SEGMENT INFORMATION

9 Months Ended

Oct. 02, 2016

Segment Reporting [Abstract]

Segment Information

SEGMENT INFORMATION

Our organizational structure is designed to ensure continued focus on North America, coupled with an emphasis on accelerating growth in our focus international markets, as we transform into a more global company. Our business is organized around geographic regions, which enables us to build processes for repeatable success in our global markets. As a result, we have defined our operating segments on a geographic basis, as this aligns with how our Chief Operating Decision Maker (“CODM”) manages our business, including resource allocation and performance assessment. Our North America business, which generates over 85% of our annual consolidated revenue, is our only reportable segment. None of our other operating segments meet the quantitative thresholds to qualify as reportable segments; therefore, these operating segments are combined and disclosed below as International and Other.

• North America - This segment is responsible for our traditional chocolate and non-chocolate confectionery market position, as well as our grocery and growing snacks market positions, in the United States and Canada. This includes developing and growing our business in chocolate and non-chocolate confectionery, pantry, food service and other snacking product lines.

• International and Other - International and Other is a combination of all other operating segments that are not individually material, including those geographic regions where we operate outside of North America. We currently have operations and manufacture product in China, Mexico, Brazil, India and Malaysia, primarily for consumers in these regions, and also distribute and sell confectionery products in export markets of Asia, Latin America, Middle East, Europe, Africa and other regions. This segment also includes our global retail operations, including Hershey's Chocolate World stores in Hershey, Pennsylvania, New York City, Chicago, Las Vegas, Shanghai, Niagara Falls (Ontario), Dubai, and Singapore, as well as operations associated with licensing the use of certain of the Company's trademarks and products to third parties around the world.

For segment reporting purposes, we use “segment income” to evaluate segment performance and allocate resources. Segment income excludes unallocated general corporate administrative expenses, unallocated mark-to-market gains and losses on commodity derivatives, business realignment and impairment charges, acquisition integration costs, the non-service related portion of pension expense and other unusual gains or losses that are not part of our measurement of segment performance. These items of our operating income are managed centrally at the corporate level and are excluded from the measure of segment income reviewed by the CODM as well the measure of segment performance used for incentive compensation purposes.

Accounting policies associated with our operating segments are generally the same as those described in Note 1 to the Consolidated Financial Statements included in our 2015 Annual Report on Form 10-K, with the exception of our accounting methodology for commodities derivatives. As discussed in Note 5, derivatives used to manage commodity price risk are not designated for hedge accounting treatment. These derivatives are recognized at fair market value with the resulting realized and unrealized losses recognized in unallocated derivative (gains) losses outside of the reporting segment results. The gains and losses are subsequently recognized in the operating results of the segments in the period in which the underlying transaction being economically hedged is included in earnings.

Certain manufacturing, warehousing, distribution and other activities supporting our global operations are integrated to maximize efficiency and productivity. As a result, assets and capital expenditures are not managed on a segment basis and are not included in the information reported to the CODM for the purpose of evaluating performance or allocating resources. We disclose depreciation and amortization that is generated by segment-specific assets, since these amounts are included within the measure of segment income reported to the CODM.

Our segment net sales and earnings were as follows:

	Three Months Ended					Nine Months Ended
	October 2, 2016		October 4, 2015			October 2, 2016			October 4, 2015
Net sales:
North America	$	1,764,528	$	1,733,869		$	4,842,840		$	4,840,438
International and Other	238,926		226,910			627,097			636,966
Total	$	2,003,454	$	1,960,779		$	5,469,937		$	5,477,404
Segment Income (Loss):
North America	$	563,946	$	546,080		$	1,519,059		$	1,561,053
International and Other	4,284		(13,509		)	(12,411		)	(79,754		)
Total segment income	568,230		532,571			1,506,648			1,481,299
Unallocated corporate expense (1)	121,828		117,695			370,622			383,160
Unallocated mark-to-market losses on commodity derivatives (2)	35,791		—			30,851			—
Goodwill impairment	—		30,991			—			280,802
Charges associated with business realignment activities	27,962		67,463			104,487			101,428
Non-service related pension expense	6,360		4,049			20,666			6,976
Acquisition integration costs	2,265		9,359			3,727			14,253
Operating profit	374,024		303,014			976,295			694,680
Interest expense, net	24,387		46,967			66,730			85,046
Other (income) expense, net	21,800		9,409			8,703			4,328
Income before income taxes	$	327,837	$	246,638		$	900,862		$	605,306

(1) Includes centrally-managed (a) corporate functional costs relating to legal, treasury, finance, and human resources, (b) expenses associated with the oversight and administration of our global operations, including warehousing, distribution and manufacturing, information systems and global shared services, (c) non-cash stock-based compensation expense, and (d) other gains or losses that are not integral to segment performance.

(2) Reflects gains and losses on commodity derivative instruments that are excluded from segment income until the related inventory is sold. See Note 5.

Activity within the unallocated mark-to-market (gains) losses on commodity derivatives for the three and nine months ended October 2, 2016 included:

	Three Months Ended		Nine Months Ended
	October 2, 2016		October 2, 2016
Net losses on mark-to-market valuation of unallocated commodity derivative positions	$	37,246	$	37,176
Net losses on commodity derivative positions allocated to segment income	1,455		6,325
Net losses on mark-to-market valuation of commodity derivative positions remaining in unallocated derivative (gains) losses	$	35,791	$	30,851

Based on our forecasts of the timing of the recognition of the underlying hedged items, we expect to reclassify losses on commodity derivatives of $11 million after tax to segment operating results in the next twelve months.

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

	Three Months Ended				Nine Months Ended
	October 2, 2016		October 4, 2015		October 2, 2016		October 4, 2015
North America	$	41,592	$	38,887	$	120,378	$	113,837
International and Other	13,515		13,993		37,523		34,136
Corporate (1)	30,015		11,174		84,000		34,882
Total	$	85,122	$	64,054	$	241,901	$	182,855

(1) Corporate includes non-cash asset-related accelerated depreciation and amortization related to business realignment activities, as discussed in Note 10. Such amounts are not included within our measure of segment income.