Tootsie Roll Industries Inc: Form 10-Q for the period ended Mar 31, 2025

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, 2024 (the “2024 Form 10-K”).

Net product sales were $146,521 in first quarter 2025 compared to $151,464 in first quarter 2024, a decrease of $4,943 or 3.3%. Domestic (U.S.) net product sales in first quarter 2025 decreased 1.8% compared to the corresponding period in the prior year and foreign net product sales, including exports to foreign markets, decreased 16.3% compared to the corresponding period in the prior year. For the first quarter 2025, domestic sales represented 91.4% of total consolidated net product sales. The Company continued to face a challenging market in first quarter 2025 as customers and consumers have become more resistant to higher price realization. These headwinds have had some adverse effect on sales in first quarter 2025.

Product cost of goods sold was $95,500 in first quarter 2025 compared to $102,732 in first quarter 2024. Product cost of goods sold includes $(155) and $365 of certain deferred compensation (credits) expenses in first quarter 2025 and 2024, respectively. These deferred compensation (credits) expenses 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. Excluding the adjustment for deferred compensation (credits) expenses, product cost of goods sold decreased from $102,367 in first quarter 2024 to $95,655 in first quarter 2025, a decrease of $6,712 or 6.6%. As a percentage of net product sales, adjusted product cost of goods sold was 65.3% and 67.6% in first quarter 2025 and 2024, respectively, a favorable decrease of 2.3 percentage points. First quarter 2025 product cost of goods sold and gross profit margins benefited from higher price realization, improvements in plant manufacturing operating efficiencies, and certain cost reductions.

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 these periods with the objective of improving sales price realization in order to recover our margin declines. Although we made progress in restoring our margins in first quarter 2025, cocoa and chocolate markets continue at significantly elevated levels compared to historical prices in past years. As a result, we expect to incur even higher cocoa and chocolate costs during the balance of 2025 and into 2026 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.

The Company uses the Last-In-First-Out (LIFO) method of accounting for inventory and costs of goods sold which generally results in lower current net earnings during such periods of increasing costs and higher inflation. As a result, the above-discussed higher cocoa and chocolate costs will have an increasingly adverse effect on our gross profit margins as this year progresses. 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 to the final consumers of our products.

Selling, marketing and administrative expenses were $29,390 in first quarter 2025 compared to $38,918 in first quarter 2024. Selling, marketing and administrative expenses include $(3,459) and $6,925 of certain deferred compensation (credits) expenses in first quarter 2025 and 2024, 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. Excluding the adjustment for deferred compensation (credits) expenses, selling, marketing and administrative expenses increased from $31,993 in first quarter 2024 to $32,849 in first quarter 2025, an increase of $856 or 2.7%. As a percentage of net product sales, adjusted selling, marketing and administrative expenses increased from 21.1% in first quarter 2024 to 22.4% in first quarter 2025, an unfavorable increase of 1.3 percentage points. 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 $13,916 and $13,616 for customer freight, delivery and warehousing expenses in first quarter 2025 and 2024, respectively, an increase of $300 or 2.2%. These expenses were 9.5% and 9.0% of net product sales in first quarter 2025 and 2024, respectively. Customer freight and delivery unit costs, including the cost per pound shipped, was less favorable in first quarter 2025 compared to the corresponding period in 2024.

Earnings from operations were $23,060 in first quarter 2025 compared to $11,110 in first quarter 2024. Earnings from operations include $(3,614) and $7,290 of certain deferred compensation (credits) expenses in first quarter 2025 and 2024, respectively, which is discussed above. Adjusting for these deferred compensation (credits) expenses, earnings from operations were $19,446 and $18,400 in first quarter 2025 and 2024, respectively, an increase of $1,046 or 5.7%. As a percentage of net product sales, these adjusted operating earnings were 13.3% and 12.1% in first quarter 2025 and 2024, respectively, a favorable increase of 1.2 percentage points. Higher price realization and resulting improvement in gross profit margins offset the adverse effects of lower sales volumes relating to first quarter 2025 adjusted operating earnings.

Other (loss) income, net was $(51) in first quarter 2025 compared to $9,032 in first quarter 2024. Other (loss) income, net for first quarter 2025 and 2024 includes net (losses) gains and investment income of $(3,614) and $7,290, respectively, on trading securities which provide an economic hedge of the Company’s deferred compensation liabilities on trading securities. The changes in net investment activity on trading securities in first quarter 2025 and 2024 reflect the overall changes in the equity markets during these periods. These changes 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 (loss) income, net for first quarter 2025 and 2024 includes investment income from available for sale securities and cash equivalents of $3,461 and $1,862 in 2025 and 2024, respectively. The aforementioned increases in 2025 investment income reflects the higher interest rate environment in 2025, including the maturities of prior investments at lower yields, as well as higher average balances held in first quarter 2025 compared to the corresponding period in the prior year. Other (loss) income, net also includes an insurance recovery of $0.8 in first quarter 2025 and pre-tax losses on foreign exchange of $(544) and $(20) in first quarter 2025 and 2024, respectively.

The consolidated effective tax rates were 21.6% and 21.4% in first quarter 2025 and 2024. The Company has provided a full valuation allowance on its Spanish subsidiaries’ tax loss carry-forward benefits 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.

Net earnings attributable to Tootsie Roll Industries, Inc. were $18,058 (after $17 net loss attributed to non-controlling interests) in first quarter 2025 compared to $15,834 (after $1 net income attributed to non-controlling interests) in first quarter 2024, and earnings per share were $0.25 and $0.22 in first quarter 2025 and 2024, respectively, an increase of $0.03 per share, or 13.6%. Earnings per share attributable to Tootsie Roll Industries, Inc. for first quarter 2025 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 73,536 at first quarter 2024 to 72,957 at first quarter 2025.

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 $0.6 in first quarter 2025 compared to its breakeven results in first quarter 2024. 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.

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 first quarter 2025. Although 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, 2024, could change this assessment in the future.

Beginning in 2012, the Company has 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. Beginning in 2015, the Plan was reclassified to “critical and declining status”, as defined by the PPA and PBGC, for the plan year beginning January 1, 2015. 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 2024 have continued to classify the Plan in the “critical and declining status” category. In June 2024, the PBGC announced that it has approved the Plan’s application for Special Financial Assistance under the American Rescue Plan Act of 2021. The Plan was granted approximately $3.4 billion in Special Financial Assistance funds and received those funds in July 2024. As a result of the Special Financial Assistance the plan status changed to “critical status” for 2024 and will be until the plan year ending in 2051.

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 discussed below and that those payments will not be affected by Special Financial Assistance regulation.

Based on these updated notices, the Plan’s funded percentage (plan investment assets as a percentage of plan liabilities), as defined, were 45.2%, 47.0%, and 49.3% as of January 1, 2024, 2023, and 2022, respectively (these valuation dates are as of the beginning of each Plan year and reflect the most recent information available). 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, 2024, the funded percentage would be 41.7% (not 45.2%). As of the January 1, 2024 valuation date (most recent valuation available), only 15% of Plan participants were current active employees, 55% were retired or separated from service and receiving benefits, and 30% were retired or separated from service and entitled to future benefits. The number of current active employee Plan participants as of January 1, 2024 rose 2% from the previous year and 1% 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 1% and participants who were retired or separated from service and entitled to future benefits increased 2%.

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 above, 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. The impact of the Special Financial Assistance on the withdrawal liability has not been assessed by the Plan as of the date of this report.

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.

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 first quarter 2025 and 2024 was $698 and $704, respectively. This expense includes surcharges of $246 and $248 for first quarter 2025 and 2024, respectively, as required under the amended plan of rehabilitation. The Company’s twelve months pension expense for this Plan for 2024 and 2023 was $3,332 and $3,516, respectively, which includes surcharges of $1,174 and $1,239, respectively.

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, 2024.

Our operations and sales are principally in North America, and our cross border transactions with Canada and Mexico qualify under the USMCA free-trade agreement. Certain ingredients, including cocoa, chocolate, and edible oils, as well as some packaging and other purchases, do have foreign origins outside of USMCA. Until such time that more clarity regarding tariffs, as well as possible retaliatory tariffs, is forthcoming, we are not able to ascertain the effects of more permanent tariffs on our business. Nonetheless, the Company has recently performed an internal analysis of the effects of the current temporary tariffs (in effect during this 90 day “pause” period) which affect certain foreign sourced ingredients and packaging materials and supplies. Based on this analysis, Management believes that such temporary tariffs, which are generally at the 10% temporary rate, is estimated to have approximately $4,500 of adverse annual (12 months) effects on our consolidated earnings from operations. When the permanent tariffs are finally determined, should they be above or below this temporary rate of 10%, our estimated annual increase in tariff costs should be adjusted accordingly.

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 $3,602 and $21,401 in first quarter 2025 and 2024, respectively, an unfavorable decrease of $17,799. The decrease in cash flows from operating activities principally reflects changes in working capital primarily relating to accounts receivables and inventory during the comparative periods. The change in accounts receivable reflects lower sales in first quarter 2025 as well as timing of sales and collections in the comparative periods. The change in inventories reflect changes in the Company’s production plan in 2025 as compared to the prior year corresponding period.

Cash flows used in investing activities reflect $13,110 and $27,297 of purchases of available for sale securities during first quarter 2025 and 2024, respectively, and $11,727 and $12,655 of sales and maturities of available for sale securities during first quarter 2025 and 2024, respectively. First quarter 2025 and 2024 investing activities also include capital expenditures of $2,852 and $4,494, respectively. The Company is currently pursuing a plant expansion, including additions to and replacement of certain processing and packaging lines, to better meet higher level of forecasted demand for certain products on a timelier and more cost effective basis. The plant expansion is expected to take place over the next seven years with most of the expenditures expected to occur during 2025 through 2027. The total cost of this expansion will approximate $95,000 to $100,000, which includes estimated normal and recurring capital expenditures at this plant location, and is expected to be funded from the Company’s cash flow from operations and internal sources.

The Company’s condensed consolidated financial statements include bank borrowings of $975 and $1,050 at March 31, 2025 and 2024, respectively, all of which relate to its Spanish subsidiary. The Company had no other outstanding bank borrowings at March 31, 2025 and 2024.

Financing activities include Company common stock purchases and retirements of $6,483 and $0 in first quarter 2025 and 2024, respectively. Cash dividends of $12,781 and $12,491 were paid in first quarter 2025 and 2024, respectively.

The Company’s current ratio (current assets divided by current liabilities) was 4.2 to 1 at March 31, 2025 compared to 3.8 to 1 at December 31, 2024 and 3.8 to 1 at March 31, 2024. Net working capital was $250,938 at March 31, 2025 compared to $246,319 and $241,272 at December 31, 2024 and March 31, 2024, respectively. Included in net working capital is cash and cash equivalents and short-term investments totaling $176,607 at March 31, 2025 compared to $194,630 and $159,361 at December 31, 2024 and March 31, 2024, respectively. In addition, long term investments, principally debt securities comprising corporate bonds, were $330,949 at March 31, 2025, as compared to $332,338 and $278,953 at December 31, 2024 and March 31, 2024, respectively. Aggregate cash and cash equivalents and short and long-term investments were $507,556, $526,968, and $438,314, at March 31, 2025, December 31, 2024 and March 31, 2024, respectively, including $100,892, $105,067, and $95,957 at March 31, 2025, December 31, 2024 and March 31, 2024, 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 first quarter 2025 and 2024, were generally used in working capital, capital expenditures or were replaced with debt securities of similar maturities. The net unrealized gain (loss) on available for sale investments was approximately $3,300 and $(2,200) at March 31, 2025 and 2024, respectively. The Company expects to hold most of these securities to maturity and therefore does not expect to ultimately realize a substantial portion of any of unrealized losses on individual investments (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 funded $20,000 to the VEBA trust in 2023. No contribution was made during first quarter. The Company has and will continue to use these VEBA funds to pay the actual cost of such benefits through part or all of 2027. The VEBA trust held $14,090, $13,926 and $19,258 of aggregate cash and cash equivalents at March 31, 2025, December 31, 2024 and March 31, 2024, respectively. This asset value is included in prepaid expenses and long-term other assets in the Company’s Condensed Consolidated Statement of Financial Position. These assets primarily comprise cash and corporate bonds and are categorized as Level 1 and 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 2024 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 effects of U.S. tariffs as well as retaliatory tariffs and other import fees and surcharges by other countries, 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, 2024.

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 2023 and 2024. The Company has entered into longer-range supply contracts for its cocoa and chocolate needs in 2025 and much of 2026 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. In addition, the current temporary tariffs, as well as the permanent tariffs, as discussed above in management discussion in Item 2, adds to the market risks of certain ingredients, packaging materials and supplies, and will likely have some adverse impact on these costs.

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 generally enters into Canadian dollar forward contracts to hedge the Canadian currency risk. 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 and tariffs 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, 2024.

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 March 31, 2025 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 March 31, 2025 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

The following update to our risk factors should be read in conjunction with the risk factors previously disclosed in Part I, Item 1A, “Risk Factors,” of our 2024 Annual Report on Form 10-K (the "2024 Form 10-K") filed with the SEC. Except as described herein, the Company is not aware of any material changes with respect to the risk factors disclosed in our 2024 Form 10-K.

Developments in economic and fiscal policy, most notably those related to tariff’s that were being contemplated by regulatory authorities at the time we filed the 2024 Form 10-K with the SEC, have had a nominal impact on our Company through the first quarter of 2025. Our products are principally produced and sold in North America. Product shipped between the United States and our Canada and Mexico manufacturing operations qualify under the U.S.-Mexico-Canada Agreement (“USMCA”) and under the current regulation, continue to be tariff-free. If regulators decide to impose tariffs, or other surcharges are levied by Canada and Mexico, on products that previously qualified under USMCA, the impact of tariffs on our cross-border shipments could be significant. Notwithstanding, we procure certain ingredients, including cocoa, chocolate and edible oils, as well as some packaging and other operating equipment and supplies, from sources outside of the United States and do not qualify as exempt from tariffs under USMCA. Imposing tariffs on goods we either import directly or purchase from suppliers who import certain products would have a negative impact on our business as well. We may be able to mitigate the impact by evaluating our sourcing strategies or working with our vendors but in most instances the inputs we need are only available from certain areas of the world outside of the USMCA. Until such time that more clarity regarding tariffs, as well as possible retaliatory tariffs, is forthcoming, we are not able to ascertain the effects of tariffs on our business.

With recent leadership changes at the U.S. Department of Health and Human Services and the U.S. Food and Drug Administration (“FDA”), as well as the Make America Healthy Again movement, the food industry is subject to increasing laws and regulations, as well as changes in consumer expectations and behavior. For example, in April 2025, it was announced that the FDA intends to phase out the approved use of petroleum-based synthetic dyes in food products. The Company anticipates continued developments in food industry legislation and regulatory requirements at the federal and state level as well. The significance of the impact remains uncertain at this time, as the Company continues to monitor and evaluate the evolving legal and regulatory landscape.