BUSINESS REALIGNMENT ACTIVITIES

2016 Operational Optimization Program

In the second quarter of 2016, we commenced a program (the “Operational Optimization Program”) to optimize our production and supply chain network, which will result in select facility consolidations. The program encompasses the continued transition of our China chocolate and SGM operations into a united Golden Hershey platform, including the integration of the China sales force, as well as the consolidation of production within certain facilities in China and North America.

We expect to incur pre-tax costs of approximately $120 million over three years, including approximately $65 million in non-cash asset-related incremental depreciation costs, with the remainder relating to severance and employee benefit costs, costs to consolidate and relocate production, and third-party costs incurred to execute these activities. The program is expected to drive annual savings of approximately $45 million by 2018.

2015 Productivity Initiative

In mid-2015, we initiated a productivity initiative (the “2015 Productivity Initiative”) intended to move decision making closer to the customer and the consumer, to enable a more enterprise-wide approach to innovation, to more swiftly advance our knowledge agenda, and to provide for a more efficient cost structure, while ensuring that we effectively allocate resources to future growth areas. Overall, the 2015 Productivity Initiative was undertaken to simplify the organizational structure to enhance the Company's ability to rapidly anticipate and respond to the changing demands of the global consumer.

The 2015 Productivity Initiative was executed throughout the third and fourth quarters of 2015, resulting in a net reduction of approximately 300 positions, with the majority of the departures taking place by the end of 2015. For the three and six months ended July 3, 2016, we incurred charges totaling $14,826 and $16,284, respectively, representing pension settlement charges, adjustments to estimated severance benefits and incremental third-party costs related to the design and implementation of the new organizational structure. We have incurred total costs of $122,040 since the program's inception. This includes pension settlement charges of $12,646 recorded in the second quarter of 2016 and $10,178 recorded in the fourth quarter of 2015, relating to lump sum withdrawals by employees retiring or leaving the Company as a result of this program.

Excluding the pension settlement costs recorded in 2016 and 2015 and any additional pension settlement costs that could be triggered by additional lump sum withdrawals in 2016, total pre-tax charges and costs for this program are currently expected to be approximately $103 million, the majority of which are cash. The remaining costs for the 2015 Productivity Initiative are expected to be incurred in the third quarter of 2016.

Other international programs

Costs incurred for the three and six months ended July 5, 2015 related principally to accelerated depreciation and amortization and employee severance costs for a couple of programs commenced in 2014 to rationalize certain non-U.S. manufacturing and distribution activities and to establish our own sales and distribution teams in Brazil in connection with our exit from the Bauducco joint venture.

Expenses recorded for business realignment activities during the three and six months ended July 3, 2016 and July 5, 2015 were classified as follows:



	Three Months Ended				Six Months Ended
	July 3, 2016		July 5, 2015		July 3, 2016		July 5, 2015
Cost of sales (1):
Operational optimization program	$	33,965	$	—	$	33,478	$	—
Other international restructuring programs	—		1,328		—		2,676
Total cost of sales	33,965		1,328		33,478		2,676
Selling, marketing and administrative (2):
Operational optimization program	3,376		—		9,408		—
2015 productivity initiative	2,649		—		5,401		—
Other international restructuring programs	—		4,945		—		6,070
Total selling, marketing and administrative	6,025		4,945		14,809		6,070
Business realignment charges (3):
Operational optimization program	9,928		—		17,355		—
2015 productivity initiative	12,177		22,552		10,883		22,552
Divestiture of Mauna Loa (see Note 2)	—		—		—		2,667
Total business realignment charges	22,105		22,552		28,238		25,219
Total charges associated with business realignment activities	$	62,095	$	28,825	$	76,525	$	33,965


(1)	Charges primarily relate to non-cash asset-related accelerated depreciation and amortization.


(2)	Charges primarily relate to third-party costs incurred to execute the restructuring initiatives.


(3)	Charges largely relate to employee severance and benefits, including pension settlement costs for the 2015 Productivity Initiative.

The costs and related benefits of the Operational Optimization Program relate approximately 15% to the North America segment and 85% to the International and Other segment. The costs and related benefits to be derived from the 2015 Productivity Initiative relate primarily to the North American segment, while the costs and related benefits of the other international programs relate primary to the International and Other segment. However, segment operating results do not include business realignment and related charges because we evaluate segment performance excluding such charges.

The following table presents the liability activity for employee-related costs qualifying as exit and disposal costs:



	Total
Liability balance at December 31, 2015	$	16,310
2016 business realignment charges	15,592
Cash payments	(16,925		)
Other, net	(161		)
Liability balance at July 3, 2016	$	14,816

The charges reflected in the liability roll-forward above do not include items charged directly to expense, such as accelerated depreciation and amortization and the loss on the Mauna Loa divestiture and certain of the third-party charges associated with various programs, as those items are not reflected in the business realignment liability in our Consolidated Balance Sheets.