HERSHEY CO 10-K

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm (PCAOB ID: 42 ) 46 Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting 48 Consolidated Statements of Income for the years ended December 31, 202 2 , 202 1 and 20 20 50 Consolidated Statements of Comprehensive Income for the years ended December 31, 202 2 , 202 1 and 20 20 51 Consolidated Balance Sheets as of December 31, 202 2 and 202 1 52 Consolidated Statements of Cash Flows for the years ended December 31, 202 2 , 202 1 and 20 2 0 53 Consolidated Statements of Stockholders’ Equity for the years ended December 31, 20 2 2 , 202 1 and 20 20 54 Notes to Consolidated Financial Statements 55 Note 1 - Summary of Significant Accounting Policies 55 Note 2 - Business Acquisitions and Divestitures 60 Note 3 - Goodwill and Intangible Assets 64 Note 4 - Short and Long-Term Debt 64 Note 5 - Derivative Instruments 66 Note 6 - Fair Value Measurements 68 Note 7 - Leases 70 Note 8 - Investments in Unconsolidated Affiliates 72 Note 9 - Business Realignment Activities 72 Note 10 - Income Taxes 74 Note 11 - Pension and Other Post-Retirement Benefit Plans 77 Note 12 - Stock Compensation Plans 83 Note 13 - Segment Information 86 Note 14 - Equity and Treasury Stock Activity 88 Note 15 - Commitments and Contingencies 90 Note 16 - Earnings Per Share 91 Note 17 - Other (Income) Expense, Net 93 Note 1 8 - Related Party Transactions 99 Note 1 9 - Supplemental Balance Sheet Information 94 Table of Contents The Hershey Company | 2022 Form 10-K | Page 45 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and the Board of Directors of The Hershey Company Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of The Hershey Company (the Company) as of December 31, 2022 and 2021, the related consolidated statements of income, comprehensive income, cash flows, and stockholders' equity for each of the three years in the period ended December 31, 2022, and the related notes and financial statement schedule listed in the Index at Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 17, 2023 expressed an unqualified opinion thereon. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Table of Contents The Hershey Company | 2022 Form 10-K | Page 46 Valuation of Accrued Liabilities for Trade Promotion Activities Description of the Matter The unsettled portion of the Company’s obligation for trade promotion activities at December 31, 2022 was $215.7 million. As discussed in Note 1 of the consolidated financial statements, the Company promotes its products through programs such as, but not limited to, discounts, coupons, rebates, in-store display incentives, and volume-based incentives. The Company recognizes the estimated costs of these trade promotion activities as a component of variable consideration when determining the transaction price. The unsettled portion of the Company’s obligation for trade promotion activities is included in accrued liabilities in the consolidated balance sheet. Auditing management’s calculation of the unsettled portion of the Company’s obligation for trade promotion activities was highly subjective and required significant judgment as a result of the nature of the required estimates and assumptions. In particular, the estimates required an analysis of the programs offered, expectations regarding customer and consumer participation, historical sales and payment trends, and experience with payment patterns associated with similar programs offered in the past. The estimated cost of these programs is sensitive to changes in trends with regard to customer and consumer participation, particularly for new programs and for programs related to the introduction of new products. How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design, and tested the operating effectiveness of the controls related to the Company’s calculation of the accrued liabilities for trade promotion activities. For example, we tested controls over management’s review of the completeness of the promotional activities as well as the significant assumptions and the data inputs utilized in the calculations. To test the unsettled portion of the Company’s obligation for trade promotion activities, we performed audit procedures that included, among others, assessing (1) the expected value estimation methodology used by management, (2) whether all material trade promotion activities were properly included in management’s estimate, and (3) the significant assumptions discussed above and the underlying data used in its analyses. Specifically, when evaluating the significant assumptions, we compared them to historical trends, third party data, and assumptions used in prior periods, and inspected management’s retrospective review of actual trade promotion activities compared to previous estimates. We also performed sensitivity analyses of significant assumptions to evaluate the changes in the estimate that would result from changes in the assumptions. /s/ ERNST & YOUNG LLP We have served as the Company’s auditor since 2016. Philadelphia, Pennsylvania February 17, 2023 . Table of Contents The Hershey Company | 2022 Form 10-K | Page 47 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and the Board of Directors of The Hershey Company Opinion on Internal Control over Financial Reporting We have audited The Hershey Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, The Hershey Company (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2022 and 2021, the related consolidated statements of income, comprehensive income, cash flows, and stockholders' equity for each of the three years in the period ended December 31, 2022, and the related notes and financial statement schedule listed in the Index at Item 15(a)(2) and our report dated February 17, 2023 expressed an unqualified opinion thereon. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Table of Contents The Hershey Company | 2022 Form 10-K | Page 48 Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ ERNST & YOUNG LLP Philadelphia, Pennsylvania February 17, 2023 Table of Contents The Hershey Company | 2022 Form 10-K | Page 49 THE HERSHEY COMPANY CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share amounts) For the years ended December 31, 2022 2021 2020 Net sales $ 10,419,294 $ 8,971,337 $ 8,149,719 Cost of sales 5,920,509 4,922,739 4,448,450 Gross profit 4,498,785 4,048,598 3,701,269 Selling, marketing and administrative expense 2,236,009 2,001,351 1,890,925 Long-lived asset impairment charges — — 9,143 Business realignment costs 1,989 3,525 18,503 Operating profit 2,260,787 2,043,722 1,782,698 Interest expense, net 137,557 127,417 149,374 Other (income) expense, net 206,159 119,081 138,327 Income before income taxes 1,917,071 1,797,224 1,494,997 Provision for income taxes 272,254 314,405 219,584 Net income including noncontrolling interest 1,644,817 1,482,819 1,275,413 Less: Net gain (loss) attributable to noncontrolling interest — 5,307 ( 3,295 ) Net income attributable to The Hershey Company $ 1,644,817 $ 1,477,512 $ 1,278,708 Net income per share—basic: Common stock $ 8.22 $ 7.34 $ 6.30 Class B common stock $ 7.47 $ 6.68 $ 5.72 Net income per share—diluted: Common stock $ 7.96 $ 7.11 $ 6.11 Class B common stock $ 7.45 $ 6.66 $ 5.71 Dividends paid per share: Common stock $ 3.874 $ 3.410 $ 3.154 Class B common stock $ 3.522 $ 3.100 $ 2.866 See Notes to Consolidated Financial Statements. Table of Contents The Hershey Company | 2022 Form 10-K | Page 50 THE HERSHEY COMPANY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in thousands) For the years ended December 31, 2022 2021 2020 Pre-Tax Amount Tax (Expense) Benefit After-Tax Amount Pre-Tax Amount Tax (Expense) Benefit After-Tax Amount Pre-Tax Amount Tax (Expense) Benefit After-Tax Amount Net income including noncontrolling interest $ 1,644,817 $ 1,482,819 $ 1,275,413 Other comprehensive income (loss), net of tax: Foreign currency translation adjustments: Foreign currency translation losses during period $ ( 10,340 ) $ — ( 10,340 ) $ ( 1,500 ) $ — ( 1,500 ) $ ( 13,767 ) $ — ( 13,767 ) Reclassification to earnings due to the sale of businesses — — — 5,249 — 5,249 — — — Pension and post-retirement benefit plans: Net actuarial (loss) gain ( 32,970 ) 7,481 ( 25,489 ) 67,728 ( 13,929 ) 53,799 ( 39,455 ) 9,351 ( 30,104 ) Reclassification to earnings 31,009 ( 7,392 ) 23,617 32,092 ( 8,067 ) 24,025 33,326 ( 8,240 ) 25,086 Cash flow hedges: Gains (losses) on cash flow hedging derivatives 2,056 ( 74 ) 1,982 ( 1,551 ) ( 2,989 ) ( 4,540 ) ( 780 ) 1,880 1,100 Reclassification to earnings 10,200 ( 3,088 ) 7,112 18,117 ( 1,034 ) 17,083 7,779 ( 3,156 ) 4,623 Total other comprehensive income (loss), net of tax $ ( 45 ) $ ( 3,073 ) ( 3,118 ) $ 120,135 $ ( 26,019 ) 94,116 $ ( 12,897 ) $ ( 165 ) ( 13,062 ) Total comprehensive income including noncontrolling interest $ 1,641,699 $ 1,576,935 $ 1,262,351 Comprehensive gain (loss) attributable to noncontrolling interest — 10,556 ( 2,241 ) Comprehensive income attributable to The Hershey Company $ 1,641,699 $ 1,566,379 $ 1,264,592 See Notes to Consolidated Financial Statements. Table of Contents The Hershey Company | 2022 Form 10-K | Page 51 THE HERSHEY COMPANY CONSOLIDATED BALANCE SHEETS (in thousands, except share data) December 31, 2022 2021 ASSETS Current assets: Cash and cash equivalents $ 463,889 $ 329,266 Accounts receivable—trade, net 711,203 671,464 Inventories 1,173,119 988,511 Prepaid expenses and other 272,195 256,965 Total current assets 2,620,406 2,246,206 Property, plant and equipment, net 2,769,702 2,586,187 Goodwill 2,606,956 2,633,174 Other intangibles 1,966,269 2,037,588 Other non-current assets 944,989 868,203 Deferred income taxes 40,498 40,873 Total assets $ 10,948,820 $ 10,412,231 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 970,558 $ 692,338 Accrued liabilities 832,518 855,638 Accrued income taxes 6,710 3,070 Short-term debt 693,790 939,423 Current portion of long-term debt 753,578 2,844 Total current liabilities 3,257,154 2,493,313 Long-term debt 3,343,977 4,086,627 Other long-term liabilities 719,742 787,058 Deferred income taxes 328,403 288,004 Total liabilities 7,649,276 7,655,002 Stockholders’ equity: The Hershey Company stockholders’ equity Preferred stock, shares issued: none in 2022 and 2021 — — Common stock, shares issued: 163,439,248 in 2022 and 160,939,248 in 2021 163,439 160,939 Class B common stock, shares issued: 58,113,777 in 2022 and 60,613,777 in 2021 58,114 60,614 Additional paid-in capital 1,296,572 1,260,331 Retained earnings 3,589,781 2,719,936 Treasury—common stock shares, at cost: 16,588,308 in 2022 and 15,444,011 in 2021 ( 1,556,029 ) ( 1,195,376 ) Accumulated other comprehensive loss ( 252,333 ) ( 249,215 ) Total stockholders’ equity 3,299,544 2,757,229 Total liabilities and stockholders’ equity $ 10,948,820 $ 10,412,231 See Notes to Consolidated Financial Statements. Table of Contents The Hershey Company | 2022 Form 10-K | Page 52 THE HERSHEY COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) For the years ended December 31, 2022 2021 2020 Operating Activities Net income including noncontrolling interest $ 1,644,817 $ 1,482,819 $ 1,275,413 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 378,959 315,002 294,907 Stock-based compensation expense 65,991 66,711 57,584 Deferred income taxes 36,889 13,374 26,880 Impairment of long-lived assets (see Note 6 ) — — 9,143 Write-down of equity investments 188,286 113,756 125,579 Other 120,818 96,016 113,470 Changes in assets and liabilities, net of business acquisitions and divestitures: Accounts receivable—trade, net ( 38,165 ) ( 14,642 ) ( 55,537 ) Inventories ( 186,963 ) 21,457 ( 151,918 ) Prepaid expenses and other current assets ( 14,507 ) 8,619 2,493 Accounts payable and accrued liabilities 216,479 39,732 41,470 Accrued income taxes 5,005 ( 29,682 ) ( 16,158 ) Contributions to pension and other benefit plans ( 78,547 ) ( 51,100 ) ( 11,671 ) Other assets and liabilities ( 11,225 ) 20,822 ( 11,998 ) Net cash provided by operating activities 2,327,837 2,082,884 1,699,657 Investing Activities Capital additions (including software) ( 519,481 ) ( 495,877 ) ( 441,626 ) Equity investments in tax credit qualifying partnerships ( 275,534 ) ( 128,417 ) ( 87,211 ) Business acquisitions, net of cash and cash equivalents acquired — ( 1,601,073 ) — Other investing activities 7,639 2,539 ( 2,443 ) Net cash used in investing activities ( 787,376 ) ( 2,222,828 ) ( 531,280 ) Financing Activities Net (decrease) increase in short-term debt ( 245,633 ) 869,030 41,759 Long-term borrowings, net of debt issuance costs — — 989,876 Repayment of long-term debt and finance leases ( 4,741 ) ( 439,444 ) ( 704,467 ) Cash dividends paid ( 775,030 ) ( 685,987 ) ( 640,732 ) Repurchase of common stock ( 388,964 ) ( 457,946 ) ( 211,196 ) Exercise of stock options 34,158 49,821 46,372 Taxes withheld and paid on employee stock awards ( 35,515 ) ( 16,610 ) ( 20,840 ) Net cash used in financing activities ( 1,415,725 ) ( 681,136 ) ( 499,228 ) Effect of exchange rate changes on cash and cash equivalents 9,887 ( 5,075 ) ( 6,990 ) Increase (decrease) in cash and cash equivalents, including cash classified as held for sale 134,623 ( 826,155 ) 662,159 Less: Decrease (increase) in cash and cash equivalents classified as held for sale — 11,434 ( 11,434 ) Net increase (decrease) in cash and cash equivalents 134,623 ( 814,721 ) 650,725 Cash and cash equivalents, beginning of period 329,266 1,143,987 493,262 Cash and cash equivalents, end of period $ 463,889 $ 329,266 $ 1,143,987 Supplemental Disclosure Interest paid $ 131,757 $ 127,726 $ 150,930 Income taxes paid 221,321 275,171 215,491 See Notes to Consolidated Financial Statements. Table of Contents The Hershey Company | 2022 Form 10-K | Page 53 THE HERSHEY COMPANY CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands) Preferred Stock Common Stock Class B Common Stock Additional Paid-in Capital Retained Earnings Treasury Common Stock Accumulated Other Comprehensive Income (Loss) Noncontrolling Interests in Subsidiaries Total Stockholders’ Equity Balance, January 1, 2020 $ — $ 160,939 $ 60,614 $ 1,142,210 $ 1,290,461 $ ( 591,036 ) $ ( 323,966 ) $ 5,772 $ 1,744,994 Net income (loss) 1,278,708 ( 3,295 ) 1,275,413 Other comprehensive (loss) income ( 14,116 ) 1,054 ( 13,062 ) Dividends (including dividend equivalents): Common Stock, $ 3.154 per share ( 466,777 ) ( 466,777 ) Class B Common Stock, $ 2.866 per share ( 173,719 ) ( 173,719 ) Stock-based compensation 56,698 56,698 Exercise of stock options and incentive-based transactions ( 7,708 ) 33,240 25,532 Repurchase of common stock ( 211,196 ) ( 211,196 ) Balance, December 31, 2020 — 160,939 60,614 1,191,200 1,928,673 ( 768,992 ) ( 338,082 ) 3,531 2,237,883 Net income 1,477,512 5,307 1,482,819 Other comprehensive income 88,867 5,249 94,116 Dividends (including dividend equivalents): Common Stock, $ 3.410 per share ( 498,346 ) ( 498,346 ) Class B Common Stock, $ 3.100 per share ( 187,903 ) ( 187,903 ) Stock-based compensation 67,482 67,482 Exercise of stock options and incentive-based transactions 1,649 31,562 33,211 Repurchase of common stock ( 457,946 ) ( 457,946 ) Divestiture of noncontrolling interest ( 1,436 ) ( 1,436 ) Distributions to joint venture partner ( 8,750 ) ( 8,750 ) Other ( 3,901 ) ( 3,901 ) Balance, December 31, 2021 — 160,939 60,614 1,260,331 2,719,936 ( 1,195,376 ) ( 249,215 ) — 2,757,229 Net income 1,644,817 — 1,644,817 Other comprehensive loss ( 3,118 ) — ( 3,118 ) Dividends (including dividend equivalents): Common Stock, $ 3.874 per share ( 567,839 ) ( 567,839 ) Class B Common Stock, $ 3.522 per share ( 207,133 ) ( 207,133 ) Conversion of Class B Common Stock into Common Stock 2,500 ( 2,500 ) — Stock-based compensation 65,909 65,909 Exercise of stock options and incentive-based transactions ( 29,668 ) 28,311 ( 1,357 ) Repurchase of common stock ( 388,964 ) ( 388,964 ) Balance, December 31, 2022 $ — $ 163,439 $ 58,114 $ 1,296,572 $ 3,589,781 $ ( 1,556,029 ) $ ( 252,333 ) $ — $ 3,299,544 See Notes to Consolidated Financial Statements. Table of Contents The Hershey Company | 2022 Form 10-K | Page 54 THE HERSHEY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (amounts in thousands, except share data or if otherwise indicated) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Business The Hershey Company together with its wholly-owned subsidiaries and entities in which it has a controlling interest, (the “Company,” “Hershey,” “we” or “us”) is a global confectionery leader known for its branded portfolio of chocolate, sweets, mints and other great tasting snacks. The Company has more than 100 brands worldwide including such iconic brand names as Hershey’s, Reese’s, Kisses, Jolly Rancher and Ice Breakers, which are marketed, sold and distributed in approximately 80 countries worldwide. Hershey’s structure is designed to ensure continued focus on North America, coupled with an emphasis on profitable growth in our focus international markets. The Company currently operates through three segments that are aligned with its management structure and the key markets it serves: (i) North America Confectionery, (ii) North America Salty Snacks and (iii) International. For additional information on our segment presentation, see Note 13 . Basis of Presentation Our consolidated financial statements include the accounts of The Hershey Company and its majority-owned or controlled subsidiaries. Intercompany transactions and balances have been eliminated. We have a controlling financial interest if we own a majority of the outstanding voting common stock and minority shareholders do not have substantive participating rights, we have significant control through contractual or economic interests in which we are the primary beneficiary or we have the power to direct the activities that most significantly impact the entity's economic performance. We use the equity method of accounting when we have a 20% to 50% interest in other companies and exercise significant influence. In addition, we use the equity method of accounting for our investments in partnership entities which make equity investments in projects eligible to receive federal historic and energy tax credits. See Note 10 for additional information on our equity investments in partnership entities qualifying for tax credits. Other investments that are not controlled, and over which we do not have the ability to exercise significant influence, are accounted for under the cost method. Both equity and cost method investments are included as Other non-current assets in the Consolidated Balance Sheets. For additional information on our investments in unconsolidated affiliates, see Note 8 . Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying disclosures. Our significant estimates and assumptions include, among others, pension and other post-retirement benefit plan assumptions, valuation assumptions of goodwill and other intangible assets, useful lives of long-lived assets, marketing and trade promotion accruals and income taxes. These estimates and assumptions are based on management’s best judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, and the effects of any revisions are reflected in the consolidated financial statements in the period that they are determined. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Revenue Recognition The majority of our revenue contracts represent a single performance obligation related to the fulfillment of customer orders for the purchase of our products, including chocolate, sweets, mints and other grocery and snack offerings. Net sales reflect the transaction prices for these contracts based on our selling list price which is then reduced by estimated costs for trade promotional programs, consumer incentives, and allowances and discounts associated with aged or potentially unsaleable products. We recognize revenue at the point in time that control of the ordered product(s) is transferred to the customer, which is typically upon delivery to the customer or other customer-designated delivery point. Amounts billed and due from our customers are classified as accounts receivables on the balance sheet and require payment on a short-term basis. Our trade promotional programs and consumer incentives are used to promote our products and include, but are not limited to, discounts, coupons, rebates, in-store display incentives, and volume-based incentives. The estimated costs Table of Contents The Hershey Company | 2022 Form 10-K | Page 55 THE HERSHEY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) associated with these programs and incentives are based upon our analysis of the programs offered, expectations regarding customer and consumer participation, historical sales and payment trends, and our experience with payment patterns associated with similar programs offered in the past. The estimated costs of these programs are reasonably likely to change in future periods due to changes in trends with regard to customer and consumer participation, particularly for new programs and for programs related to the introduction of new products. Differences between estimated expense and actual program performance are recognized as a change in estimate in a subsequent period and are normally not significant. During 2022, 2021 and 2020, actual promotional costs have not deviated from the estimated amount by more than 3 %. The Company’s unsettled portion remaining in accrued liabilities at year-end for these activities was $ 215,688 and $ 174,046 at December 31, 2022 and 2021, respectively. We also recognize a minor amount of royalty income (less than 1% of our consolidated net sales) from sales-based licensing arrangements, pursuant to which revenue is recognized as the third-party licensee sales occur. Shipping and handling costs incurred to deliver product to the customer are recorded within cost of sales. Sales, value add and other taxes we collect concurrent with revenue producing activities are excluded from revenue. The majority of our products are confectionery or confectionery-based and, therefore, exhibit similar economic characteristics, as they are based on similar ingredients and are marketed and sold through the same channels to the same customers. In connection with our recent acquisitions, we have expanded our portfolio of salty snacking products, which also exhibit similar economic characteristics to our confectionery products and are sold through the same channels to the same customers. See Note 13 for revenues reported by geographic segment, which is consistent with how we organize and manage our operations, as well as product line net sales information. In 2022, 2021 and 2020, approximately 28 %, 30 % and 31 %, respectively, of our consolidated net sales were made to McLane Company, Inc., one of the largest wholesale distributors in the United States to convenience stores, drug stores, wholesale clubs and mass merchandisers and the primary distributor of our products to Wal-Mart Stores, Inc. Cost of Sales Cost of sales represents costs directly related to the manufacture and distribution of our products. Primary costs include raw materials, packaging, direct labor, overhead, shipping and handling, warehousing and the depreciation of manufacturing, warehousing and distribution facilities. Manufacturing overhead and related expenses include salaries, wages, employee benefits, utilities, maintenance and property taxes. Selling, Marketing and Administrative Expense Selling, marketing and administrative expense (“SM&A”) represents costs incurred in generating revenues and in managing our business. Such costs include advertising and other marketing expenses, selling expenses, research and development costs, administrative and other indirect overhead costs, amortization of capitalized software and intangible assets and depreciation of administrative facilities. Research and development costs, charged to expense as incurred, totaled $ 46,943 in 2022, $ 40,107 in 2021 and $ 37,577 in 2020. Advertising expense is also charged to expense as incurred and totaled $ 517,677 in 2022, $ 511,798 in 2021 and $ 516,936 in 2020. Prepaid advertising expense was $ 241 as of December 31, 2022. There was no prepaid advertising expense as of December 31, 2021. Cash Equivalents Cash equivalents consist of highly liquid debt instruments, time deposits and money market funds with original maturities of three months or less. The fair value of cash equivalents approximates the carrying amount. Accounts Receivable—Trade In the normal course of business, we extend credit to customers that satisfy pre-defined credit criteria, based upon the results of our recurring financial account reviews and our evaluation of current and projected economic conditions. Our primary concentration of credit risk is associated with McLane Company, Inc., one customer served principally by our North America Confectionery segment. As of December 31, 2022, McLane Company, Inc. accounted for approximately 26 % of our total accounts receivable. No other customer accounted for more than 10% of our year-end accounts receivable. We believe that we have little concentration of credit risk associated with the remainder of our customer base. Accounts receivable-trade in the Consolidated Balance Sheets is presented net of allowances for bad debts and anticipated discounts of $ 26,001 and $ 28,837 at December 31, 2022 and 2021, respectively. Table of Contents The Hershey Company | 2022 Form 10-K | Page 56 THE HERSHEY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) Inventories Inventories are valued at the lower of cost or market value, adjusted for the value of inventory that is estimated to be excess, obsolete or otherwise unsaleable. As of December 31, 2022, approximately 53 % of our inventories, representing the majority of our United States (“U.S.”) inventories, were valued under the last-in, first-out (“LIFO”) method. The remainder of our inventories in the U.S. and inventories for our international businesses were valued at the lower of first-in, first-out (“FIFO”), average cost or net realizable value. LIFO cost of inventories valued using the LIFO method was $ 621,614 as of December 31, 2022 and $ 589,850 as of December 31, 2021. The adjustment to LIFO, as shown in Note 1 9 , approximates the excess of replacement cost over the stated LIFO inventory value. The net impact of LIFO acquisitions and liquidations was not material to 2022, 2021 or 2020. Property, Plant and Equipment Property, plant and equipment is stated at cost and depreciated on a straight-line basis over the estimated useful lives of the assets, as follows: 3 to 15 years for machinery and equipment; and 25 to 40 years for buildings and related improvements. At December 31, 2022 and December 31, 2021, property, plant and equipment included assets under finance lease arrangements with net book values totaling $ 72,160 and $ 72,496 , respectively. Total depreciation expense for the years ended December 31, 2022, 2021 and 2020 was $ 253,582 , $ 230,638 and $ 219,021 , respectively, and included depreciation on assets recorded under finance lease arrangements. Maintenance and repairs are expensed as incurred. We capitalize applicable interest charges incurred during the construction of new facilities and production lines and amortize these costs over the assets’ estimated useful lives. We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. We measure the recoverability of assets to be held and used by a comparison of the carrying amount of long-lived assets to future undiscounted net cash flows expected to be generated. If these assets are considered to be impaired, we measure impairment as the amount by which the carrying amount of the assets exceeds the fair value of the assets. We report assets held for sale or disposal at the lower of the carrying amount or fair value less cost to sell. We assess asset retirement obligations on a periodic basis and recognize the fair value of a liability for an asset retirement obligation in the period in which it is incurred if a reasonable estimate of fair value can be made. We capitalize associated asset retirement costs as part of the carrying amount of the long-lived asset. Computer Software We capitalize costs associated with software developed or obtained for internal use when both the preliminary project stage is completed and it is probable the software being developed will be completed and placed in service. Capitalized costs include only (i) external direct costs of materials and services consumed in developing or obtaining internal-use software, (ii) payroll and other related costs for employees who are directly associated with and who devote time to the internal-use software project and (iii) interest costs incurred, when material, while developing internal-use software. We cease capitalization of such costs no later than the point at which the project is substantially complete and ready for its intended purpose. The unamortized amount of capitalized software totaled $ 320,034 and $ 260,656 at December 31, 2022 and 2021, respectively. We amortize software costs using the straight-line method over the expected life of the software, generally 3 to 7 years. Accumulated amortization of capitalized software was $ 350,620 and $ 321,939 as of 2022 and 2021, respectively. Such amounts are recorded within other assets in the Consolidated Balance Sheets. We review the carrying value of software and development costs for impairment in accordance with our policy pertaining to the impairment of long-lived assets. Goodwill and Other Intangible Assets Goodwill and indefinite-lived intangible assets are not amortized, but are evaluated for impairment annually or more often if indicators of a potential impairment are present. Our annual impairment tests are conducted at the beginning of the fourth quarter. We test goodwill for impairment by performing either a qualitative or quantitative assessment. If we choose to perform a qualitative assessment, we evaluate economic, industry and company-specific factors in assessing the fair value of the related reporting unit. If we determine that it is more likely than not that the fair value of the reporting unit is less than its carrying value, a quantitative test is then performed. Otherwise, no further testing is Table of Contents The Hershey Company | 2022 Form 10-K | Page 57 THE HERSHEY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) required. For those reporting units tested using a quantitative approach, we compare the fair value of each reporting unit with the carrying amount of the reporting unit, including goodwill. If the estimated fair value of the reporting unit is less than the carrying amount of the reporting unit, impairment is indicated, requiring recognition of a goodwill impairment charge for the differential (up to the carrying value of goodwill). We test individual indefinite-lived intangible assets by comparing the estimated fair values with the book values of each asset. We determine the fair value of our reporting units and indefinite-lived intangible assets using an income approach. Under the income approach, we calculate the fair value of our reporting units and indefinite-lived intangible assets based on the present value of estimated future cash flows. Considerable management judgment is necessary to evaluate the impact of operating and macroeconomic changes and to estimate the future cash flows used to measure fair value. Our estimates of future cash flows consider past performance, current and anticipated market conditions and internal projections and operating plans which incorporate estimates for sales growth and profitability, and cash flows associated with taxes and capital spending. Additional assumptions include forecasted growth rates, estimated discount rates, which may be risk-adjusted for the operating market of the reporting unit, and estimated royalty rates that would be charged for comparable branded licenses. We believe such assumptions also reflect current and anticipated market conditions and are consistent with those that would be used by other marketplace participants for similar valuation purposes. Such assumptions are subject to change due to changing economic and competitive conditions. The cost of intangible assets with finite useful lives is amortized on a straight-line basis. Our finite-lived intangible assets consist primarily of certain trademarks, customer-related intangible assets and patents obtained through business acquisitions. The weighted-average amortization period for our finite-lived intangible assets is approximately 29 years , which is primarily driven by recently acquired trademarks. If certain events or changes in operating conditions indicate that the carrying value of these assets, or related asset groups, may not be recoverable, we perform an impairment assessment and may adjust the remaining useful lives. See Note 3 for additional information regarding the results of impairment tests. Supplier Finance Program Obligations During 2020, we entered into an agreement with a third-party financial institution to facilitate a supplier finance program which allows qualifying suppliers to sell their receivables from the Company to the financial institution. These participating suppliers negotiate their outstanding receivable arrangements directly with the financial institution, and our rights and obligations to our suppliers are not impacted. We have no economic interest in a supplier’s decision to enter into these agreements. Once a qualifying supplier elects to participate in the supplier finance program and reaches an agreement with a financial institution, they elect which individual Company invoices they sell to the financial institution. However, all Company payments to participating suppliers are paid to the financial institution on the invoice due date, regardless of whether the individual invoice is sold by the supplier to the financial institution. The financial institution pays the supplier on the invoice due date for any invoices that were not previously sold under the supplier finance program. Our obligations to our suppliers, including amounts due and scheduled payment terms, are not impacted by our suppliers’ decisions to sell amounts under these arrangements. The payment of these obligations is included in cash provided by operating activities in the Consolidated Statements of Cash Flows. Included in Accounts Payable in the Consolidated Balance Sheets at December 31, 2022 and 2021 were $ 105,293 and $ 36,386 of outstanding payment obligations, respectively, that were sold to the financial institution under the Company’s supplier finance program. Currency Translation The financial statements of our foreign entities with functional currencies other than the U.S. dollar are translated into U.S. dollars, with the resulting translation adjustments recorded as a component of other comprehensive income (loss). Assets and liabilities are translated into U.S. dollars using the exchange rates in effect at the balance sheet date, while income and expense items are translated using the average exchange rates during the period. Table of Contents The Hershey Company | 2022 Form 10-K | Page 58 THE HERSHEY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) Derivative Instruments We use derivative instruments principally to offset exposure to market risks arising from changes in commodity prices, foreign currency exchange rates and interest rates. See Note 5 for additional information on our risk management strategy and the types of instruments we use. Derivative instruments are recognized on the Consolidated Balance Sheets at their fair values. When we become party to a derivative instrument and intend to apply hedge accounting, we designate the instrument for financial reporting purposes as a cash flow or fair value hedge. The accounting for changes in fair value (gains or losses) of a derivative instrument depends on whether we have designated it and it qualified as part of a hedging relationship, as noted below: • Changes in the fair value of a derivative that is designated as a cash flow hedge are recorded in accumulated other comprehensive income (“AOCI”) to the extent effective and reclassified into earnings in the same period or periods during which the transaction hedged by that derivative also affects earnings. • Changes in the fair value of a derivative that is designated as a fair value hedge, along with the offsetting loss or gain on the hedged asset or liability that is attributable to the risk being hedged, are recorded in earnings, thereby reflecting in earnings the net extent to which the hedge is not effective in achieving offsetting changes in fair value. • Changes in the fair value of a derivative not designated as a hedging instrument are recognized in earnings in cost of sales or SM&A, consistent with the related exposure. For derivatives designated as hedges, we assess, both at the hedge’s inception and on an ongoing basis, whether they are highly effective in offsetting changes in fair values or cash flows of hedged items. The ineffective portion, if any, is recorded directly in earnings. In addition, if we determine that a derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge, we discontinue hedge accounting prospectively. We do not hold or issue derivative instruments for trading or speculative purposes and are not a party to any instruments with leverage or prepayment features. Cash flows related to the derivative instruments we use to manage interest, commodity or other currency exposures are classified as operating activities. Recent Accounting Pronouncements Recently Adopted Accounting Pronouncements In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments . This ASU modifies the measurement of expected credit losses of certain financial instruments. ASU 2016-13 is effective for annual periods beginning after December 15, 2019 and interim periods within those annual periods. The amendments in this ASU should be applied on a modified retrospective basis to all periods presented. We adopted the provisions of this ASU in the first quarter of 2020. Adoption of the new standard did not have a material impact on our consolidated financial statements. In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement . This ASU modifies the disclosure requirements for fair value measurements by removing, modifying or adding certain disclosures. ASU 2018-13 is effective for annual periods beginning after December 15, 2019 and interim periods within those annual periods, with early adoption permitted. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. We adopted the provisions of this ASU in the first quarter of 2020. Adoption of the new standard did not have a material impact on our consolidated financial statements. In August 2018, the FASB issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40), Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract . This ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop Table of Contents The Hershey Company | 2022 Form 10-K | Page 59 THE HERSHEY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) or obtain internal-use software (and hosting arrangements that include an internal-use software license). ASU 2018-15 is effective for annual periods beginning after December 15, 2019 and interim periods within those annual periods, with early adoption permitted. The amendments in this ASU should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. We adopted the provisions of this ASU in the first quarter of 2020 on a prospective basis. Adoption of the new standard did not have a material impact on our consolidated financial statements. In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes . This ASU is intended to simplify various aspects related to accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and clarifying certain aspects of the current guidance to promote consistency among reporting entities. ASU 2019-12 is effective for annual periods beginning after December 15, 2020 and interim periods within those annual periods, with early adoption permitted. An entity that elects early adoption must adopt all the amendments in the same period. Most amendments within this ASU are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. We adopted the provisions of this ASU in the fourth quarter of 2020. Adoption of the new standard did not have a material impact on our consolidated financial statements. In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting . The ASU is intended to provide temporary optional expedients and exceptions to the GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. Entities may apply this ASU upon issuance through December 31, 2022 on a prospective basis. We early adopted the provisions of this ASU in the first quarter of 2022. Adoption of the new standard did not have a material impact on our consolidated financial statements. In September 2022, the FASB issued ASU No. 2022-04, Liabilities—Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations . This ASU requires a buyer in a supplier finance program to disclose qualitative and quantitative information about the program including the program’s nature, activity during the period, changes from period to period and potential magnitude. ASU 2022-04 is effective for annual periods beginning after December 15, 2022 and interim periods within those annual periods. A rollforward of obligations during the annual period, including the amount of obligations confirmed and obligations subsequently paid, is effective for annual periods beginning after December 15, 2023 with early adoption permitted. This ASU should be applied retrospectively to each period in which a balance sheet is presented, except for the amendment on rollforward information, which should be applied prospectively. We early adopted provisions of this ASU in the fourth quarter of 2022, with the exception of the amendment on rollforward information, which will be adopted in the fourth quarter of 2023. Adoption of the new standard did not have a material impact on our consolidated financial statements. Recently Issued Accounting Pronouncements Not Yet Adopted In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This ASU requires an acquirer to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Revenue from Contracts with Customers (Topic 606) rather than adjust them to fair value at the acquisition date. ASU 2021-08 is effective for annual periods beginning after December 15, 2022 and interim periods within those annual periods. This ASU should be applied prospectively to business combinations occurring on or after the date of adoption. Evaluation of this new standard is dependent on multiple circumstances including the timing and complexity of completed business combinations. As a result, we intend to adopt the provisions of this ASU in the first quarter of 2023. No other new accounting pronouncement issued or effective during the fiscal year had or is expected to have a material impact on our consolidated financial statements or disclosures. Table of Contents The Hershey Company | 2022 Form 10-K | Page 60 THE HERSHEY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) 2. BUSINESS ACQUISITIONS AND DIVESTITURES Acquisitions of businesses are accounted for as business combinations and, accordingly, the results of operations of the businesses acquired have been included in the consolidated financial statements since the respective dates of the acquisitions. The purchase price for each acquisition is allocated to the assets acquired and liabilities assumed. In conjunction with acquisitions noted below, we used various valuation techniques to determine fair value of the assets acquired, with the primary techniques being discounted cash flow analysis, relief-from-royalty, a form of the multi-period excess earnings and the with-and-without valuation approaches, which use significant unobservable inputs, or Level 3 inputs, as defined by the fair value hierarchy. Inputs to these valuation approaches require significant judgment including: (i) forecasted sales, growth rates and customer attrition rates, (ii) forecasted operating margins, (iii) royalty rates and discount rates used to present value future cash flows, (iv) the amount of synergies expected from the acquisition, (v) the economic useful life of assets and (vi) the evaluation of historical tax positions. In certain acquisitions, historical data is limited, therefore, we base our estimates and assumptions on budgets, business plans, economic projections, anticipated future cash flows and marketplace data. 2021 Activity Pretzels Inc. On December 14, 2021, we completed the acquisition of Pretzels Inc. (“Pretzels”), previously a privately held company that manufactures and sells pretzels and other salty snacks for other branded products and private labels in the United States. Pretzels is an industry leader in the pretzel category with a product portfolio that includes filled, gluten free and seasoned pretzels, as well as extruded snacks that complements Hershey’s snacks portfolio. Based in Bluffton, Indiana, Pretzels operates three manufacturing locations in Indiana and Kansas. Pretzels provides Hershey with deep pretzel category and product expertise and the manufacturing capabilities to support brand growth and future pretzel innovation. The cash consideration paid for Pretzels totaled $ 304,334 and consisted of cash on hand and short-term borrowings. Acquisition-related costs for the Pretzels acquisition were immaterial. The acquisition has been accounted for as a business combination and, accordingly, Pretzels has been included within the North America Salty Snacks segment from the date of acquisition. The purchase consideration was allocated to assets acquired and liabilities assumed based on their respective fair values as follows: Goodwill $ 166,191 Other intangible assets 26,100 Current assets acquired 30,835 Property, plant and equipment, net 100,716 Other non-current assets, primarily operating lease ROU assets 111,787 Deferred income taxes 773 Current liabilities acquired ( 22,713 ) Other long-term liabilities, primarily operating lease liabilities ( 109,355 ) Net assets acquired $ 304,334 The purchase price allocation presented above has been finalized as of the third quarter of 2022 and includes an immaterial amount of measurement period adjustments. The measurement period adjustments to the initial allocation were based on more detailed information obtained about the specific assets acquired and liabilities assumed, specifically, post-closing adjustments to the working capital acquired including certain holdbacks. Goodwill was determined as the excess of the purchase price over the fair value of the net assets acquired (including the identifiable intangible assets). A portion of goodwill derived from this acquisition is deductible for tax purposes and reflects the value of leveraging our brand building expertise, supply chain capabilities and retail relationships to accelerate growth and access to the portfolio of Pretzels’ products. Other intangible assets include trademarks valued at $ 5,700 and customer relationships valued at $ 20,400 . Trademarks were assigned an estimated useful life of five years and customer relationships were assigned an estimated useful life of 19 years. Table of Contents The Hershey Company | 2022 Form 10-K | Page 61 THE HERSHEY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) Dot's Pretzels, LLC On December 13, 2021, we completed the acquisition of Dot’s Pretzels, LLC (“Dot’s”), previously a privately held company that produces and sells pretzels and other snack food products to retailers and distributors in the United States, with Dot’s Homestyle Pretzels snacks as its primary product. Dot’s is the fastest-growing scale brand in the pretzel category and complements Hershey’s snacks portfolio. The cash consideration paid for Dot’s totaled $ 891,169 and consisted of cash on hand and short-term borrowings. Acquisition-related costs for the Dot’s acquisition were immaterial. The acquisition has been accounted for as a business combination and, accordingly, Dot’s has been included within the North America Salty Snacks segment from the date of acquisition. The purchase consideration was allocated to assets acquired and liabilities assumed based on their respective fair values as follows: Goodwill $ 284,427 Other intangible assets 543,100 Current assets acquired 51,121 Property, plant and equipment, net 40,266 Other non-current assets 2,201 Other liabilities assumed, primarily current liabilities ( 29,946 ) Net assets acquired $ 891,169 The purchase price allocation presented above has been finalized as of the third quarter of 2022 and includes an immaterial amount of measurement period adjustments. The measurement period adjustments to the initial allocation were based on more detailed information obtained about the specific assets acquired and liabilities assumed, specifically, the refinement of certain assumptions in the value of customer relationships based on an analysis of historical customer-specific data and post-closing adjustments to the working capital acquired including certain holdbacks. Goodwill was determined as the excess of the purchase price over the fair value of the net assets acquired (including the identifiable intangible assets). The goodwill derived from this acquisition is deductible for tax purposes and reflects the value of leveraging our brand building expertise, supply chain capabilities and retail relationships to accelerate growth and access to the portfolio of Dot’s products. Other intangible assets include trademarks valued at $ 336,600 and customer relationships valued at $ 206,500 . Trademarks were assigned an estimated useful life of 33 years and customer relationships were assigned estimated useful life of 18 years. Lily's Sweets, LLC On June 25, 2021, we completed the acquisition of Lily’s Sweets, LLC (“Lily’s”), previously a privately held company that sells a line of sugar-free and low-sugar confectionery foods to retailers and distributors in the United States and Canada. Lily’s products include dark and milk chocolate style bars, baking chips, peanut butter cups and other confection products that complement Hershey’s confectionery and confectionery-based portfolio. The cash consideration paid for Lily’s totaled $ 422,210 and the Company may be required to pay additional cash consideration if certain defined targets related to net sales and gross margin are exceeded during the period from the closing date through December 31, 2021. As of the acquisition date, the estimated fair value of the contingent consideration obligation was classified as a liability of $ 5,000 and was determined using a scenario-based analysis on forecasted future results. Based on financial results through December 31, 2021, the fair value was reduced during the fourth quarter of 2021 to $ 1,250 , with the adjustment to fair value recorded in the selling, marketing and administrative (“SM&A”) expense caption within the Consolidated Statements of Income. We paid this contingent consideration during the second quarter of 2022. Acquisition-related costs for the Lily’s acquisition were immaterial. Table of Contents The Hershey Company | 2022 Form 10-K | Page 62 THE HERSHEY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) The acquisition has been accounted for as a business combination and, accordingly, Lily’s has been included within the North America Confectionery segment from the date of acquisition. The purchase consideration, inclusive of the acquisition date fair value of the contingent consideration, was allocated to assets acquired and liabilities assumed based on their respective fair values as follows: Goodwill $ 175,826 Other intangible assets 235,800 Other assets acquired, primarily current assets 33,092 Other liabilities assumed, primarily current liabilities ( 9,620 ) Deferred income taxes ( 7,888 ) Net assets acquired $ 427,210 The purchase price allocation presented above has been finalized as of the fourth quarter of 2021 and includes an immaterial amount of measurement period adjustments. The measurement period adjustments to the initial allocation were based on more detailed information obtained about the specific assets acquired and liabilities assumed. Goodwill was determined as the excess of the purchase price over the fair value of the net assets acquired (including the identifiable intangible assets). The majority of goodwill derived from this acquisition is expected to be deductible for tax purposes and reflects the value of leveraging our brand building expertise, supply chain capabilities and retail relationships to accelerate growth and access to the portfolio of Lily’s products. Other intangible assets include trademarks valued at $ 151,600 and customer relationships valued at $ 84,200 . Trademarks were assigned an estimated useful life of 33 years and customer relationships were assigned estimated useful lives ranging from 17 to 18 years. Lotte Shanghai Foods Co., Ltd. In January 2021, we completed the divestiture of Lotte Shanghai Foods Co., Ltd. (“LSFC”), which was previously included within the International segment results in our consolidated financial statements. Total proceeds from the divestiture and the impact on our consolidated financial statements were immaterial and were recorded in the SM&A expense caption within the Consolidated Statements of Income. 2020 Activity During the second quarter of 2020, we completed the divestitures of KRAVE Pure Foods, Inc. (“Krave”), which was previously included within the North America Salty Snacks segment, and the Scharffen Berger and Dagoba brands, both of which were previously included within the North America Confectionery segment results in our consolidated financial statements. Total proceeds from the divestitures and the impact on our Consolidated Statements of Income, both individually and on an aggregate basis, were immaterial. Table of Contents The Hershey Company | 2022 Form 10-K | Page 63 THE HERSHEY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) 3. GOODWILL AND INTANGIBLE ASSETS The changes in the carrying value of goodwill by segment for the years ended December 31, 2022 and 2021 are as follows: North America Confectionery North America Salty Snacks International Total Goodwill $ 1,854,266 $ 121,152 $ 375,145 $ 2,350,563 Accumulated impairment loss ( 4,973 ) — ( 357,375 ) ( 362,348 ) Balance at January 1, 2021 1,849,293 121,152 17,770 1,988,215 Acquired during the period 174,516 468,646 — 643,162 Measurement period adjustments 1,310 — — 1,310 Foreign currency translation 887 — ( 400 ) 487 Balance at December 31, 2021 2,026,006 589,798 17,370 2,633,174 Measurement period adjustments — ( 18,028 ) — ( 18,028 ) Foreign currency translation ( 7,576 ) — ( 614 ) ( 8,190 ) Balance at December 31, 2022 $ 2,018,430 $ 571,770 $ 16,756 $ 2,606,956 We had no goodwill impairment charges in 2022, 2021 or 2020. The following table provides the gross carrying amount and accumulated amortization for each major class of intangible asset: December 31, 2022 2021 Gross Carrying Amount Accumulated Amortization Gross Carrying Amount Accumulated Amortization Intangible assets subject to amortization: Trademarks $ 1,701,932 $ ( 190,045 ) $ 1,705,390 $ ( 141,760 ) Customer-related 513,188 ( 93,495 ) 504,667 ( 65,131 ) Patents 8,053 ( 8,053 ) 8,623 ( 8,623 ) Total 2,223,173 ( 291,593 ) 2,218,680 ( 215,514 ) Intangible assets not subject to amortization: Trademarks 34,689 34,422 Total other intangible assets $ 1,966,269 $ 2,037,588 Total amortization expense for the years ended December 31, 2022, 2021 and 2020 was $ 79,690 , $ 52,124 and $ 46,472 , respectively. Amortization expense for the next five years, based on current intangible asset balances, is estimated to be as follows: Year ending December 31, 2023 2024 2025 2026 2027 Amortization expense $ 79,249 $ 78,667 $ 78,667 $ 78,620 $ 77,527 4. SHORT AND LONG-TERM DEBT Short-term Debt As a source of short-term financing, we utilize cash on hand and commercial paper or bank loans with an original maturity of three months or less. We maintain a $ 1.5 billion unsecured revolving credit facility with the option to increase borrowings by an additional $ 500 million with the consent of the lenders. This facility is scheduled to expire Table of Contents The Hershey Company | 2022 Form 10-K | Page 64 THE HERSHEY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) on July 2, 2024; however, we may extend the termination date for up to two additional one-year periods upon notice to the administrative agent under the facility. The unsecured committed revolving credit agreement contains a financial covenant whereby the ratio of (a) pre-tax income from operations from the most recent four fiscal quarters to (b) consolidated interest expense for the most recent four fiscal quarters may not be less than 2.0 to 1.0 at the end of each fiscal quarter. The credit agreement also contains customary representations, warranties and events of default. Payment of outstanding advances may be accelerated, at the option of the lenders, should we default in our obligation under the credit agreement. As of December 31, 2022, we are in compliance with all affirmative and negative covenants and the financial covenant pertaining to our credit agreement. There were no significant compensating balance agreements that legally restricted these funds. In addition to the revolving credit facility, we maintain lines of credit with domestic and international commercial banks. Our credit limit in various currencies was $ 313,195 at December 31, 2022 and $ 280,650 at December 31, 2021. These lines permit us to borrow at the respective banks’ prime commercial interest rates, or lower. Commitment fees relating to our revolving credit facility and lines of credit are not material. Short-term debt consisted of the following: December 31, 2022 December 31, 2021 Short-term foreign bank borrowings against lines of credit $ 135,555 $ 119,038 U.S. commercial paper 558,235 820,385 Total short-term debt $ 693,790 $ 939,423 Weighted average interest rate on outstanding commercial paper 4.3 % 0.1 % The maximum amount of short-term borrowings outstanding during 2022 and 2021 was $ 937,593 and $ 939,423 , respectively. The weighted-average interest rate on short-term borrowings outstanding was 4.4 % as of December 31, 2022 and 0.2 % as of December 31, 2021. Long-term Debt Long-term debt consisted of the following: December 31, Maturity Date 2022 2021 2.625 % Notes May 1, 2023 250,000 250,000 3.375 % Notes May 15, 2023 500,000 500,000 2.050 % Notes November 15, 2024 300,000 300,000 0.900 % Notes June 1, 2025 300,000 300,000 3.200 % Notes August 21, 2025 300,000 300,000 2.300 % Notes August 15, 2026 500,000 500,000 7.200 % Debentures August 15, 2027 193,639 193,639 2.450 % Notes November 15, 2029 300,000 300,000 1.700 % Notes June 1, 2030 350,000 350,000 3.375 % Notes August 15, 2046 300,000 300,000 3.125 % Notes November 15, 2049 400,000 400,000 2.650 % Notes June 1, 2050 350,000 350,000 Finance lease obligations (see Note 7 ) 73,479 69,146 Net impact of interest rate swaps, debt issuance costs and unamortized debt discounts ( 19,563 ) ( 23,314 ) Total long-term debt 4,097,555 4,089,471 Less—current portion 753,578 2,844 Long-term portion $ 3,343,977 $ 4,086,627 Table of Contents The Hershey Company | 2022 Form 10-K | Page 65 THE HERSHEY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) In February 2021, we repaid $ 84,715 of 8.800 % Debentures due upon their maturity. In May 2021, we repaid $ 350,000 of 3.100 % Notes due upon their maturity. Aggregate annual maturities of our long-term Notes (excluding finance lease obligations and net impact of interest rate swaps, debt issuance costs and unamortized debt discounts) are as follows for the years ending December 31: 2023 $ 750,000 2024 300,000 2025 600,000 2026 500,000 2027 193,639 Thereafter 1,700,000 Our debt is principally unsecured and of equal priority. None of our debt is convertible into our Common Stock. Interest Expense Net interest expense consists of the following: For the years ended December 31, 2022 2021 2020 Interest expense $ 148,226 $ 139,156 $ 160,204 Capitalized interest ( 8,131 ) ( 9,310 ) ( 6,733 ) Interest expense 140,095 129,846 153,471 Interest income ( 2,538 ) ( 2,429 ) ( 4,097 ) Interest expense, net $ 137,557 $ 127,417 $ 149,374 5. DERIVATIVE INSTRUMENTS We are exposed to market risks arising principally from changes in foreign currency exchange rates, interest rates and commodity prices. We use certain derivative instruments to manage these risks. These include interest rate swaps to manage interest rate risk, foreign currency forward exchange contracts to manage foreign currency exchange rate risk, and commodities futures and options contracts to manage commodity market price risk exposures. In entering into these contracts, we have assumed the risk that might arise from the possible inability of counterparties to meet the terms of their contracts. We mitigate this risk by entering into exchanged-traded contracts with collateral posting requirements and/or by performing financial assessments prior to contract execution, conducting periodic evaluations of counterparty performance and maintaining a diverse portfolio of qualified counterparties. We do not expect any significant losses from counterparty defaults. Commodity Price Risk We enter into commodities futures and options contracts and other commodity derivative instruments to reduce the effect of future price fluctuations associated with the purchase of raw materials, energy requirements and transportation services. We generally hedge commodity price risks for 3 - to 24 -month periods. Our open commodity derivative contracts had a notional value of $ 243,009 as of December 31, 2022 and $ 313,200 as of December 31, 2021. Derivatives used to manage commodity price risk are not designated for hedge accounting treatment. Therefore, the changes in fair value of these derivatives are recorded as incurred within cost of sales. As discussed in Note 13 , we define our segment income to exclude gains and losses on commodity derivatives until the related inventory is sold, at which time the related gains and losses are reflected within segment income. This enables us to continue to align the derivative gains and losses with the underlying economic exposure being hedged and thereby eliminate the mark-to-market volatility within our reported segment income. Table of Contents The Hershey Company | 2022 Form 10-K | Page 66 THE HERSHEY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) Foreign Exchange Price Risk We are exposed to foreign currency exchange rate risk related to our international operations, including non-functional currency intercompany debt and other non-functional currency transactions of certain subsidiaries. Principal currencies hedged include the euro, Canadian dollar, Japanese yen, British pound, Brazilian real, Malaysian ringgit, Mexican peso and Swiss franc. We typically utilize foreign currency forward exchange contracts to hedge these exposures for periods ranging from 3 to 12 months. The contracts are either designated as cash flow hedges or are undesignated. The net notional amount of foreign exchange contracts accounted for as cash flow hedges was $ 59,448 at December 31, 2022 and $ 94,623 at December 31, 2021. The effective portion of the changes in fair value on these contracts is recorded in other comprehensive income and reclassified into earnings in the same period in which the hedged transactions affect earnings. The net notional amount of foreign exchange contracts that are not designated as accounting hedges was $ 1,843 at December 31, 2022 and $ 2,993 at December 31, 2021. The change in fair value on these instruments is recorded directly in cost of sales or selling, marketing and administrative expense, depending on the nature of the underlying exposure. Interest Rate Risk In order to manage interest rate exposure, in previous years we utilized interest rate swap agreements to protect against unfavorable interest rate changes relating to forecasted debt transactions. These swaps, which were settled upon issuance of the related debt, were designated as cash flow hedges and the gains and losses that were deferred in other comprehensive income are being recognized as an adjustment to interest expense over the same period that the hedged interest payments affect earnings. Equity Price Risk We are exposed to market price changes in certain broad market indices related to our deferred compensation obligations to our employees. To mitigate this risk, we use equity swap contracts to hedge the portion of the exposure that is linked to market-level equity returns. These contracts are not designated as hedges for accounting purposes and are entered into for periods of 3 to 12 months. The change in fair value of these derivatives is recorded in SM&A expense, together with the change in the related liabilities. The notional amount of the contracts outstanding at December 31, 2022 and 2021 was $ 18,803 and $ 24,975 , respectively. The following table presents the classification of derivative assets and liabilities within the Consolidated Balance Sheets as of December 31, 2022 and 2021: December 31, 2022 2021 Assets (1) Liabilities (1) Assets (1) Liabilities (1) Derivatives designated as cash flow hedging instruments: Foreign exchange contracts $ 3,921 $ 261 $ 2,949 $ 711 Derivatives not designated as hedging instruments: Commodities futures and options (2) 685 662 2,423 1,376 Deferred compensation derivatives 1,222 — 2,412 — Foreign exchange contracts 246 — 550 — 2,153 662 5,385 1,376 Total $ 6,074 $ 923 $ 8,334 $ 2,087 (1) Derivatives assets are classified on our Consolidated Balance Sheets within prepaid expenses and other as well as other non-current assets. Derivative liabilities are classified on our Consolidated Balance Sheets within accrued liabilities and other long-term liabilities. Table of Contents The Hershey Company | 2022 Form 10-K | Page 67 THE HERSHEY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) (2) As of December 31, 2022, amounts reflected on a net basis in assets were assets of $ 25,308 and liabilities of $ 25,296 , which are associated with cash transfers receivable or payable on commodities futures contracts reflecting the change in quoted market prices on the last trading day for the period. The comparable amounts reflected on a net basis in liabilities at December 31, 2021 were assets of $ 31,774 and liabilities of $ 32,701 . At December 31, 2022 and 2021, the remaining amount reflected in assets and liabilities related to the fair value of other non-exchange traded derivative instruments, respectively. Income Statement Impact of Derivative Instruments The effect of derivative instruments on the Consolidated Statements of Income for the years ended December 31, 2022 and 2021 was as follows: Non-designated Hedges Cash Flow Hedges Gains (losses) recognized in income (a) Gains (losses) recognized in other comprehensive income (“OCI”) Gains (losses) reclassified from AOCI into income (b) 2022 2021 2022 2021 2022 2021 Commodities futures and options $ 44,569 $ 85,402 $ — $ — $ — $ — Foreign exchange contracts ( 274 ) 547 2,056 ( 1,551 ) 636 ( 7,145 ) Interest rate swap agreements — — — — ( 10,836 ) ( 10,972 ) Deferred compensation derivatives ( 4,920 ) 6,004 — — — — Total $ 39,375 $ 91,953 $ 2,056 $ ( 1,551 ) $ ( 10,200 ) $ ( 18,117 ) (a) Gains (losses) recognized in income for non-designated commodities futures and options contracts were included in cost of sales. Gains (losses) recognized in income for non-designated foreign currency forward exchange contracts and deferred compensation derivatives were included in selling, marketing and administrative expenses. (b) Gains (losses) reclassified from AOCI into income for foreign currency forward exchange contracts were included in selling, marketing and administrative expenses. Losses reclassified from AOCI into income for interest rate swap agreements were included in interest expense. The amount of pretax net losses on derivative instruments, including interest rate swap agreements and foreign currency forward exchange contracts expected to be reclassified into earnings in the next 12 months was approximately $ 7,176 as of December 31, 2022. This amount is primarily associated with interest rate swap agreements. 6. FAIR VALUE MEASUREMENTS Accounting guidance on fair value measurements requires that financial assets and liabilities be classified and disclosed in one of the following categories of the fair value hierarchy: Level 1 – Based on unadjusted quoted prices for identical assets or liabilities in an active market. Level 2 – Based on observable market-based inputs or unobservable inputs that are corroborated by market data. Level 3 – Based on unobservable inputs that reflect the entity’s own assumptions about the assumptions that a market participant would use in pricing the asset or liability. We did no t have any Level 3 financial assets or liabilities, nor were there any transfers between levels during the periods presented. Table of Contents The Hershey Company | 2022 Form 10-K | Page 68 THE HERSHEY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) The following table presents assets and liabilities that were measured at fair value in the Consolidated Balance Sheets on a recurring basis as of December 31, 2022 and 2021: Assets (Liabilities) Level 1 Level 2 Level 3 Total December 31, 2022: Derivative Instruments: Assets: Foreign exchange contracts (1) $ — $ 4,167 $ — $ 4,167 Deferred compensation derivatives (2) — 1,222 — 1,222 Commodities futures and options (3) 685 — — 685 Liabilities: Foreign exchange contracts (1) — 261 — 261 Commodities futures and options (3) 662 — — 662 December 31, 2021: Assets: Foreign exchange contracts (1) $ — $ 3,499 $ — $ 3,499 Deferred compensation derivatives (2) — 2,412 — 2,412 Commodities futures and options (3) 2,423 — — 2,423 Liabilities: Foreign exchange contracts (1) — 711 — 711 Commodities futures and options (3) 1,376 — — 1,376 (1) The fair value of foreign currency forward exchange contracts is the difference between the contract and current market foreign currency exchange rates at the end of the period. We estimate the fair value of foreign currency forward exchange contracts on a quarterly basis by obtaining market quotes of spot and forward rates for contracts with similar terms, adjusted where necessary for maturity differences. (2) The fair value of deferred compensation derivatives is based on quoted prices for market interest rates and a broad market equity index. (3) The fair value of commodities futures and options contracts is based on quoted market prices. Other Financial Instruments The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and short-term debt approximated fair values as of December 31, 2022 and December 31, 2021 because of the relatively short maturity of these instruments. The estimated fair value of our long-term debt is based on quoted market prices for similar debt issuances and is, therefore, classified as Level 2 within the valuation hierarchy. The fair values and carrying values of long-term debt, including the current portion, were as follows: Fair Value Carrying Value At December 31, 2022 2021 2022 2021 Current portion of long-term debt $ 749,345 $ 2,844 $ 753,578 $ 2,844 Long-term debt 2,854,165 4,274,304 3,343,977 4,086,627 Total $ 3,603,510 $ 4,277,148 $ 4,097,555 $ 4,089,471 Table of Contents The Hershey Company | 2022 Form 10-K | Page 69 THE HERSHEY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) Other Fair Value Measurements In addition to assets and liabilities that are recorded at fair value on a recurring basis, GAAP requires that, under certain circumstances, we also record assets and liabilities at fair value on a nonrecurring basis. 2021 Activity In connection with the acquisitions of Lily’s, Dot’s and Pretzels during 2021, as discussed in Note 2 , we used various valuation techniques to determine fair value, with the primary techniques being discounted cash flow analysis and the relief-from-royalty, a form of the multi-period excess earnings, which use significant unobservable inputs, or Level 3 inputs, as defined by the fair value hierarchy. 2020 Activity During 2020, we recorded the following impairment charges, which use significant unobservable inputs, or Level 3 inputs, as defined by the fair value hierarchy: 2020 Adjustment to disposal group (1) $ 6,200 Other asset write-down (2) 2,943 Long-lived asset impairment charges $ 9,143 (1) In connection with the sale of the LSFC joint venture (disposal group previously classified as held for sale), we recorded impairment charges to adjust long-lived asset values. The fair value of the disposal group was supported by potential sales prices with third-party buyers. The sale of the LSFC joint venture was completed in January 2021. (2) In connection with a previous sale, the Company wrote-down certain receivables deemed uncollectible. 7. LEASES We lease office and retail space, warehouse and distribution facilities, land, vehicles, and equipment. We determine if an agreement is or contains a lease at inception. Leases with an initial term of 12 months or less are not recorded on the balance sheet. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and liabilities are based on the estimated present value of lease payments over the lease term and are recognized at the lease commencement date. As most of our leases do not provide an implicit rate, we use our estimated incremental borrowing rate in determining the present value of lease payments. The estimated incremental borrowing rate is derived from information available at the lease commencement date. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. A limited number of our lease agreements include rental payments adjusted periodically for inflation. Our lease agreements generally do not contain residual value guarantees or material restrictive covenants. For real estate, equipment and vehicles that support selling, marketing and general administrative activities the Company accounts for the lease and non-lease components as a single lease component. These asset categories comprise the majority of our leases. The lease and non-lease components of real estate and equipment leases supporting production activities are not accounted for as a single lease component. Consideration for such contracts is allocated to the lease component and non-lease components based upon relative standalone prices either observable or estimated if observable prices are not readily available. Table of Contents The Hershey Company | 2022 Form 10-K | Page 70 THE HERSHEY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) The components of lease expense were as follows: Lease expense Classification 2022 2021 Operating lease cost Cost of sales or SM&A (1) $ 48,988 $ 44,444 Finance lease cost: Amortization of ROU assets Depreciation and amortization (1) 7,043 8,098 Interest on lease liabilities Interest expense, net 4,192 4,358 Net lease cost (2) $ 60,223 $ 56,900 (1) Supply chain-related amounts were included in cost of sales. (2) Net lease cost does not include short-term leases, variable lease costs or sublease income, all of which are immaterial. Information regarding our lease terms and discount rates were as follows: 2022 2021 Weighted-average remaining lease term (years) Operating leases 15.0 15.4 Finance leases 27.7 30.0 Weighted-average discount rate Operating leases 3.2 % 3.1 % Finance leases 6.1 % 6.1 % Supplemental balance sheet information related to leases were as follows: Leases Classification 2022 2021 Assets Operating lease ROU assets Other non-current assets $ 326,472 $ 351,712 Finance lease ROU assets, at cost Property, plant and equipment, gross 86,703 89,190 Accumulated amortization Accumulated depreciation ( 14,543 ) ( 16,694 ) Finance lease ROU assets, net Property, plant and equipment, net 72,160 72,496 Total leased assets $ 398,632 $ 424,208 Liabilities Current Operating Accrued liabilities $ 31,787 $ 36,292 Finance Current portion of long-term debt 4,285 3,564 Non-current Operating Other long-term liabilities 294,849 310,899 Finance Long-term debt 69,194 65,582 Total lease liabilities $ 400,115 $ 416,337 Table of Contents The Hershey Company | 2022 Form 10-K | Page 71 THE HERSHEY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) The maturity of our lease liabilities as of December 31, 2022 were as follows: Operating leases Finance leases Total 2023 $ 41,393 $ 8,289 $ 49,682 2024 38,789 7,478 46,267 2025 27,466 5,535 33,001 2026 23,596 4,036 27,632 2027 23,770 4,065 27,835 Thereafter 264,553 142,020 406,573 Total lease payments 419,567 171,423 590,990 Less: Imputed interest 92,931 97,944 190,875 Total lease liabilities $ 326,636 $ 73,479 $ 400,115 Supplemental cash flow and other information related to leases were as follows: 2022 2021 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 45,179 $ 42,584 Operating cash flows from finance leases $ 4,192 $ 4,730 Financing cash flows from finance leases $ 4,717 $ 4,358 ROU assets obtained in exchange for lease liabilities: Operating leases $ 13,998 $ 164,951 Finance leases $ 9,617 $ ( 6,424 ) 8. INVESTMENTS IN UNCONSOLIDATED AFFILIATES We invest in partnerships that make equity investments in projects eligible to receive federal historic and renewable energy tax credits. The tax credits, when realized, are recognized as a reduction of tax expense under the flow-through method, at which time the corresponding equity investment is written-down to reflect the remaining value of the future benefits to be realized. The equity investment write-down is reflected within other (income) expense, net in the Consolidated Statements of Income (see Note 17 ). Additionally, we acquire ownership interests in emerging snacking businesses and startup companies, which vary in method of accounting based on our percentage of ownership and ability to exercise significant influence over decisions relating to operating and financial affairs. These investments afford the Company the rights to distribute brands that the Company does not own to third-party customers primarily in North America. Net sales and expenses of our equity method investees are not consolidated into our financial statements; rather, our proportionate share of earnings or losses are recorded on a net basis within other (income) expense, net in the Consolidated Statements of Income. Both equity and cost method investments are reported within other non-current assets in our Consolidated Balance Sheets. We regularly review our investments and adjust accordingly for capital contributions, dividends received and other-than-temporary impairments. Total investments in unconsolidated affiliates was $ 133,029 and $ 93,089 as of December 31, 2022 and December 31, 2021, respectively. 9. BUSINESS REALIGNMENT ACTIVITIES We periodically undertake business realignment activities designed to increase our efficiency and focus our business in support of our key growth strategies. Costs associated with business realignment activities are classified in our Consolidated Statements of Income as follows: Table of Contents The Hershey Company | 2022 Form 10-K | Page 72 THE HERSHEY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) For the years ended December 31, 2022 2021 2020 Cost of sales $ 3 $ 5,220 $ 2,209 Selling, marketing and administrative expense 2,425 7,854 10,801 Business realignment costs 1,989 3,525 18,503 Costs associated with business realignment activities $ 4,417 $ 16,599 $ 31,513 Costs recorded by program in 2022, 2021 and 2020 related to these activities were as follows: For the years ended December 31, 2022 2021 2020 International Optimization Program: Severance and employee benefit costs $ 2,001 $ 3,982 $ 18,977 Other program costs 2,416 12,617 10,366 Margin for Growth Program: Severance — — ( 653 ) Other program costs — — 2,823 Total $ 4,417 $ 16,599 $ 31,513 Amounts classified as liabilities qualifying as exit and disposal costs primarily represent employee-related and certain third-party service provider charges, however, such amounts at December 31, 2022 are not significant and are expected to be paid within the next 12 months. 2020 International Optimization Program In the fourth quarter of 2020, we commenced a program (“International Optimization Program”) to streamline resources and investments in select international markets, including the optimization of our China operating model that will improve our operational efficiency and provide for a strong, sustainable and simplified base going forward. The International Optimization Program is expected to be completed by the end of 2023, with total pre-tax costs anticipated to be $ 50,000 to $ 75,000 . Cash costs are expected to be $ 40,000 to $ 65,000 , primarily related to workforce reductions of approximately 350 positions outside of the United States, costs to consolidate and relocate production, and third-party costs incurred to execute these activities. The costs and related benefits of the International Optimization Program relate to the International segment. However, segment operating results do not include these business realignment expenses because we evaluate segment performance excluding such costs. For the year ended December 31, 2022 and 2021, we recognized total costs associated with the International Optimization Program of $ 4,417 and $ 16,599 . These charges predominantly included third-party charges in support of our initiative to transform our China operating model, as well as severance and employee benefit costs. Since inception, we have incurred pre-tax charges to execute the program totaling $ 50,359 . Margin for Growth Program In the first quarter of 2017, the Company’s Board of Directors (“Board”) unanimously approved several initiatives under a single program focused on improving global efficiency and effectiveness, optimizing the Company’s supply chain, streamlining the Company’s operating model and reducing administrative expenses to generate long-term savings. For the year ended December 31, 2020, we recognized total costs associated with the Margin for Growth Program of $ 2,170 . These charges included other program costs, which related primarily to third-party charges in support of our initiative to improve global efficiency and effectiveness. This project was completed in mid-2020. The costs and related benefits of the Margin for Growth Program relate approximately 63 % to the North America Confectionery segment and 37 % to the International segment. However, segment operating results do not include these business realignment expenses because we evaluate segment performance excluding such costs. Table of Contents The Hershey Company | 2022 Form 10-K | Page 73 THE HERSHEY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) 10. INCOME TAXES The components of income before income taxes were as follows: For the years ended December 31, 2022 2021 2020 Domestic $ 1,816,622 $ 1,775,361 $ 1,405,254 Foreign 100,449 21,863 89,743 Income before income taxes $ 1,917,071 $ 1,797,224 $ 1,494,997 The components of our provision for income taxes were as follows: For the years ended December 31, 2022 2021 2020 Current: Federal $ 121,968 $ 161,402 $ 117,348 State 85,741 60,979 46,198 Foreign 27,656 78,650 29,158 235,365 301,031 192,704 Deferred: Federal 34,848 26,726 24,486 State 3,393 8,253 3,746 Foreign ( 1,352 ) ( 21,605 ) ( 1,352 ) 36,889 13,374 26,880 Total provision for income taxes $ 272,254 $ 314,405 $ 219,584 Table of Contents The Hershey Company | 2022 Form 10-K | Page 74 THE HERSHEY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) Deferred taxes reflect temporary differences between the tax basis and financial statement carrying value of assets and liabilities. The significant temporary differences that comprised the deferred tax assets and liabilities are as follows: December 31, 2022 2021 Deferred tax assets: Post-retirement benefit obligations $ 40,100 $ 51,026 Accrued expenses and other reserves 78,523 81,847 Stock-based compensation 19,847 21,898 Derivative instruments 3,983 — Lease liabilities 91,099 95,503 Accrued trade promotion reserves 23,082 25,382 Net operating loss carryforwards 130,944 152,389 Capital loss carryforwards 1,999 2,522 Other 52,802 49,760 Gross deferred tax assets 442,379 480,327 Valuation allowance ( 137,531 ) ( 167,788 ) Total deferred tax assets 304,848 312,539 Deferred tax liabilities: Property, plant and equipment, net 247,964 234,474 Acquired intangibles 193,160 168,087 Lease ROU assets 28,573 76,285 Inventories 72,602 20,105 Derivative instruments — 1,352 Pension 11,038 11,871 Other 39,416 47,496 Total deferred tax liabilities 592,753 559,670 Net deferred tax liabilities $ ( 287,905 ) $ ( 247,131 ) Included in: Non-current deferred tax assets, net $ 40,498 $ 40,873 Non-current deferred tax liabilities, net ( 328,403 ) ( 288,004 ) Net deferred tax liabilities $ ( 287,905 ) $ ( 247,131 ) Changes in deferred taxes were primarily due to acquired intangibles and accelerated tax depreciation on property, plant and equipment. The valuation allowances as of December 31, 2022 and 2021 were primarily related to various foreign jurisdictions' net operating loss carryforwards and other deferred tax assets that we do not expect to realize. Table of Contents The Hershey Company | 2022 Form 10-K | Page 75 THE HERSHEY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) The following table reconciles the federal statutory income tax rate with our effective income tax rate: For the years ended December 31, 2022 2021 2020 Federal statutory income tax rate 21.0 % 21.0 % 21.0 % Increase (reduction) resulting from: State income taxes, net of Federal income tax benefits 3.2 2.8 2.7 Foreign rate differences ( 0.1 ) ( 0.2 ) ( 0.5 ) Historic and solar tax credits ( 9.9 ) ( 6.2 ) ( 7.7 ) Tax contingencies 0.4 1.7 0.1 Stock compensation ( 0.7 ) ( 0.5 ) ( 0.6 ) Other, net 0.3 ( 1.1 ) ( 0.3 ) Effective income tax rate 14.2 % 17.5 % 14.7 % A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: December 31, 2022 2021 Balance at beginning of year $ 143,305 $ 108,543 Additions for tax positions taken during prior years 17,987 40,145 Reductions for tax positions taken during prior years ( 9,310 ) ( 3,601 ) Additions for tax positions taken during the current year 4,112 14,329 Settlements — ( 9,858 ) Expiration of statutes of limitations ( 7,749 ) ( 6,253 ) Balance at end of year $ 148,345 $ 143,305 The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $ 120,699 as of December 31, 2022 and $ 117,552 as of December 31, 2021. We report accrued interest and penalties related to unrecognized tax benefits in income tax expense. We recognized a net tax expense of $ 4,862 , $ 8,924 and $ 1,564 in 2022, 2021 and 2020, respectively, for interest and penalties. Accrued net interest and penalties were $ 25,328 as of December 31, 2022 and $ 20,466 as of December 31, 2021. The Company and its subsidiaries file tax returns in the United States, including various state and local returns, and in other foreign jurisdictions. We are routinely audited by taxing authorities in our filing jurisdictions, and a number of these disputes are currently underway, including multi-year controversies at various stages of review, negotiation and litigation in Mexico, China, Canada and the United States. The outcome of tax audits cannot be predicted with certainty, including the timing of resolution or potential settlements. If any issues addressed in our tax audits are resolved in a manner not consistent with management’s expectations, we could be required to adjust our provision for income taxes in the period such resolution occurs. Based on our current assessments, we believe adequate provision has been made for all income tax uncertainties. We reasonably expect reductions in the liability for unrecognized tax benefits of approximately $ 22,253 within the next 12 months because of the expiration of statutes of limitations and settlements of tax audits. As of December 31, 2022, we had approximately $ 620,697 of undistributed earnings of our international subsidiaries. During 2020, previously undistributed earnings of certain international subsidiaries were no longer considered indefinitely reinvested; however, the Company had previously recognized a one-time U.S. repatriation tax due under U.S. tax reform, and as a result, only an immaterial amount of withholding tax was recognized. We intend to continue to reinvest the remainder of the earnings outside of the United States for which there would be a material tax implication to distributing, such as withholding tax, for the foreseeable future and, therefore, have not recognized additional tax expense on these earnings beyond the one-time U.S. repatriation tax due under the 2017 Tax Cuts and Jobs Act. Table of Contents The Hershey Company | 2022 Form 10-K | Page 76 THE HERSHEY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) Investments in Partnerships Qualifying for Tax Credits We invest in partnerships which make equity investments in projects eligible to receive federal historic and energy tax credits. The investments are accounted for under the equity method and reported within other non-current assets in our Consolidated Balance Sheets. The tax credits, when realized, are recognized as a reduction of tax expense under the flow-through method, at which time the corresponding equity investment is written-down to reflect the remaining value of the future benefits to be realized. For the years ended December 31, 2022, 2021 and 2020 we recognized investment tax credits and related outside basis difference benefits totaling $ 228,819 , $ 136,243 and $ 146,021 , respectively, and we wrote-down the equity investment by $ 188,286 , $ 113,756 and $ 125,579 , respectively, to reflect the realization of these benefits. The equity investment write-down is reflected within other (income) expense, net in the Consolidated Statements of Income (see Note 17 ). Inflation Reduction Act On August 16, 2022, the Inflation Reduction Act (“IRA”) was signed into law. The IRA enacted a 15% corporate minimum tax on certain corporations and an excise tax on share repurchases after December 31, 2022, and created and extended certain energy-related tax credits and incentives, as well as other provisions. We currently do not expect the tax-related provisions of the IRA to have a material impact on our consolidated financial statements, including our annual effective tax rate, or on our liquidity. We will continue to monitor and assess the impact the IRA may have on our business and financial results. American Rescue Plan Act On March 11, 2021, the American Rescue Plan Act (“ARPA”) was signed into law. The ARPA strengthens and extends certain federal programs enacted through the Coronavirus Aid, Relief, and Economic Security Act and other coronavirus disease 2019 (“COVID-19”) relief measures, and establishes new federal programs, including provisions on taxes, healthcare and unemployment benefits. The ARPA did not have a material impact on our consolidated financial statements for the years ended December 31, 2022 and 2021. Coronavirus Aid, Relief, and Economic Security Act On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was signed into law. The CARES Act provides a substantial stimulus and assistance package intended to address the impact of the COVID-19 pandemic, including tax relief and government loans, grants and investments. The CARES Act did not have a material impact on our consolidated financial statements for the years ended December 31, 2022, 2021 and 2020. 11. PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS We sponsor a number of defined benefit pension plans. The primary plans are The Hershey Company Retirement Plan and The Hershey Company Retirement Plan for Hourly Employees. These are cash balance plans that provide pension benefits for most domestic employees hired prior to January 1, 2007. We also sponsor two post-retirement benefit plans: health care and life insurance. The health care plan is contributory, with participants’ contributions adjusted annually. The life insurance plan is non-contributory. Table of Contents The Hershey Company | 2022 Form 10-K | Page 77 THE HERSHEY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) Obligations and Funded Status A summary of the changes in benefit obligations, plan assets and funded status of these plans is as follows: Pension Benefits Other Benefits December 31, 2022 2021 2022 2021 Change in benefit obligation Projected benefit obligation at beginning of year $ 1,076,180 $ 1,168,838 $ 211,490 $ 243,308 Service cost 17,500 21,361 302 1,879 Interest cost 30,491 18,320 4,603 3,857 Actuarial (gain) loss ( 184,775 ) ( 33,984 ) ( 28,145 ) ( 14,787 ) Settlement ( 82,907 ) ( 75,985 ) — — Currency translation and other ( 3,268 ) 619 ( 613 ) 113 Benefits paid ( 22,936 ) ( 22,989 ) ( 22,748 ) ( 22,880 ) Projected benefit obligation at end of year 830,285 1,076,180 164,889 211,490 Change in plan assets Fair value of plan assets at beginning of year 1,098,191 1,100,245 — — Actual return on plan assets ( 196,969 ) 68,361 — — Employer contributions 55,799 28,220 22,748 22,880 Settlement ( 82,907 ) ( 75,985 ) — — Currency translation and other ( 2,746 ) 339 — — Benefits paid ( 22,936 ) ( 22,989 ) ( 22,748 ) ( 22,880 ) Fair value of plan assets at end of year 848,432 1,098,191 — — Funded status at end of year $ 18,147 $ 22,011 $ ( 164,889 ) $ ( 211,490 ) Amounts recognized in the Consolidated Balance Sheets: Other assets $ 53,495 $ 71,618 $ — $ — Accrued liabilities ( 7,652 ) ( 12,584 ) ( 17,715 ) ( 17,886 ) Other long-term liabilities ( 27,696 ) ( 37,023 ) ( 147,174 ) ( 193,604 ) Total $ 18,147 $ 22,011 $ ( 164,889 ) $ ( 211,490 ) Amounts recognized in Accumulated Other Comprehensive Income (Loss), net of tax: Actuarial net (loss) gain $ ( 150,378 ) $ ( 132,917 ) $ 19,689 $ 1,137 Net prior service credit 12,435 15,399 — — Net amounts recognized in AOCI $ ( 137,943 ) $ ( 117,518 ) $ 19,689 $ 1,137 The projected benefit obligation during 2022 was impacted by actuarial gain of $ 184,775 which was mainly the result of the discount rate assumption increasing from 2.7 % at December 31, 2021 to 5.5 % at December 31, 2022. The accumulated benefit obligation for all defined benefit pension plans was $ 799,635 as of December 31, 2022 and $ 1,031,197 as of December 31, 2021. Table of Contents The Hershey Company | 2022 Form 10-K | Page 78 THE HERSHEY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) Plans with accumulated benefit obligations in excess of plan assets were as follows: December 31, 2022 2021 Projected benefit obligation $ 79,932 $ 108,034 Accumulated benefit obligation 68,665 92,462 Fair value of plan assets 44,584 58,427 Net Periodic Benefit Cost The components of net periodic benefit cost were as follows: Pension Benefits Other Benefits For the years ended December 31, 2022 2021 2020 2022 2021 2020 Amounts recognized in net periodic benefit cost Service cost $ 17,500 $ 21,361 $ 21,734 $ 302 $ 1,879 $ 159 Interest cost 30,491 18,320 26,112 4,603 3,857 6,029 Expected return on plan assets ( 47,637 ) ( 49,091 ) ( 52,907 ) — — — Amortization of prior service (credit) cost ( 5,651 ) ( 6,142 ) ( 7,308 ) — — 300 Amortization of net loss 16,060 20,556 26,952 ( 92 ) 1,593 ( 39 ) Settlement loss 20,692 16,085 13,421 — — — Total net periodic benefit cost $ 31,455 $ 21,089 $ 28,004 $ 4,813 $ 7,329 $ 6,449 Change in plan assets and benefit obligations recognized in AOCI, pre-tax Actuarial net (gain) loss $ 22,609 $ ( 80,047 ) $ ( 15,606 ) $ ( 26,212 ) $ ( 16,374 ) $ 15,266 Prior service cost (credit) 5,601 6,447 7,310 — — ( 300 ) Total recognized in other comprehensive (income) loss, pre-tax $ 28,210 $ ( 73,600 ) $ ( 8,296 ) $ ( 26,212 ) $ ( 16,374 ) $ 14,966 Net amounts recognized in periodic benefit cost and AOCI $ 59,665 $ ( 52,511 ) $ 19,708 $ ( 21,399 ) $ ( 9,045 ) $ 21,415 The non-service cost components of net periodic benefit cost relating to pension and other post-retirement benefit plans is reflected within other (income) expense, net in the Consolidated Statements of Income (see Note 17 ). Assumptions The weighted-average assumptions used in computing the year end benefit obligations were as follows: Pension Benefits Other Benefits December 31, 2022 2021 2022 2021 Discount rate 5.5 % 2.7 % 5.5 % 2.9 % Rate of increase in compensation levels 3.4 % 3.5 % 4.0 % N/A Interest crediting rate 4.7 % 4.6 % N/A N/A Table of Contents The Hershey Company | 2022 Form 10-K | Page 79 THE HERSHEY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) The weighted-average assumptions used in computing net periodic benefit cost were as follows: Pension Benefits Other Benefits For the years ended December 31, 2022 2021 2020 2022 2021 2020 Discount rate 2.7 % 2.3 % 3.1 % 2.9 % 2.5 % 3.2 % Expected long-term return on plan assets 4.9 % 4.8 % 5.3 % N/A N/A N/A Rate of compensation increase 3.5 % 3.5 % 3.6 % N/A N/A N/A The Company’s discount rate assumption is determined by developing a yield curve based on high quality corporate bonds with maturities matching the plans’ expected benefit payment streams. The plans’ expected cash flows are then discounted by the resulting year-by-year spot rates. We base the asset return assumption on current and expected asset allocations, as well as historical and expected returns on the plan asset categories. We utilize a full yield curve approach in the estimation of service and interest costs by applying the specific spot rates along the yield curve used in the determination of the benefit obligation to the relevant projected cash flows. This approach provides a more precise measurement of service and interest costs by improving the correlation between the projected cash flows to the corresponding spot rates along the yield curve. This approach does not affect the measurement of our pension and other post-retirement benefit liabilities but generally results in lower benefit expense in periods when the yield curve is upward sloping. For purposes of measuring our post-retirement benefit obligation at December 31, 2022, we assumed a 6.7 % annual rate of increase in the per capita cost of covered health care benefits for 2023, grading down to 5.0 % by 2030. For purposes of measuring our post-retirement benefit obligation at December 31, 2021, we assumed a 6.2 % annual rate of increase in the per capita cost of covered health care benefits for 2022, grading down to 5.0 % by 2025. The valuations and assumptions reflect adoption of the Society of Actuaries updated Pri-2012 mortality tables with MP-2021 generational projection scales, which we adopted as of December 31, 2021. The Society of Actuaries did not update the Pri-2012 mortality tables in 2022. Adoption of the updated scales did not have a significant impact on our current pension obligations or net period benefit cost since our primary plans are cash balance plans and most participants take lump-sum settlements upon retirement. Plan Assets We broadly diversify our pension plan assets across public equity, fixed income, diversified credit strategies and diversified alternative strategies asset classes. Our target asset allocation for our major domestic pension plans as of December 31, 2022 was as follows: Asset Class Target Asset Allocation Cash 1 % Equity securities 27 % Fixed income securities 48 % Alternative investments, including real estate, listed infrastructure and other 24 % As of December 31, 2022, actual allocations were consistent with the targets and within our allowable ranges. We expect the level of volatility in pension plan asset returns to be in line with the overall volatility of the markets within each asset class. Table of Contents The Hershey Company | 2022 Form 10-K | Page 80 THE HERSHEY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) The following table sets forth by level, within the fair value hierarchy (as defined in Note 6 ), pension plan assets at their fair values as of December 31, 2022: Quoted prices in active markets of identical assets (Level 1) Significant other observable inputs (Level 2) Significant other unobservable inputs (Level 3) Investments Using NAV as a Practical Expedient (1) Total Cash and cash equivalents $ 327 $ 29,595 $ — $ 566 $ 30,488 Equity securities: Global all-cap (a) — — — 206,636 206,636 Fixed income securities: U.S. government/agency — — — 173,122 173,122 Corporate bonds (b) — — — 58,646 58,646 International government/corporate bonds (c) — — — 26,489 26,489 Diversified credit (d) — — — 109,926 109,926 Alternative investments: Global diversified assets (e) — — — 95,243 95,243 Real assets fund (f) — — — 147,882 147,882 Total pension plan assets $ 327 $ 29,595 $ — $ 818,510 $ 848,432 The following table sets forth by level, within the fair value hierarchy, pension plan assets at their fair values as of December 31, 2021: Quoted prices in active markets of identical assets (Level 1) Significant other observable inputs (Level 2) Significant other unobservable inputs (Level 3) Investments Using NAV as a Practical Expedient (1) Total Cash and cash equivalents $ 534 $ 23,715 $ — $ 649 $ 24,898 Equity securities: Global all-cap (a) — — — 294,090 294,090 Fixed income securities: U.S. government/agency — — — 248,579 248,579 Corporate bonds (b) — — — 78,360 78,360 International government/corporate bonds (c) — — — 31,922 31,922 Diversified credit (d) — — — 154,004 154,004 Alternative investments: Global diversified assets (e) — — — 97,412 97,412 Real assets fund (f) — — — 168,926 168,926 Total pension plan assets $ 534 $ 23,715 $ — $ 1,073,942 $ 1,098,191 (1) Certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been categorized in the fair value hierarchy but are included to reconcile to the amounts presented in our Obligations and Funded Status table. Table of Contents The Hershey Company | 2022 Form 10-K | Page 81 THE HERSHEY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) (a) This category comprises equity funds that primarily track the MSCI World Index or MSCI All Country World Index. (b) This category comprises fixed income funds primarily invested in investment grade and high yield bonds. (c) This category comprises fixed income funds primarily invested in Canadian and other international bonds. (d) This category comprises fixed income funds primarily invested in high yield bonds, loans, securitized debt and emerging market debt. (e) This category comprises diversified funds invested across alternative asset classes. (f) This category comprises funds primarily invested in publicly traded real estate securities, publicly listed infrastructure securities and real estate debt. The fair value of the Level 1 assets was based on quoted prices in active markets for the identical assets. The fair value of the Level 2 assets was determined by management based on an assessment of valuations provided by asset management entities and was calculated by aggregating market prices for all underlying securities. Investment objectives for our domestic plan assets are: • To ensure high correlation between the value of plan assets and liabilities; • To maintain careful control of the risk level within each asset class; and • To focus on a long-term return objective. We believe that there are no significant concentrations of risk within our plan assets as of December 31, 2022. We comply with the rules and regulations promulgated under the Employee Retirement Income Security Act of 1974 (“ERISA”) and we prohibit investments and investment strategies not allowed by ERISA. We do not permit direct purchases of our Company’s securities or the use of derivatives for the purpose of speculation. We invest the assets of non-domestic plans in compliance with laws and regulations applicable to those plans. Cash Flows and Plan Termination Our policy is to fund domestic pension liabilities in accordance with the limits imposed by the ERISA, federal income tax laws and the funding requirements of the Pension Protection Act of 2006. We fund non-domestic pension liabilities in accordance with laws and regulations applicable to those plans. We made total contributions to the pension plans of $ 55,799 during 2022. In 2021, we made total contributions of $ 28,220 to the pension plans. For 2023, minimum funding requirements for our pension plans are approximately $ 1,746 . Total benefit payments expected to be paid to plan participants, including pension benefits funded from the plans and other benefits funded from Company assets, are as follows: Expected Benefit Payments 2023 2024 2025 2026 2027 2028-2032 Pension Benefits $ 115,689 $ 88,637 $ 88,579 $ 91,949 $ 75,724 $ 326,440 Other Benefits 17,745 16,794 15,579 14,465 13,654 57,698 Savings Plans The Company sponsors several defined contribution plans to provide retirement benefits to employees. Contributions to The Hershey Company 401(k) Plan and similar plans for non-domestic employees are based on a portion of eligible pay up to a defined maximum. All matching contributions were made in cash. Expense associated with the defined contribution plans was $ 61,477 in 2022, $ 58,883 in 2021 and $ 52,793 in 2020. Table of Contents The Hershey Company | 2022 Form 10-K | Page 82 THE HERSHEY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) 12. STOCK COMPENSATION PLANS Share-based grants for compensation and incentive purposes are made pursuant to the Equity and Incentive Compensation Plan (“EICP”). The EICP provides for grants of one or more of the following stock-based compensation awards to employees, non-employee directors and certain service providers upon whom the successful conduct of our business is dependent: • Non-qualified stock options (“stock options”); • Performance stock units (“PSUs”) and performance stock; • Stock appreciation rights; • Restricted stock units (“RSUs”) and restricted stock; and • Other stock-based awards. As of December 31, 2022, 65.8 million shares were authorized and approved by our stockholders for grants under the EICP. The EICP also provides for the deferral of stock-based compensation awards by participants if approved by the Compensation and Human Capital Committee of our Board and if in accordance with an applicable deferred compensation plan of the Company. Currently, the Compensation and Human Capital Committee has authorized the deferral of PSU and RSU awards by certain eligible employees under the Company’s Deferred Compensation Plan. Our Board has authorized our non-employee directors to defer any portion of their cash retainer, committee chair fees and RSUs awarded that they elect to convert into deferred stock units under our Directors’ Compensation Plan. At the time stock options are exercised or PSUs and RSUs become payable, Common Stock is issued from our accumulated treasury shares. Dividend equivalents are credited on RSUs on the same date and at the same rate as dividends paid on our Common Stock. Dividend equivalents are charged to retained earnings and included in accrued liabilities until paid. Awards to employees eligible for retirement prior to the award becoming fully vested are amortized to expense over the period through the date that the employee first becomes eligible to retire and is no longer required to provide service to earn the award. In addition, historical data is used to estimate forfeiture rates and record share-based compensation expense only for those awards that are expected to vest. For the periods presented, compensation expense for all types of stock-based compensation programs and the related income tax benefit recognized were as follows: For the years ended December 31, 2022 2021 2020 Pre-tax compensation expense $ 65,991 $ 66,711 $ 57,584 Related income tax benefit 9,635 11,608 8,580 Compensation expenses for stock compensation plans are primarily included in SM&A expense. As of December 31, 2022, total stock-based compensation expense related to non-vested awards not yet recognized was $ 74,635 and the weighted-average period over which this amount is expected to be recognized was approximately 1.9 years. Stock Options The exercise price of each stock option awarded under the EICP equals the closing price of our Common Stock on the New York Stock Exchange on the date of grant. Each stock option has a maximum term of 10 years. Grants of stock options provide for pro-rated vesting, typically over a four-year period. Expense for stock options is based on grant date fair value and recognized on a straight-line method over the vesting period, net of estimated forfeitures. Table of Contents The Hershey Company | 2022 Form 10-K | Page 83 THE HERSHEY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) A summary of activity relating to grants of stock options for the year ended December 31, 2022 is as follows: Stock Options Shares Weighted-Average Exercise Price (per share) Weighted-Average Remaining Contractual Term Aggregate Intrinsic Value Outstanding at beginning of the period 1,332,956 $ 102.78 4.4 years Granted 4,025 $ 202.03 Exercised ( 351,503 ) $ 99.11 Forfeited ( 6,971 ) $ 123.07 Expired ( 1,873 ) $ 103.07 Outstanding as of December 31, 2022 976,634 $ 104.36 3.8 years $ 124,240 Options exercisable as of December 31, 2022 943,561 $ 102.54 3.7 years $ 121,749 The weighted-average fair value of options granted was $ 37.28 , $ 24.12 and $ 21.31 per share in 2022, 2021 and 2020, respectively. The fair value was estimated on the date of grant using a Black-Scholes option-pricing model and the following weighted-average assumptions: For the years ended December 31, 2022 2021 2020 Dividend yields 1.9 % 2.2 % 2.1 % Expected volatility 21.1 % 21.8 % 17.5 % Risk-free interest rates 1.9 % 1 % 1.3 % Expected term in years 6.3 6.3 6.7 • “Dividend yields” means the sum of dividends declared for the four most recent quarterly periods, divided by the average price of our Common Stock for the comparable periods; • “Expected volatility” means the historical volatility of our Common Stock over the expected term of each grant; • “Risk-free interest rates” means the U.S. Treasury yield curve rate in effect at the time of grant for periods within the contractual life of the stock option; and • “Expected term” means the period of time that stock options granted are expected to be outstanding based on historical data. The total intrinsic value of options exercised was $ 40,882 , $ 38,645 and $ 32,121 in 2022, 2021 and 2020, respectively. As of December 31, 2022, there was $ 826 of total unrecognized compensation expense related to non-vested stock option awards granted under the EICP, which we expect to recognize over a weighted-average period of 1.1 years. The following table summarizes information about stock options outstanding as of December 31, 2022: Options Outstanding Options Exercisable Range of Exercise Prices Number Outstanding as of 12/31/22 Weighted-Average Remaining Contractual Life in Years Weighted-Average Exercise Price Number Exercisable as of 12/31/22 Weighted-Average Exercise Price $ 60.68 - $ 99.90 472,273 4.1 $ 96.38 472,273 $ 96.38 $ 99.91 - $ 107.95 376,889 2.8 $ 106.88 376,889 $ 106.88 $ 107.96 - $ 202.03 127,472 5.6 $ 126.44 94,399 $ 116.00 $ 60.68 - $ 202.03 976,634 3.8 $ 104.36 943,561 $ 102.54 Table of Contents The Hershey Company | 2022 Form 10-K | Page 84 THE HERSHEY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) Performance Stock Units and Restricted Stock Units Under the EICP, we grant PSUs to selected executives and other key employees. Vesting is contingent upon the achievement of certain performance objectives. We grant PSUs over 3 -year performance cycles. If we meet targets for financial measures at the end of the applicable 3 -year performance cycle, we award a resulting number of shares of our Common Stock to the participants. The number of shares may be increased to the maximum or reduced to the minimum threshold based on the results of these performance metrics in accordance with the terms established at the time of the award . For PSUs granted, the target award is a combination of a market-based total shareholder return and performance-based components. For market-based condition components, market volatility and other factors are taken into consideration in determining the grant date fair value and the related compensation expense is recognized regardless of whether the market condition is satisfied, provided that the requisite service has been provided. For performance-based condition components, we estimate the probability that the performance conditions will be achieved each quarter and adjust compensation expenses accordingly. The performance scores of PSUs granted in 2022, 2021, and 2020 can range from 0 % to 250 % of the targeted amounts. We recognize the compensation expense associated with PSUs ratably over the 3 -year term. Compensation expense is based on the grant date fair value because the grants can only be settled in shares of our Common Stock. The grant date fair value of PSUs is determined based on the Monte Carlo simulation model for the market-based total shareholder return component and the closing market price of the Company’s Common Stock on the date of grant for performance-based components. In 2022, 2021 and 2020, we awarded RSUs to certain executive officers and other key employees under the EICP. We also awarded RSUs quarterly to non-employee directors. We recognize the compensation expense associated with employee RSUs over a specified award vesting period based on the grant date fair value of our Common Stock. We recognize expense for employee RSUs based on the straight-line method. The compensation expense associated with non-employee director RSUs is recognized ratably over the vesting period, net of estimated forfeitures. A summary of activity relating to grants of PSUs and RSUs for the period ended December 31, 2022 is as follows: Performance Stock Units and Restricted Stock Units Number of units Weighted-average grant date fair value for equity awards (per unit) Outstanding at beginning of year 1,303,521 $ 146.96 Granted 313,285 $ 211.85 Performance assumption change (1) 77,150 $ 253.68 Vested ( 516,502 ) $ 130.69 Forfeited ( 35,775 ) $ 167.81 Outstanding at end of year 1,141,679 $ 181.91 (1) Reflects the net number of PSUs above and below target levels based on the performance metrics. The following table sets forth information about the fair value of the PSUs and RSUs granted for potential future distribution to employees and non-employee directors. In addition, the table provides assumptions used to determine the fair value of the market-based total shareholder return component using the Monte Carlo simulation model on the date of grant. For the years ended December 31, 2022 2021 2020 Units granted 313,285 404,517 353,037 Weighted-average fair value at date of grant $ 211.85 $ 154.83 $ 161.30 Monte Carlo simulation assumptions: Estimated values $ 100.41 $ 66.44 $ 80.08 Dividend yields 1.8 % 2.2 % 2.0 % Expected volatility 25.3 % 26.4 % 17.3 % Table of Contents The Hershey Company | 2022 Form 10-K | Page 85 THE HERSHEY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) • “Estimated values” means the fair value for the market-based total shareholder return component of each PSU at the date of grant using a Monte Carlo simulation model; • “Dividend yields” means the sum of dividends declared for the four most recently quarterly periods, divided by the average price of our Common Stock for the comparable periods; • “Expected volatility” means the historical volatility of our Common Stock over the expected term of each grant. The fair value of shares vested totaled $ 105,668 , $ 52,008 and $ 56,294 in 2022, 2021 and 2020, respectively. Deferred PSUs, deferred RSUs and deferred stock units representing directors’ fees totaled 266,469 units as of December 31, 2022. Each unit is equivalent to one share of the Company’s Common Stock. 13. SEGMENT INFORMATION The Company reports its operations through three segments: (i) North America Confectionery, (ii) North America Salty Snacks and (iii) International. This organizational structure aligns with how our Chief Operating Decision Maker (“CODM”) manages our business, including resource allocation and performance assessment, and further aligns with our product categories and the key markets we serve. • North America Confectionery – This segment is responsible for our traditional chocolate and non-chocolate confectionery market position in the United States and Canada. This includes our business in chocolate and non-chocolate confectionery, gum and refreshment products, protein bars, spreads, snack bites and mixes, as well as pantry and food service lines. This segment also includes our retail operations, including Hershey’s Chocolate World stores in Hershey, Pennsylvania; New York, New York; Las Vegas, Nevada; Niagara Falls (Ontario) and Singapore, as well as operations associated with licensing the use of certain of the Company’s trademarks and products to third parties around the world. • North America Salty Snacks – This segment is responsible for our salty snacking products in the United States. This includes ready-to-eat popcorn, baked and trans fat free snacks, pretzels and other snacks. • International – International is a combination of all other operating segments that are not individually material, including those geographic regions where we operate outside of North America. We currently have operations and manufacture product in Mexico, Brazil, India and Malaysia, primarily for consumers in these regions, and also distribute and sell confectionery products in export markets of Asia, Latin America, Middle East, Europe, Africa and other regions. For segment reporting purposes, we use “segment income” to evaluate segment performance and allocate resources. Segment income excludes unallocated general corporate administrative expenses, unallocated mark-to-market gains and losses on commodity derivatives, business realignment and impairment charges, acquisition-related costs and other unusual gains or losses that are not part of our measurement of segment performance. These items of our operating income are managed centrally at the corporate level and are excluded from the measure of segment income reviewed by the CODM as well the measure of segment performance used for incentive compensation purposes. Accounting policies associated with our operating segments are generally the same as those described in Note 1 . 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 (gains) losses recognized in unallocated derivative (gains) losses outside of the reporting segment results until the related inventory is sold, at which time the related gains and losses are reallocated to segment income. This enables us to align the derivative gains and losses with the underlying economic exposure being hedged and thereby eliminate the mark-to-market volatility within our reported segment income. 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. Table of Contents The Hershey Company | 2022 Form 10-K | Page 86 THE HERSHEY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) Our segment net sales and earnings were as follows: For the years ended December 31, 2022 2021 2020 Net sales: North America Confectionery $ 8,536,480 $ 7,682,416 $ 7,084,860 North America Salty Snacks 1,029,405 555,424 438,224 International 853,409 733,497 626,635 Total $ 10,419,294 $ 8,971,337 $ 8,149,719 Segment income (loss): North America Confectionery $ 2,811,066 $ 2,475,873 $ 2,274,584 North America Salty Snacks 159,935 100,777 75,845 International 107,927 74,170 ( 14 ) Total segment income 3,078,928 2,650,820 2,350,415 Unallocated corporate expense (1) 735,542 614,875 520,632 Unallocated mark-to-market losses (gains) on commodity derivatives 78,182 ( 24,376 ) 6,429 Long-lived asset impairment charges (see Note 6 ) — — 9,143 Costs associated with business realignment activities (see Note 9 ) 4,417 16,599 31,513 Operating profit 2,260,787 2,043,722 1,782,698 Interest expense, net (see Note 4 ) 137,557 127,417 149,374 Other (income) expense, net (see Note 17 ) 206,159 119,081 138,327 Income before income taxes $ 1,917,071 $ 1,797,224 $ 1,494,997 (1) Includes centrally-managed (a) corporate functional costs relating to legal, treasury, finance, and human resources, (b) expenses associated with the oversight and administration of our global operations, including warehousing, distribution and manufacturing, information systems and global shared services, (c) non-cash stock-based compensation expense, (d) acquisition-related costs and (e) other gains or losses that are not integral to segment performance. Activity within the unallocated mark-to-market losses (gains) on commodity derivatives is as follows: For the years ended December 31, 2022 2021 2020 Net gains on mark-to-market valuation of commodity derivative positions recognized in income $ ( 44,569 ) $ ( 85,402 ) $ ( 6,593 ) Net gains on commodity derivative positions reclassified from unallocated to segment income 122,751 61,026 13,022 Net losses (gains) on mark-to-market valuation of commodity derivative positions recognized in unallocated derivative losses (gains) $ 78,182 $ ( 24,376 ) $ 6,429 As of December 31, 2022, the cumulative amount of mark-to-market gains on commodity derivatives that have been recognized in our consolidated cost of sales and not yet allocated to reportable segments was $ 8,735 . Based on our forecasts of the timing of the recognition of the underlying hedged items, we expect to reclassify net pretax gains on commodity derivatives of $ 1,228 to segment operating results in the next twelve months. Table of Contents The Hershey Company | 2022 Form 10-K | Page 87 THE HERSHEY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) Depreciation and amortization expense included within segment income presented above is as follows: For the years ended December 31, 2022 2021 2020 North America Confectionery $ 228,399 $ 213,113 $ 198,951 North America Salty Snacks 68,600 29,744 27,362 International 23,148 22,754 24,533 Corporate 58,812 49,391 44,061 Total $ 378,959 $ 315,002 $ 294,907 Additional information regarding our net sales and long-lived assets disaggregated by geographical region is as follows: For the years ended December 31, 2022 2021 2020 Net sales: United States $ 9,121,166 $ 7,807,606 $ 7,042,804 Other 1,298,128 1,163,731 1,106,915 Total $ 10,419,294 $ 8,971,337 $ 8,149,719 Long-lived assets: United States $ 2,272,811 $ 2,099,786 $ 1,836,114 Other 496,891 486,401 449,141 Total $ 2,769,702 $ 2,586,187 $ 2,285,255 14. EQUITY AND TREASURY STOCK ACTIVITY We had 1,055,000,000 authorized shares of capital stock as of December 31, 2022. Of this total, 900,000,000 shares were designated as Common Stock, 150,000,000 shares were designated as Class B Common Stock (“Class B Stock”) and 5,000,000 shares were designated as Preferred Stock. Each class has a par value of one dollar per share. Holders of the Common Stock and the Class B Stock generally vote together without regard to class on matters submitted to stockholders, including the election of directors. The holders of Common Stock have 1 vote per share and the holders of Class B Common Stock have 10 votes per share. However, the Common Stock holders, voting separately as a class, are entitled to elect one-sixth of the Board. With respect to dividend rights, the Common Stock holders are entitled to cash dividends 10 % higher than those declared and paid on the Class B Common Stock. Class B Stock can be converted into Common Stock on a share-for-share basis at any time. During 2022, 2,500,000 shares of Class B Common Stock were converted to Common Stock by Hershey Trust Company, as trustee for the Milton Hershey School Trust (the “School Trust”). During 2021 and 2020, no shares of Class B Stock were converted into Common Stock. Table of Contents The Hershey Company | 2022 Form 10-K | Page 88 THE HERSHEY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) Changes in the outstanding shares of Common Stock for the past three years were as follows: For the years ended December 31, 2022 2021 2020 Shares issued 221,553,025 221,553,025 221,553,025 Treasury shares at beginning of year ( 15,444,011 ) ( 13,325,898 ) ( 12,723,592 ) Stock repurchases: Shares repurchased in the open market under pre-approved share repurchase programs — ( 871,144 ) ( 951,138 ) Milton Hershey School Trust repurchase ( 1,000,000 ) — — Shares repurchased in the open market to replace Treasury Stock issued for stock options and incentive compensation ( 824,701 ) ( 2,005,500 ) ( 450,000 ) Stock issuances: Shares issued for stock options and incentive compensation 680,404 758,531 798,832 Treasury shares at end of year ( 16,588,308 ) ( 15,444,011 ) ( 13,325,898 ) Net shares outstanding at end of year 204,964,717 206,109,014 208,227,127 In July 2018, our Board of Directors approved a $ 500,000 share repurchase authorization to repurchase shares of our Common Stock. As of December 31, 2022, $ 109,983 remained available for repurchases of our Common Stock under this program. In May 2021, our Board of Directors approved an additional $ 500,000 share repurchase authorization. This program is to commence after the existing 2018 authorization is completed and is to be utilized at management’s discretion. We are authorized to purchase our outstanding shares in open market and privately negotiated transactions. The program has no expiration date and acquired shares of Common Stock will be held as treasury shares. Purchases under approved share repurchase authorizations are in addition to our practice of buying back shares sufficient to offset those issued under incentive compensation plans. Hershey Trust Company Hershey Trust Company, as trustee for the School Trust and as direct owner of investment shares, held 39,630 shares of our Common Stock as of December 31, 2022. As trustee for the School Trust, Hershey Trust Company held 58,112,012 shares of the Class B Common Stock as of December 31, 2022, and was entitled to cast approximately 80 % of all of the votes entitled to be cast on matters requiring the vote of both classes of our common stock voting together. Hershey Trust Company, as trustee for the School Trust, or any successor trustee, or Milton Hershey School, as appropriate, must approve any issuance of shares of Common Stock or other action that would result in it not continuing to have voting control of our Company. Stock Purchase Agreements In February 2023, the Company entered into a Stock Purchase Agreement with Hershey Trust Company, as trustee for the School Trust, pursuant to which the Company purchased 1,000,000 shares of the Company’s Common Stock from the School Trust at a price equal to $ 239.91 per share, for a total purchase price of $ 239,910 . As a result of this repurchase, our July 2018 share repurchase authorization program was completed in February 2023. In February 2022, the Company entered into a Stock Purchase Agreement with Hershey Trust Company, as trustee for the School Trust, pursuant to which the Company purchased 1,000,000 shares of the Company’s Common Stock from the School Trust at a price equal to $ 203.35 per share, for a total purchase price of $ 203,350 . Table of Contents The Hershey Company | 2022 Form 10-K | Page 89 THE HERSHEY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) 15. COMMITMENTS AND CONTINGENCIES Purchase obligations We enter into certain obligations for the purchase of raw materials. These obligations are primarily in the form of forward contracts for the purchase of raw materials from third-party brokers and dealers. These contracts minimize the effect of future price fluctuations by fixing the price of part or all of these purchase obligations. Total obligations consisted of fixed price contracts for the purchase of commodities and unpriced contracts that were valued using market prices as of December 31, 2022. The cost of commodities associated with the unpriced contracts is variable as market prices change over future periods. We mitigate the variability of these costs to the extent that we have entered into commodities futures contracts or other commodity derivative instruments to hedge our costs for those periods. Increases or decreases in market prices are offset by gains or losses on commodities futures contracts or other commodity derivative instruments. Taking delivery of and making payments for the specific commodities for use in the manufacture of finished goods satisfies our obligations under the forward purchase contracts. For each of the three years in the period ended December 31, 2022, we satisfied these obligations by taking delivery of and making payment for the specific commodities. As of December 31, 2022, we had entered into agreements for the purchase of raw materials with various suppliers. Subject to meeting our quality standards, the purchase obligations covered by these agreements were as follows as of December 31, 2022: in millions 2023 2024 2025 2026 2027 Purchase obligations $ 1,871.0 $ 202.6 $ 12.5 $ 12.5 $ 12.5 Environmental contingencies We have a number of facilities that contain varying amounts of asbestos in certain locations within the facilities. Our asbestos management program is compliant with current applicable regulations, which require that we handle or dispose of asbestos in a special manner if such facilities undergo major renovations or are demolished. We do not have sufficient information to estimate the fair value of any asset retirement obligations related to these facilities. We cannot specify the settlement date or range of potential settlement dates and, therefore, sufficient information is not available to apply an expected present value technique. We expect to maintain the facilities with repairs and maintenance activities that would not involve or require the removal of significant quantities of asbestos. Legal contingencies On February 12, 2021, Issouf Coubaly, individually and on behalf of proposed class members, filed a complaint (Coubaly v. Nestlé U.S.A. et al., 1:21-cv-00386-DLF (D.D.C. Feb. 12, 2021)) in the District Court of the District of Columbia, seeking injunctive relief and unspecified damages for alleged violations of child labor and human trafficking laws under the Trafficking Victims Protection Reauthorization Act. The Company was among several defendants named in the suit. The defendants filed a joint motion to dismiss the case on July 30, 2021, and on June 28, 2022, the District Court granted the motion and dismissed the case without prejudice. On July 22, 2022, the plaintiffs filed an appeal in the U.S. Court of Appeals for the District of Columbia challenging the dismissal of the case. The Company continues to believe that the suit, including the appeal, is without merit and is defending vigorously against the appeal. In addition to the above-referenced matter, the Company is subject to certain legal proceedings and claims arising out of the ordinary course of our business, which cover a wide range of matters including trade regulation, product liability, advertising, contracts, environmental issues, patent and trademark matters, labor and employment matters, human and workplace rights matters and tax. While it is not feasible to predict or determine the outcome of such proceedings and claims with certainty, in our opinion these matters, both individually and in the aggregate, are not expected to have a material effect on our financial condition, results of operations or cash flows. Table of Contents The Hershey Company | 2022 Form 10-K | Page 90 THE HERSHEY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) Collective Bargaining As of December 31, 2022, the Company employed approximately 18,075 full-time and 1,790 part-time employees worldwide. Collective bargaining agreements covered approximately 6,470 employees, or approximately 33 % of the Company’s employees worldwide. During 2023, agreements will be negotiated for certain employees at five facilities, four of which are outside of the United States, comprising approximately 67 % of total employees under collective bargaining agreements. We currently expect that we will be able to renegotiate such agreements on satisfactory terms when they expire. Table of Contents The Hershey Company | 2022 Form 10-K | Page 91 THE HERSHEY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) 16. EARNINGS PER SHARE We compute basic earnings per share for Common Stock and Class B common stock using the two-class method. The Class B common stock is convertible into Common Stock on a share-for-share basis at any time. In June 2022, 1,500,000 shares of Class B Common Stock were converted to Common Stock by Hershey Trust Company, as trustee for the School Trust. The computation of diluted earnings per share for Common Stock assumes the conversion of Class B common stock using the if-converted method, while the diluted earnings per share of Class B common stock does not assume the conversion of those shares. We compute basic and diluted earnings per share based on the weighted-average number of shares of Common Stock and Class B common stock outstanding as follows: For the years ended December 31, 2022 2021 2020 Common Stock Class B Common Stock Common Stock Class B Common Stock Common Stock Class B Common Stock Basic earnings per share: Numerator: Allocation of distributed earnings (cash dividends paid) $ 567,897 $ 207,133 $ 498,084 $ 187,903 $ 467,013 $ 173,719 Allocation of undistributed earnings 637,438 232,349 574,772 216,753 464,802 173,174 Total earnings—basic $ 1,205,335 $ 439,482 $ 1,072,856 $ 404,656 $ 931,815 $ 346,893 Denominator (shares in thousands): Total weighted-average shares—basic 146,713 58,822 146,120 60,614 147,832 60,614 Earnings Per Share—basic $ 8.22 $ 7.47 $ 7.34 $ 6.68 $ 6.30 $ 5.72 Diluted earnings per share: Numerator: Allocation of total earnings used in basic computation $ 1,205,335 $ 439,482 $ 1,072,856 $ 404,656 $ 931,815 $ 346,893 Reallocation of total earnings as a result of conversion of Class B common stock to Common stock 439,482 — 404,656 — 346,893 — Reallocation of undistributed earnings — ( 1,201 ) — ( 1,098 ) — ( 822 ) Total earnings—diluted $ 1,644,817 $ 438,281 $ 1,477,512 $ 403,558 $ 1,278,708 $ 346,071 Denominator (shares in thousands): Number of shares used in basic computation 146,713 58,822 146,120 60,614 147,832 60,614 Weighted-average effect of dilutive securities: Conversion of Class B common stock to Common shares outstanding 58,822 — 60,614 — 60,614 — Employee stock options 571 — 609 — 600 — Performance and restricted stock units 469 — 415 — 368 — Total weighted-average shares—diluted 206,575 58,822 207,758 60,614 209,414 60,614 Earnings Per Share—diluted $ 7.96 $ 7.45 $ 7.11 $ 6.66 $ 6.11 $ 5.71 The earnings per share calculations for the years ended December 31, 2022, 2021 and 2020 excluded 5 , 43 and 15 stock options (in thousands), respectively, that would have been antidilutive. Table of Contents The Hershey Company | 2022 Form 10-K | Page 92 THE HERSHEY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) 17. OTHER (INCOME) EXPENSE, NET Other (income) expense, net reports certain gains and losses associated with activities not directly related to our core operations. A summary of the components of other (income) expense, net is as follows: For the years ended December 31, 2022 2021 2020 Write-down of equity investments in partnerships qualifying for historic and renewable energy tax credits (see Note 8 ) $ 188,286 $ 113,756 $ 125,579 Non-service cost components of net periodic benefit cost relating to pension and other post-retirement benefit plans (see Note 11 ) 18,466 5,177 12,560 Other (income) expense, net ( 593 ) 148 188 Total $ 206,159 $ 119,081 $ 138,327 18. RELATED PARTY TRANSACTIONS Hershey Trust Company, as trustee for the trust established by Milton S. and Catherine S. Hershey that has as its sole beneficiary the School Trust, maintains voting control over The Hershey Company. In any given year, we may engage in certain transactions with Hershey Trust Company, Milton Hershey School, the Milton Hershey School Trust and companies owned by and/or affiliated with any of the foregoing. Most transactions with these related parties are immaterial and do not require disclosure, but certain transactions are more significant in nature and have been deemed material for disclosure. A summary of material related party transactions with Hershey Trust Company and/or its affiliates for the year ended December 31, 2022 is as follows: Sale and Donation of Property, Plant and Equipment In May 2022, the Company entered into a Purchase and Sale Agreement (the “Purchase Agreement”) with Hershey Trust Company, as trustee for the School Trust, pursuant to which the Company agreed to sell certain real and personal property consisting of approximately six acres of land located in Hershey, Pennsylvania, together with portions of a building located on the land. Additionally, in June 2022, the Company entered into a Donation Agreement with Hershey Trust Company, as trustee for The M.S. Hershey Foundation, pursuant to which the Company agreed to donate a portion of the building concurrently with the closing of the Purchase Agreement. The sale and donation transactions closed in June 2022. Total proceeds from the sale were approximately $ 6,300 (net of transaction and closing costs), resulting in a loss of $ 13,568 , which was recorded in the SM&A expense caption within the Consolidated Statements of Income. The fair values of the disposed assets were supported by a proposed sales price submitted by a third-party buyer received prior to executing the Purchase Agreement. Stock Purchase Agreements In February 2023 and February 2022, the Company entered into Stock Purchase Agreements with Hershey Trust Company, as trustee for the School Trust, pursuant to which the Company purchased shares of its Common Stock from the School Trust (see Note 14 ). Table of Contents The Hershey Company | 2022 Form 10-K | Page 93 THE HERSHEY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) 19. SUPPLEMENTAL BALANCE SHEET INFORMATION The components of certain Consolidated Balance Sheet accounts are as follows: December 31, 2022 2021 Inventories: Raw materials $ 372,612 $ 395,358 Goods in process 137,298 110,008 Finished goods 855,217 649,082 Inventories at FIFO 1,365,127 1,154,448 Adjustment to LIFO ( 192,008 ) ( 165,937 ) Total inventories $ 1,173,119 $ 988,511 Prepaid expenses and other: Prepaid expenses $ 143,888 $ 129,287 Other current assets 128,307 127,678 Total prepaid expenses and other $ 272,195 $ 256,965 Property, plant and equipment: Land $ 155,963 $ 154,494 Buildings 1,545,053 1,508,139 Machinery and equipment 3,592,251 3,443,500 Construction in progress 416,220 294,824 Property, plant and equipment, gross 5,709,487 5,400,957 Accumulated depreciation ( 2,939,785 ) ( 2,814,770 ) Property, plant and equipment, net $ 2,769,702 $ 2,586,187 Other non-current assets: Pension $ 53,495 $ 71,618 Capitalized software, net 320,034 260,656 Operating lease ROU assets 326,472 351,712 Investments in unconsolidated affiliates 133,029 93,089 Other non-current assets 111,959 91,128 Total other non-current assets $ 944,989 $ 868,203 Accrued liabilities: Payroll, compensation and benefits $ 293,865 $ 291,446 Advertising, promotion and product allowances 337,024 305,050 Operating lease liabilities 31,787 36,292 Other 169,842 222,850 Total accrued liabilities $ 832,518 $ 855,638 Other long-term liabilities: Post-retirement benefits liabilities $ 147,174 $ 193,604 Pension benefits liabilities 27,696 37,023 Operating lease liabilities 294,849 310,899 Other 250,023 245,532 Total other long-term liabilities $ 719,742 $ 787,058 Accumulated other comprehensive loss: Foreign currency translation adjustments $ ( 110,364 ) $ ( 100,025 ) Pension and post-retirement benefit plans, net of tax ( 118,254 ) ( 116,381 ) Cash flow hedges, net of tax ( 23,715 ) ( 32,809 ) Total accumulated other comprehensive loss $ ( 252,333 ) $ ( 249,215 ) Table of Contents The Hershey Company | 2022 Form 10-K | Page 94 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.