SUMMARY OF OPERATING RESULTS
Analysis of Selected Items from Our Income Statement
                                                      For the Three Months Ended
                                                                                   Percent
                                                                                   Change
                                                                                  Increase
                                           April 1, 2012      April 3, 2011      (Decrease)
In millions except per share amounts
Net Sales                                 $      1,732.1     $      1,564.2         10.7%
Cost of Sales                                      988.7              908.0          8.9
Gross Profit                                       743.4              656.2         13.3
Gross Margin                                        42.9 %             41.9 %
SM&A Expense                                       405.6              377.8          7.3
SM&A Expense as a percent of sales                  23.4 %             24.2 %
Business Realignment and Impairment
Charges, net                                         3.3                1.8         79.8
EBIT                                               334.5              276.6         21.0
EBIT Margin                                         19.3 %             17.7 %
Interest Expense, net                               24.0               24.5         (1.9)
Provision for Income Taxes                         111.8               92.0         21.6
Effective Income Tax Rate                           36.0 %             36.5 %
Net Income                                $        198.7     $        160.1         24.1
Net Income Per Share-Diluted              $         0.87     $         0.70         24.3

Results of Operations - First Quarter 2012 vs. First Quarter 2011 U.S. Price Increases
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 was not expected until Easter 2012. 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 that occur 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. Net Sales
Net sales increased 10.7% for the first quarter of 2012 over the comparable period of 2011 due primarily to net price realization of 10.9%. The increase was partially offset by sales volume declines of 0.5% as well as the impact of unfavorable foreign currency exchange rates of 0.4%. Net sales for our businesses outside of the U.S. increased approximately 15.3% in 2012 compared with 2011, reflecting net price realization and sales volume increases, particularly for our focus markets in Mexico, Brazil and China. Net sales attributable to Brookside contributed 0.7% to the increase. Key Marketplace Metrics
Consumer takeaway increased 6.4% during the first quarter of 2012 compared with the same period of 2011. Excluding the impact of Easter sales, consumer takeaway increased 3.3% during the period. Consumer takeaway is provided for channels of distribution accounting for approximately 80% of our U.S. confectionery retail business. These

channels of distribution include food, drug, mass merchandisers, including Wal-Mart Stores, Inc., and convenience stores.
Market share in measured channels remained flat in the first quarter of 2012 compared with the same period of 2011. The change in market share is provided for measured channels by syndicated data which include sales in the food, drug, convenience store and mass merchandiser classes of trade, excluding Wal-Mart Stores, Inc.
Cost of Sales and Gross Margin
Cost of sales increased by approximately 8.9% in the first quarter of 2012 primarily due to significantly higher input costs which increased cost of sales by about 3%. Higher supply chain costs were only partially offset by productivity improvements, resulting in a net increase to cost of sales of approximately 2%. Business realignment and impairment charges of $19.5 million were included in cost of sales in the first quarter of 2012 which increased cost of sales by approximately 1% compared with the first quarter of 2011. Business realignment and impairment charges included in cost of sales of $6.9 million were recorded during the comparable period of 2011.
Gross margin increased by 1.0 percentage point for the first quarter of 2012 primarily as a result of price realization and supply chain productivity improvements, which together improved gross margin by 5.4 percentage points. These improvements were partially offset by higher input and supply chain costs of approximately 2.2 percentage points. The impact of higher business realignment and impairment charges recorded in the first quarter of 2012 as compared with the same period of 2011 reduced gross margin by 0.8 percentage points.
Selling, Marketing and Administrative
Selling, marketing and administrative expenses increased by 7.3% in the first quarter of 2012 primarily due to increased advertising expense, higher employee-related expenses, and expenses associated with business acquisitions. These increases were partially offset by lower costs in 2012 associated with legal fees and contingencies compared with the first quarter of 2011. Advertising costs in the first quarter of 2012 increased by 13.7% from the same period in 2011.
Business realignment charges of $0.8 million were included in selling, marketing and administrative expenses in the first quarter of 2012. Business realignment charges of $1.0 million were included in selling, marketing and administrative expenses in the first quarter of 2011.
Business Realignment and Impairment Charges Business realignment and impairment charges of $3.3 million associated with the Project Next Century program were recorded in the first quarter of 2012. The 2012 charges were primarily associated with the relocation and start up of production lines. The 2011 business realignment and impairment charges of $1.8 million associated with the Project Next Century program were primarily for employee separation costs and production line relocation costs. Income Before Interest and Income Taxes and EBIT Margin EBIT increased in the first quarter of 2012 compared with the first quarter of 2011 as a result of higher gross profit, partially offset by higher selling, marketing and administrative expenses. Net pre-tax business realignment and impairment charges of $23.6 million were recorded in the first quarter of 2012. Net pre-tax business realignment and impairment charges of $9.7 million were recorded in the first quarter of 2011.
EBIT margin increased from 17.7% for the first quarter of 2011 to 19.3% for the first quarter of 2012 due to higher gross margin and lower selling, marketing and administrative expenses as a percent of sales. Interest Expense, Net
Net interest expense was slightly lower in the first quarter of 2012 than the comparable period of 2011 primarily reflecting an increase in capitalized interest.
Income Taxes and Effective Tax Rate
Our effective income tax rate was 36.0% for the first quarter of 2012 compared with 36.5% for the first quarter of 2011. The lower tax rate for the first quarter of 2012 was due to the mix of income among various tax jurisdictions. Excluding the impact of tax rates associated with business realignment and impairment charges, we expect our income tax rate for the full year 2012 to be about 35.0%.

Net Income and Net Income Per Share
Earnings per share-diluted in the first quarter of 2012 increased $0.17 as compared with the first quarter of 2011. Net income was reduced by $14.9 million, or $0.07 per share-diluted, in the first quarter of 2012 as a result of business realignment and impairment charges. Net income was reduced by $3.8 million, or $0.01 per share-diluted, in the first quarter of 2012 as a result of closing and integration costs for the Brookside acquisition. Net income was reduced by $2.6 million, or $0.01 per share-diluted related to higher non-service related pension expenses in the first quarter of 2012 compared with 2011. Excluding the impact of business realignment and impairment charges, business acquisition costs and non-service related pension expenses, earnings per share-diluted increased $0.23 per share, or 31.5%, in 2012 compared with 2011.
Liquidity and Capital Resources
Historically, our major source of financing has been cash generated from operations. Domestic seasonal working capital needs, which typically peak during the summer months, generally have been met by utilizing cash on hand and issuing commercial paper. Commercial paper also may be issued, from time to time, to finance ongoing business transactions such as the repayment of long-term debt, business acquisitions and for other general corporate purposes. During the first three months of 2012, cash and cash equivalents decreased by $126.3 million to $567.3 million.
Cash provided from operations, cash on hand at the beginning of the period, short-term borrowings and other cash inflows during the first three months of 2012 were sufficient to fund the repurchase of Common Stock of $218.3 million, business acquisitions of $172.9 million, capital additions and capitalized software expenditures of $91.7 million and dividend payments of $83.5 million. Net cash provided from operating activities was $275.8 million in 2012 and $159.4 million in 2011. The increase was primarily the result of the change in cash provided from (used by) other assets and liabilities and higher net income in 2012, partially offset by cash used by working capital. Cash provided from changes in other assets and liabilities was $129.4 million for the first three months of 2012 compared with cash used of $32.1 million for the same period of 2011. The increase in the amount of cash provided from other assets and liabilities from 2011 to 2012 primarily reflected the effect of hedging transactions of $114.8 million, the effect of changes in income taxes of $20.7 million and the timing of payments associated with selling and marketing programs, incentive compensation and interest of $46.6 million, partially offset by the impact of business realignment and impairment charges of $27.9 million. Cash used by working capital was $129.7 million in 2012 compared with $30.0 million in 2011. The change in cash used by working capital was principally related to changes in raw material and finished goods inventories in 2012 compared with 2011, along with an increase in accounts receivable resulting from higher sales in 2012 compared with 2011.
During the first quarter 2012, the Company acquired Brookside for approximately $172.9 million. Also during the first quarter 2012, the Company loaned $9.0 million to an affiliate to finance the expansion of its manufacturing capacity. Interest paid was $31.4 million during the first three months of 2012 versus $41.9 million for the comparable period of 2011. The decrease in interest paid in 2012 was due to the timing of interest payments on long-term debt. Income taxes paid were $7.6 million during the first three months of 2012 versus $15.7 million for the comparable period of 2011. The decrease in taxes paid in 2012 was primarily related to the timing of foreign income tax payments in 2012 compared with 2011.
The ratio of current assets to current liabilities was 1.5:1.0 as of April 1, 2012 and 1.7:1.0 as of December 31, 2011. The capitalization ratio (total short-term and long-term debt as a percent of stockholders' equity, short-term and long-term debt) increased to 69% as of April 1, 2012 from 68% as of December 31, 2011.
Generally, our short-term borrowings are in the form of commercial paper or bank loans with an original maturity of three months or less. However, during the first quarter of 2012 there were no commercial paper borrowings. Outlook
The outlook section contains a number of forward-looking statements, all of which are based on current expectations. Actual results may differ materially. Refer to the Safe Harbor Statement below as well as Risk Factors and other information contained in our 2011 Annual Report on Form 10-K for information concerning the key risks to achieving future performance goals.
Our first quarter results were strong and we expect to continue our marketplace momentum. The economic

environment is expected to continue to be challenging during the remainder of 2012. We will continue to remain focused on building brands in both the U.S. and key international markets and will make the necessary investments to ensure that we are positioned to grow our brands and manage challenges. We have planned merchandising and programming events throughout the year and will work closely with retail customers and monitor our brand performance. We will continue with the distribution and rollout of Jolly Rancher Crunch 'N Chew candy, Rolo minis and Ice Breakers Duo mints, along with the planned introduction of Hershey's Simple Pleasures candy in June.
Advertising expense increased 13.7% in the first quarter of 2012, compared with the first quarter of 2011. For the full year, we expect advertising to increase low double digits on a percentage basis versus the prior year, supporting core brands in both the U.S. and international markets, new product launches, and new advertising campaigns on the Jolly Rancher and Rolo brands.
Excluding the Brookside acquisition, we expect sales volume to be slightly up for the full-year 2012. Including net sales for Brookside of about $90 million at current exchange rates, we now expect full-year net sales growth of about 7% to 9%, including the impact of foreign currency exchange rates. This is greater than our previous estimates.
In 2012, the Company expects reported earnings per share-diluted of $2.82 to $2.92. Reported earnings per share-diluted includes anticipated business realignment and impairment charges of $0.16 to $0.19 per share-diluted related to the Next Century program and non-service related pension expenses of $0.05 per share-diluted. Reported gross margin, reported EBIT margin and reported earnings per share-diluted will be impacted by these charges and expenses in addition to closing and integration costs related to the Brookside acquisition estimated at $0.04 to $0.05 per share-diluted. We now expect reported gross margin to increase from 90 to 100 basis points in 2012.
We do not expect a material change to our full-year inflation outlook. We continue to expect that input costs in 2012 will be higher than last year. As a result of our strong results for the first quarter, we have further visibility into our full-year cost structure and now expect adjusted gross margin expansion of 90 to 100 basis points compared with last year, driven by productivity and cost savings, as well as net price realization. Therefore, considering our results for the first quarter and planned investments in market research, category management and selling capabilities during the remainder of the year, particularly in our international markets, we now expect adjusted earnings per share-diluted for 2012 to increase 10% to 12%.
NOTE: In the Outlook above, the Company has provided income measures excluding certain items, in addition to net income determined in accordance with GAAP. These non-GAAP financial measures are used in evaluating results of operations for internal purposes. These non-GAAP measures are not intended to replace the presentation of financial results in accordance with GAAP. Rather, the Company believes exclusion of such items provides additional information to investors to facilitate the comparison of past and present operations.
In 2011, the Company recorded GAAP charges of $49.2 million, or $0.13 per share-diluted, attributable to the Project Next Century program and the global supply chain transformation program. Additionally, in the third quarter of 2011, the Company recorded a pre-tax gain of $17.0 million, or $0.05 per share-diluted, from the sale of trademark licensing rights. Non-service related pension expenses of $2.8 million, or $0.01 per share-diluted, were recorded in 2011.
In 2012, the Company expects acquisition and integration costs related to the Brookside acquisition to be $0.04 to $0.05 per share-diluted. The Company also expects to record total GAAP charges of about $55 million to $65 million, or $0.16 to $0.19 per share-diluted, attributable to Project Next Century. Non-service related pension expenses are expected to be $19.0 million, or $0.05 per share-diluted in 2012.

Below is a reconciliation of GAAP and non-GAAP items to the Company's 2011 and 2012 adjusted earnings per share-diluted and projected adjusted earnings per share-diluted for 2012:

                                                    2011     2012 (Projected)
Reported EPS-Diluted                              $ 2.74      $2.82 - $2.92
Acquisition closing and integration charges            -       0.04 - 0.05
Gain on sale of trademark licensing rights         (0.05 )          -
Total Business Realignment and Impairment Charges   0.13       0.16 - 0.19
Non-service related pension expenses                0.01           0.05
Adjusted EPS-Diluted                              $ 2.83      $3.11 - $3.17

Outlook for Project Next Century
In June 2010, we announced Project Next Century as part of our ongoing efforts to create an advantaged supply chain and competitive cost structure. We continue to expect total pre-tax charges and non-recurring project implementation costs for the Project Next Century program of $150 million to $160 million. During 2012, we expect to record $55 million to $65 million in program charges. During 2012, we expect capital expenditures for Project Next Century to be approximately $65 million to $70 million. Depreciation and amortization for 2012 is estimated to be $195 million to $205 million, excluding accelerated depreciation of $20 million to $25 million related to Project Next Century. When fully implemented, the Next Century program is expected to provide annual cost savings from efficiency improvements of $65 million to $80 million. Safe Harbor Statement
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 that we have discussed directly or implied in this report. Many of the forward-looking statements contained in this report may be identified by the use of words such as "intend," "believe," "expect," "anticipate," "should," "planned," "projected," "estimated," and "potential," among others.
The factors that could cause our actual results to differ materially from the results projected in our forward-looking statements include, but are not limited to the following:
• 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;

• Increases in raw material and energy costs, along with the availability of adequate supplies of raw materials could affect future financial results;

• Price increases may not be sufficient to offset cost increases and maintain profitability, or may result in sales volume declines associated with pricing elasticity;

• Market demand for new and existing products could decline;

• Increased marketplace competition could hurt our business;

• 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;

• Our financial results may be adversely impacted by the failure to successfully execute or integrate acquisitions, divestitures and joint ventures;

• Changes in governmental laws and regulations could increase our costs and liabilities or impact demand for our products;

• Political, economic, and/or financial market conditions could negatively impact our financial results;

• International operations could fluctuate unexpectedly and adversely impact our business;

• Disruptions, failures or security breaches of our information technology infrastructure could have a negative impact on our operations;

• Future developments related to the investigation by government regulators of alleged pricing practices by members of the confectionery industry could impact our reputation, the regulatory environment under which we operate, and our operating results;

• Pension costs or funding requirements could increase at a higher than anticipated rate;

• Implementation of our Project Next Century program may not occur within the anticipated timeframe and/or may exceed our cost estimates;

• Annual savings from initiatives to transform our supply chain and advance our value-enhancing strategy may be less than we expect; and

• Such other matters as discussed in our Annual Report on Form 10-K for 2011.