SUMMARY OF OPERATING RESULTS
              Analysis of Selected Items from Our Income Statement
                                    For the Three Months Ended                              For the Six Months Ended
                                                            Percent Change                                         Percent Change
                                                               Increase                                               Increase
                        July 1, 2012      July 3, 2011        (Decrease)       July 1, 2012      July 3, 2011        (Decrease)
In millions except per share amounts
Net Sales              $     1,414.4     $     1,325.2           6.7 %        $     3,146.5     $     2,889.4           8.9 %
Cost of Sales                  795.9             760.9           4.6                1,784.6           1,668.9           6.9
Gross Profit                   618.5             564.3           9.6                1,361.9           1,220.5          11.6
Gross Margin                    43.7 %            42.6 %                               43.3 %            42.2 %
SM&A Expense                   391.4             345.9          13.1                  797.0             723.7          10.1
SM&A Expense as a
percent of sales                27.7 %            26.1 %                               25.3 %            25.0 %
Business Realignment
and Impairment Charges
(Credits), net                   4.9             (10.0 )       148.7                    8.1              (8.1 )       200.4
EBIT                           222.2             228.4          (2.7 )                556.8             504.9          10.3
EBIT Margin                     15.7 %            17.2 %                               17.7 %            17.5 %
Interest Expense, net           24.3              23.4           4.3                   48.4              47.8           1.1
Provision for Income
Taxes                           62.2              75.0         (17.0 )                174.1             167.0           4.3
Effective Income Tax
Rate                            31.4 %            36.6 %                               34.2 %            36.5 %
Net Income             $       135.7     $       130.0           4.4          $       334.3     $       290.1          15.2
Net Income Per
Share-Diluted          $        0.59     $        0.56           5.4          $        1.46     $        1.26          15.9

Results of Operations - Second Quarter 2012 vs. Second 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 6.7% for the second quarter of 2012 over the comparable period of 2011 due primarily to net price realization of 6.6%. The increase was partially offset by sales volume declines of 1.1% as well as the impact of unfavorable foreign currency exchange rates of 1.2%. Net sales attributable to Brookside contributed 2.4% to the increase.

Key Marketplace Metrics
For the twelve-week period ending June 16, 2012, consumer takeaway increased 5.0% in 2012 compared with the same period of 2011. Market share in measured channels increased by 0.4 share points in the twelve-week period ending June 16, 2012 compared with the same period of 2011. Consumer takeaway and the change in market share are provided for channels of distribution accounting for approximately 90% of our U.S. confectionery retail business. These channels of distribution primarily include food, drug, mass merchandisers, including Wal-Mart Stores, Inc., and convenience stores. Cost of Sales and Gross Margin
Cost of sales increased by approximately 4.6% in the second quarter of 2012 primarily due to higher input and supply chain costs which increased cost of sales by about 3.8%. An increase to cost of sales resulting from an unfavorable sales mix was substantially offset by the impact of sales volume decreases. An increase to cost of sales of 2.6% resulted from the Brookside acquisition. Supply chain productivity improvements reduced cost of sales by approximately 3.0%. Business realignment and impairment charges of $13.4 million were included in cost of sales in the second quarter of 2012 which increased cost of sales by approximately 0.8% compared with the second quarter of 2011. Business realignment and impairment charges included in cost of sales of $7.0 million were recorded during the comparable period of 2011.
Gross margin increased by 1.1 percentage points for the second quarter of 2012 primarily as a result of price realization and supply chain productivity improvements, which together improved gross margin by 4.1 percentage points. These improvements were substantially 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 second quarter of 2012 as compared with the same period of 2011 reduced gross margin by 0.6 percentage points.
Selling, Marketing and Administrative
Selling, marketing and administrative expenses increased by 13.1% in the second quarter of 2012 primarily due to increased advertising and marketing research expenses, higher employee-related expenses, increased incentive compensation costs and expenses associated with business acquisitions. Advertising costs in the second quarter of 2012 increased by 10.1% from the same period in 2011. Business realignment charges of $0.7 million were included in selling, marketing and administrative expenses in the second quarter of 2012. Business realignment charges of $1.1 million were included in selling, marketing and administrative expenses in the second quarter of 2011.
Business Realignment and Impairment Charges (Credits) Business realignment and impairment charges of $4.8 million associated with the Next Century program were recorded in the second quarter of 2012. The 2012 charges were primarily associated with the relocation and start up of production lines.
Net pre-tax business realignment and impairment credits of $10.0 million were recorded in the second quarter of 2011 associated with the Next Century program. The 2011 credits were primarily associated with a reduction of employee separation expense of $11.2 million, partially offset by asset retirement costs. Income Before Interest and Income Taxes and EBIT Margin EBIT decreased in the second quarter of 2012 compared with the second quarter of 2011 as a result of higher selling, marketing and administrative expenses and business realignment charges. Net pre-tax business realignment and impairment charges of $19.0 million were recorded in the second quarter of 2012. Net pre-tax business realignment and impairment credits of $1.8 million were recorded in the second quarter of 2011.
EBIT margin decreased from 17.2% for the second quarter of 2011 to 15.7% for the second quarter of 2012 due to higher selling, marketing and administrative expenses as a percent of sales and the higher business realignment charges. Interest Expense, Net
Net interest expense was slightly higher in the second quarter of 2012 than the comparable period of 2011 primarily reflecting the impact of higher short-term borrowings.

Income Taxes and Effective Tax Rate
Our effective income tax rate was 31.4% for the second quarter of 2012 compared with 36.6% for the second quarter of 2011. The lower effective income tax rate in the second quarter of 2012 primarily resulted from favorable adjustments of approximately $11.5 million during the quarter associated with the conclusion of income tax audits for 2007 and 2008.
Net Income and Net Income Per Share
Earnings per share-diluted in the second quarter of 2012 increased $0.03 as compared with the second quarter of 2011. Net income was reduced by $12.1 million, or $0.05 per share-diluted, in the second quarter of 2012 as a result of business realignment and impairment charges. Closing and integration costs for the Brookside acquisition reduced net income by $0.9 million, or $0.01 per share-diluted, in the second quarter of 2012. Net income was reduced by $2.8 million, or $0.01 per share-diluted related to higher non-service related pension expenses in the second 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 $0.10 per share, or 17.9%, in 2012 compared with 2011. Results of Operations - First Six Months 2012 vs. First Six Months 2011 Net Sales
Net sales increased 8.9% for the first six months of 2012 over the comparable period of 2011 due primarily to net price realization of 8.7%. The increase was partially offset by sales volume declines of 0.5% as well as the impact of unfavorable foreign currency exchange rates of 0.8%. Excluding the Brookside acquisition, net sales for our businesses outside of the U.S. increased approximately 8.3% 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 1.5% to the increase in net sales.
Key Marketplace Metrics
For the year-to-date period ended June 16, 2012, consumer takeaway increased 6.1% compared with the same period of 2011. Market share in measured channels increased 0.3 share points in the year-to-date period ended June 16, 2012 compared with the same period of 2011. Consumer takeaway and the change in market share are provided for measured channels of distribution accounting for approximately 90% of our U.S. confectionery retail business. These channels of distribution primarily include food, drug, mass merchandisers, including Wal-Mart Stores, Inc., and convenience stores. Cost of Sales and Gross Margin
Cost of sales increased by approximately 6.9% in the first six months of 2012 primarily due to higher input and supply chain costs, along with the impact of an unfavorable sales mix, which increased cost of sales by about 6.0%. An increase in cost of sales of 1.6% resulted from the Brookside acquisition. Supply chain productivity improvements reduced cost of sales by approximately 2.5%. Business realignment and impairment charges of $32.9 million were included in cost of sales in the first six months of 2012 which increased cost of sales by approximately 1.1% compared with the first six months of 2011. Business realignment and impairment charges included in cost of sales of $13.9 million were recorded during the comparable period of 2011.
Gross margin increased by 1.1 percentage points for the first six months of 2012 primarily as a result of price realization and supply chain productivity improvements, which together improved gross margin by 4.9 percentage points. These improvements were partially offset by higher input and supply chain costs of approximately 3.1 percentage points. The impact of higher business realignment and impairment charges recorded in the first six months of 2012 as compared with the same period of 2011 reduced gross margin by 0.7 percentage points.

Selling, Marketing and Administrative
Selling, marketing and administrative expenses increased by 10.1% in the first six months of 2012 primarily due to increased advertising and marketing research expenses, higher employee-related expenses, increased incentive compensation costs 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 six months of 2011. Advertising costs in the first six months of 2012 increased by 12.1% from the same period in 2011. Business realignment charges of $1.6 million were included in selling, marketing and administrative expenses in the first six months of 2012. Business realignment charges of $2.2 million were included in selling, marketing and administrative expenses in the first six months of 2011. Business Realignment and Impairment Charges (Credits) Business realignment and impairment charges of $8.1 million associated with the Next Century program were recorded in the first six months of 2012. The 2012 charges were primarily associated with the relocation and start up of production lines.
Net pre-tax business realignment and impairment credits of $8.1 million were recorded in the first six months of 2011 associated with Next Century program. The 2011 credits were primarily associated with a reduction of employee separation expense of $10.2 million, partially offset by asset retirement costs. Income Before Interest and Income Taxes and EBIT Margin EBIT increased in the first six months of 2012 compared with the first six months 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 $42.6 million were recorded in the first six months of 2012. Net pre-tax business realignment and impairment credits of $7.9 million were recorded in the first six months of 2011.
EBIT margin increased from 17.5% for the first six months of 2011 to 17.7% for the first six months of 2012 due to higher gross margin, substantially offset by the impact of higher business realignment and impairment charges in 2012. Interest Expense, Net
Net interest expense was slightly higher in the first six months of 2012 than the comparable period of 2011, primarily reflecting increased interest expense associated with higher short-term borrowings, partially offset by an increase in capitalized interest.
Income Taxes and Effective Tax Rate
Our effective income tax rate was 34.2% for the first six months of 2012 compared with 36.5% for the first six months of 2011. The lower effective income tax rate for the first six months of 2012 primarily resulted from adjustments associated with the conclusion of income tax audits for 2007 and 2008 during the second quarter. 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 for the first six months of 2012 were $1.46 as compared with $1.26 for the first six months of 2011. Net income was reduced by $27.0 million, or $0.12 per share-diluted, in the first six months of 2012 as a result of business realignment and impairment charges. Net income was reduced by $4.7 million, or $0.02 per share-diluted, in the first six months of 2012 as a result of closing and integration costs for the Brookside acquisition. Net income was reduced by $5.3 million, or $0.02 per share-diluted related to higher non-service related pension expenses in the first six months 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 $0.33 per share, or 25.6%, 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 six months of 2012, cash and cash equivalents decreased by $103.9 million to $589.8 million.
Cash provided from operations, cash on hand at the beginning of the period, short-term borrowings and other cash inflows, primarily associated with the exercise of stock options, during the first six 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 $147.8 million and dividend payments of $167.1 million.
Net cash provided from operating activities was $314.2 million in 2012 and $286.7 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 used by changes in other assets and liabilities was $28.0 million for the first six months of 2012 compared with cash used of $108.3 million for the same period of 2011. The decrease in the amount of cash used by other assets and liabilities from 2011 to 2012 primarily reflected the effect of hedging transactions of $125.0 million and incentive compensation of $25.2 million, partially offset by the impact of business realignment and impairment charges of $34.7 million and the timing of payments associated with selling and marketing programs and payroll. Cash used by working capital was $121.3 million in 2012 compared with $3.6 million in 2011. The increase 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. Changes in accounts payable in 2012 compared with 2011, primarily associated with capital and manufacturing expenditures, also contributed to the higher cash used by working capital.
During the first quarter 2012, the Company acquired Brookside for approximately $172.9 million. Also during the first six months of 2012, the Company loaned $16.0 million to an affiliate to finance the expansion of its manufacturing capacity.
Interest paid was $49.2 million during the first six months of 2012 versus $47.7 million for the comparable period of 2011. The increase in interest paid in 2012 was due to additional short-term debt. Income taxes paid were $218.2 million during the first six months of 2012 versus $193.7 million for the comparable period of 2011. The increase in taxes paid in 2012 was primarily related to the impact of higher annualized taxable income in 2012 compared with 2011.
The ratio of current assets to current liabilities was 1.4:1.0 as of July 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) decreased to 65% as of July 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 six months 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 results for the first six months of 2012 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 during the remainder of 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, Ice Breakers Duo mints and Hershey's Simple Pleasures candy.

Advertising expense increased 12.1% in the first six months of 2012, compared with the first six months 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 key international markets, new product launches, and new advertising campaigns on the Jolly Rancher and Rolo brands.
Excluding the Brookside acquisition, we expect organic sales volume growth to accelerate in the second half of the year and be up for the full-year 2012. Including a 1.5 percentage point benefit from net sales for Brookside at current exchange rates, we expect full-year net sales growth of about 7% to 9%, including the impact of foreign currency exchange rates. Our new long-term target for net sales growth is 5% to 7%.
In 2012, the Company expects reported earnings per share-diluted of $2.88 to $2.98. 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 120 to 130 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 six months and further visibility into our full-year cost structure, we now expect adjusted gross margin expansion of 100 to 120 basis points compared with last year, driven by better than expected net price realization in the first six months of the year, along with productivity and cost savings. Therefore, considering our results for the first six months 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 12% to 14% compared with our new long-term growth target of 8% to 10%.
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 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 expense of $2.8 million, or $0.01 per share-diluted, was 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 the Next Century program. 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 2011 and projected 2012 earnings per share-diluted in accordance with GAAP to non-GAAP 2011 adjusted earnings per share-diluted and projected adjusted earnings per share-diluted for 2012:

                                                    2011     2012 (Projected)
Reported EPS-Diluted                              $ 2.74      $2.88 - $2.98
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      $3.17 - $3.23

Outlook for Project Next Century
In June 2010, we announced the Next Century program as part of our ongoing efforts to create an advantaged supply chain and competitive cost structure. We now expect total pre-tax charges and non-recurring project implementation costs for the Next Century program of $160 million to $180 million. The total expected cost for the Next Century program does not include a possible pension settlement loss if substantial lump sum withdrawals by employees retiring or leaving the Company are made during the remainder of the year. Possible pension settlement losses would result in a non-cash charge for the Company.
During 2012, we expect to record $55 million to $65 million in program charges. During 2012, we expect capital expenditures for the Next Century program 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 $15 million to $20 million related to the Next Century program. 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;

. . .