anticipation of the transition of production under the Next Century program, along with higher inventories to support seasonal sales.

l During the three-year period, cash provided from or used by changes in other assets and liabilities reflected the effect of hedging transactions and the impact of business realignment initiatives, along with the related tax effects. Cash provided from changes in other assets and liabilities in 2013 compared with 2012 was primarily associated with the effect of business realignment and impairment charges and the timing of payments associated with selling and marketing programs of $92.5 million, partially offset by the impact of changes in various accrued liabilities and hedging transactions of $53.7 million. Cash provided from changes in other assets and liabilities in 2012 compared with cash used by changes in other assets and liabilities in 2011 primarily reflected the effect of hedging transactions of $304.2 million, the effect of changes in deferred and accrued income taxes of $44.1 million and business realignment initiatives of $46.8 million.

l Taxable income and related tax payments in 2013 reflected the increase in income for the year. Taxable income and related tax payments in 2012 and 2011 were reduced primarily by bonus depreciation tax deductions driven by capital expenditures associated with the Next Century program. This was offset somewhat by increases in income taxes paid associated with higher income.

Cash Flows from Investing Activities Our cash flows provided from (used by) investing activities were as follows: For the years ended December 31, 2013 2012 2011 In thousands of dollars Capital additions $ (323,551 ) $ (258,727 ) $ (323,961 ) Capitalized software additions (27,360 ) (19,239 ) (23,606 ) Proceeds from sales of property, plant and equipment 15,331 453 312 Proceeds from sale of trademark licensing rights - - 20,000 Loan to affiliate (16,000 ) (23,000 ) (7,000 ) Business acquisitions - (172,856 ) (5,750 ) Net cash used by investing activities $ (351,580 ) $ (473,369 ) $ (340,005 ) 30 -------------------------------------------------------------------------------- l Capital additions in 2013 for the construction of a new manufacturing facility in Malaysia totaled $40.0 million. Capital additions associated with our Next Century program in 2013 were $11.8 million, in 2012 were $74.7 million, and in 2011 were $179.4 million. Other capital additions were primarily related to purchases of manufacturing equipment for new products and the improvement of manufacturing efficiency.

l Capitalized software additions were primarily for ongoing enhancement of our information systems.

l We anticipate total capital expenditures, including capitalized software, of approximately $355 million to $375 million in 2014 of which $120 million to $130 million is associated with the construction of the manufacturing facility in Malaysia.

l The loans to affiliate during the three-year period were associated with financing the expansion of manufacturing capacity under our manufacturing agreement in China with Lotte Confectionery Company LTD.

l In January 2012, the Company acquired Brookside for approximately $172.9 million.

Cash Flows from Financing Activities Our cash flows provided from (used by) financing activities were as follows: For the years ended December 31, 2013 2012 2011 In thousands of dollars Net change in short-term borrowings $ 54,351 $ 77,698 $ 10,834 Long-term borrowings 250,595 4,025 249,126 Repayment of long-term debt (250,761 ) (99,381 ) (256,189 ) Proceeds from lease financing agreement - - 47,601 Cash dividends paid (393,801 ) (341,206 ) (304,083 ) Exercise of stock options and excess tax benefits 195,651 295,473 198,408 Net contributions from (payments to) noncontrolling interests 2,940 (12,851 ) - Repurchase of Common Stock (305,564 ) (510,630 ) (384,515 ) Net cash used by financing activities $ (446,589 ) $ (586,872 ) $ (438,818 ) l In addition to utilizing cash on hand, we use short-term borrowings (commercial paper and bank borrowings) to fund seasonal working capital requirements and ongoing business needs. The reduction in short-term borrowings in 2013 was associated with our international businesses. The increase in short-term borrowings in 2012 was primarily associated with the Brookside acquisition and our international businesses, partially offset by repayments of Godrej Hershey debt. Additional information on short-term borrowings is included under Borrowing Arrangements below.

l In May 2013, we issued $250 million of 2.625% Notes due in 2023 and, in November 2011, we issued $250 million of 1.5% Notes due in 2016.

The long-term borrowings in 2013 and 2011 were issued under shelf registration statements on Form S-3 described under Registration Statements below.

l In April 2013, we repaid $250 million of 5.0% Notes due in 2013 and, in August 2012, we repaid $92.5 million of 6.95% Notes due in 2012.

Additionally, in September 2011, we repaid $250.0 million of 5.3% Notes due in 2011.

l In September 2011, we entered into a sale and leasing agreement for the 19 East Chocolate Avenue manufacturing facility. Based on the leasing agreement, we are deemed to be the owner of the property for accounting purposes. We received net proceeds of $47.6 million and recorded a lease financing obligation of $50.0 million under the leasing agreement.

31-------------------------------------------------------------------------------- l Equity contributions of $2.9 million were received from the noncontrolling interests in Hershey do Brasil in 2013. In May 2007, we entered into an agreement with Godrej Beverages and Foods, Ltd., a consumer goods, confectionery and food company, to manufacture and distribute confectionery products, snacks and beverages across India.

Under the agreement, we owned a 51% controlling interest in Godrej Hershey Ltd. In September 2012, we acquired the remaining 49% interest in Godrej Hershey Ltd. for approximately $15.8 million. Payments to noncontrolling interests associated with Godrej Hershey Ltd. in 2012 were partially offset by equity contributions of $2.9 million by the noncontrolling interests in Hershey do Brasil in 2012.

l We paid cash dividends of $295.0 million on our Common Stock and $98.8 million on our Class B Stock in 2013.

l Cash used for the repurchase of Common Stock was partially offset by cash received from the exercise of stock options and the impact of excess tax benefits from stock-based compensation.

Repurchases and Issuances of Common Stock For the years ended December 31, 2013 2012 2011 In thousands Shares Dollars Shares Dollars Shares Dollars Shares repurchased under authorized programs: Open market repurchases - $ - 2,054 $ 124,931 1,903 $ 100,015 Shares repurchased to replace reissued shares 3,656 305,564 5,599 385,699 5,179 284,500 Total share repurchases 3,656 305,564 7,653 510,630 7,082 384,515 Shares issued for stock-based compensation programs (3,765 ) (156,502 ) (6,233 ) (210,924 ) (5,258 ) (177,654 ) Net change (109 ) $ 149,062 1,420 $ 299,706 1,824 $ 206,861 l We intend to repurchase shares of Common Stock in order to replace Treasury Stock shares issued for exercised stock options and other stock-based compensation. The value of shares purchased in a given period will vary based on stock options exercised over time and market conditions.

l In April 2011, our Board of Directors approved a $250 million authorization to repurchase shares of our Common Stock. As of December 31, 2013, $125.1 million remained available for repurchases of our Common Stock.

32-------------------------------------------------------------------------------- Cumulative Share Repurchases and Issuances A summary of cumulative share repurchases and issuances is as follows: Shares Dollars In thousands Shares repurchased under authorized programs: Open market repurchases 61,393 $ 2,209,377 Repurchases from the Milton Hershey School Trust 11,918 245,550 Shares retired (1,056 ) (12,820 ) Total repurchases under authorized programs 72,255 2,442,107 Privately negotiated purchases from the Milton Hershey School Trust 67,282 1,501,373 Shares repurchased to replace reissued shares 44,995 2,208,116 Shares issued for stock-based compensation programs and employee benefits (48,525 ) (1,443,866 ) Total held as Treasury Stock as of December 31, 2013 136,007 $ 4,707,730 Borrowing Arrangements We maintain debt levels we consider prudent based on our cash flow, interest coverage ratio and percentage of debt to capital. We use debt financing to lower our overall cost of capital which increases our return on stockholders' equity.

l In October 2011, we entered into a new five-year agreement establishing an unsecured revolving credit facility to borrow up to $1.1 billion, with an option to increase borrowings by an additional $400 million with the consent of the lenders.

l In November 2013, the five-year agreement entered into in October 2011 was amended. The amendment reduced the amount of borrowings available under the unsecured revolving credit facility to $1.0 billion, with an option to increase borrowings by an additional $400 million with the consent of the lenders, and extended the termination date to November 2018. As of December 31, 2013, $1.0 billion was available to borrow under the agreement and no borrowings were outstanding. The unsecured revolving credit agreement contains certain financial and other covenants, customary representations, warranties and events of default. As of December 31, 2013, we complied with all of these covenants. We may use these funds for general corporate purposes, including commercial paper backstop and business acquisitions.

l In addition to the revolving credit facility, we maintain lines of credit with domestic and international commercial banks. As of December 31, 2013, we could borrow up to approximately $290.3 million in various currencies under the lines of credit and as of December 31, 2012, we could borrow up to $176.7 million.

33-------------------------------------------------------------------------------- Registration Statements l In May 2009, we filed a shelf registration statement on Form S-3 that registered an indeterminate amount of debt securities. This registration statement was effective immediately upon filing under Securities and Exchange Commission regulations governing "well-known seasoned issuers" (the "2009 WKSI Registration Statement").

l In November 2011, we issued $250 million of 1.50% Notes due November 1, 2016 and, in December 2010, we issued $350 million of 4.125% Notes due December 1, 2020. The Notes were issued under the 2009 WKSI Registration Statement.

l The 2009 WKSI Registration Statement expired in May 2012. Accordingly, in May 2012, we filed a new registration statement on Form S-3 (the "2012 WKSI Registration Statement") to replace the 2009 WKSI Registration Statement. The registration statement filed in May 2012 registered an indeterminate amount of debt securities effective immediately.

l In May 2013, we issued $250 million of 2.625% Notes due May 1, 2023. The Notes were issued under the 2012 WKSI Registration Statement.

l Proceeds from the debt issuances and any other offerings under the the 2012 WKSI Registration Statement may be used for general corporate requirements.

These may include reducing existing borrowings, financing capital additions, and funding contributions to our pension plans, future business acquisitions and working capital requirements.

OFF-BALANCE SHEET ARRANGEMENTS, CONTRACTUAL OBLIGATIONS AND CONTINGENT LIABILITIES AND COMMITMENTS As of December 31, 2013, our contractual cash obligations by year were as follows: Payments Due by Year In thousands of dollars Contractual Obligations 2014 2015 2016 2017 2018 Thereafter Total Unconditional Purchase Obligations $ 1,381,600 $ 651,900 $ 48,300 $ 6,400 $ - $ - $ 2,088,200 Lease Obligations 36,669 11,521 10,819 7,563 2,184 1,580 70,336 Minimum Pension Plan Funding Obligations 3,559 2,746 2,712 2,782 2,556 2,433 16,788 Long-term Debt 914 251,433 501,331 878 411 1,041,089 1,796,056 Total Obligations $ 1,422,742 $ 917,600 $ 563,162 $ 17,623 $ 5,151 $ 1,045,102 $ 3,971,380 In entering into contractual obligations, we have assumed the risk that might arise from the possible inability of counterparties to meet the terms of their contracts. We mitigate this risk by performing financial assessments prior to contract execution, conducting periodic evaluations of counterparty performance and maintaining a diverse portfolio of qualified counterparties. Our risk is limited to replacing the contracts at prevailing market rates. We do not expect any significant losses resulting from counterparty defaults.

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 for each year presented above consisted of fixed price contracts for the purchase of commodities and unpriced contracts that were valued using market prices as of December 31, 2013.

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 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 34 -------------------------------------------------------------------------------- are offset by gains or losses on commodities futures contracts or other commodity derivative instruments. This applies to the extent that we have hedged the unpriced contracts as of December 31, 2013 and in future periods by entering into commodities futures contracts. 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, 2013, we satisfied these obligations by taking delivery of and making payment for the specific commodities.

Lease Obligations Lease obligations include the minimum rental commitments under non-cancelable operating leases primarily for offices, retail stores, warehouse and distribution facilities, and certain equipment.

In September 2013, we entered into an agreement to lease land for the construction of the new confectionery manufacturing plant in Johor, Malaysia.

The lease term is 99 years and obligations under the terms of the lease require a payment of approximately $24.0 million in 2014, which is included in Lease Obligations in the Contractual Obligations table.

Minimum Pension Plan Funding Obligations Our policy is to fund domestic pension liabilities in accordance with the minimum and maximum limits imposed by the Employee Retirement Income Security Act of 1974 ("ERISA"), federal income tax laws and the funding requirements of the Pension Protection Act of 2006. We fund non-domestic pension liabilities in accordance with laws and regulations applicable to those plans. Minimum pension plan funding obligations include our current assumptions and estimates of the minimum required contributions to our defined benefit pension plans through 2019. For more information, see Note 14, Pension and Other Post-Retirement Benefit Plans.

Long-term Debt Long-term debt is comprised primarily of obligations associated with the issuance of unsecured long-term debt instruments. Additional information with regard to long-term debt is contained in Note 12, Long-Term Debt.

In February 2012, we entered into agreements with the Ferrero Group ("Ferrero"), an international packaged goods company, forming an alliance to mutually benefit from various warehousing, co-packing, transportation and procurement services in North America. The initial terms of the agreements are 10 years, with three renewal periods, each with a term of 10 years. The agreements include the construction of a warehouse and distribution facility in Brantford, Ontario, Canada for the mutual use of the Company and Ferrero. Ferrero was responsible for construction of the warehouse and we were responsible for development and implementation of related information systems. Over the term of the agreements, costs associated with the warehouse construction and the information systems will essentially be shared equally.

During 2012, Ferrero made payments of approximately $36.0 million and we made payments of approximately $5.1 million for construction of the facility. During 2013, Ferrero made payments of approximately $5.6 million and we made payments of approximately $6.3 million for the construction of the facility. Because we were involved with the design of the facility and made payments during the construction period, the Company has been deemed to be the owner of the warehouse and distribution facility for accounting purposes. As a result, we recorded a total of $41.1 million in construction in progress as of December 31, 2012, including the payments made by Ferrero, the legal owner of the facility. A corresponding financing obligation of $36.0 million was recorded as of December 31, 2012, reflecting the amount paid by Ferrero. As of December 31, 2013, our property, plant and equipment, net included $53.0 million related to this facility and our long-term debt included $42.6 million related to the financing obligation.

Plant Construction Obligations In December 2013, we entered into an agreement for the construction of the new confectionery manufacturing plant in Malaysia. The total cost of construction is expected to be approximately $240 million. The plant is expected to begin operations during the second quarter of 2015.

35 -------------------------------------------------------------------------------- Asset Retirement Obligations We have a number of facilities that contain varying amounts of asbestos in certain locations within the facilities. Our asbestos management program is compliant with current applicable regulations. Current regulations require that we handle or dispose of asbestos in a special manner if such facilities undergo major renovations or are demolished. Costs associated with the removal of asbestos related to the closure of a manufacturing facility under the Next Century program were recorded primarily in 2012 and included in business realignment and impairment charges. The costs associated with the removal of asbestos from the facility were not material. With regard to other facilities, we believe we do not have sufficient information to estimate the fair value of any asset retirement obligations related to these facilities. We cannot specify the settlement date or range of potential settlement dates and, therefore, sufficient information is not available to apply an expected present value technique. We expect to maintain the facilities with repairs and maintenance activities that would not involve or require the removal of significant quantities of asbestos.

Income Tax Obligations We base our deferred income taxes, accrued income taxes and provision for income taxes upon income, statutory tax rates, the legal structure of our Company and interpretation of tax laws. We are regularly audited by federal, state and foreign tax authorities. From time to time, these audits result in assessments of additional tax. We maintain reserves for such assessments. We adjust the reserves based upon changing facts and circumstances, such as receiving audit assessments or clearing of an item for which a reserve has been established.

Assessments of additional tax require cash payments. For more information, see Income Taxes beginning on page 47 under Use of Estimates and Other Critical Accounting Policies. The amount of tax obligations is not included in the table of contractual cash obligations by year on page 34 because we are unable to reasonably predict the ultimate amount or timing of settlement of our reserves for income taxes.

Acquisition Agreement In December 2013, we entered into an agreement to acquire all of the outstanding shares of Shanghai Golden Monkey Food Joint Stock Co., Ltd. ("SGM"), a privately held confectionery company based in Shanghai, China. SGM manufactures, markets and distributes Golden Monkey branded products, including candy, chocolates, protein-based products and snack foods, in China. The purchase price of approximately $584 million will be paid in cash of approximately $498 million and the assumption of approximately $86 million of net debt. Eighty percent of the purchase price will be paid in mid-2014, with the remaining twenty percent to be paid one year from the date of the initial payment. The acquisition is subject to government and regulatory approvals and customary closing conditions.

ACCOUNTING POLICIES AND MARKET RISKS ASSOCIATED WITH DERIVATIVE INSTRUMENTS We use certain derivative instruments to manage risks. These include interest rate swaps to manage interest rate risk; foreign currency forward exchange contracts and options to manage foreign currency exchange rate risk; and commodities futures and options contracts to manage commodity market price risk exposures.

We enter into interest rate swap agreements and foreign exchange forward contracts and options for periods consistent with related underlying exposures.

These derivative instruments do not constitute positions independent of those exposures.

We enter into commodities futures and options contracts and other derivative instruments for varying periods. These commodity derivative instruments are intended to be, and are effective as, hedges of market price risks associated with anticipated raw material purchases, energy requirements and transportation costs. We do not hold or issue derivative instruments for trading purposes and are not a party to any instruments with leverage or prepayment features.

In entering into these contracts, we have assumed the risk that might arise from the possible inability of counterparties to meet the terms of their contracts.

We mitigate this risk by entering into exchange-traded contracts with collateral posting requirements and/or by performing financial assessments prior to contract execution, conducting periodic evaluations of counterparty performance and maintaining a diverse portfolio of qualified counterparties. We do not expect any significant losses from counterparty defaults.

36 -------------------------------------------------------------------------------- Accounting Policies Associated with Derivative Instruments We report the effective portion of the gain or loss on a derivative instrument designated and qualifying as a cash flow hedging instrument as a component of other comprehensive income. We reclassify the effective portion of the gain or loss on these derivative instruments into income in the same period or periods during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instrument resulting from hedge ineffectiveness, if any, must be recognized currently in earnings.

Fair value hedges pertain to derivative instruments that qualify as a hedge of exposures to changes in the fair value of a firm commitment or assets and liabilities recognized on the balance sheet. For fair value hedges, our policy is to record the gain or loss on the derivative instrument in earnings in the period of change together with the offsetting loss or gain on the hedged item.

The effect of that accounting is to reflect in earnings the extent to which the hedge is not effective in achieving offsetting changes in fair value.

As of December 31, 2013, we designated and accounted for all derivative instruments as cash flow hedges, except for out of the money options contracts on certain commodities. These included interest rate swap agreements, foreign exchange forward contracts and options, commodities futures and options contracts, and other commodity derivative instruments. Additional information regarding accounting policies associated with derivative instruments is contained in Note 6, Derivative Instruments and Hedging Activities.

The information below summarizes our market risks associated with long-term debt and derivative instruments outstanding as of December 31, 2013. Note 1, Note 6 and Note 7 to the Consolidated Financial Statements provide additional information.

Long-term Debt The table below presents the principal cash flows and related interest rates by maturity date for long-term debt, including the current portion, as of December 31, 2013. We determined the fair value of long-term debt based upon quoted market prices for the same or similar debt issues.

Maturity Date 2014 2015 2016 2017 2018 Thereafter Total Fair Value In thousands of dollars except for rates Long-term Debt $914 $251,433 $501,331 $878 $411 $1,041,089 $1,796,056 $1,947,023 Interest Rate 7.7 % 4.9 % 3.5 % 6.9 % 5.1 % 5.1 % 4.6 % We calculated the interest rates on variable rate obligations using the rates in effect as of December 31, 2013.

Interest Rate Swaps In order to manage interest rate exposure, the Company, from time to time, enters into interest rate swap agreements. In April 2012, the Company entered into forward starting interest rate swap agreements to hedge interest rate exposure related to the anticipated $250 million of term financing expected to be executed during 2013 to repay $250 million of 5.0% Notes maturing in April 2013. The weighted-average fixed rate on these forward starting swap agreements was 2.4%. In May 2012, the Company entered into forward starting interest rate swap agreements to hedge interest rate exposure related to the anticipated $250 million of term financing expected to be executed during 2015 to repay $250 million of 4.85% Notes maturing in August 2015. The weighted-average fixed rate on these forward starting swap agreements is 2.7%.

The forward starting swap agreements entered into in April 2012 matured in March 2013, resulting in a realized loss of approximately $9.5 million. Also, in March 2013, we entered into forward starting swap agreements to continue to hedge interest rate exposure related to the term financing expected to be executed in 2013. The weighted-average fixed rate on the forward starting swap agreements was 2.1%.

In May 2013, we terminated the forward starting swap agreements which were entered into in March 2013 to 37 -------------------------------------------------------------------------------- hedge the anticipated execution of term financing. The swap agreements were terminated upon the issuance of the 2.625% Notes due May 1, 2023, resulting in cash payments of $0.2 million in May 2013. Losses on these swap agreements are included in accumulated other comprehensive loss and are being amortized as an increase to interest expense over the term of the Notes.

The fair value of interest rate swap agreements was an asset of $22.7 million as of December 31, 2013. Our risk related to interest rate swap agreements is limited to the cost of replacing such agreements at prevailing market rates. As of December 31, 2013, the potential net loss associated with interest rate swap agreements resulting from a hypothetical near-term adverse change in interest rates of ten percent was approximately $8.0 million.

In March 2009, we entered into forward starting interest rate swap agreements to hedge interest rate exposure related to the anticipated $250 million of term financing expected to be executed during 2011. In September 2011, the forward starting interest rate swap agreements which were entered into in March 2009 matured, resulting in cash payments by the Company of approximately $26.8 million. Also in September 2011, we entered into forward starting swap agreements to continue to hedge interest rate exposure related to the term financing. These swap agreements were terminated upon the issuance of the 1.5% Notes due November 1, 2016, resulting in cash payments by the Company of $2.3 million in November 2011. The losses on these swap agreements are being amortized as an increase to interest expense over the term of the Notes.

For more information see Note 6, Derivative Instruments and Hedging Activities.

Foreign Exchange Forward Contracts and Options We enter into foreign currency forward exchange contracts and options to hedge transactions denominated in foreign currencies. These transactions are primarily purchase commitments or forecasted purchases associated with the construction of a manufacturing facility, equipment, raw materials and finished goods denominated in foreign currencies. We also may hedge payment of forecasted intercompany transactions with our subsidiaries outside of the United States.

These contracts reduce currency risk from exchange rate movements. We generally hedge foreign currency price risks for periods from 3 to 24 months.

Foreign exchange forward contracts and options are effective as hedges of identifiable foreign currency commitments or forecasted transactions. We designate our foreign exchange forward contracts as cash flow hedging derivatives. The fair value of these contracts is classified as either an asset or liability on the Consolidated Balance Sheets. We record gains and losses on these contracts as a component of other comprehensive income and reclassify them into earnings in the same period during which the hedged transaction affects earnings.

A summary of foreign exchange forward contracts and the corresponding amounts at contracted forward rates is as follows: December 31, 2013 2012 Contract Primary Contract Primary Amount Currencies Amount Currencies In millions of dollars Foreign exchange forward Malaysian ringgits contracts to purchase Swiss francs Euros foreign currencies $ 158.4 Euros $ 17.1 British pound sterling Foreign exchange forward contracts to sell foreign currencies $ 2.8 Japanese yen $ 57.8 Canadian dollars Foreign exchange forward contracts for the purchase of Malaysian ringgits and certain other currencies are associated with the construction of the manufacturing facility in Malaysia.

The fair value of foreign exchange forward contracts is the amount of the difference between the contracted and current market foreign currency exchange rates at the end of the period. We estimate the fair value of foreign exchange forward 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.

38 -------------------------------------------------------------------------------- A summary of the fair value and market risk associated with foreign exchange forward contracts is as follows: December 31, 2013 2012 In millions of dollars Fair value of foreign exchange forward contracts, net - asset $ 3.2 $ 1.2 Potential net loss associated with foreign exchange forward contracts resulting from a hypothetical near-term adverse change in market rates of ten percent $ 12.9 $ 7.9 Our risk related to foreign exchange forward contracts is limited to the cost of replacing the contracts at prevailing market rates.

Commodities-Price Risk Management and Futures Contracts Our most significant raw material requirements include cocoa products, sugar, dairy products, peanuts and almonds. For more information on our major raw material requirements, see Raw Materials on page 5. The cost of cocoa products and prices for related futures contracts and costs for certain other raw materials historically have been subject to wide fluctuations attributable to a variety of factors. These factors include: l Commodity market fluctuations; l Foreign currency exchange rates; l Imbalances between supply and demand; l The effect of weather on crop yield; l Speculative influences; l Trade agreements among producing and consuming nations; l Political unrest in producing countries; and l Changes in governmental agricultural programs and energy policies.

We use futures and options contracts and other commodity derivative instruments in combination with forward purchasing of cocoa products, sugar, corn sweeteners, natural gas and certain dairy products primarily to reduce the risk of future price increases and provide visibility to future costs. Currently, active futures contracts are not available for use in pricing our other major raw material requirements, primarily peanuts and almonds. We attempt to minimize the effect of future price fluctuations related to the purchase of raw materials by using forward purchasing to cover future manufacturing requirements generally for 3 to 24 months. However, the dairy futures markets are not as developed as many of the other commodities futures markets and, therefore, it is difficult to hedge our costs for dairy products by entering into futures contracts or other derivative instruments to extend coverage for long periods of time. We use diesel swap futures contracts to minimize price fluctuations associated with our transportation costs. Our commodity procurement practices are intended to reduce the risk of future price increases and provide visibility to future costs, but also may potentially limit our ability to benefit from possible price decreases.

Our costs for major raw materials will not necessarily reflect market price fluctuations primarily because of our forward purchasing and hedging practices.

During 2013, the average cocoa futures contract prices decreased compared with 2012 and traded in a range between $0.97 and $1.26 per pound, based on the IntercontinentalExchange futures contract. Cocoa production was moderately lower in 2013 and global demand was slightly higher which produced a small deficit in cocoa supplies over the past year. Despite the small reduction in global cocoa inventories, the global stocks to use ratio remains above 40% and is considered normal.

39 -------------------------------------------------------------------------------- The table below shows annual average cocoa futures prices, and the highest and lowest monthly averages for each of the calendars years indicated. The prices are the monthly averages of the quotations at noon of the three active futures trading contracts closest to maturity on the IntercontinentalExchange.

Cocoa Futures Contract Prices (dollars per pound) 2013 2012 2011 2010 2009 Annual Average $ 1.09 $ 1.07 $ 1.34 $ 1.36 $ 1.28 High 1.26 1.17 1.55 1.53 1.52 Low 0.97 1.00 0.99 1.26 1.10 Source: International Cocoa Organization Quarterly Bulletin of Cocoa Statistics Our costs for cocoa products will not necessarily reflect market price fluctuations because of our forward purchasing and hedging practices, premiums and discounts reflective of varying delivery times, and supply and demand for our specific varieties and grades of cocoa liquor, cocoa butter and cocoa powder. As a result, the average futures contract prices are not necessarily indicative of our average costs.

The Food, Conservation and Energy Act of 2008, impacted the prices of sugar, corn, peanuts and dairy products in 2013 because it set price support levels for these commodities.

During 2013, prices for fluid dairy milk ranged from a low of $0.18 to a high of $0.22 per pound, on a class II fluid milk basis. Drought in New Zealand in early 2013 created a global shortfall in dairy production.

The price of sugar is subject to price supports under U.S. farm legislation.

Such legislation establishes import quotas and duties to support the price of sugar. As a result, sugar prices paid by users in the U.S. are currently higher than prices on the world sugar market. Ideal weather in the North American sugar-growing regions caused prices to trade lower during 2013. As a result, refined sugar prices have decreased compared to 2012, trading lower in a range from $0.36 to $0.30 per pound.

Peanut prices in the U.S. began the year around $0.46 per pound and increased during the year to $0.55 per pound. Price increases were driven by a reduced crop of 1.95 million tons, down 42% from 2012, which was a record crop year. In addition, the prices were buoyed by the entrance of the Chinese into the U.S.

peanut market in the first quarter of 2013. Almond prices began the year at $2.95 per pound and increased to $3.39 per pound during the year driven by a decrease in almond production of approximately 2% versus 2012.

We make or receive cash transfers to or from commodity futures brokers on a daily basis reflecting changes in the value of futures contracts on the IntercontinentalExchange or various other exchanges. These changes in value represent unrealized gains and losses. We report these cash transfers as a component of other comprehensive income. The cash transfers offset higher or lower cash requirements for the payment of future invoice prices of raw materials, energy requirements and transportation costs.

40 -------------------------------------------------------------------------------- Commodity Position Sensitivity Analysis The following sensitivity analysis reflects our market risk to a hypothetical adverse market price movement of 10%, based on our net commodity positions at four dates spaced equally throughout the year. Our net commodity positions consist of the amount of futures contracts we hold over or under the amount of futures contracts we need to price unpriced physical forward contracts for the same commodities. Inventories, fixed-price forward contracts and anticipated purchases not yet under contract were not included in the sensitivity analysis calculations. We define a loss, for purposes of determining market risk, as the potential decrease in fair value or the opportunity cost resulting from the hypothetical adverse price movement. The fair values of net commodity positions reflect quoted market prices or estimated future prices, including estimated carrying costs corresponding with the future delivery period.

For the years ended December 31, 2013 2012 Market Risk Market Risk Fair (Hypothetical Fair (Hypothetical Value 10% Change) Value 10% Change) In millions of dollars Highest long position $ (29.3 ) $ 2.9 $ 35.8 $ 3.6 Lowest long position (249.4 ) 24.9 (167.2 ) 16.7 Average position (long) (105.6 ) 10.6 (44.0 ) 4.4 Decreases or increases in fair values from 2012 to 2013 primarily reflected changes in net commodity positions. The negative positions primarily resulted as unpriced physical forward contract futures requirements exceeded the amount of commodities futures that we held at certain points in time during the years.

USE OF ESTIMATES AND OTHER CRITICAL ACCOUNTING POLICIES Our consolidated financial statements are prepared in accordance with GAAP. In various instances, GAAP requires management to make estimates, judgments and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We believe that our most critical accounting policies and estimates relate to the following: l Accrued Liabilities l Pension and Other Post-Retirement Benefits Plans l Goodwill and Other Intangible Assets l Commodities Futures and Options Contracts l Income Taxes Management has discussed the development, selection and disclosure of critical accounting policies and estimates with the Audit Committee of our Board of Directors. While we base estimates and assumptions on our knowledge of current events and actions we may undertake in the future, actual results may ultimately differ from these estimates and assumptions. We discuss our significant accounting policies in Note 1, Summary of Significant Accounting Policies.

Accrued Liabilities Accrued liabilities requiring the most difficult or subjective judgments include liabilities associated with marketing promotion programs and potentially unsaleable products.

Liabilities associated with marketing promotion programs We recognize the costs of marketing promotion programs as a reduction to net sales along with a corresponding accrued liability based on estimates at the time of revenue recognition.

41 --------------------------------------------------------------------------------Information on our promotional costs and assumptions is as follows: For the years ended December 31, 2013 2012 2011 In millions of dollars Promotional costs $ 995.7 $ 949.3 $ 945.9 l We determine the amount of the accrued liability by: Ÿ Analysis of programs offered; Ÿ Historical trends; Ÿ Expectations regarding customer and consumer participation; Ÿ Sales and payment trends; and Ÿ Experience with payment patterns associated with similar, previously offered programs.

l The estimated costs of these programs are reasonably likely to change in the future 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.

l Reasonably possible near-term changes in the most material assumptions regarding the cost of promotional programs could result in changes within the following range: Ÿ A reduction in costs of approximately $9.9 million; and Ÿ An increase in costs of approximately $2.5 million.

l Changes in these assumptions would affect net sales and income before income taxes.

l Over the three-year period ended December 31, 2013, actual promotion costs have not deviated from the estimated amounts by more than approximately 3%.

l Reasonably possible near-term changes in estimates related to the cost of promotional programs would not have a material impact on our liquidity or capital resources.

Liabilities associated with potentially unsaleable products l At the time of sale, we estimate a cost for the possibility that products will become aged or unsaleable in the future. The estimated cost is included as a reduction to net sales.

l A related accrued liability is determined using statistical analysis that incorporates historical sales trends, seasonal timing and sales patterns, and product movement at retail.

l Estimates for costs associated with unsaleable products may change as a result of inventory levels in the distribution channel, current economic trends, changes in consumer demand, the introduction of new products and changes in trends of seasonal sales in response to promotional programs.

l Over the three-year period ended December 31, 2013, costs associated with aged or unsaleable products have amounted to approximately 2% of gross sales.

l Reasonably possible near-term changes in the most material assumptions regarding the estimates of such costs would have increased or decreased net sales and income before income taxes in a range from $0.5 million to $1.0 million.

l Over the three-year period ended December 31, 2013, actual costs have not deviated from our estimates by more than approximately 4%.

l Reasonably possible near-term changes in the estimates of costs associated with unsaleable products would not have a material impact on our liquidity or capital resources.

Pension and Other Post-Retirement Benefits Plans Overview 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 primary 42 -------------------------------------------------------------------------------- post-retirement benefit plans. The health care plan is contributory, with participants' contributions adjusted annually, and the life insurance plan is non-contributory.

We fund domestic pension liabilities in accordance with the limits imposed by 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 broadly diversify our pension plan assets, consisting primarily of domestic and international common stocks and fixed income securities. Short-term and long-term liabilities associated with benefit plans are primarily determined based on actuarial calculations. These calculations consider payroll and employee data, including age and years of service, along with actuarial assumptions at the date of the financial statements. We take into consideration long-term projections with regard to economic conditions, including interest rates, return on assets and the rate of increase in compensation levels. With regard to liabilities associated with post-retirement benefit plans that provide health care and life insurance, we take into consideration the long-term annual rate of increase in the per capita cost of the covered benefits. We review the discount rate assumptions and revise them annually. The expected long-term rate of return on assets assumption ("asset return assumption") for funded plans is of a longer duration and revised only when long-term asset return projections demonstrate that need.

Pension Plans Our pension plan costs and related assumptions were as follows: For the years ended December 31 2013 2012 2011 In millions of dollars Service cost and amortization of prior service cost $ 31.8 $ 31.6 $ 31.1 Interest cost, expected return on plan assets and amortization of net loss 11.2 16.7 2.8 Administrative expenses 0.7 0.5 0.6 Net periodic pension benefit cost $ 43.7 $ 48.8 $ 34.5 Assumptions: Average discount rate assumptions-net periodic benefit cost calculation 3.7 % 4.5 % 5.2 % Average discount rate assumptions-benefit obligation calculation 4.5 % 3.7 % 4.5 % Asset return assumptions 7.75 % 8.0 % 8.0 % Net Periodic Pension Benefit Costs We believe that the service cost and amortization of prior service cost components of net periodic pension benefit cost reflect the ongoing operating cost of our pension plans, particularly since our most significant plans were closed to most new entrants after 2007.

The decrease in net periodic pension benefit cost from 2012 to 2013 was primarily due to the lower interest cost in the current year. Our service cost and prior service cost amortization is expected to be approximately $4.8 million lower in 2014. Interest cost, expected return on plan assets and amortization of net loss is expected to decrease in 2014 by $13.8 million due primarily to the 2013 actual return on plan assets, which exceeded the expected long-term return on plan assets assumption, and the higher discount rate. For more information, see Note 14, Pension and Other Post-Retirement Benefit Plans.

Actuarial gains and losses may arise when actual experience differs from assumed experience or when we revise the actuarial assumptions used to value the plans' obligations. We only amortize the unrecognized net actuarial gains and losses in excess of 10% of a respective plan's projected benefit obligation, or the fair market value of assets, if greater. The estimated recognized net actuarial loss component of net periodic pension benefit expense for 2014 is $23.0 million. The 2013 recognized net actuarial loss component of net periodic pension benefit expense was $40.4 million. Projections beyond 2013 are dependent on a variety of factors such as changes to the discount rate and the actual return on pension plan assets.

43 -------------------------------------------------------------------------------- Average Discount Rate Assumption-Net Periodic Benefit Cost The discount rate represents the estimated rate at which we could effectively settle our pension benefit obligations. In order to estimate this rate for 2011 to 2013, a single effective rate of discount was determined by our actuaries after discounting the pension obligation's cash flows using the spot rate of matching duration from the Towers Watson RATE:Link 40/90 discount curve.

The use of a different discount rate assumption can significantly affect net periodic benefit cost: l A one-percentage point decrease in the discount rate assumption would have increased 2013 net periodic pension benefit expense by $5.7 million.

l A one-percentage point increase in the discount rate assumption would have decreased 2013 net periodic pension benefit expense by $5.0 million.

Average Discount Rate Assumption-Benefit Obligations The discount rate assumption to be used in calculating the amount of benefit obligations is determined in the same manner as the average discount rate assumption used to calculate net periodic benefit cost as described above. We increased our 2013 discount rate assumption due to the increasing interest rate environment consistent with the duration of our pension plan liabilities.

The use of a different discount rate assumption can significantly affect the amount of benefit obligations: l A one-percentage point decrease in the discount rate assumption would have increased the December 31, 2013 pension benefits obligations by $108.2 million.

l A one-percentage point increase in the discount rate assumption would have decreased the December 31, 2013 pension benefits obligations by $92.6 million.

Asset Return Assumptions For 2014, we reduced the expected return on plan assets assumption to 7.0% from the 7.75% assumption used during 2013, reflecting lower expected future returns on plan assets resulting from a reduction of the pension asset allocation to equity securities. We based the expected return on plan assets component of net periodic pension benefit cost on the fair market value of pension plan assets.

To determine the expected return on plan assets, we consider the current asset allocations, as well as historical and expected returns on the categories of plan assets. The historical geometric average return over the 26 years prior to December 31, 2013 was approximately 8.7%. The actual return on assets was as follows: For the years ended December 31, 2013 2012 2011 Actual return on assets 16.7 % 13.2 % 0.8 % The use of a different asset return assumption can significantly affect net periodic benefit cost: l A one-percentage point decrease in the asset return assumption would have increased 2013 net periodic pension benefit expense by $9.5 million.

l A one-percentage point increase in the asset return assumption would have decreased 2013 net periodic pension benefit expense by $9.4 million.

Our investment policies specify ranges of allocation percentages for each asset class. The ranges for the domestic pension plans were as follows: Asset Class Allocation Range Equity securities 55% - 75% Debt securities 25% - 45% Cash and certain other investments 0% - 5% 44 -------------------------------------------------------------------------------- As of December 31, 2013, actual allocations were within the specified ranges. We expect the level of volatility in pension plan asset returns to be in line with the overall volatility of the markets and weightings within the asset classes.

As of December 31, 2013 and 2012, the benefit plan fixed income assets were invested primarily in conventional instruments benchmarked to the Barclays Capital U.S. Aggregate Bond Index or the U.S. Long Government/Credit Index.

For 2013 and 2012, minimum funding requirements for the plans were not material.

However, we made contributions of $32.3 million in 2013 and $21.4 million in 2012, including $25.0 million in 2013 to improve the funded status of our domestic plans in addition to contributions to pay benefits under our non-qualified pension plans in both years. These contributions were fully tax deductible. A one-percentage point change in the funding discount rate would not have changed the 2013 minimum funding requirements significantly for the domestic plans. For 2014, minimum funding requirements for our pension plans are approximately $3.6 million and we expect to make additional contributions of approximately $22.0 million to improve the funded status of our domestic plans.

Post-Retirement Benefit Plans Other post-retirement benefit plan costs and related assumptions were as follows: For the years ended December 31, 2013 2012 2011 In millions of dollars Net periodic other post-retirement benefit cost $ 12.5 $ 15.1 $ 16.2 Assumptions: Average discount rate assumption 3.7 % 4.5 % 5.2 % The use of a different discount rate assumption can significantly affect net periodic other post-retirement benefit cost: l A one-percentage point decrease in the discount rate assumption would have decreased 2013 net periodic other post-retirement benefit cost by $1.4 million.

l A one-percentage point increase in the discount rate assumption would have increased 2013 net periodic other post-retirement benefit cost by $1.2 million.

For the post-retirement benefit plans, a decrease in the discount rate assumption would result in a decrease in benefit cost because of the lower interest cost which would more than offset the impact of the lower discount rate assumption on the post-retirement benefit obligation.

Other post-retirement benefit obligations and assumptions were as follows: December 31, 2013 2012 In millions of dollars Other post-retirement benefit obligation $ 270.9 $ 318.4 Assumptions: Benefit obligations discount rate assumption 4.5 % 3.7 % l A one-percentage point decrease in the discount rate assumption would have increased the December 31, 2013 other post-retirement benefits obligations by $28.6 million.

l A one-percentage point increase in the discount rate assumption would have decreased the December 31, 2013 other post-retirement benefits obligations by $23.6 million.

45-------------------------------------------------------------------------------- Goodwill and Other Intangible Assets We classify intangible assets into 3 categories: (1) intangible assets with finite lives subject to amortization; (2) intangible assets with indefinite lives not subject to amortization; and (3) goodwill.

Our intangible assets with finite lives consist primarily of certain trademarks, customer-related intangible assets and patents obtained through business acquisitions. We are amortizing trademarks with finite lives over their estimated useful lives of approximately 25 years. We are amortizing customer-related intangible assets over their estimated useful lives of approximately 15 years. We are amortizing patents over their remaining legal lives of approximately 5 years. We conduct impairment tests when events or changes in circumstances indicate that the carrying value of these assets may not be recoverable. Undiscounted cash flow analyses are used to determine if an impairment exists. If an impairment is determined to exist, the loss is calculated based on the estimated fair value of the assets.

Our intangible assets with indefinite lives consist of trademarks obtained through business acquisitions. We do not amortize existing trademarks whose useful lives were determined to be indefinite. We conduct impairment tests for other intangible assets with indefinite lives and goodwill at the beginning of the fourth quarter of each year, or when circumstances arise that indicate a possible impairment might exist.

We evaluate our trademarks with indefinite lives for impairment by comparing their carrying amount to their estimated fair value. The fair value of trademarks is calculated using a "relief from royalty payments" methodology.

This approach involves a two-step process. In the first step, we estimate reasonable royalty rates for each trademark. In the second step, we apply these royalty rates to a net sales stream and discount the resulting cash flows to determine fair value. This fair value is then compared with the carrying value of each trademark. If the estimated fair value is less than the carrying amount, we record an impairment charge to reduce the asset to its estimated fair value.

The estimates of future cash flows are generally based on past performance of the brands and reflect net sales projections and assumptions for the brands that we use in current operating plans. We also consider assumptions that market participants may use. Such assumptions are subject to change due to changing economic and competitive conditions.

We use a two-step process to evaluate goodwill for impairment. In the first step, we compare the fair value of each reporting unit with the carrying amount of the reporting unit, including goodwill. We estimate the fair value of the reporting unit based on discounted future cash flows. If the estimated fair value of the reporting unit is less than the carrying amount of the reporting unit, we complete a second step to determine the amount of the goodwill impairment that we should record. In the second step, we determine an implied fair value of the reporting unit's goodwill by allocating the reporting unit's fair value to all of its assets and liabilities other than goodwill (including any unrecognized intangible assets). We compare the resulting implied fair value of the goodwill to the carrying amount and record an impairment charge for the difference.

The assumptions we use to estimate fair value are based on the past performance of each reporting unit and reflect the projections and assumptions that we use in current operating plans. We also adjust the assumptions, if necessary, to estimates that we believe market participants would use. Such assumptions are subject to change due to changing economic and competitive conditions.

Based on our annual impairment evaluations, we determined that no goodwill or other intangible assets were impaired as of December 31, 2013 and December 31, 2012. The assumptions used to estimate fair value were based on the past performance of the reporting unit as well as the projections incorporated in our current operating plans. Significant assumptions and estimates included in our current operating plans were associated with sales growth, profitability, and related cash flows, along with cash flows associated with taxes and capital spending. The discount rate used to estimate fair value was risk adjusted in consideration of the economic conditions of the reporting unit. We also considered assumptions that market participants may use. By their nature, these projections and assumptions are uncertain. Potential events and circumstances that could have an adverse effect on our assumptions include the unavailability of raw or packaging materials or significant cost increases, pricing constraints and possible disruptions to our supply chain.

46 -------------------------------------------------------------------------------- Commodities Futures and Options Contracts We use futures and options contracts and other commodity derivative instruments in combination with forward purchasing of cocoa products and other commodities primarily to reduce the effect of future price increases and provide visibility to future costs. Additional information with regard to accounting policies associated with commodities futures and options contracts and other derivative instruments is contained in Note 6, Derivative Instruments and Hedging Activities.

Our gains (losses) on cash flow hedging derivatives were as follows: For the years ended December 31, 2013 2012 2011 In millions of dollars Net after-tax gains (losses) on cash flow hedging derivatives $ 72.3 $ (0.9 ) $ (107.7 ) Reclassification adjustments from accumulated other comprehensive loss to income 5.8 60.0 (12.5 ) Hedge ineffectiveness gains (losses) recognized in income, before tax 3.2 0.7 (2.0 ) l We reflected reclassification adjustments related to gains or losses on commodities futures and options contracts and other commodity derivative instruments in cost of sales.

l No gains or losses on commodities futures and options contracts resulted because we discontinued a hedge due to the probability that the forecasted hedged transaction would not occur.

l We recognized no components of gains or losses on commodities futures and options contracts in income due to excluding such components from the hedge effectiveness assessment.

The amount of net gains on cash flow hedging derivatives, including interest rate swap agreements, foreign exchange forward contracts and options, commodities futures and options contracts and other commodity derivative instruments, expected to be reclassified into earnings in the next 12 months was approximately $22.5 million after tax as of December 31, 2013. This amount was primarily associated with commodities futures contracts.

Income Taxes We base our deferred income taxes, accrued income taxes and provision for income taxes upon income, statutory tax rates, the legal structure of our Company and interpretation of tax laws. We are regularly audited by federal, state and foreign tax authorities. From time to time, these audits result in assessments of additional tax. We maintain reserves for such assessments. We adjust the reserves based upon changing facts and circumstances, such as receiving audit assessments or clearing of an item for which a reserve has been established.

Assessments of additional tax require cash payments.

We apply a more-likely-than-not threshold to the recognition and derecognition of uncertain tax positions. Accordingly, we recognize the amount of tax benefit that has a greater than 50% likelihood of being ultimately realized upon settlement. We believe it is more likely than not that the results of future operations will generate sufficient taxable income to realize the deferred tax assets. Valuation allowances are recorded for deferred income taxes when it is more likely than not that a tax benefit will not be realized. Valuation allowances are primarily associated with temporary differences related to advertising and promotions, and tax loss carryforwards from operations in various foreign tax jurisdictions. Future changes in judgment and estimates related to the expected ultimate resolution of uncertain tax positions will affect income in the quarter of such change.

We file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. A number of years may elapse before an uncertain tax position, for which we have unrecognized tax benefits, is audited and finally resolved. While it is often difficult to predict the final outcome or the timing of resolution of any particular uncertain tax position, we believe that our unrecognized tax benefits reflect the most likely outcome. Accrued interest and penalties related to unrecognized tax benefits are included in income tax expense. We adjust these unrecognized tax benefits, as well as the related interest, in light of changing facts and circumstances. Settlement of any particular 47 -------------------------------------------------------------------------------- position could require the use of cash. Favorable resolution would be recognized as a reduction to our effective income tax rate in the period of resolution.

The number of years with open tax audits varies depending on the tax jurisdiction. Our major taxing jurisdictions include the United States (federal and state), Canada and Mexico. U.S., Canadian and Mexican federal audit issues typically involve the timing of deductions and transfer pricing adjustments.

During the first quarter of 2013, the U.S. Internal Revenue Service ("IRS") commenced its audit of our U.S. income tax returns for 2009 through 2011, and we expect the audit to conclude in 2014. Tax examinations by various state taxing authorities could be conducted for years beginning in 2010. We are no longer subject to Canadian federal income tax examinations by the Canada Revenue Agency ("CRA") for years before 2007. During the third quarter of 2013, the CRA notified us that it will be conducting an audit of our Canadian income tax returns for 2010 through 2012, and we expect the audit to commence in the first quarter of 2014. During the fourth quarter of 2013, the CRA concluded its audit for 2007 through 2009 and issued a letter to us indicating proposed adjustments primarily associated with business realignment charges and transfer pricing. As of December 31, 2013, we recorded accrued income taxes of approximately $70.6 million related to the proposed adjustments. We provided notice to the U.S. Competent Authority and the CRA provided notice to the Canada Competent Authority of the likely need for their assistance to resolve the proposed adjustments. Accordingly, as of December 31, 2013, we recorded a non-current receivable of approximately $63.9 million associated with the anticipated resolution of the proposed adjustments by the Competent Authority of each country. We are no longer subject to Mexican federal income tax examinations by the Servicio de Administracion Tributaria ("SAT") for years before 2008. We work with the IRS, the CRA, and the SAT to resolve proposed audit adjustments and to minimize the amount of adjustments. We do not anticipate that any potential tax adjustments will have a significant impact on our financial position or results of operations.

We reasonably expect reductions in the liability for unrecognized tax benefits of approximately $81.2 million within the next 12 months due to proposed adjustments and settlements associated with tax audits and the expiration of statutes of limitations.

OUTLOOK The outlook section contains a number of forward-looking statements, all of which are based on current expectations. Because actual results may differ materially from those contained in the forward-looking statements, investors should not place undue reliance on forward-looking statements, and we undertake no obligation to publicly update or revise any forward-looking statements to reflect actual results, changes in expectations or events or circumstances after the date this report. Refer to Risk Factors beginning on page 9 for information concerning the key risks to achieving our future performance goals.

Our results for 2013 were strong, with solid financial and marketplace results.

We have a solid position in the marketplace and we are responding to retail customer needs to drive overall category growth.

We have consumer-driven initiatives planned for 2014 that we believe will continue to drive net sales growth across our businesses. We expect net sales growth of 5% to 7%, including the impact of foreign currency exchange rates. Net sales increases are expected to be driven by core brand volume growth and innovation in the U.S. and international markets, complemented by in-store merchandising, programming and advertising. Net sales gains from innovation include the introduction of Hershey's Spreads, Lancaster Soft Crèmes Caramels and York Minis, in addition to the introduction of a Brookside instant consumable pack-type, Brookside Crunchy Clusters, Hershey's Kisses Deluxe in China and the continued rollout of our five global brands in key international markets. We expect innovation to contribute meaningfully to our net sales growth in 2014. Our international business is on track, and we expect net sales outside the U.S. and Canada to increase toward the top end of our 15% to 20% target, on a percentage basis versus 2013.

We have good visibility into our cost structure, except for costs of dairy products which cannot be effectively hedged. We expect gross margin to increase in 2014, driven by productivity and cost savings initiatives, along with a favorable sales mix. We do not expect input cost deflation in 2014. Therefore, we expect 2014 gross margin on a reported basis to increase about 60 basis points, with expansion of adjusted gross margin expected to be around 50 basis points. As a result, we anticipate that earnings per share-diluted in accordance with GAAP will increase 11% to 14% in 2014 compared with 2013. Growth in adjusted earnings per share-diluted is expected to be in the 9% to 11% range, as reflected in the reconciliation of reported to adjusted earnings per share-diluted projections provided below.

48 -------------------------------------------------------------------------------- Advertising and related consumer marketing is expected to increase mid to high single-digits, on a percentage basis versus last year. Selling, marketing and administrative expenses, excluding advertising and related consumer marketing, are expected to increase at a more modest rate in 2014 as we build on the investments in go-to-market capabilities established over the last few years, as well as consumer knowledge-based projects related to our Insights Driven Performance initiatives.

NOTE: In the Outlook above, we have provided income measures excluding certain items, in addition to net income determined in accordance with GAAP. These non-GAAP financial measures are used in evaluating results of operations for internal purposes. These non-GAAP measures are not intended to replace the presentation of financial results in accordance with GAAP. Rather, the Company believes exclusion of such items provides additional information to investors to facilitate the comparison of past and present operations.

In 2013, the Company recorded GAAP charges of $19.0 million, or $0.05 per share-diluted, attributable to the Next Century program. Non-service related pension expense of $10.9 million, or $0.03 per share-diluted, was recorded in 2013. In 2013, the Company recorded pre-tax acquisition costs of $4.1 million, or $0.03 per share-diluted, primarily related to the agreement to acquire all of the outstanding shares of SGM.

In 2014, the Company expects to record GAAP charges of about $7.0 million to $9.0 million, or $0.02 to $0.03 per share-diluted. Charges associated with the Next Century program are expected to be $0.01 to $0.02 per share-diluted.

Acquisition closing, integration and transaction charges related to SGM are expected to be $0.02 to $0.03 per share-diluted. Non-service related pension income is expected to be approximately $0.01 to $0.02 per share-diluted, in 2014.

Below is a reconciliation of 2012 and 2013 and projected 2014 earnings per share-diluted in accordance with GAAP to non-GAAP 2012 and 2013 adjusted earnings per share-diluted and projected adjusted earnings per share-diluted for 2014: 2012 2013 2014 (Projected) Reported EPS-Diluted $2.89 $3.61 $4.02 - $4.11 Acquisition closing, integration and transaction charges 0.04 0.03 0.02 - 0.03 Total Business Realignment and Impairment Charges 0.25 0.05 0.01 - 0.02 Non-service related pension expense (income) 0.06 0.03 (0.01) - (0.02) Adjusted EPS-Diluted $3.24 $3.72 $4.05 - $4.13

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