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UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K x Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2012 OR Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to Commission File Number 1-183 THE HERSHEY COMPANY (Exact name of registrant as specified in its charter) 23-0691590 Delaware (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 100 Crystal A Drive, Hershey, PA (Address of principal executive offices) 17033 (Zip Code) Registrant's telephone number, including area code: (717) 534-4200 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock, one dollar par value New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: Title of class Class B Common Stock, one dollar par value Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No x Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of \"large accelerated filer,\" \"accelerated filer\" and \"smaller reporting company\" in Rule 12b-2 of the Exchange Act. (Check one) Large accelerated filer x Accelerated filer Non-accelerated filer Smaller reporting company (Do not check if a smaller reporting company) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No x State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant's most recently completed second fiscal quarter. Common Stock, one dollar par value$10,983,764,663 as of June 29, 2012. Class B Common Stock, one dollar par value$1,289,697 as of June 29, 2012. While the Class B Common Stock is not listed for public trading on any exchange or market system, shares of that class are convertible into shares of Common Stock at any time on a share-for-share basis. The market value indicated is calculated based on the closing price of the Common Stock on the New York Stock Exchange on June 29, 2012. Indicate the number of shares outstanding of each of the registrant's classes of common stock as of the latest practicable date. Common Stock, one dollar par value163,458,859 shares, as of February 6, 2013. Class B Common Stock, one dollar par value60,628,737 shares, as of February 6, 2013. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Company's Proxy Statement for the Company's 2013 Annual Meeting of Stockholders are incorporated by reference into Part III of this report. PART I Item 1. BUSINESS The Hershey Company was incorporated under the laws of the State of Delaware on October 24, 1927 as a successor to a business founded in 1894 by Milton S. Hershey. In this report, the terms \"Company,\" \"we,\" \"us,\" or \"our\" mean The Hershey Company and its wholly-owned subsidiaries and entities in which it has a controlling financial interest, unless the context indicates otherwise. We are the largest producer of quality chocolate in North America and a global leader in chocolate and sugar confectionery. Our principal product groups include chocolate and sugar confectionery products; pantry items, such as baking ingredients, toppings and beverages; and gum and mint refreshment products. Reportable Segment We operate as a single reportable segment in manufacturing, marketing, selling and distributing our products under more than 80 brand names. Our three operating segments comprise geographic regions including the United States, the Americas, and Asia, Europe, the Middle East and Africa (\"AEMEA\"). We market our products in approximately 70 countries worldwide. For segment reporting purposes, we aggregate our operations in the United States and in the Americas, which includes Canada, Mexico, Brazil, Central and South America, Puerto Rico and our exports business in this region. We base this aggregation on similar economic characteristics; products and services; production processes; types or classes of customers; distribution methods; and the similar nature of the regulatory environment in each location. We aggregate our AEMEA operations with the United States and the Americas to form one reportable segment. Our AEMEA operations share most of the aggregation criteria and represent less than 10% of our consolidated revenues, operating profits and assets. Organization We operate under a matrix reporting structure designed to ensure continued focus on North America and on continuing our transformation into a more global company. Our business is organized around geographic regions and strategic business units. It is designed to enable us to build processes for repeatable success in our global markets. Our geographic regions are accountable for delivering our annual financial plans. The key regions are: The United States; The Americas, including Canada, Mexico, Brazil, Central and South America, Puerto Rico and exports to this region; and AEMEA, including Asia, Europe, the Middle East, Africa and exports to these geographical areas. In addition, The Hershey Experience manages our retail operations globally, including Hershey's Chocolate World Stores in Hershey, Pennsylvania, New York City, San Francisco, Chicago, Shanghai, Niagara Falls (Ontario), Dubai, and Singapore. Our two strategic business units are the chocolate business unit and the sweets and refreshment business unit. These strategic business units focus on certain components of our product line and are responsible for building and leveraging the Company's global brands, and disseminating best demonstrated practices around the world. Business Acquisition In January 2012, we acquired all of the outstanding stock of Brookside Foods Ltd. (\"Brookside\"), a privately held confectionery company based in Abbottsford, British Columbia, Canada. As part of this transaction, we acquired two production facilities located in British Columbia and Quebec. The Brookside product line is primarily sold in the U.S. and Canada in a take home re-sealable pack type. At the time of the acquisition, annual net sales of the business were approximately $90 million. The business complements our position in North America and we are making investments in manufacturing capabilities and conducting market research that will enable future growth. 1 Products United States The primary products we sell in the United States include the following: Under the HERSHEY'S brand franchise: HERSHEY'S milk chocolate bar HERSHEY'S BLISS chocolates HERSHEY'S milk chocolate with almonds bar HERSHEY'S COOKIES 'N' CRME candy bar HERSHEY'S Extra Dark pure dark chocolate HERSHEY'S COOKIES 'N' CRME DROPS candy HERSHEY'S NUGGETS chocolates HERSHEY'S POT OF GOLD boxed chocolates HERSHEY'S DROPS chocolates HERSHEY'S sugar free chocolate candy HERSHEY'S AIR DELIGHT aerated milk chocolate HERSHEY'S HUGS candies HERSHEY'S MINIATURES chocolate candy HERSHEY'S SIMPLE PLEASURES candy Under the REESE'S brand franchise: REESE'S peanut butter cups REESE'S sugar free peanut butter cups REESE'S peanut butter cups minis REESE'S crispy and crunchy bar REESE'S PIECES candy REESE'S WHIPPS candy bar REESE'S BIG CUP peanut butter cups REESESTICKS wafer bars REESE'S NUTRAGEOUS candy bar REESE'S FAST BREAK candy bar Under the KISSES brand franchise: HERSHEY'S KISSES brand milk chocolates HERSHEY'S KISSES brand milk chocolates with almonds HERSHEY'S KISSES brand milk chocolates with cherry cordial crme HERSHEY'S KISSES brand chocolate meltaway milk chocolates HERSHEY'S KISSES brand milk chocolates filled with caramel HERSHEY'S KISSES brand SPECIAL DARK mildly sweet chocolates 2 Our other products we sell in the United States include the following: 5th AVENUE candy bar ROLO minis ALMOND JOY candy bar SKOR toffee bar ALMOND JOY PIECES candy SPECIAL DARK mildly sweet chocolate bar BROOKSIDE chocolate covered real fruit juice pieces SPECIAL DARK PIECES candy CADBURY chocolates SYMPHONY milk chocolate bar CARAMELLO candy bar SYMPHONY milk chocolate bar with almonds and toffee GOOD & PLENTY candy TAKE5 candy bar HEATH toffee bar THINGAMAJIG candy bar JOLLY RANCHER candy TWIZZLERS candy JOLLY RANCHER CRUNCH 'N CHEW candy TWIZZLERS sugar free candy JOLLY RANCHER sugar free candy WHATCHAMACALLIT candy bar KIT KAT wafer bar WHOPPERS malted milk balls MAUNA LOA macadamia snack nuts YORK peppermint pattie MILK DUDS candy YORK sugar free peppermint pattie MOUNDS candy bar YORK PIECES candy MR. GOODBAR chocolate bar ZAGNUT candy bar PAYDAY peanut caramel bar ZERO candy bar ROLO caramels in milk chocolate We also sell products in the United States under the following product lines: Premium products Artisan Confections Company, a wholly-owned subsidiary of The Hershey Company, markets SCHARFFEN BERGER high-cacao dark chocolate products, and DAGOBA natural and organic chocolate products. Our SCHARFFEN BERGER products include chocolate bars, tasting squares and home baking products. DAGOBA products include chocolate bars, drinking chocolate and baking products. Refreshment products Our line of refreshment products includes ICE BREAKERS mints and chewing gum, ICE BREAKERS ICE CUBES chewing gum, BREATH SAVERS mints, and BUBBLE YUM bubble gum. Pantry items Pantry items include HERSHEY'S, REESE'S, HEATH , and SCHARFFEN BERGER baking products. Our toppings and sundae syrups include REESE'S , HEATH and HERSHEY'S. We sell hot cocoa mix under the HERSHEY'S BLISS brand name. Americas The primary products we sell in the Americas include the following: Canada In Canada we sell HERSHEY'S milk chocolate bars and milk chocolate with almonds bars; OH HENRY! candy bars; REESE PEANUT BUTTER CUPS candy; HERSHEY'S KISSES brand milk chocolates; TWIZZLERS candy; GLOSETTE chocolate-covered raisins, peanuts and almonds; JOLLY RANCHER candy; WHOPPERS malted milk balls; SKOR toffee bars; EAT MORE candy bars; POT OF GOLD boxed chocolates; BROOKSIDE chocolate-covered fruit, real fruit juice pieces and nuts; and CHIPITS chocolate chips. Mexico We manufacture, import, market, sell and distribute chocolate, sweets, refreshment and beverage products in Mexico, under the HERSHEY'S, KISSES, JOLLY RANCHER and PELN PELO RICO brands. 3 Brazil We manufacture, import and market chocolate, sweets and refreshment products in Brazil, including HERSHEY'S chocolate and confectionery items and IO-IO items. Exports We also import, market, sell and distribute chocolate, sweets and refreshment products in Central America and Puerto Rico, and export products to other countries in the Americas. Asia, Europe, Middle East and Africa We manufacture, market, sell and distribute sugar confectionery, beverage and cooking oil products in India, including NUTRINE and MAHA LACTO confectionery products and JUMPIN and SOFIT beverage products. We market, sell and distribute chocolate products in China, primarily under the HERSHEY'S and KISSES brands. We market, sell and distribute chocolate products in the Middle East, primarily under the HERSHEY'S, REESE'S and KISSES brands. We license the VAN HOUTEN brand name and related trademarks to sell chocolate products, cocoa, and baking products in Asia and the Middle East for the retail and duty-free distribution channels. We also export products to countries in the Asia, Europe, Middle East and Africa regions. Customers Full-time sales representatives and food brokers sell our products to our customers. Our customers are mainly wholesale distributors, chain grocery stores, mass merchandisers, chain drug stores, vending companies, wholesale clubs, convenience stores, dollar stores, concessionaires and department stores. Our customers then resell our products to end-consumers in retail outlets in North America and other locations worldwide. In 2012, sales to McLane Company, Inc., one of the largest wholesale distributors in the United States to convenience stores, drug stores, wholesale clubs and mass merchandisers, amounted to approximately 22.2% of our total net sales. McLane Company, Inc. is the primary distributor of our products to Wal-Mart Stores, Inc. Marketing Strategy and Seasonality The foundation of our marketing strategy is our strong brand equities, product innovation and the consistently superior quality of our products. We devote considerable resources to the identification, development, testing, manufacturing and marketing of new products. We have a variety of promotional programs for our customers as well as advertising and promotional programs for consumers of our products. We use our promotional programs to stimulate sales of certain products at various times throughout the year. Our sales are typically higher during the third and fourth quarters of the year, representing seasonal and holiday-related sales patterns. Product Distribution In conjunction with our sales and marketing efforts, our efficient product distribution network helps us maintain sales growth and provide superior customer service. We plan optimum stock levels and work with our customers to set reasonable delivery times. Our distribution network provides for the efficient shipment of our products from our manufacturing plants to strategically located distribution centers. We primarily use common carriers to deliver our products from these distribution points to our customers. Price Changes We change prices and weights of our products when necessary to accommodate changes in costs, the competitive environment and profit objectives, while at the same time maintaining consumer value. Price increases and weight changes help to offset increases in our input costs, including raw and packaging materials, fuel, utilities, transportation, and employee benefits. Usually there is a time lag between the effective date of list price increases and the impact of the price increases on net sales. The impact of price increases is often delayed because we honor previous commitments to planned consumer and customer promotions and merchandising events subsequent to the effective date of the price increases. In addition, promotional allowances may be increased subsequent to the effective date, delaying or partially offsetting the impact of price increases on net sales. 4 In March 2011, we announced a weighted-average increase in wholesale prices of approximately 9.7% across the majority of our U.S., Puerto Rico and export portfolio, effective immediately. The price increase applied to our instant consumable, multi-pack, packaged candy and grocery lines. Direct buying customers were able to purchase transitional amounts of product into May, and seasonal net price realization did not occur until Easter 2012. Raw Materials Cocoa products are the most significant raw materials we use to produce our chocolate products. Cocoa products, including cocoa liquor, cocoa butter and cocoa powder processed from cocoa beans, are used to meet manufacturing requirements. Cocoa products are purchased directly from third-party suppliers. These third-party suppliers source cocoa beans which are grown principally in Far Eastern, West African and South American equatorial regions to produce the cocoa products which we purchase. West Africa accounts for approximately 70% of the world's supply of cocoa beans. Historically, there have been instances of adverse weather, crop disease, political unrest, and other problems in cocoa-producing countries that have caused price fluctuations, but have never resulted in total loss of a particular producing country's cocoa crop and/or exports. In the event that such a disruption would occur in any given country, we believe cocoa from other producing countries and from current physical cocoa stocks in consuming countries would provide a significant supply buffer. During 2012, the average cocoa futures contract prices decreased compared with 2011, and traded in a range between $1.17 and $1.00 per pound, based on the IntercontinentalExchange futures contract. After trading at 37-year highs in early 2011, cocoa prices moderated in 2012. The table below shows annual average cocoa futures prices, and the highest and lowest monthly averages for each of the calendar years indicated. The prices are the monthly averages of the quotations at noon of the three active futures trading contracts closest to maturity on the IntercontinentalExchange. Cocoa Futures Contract Prices (dollars per pound) 2011 2012 Annual Average High $ 1.07 1.17 $ 1.34 2010 $ 1.36 2009 $ 1.28 2008 $ 1.19 1.55 1.53 1.52 1.50 1.00 0.99 Source: International Cocoa Organization Quarterly Bulletin of Cocoa Statistics 1.26 1.10 0.86 Low Our costs will not necessarily reflect market price fluctuations because of our forward purchasing and hedging practices, premiums and discounts reflective of varying delivery times, and supply and demand for our specific varieties and grades of cocoa liquor, cocoa butter and cocoa powder. As a result, the average futures contract prices are not necessarily indicative of our average costs. The Food, Conservation and Energy Act of 2008, impacts the prices of sugar, corn, peanuts and dairy products because it sets price support levels for these commodities. During 2012, prices for fluid dairy milk ranged from a low of $0.14 to a high of $0.19 per pound, on a class II fluid milk basis. Higher feed prices resulting from the historic drought in the U.S. caused dairy prices to rise starting in July, but not to the price levels experienced during 2011. Our costs for certain dairy products may not necessarily reflect market price fluctuations because of our forward purchasing practices. The price of sugar is subject to price supports under U.S. farm legislation. This legislation establishes import quotas and duties to support the price of sugar. As a result, sugar prices paid by users in the U.S. are currently substantially higher than prices on the world sugar market. In early 2012, sugar supplies in the U.S. were negatively impacted by government import restrictions; however, ideal weather in the North American sugar-growing regions caused prices to trade lower in the Fall of 2012. As a result, refined sugar prices decreased in 2012 compared with 2011, trading lower in a range from $0.54 to $0.37 per pound. Our costs for sugar will not necessarily reflect market price fluctuations primarily because of our forward purchasing and hedging practices. Peanut prices in the U.S. began the year around $1.25 per pound and decreased during the year to $0.52 per pound. Price decreases were driven by a record crop of 3.4 million tons, up 85% from 2011. Almond prices began the year at $2.20 per pound and increased to $2.90 per pound during the year driven by a decrease in almond production of 5 approximately 8% versus 2011. Our costs for peanuts and almonds will not necessarily reflect market price fluctuations because of our forward purchasing practices. We attempt to minimize the effect of future price fluctuations related to the purchase of major raw materials and certain energy requirements primarily through forward purchasing to cover our future requirements, generally for periods from 3 to 24 months. We enter into futures contracts and other commodity derivative instruments to manage price risks for cocoa products, sugar, corn sweeteners, natural gas, certain dairy products and transportation costs. However, the dairy futures markets are not as developed as many of the other commodities futures markets and, therefore, generally it is difficult to hedge our costs for dairy products by entering into futures contracts and other derivative instruments to extend coverage for long periods of time. Currently, active futures contracts are not available for use in pricing our other major raw material requirements, primarily peanuts and almonds. For more information on price risks associated with our major raw material requirements, see Commodities -Price Risk Management and Futures Contracts on page 38. Product Sourcing We manufacture or contract to our specifications for the manufacture of the products we sell. In addition, we contract with third-party suppliers to source certain ingredients. We enter into manufacturing contracts with third parties to improve our strategic competitive position and achieve cost effective production and sourcing of our products. Competition Many of our brands enjoy wide consumer acceptance and are among the leading brands sold in the marketplace in North America. We sell our brands in highly competitive markets with many other global multinational, national, regional and local firms. Some of our competitors are much larger firms that have greater resources and more substantial international operations. Trademarks, Service Marks and License Agreements We own various registered and unregistered trademarks and service marks, and have rights under licenses to use various trademarks that are of material importance to our business. We also grant trademark licenses to third parties to produce and sell pantry items, flavored milks and various other products primarily under the HERSHEY'S and REESE'S brand names. We have license agreements with several companies to manufacture and/or sell and distribute certain products. Our rights under these agreements are extendible on a long-term basis at our option. Our most significant licensing agreements are as follows: Company Brand Location Cadbury Ireland Limited YORK PETER PAUL ALMOND JOY PETER PAUL MOUNDS Worldwide Cadbury UK Limited CADBURY CARAMELLO United States Requirements None Minimum sales requirement exceeded in 2012 Socit des Produits Nestl SA KIT KAT ROLO United States Minimum unit volume sales exceeded in 2012 Huhtamki Oy affiliate GOOD & PLENTY HEATH JOLLY RANCHER MILK DUDS PAYDAY WHOPPERS Worldwide None 6 Backlog of Orders We manufacture primarily for stock and fill customer orders from finished goods inventories. While at any given time there may be some backlog of orders, this backlog is not material in respect to our total annual sales, nor are the changes, from time to time, significant. Research and Development We engage in a variety of research and development activities in a number of countries, including the United States, Mexico, Brazil, India and China. We develop new products, improve the quality of existing products, improve and modernize production processes, and develop and implement new technologies to enhance the quality and value of both current and proposed product lines. Information concerning our research and development expense is contained in the Notes to the Consolidated Financial Statements , Note 1, Summary of Significant Accounting Policies . Food Quality and Safety Regulation The manufacture and sale of consumer food products is highly regulated. In the United States, our activities are subject to regulation by various government agencies, including the Food and Drug Administration, the Department of Agriculture, the Federal Trade Commission, the Department of Commerce and the Environmental Protection Agency, as well as various state and local agencies. Similar agencies also regulate our businesses outside of the United States. Our Product Excellence Program provides us with an effective product quality and safety program. This program assures that all products we purchase, manufacture and distribute are safe, are of high quality and comply with all applicable laws and regulations. Through our Product Excellence Program, we evaluate the supply chain including ingredients, packaging, processes, products, distribution and the environment to determine where product quality and safety controls are necessary. We identify risks and establish controls to assure product quality and safety. Various government agencies, third-party firms and our quality assurance staff conduct audits of all facilities that manufacture our products to assure effectiveness and compliance with our program and all applicable laws and regulations. Environmental Considerations We made routine operating and capital expenditures during 2012 to comply with environmental laws and regulations. These expenditures were not material with respect to our results of operations, capital expenditures, earnings or competitive position. Employees As of December 31, 2012, we employed approximately 12,100 full-time and 2,100 part-time employees worldwide. Collective bargaining agreements covered approximately 4,800 employees. During 2013, agreements will be negotiated for certain employees at four facilities outside of the United States, comprising approximately 58% of total employees under collective bargaining agreements. We believe that our employee relations are good. Financial Information by Geographic Area Our principal operations and markets are located in the United States. The percentage of total consolidated net sales for our businesses outside of the United States was 16.1% for 2012, 15.6% for 2011 and 14.6% for 2010. The percentage of total consolidated assets outside of the United States as of December 31, 2012 was 20.5% and as of December 31, 2011 was 14.5%. Corporate Social Responsibility Our founder, Milton S. Hershey, established an enduring model of responsible citizenship while creating a successful business. Driving sustainable business practices, making a difference in our communities, and operating with the highest integrity are vital parts of our heritage. Milton Hershey School, established by Milton and Catherine Hershey, lies at the center of our unique heritage. Mr. Hershey donated and bequeathed almost his entire fortune to Milton Hershey School, which remains our primary beneficiary and provides a world-class education and nurturing home to nearly 2,000 children in need annually. We continue Milton Hershey's legacy of commitment to consumers, community and children by providing high-quality Hershey products while conducting our business in a socially responsible and environmentally 7 sustainable manner. In 2012, we published our second corporate social responsibility (\"CSR\") report, which provided an update on the progress we've made in advancing the priorities that were established in our first CSR report. The report outlines how we performed against the identified performance indicators within our four CSR pillars: environment, community, workplace and marketplace. The safety and health of our employees, and the safety and quality of our products are consistently at the core of our operations and are areas of ongoing focus for Hershey in the workplace. Our over-arching safety goal is to consistently achieve best in class safety performance, and Hershey has achieved continuous improvement in employee safety in the workplace since 2007. We continue to invest in our quality management systems to ensure product quality and food safety remain top priorities. We carefully monitor and rigorously enforce our high standards of excellence for superior quality, consistency and taste, and absolute food safety. For the first time, in 2012, Hershey was recognized for its environmental, social and governance performance by being named to the Dow Jones Sustainability Index (\"DJSI\") - North America. The DJSI evaluates and selects the top 20% of companies, as determined by their financial and sustainability efforts, and Hershey was one of only seven companies in the Food and Beverage super-sector that were recognized in the DJSI. Hershey has committed to minimizing the environmental impacts of our operations. Our environmental stewardship programs produced meaningful gains in 2011. Over our 2008 baseline, Hershey decreased waste generation by 23%, water usage by 12%, and green house gas emissions by 15%, while improving our company-wide recycling rate to 80%. Additionally, in 2012, we improved our Carbon Disclosure Score by 20%, and we moved up 172 spots in the Newsweek Green Rankings. Hershey now has three manufacturing facilities that have attained Zero-Waste-to-Landfill status with several others working to achieve this goal. We have installed more than 1,200 solar panels in Hershey, Pennsylvania, expected to generate an estimated 318 megawatt-hours of electricity per year. This project also included the installation of the region's first public electric vehicle charging stations, and we are piloting several 100% electric vehicles in our corporate fleet. In the marketplace, Hershey focuses on promoting fair and ethical business dealings. A condition of doing business with us is compliance with our Supplier Code of Conduct, which outlines our expectations with regard to our suppliers' commitment to legal compliance and business integrity, social and working conditions, environment and food safety. We continue our leadership role in improving the lives of cocoa farming families through a variety of initiatives. In October 2012, we announced that it is our goal to source 100% certified cocoa for our global chocolate product lines by 2020, assuming adequate supply. Also, earlier in the year we pledged $10 million over 5 years to directly benefit 750,000 farmers through programs such as Hershey's Learn to Grow Farm and Family Center in Ghana. Our active engagement and financial support also continues for the World Cocoa Foundation, the International Cocoa Initiative, and CocoaLink, a first-of-its kind approach that uses mobile technology to deliver practical information on agricultural and social programs to rural cocoa farmers. Our employees share their time and resources generously in their communities. Both directly and through the United Way, we contribute to hundreds of agencies that deliver much needed services and resources. In 2011, Hershey donated more than $9 million in cash and product to worthy causes, our employees volunteered more than 10,000 hours in their communities and we believe our results in 2012 have been even better. Our focus on \"Kids and Kids at Risk\" is supported through contributions to the Children's Miracle Network; Project Fellowship, where employees partner with student homes at the Milton Hershey School; an orphanage for special needs children in the Philippines; and a children's burn center in Guadalajara, Mexico, to name a few. In 2012, Hershey was recognized by The National Conference on Citizenship and Points of Light, the nation's definitive experts on civic engagement, in partnership with Bloomberg LP, as one of the 50 most community minded companies in America . Our commitment to CSR is yielding powerful results. As we move into new markets and expand our leadership in North America, we are convinced that our values and heritage will be fundamental to our continuing success. Available Information We are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended. We file or furnish annual, quarterly and current reports, proxy statements and other information with the United States Securities and Exchange Commission (\"SEC\"). You may obtain a copy of any of these reports, free of charge, from the Investors section of our website, www.thehersheycompany.com, shortly after we file or furnish the information to the SEC. 8 You may obtain a copy of any of these reports directly from the SEC's Public Reference Room. Contact the SEC by calling them at 1-800-SEC-0330 or by submitting a written request to U.S. Securities and Exchange Commission, Office of Investor Education and Advocacy, 100 F Street N.E., Washington, D.C. 20549. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov. You can obtain additional information on how to request public documents from the SEC on their website. The electronic mailbox address of the SEC is publicinfo@sec.gov. We have a Code of Ethical Business Conduct that applies to our Board of Directors, all company officers and employees, including, without limitation, our Chief Executive Officer and \"senior financial officers\" (including the Chief Financial Officer, Chief Accounting Officer and persons performing similar functions). You can obtain a copy of our Code of Ethical Business Conduct from the Investors section of our website, www.thehersheycompany.com. If we change or waive any portion of the Code of Ethical Business Conduct that applies to any of our directors, executive officers or senior financial officers, we will post that information on our website within four business days. In the case of a waiver, such information will include the name of the person to whom the waiver applied, along with the date and type of waiver. We also post our Corporate Governance Guidelines and charters for each of the Board's standing committees in the Investors section of our website, www.thehersheycompany.com. The Board of Directors adopted these Guidelines and charters. We will provide to any stockholder a copy of one or more of the Exhibits listed in Part IV of this report, upon request. We charge a small copying fee for these exhibits to cover our costs. To request a copy of any of these documents, you can contact us at The Hershey Company, Attn: Investor Relations Department, 100 Crystal A Drive, Hershey, Pennsylvania 17033-0810. Item 1A. RISK FACTORS We are subject to changing economic, competitive, regulatory and technological risks and uncertainties because of the nature of our operations. In connection with the \"safe harbor\" provisions of the Private Securities Litigation Reform Act of 1995, we note the following factors that, among others, could cause future results to differ materially from the forward-looking statements, expectations and assumptions expressed or implied in this report. Many of the forward-looking statements contained in this document may be identified by the use of words such as \"intend,\" \"believe,\" \"expect,\" \"anticipate,\" \"should,\" \"planned,\" \"projected,\" \"estimated\" and \"potential,\" among others. Among the factors that could cause our actual results to differ materially from the results projected in our forward-looking statements are the risk factors described below. Issues or concerns related to the quality and safety of our products, ingredients or packaging could cause a product recall and/or result in harm to the Company's reputation, negatively impacting our operating results. In order to sell our iconic, branded products, we need to maintain a good reputation with our customers and consumers. Issues related to quality and safety of our products, ingredients or packaging, could jeopardize our Company's image and reputation. Negative publicity related to these types of concerns, or related to product contamination or product tampering, whether valid or not, might negatively impact demand for our products, or cause production and delivery disruptions. We may need to recall products if any of our products become unfit for consumption. In addition, we could potentially be subject to litigation or government actions, which could result in payments of fines or damages. Costs associated with these potential actions could negatively affect our operating results. Increases in raw material and energy costs along with the availability of adequate supplies of raw materials could affect future financial results. We use many different commodities for our business, including cocoa products, sugar, dairy products, peanuts, almonds, corn sweeteners, natural gas and fuel oil. 9 Commodities are subject to price volatility and changes in supply caused by numerous factors, including: Commodity market fluctuations; Currency exchange rates; Imbalances between supply and demand; The effect of weather on crop yield; Speculative influences; Trade agreements among producing and consuming nations; Supplier compliance with commitments; Political unrest in producing countries; and Changes in governmental agricultural programs and energy policies. Although we use forward contracts and commodity futures and options contracts, where possible, to hedge commodity prices, commodity price increases ultimately result in corresponding increases in our raw material and energy costs. If we are unable to offset cost increases for major raw materials and energy, there could be a negative impact on our results of operations and financial condition. Price increases may not be sufficient to offset cost increases and maintain profitability or may result in sales volume declines associated with pricing elasticity. We may be able to pass some or all raw material, energy and other input cost increases to customers by increasing the selling prices of our products or decreasing the size of our products; however, higher product prices or decreased product sizes may also result in a reduction in sales volume and/or consumption. If we are not able to increase our selling prices or reduce product sizes sufficiently to offset increased raw material, energy or other input costs, including packaging, direct labor, overhead and employee benefits, or if our sales volume decreases significantly, there could be a negative impact on our results of operations and financial condition. Market demand for new and existing products could decline. We operate in highly competitive markets and rely on continued demand for our products. To generate revenues and profits, we must sell products that appeal to our customers and to consumers. Our continued success is impacted by many factors, including the following: Effective retail execution; Appropriate advertising campaigns and marketing programs; Our ability to secure adequate shelf space at retail locations; Product innovation, including maintaining a strong pipeline of new products; Changes in product category consumption; Our response to consumer demographics and trends; and Consumer health concerns, including obesity and the consumption of certain ingredients. In these markets, there continue to be competitive product and pricing pressures, as well as challenges in maintaining profit margins. We must maintain mutually beneficial relationships with our key customers, including retailers and distributors, to compete effectively. Our largest customer, McLane Company, Inc., accounted for approximately 22.2% of our total net sales in 2012. McLane Company, Inc. is one of the largest wholesale distributors in the United States to convenience stores, drug stores, wholesale clubs and mass merchandisers, including Wal-Mart Stores, Inc. Increased marketplace competition could hurt our business. The global confectionery packaged goods industry is intensely competitive and consolidation in this industry continues. Some of our competitors are much larger firms that have greater resources and more substantial international operations. In order to protect our existing market share or capture increased market share in this highly competitive retail environment, we may be required to increase expenditures for promotions and advertising, and continue to introduce and establish new products. Due to inherent risks in the marketplace associated with advertising and new product 10 introductions, including uncertainties about trade and consumer acceptance, increased expenditures may not prove successful in maintaining or enhancing our market share and could result in lower sales and profits. In addition, we may incur increased credit and other business risks because we operate in a highly competitive retail environment. Disruption to our supply chain could impair our ability to produce or deliver our finished products, resulting in a negative impact on our operating results. Disruption to our manufacturing operations or our supply chain could result from, but are not limited to, the following: Natural disaster; Pandemic outbreak of disease; Weather; Fire or explosion; Terrorism or other acts of violence; Labor strikes or other labor activities; Unavailability of raw or packaging materials; and Operational and/or financial instability of key suppliers, and other vendors or service providers. We take adequate precautions to mitigate the impact of possible disruptions. We have strategies and plans in place to manage such events if they were to occur, including our global supply chain strategies and our principle-based global labor relations strategy. If we are unable, or if it is not financially feasible, to effectively mitigate the likelihood or potential impact of such disruptive events, our results of operations and financial condition could be negatively impacted. Our financial results may be adversely impacted by the failure to successfully execute or integrate acquisitions, divestitures and joint ventures. From time to time, we may evaluate potential acquisitions, divestitures or joint ventures that align with our strategic objectives. The success of such activity depends, in part, upon our ability to identify suitable buyers, sellers or business partners; perform effective assessments prior to contract execution; negotiate contract terms; and, if applicable, obtain government approval. These activities may present certain financial, managerial, staffing and talent, and operational risks, including diversion of management's attention from existing core businesses; difficulties integrating or separating businesses from existing operations; and challenges presented by acquisitions or joint ventures which may not achieve sales levels and profitability that justify the investments made. If the acquisitions, divestitures or joint ventures are not successfully implemented or completed, there could be a negative impact on our results of operations, financial condition and cash flows. Changes in governmental laws and regulations could increase our costs and liabilities or impact demand for our products. Changes in laws and regulations and the manner in which they are interpreted or applied may alter our business environment. These negative impacts could result from changes in food and drug laws, laws related to advertising and marketing practices, accounting standards, taxation requirements, competition laws, employment laws and environmental laws, among others. It is possible that we could become subject to additional liabilities in the future resulting from changes in laws and regulations that could result in an adverse effect on our results of operations and financial condition. Political, economic, and/or financial market conditions could negatively impact our financial results. Our operations are impacted by consumer spending levels and impulse purchases which are affected by general macroeconomic conditions, consumer confidence, employment levels, availability of consumer credit and interest rates on that credit, consumer debt levels, energy costs and other factors. Volatility in food and energy costs, sustained global recessions, rising unemployment and declines in personal spending could adversely impact our revenues, profitability and financial condition. Changes in financial market conditions may make it difficult to access credit markets on commercially acceptable terms which may reduce liquidity or increase borrowing costs for our Company, our customers and our suppliers. A significant reduction in liquidity could increase counterparty risk associated with certain suppliers and service providers, 11 resulting in disruption to our supply chain and/or higher costs, and could impact our customers, resulting in a reduction in our revenue, or a possible increase in bad debt expense. International operations could fluctuate unexpectedly and adversely impact our business. In 2012, we derived approximately 16.1% of our net sales from customers located outside of the United States. Additionally, 20.5% of our total consolidated assets were located outside of the United States as of December 31, 2012. As part of our global growth strategy, we are increasing our investments outside of the United States, particularly in Mexico, Brazil, India and China. As a result, we are subject to numerous risks and uncertainties relating to international sales and operations, including: Unforeseen global economic and environmental changes resulting in business interruption, supply constraints, inflation, deflation or decreased demand; Difficulties and costs associated with compliance and enforcement of remedies under a wide variety of complex laws, treaties and regulations; Unexpected changes in regulatory environments; Political and economic instability, including the possibility of civil unrest, terrorism, mass violence or armed conflict; Nationalization of our properties by foreign governments; Tax rates that may exceed those in the United States and earnings that may be subject to withholding requirements and incremental taxes upon repatriation; Potentially negative consequences from changes in tax laws; The imposition of tariffs, quotas, trade barriers, other trade protection measures and import or export licensing requirements; Increased costs, disruptions in shipping or reduced availability of freight transportation; The impact of currency exchange rate fluctuations between the U.S. dollar and foreign currencies; Failure to gain sufficient profitable scale in certain international markets resulting in losses from impairment or sale of assets; and Failure to recruit, retain and build an engaged global workforce. Disruptions, failures or security breaches of our information technology infrastructure could have a negative impact on our operations. Information technology is a critically important part of our business operations. We use information technology to manage all business processes including manufacturing, financial, logistics, sales, marketing and administrative functions. These processes collect, interpret and distribute business data and communicate internally and externally with employees, suppliers, customers and others. We invest in industry standard security technology to protect the Company's data and business processes against risk of data security breach and cyber attack. Our data security management program includes identity, trust, vulnerability and threat management business processes as well as adoption of standard data protection policies. We measure our data security effectiveness through industry accepted methods and remediate significant findings. Additionally, we certify our major technology suppliers and any outsourced services through accepted security certification standards. We maintain and routinely test backup systems and disaster recovery, along with external network security penetration testing by an independent third party as part of our business continuity preparedness. We also have processes in place to prevent disruptions resulting from the implementation of new software and systems of the latest technology. While we believe that our security technology and processes are adequate in preventing security breaches and in reducing cybersecurity risks, disruptions or failure of information technology systems is possible and could have a negative impact on our operations or business reputation. Failure of our systems, including failures due to cyber attacks that would prevent the ability of systems to function as intended, could cause transaction errors, loss of customers and sales, and could have negative consequences to our Company, our employees, and those with whom we do business. 12 Future developments related to the investigation by government regulators of alleged pricing practices by members of the confectionery industry and civil antitrust lawsuits in the United States could negatively impact our reputation and our operating results. In 2007, the Competition Bureau of Canada began an inquiry into alleged violations of the Canadian Competition Act in the sale and supply of chocolate products sold in Canada between 2002 and 2008 by members of the confectionery industry, including Hershey Canada, Inc. The U.S. Department of Justice also notified the Company in 2007 that it had opened an inquiry, but has not requested any information or documents. We also are party to a number of civil antitrust lawsuits in the United States, including individual, class, and putative class actions. Additional information about these proceedings is contained in Item 3. Legal Proceedings of this Form 10-K. Competition and antitrust law investigations can be lengthy and violations are subject to civil and/or criminal fines and other sanctions. Class action civil antitrust lawsuits are expensive to defend and could result in significant judgments, including in some cases, payment of treble damages and/or attorneys' fees to the successful plaintiff. Additionally, negative publicity involving these proceedings could affect our Company's brands and reputation, possibly resulting in decreased demand for our products. These possible consequences, in our opinion, should not materially impact our financial position or liquidity but could materially impact our results of operations and cash flows in the period in which they are accrued or paid, respectively. Pension costs or funding requirements could increase at a higher than anticipated rate. We sponsor a number of defined benefit pension plans. Changes in interest rates or in the market value of plan assets could affect the funded status of our pension plans. This could cause volatility in our benefits costs and increase future funding requirements for our pension plans. Additionally, we could incur pension settlement losses if a significant number of employees who have retired or have left the Company decide to withdraw substantial lump sums from their pension accounts. A significant increase in pension expense, in pension settlement losses or in future funding requirements could have a negative impact on our results of operations, financial condition and cash flows. For more information, refer to page 41. Item 1B. UNRESOLVED STAFF COMMENTS None. Item 2. PROPERTIES Our principal properties include the following: Status Country United States Canada Mexico Type Location Hershey, Pennsylvania (2 principal plants) Lancaster, Pennsylvania Robinson, Illinois Stuarts Draft, Virginia Edwardsville, Illinois Palmyra, Pennsylvania Ogden, Utah Mississauga, Ontario (1) Monterrey, Mexico (Own/Lease) Manufacturingconfectionery products and pantry items Own Manufacturingconfectionery products Manufacturingconfectionery products, and pantry items Manufacturingconfectionery products and pantry items Distribution Distribution Distribution Distribution Manufacturingconfectionery products Own Own Own Own Own Own Lease Own (1) The lease of the distribution center located in Mississauga, Ontario, Canada expires in 2013. We have entered into an agreement with the Ferrero Group for the construction and use of a warehouse and distribution facility located in Brantford, Ontario, Canada beginning in 2013. In addition to the locations indicated above, we also own or lease several other properties and buildings worldwide which we use for manufacturing, sales, distribution and administrative functions. Our facilities are well maintained and generally have adequate capacity to accommodate seasonal demands, changing product mixes and certain additional 13 growth. The largest facilities are located in Hershey and Lancaster, Pennsylvania; Monterrey, Mexico; and Stuarts Draft, Virginia. Many additions and improvements have been made to these facilities over the years and they include equipment of the latest type and technology. Item 3. LEGAL PROCEEDINGS In 2007, the Competition Bureau of Canada began an inquiry into alleged violations of the Canadian Competition Act in the sale and supply of chocolate products sold in Canada between 2002 and 2008 by members of the confectionery industry, including Hershey Canada, Inc. The U.S. Department of Justice also notified the Company in 2007 that it had opened an inquiry, but has not requested any information or documents. Subsequently, 13 civil lawsuits were filed in Canada and 91 civil lawsuits were filed in the United States against the Company. The lawsuits were instituted on behalf of direct purchasers of our products as well as indirect purchasers that purchase our products for use or for resale. Several other chocolate and confectionery companies were named as defendants in these lawsuits as they also were the subject of investigations and/or inquiries by the government entities referenced above. The cases seek recovery for losses suffered as a result of alleged conspiracies in restraint of trade in connection with the pricing practices of the defendants. The Canadian civil cases were settled in 2012. The Canadian Competition Bureau investigation remains pending. However, Hershey Canada, Inc. has reached a tentative settlement agreement with the Canadian government with regard to its investigation and the Company has accrued a liability related thereto. We do not believe the terms of the tentative settlement agreement should have a material impact on the Company's results of operations, financial position or liquidity. With regard to the U.S. lawsuits, the Judicial Panel on Multidistrict Litigation assigned the cases to the U.S. District Court for the Middle District of Pennsylvania. Plaintiffs are seeking actual and treble damages against the Company and other defendants based on an alleged overcharge for certain, or in some cases all chocolate products sold in the U.S. between 2003 and 2008. The lawsuits have been proceeding on different scheduling tracks for different groups of plaintiffs. Defendants have briefed summary judgment against the plaintiffs that have not sought class certification (the \"Opt-Out Plaintiffs\"). The plaintiffs that purchased products from defendants directly (the \"Direct Purchaser Plaintiffs\") were granted class certification in December 2012. Defendants will conduct expert discovery on liability and damages and brief summary judgment against the Direct Purchaser Plaintiffs through the third quarter of 2013. The hearing on summary judgment for the Direct Purchaser Plaintiffs is scheduled for September 2013, combined with the summary judgment hearing for the Opt-Out Plaintiffs. Putative class plaintiffs that purchased product indirectly for resale (the \"Indirect Purchasers for Resale\") have a May 1, 2013 deadline to file for class certification. Putative class plaintiffs that purchased product indirectly for use (the \"Indirect End Users\") may seek class certification after summary judgment against the Direct Purchaser Plaintiffs and the Opt-Out Plaintiffs has been resolved. No trial date has been set for any group of plaintiffs. The Company will continue to vigorously defend against these lawsuits. At this stage, we are unable to predict the range of any potential liability that is reasonably possible as a result of the proceedings outlined above. Competition and antitrust law investigations can be lengthy and violations are subject to civil and/or criminal fines and other sanctions. Class action civil antitrust lawsuits are expensive to defend and could result in significant judgments, including in some cases, payment of treble damages and/or attorneys' fees to the successful plaintiff. Additionally, negative publicity involving these proceedings could affect our Company's brands and reputation, possibly resulting in decreased demand for our products. These possible consequences, in our opinion, should not materially impact our financial position or liquidity, but could materially impact our results of operations and cash flows in the period in which they are accrued or paid, respectively. Please refer to Item 1A. Risk Factors, beginning on page 9, for additional information concerning the key risks to achieving the Company's future performance goals. We have no other material pending legal proceedings, other than ordinary routine litigation incidental to our business. Pursuant to the disclosure requirements of the U.S. Internal Revenue Service (\"IRS\") Revenue Procedure 2005-51, in the second quarter of 2012, the IRS assessed an accuracy-related penalty of $222,975 on a reportable transaction understatement for the 2008 tax year and that this penalty was paid in full in 2012. The penalty was imposed by 6662A(a) of the Internal Revenue Code at the 30% rate determined under 6662A(c) of the Internal Revenue Code. The penalty was imposed for a reportable transaction understatement with respect to which the relevant facts affecting the tax treatment of the sale by the Company in 2008 of a 49% interest in its wholly-owned subsidiary, Hershey do Brasil LTDA, were not adequately disclosed under 6011 of the Internal Revenue Code in the Company's 2008 federal income tax return. 14 Item 4. MINE SAFETY DISCLOSURES Not applicable. 15 PART II Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES We paid $341.2 million in cash dividends on our Common Stock and Class B Common Stock (\"Class B Stock\") in 2012 and $304.1 million in 2011. The annual dividend rate on our Common Stock in 2012 was $1.56 per share. On January 29, 2013, our Board of Directors declared a quarterly dividend of $0.42 per share of Common Stock payable on March 15, 2013, to stockholders of record as of February 25, 2013. It is the Company's 333rd consecutive Common Stock dividend. A quarterly dividend of $0.38 per share of Class B Stock also was declared. Our Common Stock is listed and traded principally on the New York Stock Exchange (\"NYSE\") under the ticker symbol \"HSY.\" Approximately 260.2 million shares of our Common Stock were traded during 2012. The Class B Stock is not publicly traded. The closing price of our Common Stock on December 31, 2012, was $72.22. There were 36,964 stockholders of record of our Common Stock and our Class B Stock as of December 31, 2012. The following table shows the dividends paid per share of Common Stock and Class B Stock and the price range of the Common Stock for each quarter of the past 2 years: Dividends Paid Per Common Stock Price Range* Share Class B Stock Common Stock Low High 2012 1st Quarter $ $ 0.344 $61.94 $59.49 0.380 0.344 72.03 59.81 3rd Quarter 0.380 0.344 73.16 70.09 4th Quarter 0.420 0.380 74.64 68.85 0.380 2nd Quarter Total $ 1.560 $ 1.412 Dividends Paid Per Common Stock Share Price Range* Class B Stock Common Stock High Low 2011 1st Quarter $ 0.345 $ 0.3125 $55.05 $46.24 2nd Quarter 0.345 0.3125 58.20 53.77 3rd Quarter 0.345 0.3125 60.96 53.83 4th Quarter 0.345 0.3125 62.26 55.32 Total $ 1.380 * NYSE-Composite Quotations for Common Stock by calendar quarter. Unregistered Sales of Equity Securities and Use of Proceeds None. 16 $ 1.2500 Issuer Purchases of Equity Securities Purchases of equity securities during the fourth quarter of the fiscal year ended December 31, 2012: Period (a) Total Number of Shares Purchased (b) Average Price Paid per (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Value of Shares that May Yet Be Purchased Under the Plans or Share Programs Programs(1) (d) Approximate Dollar (in thousands of dollars) October 1 through October 28, 2012 October 29 through November 25, 2012 November 26 through December 31, 2012 Total (1) 187,570 $69.68 187,570 $69.68 $125,069 $125,069 $125,069 In April 2011, our Board of Directors approved a $250 million share repurchase program. This authorization is in addition to the Company's policy of repurchasing shares in the open market to replace Treasury Stock shares issued in connection with stock option exercises or other equity-based compensation programs. Performance Graph The following graph compares our cumulative total stockholder return (Common Stock price appreciation plus dividends, on a reinvested basis) over the last five fiscal years with the Standard & Poor's 500 Index and the Standard & Poor's Packaged Foods Index. *Hypothetical $100 invested on December 31, 2007 in Hershey Common Stock, S&P 500 Index and S&P 500 Packaged Foods Index, assuming reinvestment of dividends. 17 Item 6. SELECTED FINANCIAL DATA SIX-YEAR CONSOLIDATED FINANCIAL SUMMARY All dollar and share amounts in thousands except market price and per share statistics 5-Year Compound Growth Rate 2012 2011 2010 2009 2008 2007 Summary of Operations Net Sales Cost of Sales Selling, Marketing and Administrative Business Realignment and Impairment Charges (Credits), Net 6.1 % $ 2.7 % 6,644,252 6,080,788 5,671,009 5,298,668 5,132,768 4,946,716 $ 3,784,370 3,548,896 3,255,801 3,245,531 3,375,050 3,315,147 13.7 % $ 1,703,796 1,477,750 1,426,477 1,208,672 1,073,019 895,874 (30.5)% $ 44,938 83,433 82,875 94,801 276,868 Interest Expense, Net (4.2)% $ 95,569 92,183 (886) 96,434 90,459 97,876 118,585 Provision for Income Taxes 23.0 % $ 354,648 333,883 299,065 235,137 180,617 126,088 Net Income 25.3 % $ 660,931 628,962 509,799 435,994 311,405 214,154 BasicClass B Stock 25.7 % $ 2.73 2.58 2.08 1.77 1.27 0.87 DilutedClass B Stock 25.5 % $ 2.71 2.56 2.07 1.77 1.27 0.87 BasicCommon Stock 25.7 % $ 3.01 2.85 2.29 1.97 1.41 0.96 DilutedCommon Stock 25.5 % $ 2.89 2.74 2.21 1.90 1.36 0.93 BasicCommon Stock 164,406 165,929 167,032 167,136 166,709 168,050 BasicClass B Stock 60,630 60,645 60,708 60,709 60,777 60,813 228,337 229,919 230,313 228,995 228,697 231,449 190,199 Net Income Per Share: Weighted-Average Shares Outstanding: Diluted 255,596 228,269 213,013 198,371 197,839 6.5 % $ 1.56 1.38 1.28 1.19 1.19 1.14 6.6 % $ 85,610 75,814 70,421 65,032 65,110 62,064 6.7 % $ 1.41 1.25 1.16 1.07 1.07 1.02 Depreciation (9.8)% $ 174,788 188,491 169,677 157,996 227,183 292,658 Advertising 30.3 % $ 480,016 414,171 391,145 241,184 161,133 127,896 1.9 % $ 709,621 676,482 641,756 613,568 645,456 645,083 Capital Additions 6.4 % $ 258,727 323,961 179,538 126,324 262,643 189,698 Capitalized Software Additions 6.3 % $ 19,239 23,606 21,949 19,146 20,336 14,194 Total Assets 2.3 % $ 4,754,839 4,407,094 4,267,627 3,669,926 3,629,614 4,242,008 (15.2)% $ 375,898 139,673 285,480 39,313 501,504 856,392 1,530,967 1,748,500 1,541,825 1,502,730 1,505,954 1,279,965 10.7 % $ 1,048,373 880,943 945,896 768,634 358,239 631,815 12,100 11,800 11,300 12,100 12,800 12,400 223,786 225,206 227,030 227,998 227,035 227,050 Dividends Paid on Common Stock Per Share Dividends Paid on Class B Stock Per Share Payroll 6.1 % $ Year-end Position and Statistics Short-term Debt and Current Portion of Long-term Debt Long-term Portion of Debt Stockholders' Equity 3.6 % $ Full-time Employees Stockholders' Data Outstanding Shares of Common Stock and Class B Stock at Year-end Market Price of Common Stock at Year-end 12.9 % $ 72.22 61.78 47.15 35.79 34.74 39.40 Price Range During Year (high) $ 74.64 62.26 52.10 42.25 44.32 56.75 Price Range During Year (low) $ 59.49 46.24 35.76 30.27 32.10 38.21 18 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS EXECUTIVE OVERVIEW Results for the year ended December 31, 2012 were strong with increases in net sales, earnings per share and profitability despite continued macroeconomic challenges. Net sales increased 9.3% compared with 2011 due to net price realization and volume increases in the United States and key international markets as we continued our focus on core brands and innovation. Advertising expense increased 15.9% for the year supporting core brands along with new product launches. Net income and earnings per share-diluted also increased at greater rates than our long-term growth targets. The investments we have made in both productivity and cost savings resulted in a business model that is mo