Tootsie Roll Industries Inc: Form 10-Q for the period ended Sep 30, 2024

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, 2023 (the “2023 Form 10-K”).

Net product sales were $223,891 in third quarter 2024 compared to $248,336 in third quarter 2023, a decrease of $24,445 or 9.8%. Nine months 2024 net product sales were $524,174 compared to $567,884 in nine months 2023, a decrease of $43,710 or 7.7%. Domestic (U.S.) net product sales in third quarter and nine months 2024 decreased 9.7% and 7.6%, respectively, compared to the corresponding periods in the prior year, and, foreign net product sales, including exports to foreign markets, decreased 11.2% and 8.4%, respectively, compared to the corresponding periods in the prior year. For the third quarter and nine months 2024, domestic sales represented 91.6% and 91.3%, respectively, of total consolidated net product sales. The Company faced a more challenging market in third quarter and nine months 2024 as customers and consumers became more resistant to higher price realization which was necessary to restore our margins. The Company expects this adverse sales trend to continue through the balance of 2024 and may continue into 2025. Third quarter and nine months 2024 sales were also adversely affected by the timing of certain sales between third and fourth quarters 2024 when compared to the prior year comparative quarterly periods.

Product cost of goods sold was $148,266 in third quarter 2024 compared to $164,163 in third quarter 2023, and nine months 2024 product cost of goods sold was $350,730 compared to $382,644 in nine months 2023. Product cost of goods sold includes $240 and $(89) of certain deferred compensation expenses (credits) in third quarter 2024 and 2023, respectively, and $727 and $397 of certain deferred compensation expenses in nine months 2024 and 2023, 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 decreased from $164,252 in third quarter 2023 to $148,026 in third quarter 2024, a decrease of $16,226 or 9.9%; and decreased from $382,247 in nine months 2023 to $350,003 in nine months 2024, a decrease of $32,244 or 8.4%. As a percentage of net product sales, adjusted product cost of goods sold was 66.1% in both third quarter 2024 and 2023; and adjusted product cost of goods sold was 66.8% and 67.3% in nine months 2024 and 2023, respectively, a favorable decrease of 0.5 percentage points. Third quarter and nine months 2024 gross profit margins benefited from higher price realization, improvements in plant manufacturing operating efficiencies, and more favorable packaging material unit costs. Although we did achieve improvement in gross profit margin, higher overall ingredient costs, and increases in labor, employee benefits, and certain plant manufacturing costs offset some of these benefits in third quarter and nine months 2024.

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. We made progress in restoring our margins in 2023 and have continued to do so in 2024. However, cocoa and chocolate costs have been moving significantly higher in the market during 2024, and we expect that these increases, as well as increased costs for many of our other ingredients, will have adverse effects on our input costs and margins for the remainder of 2024 and in 2025. 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. 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.

Selling, marketing and administrative expenses were $41,825 in third quarter 2024 compared to $39,300 in third quarter 2023, and nine months 2024 selling, marketing and administrative expenses were $115,783 compared to $114,656 in nine months 2023. Selling, marketing and administrative expenses include $4,560 and $(1,596) of certain deferred compensation expenses (credits) in third quarter 2024 and 2023, respectively; and $13,855 and $7,196 of certain deferred compensation expenses in nine months 2024 and 2023, respectively. As discussed above, these 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 deferred compensation expenses, selling, marketing and administrative expenses decreased from $40,896 in third quarter 2023 to $37,265 in third quarter 2024, a decrease of $3,631 or 8.9%; and selling, marketing and administrative expenses decreased from $107,460 in nine months 2023 to $101,928 in nine months 2024 a decrease of $5,532 or 5.1%. As a percentage of net product sales, adjusted selling, marketing and administrative expenses increased from 16.5% in third quarter 2023 to 16.6% in third quarter 2024, an unfavorable increase of 0.1 percentage points as a percent of net product sales; and adjusted selling, marketing and administrative expenses increased from 18.9% in nine months 2023 to 19.4% in nine months 2024, an unfavorable increase of 0.5 percentage points as a percent of net sales. These higher expenses as a percentage of sales reflect the adverse effects of lower sales as certain expenses are generally fixed and do not change significantly with changes in sales.

Selling, marketing and administrative expenses include $15,442 and $17,997 for customer freight, delivery and warehousing expenses in third quarter 2024 and 2023, respectively, a decrease of $2,555 or 14.2%; and $42,897 and $49,662 in nine months 2024 and 2023, respectively, a decrease of $6,765 or 13.6%. These expenses were 6.9% and 7.2% of net product sales in third quarter 2024 and 2023, respectively; and were 8.2% and 8.7% of net product sales in nine months 2024 and 2023, respectively. Customer freight and delivery unit costs, including the cost per pound shipped, was more favorable in nine months 2024 compared to the corresponding period in 2023. Increased over-the-road truck availability in 2024 relative to tight freight markets over the past few years has resulted in a more competitive market and resulting lower costs.

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 $3,725 and $5,965 reduction in accrued liabilities and an increase in net product sales in third quarter and nine months 2024, respectively.

Earnings from operations were $35,244 in third quarter 2024 compared to $45,900 in third quarter 2023; and were $61,789 in nine months 2024 compared to $73,449 in nine months 2023. Earnings from operations include $4,800 and $(1,685) of certain deferred compensation expenses (credits) in third quarter 2024 and 2023, respectively; and include $14,582 and $7,593 of certain deferred compensation expenses in nine months 2024 and 2023, respectively, which is discussed above. Adjusting for these deferred compensation costs and expenses (credits), adjusted earnings from operations were $40,044 and $44,215 in third quarter 2024 and 2023, respectively, a decrease of $4,171 or 9.4%; and adjusted operating earnings were $76,371 and $81,042 in nine months 2024 and 2023, respectively, a decrease of $4,671 or 5.8%. As a percentage of net product sales, these adjusted operating earnings were 17.9% and 17.8% in third quarter 2024 and 2023, respectively, a favorable increase of 0.1 percentage points; and as a percentage of net product sales, these adjusted operating earnings were 14.6% and 14.3% in nine months 2024 and 2023, respectively, a favorable increase of 0.3 percentage points. Higher price realization, as well as a decrease in certain costs and expenses as discussed above, mitigated some of the adverse effects of lower sales volumes relating to third quarter and nine months 2024 adjusted operating earnings.

Other income (loss), net was $7,188 in third quarter 2024 compared to $(718) in third quarter 2023; and $21,120 in nine months 2024 compared to $8,866 in nine months 2023. Other income, net for third quarter 2024 and 2023 includes net gains (loss) and investment income of $4,800 and $(1,685), respectively, on trading securities which provide an economic hedge of the Company’s deferred compensation liabilities on trading securities; and other income, net for nine months 2024 and 2023 includes net gains and investment income of $14,582 and $7,593, respectively, on trading securities which provide an economic hedge of the Company’s deferred compensation liabilities on trading securities. The investment gains on trading securities in third quarter and nine months 2024 and 2023 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 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 useful to our investors and other users of our financial information in assessing the operations of the Company.

Other income (loss), net for third quarter 2024 and 2023 includes investment income on available for sale securities of $2,367and $1,227 in 2024 and 2023, respectively; and other income, net for nine months 2024 and 2023 includes investment income on available for sale securities of $6,344 and $3,534 in 2024 and 2023, respectively. The aforementioned increases in 2024 investment income on available for sale securities reflects the higher interest rate environment in 2024 as well as a higher average balance in the investment portfolio of available for sale securities in third quarter and nine months 2024 compared to the corresponding periods in the prior year. Other income (loss), net also includes pre-tax gains (loss) on foreign exchange of $6 and $(130) in third quarter 2024 and 2023, respectively; and $126 and $(2,189) in nine months 2024 and 2023, respectively, which contributed to improved net earnings in third quarter and nine months 2024 when compared to third quarter and nine months 2023. In addition, higher leasing revenue from the leasing of certain real estate to third parties contributed to higher net earnings in third quarter and nine months 2024.

The consolidated effective tax rates were 22.6% and 23.9% in third quarter 2024 and 2023, respectively; and 22.4% and 24.1% in nine months 2024 and 2023, respectively. The lower effective income tax rate in third quarter and nine months 2024 reflects a reduction in state income taxes and increases in federal income tax credits, which contributed to higher net earnings in third quarter and nine months 2024 compared to the corresponding periods in the prior year.

Net earnings attributable to Tootsie Roll Industries, Inc. were $32,844 (after $11 net loss attributed to non-controlling interests) in third quarter 2024 compared to $34,382 (after $5 net loss attributed to non-controlling interests) in third quarter 2023, and earnings per share were $0.46 and $0.48 in third quarter 2024 and 2023, respectively, a decrease of $0.02 per share, or 4.2%. Nine months 2024 net earnings attributable to Tootsie Roll Industries, Inc. were $64,318 (after $16 net loss attributed to non-controlling interests) compared to nine months 2023 net earnings of $62,509 (after $18 net loss attributed to non-controlling interests), and net earnings per share were $0.90 and $0.87 in nine months 2024 and nine months 2023, respectively, an increase of $0.03 per share or 3.4%. Earnings per share attributable to Tootsie Roll Industries, Inc. for third quarter and nine months 2024 benefited from the reduction in average shares outstanding resulting from purchases in the open market by the Company of its common stock during the preceding twelve months. Average shares outstanding decreased from 71,696 at third quarter 2023 to 71,379 at third quarter 2024, and from 72,049 in nine months 2023 to 71,402 in nine months 2024.

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 2024. Although Company management has not identified any trigging events at this time relating to its intangibles, factors outlined in the Company’s risk factors discussed on Form 10-K for the year ended December 31, 2023, 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 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.

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%.

The Company has been advised by the Plan that its withdrawal liability would have been $102,200, $96,000, and $104,300 if it had withdrawn from the Plan during 2023, 2022 and 2021, respectively (most recent information provided by the Plan). The aforementioned most recent increase in the withdrawal liability as advised by the Plan was primarily driven by the Plan’s unfavorable investment performance in 2022, which was partially offset by an increase in the PBGC interest rates used to value a portion of the 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, 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 2023 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 2023 would likely be limited to twenty annual payments of $2,654 which have a present value in the range of $31,142 to $37,808 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 2023, the present value of such perpetuities is in the range of $43,483 to $70,702 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.

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 2024 and 2023 was $2,579 and $2,785, respectively. The aforementioned expense includes surcharges of $909 and $982 for nine months 2024 and 2023, respectively, as required under the amended plan of rehabilitation. The decrease in the nine months 2024 expense compared to nine months 2023 reflects the effects of lower sales volumes in nine months 2024, and corresponding reductions in lower production and labor hours worked. The Company’s twelve months pension expense for this Plan for 2023 and 2022 was $3,516 and $3,510, respectively, which includes surcharges of $1,239 and $1,237, respectively.

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, as defined, and a phase-in of the Special Financial Assistance in determining the Company’s withdrawal liability. 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.

During second quarter 2023, the Company and the union 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, 2023.

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 $70,102 and $39,606 in nine months 2024 and 2023, respectively, a favorable increase of $30,496. The $30,496 increase in cash flows from operating activities from 2024 to 2023 principally reflects benefits from changes in working capital, primarily more favorable changes in inventories and the timing of pre-payments during nine months 2024 compared to nine months 2023. The favorable changes in inventories reflect changes in the Company’s production plan in 2024, as well as the effects of lower sales demand for the rest of 2024, which trend is generally in line with the nine months 2024 sales results when compared to nine months 2023.

Net cash (used in) provided by investing activities was $(32,176) in nine months 2024 compared to $233 in nine months 2023. Cash flows used in investing activities reflect $82,391 and $65,616 of purchases of available for sale securities during nine months 2024 and 2023, respectively, and $65,578 and $86,259 of sales and maturities of available for sale securities during nine months 2024 and 2023, respectively. Nine months 2024 and 2023 investing activities include capital expenditures of $13,911 and $19,458, respectively. The Company is evaluating a plant expansion, including both the addition and replacement of certain processing and packaging lines, to better meet its higher level of projected demand for certain products on a timelier and more cost effective basis. The Company believes that this plant expansion would take place over the next five years, but most of the actual expenditures would likely occur during the next three years. Company management believes that the total cost of this expansion, including new machinery, equipment and food processing infrastructure, will approximate $70,000 to $80,000. 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.

The Company’s consolidated financial statements include bank borrowings of $1,078 and $1,018 at September 30, 2024 and 2023, respectively, all of which relate to its Spanish subsidiary. The Company had no other outstanding bank borrowings at September 30, 2024.

Financing activities include Company common stock purchases and retirements of $2,196 and $27,550 in nine months 2024 and 2023, respectively. Cash dividends of $19,062 and $18,825 were paid in nine months 2024 and 2023, respectively.

The Company’s current ratio (current assets divided by current liabilities) was 3.6 to 1 at September 30, 2024 compared to 3.6 to 1 at December 31, 2023 and 3.2 to 1 at September 30, 2023. Net working capital was $247,685 at September 30, 2024 compared to $245,763 and $230,426 at December 31, 2023 and September 30, 2023, respectively. Included in net working capital is cash and cash equivalents and short-term investments totaling $163,211 at September 30, 2024 compared to $171,422 and $135,400 at December 31, 2023 and September 30, 2023, respectively. In addition, long term investments, principally debt securities comprising corporate bonds, were $318,344 at September 30, 2024, as compared to $255,606 and $243,205 at December 31, 2023 and September 30, 2023, respectively. Aggregate cash and cash equivalents and short and long-term investments were $481,555, $427,028, and $378,605, at September 30, 2024, December 31, 2023 and September 30, 2023, respectively, including $103,875,

$87,800, and $79,754 at September 30, 2024, December 31, 2023 and September 30, 2023, 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 2024 and 2023, were generally used in working capital or were replaced with debt securities of similar maturities. The net unrealized loss on available for sale investments was approximately $4,300 and $6,600 at September 30, 2024 and 2023, respectively, which principally reflects the increase in market interest rates since such securities were purchased. The Company expects to hold most of these securities to maturity and therefore does not expect to ultimately realize a substantial portion of 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. The Company added $20,000 in additional funding to the VEBA trust in 2023. No contribution was made during nine months 2024. The Company expects to use these VEBA funds to pay the actual cost of such benefits through part or all of 2027. The VEBA trust held $16,345, $19,126 and $21,965 of aggregate cash and cash equivalents at September 30, 2024, December 31, 2023 and September 30, 2023, 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 2023 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 the ability to recover increases in input costs through price increases and restoring margins, the overall competitive environment in the Company’s industry, successful distribution and sell-through during Halloween and other seasons, the availability of cocoa and chocolate at reasonable prices given that these markets are significantly elevated and volatile, and changes in assumptions, judgments and risk factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2023.

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.

The Company is exposed to various market risks, including fluctuations in and sufficient availability of sugar, corn syrup, edible oils, including palm oils, cocoa, chocolate, 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. The Company has experienced significant increases in its ingredient and packaging costs in 2022 and 2023, and more recently, the cocoa and chocolate markets have moved to unprecedented highs. The Company has entered into longer-range supply contracts for its cocoa and chocolate needs in 2024 and much of 2025 in order to help ensure supply and reduce the risk of further increases in these ingredients. However, these extended cocoa and chocolate supply contracts are at significantly higher costs than in recent years. The cocoa market is experiencing unprecedented volatility and highs, and remains a risk for the intermediate term and possibly for a longer term.

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 principally in corporate bonds (available for sale securities) with an average maturity of three to five years, to manage its interest rate risk. While the Company generally holds these investments to maturity, the Company would sell prior to maturity if it was considered beneficial to do so for tax-planning strategies, credit quality 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. Other than the cocoa and chocolate market as discussed above, 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, 2023.

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, 2024 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, 2024 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.