# Tootsie Roll Industries Inc: Form 10-Q for the period ended Sep 30, 2023

- Company: [Tootsie Roll Industries Inc](/companies/tr.md) (CIK 98677)
- Form: 10-Q
- Filed: 2023-11-08
- Accepted by EDGAR: Nov 8, 2023, 18:00 ET
- Period: 2023-09-30
- Accession: 0001558370-23-018181
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/98677/000155837023018181/tr-20230930x10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/98677/000155837023018181/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-07-01 to 2023-09-30 | $249.9m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2023-01-01 to 2023-09-30 | $572.1m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2023-07-01 to 2023-09-30 | $164.7m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2023-01-01 to 2023-09-30 | $384.0m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2023-07-01 to 2023-09-30 | $85.2m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2023-01-01 to 2023-09-30 | $188.1m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2023-07-01 to 2023-09-30 | $39.3m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2023-01-01 to 2023-09-30 | $114.7m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2023-07-01 to 2023-09-30 | $45.9m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2023-01-01 to 2023-09-30 | $73.4m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2023-07-01 to 2023-09-30 | $10.8m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2023-01-01 to 2023-09-30 | $19.8m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-07-01 to 2023-09-30 | $34.4m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2023-01-01 to 2023-09-30 | $62.5m | us-gaap:NetIncomeLoss |
| Basic EPS | 3 months, 2023-07-01 to 2023-09-30 | $0.49 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2023-01-01 to 2023-09-30 | $0.89 | us-gaap:EarningsPerShareBasic |
| Operating cash flow | 9 months, 2023-01-01 to 2023-09-30 | $39.6m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2023-01-01 to 2023-09-30 | $19.5m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2023-01-01 to 2023-09-30 | $18.8m | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 9 months, 2023-01-01 to 2023-09-30 | $27.6m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2023-09-30 | $47.3m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-09-30 | $336.1m | us-gaap:AssetsCurrent |
| Total assets | at 2023-09-30 | $1.07bn | us-gaap:Assets |
| Current liabilities | at 2023-09-30 | $105.6m | us-gaap:LiabilitiesCurrent |
| Shareholders' equity | at 2023-09-30 | $803.9m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 32,056 characters.

This financial review discusses the Company’s financial condition, results of operations, liquidity and capital resources and other matters. Dollars are presented in thousands, except per share amounts. This review should be read in conjunction with the accompanying Condensed Consolidated Financial Statements and related notes included in this Form 10-Q and with the Company’s Consolidated Financial Statements and related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s Form 10-K for the year ended December 31, 2022 (the “2022 Form 10-K”).

Net product sales were $248,336 in third quarter 2023 compared to $211,888 in third quarter 2022, an increase of $36,448 or 17.2%. Nine months 2023 net product sales were $567,884 compared to $493,260 in nine months 2022, an increase of $74,624 or 15.1%. Domestic (U.S.) net product sales in third quarter and nine months 2023 increased 17.0% and 14.3%, respectively, compared to the corresponding periods in the prior year, and, foreign net product sales, including exports to foreign markets, increased 19.4% and 24.6%, respectively, compared to the corresponding periods in the prior year. For the third quarter and nine months 2023, domestic sales represented 91.4% and 91.3%, respectively, of total consolidated net product sales. Sales growth in third quarter and nine months 2023 was driven by effective sales and marketing programs, including seasonal sales programs during these periods. Higher sales price realization was the primary contributor to the sales increase in third quarter and nine months 2023, however, higher sales volumes were also achieved in third quarter and nine months 2023 compared to third quarter and nine months 2022. Third quarter and nine months 2023 net sales also benefited from the timing of earlier pre-Halloween and other sales in 2023 when compared to the prior comparative 2022 periods. As a result, we expect that the aforementioned timing of sales between the comparative third and fourth quarters in 2023 and 2022 will have some adverse effect on sales and earnings in fourth quarter 2023 when compared to fourth quarter 2022.

Although the increase in third quarter and nine months 2023 sales contributed to improved net earnings, higher input costs significantly mitigated the benefits of these higher sales. Third quarter and nine months 2023 gross profit margins were adversely affected by higher costs for ingredients, packaging materials, labor and employee fringe benefits, plant manufacturing repairs and maintenance, and many manufacturing supplies and services. We also incurred additional costs, including overtime and extended operating shifts for plant manufacturing, to meet our sales demands in 2023.

Our input unit costs moved significantly higher in third quarter and nine months 2023 as most of our supply contracts for ingredients, packaging materials and manufacturing supplies and services expired at the end of 2022, and new supply agreements at higher prices became effective in early first quarter 2023. These higher costs in 2023 are incremental to the significant increase in input costs that we experienced last year in 2022 when compared to 2021. We believe that the increases in ingredients and packaging materials since 2021 are the greatest that we have experienced over a two-year period in over twenty years. Limited supply and continuing high demand for certain ingredients, as well as generally elevated commodity markets and overall inflation, have driven up our unit costs for many ingredients and materials in each of the past two years. 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 thereby accelerates the realization of these higher costs.

Product cost of goods sold was $164,163 in third quarter 2023 compared to $141,243 in third quarter 2022, and nine months 2023 product cost of goods sold was $382,644 compared to $328,995 in nine months 2022. Product cost of goods sold includes $(89) and $41 of certain deferred compensation expenses (credits) in third quarter 2023 and 2022, respectively, and $397 and $(1,093) of certain deferred compensation expenses (credits) in nine months 2023 and 2022, respectively. These deferred compensation expenses (credits) principally resulted from the 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 increased from $141,202 in third quarter 2022 to $164,252 in third quarter 2023, an increase of $23,050 or 16.3%; and increased from $330,088 in nine months 2022 to $382,247 in nine months 2023, an increase of $52,159 or 15.8%. As a percentage of net product sales, adjusted product cost of goods sold was 66.1% and 66.6% in third quarter 2023 and 2022, respectively, a favorable decrease of 0.5 percentage points; and adjusted product cost of goods sold was 67.3% and 66.9% in nine months 2023 and 2022, respectively, an unfavorable increase of 0.4 percentage points. Third quarter and nine months 2023 adjusted product cost of goods sold was adversely affected by increasing costs for ingredients and packaging materials as discussed above, as well as for certain manufacturing supplies and services, plant utilities, repairs and maintenance, and labor and benefits, including overtime and extended work shifts. Although the above discussed higher costs for ingredients and packaging materials adversely affected results for third quarter and nine months 2023, higher sales, including higher price realization, and production volumes provided some benefit as certain plant manufacturing overhead costs are generally fixed and do not change significantly when sales increase. In addition, certain cost and expense reductions initiated by the Company mitigated some of the cost increase in adjusted product cost of goods sold in third quarter and nine months 2023 compared to the corresponding period in the prior year.

Our supply chain improved in nine months 2023 compared to 2022. However, we remain focused on the supply chain in order to insure that we avoid delays and disruptions which could result in the temporary shutdown of one or more manufacturing lines resulting in lost sales and profits in 2023. Although the labor market is not as tight this year compared to a year ago, we continue to experience some labor challenges at some of our manufacturing plant locations. We did expand our work shifts and overtime in nine months 2023 in order to increase production and inventory levels, and insure that we can meet our sales demands in 2023.

In response to higher costs for ingredients, packaging materials, and other input costs, many companies in the consumer products industry have increased selling prices during the 2021 through 2023 period. We have and continue to implement price increases as well with the objective of improving sales price realization in order to pass along some of these higher input costs and restore some of our margin declines. Price increases were phased in principally beginning in second half 2021 and have continued into 2023. We have made some progress in restoring our margins this year, but we have not as yet restored our margins to historical levels. As we look into 2024, we believe that our costs for ingredients will be even higher in 2024 than in 2023. Continuing increases in input costs and overall high inflation may not allow us to fully restore our margins to historical levels. Although the Company continues to monitor these higher input costs and price increases, we are mindful of the effects and limits of passing on all of these higher input costs to our customers as well as the final consumers of our products.

Selling, marketing and administrative expenses were $39,300 in third quarter 2023 compared to $35,957 in third quarter 2022, and nine months 2023 selling, marketing and administrative expenses were $114,656 compared to $83,704 in nine months 2022. Selling, marketing and administrative expenses include $(1,596) and $(2,680) of certain deferred compensation expenses (credits) in third quarter 2023 and 2022, respectively; and $7,196 and $(19,709) of certain deferred compensation expenses (credits) in nine months 2023 and 2022, respectively. As discussed above, these expenses (credits) 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 deferred compensation expenses (credits), selling, marketing and administrative expenses increased from $38,637 in third quarter 2022 to $40,896 in third quarter 2023, an increase of $2,259 or 5.8%; and selling, marketing and administrative expenses increased from $103,413 in nine months 2022 to $107,460 in nine months 2023 an increase of $4,047 or 3.9%. As a percentage of net product sales, adjusted selling, marketing and administrative expenses decreased from 18.2% in third quarter 2022 to 16.5% in third quarter 2023, a favorable decrease of 1.7 percentage points as a percent of net product sales; and adjusted selling, marketing and administrative expenses decreased from 21.0% in nine months 2022 to 18.9% in nine months 2023, a favorable decrease of 2.1 percentage points as a percent of net sales. These lower expenses as a percentage of sales reflect the benefits of higher sales, including higher price realization, against certain expenses that are generally fixed and do not change significantly with changes in sales.

Selling, marketing and administrative expenses include $17,997 and $19,060 for customer freight, delivery and warehousing expenses in third quarter 2023 and 2022, respectively, a decrease of $1,063 or 5.6%; and $49,662 and $49,754 in nine months 2023 and 2022, respectively, a decrease of $92 or 0.2%. These expenses were 7.2% and 9.0% of net product sales in third quarter 2023 and 2022, respectively; and were 8.7% and 10.1% of net product sales in nine months 2023 and 2022, respectively. Customer freight and delivery unit costs, including the cost per pound shipped, was more favorable in third quarter and nine months 2023 compared to the corresponding periods in 2022.

Earnings from operations were $45,900 in third quarter 2023 compared to $35,585 in third quarter 2022; and were $73,449 in nine months 2023 compared to $83,398 in nine months 2022. Earnings from operations include $(1,685) and $(2,639) of certain deferred compensation expenses (credits) in third quarter 2023 and 2022, respectively; and include $7,593 and $(20,802) of certain deferred compensation expenses (credits) in nine months 2023 and 2022, respectively, which is discussed above. Adjusting for these deferred compensation costs and expenses (credits), adjusted earnings from operations were $44,215 and $32,946 in third quarter 2023 and 2022, respectively, an increase of $11,269 or 34.2%; and adjusted operating earnings were $81,042 and $62,596 in nine months 2023 and 2022, respectively, an increase of $18,446 or 29.5%. As a percentage of net product sales, these adjusted operating earnings were 17.8% and 15.5% in third quarter 2023 and 2022, respectively, a favorable increase of 2.3 percentage points; and as a percentage of net product sales, these adjusted operating earnings were 14.3% and 12.7% in nine months 2023 and 2022, respectively, a favorable increase of 1.6 percentage points. Although higher third quarter and nine months 2023 sales contributed to improved operating earnings compared to the corresponding prior year periods, higher input costs, as discussed above, substantially offset much of the benefits of increased sales.

Other income (loss), net was $(718) in third quarter 2023 compared to $(1,246) in third quarter 2022; and $8,866 in nine months 2023 compared to $(17,399) in nine months 2022. Other income (loss), net for third quarter 2023 and 2022 includes net gains (losses) and investment income of $(1,685) and $(2,639), respectively, on trading securities which provide an economic hedge of the Company’s deferred compensation liabilities; and other income, net for nine months 2023 and 2022 includes net gains (losses) and investment income of $7,593 and $(20,802), respectively, on trading securities. The investment gains and (losses) on trading securities in third quarter and nine months 2023 and 2022 reflect the overall changes in the equity markets during these periods. These changes in market values were substantially offset by a like amount of deferred compensation expense (credits) included in product cost of goods sold and selling, marketing, and administrative expenses in the respective periods as discussed above.

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.

Other income (loss), net for third quarter 2023 and 2022 includes investment income on available for sale securities of $1,227 and $548 in 2023 and 2022, respectively; and other income, net for nine months 2023 and 2022 includes investment income on available for sale securities of $3,534 and $1,617 in 2023 and 2022, respectively. The aforementioned increases in 2023 investment income reflects the higher interest rate environment in 2023. Other income (loss), net also includes pre-tax gain (loss) on foreign exchange of $(130) and $730 in third quarter 2023 and 2022, respectively; and $(2,189) and $1,240 in nine months 2023 and 2022, respectively.

The consolidated effective tax rates were 23.9% and 22.7 in third quarter 2023 and 2022, respectively; and 24.1% and 23.4% in nine months 2023 and 2022, respectively.

Net earnings attributable to Tootsie Roll Industries, Inc. were $34,382 (after $5 net loss attributed to non-controlling interests) in third quarter 2023 compared to $26,577 (after $16 net loss attributed to non-controlling interests) in third quarter 2022, and earnings per share were $0.49 and $0.37 in third quarter 2023 and 2022, respectively, an increase of $0.12 per share, or 32.4%. Nine months 2023 net earnings attributable to Tootsie Roll Industries, Inc. were $62,509 (after $18 net loss attributed to non-controlling interests) compared to nine months 2022 net earnings of $50,593 (after $32 net loss attributed to non-controlling interests), and net earnings per share were $0.89 and $0.71 in nine months 2023 and nine months 2022, respectively, an increase of $0.18 per share or 25.4%. Earnings per share attributable to Tootsie Roll Industries, Inc. for third quarter and nine months 2023 benefited from the reduction in average shares outstanding resulting from purchases in the open market by the Company of its common stock. Average shares outstanding decreased from 70,915 at third quarter 2022 to 69,621 at third quarter 2023, and from 70,992 in nine months 2022 to 69,973 in nine months 2023.

Goodwill and intangibles, principally trademarks, are assessed annually as of December 31 or whenever events or circumstances indicate that the carrying values may not be recoverable from future cash flows. The Company has not identified any triggering events, as defined, or other adverse information that would indicate a material impairment of its goodwill or intangibles in nine months 2023. Although Company management has not identified any trigging events at this time relating to its intangibles, factors that may have longer term effects on consumer lifestyles and behavior, as outlined in the Company’s risk factors discussed on Form 10-K for the year ended December 31, 2022, could change this assessment in the future.

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 continues to date. A designation of “critical and declining status” implies that the Plan is expected to become insolvent in the next 20 years. 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 2023 have continued to classify the Plan in the “critical and declining status” category.

Based on these updated notices, the Plan’s funded percentage (plan investment assets as a percentage of plan liabilities), as defined, were 49.4%, 48.5%, and 48.3% as of January 1, 2022, 2021, and 2020, 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, 2022 the funded percentage would be 56.7% (not 49.4%). As of the January 1, 2022 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, 2022 fell 5% from the previous year and 10% 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 54%, 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 8%.

The Company has been advised by the Plan that its withdrawal liability would have been $96,000, $104,300 and $99,300 if it had withdrawn from the Plan during 2022, 2021 and 2020, respectively. 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 liability as well as the positive market value investment performance in 2021. Not all mortality and certain other assumption changes made in 2022 have been fully updated in the calculation of the Company’s withdrawal liability had the Company withdrawn from the Plan during 2022. Updating these assumptions may result in a change in the Company’s withdrawal liability. The Company’s relative share of the Plan’s contribution base, driven by employer withdrawals, has increased in the last several years, and management believes that this trend could continue indefinitely and add upward pressure on the Company’s withdrawal liability. Based on the above, including the Company’s increase in such union labor hours to meet its higher product demand and the Plan’s projected insolvency in the next 20 years, management believes that the Company’s withdrawal liability will likely increase further in future years.

Based on the Company’s most recent actuarial estimates using the information provided by the Plan with respect to its 2022 withdrawal liability and certain provisions in ERISA and laws relating to withdrawal liability payments, management believes that the Company’s liability had the Company withdrawn in 2022 would likely be limited to twenty annual payments of $2,714 which have a present value in the range of $31,851 to $43,741 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 2022, the present value of such perpetuities is in the range of $44,472 to $115,808 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.

The amended rehabilitation plan, which also continues, required that employer contributions include 5% compounded annual surcharge increases each year for an unspecified period of time beginning in 2012 as well as certain plan benefit reductions. 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.

The Company’s pension expense for this Plan for nine months 2023 and 2022 was $2,785 and $2,754, respectively. The aforementioned expense includes surcharges of $982 and $971 for nine months 2023 and 2022, respectively, as required under the amended plan of rehabilitation. The Company’s twelve months pension expense for this Plan for 2022 and 2021 was $3,510 and $3,156, respectively, which includes surcharges of $1,237 and $1,112, respectively. From 2012 through 2020, the Company’s employer contributions were subject to annual 5% compounded surcharge increases. Beginning in 2021, the Plan ceased additional surcharges, but the prior surcharges remain in effect indefinitely.

On March 1, 2023, the Plan submitted an initial application to the PBGC for Special Financial Assistance under the American Rescue Plan Act of 2021. The Plan advised us that they subsequently withdrew the application in the second quarter of 2023 and resubmitted the application on October 6, 2023. 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. Nonetheless, the Company’s actuary believes that given the Plan’s projected insolvency within the next 20 years as well as other factors, that it still remains unclear if the Plan can remain solvent through the targeted date of 2051. The Company’s actuary also advised that the regulations under the aforementioned PBGC financial assistance could result in a higher Company withdrawal liability even with PBGC financial assistance.

During second quarter 2023, the Company and the union concluded negotiations and entered into a new five year contract which expires in September 2027 (prior contract expired in September 2022). Under terms of this new union contract the Company is obligated to continue its participation in the Plan. 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, 2022

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.

LIQUIDITY AND CAPITAL RESOURCES

Net cash flows provided by operating activities were $39,606 and $30,596 in nine months 2023 and 2022, respectively, a favorable increase of $9,010. The $9,010 increase in cash flows from operating activities from 2023 to 2022 principally reflects higher net earnings as discussed above and a greater benefit from changes in working capital during nine months 2023 as compared to nine months 2022 partially offset by a $20,000 contribution to fund the Company’s Voluntary Employees’ Beneficiary Association plan (“VEBA”) in third quarter 2023 as further discussed below. While increased production volume to support expected demand and higher costs of raw materials combined to grow inventory balances during the first six months of 2023, strong sales in third quarter 2023 resulted in significantly higher cash conversion from inventory sell-through and collection of receivables than in third quarter 2022.

Net cash provided by (used in) investing activities was $233 in nine months 2023 compared to $(52,963) in nine months 2022. Cash flows used in investing activities reflect $65,616 and $75,125 of purchases of available for sale securities during nine months 2023 and 2022, respectively, and $86,259 and $38,439 of sales and maturities of available for sale securities during nine months 2023 and 2022, respectively. Nine months 2023 and 2022 investing activities include capital expenditures of $19,458 and $17,552, respectively. All capital expenditures have been or are expected to be funded from the Company’s cash flow from operations and internal sources including available for sale securities.

The Company’s consolidated financial statements include bank borrowings of $1,018 and $949 at September 30, 2023 and 2022, respectively, all of which relate to its Spanish subsidiary. The Company had no other outstanding bank borrowings at September 30, 2023.

Financing activities include Company common stock purchases and retirements of $27,550 and $8,024 in nine months 2023 and 2022, respectively. Cash dividends of $18,825 and $18,438 were paid in nine months 2023 and 2022, respectively.

The Company’s current ratio (current assets divided by current liabilities) was 3.2 to 1 at September 30, 2023 compared to 3.4 to 1 at December 31, 2022 and 3.2 to 1 at September 30, 2022. Net working capital was $230,426 at September 30, 2023 compared to $218,894 and $222,547 at December 31, 2022 and September 30, 2022, respectively. Included in net working capital is cash and cash equivalents and short-term investments totaling $135,400 at September 30, 2023 compared to $149,398 and $145,726 at December 31, 2022 and September 30, 2022, respectively. In addition, long term investments, principally debt securities comprising corporate bonds, were $243,205 at September 30, 2023, as compared to $247,528 and $241,308 at December 31, 2022 and September 30, 2022, respectively. Aggregate cash and cash equivalents and short and long-term investments were $378,605, $396,926, and $387,034, at September 30, 2023, December 31, 2022 and September 30, 2022, respectively, including $79,754, $71,208, and $67,659 at September 30, 2023, December 31, 2022 and September 30, 2022, respectively, relating to trading securities which are used as an economic hedge for the Company’s deferred compensation liabilities.

Investments in available for sale securities, primarily high quality corporate bonds, that matured during nine months 2023 and 2022 were generally used in working capital and to purchase the Company’s common stock, or were replaced with debt securities of similar maturities. The net unrealized loss on available for sale investments was approximately $6,600 and $10,100 at September 30 2023 and 2022, respectively, which principally reflects the increase in interest rates since such securities were purchased. The Company expects to hold these securities to maturity and therefore does not expect to ultimately realized the aforementioned unrealized losses (see also Item 3 below, QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK).

The Company periodically contributes to a VEBA trust, managed and controlled by the Company, to fund the estimated future costs of certain employee health, welfare and other benefits. After reviewing the longer term funding needs for this VEBA, the Company added $20,000 in additional funding to the VEBA trust in third quarter 2023. The Company is using these VEBA funds to pay the actual cost of such benefits through part or all of 2026. The VEBA trust held $21,965, $3,879 and $577 of aggregate cash and cash equivalents at September 30, 2023, December 31, 2022 and September 30, 2022, respectively. This asset value is included in prepaid expenses and long-term other assets in the Company’s Consolidated Statement of Financial Position. These assets are categorized as Level 2 within the fair value hierarchy.

ACCOUNTING PRONOUNCEMENTS

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

See Note 1 of the Company’s Condensed Consolidated Financial Statements for more information related to our use of estimates in the preparation of financial statements as well as information related to material changes in our significant accounting policies that were included in our 2022 Form 10-K.

FORWARD-LOOKING STATEMENTS

This discussion and certain other sections contain forward-looking statements that are based largely on the Company’s current expectations and are made pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by the use of words such as “anticipated,” “believe,” “expect,” “intend,” “estimate,” “project,” “plan” and other words of similar meaning in connection with a discussion of future operating or financial performance and are subject to certain factors, risks, trends and uncertainties that could cause actual results and achievements to differ materially from those expressed in the forward-looking statements. Such factors, risks, trends and uncertainties, which in some instances are beyond the Company’s control, include high input costs, the overall competitive environment in the Company’s industry, successful distribution and sell-through during Halloween and other seasons, supply chain disruptions, availability of labor, and changes in assumptions, judgments and risk factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2022.

The risk factors referred to above are believed to be significant factors, but not necessarily all of the significant factors that could cause actual results to differ from those expressed in any forward-looking statement. Readers are cautioned not to place undue reliance on such forward-looking statements, which are made only as of the date of this report. The Company undertakes no obligation to update such forward-looking statements.

## Market risk

As filed, 1,795 characters.

The Company is exposed to various market risks, including fluctuations in and sufficient availability of sugar, corn syrup, edible oils, including palm oils, cocoa, dextrose, milk and whey, gum-base input ingredients, packaging, and fuel costs principally relating to freight and delivery fuel surcharges. The Company generally enters into annual supply contracts and hedges certain commodities (primarily sugar) to control and plan for such cost changes, however, the Company has experienced significant increases in its costs in 2023 as the Company’s prior 2022 supply contracts and many of its previous hedges have been utilized. The Company is exposed to exchange rate fluctuations in the Canadian dollar which is the currency used for a portion of the raw material and packaging material costs and all labor, benefits and local plant operating costs at its Canadian plants. The Company is exposed to exchange rate fluctuations in Mexico, Canada, and Spain where its subsidiaries sell products in their local currencies. The Company invests in corporate bonds with an average maturity of three to five years and variable rate demand notes where interest rates are generally reset weekly. While the Company generally holds its investments to maturity, the Company would sell prior to maturity if it was considered beneficial to do so for tax-planning strategies or if the Company required the funds to finance a significant reinvestment in the Company, including an acquisition. The Company believes that the above discussed policies and programs limit the Company’s exposure to significant interest rate fluctuations. There have been no material changes in the Company’s market risks that would significantly affect the disclosures made in the Form 10-K for the year ended December 31, 2022.

## Controls and procedures

As filed, 1,325 characters.

Under the supervision and with the participation of Management, the Chief Executive Officer and Chief Financial Officer of the Company have evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of September 30, 2023 and, based on their evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these controls and procedures are effective. Disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures are also designed to ensure that information is accumulated and communicated to Management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

There has been no change in the Company’s internal control over financial reporting that occurred during the Company’s fiscal quarter ended September 30, 2023 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Filed Nov 8, 2023.
Source: SEC EDGAR, the filing index for accession 0001558370-23-018181. Last ingested by Listed: Oct 24, 2026, 14:54 ET. No prices; not investment advice.