# TOOTSIE ROLL INDUSTRIES INC (TR) FY 2024 MD&A

Verbatim Item 7 Management's Discussion and Analysis from TOOTSIE ROLL INDUSTRIES INC's 10-K for fiscal year 2024.

SEC filing source: https://www.sec.gov/Archives/edgar/data/98677/000155837025001926/tr-20241231x10k.htm
Accession: 0001558370-25-001926
Filing date: 2025-02-28
Report date: 2024-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/TR/
All MD&A years: /company/TR/mda/
Previous year: /company/TR/mda/fy2023/ (FY 2023)
Next year: /company/TR/mda/fy2025/ (FY 2025)

ITEM 7.               Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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(Thousands of dollars except per share, percentage and ratio figures)

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The following discussion should be read in conjunction with the other sections of this report, including the consolidated financial statements and related notes contained in Item 8 of this Form 10-K. This section of this Form 10-K generally discusses the twelve months ended December 31, 2024 as compared to the same period of 2023.  Discussions comparing the results of the twelve months ended December 31, 2023 as compared to same period of 2022 can be found in

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“Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Form 10-K for the year ended December 31, 2023.

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FINANCIAL REVIEW

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This financial review discusses the Company’s financial condition, results of operations, liquidity and capital resources, significant accounting policies and estimates, new accounting pronouncements, market risks and other matters. It should be read in conjunction with the Consolidated Financial Statements and related Notes that follow this discussion.

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FINANCIAL CONDITION

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The Company’s overall financial position remains strong given that aggregate cash, cash equivalents and investments is $526,968 at December 31, 2024, including $105,067 in trading securities discussed below. Cash flows from 2024 operating activities totaled $138,889 compared to $94,611 in 2023, and are discussed in the section entitled Liquidity and Capital Resources. During 2024, the Company paid cash dividends of $25,515, purchased and retired $13,534 of its outstanding shares, and made capital expenditures of $17,997, all of which was financed from internal sources.

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The Company’s net working capital was $246,319 at December 31, 2024 compared to $245,763 at December 31, 2023. As of December 31, 2024, the Company’s total cash, cash equivalents and investments, including all long-term investments, was $526,968 compared to $427,028 at December 31, 2023, an increase of $99,940. See Liquidity And Capital Resources section below for discussion. The aforementioned includes $105,067 and $87,800 of investments in trading securities as of December 31, 2024 and 2023, respectively. The Company invests in trading securities to provide an economic hedge for its deferred compensation liabilities, as further discussed herein and in Note 7 of the Company’s Notes to Consolidated Financial Statements.

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Shareholders’ equity increased from $823,422 at December 31, 2023 to $870,743 as of December 31, 2024, which principally reflects 2024 net earnings of $86,827, less cash dividends of $25,515 and share repurchases of $13,534.

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The Company has a relatively straight-forward financial structure and has historically maintained a conservative financial position. The Company has no special financing arrangements or “off-balance sheet” special purpose entities. Cash flows from operations plus maturities of short-term investments are expected to be adequate to meet the Company’s overall financing needs, including capital expenditures, in 2025. Periodically, the Company considers possible acquisitions, and if the Company were to pursue and complete such an acquisition, that could result in bank borrowings or other financing.

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RESULTS OF OPERATIONS

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2024 vs. 2023

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The consolidated net product sales for the twelve months of 2024 were $715,530 compared to the twelve months 2023 of $763,252, a decrease of $47,722 or 6.3%. Fourth quarter 2024 net product sales were $191,356 compared to $195,368 in fourth quarter 2023, a decrease of $4,012, or 2.1%. The sales decline in fourth quarter and twelve months 2024 was driven primarily by lower sales volumes. The Company faced a more challenging market in 2024 as customers and consumers became more resistant to higher prices for our products. which were implemented to help restore our margins.

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Product cost of goods sold were $468,056 in 2024 compared to $510,737 in 2023, a decrease of $42,681 or 8.4%. Product cost of goods sold includes $803 and $814 in certain deferred compensation expenses in 2024 and 2023, respectively. These deferred compensation expenses principally result from changes in the market value of investments and investment income from trading securities relating to compensation deferred in previous years and are not reflective of current operating results. Adjusting for the aforementioned, product cost of goods sold decreased from $509,923 in 2023 to $467,253 in 2024, a decrease of $42,670 or 8.4%. As a percent of net product sales, these adjusted costs decreased from 66.8% in 2023 to 65.3% in 2024, a 1.5 favorable percentage point change. Certain cost and expense reductions, as well as higher price realizations helped benefit 2024 cost of goods sold and gross profit margins.

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We have experienced significant increases in input costs, primarily ingredients, packaging materials, labor, and manufacturing maintenance and supply costs from 2021 through 2024. Fourth quarter and twelve months 2024 gross profit

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margins benefited from improvements in plant manufacturing operating efficiencies. However, lower sales volumes adversely affected our results in fourth quarter and twelve months 2024 because a significant portion of our plant overhead costs, and certain other costs and operating expenses, do not decrease with lower sales. The Company uses the Last-In-First-Out (LIFO) method of accounting for inventory and costs of goods sold which results in lower current income taxes during such periods of increasing costs and higher inflation, but this method does charge the most current costs to cost of goods sold and usually accelerates the realization of these higher costs. During fourth quarter 2024, the Company reduced inventories which resulted in a LIFO liquidation. The liquidated inventory was carried at lower costs prevailing in prior years as compared with current costs in 2024, and therefore benefited fourth quarter and twelve months 2024 operating earnings and pre-tax earnings.

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In response to increases in input costs in recent years, many companies in the consumer products industry have increased selling prices. We have implemented price increases as well during this period with the objective of improving sales price realization in order to recover our margin declines. Although we made progress in restoring our margins in 2024, cocoa and chocolate costs have moved significantly higher in the markets this year, and we expect to experience even higher cocoa and chocolate costs in 2025 as many of our older supply contracts expire and new contracts at higher costs become effective. Although the Company continues to monitor its input costs, we are mindful of the effects and limits when passing on the above-discussed higher input costs to our customers as well as the final consumers of our products.

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Selling, marketing and administrative expenses were $152,675 in 2024 compared to $155,012 in 2023, a decrease of $2,337 or 1.5%. Selling, marketing and administrative expenses include $15,521 and $14,675 in certain deferred compensation expenses in 2024 and 2023, respectively. These deferred compensation expenses principally result from changes in the market value of investments and investment income from trading securities relating to compensation deferred in previous years and are not reflective of current operating results. Adjusting for the aforementioned, selling, marketing and administrative expenses decreased from $140,337 in 2023 to $137,154 in 2024, a decrease of $3,183 or 2.3%. As a percent of net product sales, these adjusted expenses increased from 18.4% of net product sales in 2023 to 19.2% of net product sales in 2024, a 0.8 unfavorable percentage point change. The increase in these expenses, as a percentage of net product sales was attributable to lower sales volume in 2024 compared to 2023, primarily due to the impact of employee compensation, that is largely fixed in nature.

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As outlined in Note 1 to the consolidated financial statements, the Company records revenue from net product sales based on accounting guidance. Adjustments for estimated customer cash discounts upon payment, discounts for price adjustments, product returns, allowances, and certain advertising and promotional costs, including consumer coupons, are variable considerations and are recorded as a reduction of net product sales revenue in the same period the related net product sales are recorded. These estimates are calculated using historical averages adjusted for any expected changes due to current business conditions and experience. The Company identified changes in business conditions that changed Management’s estimated current and future liabilities resulting in a $5,665 reduction in accrued liabilities and an increase in net product sales in twelve months 2024.

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Selling, marketing and administrative expenses include freight, delivery and warehousing expenses. These expenses decreased from $65,465 in 2023 to $57,581 in 2024, a decrease of $7,884 or 12.0%. As a percent of net product sales, these adjusted expenses decreased from 8.6% in 2023 to 8.0% in 2024, a 0.6 favorable percentage point change, which generally reflects the benefits of lower freight surcharges and a more favorable freight market.

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The Company has foreign operating businesses in Mexico, Canada and Spain, and exports products to many foreign markets. The Company’s Spanish subsidiary (97% owned by the Company) incurred an operating loss of $611 in 2024 compared to its $828 loss in 2023. Company management expects the competitive and business challenges in Spain to continue. Management believes that operating losses at its Spanish subsidiary are expected to continue beyond 2025 and that these future losses, as well as some capital expenditures, will likely require additional cash financing.

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The Company believes that the carrying values of its goodwill and trademarks have indefinite lives as they are expected to generate cash flows indefinitely. In accordance with current accounting guidance, these indefinite-lived intangible assets are assessed at least annually for impairment as of December 31 or whenever events or circumstances indicate that the carrying values may not be recoverable from future cash flows. No impairments were recorded in 2024, 2023 or 2022. Current accounting guidance provides entities an option of performing a qualitative assessment (a "step-zero" test) before

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performing a quantitative analysis. If the entity determines, on the basis of certain qualitative factors, that it is more-likely-than-not that the intangibles (goodwill and certain trademarks) are not impaired, the entity would not need to proceed to the two step impairment testing process (quantitative analysis) as prescribed in the guidance. During fourth quarter 2024 (and fourth quarters 2023 and 2022), the Company performed a “step zero” test of its goodwill and certain trademarks, and concluded that there was no impairment based on this guidance. For the fair value assessment of certain trademarks where the “step-zero” analysis was not considered appropriate, impairment testing was performed in fourth quarter 2024 (and fourth quarters 2023 and 2022) using discounted cash flows and estimated royalty rates and concluded that the trademarks were not impaired. For these trademarks, holding all other assumptions constant, as of December 31, 2024, a 100 basis point increase in the discount rate would reduce the fair value of these trademarks by approximately 12% and a 100 basis point decrease in the royalty rate would increase the fair value of these trademarks by approximately 16%. Individually, a 100 basis point increase in the discount rate or a 100 basis point decrease in the royalty rate would not result in a potential impairment as of December 31, 2024. 

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Earnings from operations were $100,505 in 2024 compared to $101,828 in 2023, a decrease of $1,323. Earnings from operations include $16,324 and $15,489 in certain deferred compensation expense in 2024 and 2023, respectively, which are discussed above. Adjusting for these deferred compensation expenses, adjusted earnings from operations decreased from $117,317 in 2023 to $116,829 in 2024, a decrease of $488 or 0.4%. The above discussed decrease in net product sales was the principal driver of lower adjusted operating earnings in 2024 compared to 2023.

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Management believes the comparisons presented in the preceding paragraphs, after adjusting for changes in deferred compensation, are more reflective of the underlying operations of the Company.

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Other income, net was $26,366 in 2024 compared to $18,066 in 2023, an increase of $8,300. Other income, net principally reflects $16,324 and $15,489 of aggregate net gains and investment income on trading securities in 2024 and 2023, respectively. These trading securities provide an economic hedge of the Company’s deferred compensation liabilities; and the related net gains and investment income were offset by a like amount of expense in aggregate product cost of goods sold and selling, marketing, and administrative expenses in the respective years as discussed above. Other income, net includes investment income from available for sale securities of $9,598 and $5,211 in 2024 and 2023, respectively, which reflects both higher interest rates and related investment returns on the Company’s available for sale marketable securities, as well as an increase in the average balances in 2024 on such securities. Other income, net also includes foreign exchange gains (losses) of $511 and $(2,803) in 2024 and 2023, respectively.

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On December 3, 2024, the Board of Directors (the “Board”) of the Company revoked its prior action dated December 28, 2018 that permitted management to take appropriate action to preserve the full income tax deductibility of certain amounts under its nonqualified deferred compensation plans in light of changes to Section 162(m) of Internal Revenue Code made by the Tax Cuts and Jobs Act of 2017 (“TCJA”).  The Board revoked its authorization after determining that it was no longer feasible, after considering the purpose of these plans, to secure tax deductions on all accrued deferred compensation by further deferring payment amounts, in large part, due to interpretations of TCJA later adopted by the IRS and the subsequent growth of plan account balances due to sustained equity market appreciation. Given this Board action and the resulting expectation that certain additional amounts of deferred compensation will not be tax deductible in future years, the Company concluded that it will be required under generally accepted accounting principles in the United States of America to write off the related deferred tax assets. The adjustment to the deferred tax assets resulted in a non-cash tax charge of $11,010 in fourth quarter 2024. The Company does not anticipate that this write off will result in future cash expenditures other than the Company’s inability to deduct certain deferred compensation payments against future taxable income.

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The Company’s effective income tax rates were 48.8% and 21.8% in fourth quarter 2024 and 2023, respectively, and 31.6% and 23.4% in twelve months 2024 and 2023, respectively. Excluding the effects of the write-off of deferred tax assets as discussed above, the Company’s effective income tax rates were 23.8% and 21.8% in fourth quarter 2024 and 2023, respectively, and 22.9% and 23.4% in twelve months 2024 and 2023, respectively. A reconciliation of the differences between the U.S. statutory rate and these effective tax rates is provided in Note 4 of the Company’s Notes to Consolidated Financial Statements.

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The Company has provided a full valuation allowance on its Spanish subsidiaries’ tax loss carry-forward benefits of $4,681 and $4,836 as of December 31, 2024 and 2023, respectively, because the Company has concluded that it is not more-likely-than-not that these losses will be utilized before their expiration dates. The Spanish subsidiary has a history of net operating losses and it is not known when and if they will generate taxable income in the future.

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U.S. tax reform (the TCJA) changed the United States approach to the taxation of foreign earnings to a territorial system by providing a one hundred percent dividends received deduction for certain qualified dividends received from foreign subsidiaries. These provisions of U.S. tax reform significantly impact the accounting for the undistributed earnings of foreign subsidiaries. After carefully considering these facts, the Company determined that it asserts the permanent reinvestment of all of its foreign subsidiaries’ earnings as of December 31, 2024.

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Net earnings attributable to Tootsie Roll Industries, Inc. were $86,827 in twelve months 2024 compared to $91,912 in 2023, and net earnings per share were $1.22 and $1.28 in 2024 and 2023, respectively, a decrease of $0.06 per share or 4.7%. Fourth quarter 2024 and 2023 net earnings attributable to Tootsie Roll Industries, Inc. were $22,509 and $29,403, respectively, and net earnings per share were $0.32 and $0.41, respectively, a decrease of $0.09 per share or 22.0%. Adjusting for the above-discussed write-off of deferred tax assets relating to deferred compensation, net earnings in fourth quarter 2024 would have been $33,519 compared to $29,403 in fourth quarter 2023, an increase of $4,116 or 14%, and net earnings in twelve months 2024 would have been $97,837 compared to $91,912 in 2023, an increase of $5,925 or 6%.  Earnings per share in both fourth quarter and twelve months 2024 benefited by the reduction in average shares outstanding resulting from purchases of the Company’s common stock in the open market by the Company. Average shares outstanding decreased from 71,903 in 2023 to 71,320 in 2024 which reflects share repurchases of $13,534 during 2024.

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Beginning in 2012, the Company received periodic notices from the Bakery and Confectionery Union and Industry International Pension Fund (Plan), a multi-employer defined benefit pension plan for certain Company union employees, that the Plan’s actuary certified the Plan to be in “critical status”, as defined by the Pension Protection Act (PPA) and the Pension Benefit Guaranty Corporation (PBGC); and that a plan of rehabilitation was adopted by the trustees of the Plan in 2012. The Plan’s status was changed to “critical and declining status”, as defined by the PPA and PBGC, for the plan year beginning January 1, 2015, and this status has continued. In 2016, the Company received new notices that the Plan’s trustees adopted an updated Rehabilitation Plan effective January 1, 2016, and all annual notices through 2024 have continued to classify the Plan in the “critical and declining status” category.

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Based on these updated notices, the Plan’s funded percentage (plan investment assets as a percentage of plan liabilities), as defined, were 47.0%, 49.3%, and 48.5% as of January 1, 2023, 2022, and 2021, respectively (these valuation dates are as of the beginning of each Plan year). These funded percentages are based on actuarial values, as defined, and do not reflect the actual market value of Plan investments as of these dates. If the market value of investments had been used as of January 1, 2023, the funded percentage would be 43.6% (not 47.0%). As of the January 1, 2023 valuation date (most recent valuation available), only 14% of Plan participants were current active employees, 55% were retired or separated from service and receiving benefits, and 31% were retired or separated from service and entitled to future benefits. The number of current active employee Plan participants as of January 1, 2023 fell 1% from the previous year and 6% over the past two years. When compared to the Plan valuation date of January 1, 2011 (just prior to the Plan being certified to be in “critical status”), current active employee participants have declined 55%, whereas participants who were retired or separated from service and receiving benefits increased 3% and participants who were retired or separated from service and entitled to future benefits increased 6%.

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The Company has been advised that its withdrawal liability would have been $97,500, $102,200 and $96,000 if it had withdrawn from the Plan during 2024, 2023 and 2022 respectively (most recent information provided by the Plan). The most recent decrease in the withdrawal liability as advised by the Plan was primarily driven by an increase in the PBGC interest rates used to value a portion of the present value of vested benefits (the Plan uses a blended interest rate assumption). As discussed below, the Plan was granted $3.4 billion in Special Financial Assistance in July 2024. The withdrawal liability, since it is calculated as of the end of 2023 as if the Company were to have withdrawn in 2024, does not include any of the $3.4 billion of assets received.  After receiving the Special Financial Assistance, the Plan will be required to use PBGC interest rates to value all, instead of a portion, of the present value of vested benefits to provide an estimate of the Company’s withdrawal liability.   In addition, for withdrawal liability purposes, PBGC regulations require the Special Financial Assistance to be phased-in over a period of time instead of fully recognized immediately.  

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Based on the Company’s most recent actuarial estimates using the information provided by the Plan with respect to its 2024 withdrawal liability (based on most recent information provided to the Company) and certain provisions in ERISA and laws relating to withdrawal liability payments, management believes that the Company’s liability had the Company withdrawn in 2024 would likely be limited to twenty annual payments of $2,664 which have a present value in the range of $31,262 to $37,654 depending on the interest rate used to discount these payments. While the Company’s actuarial consultant did not believe that the Plan will suffer a future mass withdrawal (as defined) of participating employers, in the event of a mass withdrawal, the Company’s annual withdrawal payments would theoretically be payable in perpetuity. Based on the same actuarial estimates, had a mass withdrawal occurred in 2024, the present value of such perpetuities is in the range of $43,650 to $69,266 and would apply in the unlikely event that substantially all employers withdraw from the Plan. The aforementioned is based on a range of valuations and interest rates which the Company’s actuary has advised is provided under the statute. Should the Company actually withdraw from the Plan at a future date, a withdrawal liability, which could be higher than the above discussed amounts, could be payable to the Plan.

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In fourth quarter 2020, the Plan Trustees advised the Company that the surcharges would no longer increase annually and therefore be “frozen” at the rates and amounts in effect as of December 31, 2020 provided that the local bargaining union and the Company executed a formal consent agreement by March 31, 2021. The Trustees advised that they have concluded that continuing increases in surcharges would likely have a long-term adverse effect on the solvency of the Plan. The Trustees concluded that further increases would result in increasing financial hardships and withdrawals of participating employers, and that this change will not have a material effect on the Plan’s insolvency date. In first quarter 2021, the local bargaining union and the Company executed this agreement which resulted in the “freezing” of such surcharges as of December 31, 2020.

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The Company’s pension expense for this Plan for twelve months 2024 and 2023 was $3,332 and $3,516, respectively. The aforementioned expense includes surcharges of $1,174 and $1,239 for twelve months 2024 and 2023, respectively, as required under the amended plan of rehabilitation. The decrease in the twelve months 2024 expense compared to twelve months 2023 reflects the effects of lower sales volumes in twelve months 2024, and corresponding reductions in lower production and labor hours worked.

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In June 2024, the PBGC announced that it had approved the Plan’s application for Special Financial Assistance under the American Rescue Plan Act of 2021. Company management understands that this legislation would provide financial assistance from the PBGC to shore up financially distressed multi-employer plans to ensure that they can remain solvent and continue to pay benefits to retirees through 2051 without any reduction in retiree benefits.  The Plan advised the Company that it was granted approximately $3.4 billion in Special Financial Assistance funds and received those funds in July 2024. The Company’s actuary believes that it still remains unclear if the Plan can remain solvent through the targeted date of 2051 although as a requirement of the American Rescue Plan Act of 2021, the Plan must remain in “critical status” through 2051 regardless of solvency. The regulations under the aforementioned PBGC financial assistance could result in a higher withdrawal liability even with PBGC financial assistance since those regulations require use of settlement interest rates to value all, instead of a portion, of the present value of vested benefits in determining the Company’s withdrawal liability. In addition, for withdrawal liability purposes, PBGC regulations require the Special Financial Assistance to be phased-in over a period of time instead of fully recognized immediately. While it is uncertain how the requirements imposed by the Special Financial Assistance will impact the Company’s withdrawal liability in the future, the Company’s actuary believes any withdrawal will continue to be limited to the twenty annual payments previously discussed and that those payments will not be affected by Special Financial Assistance regulation.

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During second quarter 2023, the Company and the union associated with the Plan concluded negotiations and entered into a new labor contract which expires in September 2027. Under terms of the union contract the Company is obligated to continue its participation in the Plan during the contract period. The Company is unable to determine the ultimate outcome of the above discussed multi-employer union pension matter and therefore is unable to determine the effects on its consolidated financial statements, but the ultimate outcome could have a material adverse effect on the Company’s consolidated results of operations or cash flows in one or more future periods. See also Note 7 of the Company’s Notes to Consolidated Financial Statements on Form 10-K for the year ended December 31, 2024.

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The Company is focused on the longer term and therefore is continuing to make investments in plant manufacturing operations to meet new consumer and customer product demands, achieve product quality improvements, expand capacity in certain product lines, and increase operational efficiencies in order to provide genuine value to consumers.

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LIQUIDITY AND CAPITAL RESOURCES

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Cash flows from operating activities were $138,889, $94,611 and $72,051 in 2024, 2023 and 2022, respectively. The $44,278 increase in cash flows from operating activities from 2023 to 2024 primarily reflects a lower investment in net working capital. Inventories decreased by $17,296 or 18.2% in 2024 to better meet demand on a timely basis. The $22,560 increase in cash flows from operating activities from 2022 to 2023 primarily reflects increases net earnings during 2023,  lower inventories, and changes in deferred income taxes including the write-off of deferred tax assets relating to deferred compensation as discussed above.

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The Company manages and controls a VEBA trust, to fund the estimated future costs of certain union employee health, welfare and other benefits. Contributions of $20,000 and $5,000 were made to this trust in 2023 and 2022, respectively; no contribution was made to the trust during 2024. The Company uses these funds to pay the actual cost of such benefits over each union contract period. At December 31, 2024 and 2023, the VEBA trust held $13,926 and $19,126 respectively, of aggregate cash and cash equivalents, which the Company expects to use to pay certain union employee benefits through part or all of 2027. This asset value is included in prepaid expenses and long-term other assets in the Company’s Consolidated Statement of Financial Position and is categorized as Level 1 within the fair value hierarchy.

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Cash flows from investing activities reflect capital expenditures of $17,997, $26,796, and $23,356 in 2024, 2023 and 2022, respectively. The Company is currently pursuing a plant expansion, including additional and replacement of certain processing and packaging lines, to better meet its higher level of forecasted demand for certain products on a timelier and more cost effective basis. The Company expects that this will take place over the next seven years, however, most of the actual expenditures are expected to occur in 2025 and 2026. Company management believes that the total cost of this expansion, including new machinery, equipment and food processing infrastructure, and warehousing will approximate $100,000. All capital expenditures have been and are expected to be funded from the Company’s cash flow from operations and internal sources including available for sale securities.

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Other than the bank loans and the related restricted cash of the Company’s Spanish subsidiary which are discussed in Note 1 of the Company’s Notes to Consolidated Financial Statements, the Company had no bank borrowings or repayments in 2022, 2023, or 2024, and had no outstanding bank borrowings as of December 31, 2023 or 2022. Nonetheless, the Company would consider bank borrowing or other financing in the event that a business acquisition is completed.

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Financing activities include Company common stock purchases and retirements of $13,534, $33,114, and $31,910 in 2024, 2023 and 2022, respectively. Cash dividends of $25,515, $25,076, and $24,629 were paid in 2024, 2023 and 2022, respectively.

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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Preparation of the Company’s financial statements involves judgments and estimates due to uncertainties affecting the application of accounting policies, and the likelihood that different amounts would be reported under different conditions or using different assumptions. The Company bases its estimates on historical experience and other assumptions, as discussed herein, that it believes are reasonable. If actual amounts are ultimately different from previous estimates, the revisions are included in the Company’s results of operations for the period in which the actual amounts become known. The Company’s significant accounting policies are discussed in Note 1 of the Company’s Notes to Consolidated Financial Statements.

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Following is a summary and discussion of the more significant accounting policies and estimates which management believes to have a significant impact on the Company’s operating results, financial position, cash flows and footnote disclosure.

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Revenue recognition

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As further discussed in Note 1 of the Company’s Notes to Consolidated Financial Statements, the Company follows the revenue recognition guidance in ASC 606. ASC 606 requires adjustments for estimated customer cash discounts upon payment, discounts for price adjustments, product returns, allowances, and certain advertising and promotional costs, including consumer coupons, which are variable consideration and are recorded as a reduction of product sales revenue in the same period the related product sales are recorded. Such estimates are calculated using historical averages adjusted for any expected changes due to current business conditions and experience. Revenue for net product sales is recognized at a point in time when products are delivered to or picked up by the customer, as designated by customers’ purchase orders, as discussed in Note 1 of the Company’s Notes to Consolidated Financial Statements.

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Provisions for bad debts are recorded as selling, marketing and administrative expenses. Write-offs of bad debts did not exceed 0.2% of net product sales in each of 2024, 2023 and 2022, and accordingly, have not been significant to the Company’s financial position or results of operations.

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Intangible assets

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The Company’s intangible assets consist primarily of goodwill and acquired trademarks. In accordance with accounting guidance, goodwill and other indefinite-lived assets, trademarks, are not amortized, but are instead subjected to annual testing for impairment unless certain triggering events or circumstances are noted. The Company performs its annual impairment review and assessment as of December 31. All trademarks have been assessed by management to have indefinite lives because they are expected to generate cash flows indefinitely. The Company reviews and assesses certain trademarks (non-amortizable intangible assets) for impairment by comparing the fair value of each trademark with its carrying value. Current accounting guidance provides entities an option of performing a qualitative assessment (a "step-zero" test) before performing a quantitative analysis. If the entity determines, on the basis of certain qualitative factors, that it is more-likely-than-not that the intangibles (goodwill and certain trademarks) are not impaired, the entity would not need to proceed to the two step impairment testing process (quantitative analysis) as prescribed in the guidance. During fourth quarter 2024, the Company performed a “step zero” test of its goodwill and certain trademarks, and concluded that there was no impairment based on this guidance.

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The Company determines the fair value of certain trademarks using discounted cash flows and estimates of royalty rates. If the carrying value exceeds fair value, such trademarks are considered impaired and are reduced to fair value. The Company utilizes third-party professional valuation firms to assist in the determination of valuation of certain trademarks. Impairments have not generally been material to the Company’s historical operating results. Cash flow projections require the Company to make assumptions and estimates regarding the Company’s future plans, including sales projections and profit margins, market based discount rates, competitive factors, and economic conditions; and the Company’s actual results and conditions may differ over time. A change in the assumptions relating to the impairment analysis including but not limited to a reduction in projected cash flows, the use of a different discount rate to discount future cash flows or a different royalty rate applied to such trademarks, could cause impairment in the future.

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Customer incentive programs, advertising and marketing

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Advertising and marketing costs are recorded in the period to which such costs relate. The Company does not defer the recognition of any amounts on its consolidated balance sheet with respect to such costs. The expected cost of future payments to customers for incentives and other trade promotional programs is recorded at the time sale as a reduction of Net product sales. The liabilities associated with these programs are reviewed quarterly and adjusted if the expected utilization rate differs from management’s original estimates. Although the Company recorded a $5,665 favorable change in this estimate in 2024, as discussed above, such adjustments have not historically been material to the Company’s operating results.

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Valuation of long-lived assets

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Long-lived assets, primarily property, plant and equipment, are reviewed for impairment as events or changes in business circumstances occur indicating that the carrying value of the asset may not be recoverable. The estimated cash flows produced by assets or asset groups, are compared to the asset carrying value to determine whether impairment exists. Such estimates involve considerable management judgment and are based upon assumptions about expected future operating performance. As a result, actual cash flows could differ from management’s estimates due to changes in business conditions, operating performance, and economic and competitive conditions. Such impairments have not historically been material to the Company’s operating results.

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Income taxes

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Deferred income taxes are recognized for future tax effects of temporary differences between financial and income tax reporting using tax rates in effect for the years in which the differences are expected to reverse. The Company records valuation allowances, or may actually adjust or write-off deferred tax assets, in situations where the realization of deferred tax assets, including those relating to net operating tax losses, is not more-likely-than-not; and the Company adjusts and releases such valuation allowances when realization becomes more-likely-than-not as defined by accounting guidance. The Company periodically reviews assumptions and estimates of the Company’s probable tax obligations and effects on its liability for uncertain tax positions, using informed judgment which may include the use of third-party consultants, advisors and legal counsel, as well as historical experience.

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Valuation of investments

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Investments are classified as either available for sale or trading. Investments classified as available for sale primarily comprise high quality corporate bonds which are generally not sold prior to maturity, which is typically three to five years. The Company uses a “ladder” approach to its maturities so that approximately 20% to 35% of the portfolio matures each year with the objective of achieving higher yields with minimum interest rate risk. The Company also invests in variable rate demand notes (generally long term bonds where interest rates are reset weekly, and provide a weekly “put” which allows the holder to also sell each week with no loss in principal). Available for sale investments are reviewed for impairment at each reporting period by comparing the carrying value or amortized cost to the fair market value. In the event that the Company determines that a security’s fair value is permanently impaired, the Company will record the amount of the impairment attributable to credit factors in earnings as credit loss expense or, as applicable, a reversal of that expense, with the amount attributable to non-credit factors in other comprehensive income, net of applicable taxes. The Company’s investment policy, which guides investment decisions, is focused on high quality investments which mitigates the risk of impairment. Investments classified as trading securities primarily comprise mutual funds which are used as an economic hedge against our deferred compensation liabilities. Trading securities are carried at fair value with gains or losses included in other income, net. The Company does not invest in Level 3 securities, as defined, but may utilize third-party professional valuation firms as necessary to assist in the determination of the value of investments that utilize Level 3 inputs (as defined by guidance) should any of its investments be downgraded to Level 3.

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Other matters

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In the opinion of management, other than contracts for foreign currency forwards and raw materials, including currency and commodity hedges and outstanding purchase orders for packaging, ingredients, supplies, operational services, and capital expenditures, all entered into in the ordinary course of business, the Company does not have any significant contractual obligations or future commitments.

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RECENT ACCOUNTING PRONOUNCEMENTS

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See Note 1 of the Company’s Notes to Consolidated Financial Statements.

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MARKET RISKS

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The Company is exposed to market risks related to commodity prices, interest rates, investments in marketable securities, equity price and foreign exchange.

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The Company’s ability to forecast the direction and scope of changes to its major input costs is impacted by significant potential volatility in crude oil and energy, sugar, corn, edible oils, cocoa and cocoa powder, and dairy products markets. The prices of these commodities are influenced by changes in global demand, changes in weather and crop yields, including the effects of climate change, changes in import tariffs and governments’ farm policies, including mandates for ethanol and bio-fuels, environmental matters, fluctuations in the U.S. dollar relative to dollar-denominated commodities in world markets, and in some cases, geo-political and military conflict risks. The Company believes that its competitors face the same or similar challenges.

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In order to address the impact of changes in input and other costs, the Company periodically reviews each item in its product portfolio to ascertain if price realization adjustments or other actions should be taken. These reviews include an evaluation of the risk factors relating to market place acceptance of such changes and their potential effect on future sales volumes. In addition, the estimated cost of packaging modifications associated with weight changes, if applicable, is evaluated. The Company also maintains ongoing cost reduction and productivity improvement programs under which cost savings initiatives are encouraged and progress monitored, and continuously reviews automation and productivity opportunities requiring capital investments. The Company is not able to accurately predict the outcome of these cost savings initiatives and their effects on its future results.

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Commodity future and foreign currency forward contracts

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Commodity price risks relate to ingredients, primarily sugar, cocoa and cocoa powder, chocolate, corn syrup, dextrose, edible oils, milk, whey and gum base ingredients. The Company believes its competitors face similar risks, and the industry has historically adjusted prices, and/or product weights, to compensate for adverse fluctuations in commodity costs. The Company, as well as competitors in the confectionery industry, has historically taken actions, including higher price realization to mitigate rising input costs for ingredients, packaging, labor and fringe benefits, energy, freight and delivery, and plant manufacturing maintenance, supplies and services. Although management seeks to substantially recover cost increases over the long-term, there is risk that higher price realization cannot be fully passed on to customers and, to the extent they are passed on, they could adversely affect customer and consumer acceptance and resulting sales volume.

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The Company utilizes commodity futures contracts, as well as annual supply agreements, to hedge and plan for anticipated purchases of certain ingredients, including sugar, in order to mitigate commodity cost fluctuation. The Company also may purchase forward foreign exchange contracts to hedge its costs of manufacturing certain products in Canada for sale and distribution in the United States (U.S.A.), and periodically does so for purchases of equipment or raw materials from foreign suppliers. Such commodity futures and currency forward contracts are cash flow hedges and are effective as hedges as defined by accounting guidance. The unrealized gains and losses on such contracts are deferred as a component of accumulated other comprehensive loss (or gain) and are recognized as a component of product cost of goods sold when the related inventory is sold.

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The potential change in fair value of commodity and foreign currency derivative instruments held by the Company at December 31, 2024, assuming a 10% change in the underlying contract price, was $4,709. The analysis only includes commodity and foreign currency derivative instruments and, therefore, does not consider the offsetting effect of changes in the price of the underlying commodity or foreign currency. This amount is not significant compared with the net earnings and shareholders’ equity of the Company.

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Interest rates

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Interest rate risks primarily relate to the Company’s investments in available for sale marketable securities with maturity dates of generally three to five years.

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The majority of the Company’s investments which are classified as available for sale have generally not been sold prior to their maturity, which is typically three to five years. Approximately 20% to 35% of this investment portfolio matures each year. This “ladder” approach to investing limits the Company’s exposure to interest rate fluctuations. The Company also invests in variable rate demand notes which have interest rates that are reset weekly and can be “put back” and sold each week through a remarketing agent, generally a large financial broker, which also substantially eliminates the Company’s

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exposure to interest rate fluctuations on the principal invested. The accompanying chart summarizes the maturities of the Company’s investments in debt securities at December 31, 2024.

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[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b"],["Less than 1 year","","$","55,789"],["1 \u2013 2 years","\u200b","","46,980"],["2 \u2013 5 years","\u200b","\u200b","180,291"],["Total","\u200b","$","283,060"]]
[[/GREPCENT_TABLE]]

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The Company’s outstanding debt at December 31, 2024 and 2023 was $7,500 in an industrial development bond in which interest rates reset each week based on the current market rate. Therefore, the Company does not believe that it has significant interest rate risk with respect to its interest bearing debt.

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Investment in marketable securities

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As stated above, the Company’s investments classified as available for sale primarily include marketable securities which mature in three to five years and variable rate demand notes (VRDNs). The VRDNs have weekly “puts” which are collateralized by bank letters of credit or other assets, and interest rates are reset weekly. Except for VRDNs, the Company’s marketable securities are generally not sold prior to maturity and such maturities generally approximate three to five years. The Company utilizes professional money managers and maintains investment policy guidelines which emphasize high quality and liquidity in order to minimize the potential loss exposures that could result in the event of higher interest rates, a default or other adverse event. The Company continues to monitor these investments and markets, as well as its investment policies, however, the financial markets could experience unanticipated or unprecedented events and future outcomes may be less predictable than in the past.

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Equity price

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Equity price risk relates to the Company’s investments in mutual funds which are principally used to fund and hedge the Company’s deferred compensation liabilities. These investments in mutual funds are classified as trading securities. Any change in the fair value of these trading securities is completely offset by a corresponding change in the respective hedged deferred compensation liability, and therefore, the Company does not believe that it has significant equity price risk with respect to these investments.

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Foreign currency

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Foreign currency risk principally relates to the Company’s foreign operations in Canada, Mexico and Spain, as well as periodic purchase commitments of machinery and equipment from foreign sources, generally the European Union where the Euro is the currency.

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Certain of the Company’s Canadian manufacturing costs, including local payroll and plant operations, and a portion of its packaging and ingredients are sourced in Canadian dollars. The Company may purchase Canadian forward contracts to receive Canadian dollars at a specified date in the future and uses its Canadian dollar collections on Canadian sales as a partial hedge of its overall Canadian manufacturing obligations sourced in Canadian dollars. The Company also periodically purchases and holds Canadian dollars to facilitate the risk management of these currency changes.

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From time to time, the Company may use foreign exchange forward contracts and derivative instruments to mitigate its exposure to foreign exchange risks, as well as those related to firm commitments to purchase equipment from foreign vendors. See Note 10 of the Company’s Notes to Consolidated Financial Statements for outstanding foreign exchange forward contracts as of December 31, 2024.

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