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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2020

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                    to                   

Commission file number 1-1361

TOOTSIE ROLL INDUSTRIES, INC.

(Exact name of Registrant as specified in its charter)

Virginia

22-1318955

(State or other jurisdiction of

(IRS Employer Identification No.)

incorporation or organization)

7401 South Cicero Avenue, ChicagoIllinois 60629

(Address of principal executive offices) (Zip Code)

Registrant’s Telephone Number: (773) 838-3400

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol

Name of each exchange
on which registered

Common Stock — Par Value $.69-4/9 Per Share

TR

New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: Class B Common Stock — Par Value $.69-4/9 Per Share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  No 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes  No 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  No 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit). Yes  No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  No 

As of February 18, 2021, there were outstanding 38,989,889 shares of Common Stock par value $.69-4/9 per share, and 27,011,521 shares of Class B Common Stock par value $.69-4/9 per share.

As of June 30, 2020 the aggregate market value of the Common Stock (based upon the closing price of the stock on the New York Stock Exchange on such date) held by non-affiliates was approximately $597,009,000. Class B Common Stock is not traded on any exchange, is restricted as to transfer or other disposition, but is convertible into Common Stock on a share-for-share basis. Upon such conversion, the resulting shares of Common Stock are freely transferable and publicly traded. Assuming all 27,024,933 shares of outstanding Class B Common Stock were converted into Common Stock, the aggregate market value of Common Stock held by non-affiliates on June 30, 2020 (based upon the closing price of the stock on the New York Stock Exchange on such date) would have been approximately $751,335,511. Determination of stock ownership by non-affiliates was made solely for the purpose of this requirement, and the Registrant is not bound by these determinations for any other purpose.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Company’s Definitive Proxy Statement for the Company’s Annual Meeting of Shareholders (the “2021 Proxy Statement”) scheduled to be held on May 3, 2021 are incorporated by reference in Part III of this report.

Table of Contents

TABLE OF CONTENTS

ITEM 1.

Business

3

ITEM 1A.

Risk Factors

5

ITEM 1B.

Unresolved Staff Comments

9

ITEM 2.

Properties

10

ITEM 3.

Legal Proceedings

10

ITEM 4.

Mine Safety Disclosures

10

ITEM 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

11

ITEM 6.

Selected Financial Data

13

ITEM 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

14

ITEM 7A.

Quantitative and Qualitative Disclosures About Market Risk

26

ITEM 8.

Financial Statements and Supplementary Data

26

ITEM 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

51

ITEM 9A.

Controls and Procedures

51

ITEM 9B.

Other Information

51

ITEM 10.

Directors, Executive Officers and Corporate Governance

52

ITEM 11.

Executive Compensation

52

ITEM 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

52

ITEM 13.

Certain Relationships and Related Transactions, and Director Independence

53

ITEM 14.

Principal Accounting Fees and Services

53

ITEM 15.

Exhibits, Financial Statement Schedules

53

ITEM 16.

Form 10-K Summary

53

2

Table of Contents

Forward-Looking Information

From time to time, in the Company’s statements and written reports, including this report, the Company discusses its expectations regarding future performance by making certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by the use of words such as “anticipate,” “believe,” “expect,” “intend,” “estimate,” “project,” 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. These forward-looking statements are based on currently available competitive, financial and economic data and management’s views and assumptions regarding future events. Such forward-looking statements are inherently uncertain, and actual results may differ materially from those expressed or implied herein. Consequently, the Company wishes to caution readers not to place undue reliance on any forward-looking statements. Factors, among others, which could cause the Company’s future results to differ materially from the forward-looking statements, expectations and assumptions expressed or implied herein include general factors, such as economic conditions, political developments, currency exchange rates, interest and inflation rates, accounting standards, taxes, and laws and regulations affecting the Company in markets where it competes and those factors described in Item 1A “Risk Factors” and elsewhere in this Form 10-K and in other Company filings with the Securities and Exchange Commission. The Company does not undertake to update any of these forward-looking statements.

PART I

ITEM 1.               Business.

Tootsie Roll Industries, Inc. and its consolidated subsidiaries (the “Company”) have been engaged in the manufacture and sale of confectionery products for over 100 years. This is the only industry segment in which the Company operates and is its only line of business. The majority of the Company’s products are sold under the registered trademarks TOOTSIE ROLL, TOOTSIE POPS, CHILD’S PLAY, CARAMEL APPLE POPS, CHARMS, BLOW-POP, CHARMS MINI POPS, CELLA’S, DOTS, JUNIOR MINTS, CHARLESTON CHEW, SUGAR DADDY, SUGAR BABIES, ANDES, FLUFFY STUFF, DUBBLE BUBBLE, RAZZLES, CRY BABY, NIK-L-NIP, and TUTSI POP (Mexico).

The Company’s products are marketed in a variety of packages designed to be suitable for display and sale in different types of retail outlets. They are sold through approximately 30 food and grocery brokers and by the Company itself to approximately 2,000 customers throughout the United States, Canada and Mexico. These customers include wholesale distributors of candy, food and groceries, supermarkets, variety stores, dollar stores, chain grocers, drug chains, discount chains, cooperative grocery associations, mass merchandisers, warehouse and membership club stores, vending machine operators, the U.S. military and fund-raising charitable organizations.

The Company’s principal markets are in the United States, Canada and Mexico. The majority of production from the Company’s Canadian plants is sold in the United States. The majority of production from the Company’s Mexican plant is sold in Mexico.

The domestic confectionery business is highly competitive. The Company competes primarily with other manufacturers of confectionery products sold to the above mentioned customers. Although accurate statistics are not available, the Company believes it is among the ten largest domestic manufacturers in this field. In the markets in which the Company competes, the main forms of competition comprise brand recognition, as well as competition for retail shelf space and a fair price for the Company’s products at various retail price points.

The Company did not have a material backlog of firm orders at the end of the calendar years 2020 or 2019.

The Company has historically hedged certain of its future sugar and corn syrup needs with derivatives at such times that it believes that the forward markets are favorable. The Company’s decision to hedge its major ingredient requirements is dependent on the Company’s evaluation of forward commodity markets and their comparison to vendor quotations, if available, and/or historical costs. The Company has historically hedged some of these major ingredients with

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derivatives, primarily commodity futures contracts, before the commencement of the next calendar year to better ascertain the need for product pricing changes or product weight decline (indirect price change) adjustments to its product sales portfolio and better manage ingredient costs. The Company will generally purchase forward derivative contracts (i.e., “long” position) in selected future months that correspond to the Company’s estimated procurement and usage needs of the respective commodity in the respective forward periods.

From time to time, the Company also changes the size and weight of certain of its products in response to significant changes in ingredient and other input costs.

The Company does not hold any material patents, licenses, franchises or concessions. The Company’s major trademarks are registered in the United States, Canada, Mexico and in many other countries. Continued trademark protection is of material importance to the Company’s business as a whole.

Although the Company does research and develops new products and product line extensions for existing brands, it also improves the quality of existing products, improves and modernizes production processes, and develops and implements new technologies to enhance the quality and reduce the costs of products. The Company does not expend material amounts of money on research or development activities.

The manufacture and sale of consumer food products is highly regulated. In the United States, the Company’s activities are subject to regulation by various government agencies, including the Food and Drug Administration, the Department of Agriculture, the Federal Trade Commission, the Department of Commerce and the Environmental Protection Agency, as well as various state and local agencies. Similar agencies also regulate the businesses outside of the United States. The Company maintains quality assurance, food safety and other programs to help ensure that all products the Company manufactures and distributes are safe and of high quality and comply with all applicable laws and regulations.

The Company’s compliance with federal, state and local regulations which have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, has not had a material effect on the capital expenditures, earnings or competitive position of the Company nor does the Company anticipate any such material effects from presently enacted or adopted regulations.

The Company employs approximately 2,000 full-time persons at all locations. Our business has seasonality which results in bringing on some additional employees to meet seasonal production demands. The Company experiences a relatively consistent sales level throughout the year except for an increase in the third quarter which reflects pre-Halloween and back-to-school sales. In anticipation of this seasonal sales period, the Company generally begins building inventories, and its seasonal workforce, in the second and third quarter of each year. Although Halloween is the most significant season in sales and related production, other seasons, including Christmas, Valentines, and Easter also have some impact on workforce levels. The Company’s union labor agreement at its Chicago plant was executed in 2018 and will continue through September 2022.

We believe our employees are among our most important resources and are critical to our continued success. We focus significant attention on attracting and retaining talented and experienced individuals to manage and support our operations. We pay our employees competitively and offer a broad range of company-paid benefits, which we believe are competitive with others in our industry. Our management teams and all of our employees are expected to exhibit and promote honest, ethical and respectful conduct in the workplace. All of our employees must adhere to a code of conduct that sets standards for appropriate behavior. A copy of our code of conduct can be found on our website, Tootsie.com. We have prioritized the safety of our employees and therefore implemented safety protocols during 2020 and continuing into 2021, to respond to the Covid-19 pandemic. We have taken many steps to provide our employees with a safe and healthy work environment, including increased sanitation, social distancing measures at all Company locations, employee temperature checks, having office employees work remotely where possible, curtailing visitors at Company locations, and limiting all airline and other business travel by employees.

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Our net product sales from Wal-Mart Stores, Inc. aggregated approximately 23.5%, 24.2%, and 24.1% of net product sales during the years ended December 31, 2020, 2019 and 2018, respectively. Our net sales from Dollar Tree, Inc. (which includes net sales from Family Dollar which is owned by Dollar Tree) aggregated approximately 11.7%, 11.3%, and 11.2% of net product sales during the years ended December 31, 2020, 2019 and 2018, respectively. Some of the aforementioned sales to Wal-Mart and Dollar Tree were sold to McLane Company, a large national grocery wholesaler, which services and delivers certain of the Company’s products to Wal-Mart, Dollar Tree and other retailers in the U.S.A. Net product sales revenues from McLane, which includes these Wal-Mart and Dollar Tree sales as well as sales and deliveries to other Company customers, were 22.1% in 2020 and 17.7% in 2019 and 17.4% in 2018. At December 31, 2020 and 2019, the Company’s three largest customers discussed above accounted for approximately 21% and 30% of total accounts receivable, respectively. Although no customer, other than McLane Company, Inc., Wal-Mart Stores, Inc. and Dollar Tree, accounted for more than 10% of net product sales, the loss of one or more significant customers could have a material adverse effect on the Company’s business. The Company historically offers extended credit terms for sales made under seasonal sales programs, including Halloween. Each year, after accounts receivables related to third quarter sales have been collected, the Company invests such funds in various marketable securities.

For a summary of sales and long-lived assets of the Company by geographic area see Note 9 of the “Notes to Consolidated Financial Statements” which is incorporated herein by reference.

Information regarding the Company’s Form 10-K, Form 10-Q, current reports on Form 8-K, and any amendments to these reports, will be made available, free of charge, upon written request to Tootsie Roll Industries, Inc., 7401 South Cicero Avenue, Chicago, Illinois 60629, Attention: Barry Bowen, Treasurer and Assistant Secretary. The Company does not make all such reports available on its website at www.tootsie.com because it believes that they are readily available from the Securities Exchange Commission at www.sec.gov, and because the Company provides them free of charge upon request. Interested parties, including shareholders, may communicate to the Board of Directors or any individual director in writing, by regular mail, addressed to the Board of Directors or an individual director, in care of Tootsie Roll Industries, Inc., 7401 South Cicero Avenue, Chicago, Illinois 60629, Attention: Ellen R. Gordon, Chairman and Chief Executive Officer. If an interested party wishes to communicate directly with the Company’s non-employee directors, it should be noted on the cover of the communication.

ITEM 1A.            Risk Factors.

Significant factors that could impact the Company’s financial condition or results of operations include, without limitation, the following:

Risk factors which we believe affect all competitors in our industry

Our business and financial results may be negatively impacted by changes in confectionary trade practices and consumer patterns, operational challenges associated with the actual or perceived effects of a disease or pandemic outbreak, such as the Covid-19 pandemic, and other public health concerns, consumer spending levels, shopping habits and behaviors (including changes in impulse purchase behaviors), consumer activities, work routines, events and traditions where confectionary products are consumed, the availability of our products at retail, including at large retail customers, and our ability to manufacture and distribute products to our customers and consumers in an effective and efficient manner. Government mandates to “shelter in place” or “closing of the economy”, public health guidelines, or fear of exposure or actual effects of a disease, such as the Covid-19 pandemic, have in 2020 and in the future could continue to negatively impact our overall business and financial results. Specific factors that may impact our operations, some of which have had, and in the future could have, an unfavorable impact on our operations as a result of Covid-19, include, but are not limited to:

a. Significant reductions in demand for one or more of our products - Changes in demand may be caused by, among other things, the temporary inability of consumers to purchase our products due to illness, quarantine, travel restrictions, financial hardship, “shelter in place” directives, or overall fear to return to past behaviors.

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Shifts in demand for one or more of our products, changes in trade and distribution patterns, or changes in consumer buying habits, if prolonged, could negatively impact our results.

b. The inability to meet our customers’ needs and achieve efficient production of finished products - Disruptions in our manufacturing operations or supply arrangements caused by the loss or disruption of essential manufacturing materials, supplies and services, transportation resources, workforce availability, or other manufacturing and distribution capability could have significant adverse effects on our business and financial results.

c. Significant adverse changes in the political conditions and government mandates or directives - In markets in which we manufacture, sell or distribute our products, governmental or regulatory actions, closures or other restrictions such as quarantine or travel restrictions, that limit or close our manufacturing, distribution or office facilities, or otherwise prevent our third-party suppliers, sales brokers, or customers from achieving the level of operations necessary for the production, distribution, sale, and support of our products, could negatively impact our results.

d. Risk related to Halloween and other seasonal sales - The Company’s net product sales are highest during the Halloween season which have historically comprised approximately 50% of third quarter domestic net product sales. Changes in consumer behavior, traditions, behaviors, and interest in Halloween activities and events, or changes mandated or recommended by government or health officials, as well as negative media coverage, could significantly affect the Company’s seasonal sales.

e. Risks relating to potential employer liability – The effects of Covid-19 relating to employer liability remains uncertain, and if it is determined that employers are to have liability for employee or other matters related to Covid-19, this could have significant adverse effects on our financial results.

Risk of changes in the price and availability of raw materials - The principal ingredients used by the Company are subject to price volatility. Although the Company engages in commodity hedging transactions and annual supply agreements as well as leveraging the high volume of its annual purchases, the Company may experience price increases in certain ingredients that it may not be able to offset, which could have an adverse impact on the Company’s results of operations and financial condition. In addition, although the Company has historically been able to procure sufficient supplies of its ingredients, market conditions could change such that adequate supplies might not be available or only become available at substantially higher costs. Adverse weather patterns, including the effects of climate change or supply interruptions, could also significantly affect the cost and availability of ingredients.

Risk of changes in product performance and competition - The Company competes with other well-established manufacturers of confectionery products. A failure of new or existing products to be favorably received, a failure to retain preferred shelf space at retail or a failure to sufficiently counter aggressive promotional and price competition could have an adverse impact on the Company’s results of operations and financial condition.

Risk of discounting and other competitive actions - Discounting and pricing pressure by the Company’s retail customers, including the effects of import tariffs, and other competitive actions could make it more difficult for the Company to maintain its operating margins. Actions taken by major customers and competitors may make shelf space less available for the confectionery product category or some of the Company’s products.

Risk of pricing actions - Inherent risks in the marketplace, including uncertainties about trade and consumer acceptance of pricing actions, including related trade discounts, or product weight changes (indirect price increases), could make it more difficult for the Company to maintain its sales and operating margins.

Risk related to seasonality of sales - The Company’s sales are highest during the Halloween season. Circumstances surrounding Halloween, such as, widespread adverse weather or other widespread events that affect consumer behavior and related media coverage at that time of year or general changes in consumer interest in Halloween, could significantly affect the Company’s sales.

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Risk of changes in consumer preferences and tastes - Failure to adequately anticipate and react to changing demographics, consumer trends, consumer health concerns and product preferences, including product ingredients, could have an adverse impact on the Company’s results of operations and financial condition.  

Risk of economic conditions on consumer purchases - The Company’s sales are impacted by consumer spending levels and impulse purchases which are affected by general macroeconomic conditions, consumer confidence, employment levels, disposable income, availability of consumer credit and interest rates on that credit, consumer debt levels, energy costs and other factors. Volatility in food and energy costs, rising unemployment and/or underemployment, declines in personal spending, recessionary economic conditions or other adverse market conditions, could adversely impact the Company’s revenues, profitability and financial condition.

Risks related to environmental matters - The Company’s operations are not particularly impactful on the environment, but, increased government environmental regulation or legislation, including various “green” initiatives could adversely impact the Company’s profitability.

Risk of new governmental laws and regulations - Governmental laws and regulations, including those that affect food advertising and marketing to children, use of certain ingredients in products, new labeling requirements, income and other taxes and tariffs, including the effects of changes to international trade agreements, new taxes targeted toward confectionery products and the environment, both in and outside the U.S.A., are subject to change over time, which could adversely impact the Company’s results of operations and ability to compete in domestic or foreign marketplaces.

Risk of labor stoppages - To the extent the Company experiences any significant labor stoppages, strikes or possible labor shortages, could negatively affect overall operations including production or shipments of finished product to customers. The Company’s union labor agreement at its Chicago plant was executed in 2018 and will continue through September 2022.

Risk of the cost of energy increasing - Higher energy costs would likely result in higher plant overhead, distribution, freight and delivery, and other operating costs. The Company may not be able to offset these cost increases or pass such cost increases onto customers in the form of price increases, which could have an adverse impact on the Company’s results of operations and financial condition.

Risk of a product recall - Issues related to the quality and safety of the Company’s products could result in a voluntary or involuntary large-scale product recall. Costs associated with a product recall and related litigation or fines, and marketing costs relating to the re-launch of such products or brands, could negatively affect operating results. In addition, negative publicity associated with this type of event, including a product recall relating to product contamination or product tampering, whether valid or not, could negatively impact future demand for the Company’s products.

Risk of operational interruptions relating to computer software or hardware failures, including cyber-attacks - The Company is reliant on computer systems to operate its business and supply chain. Software failure or corruption, including cyber-based attacks or network security breaches, or catastrophic hardware failures or other disasters could disrupt communications, supply chain planning and activities relating to sales demand forecasts, materials procurement, production and inventory planning, customer shipments, and financial and accounting, all of which could negatively impact sales and profits.

Risk of releasing sensitive information - Although the Company does not believe that it maintains a large amount of sensitive data, a system breach, whether inadvertent or perpetrated by hackers, could result in identity theft, ransomware and/or a disruption in operations which could expose the Company to financial costs and adversely affect profitability.  

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Disruption to the Company’s supply chain could impair the Company’s ability to produce or deliver its finished products, resulting in a negative impact on operating results - Disruption to the manufacturing operations or supply chain, some of which are discussed above, could result from, but are not limited to adverse tariffs which could effectively limit supply or make supply more costly, natural disasters, pandemics, weather, fire or explosion, earthquakes, terrorism or other acts of violence, unavailability of ingredients or packaging materials, labor strikes or other labor activities, operational and/or financial instability of key suppliers, and other vendors or service providers. Although precautions are taken to mitigate the impact of possible disruptions, if the Company is unable, or if it is not financially feasible to effectively mitigate the likelihood or potential impact of such disruptive events, the Company’s results of operations and financial condition could be negatively impacted.

Risk factors which we believe are principally specific to our Company (although some may apply to varying degrees to competitors in our industry)

Risks relating to participation in the multi-employer pension plan for certain Company union employees - As outlined in the Note 7 of the Consolidated Financial Statements and discussed in the Management’s Discussion and Analysis, the Company participates in a multi-employer pension plan (Plan) which is currently in “critical and declining status”, as defined by applicable law. A designation of “critical and declining status” implies that the Plan is expected to become insolvent within the next 20 years. Under terms of a rehabilitation plan, the Company is to be assessed 5% annual compounded surcharges on its contributions to the Plan until such time as the Plan emerges from critical status. Should the Company withdraw from the Plan, it would be subject to a significant withdrawal liability which is discussed in Note 7 of the Company’s Notes to Consolidated Financial Statements and Management’s Discussion and Analysis. The Company is currently unable to determine the ultimate outcome of this matter and therefore, is unable to determine the effects on its consolidated financial statements, but, the ultimate outcome could be material to its consolidated results of operations in one or more future periods.

Risk of impairment of goodwill or indefinite-lived intangible assets - In accordance with authoritative guidance, goodwill and indefinite-lived intangible assets are not amortized but are subject to an impairment evaluation annually or more frequently upon the occurrence of a triggering event. Other long-lived assets are likewise tested for impairment upon the occurrence of a triggering event. Such evaluations are based on assumptions and variables including sales growth, profit margins and discount rates. Adverse changes in any of these variables could affect the carrying value of these intangible assets and the Company’s reported profitability.

Risk of production interruptions - The majority of the Company’s products are manufactured in a single production facility on specialized equipment. In the event of a disaster, such as a fire or earthquake, at a specific plant location, it would be difficult to transfer production to other facilities or a new location in a timely manner, which could result in loss of market share for the affected products. In addition, from time to time, the Company upgrades or replaces this specialized equipment. In many cases these are integrated and complex installations. A failure or delay in implementing such an installation could impact the availability of one or more of the Company’s products which would have an adverse impact on sales and profits.

Risk related to investments in marketable securities - The Company invests its surplus cash in a diversified portfolio of highly rated marketable securities, including corporate bonds, with maturities of generally up to three years, and variable rate demand notes with weekly resets of interest rates and “puts’ to redeem the investment each week. Nonetheless, such investments could become impaired in the event of certain adverse economic and/or geopolitical events which, if severe, would adversely affect the Company’s financial condition.

Risk of further losses in Spain - The Company has restructured its Spanish subsidiary and is exploring a variety of programs to increase sales and profitability. These efforts thus far are resulting in reductions in operating losses, and our efforts are continuing. Nonetheless, if our efforts are not successful, additional losses and impairments may be reported in the future. See also Management’s Discussion and Analysis.

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Risk of dependence on large customers - The Company’s largest customers, McLane Company,Wal-Mart, Dollar Tree, and Target Corporation, accounted for approximately 37.5% of net product sales in 2020, and other large national chains are also material to the Company’s sales. The loss of any of these customers, or one or more other large customers, or a material decrease in purchases by one or more large customers, could result in decreased sales and adversely impact the Company’s results of operations and financial condition.

Risk related to acquisitions - From time to time, the Company has purchased other confectionery companies or brands. These acquisitions generally come at a high multiple of earnings and are justified based on various assumptions related to sales growth, and operating margins. Were the Company to make another acquisition and be unable to achieve the assumed sales and operating margins, it could have an adverse impact on future sales and profits. In addition, it could become necessary to record an impairment which would have a further adverse impact on reported profits.

Risk of “slack fill” litigation - The Company, as well as other confectionery and food companies, have experienced a number of plaintiff claims that certain products are sold in boxes that are not completely full, and therefore such “slack filled” products are misleading, and even deceptive, to the consumer. Although the Company believes that these claims are without merit and has generally been successful in litigation and court decrees, the Company could be exposed to significant legal fees to defend its position, and in the event that it is not successful, could be subject to fines and costs of settlement, including class action settlements.  

Risk related to international operations - To the extent there are political leadership or legislative changes, social and/or political unrest, civil war, pandemics such as the Coronavirus, terrorism or significant economic or social instability in the countries in which the Company operates, the results of the Company’s business in such countries could be adversely impacted. Currency exchange rate fluctuations between the U.S. dollar and foreign currencies could also have an adverse impact on the Company’s results of operations and financial condition. The Company’s principal markets are the U.S.A., Canada, and Mexico.

The Company is a controlled company due to the common stock holdings of the Gordon family - The Gordon family’s share ownership represents a majority of the combined voting power of all classes of the Company’s common stock as of December 31, 2020. As a result, the Gordon family has the power to elect the Company’s directors and approve actions requiring the approval of the shareholders of the Company.

The factors identified above are believed to be significant factors, but not necessarily all of the significant factors, that could impact the Company’s business.  Unpredictable or unknown factors could also have material effects on the Company.

Additional significant factors that may affect the Company’s operations, performance and business results include the risks and uncertainties listed from time to time in filings with the Securities and Exchange Commission and the risk factors or uncertainties listed herein or listed in any document incorporated by reference herein.

ITEM 1B.            Unresolved Staff Comments.

None.

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ITEM 2.               Properties.

The Company owns its principal manufacturing, warehousing and distribution and offices facilities which are located in Chicago, Illinois in a building consisting of approximately 2,354,000 square feet. In addition, the Company leases manufacturing and warehousing facilities at a second location in Chicago which comprises 137,000 square feet. The lease is renewable by the Company every five years through June 2041.

The Company’s other principal manufacturing, warehousing and distribution facilities, all of which are owned, are:

Location

    

Square Feet (a)

 

Covington, Tennessee

 

685,000

Cambridge, Massachusetts

 

142,000

Delavan, Wisconsin

 

162,000

Concord, Ontario, Canada

 

280,500

(b)  

Mexico City, Mexico

 

90,000

Barcelona, Spain

93,000

(c)  

(a)Square footage is approximate and includes production, warehousing and office space.
(b)Two facilities.
(c)Excludes 9,500 square feet of unused office space in a separate facility which is leased to a third party.

The Company owns substantially all of the production machinery and equipment located in its plants, warehouses and distribution centers. The Company also holds four commercial real estate properties for investment which were acquired with the proceeds from a sale of surplus real estate in 2005 as well as two warehouse facilities (in Concord, Ontario, Canada, and Hazelton, Pennsylvania, USA) that are currently leased to third parties.

ITEM 3.               Legal Proceedings.

In the ordinary course of business, the Company is, from time to time, subject to a variety of active or threatened legal proceedings and claims. While it is not possible to predict the outcome of such matters with certainty, in the Company’s opinion, both individually and in the aggregate, they are not expected to have a material effect on the Company’s financial condition, results of operations or cash flows.

ADDITIONAL ITEM.     Executive Officers of the Registrant.

See the information on Executive Officers set forth in the table in Part III, Item 10.

ITEM 4.               Mine Safety Disclosures.

None.

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PART II

ITEM 5.               Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

The Company’s common stock is traded on the New York Stock Exchange. The Company’s Class B common stock is subject to restrictions on transferability. The Class B common stock is convertible at the option of the holder into shares of common stock on a share-for-share basis. As of February 18, 2021 there were approximately 2,400 and 900 registered holders of record of common and Class B common stock, respectively. In addition, the Company estimates that as of February 18, 2021 there were 18,500 and 1,000 beneficial holders of common and Class B common stock, respectively.

The following table sets forth information about the shares of its common stock the Company purchased on the open market during the fiscal quarter ended December 31, 2020:

Issuer Purchases of Equity Securities

    

    

    

    

    

Total Number of

    

Maximum Number (or

 

Total

Average

Shares Purchased

Approximate Dollar Value)

 

Number

Price

as Part of Publicly

of Shares that May Yet

 

of Shares

Paid per

Announced Plans

be Purchased Under the

 

Period

Purchased

Share

or Programs

Plans or Programs

 

Oct 1 to Oct 31

 

165,000

$

31.01

 

Not Applicable

 

Not Applicable

Nov 1 to Nov 30

 

111,062

 

30.80

 

Not Applicable

 

Not Applicable

Dec 1 to Dec 31

 

 

 

Not Applicable

 

Not Applicable

Total

 

276,062

$

30.92

While the Company does not have a formal or publicly announced Company common stock purchase program, the Company repurchases its common stock on the open market from time to time as authorized by the Board of Directors.

Quarterly Stock Prices and Dividends

The high and low quarterly prices for the Company’s common stock, as reported on the New York Stock Exchange and quarterly dividends in 2020 and 2019 were:

2020

2019

4th

3rd

2nd

1st

4th

3rd

2nd

1st

    

Quarter

    

Quarter

    

Quarter

    

Quarter

    

Quarter

    

Quarter

    

Quarter

    

Quarter

High

$

32.47

$

34.37

$

39.23

$

37.54

$

36.93

$

38.44

$

40.43

$

37.80

Low

29.42

29.07

32.71

32.00

33.33

35.24

36.48

31.57

Dividends per share

0.09

0.09

0.09

0.09

0.09

0.09

0.09

0.09

NOTE: In addition to the above cash dividends, a 3% stock dividend was issued on April 3, 2020 and April 5, 2019.

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Performance Graph

The following performance graph compares the cumulative total shareholder return on the Company’s common stock for a five-year period (December 31, 2015 to December 31, 2020) with the cumulative total return of Standard & Poor’s 500 Stock Index (“S&P 500”) and the Dow Jones Industry Food Index (“Peer Group,” which includes the Company), assuming (i) $100 invested on December 31 of the first year of the chart in each of the Company’s common stock, S&P 500 and the Dow Jones Industry Food Index and (ii) the reinvestment of cash and stock dividends.

Graphic

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ITEM 6.               Selected Financial Data.

Five Year Summary of Earnings and Financial Highlights

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

    

2020

    

2019

    

2018

    

2017

    

2016

    

Sales and Earnings Data

Net product sales

$

467,427

$

523,616

$

515,251

$

515,674

$

517,373

Product gross margin

 

167,717

 

194,514

 

185,371

 

189,263

 

196,504

Interest expense

 

164

 

220

 

181

 

144

 

105

Provision for income taxes

 

17,288

 

20,565

 

16,401

 

3,907

 

30,593

Net earnings attributable to Tootsie Roll Industries, Inc.

 

58,995

 

64,920

 

56,893

 

80,864

(2)

 

67,510

% of net product sales

 

12.6

%  

 

12.4

%  

 

11.0

%  

 

15.7

%  

 

13.0

%  

% of shareholders’ equity

 

7.7

%  

 

8.5

%  

 

7.6

%  

 

11.0

%  

 

9.5

%  

Per Common Share Data (1)

Net earnings attributable to Tootsie Roll Industries, Inc.

$

0.89

$

0.96

$

0.84

$

1.17

(2)

$

0.97

Cash dividends declared

 

0.36

 

0.36

 

0.36

 

0.36

 

0.36

Stock dividends

 

3

%  

 

3

%  

 

3

%  

 

3

%  

 

3

%  

Additional Financial Data (1)

Working capital

$

250,851

$

273,786

$

242,655

$

207,132

$

235,739

Net cash provided by operating activities

 

74,710

 

100,221

 

100,929

 

42,973

 

98,550

Net cash provided by (used in) investing activities

 

9,501

 

(15,009)

 

(44,510)

 

(9,320)

 

(51,884)

Net cash used in financing activities

 

(55,846)

 

(57,187)

 

(42,353)

 

(56,881)

 

(51,387)

Property, plant & equipment additions

 

17,970

 

20,258

 

27,612

 

16,673

 

16,090

Net property, plant & equipment

 

187,328

 

188,455

 

186,101

 

178,972

 

180,905

Total assets

 

984,558

 

977,864

 

947,361

 

930,946

 

920,101

Long-term debt

 

7,500

 

7,500

 

7,500

 

7,500

 

7,500

Total Tootsie Roll Industries, Inc. shareholders’ equity

 

763,327

 

759,854

 

750,622

 

733,840

 

711,364

Average shares outstanding

 

66,512

 

67,416

 

68,072

 

68,904

 

69,811

(1)Per common share data and average shares outstanding adjusted for annual 3% stock dividends.
(2)The 2017 net earnings and earnings per share includes $20,318 or $0.29 per share relating to a favorable accounting adjustment to revalue the Company’s deferred income tax liabilities resulting from the enactment of the U.S. Tax Cuts and Jobs Act in December 2017.

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

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

The following discussion should be read in conjunction with the other sections of this report, including the consolidated financial statements and related notes contained in Item 8 of this Form 10-K.

FINANCIAL REVIEW

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

FINANCIAL CONDITION

The Company’s overall financial position remains strong given that aggregate cash, cash equivalents and investments is $428,951 at December 31, 2020, including $73,828 in trading securities discussed below. Cash flows from 2020 operating activities totaled $74,710 compared to $100,221 in 2019, and are discussed in the section entitled Liquidity and Capital Resources. During 2020, the Company paid cash dividends of $23,810, purchased and retired $32,055 of its outstanding shares, and made capital expenditures of $17,970.

The Company’s net working capital was $250,851 at December 31, 2020 compared to $273,786 at December 31, 2019. This change principally reflects the effects of a $66,989 increases in long-term investments because more of our investments have maturities great than one year at December 31, 2020 compared to December 31, 2019. As of December 31, 2020, the Company’s total cash, cash equivalents and investments, including all long-term investments, was $428,951 compared to $392,435 at December 31, 2019, an increase of $36,516. See Liquidity And Capital Resources section below. The aforementioned includes $73,828 and $76,183 of investments in trading securities as of December 31, 2020 and 2019, respectively. The Company invests in trading securities to provide an economic hedge for its deferred compensation liabilities, as further discussed herein and in Note 7 of the Company’s Notes to Consolidated Financial Statements.

Shareholders’ equity increased from $759,854 at December 31, 2019 to $763,327 as of December 31, 2020, which principally reflects 2020 net earnings of $58,995, less cash dividends of $23,810 and share repurchases of $32,055.

The Company has a relatively straight-forward financial structure and has historically maintained a conservative financial position. The Company has no special financing arrangements or “off-balance sheet” special purpose entities. Cash flows from operations plus maturities of short-term investments are expected to be adequate to meet the Company’s overall financing needs, including capital expenditures, in 2021. Periodically, the Company considers possible acquisitions, and if the Company were to pursue and complete such an acquisition, that could result in bank borrowings or other financing.

RESULTS OF OPERATIONS

2020 vs. 2019

Twelve months 2020 consolidated net product sales were $467,427 compared to $523,616 in twelve months 2019, a decrease of $56,189 or 10.7%. Net product sales were adversely impacted by the effects of the Covid-19 pandemic, which curtailed and limited access to certain channels of trade where the Company has historically sold its products. Response to this pandemic has resulted in the disruption and changes in lifestyles, shopping habits, daily work routines, and consumer behaviors, all of which have adversely affected planned consumer purchases of the Company’s products for “sharing” and “give away” occasions. Many of the Company’s products are consumed at group events, outings, and other gatherings which have been significantly curtailed or in some cases eliminated due to concern of possible infection or spreading of the Covid-19 virus. Impulse purchases of Company products at retail outlets have also been adversely affected by these

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changes in consumer behavior. Unfavorable foreign exchange also had some adverse impact on 2020 net product sales compared to 2019.

Fourth quarter 2020 net product sales were $127,866 compared to $134,663 in fourth quarter 2019, a decrease of $6,797 or 5.0%. After a 2% sales increase in first quarter 2020, sales declined 25% in second quarter 2020 at the height of the pandemic and economic downturn. In third quarter 2020 sales declined 14%, while in fourth quarter 2020 the sales decline was narrowed to 5% when compared to the corresponding quarterly periods in 2019.

Product cost of goods sold were $299,710 in 2020 compared to $329,102 in 2019, a decrease of $29,392 or 8.9%. Product cost of goods sold includes $610 and $408 in certain deferred compensation expenses in 2020 and 2019, respectively. These deferred compensation expenses principally result from changes in the market value of investments and investment income from trading securities relating to compensation deferred in previous years and are not reflective of current operating results. Adjusting for the aforementioned, product cost of goods sold decreased from $328,694 in 2019 to $299,100 in 2020, a decrease of $29,594 or 9.0%. As a percent of net product sales, these adjusted costs increased from 62.8% in 2019 to 64.0% in 2020, a 1.2 unfavorable percentage point change. Lower sales and production volumes had an unfavorable impact on plant manufacturing overhead costs included in the aforementioned adjusted product cost of goods sold. These plant overhead costs are primarily fixed and recurring each year, and only partially decline with lower volumes.

Product gross margin was $167,717 in 2020 compared to $194,514 in 2019, a decrease of $26,797 or 13.8%.  The above discussed sales decline was the principal driver that adversely impacted gross profit margins in 2020. Certain cost and expense reductions, including Company initiatives to reduce costs did provide some benefit to 2020 gross profit margins. The Company is continuing its investments in its plant manufacturing operations to meet new consumer and customer demands, achieve quality improvements, provide genuine value to consumers, and increase operational efficiencies.

Selling, marketing and administrative expenses were $112,117 in 2020 compared to $127,802 in 2019, a decrease of $15,685 or 12.3%. Selling, marketing and administrative expenses include $11,909 and $10,884 in certain deferred compensation expenses in 2020 and 2019, respectively. These deferred compensation expenses principally result from changes in the market value of investments and investment income from trading securities relating to compensation deferred in previous years and are not reflective of current operating results. Adjusting for the aforementioned, selling, marketing and administrative expenses decreased from $116,918 in 2019 to $100,208 in 2020, a decrease of $16,710 or 14.3%. As a percent of net product sales, these adjusted expenses decreased from 22.3% of net product sales in 2019 to 21.4% of net product sales in 2020, a 0.9 favorable percentage point change. Reductions in travel and trade show expense resulting from changes in Company policies in response to the Covid-19 pandemic, and more favorable freight and delivery unit costs were the principal drivers in this expense reduction as a percentage of sales in 2020.

Selling, marketing and administrative expenses include freight, delivery and warehousing expenses. These expenses decreased from $49,288 in 2019 to $42,593 in 2020, a decrease of $6,695 or 13.6%. As a percent of net product sales, these adjusted expenses decreased from 9.4% in 2019 to 9.1% in 2020, a 0.3 favorable percentage point change. More favorable freight and delivery rates from third-party over-the-road truck carriers, and certain operational and cost reduction initiatives, contributed to this favorable change.

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 $691 in 2020 which was an improvement compared to its $1,102 loss in 2019. The Company provided approximately $889 and $1,399 of additional cash to finance these losses and certain capital expenditures in 2020 and 2019, respectively. Company management expects the competitive and business challenges in Spain to continue but believes that there will be continued reductions in operating losses in 2021 compared to 2020. Nonetheless, management believes that operating losses will likely continue beyond 2021 and that these future losses, as well as some capital expenditures, will likely require some additional cash financing.

The Company believes that the carrying values of its goodwill and trademarks have indefinite lives as they are expected to generate cash flows indefinitely. In accordance with current accounting guidance, these indefinite-lived intangible assets are assessed at least annually for impairment as of December 31 or whenever events or circumstances indicate that the carrying values may not be recoverable from future cash flows. No impairments were recorded in 2020, 2019 or 2018.

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Current accounting guidance provides entities an option of performing a qualitative assessment (a "step-zero" test) before performing a quantitative analysis. If the entity determines, on the basis of certain qualitative factors, that it is more-likely-than-not that the intangibles (goodwill and certain trademarks) are not impaired, the entity would not need to proceed to the two step impairment testing process (quantitative analysis) as prescribed in the guidance. During fourth quarter 2020 (and fourth quarters 2019 and 2018), the Company performed a “step zero” test of its goodwill and certain trademarks, and concluded that there was no impairment based on this guidance. For the fair value assessment of certain trademarks where the “step-zero” analysis was not considered appropriate, impairment testing was performed in fourth quarter 2020 (and fourth quarter 2019 and 2018) using discounted cash flows and estimated royalty rates. For these trademarks, holding all other assumptions constant at the test date, a 100 basis point increase in the discount rate or a 100 basis point decrease in the royalty rate would reduce the fair value of these trademarks by approximately 18% and 10%, respectively. Individually, a 100 point increase in the discount rate or a 100 point decrease in the royalty rate would not result in a potential impairment as of December 31, 2020. 

Earnings from operations were $58,244 in 2020 compared to $69,214 in 2019, a decrease of $10,970. Earnings from operations include $12,519 and $11,292 in certain deferred compensation expense in 2020 and 2019, respectively, which are discussed above. Adjusting for these deferred compensation expenses, adjusted earnings from operations decreased from $80,506 in 2019 to $70,763 in 2019, a decrease of $9,743 or 12.1%. The above discussed decline in net product sales was the principal driver of lower operating income in 2020 compared to 2019, however, 2020 earnings from operations did benefit from some cost and expense reductions 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, net was $18,018 in 2020 compared to $16,190 in 2019, an increase of $1,828. Other income, net principally reflects $12,519 and $11,292 of aggregate net gains and investment income on trading securities in 2020 and 2019, respectively. These trading securities provide an economic hedge of the Company’s deferred compensation liabilities; and the related net gains and investment income were offset by a like amount of expense in aggregate product cost of goods sold and selling, marketing, and administrative expenses in the respective years as discussed above. Other income, net includes investment income on available for sale securities of $4,005 and $4,423 in 2020 and 2019, respectively. Other income, net also includes foreign exchange gains (losses) of $534 and $(533) in 2020 and 2019, respectively.

The Company’s effective income tax rate was 22.7% and 24.1% in 2020 and 2019, respectively. The decrease in the effective tax rate in 2020 reflects more favorable foreign tax rates, income tax credits and adjustments for reserves for uncertain tax positions. A reconciliation of the differences between the U.S. statutory rate and these effective tax rates is provided in Note 4 of the Company’s Notes to Consolidated Financial Statements.

The Company utilized $617 and $1,227 of Canadian tax carry-forward benefits in 2020 and 2019, respectively. At December 31, 2019, the Company’s deferred tax assets included $617 of income tax benefits relating to its Canadian subsidiary tax loss carry-forwards. The Company fully utilized this deferred tax asset in 2020 as expected. The Company has provided a full valuation allowance on its Spanish subsidiaries’ tax loss carry-forward benefits of $4,508 and $4,584 as of December 31, 2020 and 2019, respectively, because the Company has concluded that it is not more-likely-than-not that these losses will be utilized before their expiration dates. The Spanish subsidiary has a history of net operating losses and it is not known when and if they will generate taxable income in the future.

U.S. tax reform (US Tax Cuts and Jobs Act enacted in December 2017) changed the United States approach to the taxation of foreign earnings to a territorial system by providing a one hundred percent dividends received deduction for certain qualified dividends received from foreign subsidiaries. These provisions of U.S. tax reform significantly impact the accounting for the undistributed earnings of foreign subsidiaries, and as a result the Company distributed $8,200 of the earnings held in excess cash by its foreign subsidiaries in 2019. The tax costs associated with a future distribution, including foreign withholding taxes, are not material to the Company’s financial statements. After carefully considering these facts,

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the Company determined that it would not be asserting permanent reinvestment of its foreign subsidiaries earnings as of December 31, 2017, and the Company continued to take this position as of December 31, 2020.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was signed into U.S. law. The CARES Act has provided a substantial stimulus and assistance package intended to address the economic impact of the Covid-19 pandemic, including tax relief and government loans, grants and investments. The Canadian government also enacted a stimulus program, Canadian Emergency Wage Subsidy (“CEWS”), to respond to the economic impact of Covid-19 during 2020 The Company’s financial results in 2020 did reflect some benefits, primarily in the second and third quarters of 2020, from these stimulus programs. The Company continues to monitor any effects and related benefits that may result from the above discussed legislation and other proposed stimulus programs. Based on consultation with its tax advisors, the Company does not believe that it will be eligible for any significant benefits in 2021 under these stimulus programs.

Net earnings were $58,995 in 2020 compared to $64,920 in 2019, and net earnings per share were $0.89 and $0.96 in 2020 and 2019, respectively, a decrease of $0.07 per share of 7%. Earnings per share in 2020 benefited from the reduction in average shares outstanding resulting from purchases of the Company’s common stock in the open market by the Company. Average shares outstanding decreased from 67,416 in 2019 to 66,512 in 2020 which reflects share repurchases of $32,055 during 2020.

Fourth quarter 2020 and 2019 net earnings attributable to Tootsie Roll Industries, Inc. were $14,952 and $14,555, respectively, and net earnings per share were $0.23 and $0.22, respectively, an increase of $0.01 per share or 5%. Certain cost and expense reductions, including Company operational changes and initiatives to reduce costs as discussed above, did provide some benefit to fourth quarter 2020 results. Although unfavorable foreign exchange adversely affected fourth quarter 2020 results, a lower effective income tax rate contributed to the increase in net earnings in fourth quarter 2020 compared to fourth quarter 2019.

Beginning in 2012, the Company received periodic notices from the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union Pension Plan (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. During 2015, the Company received notices that 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 that the Plan was projected to have an accumulated funding deficiency for the 2017 through 2024 plan years. A designation of “critical and declining status” implies that the Plan is expected to become insolvent in the next 20 years. The Company has continued to receive annual notices each year (2016 to 2020) that this Plan remains in “critical and declining status” and is projected to become insolvent within the next 20 years. These notices have also advised that the Plan trustees were considering the reduction or elimination of certain retirement benefits and may seek assistance from the PBGC. Plans in “critical and declining status” may elect to suspend (temporarily or permanently) some benefits payable to all categories of participants, including retired participants, except retirees that are disabled or over the age of 80. Suspensions must be equally distributed and cannot drop below 110% of what would otherwise be guaranteed by the PBGC.  

 

Based on these updated notices, the Plan’s funded percentage (plan investment assets as a percentage of plan liabilities), as defined, were 50.4%, 51.6%, and 54.7% as of the most recent valuation dates available, January 1, 2019, 2018, and 2017, 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, 2019 the funded percentage would be 48.8% (not 50.4%). As of the January 1, 2019 valuation date (most recent valuation available), only 16% of Plan participants were current active employees, 53% 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, 2019 fell 14% from the previous year and 17% over the past two years. When compared to the Plan valuation date of January 1, 2011 (eight years earlier), current active employee participants have declined 47%, whereas participants who were retired

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or separated from service and receiving benefits increased 4% and participants who were retired or separated from service and entitled to future benefits increased 14%.

The Company has been advised that its withdrawal liability would have been $99,300, $99,800 and $81,600 if it had withdrawn from the Plan during 2020, 2019 and 2018, respectively. The Company’s relative share of the Plan’s contribution base, driven by employer withdrawals, has increased for the last several years, and management believes that this trend could continue indefinitely which will continue to add upward pressure on the Company’s withdrawal liability. In addition, the overall reduction in interest rates through the 12 months ended December 31, 2020, will increase the value of vested benefits and likely increase the Company’s withdrawal liability in 2020. Based on the above, including the Plan’s projected insolvency in the next 20 years, management believes that the Company’s withdrawal liability will increase further in future years.

Based on the Company’s updated actuarial study and certain provisions in ERISA and the law relating to withdrawal liability payments, management believes that the Company’s liability would likely be limited to twenty annual payments of $2,958 which have a present value in the range of $34,700 to $49,300 depending on the interest rate used to discount these payments. While the Company’s actuarial consultant does 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 Company’s updated actuarial study, the present value of such perpetuities is in the range of $48,500 to $150,900 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 Company and the union concluded a new labor contract in 2018 which requires the Company’s continued participation in this Plan through September 2022. The amended rehabilitation plan, which also continues, requires 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. The Company’s pension expense for this Plan for 2020, 2019 and 2018 was $2,866, $2,961 and $2,836, respectively. The aforementioned expense includes surcharges of $1,010, $948 and $811 in 2020, 2019 and 2018, respectively, as required under the amended rehabilitation 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. Subsequent to December 31, 2020, the local bargaining union and the Company executed this agreement which resulted in the “freezing” of such surcharges as of December 31, 2020.

 

Company management understands that the US House of Representatives Ways and Means Committee is preparing legislation under President Biden’s proposed $1.9 trillion American Rescue Plan that would provide financial assistance to shore up struggling multi-employer plans for many years. The Ways and Means bill would create special assistance programs that would allow the PBGC to make direct cash payments to financially troubled multiemployer plans to ensure that they can remain solvent and continue to pay benefits to retirees through 2051. The Company is currently 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 be material to its consolidated results of operations or cash flows in one or more future periods. See also Note 7 in the Company’s Consolidated Financial Statements on Form 10-K for the year ended December 31, 2020.

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2019 vs. 2018

Consolidated net product sales were $523,616 in 2019 compared to $515,251 in 2018, an increase of $8,365 or 1.6%. Fourth quarter 2019 net product sales were $134,663 compared to $127,264 in fourth quarter 2018, an increase of $7,399 or 5.8%. Successful marketing and sales programs contributed to the increases in sales for both fourth quarter and twelve months 2019 compared to the corresponding periods in the prior year. Fourth quarter 2019 sales also benefited from the timing of sales between the third and fourth quarters of 2019, however, foreign currency translation had some adverse effects on consolidated sales for the twelve months 2019 period compared to 2018.  

Product cost of goods sold were $329,102 in 2019 compared to $329,880 in 2018, a decrease of $778 or 0.2%. Product cost of goods sold includes $408 and $(39) in certain deferred compensation expenses (credits) in 2019 and 2018, respectively. These deferred compensation expenses principally result from changes in the market value of investments and investment income from trading securities relating to compensation deferred in previous years and are not reflective of current operating results. Adjusting for the aforementioned, product cost of goods sold decreased from $329,919 in 2018 to $328,694 in 2019, a decrease of $1,225 or 0.4%. As a percent of net product sales, these adjusted costs decreased from 64.0% in 2018 to 62.8% in 2019, a 1.3 favorable percentage point change.

Product cost of goods sold and resulting gross profit margins in 2019 benefited from increased sales and higher price realization which allowed the Company to recover some margin decline resulting from increases in certain input costs in recent years. Plant efficiencies driven by capital investments and ongoing cost containment programs contributed to the above discussed decreases in adjusted cost of goods sold as a percentage of sales in 2019. The prior year 2018 gross margin was adversely affected by the implementation and start-up of new manufacturing packaging lines and resulting operational inefficiencies, as well as unfavorable experience from self-insurance programs.

Selling, marketing and administrative expenses were $127,802 in 2019 compared to $117,691 in 2018, an increase of $10,111 or 8.6%. Selling, marketing and administrative expenses include $10,884 and $(1,064) in certain deferred compensation expenses (credits) in 2019 and 2018, respectively. These deferred compensation expenses principally result from changes in the market value of investments and investment income from trading securities relating to compensation deferred in previous years and are not reflective of current operating results. Adjusting for the aforementioned, selling, marketing and administrative expenses decreased from $118,755 in 2018 to $116,918 in 2019, a decrease of $1,837 or 1.5%. As a percent of net product sales, these adjusted expenses decreased from 23.0% of net product sales in 2018 to 22.3% of net product sales in 2019, a 0.7 favorable percentage point change. Higher price realization, lower general and administrative expenses, primarily legal and professional fees, and lower freight and delivery unit costs were the principal drivers in these favorable reductions, including reductions as a percentage of sales, in 2019.

Selling, marketing and administrative expenses include freight, delivery and warehousing expenses. These expenses decreased from $49,527 in 2018 to $49,288 in 2019, a decrease of $239 or 0.5%. As a percent of net product sales, these adjusted expenses decreased from 9.6% in 2018 to 9.4% in 2019, a 0.2 favorable percentage point change. During 2019, the Company implemented additional freight and delivery computer systems and carrier selection processes, including enhanced competitive bidding, which facilitated this favorable unit cost reduction in 2019.

Earnings from operations were $69,214 in 2019 compared to $70,482 in 2018, a decrease of $1,268. Earnings from operations include $11,292 and $(1,103) in certain deferred compensation expense (credits) in 2019 and 2018, respectively, which are discussed above. Adjusting for these deferred compensation expenses, adjusted earnings from operations increased from $69,379 in 2018 to $80,506 in 2019, an increase of $11,127 or 16.0%. Increased sales and higher price realization in 2019, as well as reductions in certain costs and expenses discussed above, contributed to these improved results.

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, net was $16,190 in 2019 compared to $2,724 in 2018, an increase of $13,466. Other income, net principally reflects $11,292 and $(1,103) of aggregate net gains (losses) and investment income on trading securities in 2019 and

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2018, respectively. These trading securities provide an economic hedge of the Company’s deferred compensation liabilities; and the related net gains (losses) and investment income were offset by a like amount of expense in aggregate product cost of goods sold and selling, marketing, and administrative expenses in the respective years as discussed above. Other income, net includes investment income on available for sale securities of $4,423 and $3,535 in 2019 and 2018, respectively. Other income, net also includes foreign exchange losses of $533 and $659 in 2019 and 2018, respectively.

The Company’s effective income tax rate was 24.1% and 22.4% in 2019 and 2018, respectively. The increase in the effective tax rate for 2019 reflects higher state income taxes, including increases in reserves for uncertain state tax benefits, and increases in valuation allowances for state income tax credit carry-forwards which are not likely to be fully realized in the future.

Net earnings attributable to Tootsie Roll Industries, Inc. were $64,920 in 2019 compared to $56,893 in 2018, and net earnings per share were $0.96 and $0.84 in 2019 and 2018, respectively, an increase of $0.12 per share or 14%. Higher sales, including higher sales realization, and cost and expense reduction discussed above, were the principal drivers of this improvement in 2019 compared to 2018. Earnings per share in 2019 benefited from the reduction in average shares outstanding resulting from purchases of the Company’s common stock in the open market by the Company. Average shares outstanding decreased from 68,072 in 2018 to 67,416 in 2019 which reflects share repurchases of $34,116 during 2019. Net earnings attributable to Tootsie Roll Industries, Inc. were $14,555 in fourth quarter 2019 compared to $12,175 in fourth quarter 2018, and net earnings per share were $0.22 and $0.18 in fourth quarter 2019 and 2018, respectively an increase of $0.04 per share or 22%.

LIQUIDITY AND CAPITAL RESOURCES

Cash flows from operating activities were $74,710, $100,221 and $100,929 in 2020, 2019 and 2018, respectively. The $25,511 decrease in cash flows from operating activities from 2019 to 2020 primarily reflects decreases in net earnings and payments of deferred compensation in 2020. The $708 decrease in cash flows from operating activities from 2018 to 2019 primarily reflects the timing of payments and refunds of income taxes, combined with increases in prepaid expenses and inventories, offset by a decrease in accounts receivable as of December 31, 2019.

The Company manages and controls a VEBA trust, to fund the estimated future costs of certain union employee health, welfare and other benefits. A contribution of $20,024 was made to this trust in 2017; no contribution was made to the trust during 2018, 2019 or 2020. The Company uses these funds to pay the actual cost of such benefits over each union contract period. At December 31, 2020 and 2019, the VEBA trust held $8,272 and $12,085, respectively, of aggregate cash and cash equivalents, which the Company will use to pay certain union employee benefits through some time in 2022. 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 1 within the fair value hierarchy.

Cash flows from investing activities reflect capital expenditures of $17,970, $20,258, and $27,612 in 2020, 2019 and 2018, respectively. The changes in amounts from 2018 to 2019 principally reflect new manufacturing packaging lines in 2018 and the timing of expenditures relating to other plant manufacturing capital projects. Company management has committed approximately $25,000 to a rehabilitation upgrade and expansion of one of its manufacturing plants in the U.S.A. The Company spent approximately $6,000 and 2,000 in 2020 and 2019, respectively. Company management expects cash outlays for this project to approximate $17,000 in 2021. All capital expenditures are to be funded from the Company’s cash flow from operations and internal sources including available for sale securities. The repayment of $23,527 of previously paid premiums on split dollar life insurance policies did provide additional cash from investing activities in 2020 (see Note 1 to the Company’s Notes to Consolidated Financial Statements).

Other than the bank loans and the related restricted cash of the Company’s Spanish subsidiary which are discussed in Note 1 of the Company’s Notes to Consolidated Financial Statements, the Company had no bank borrowings or repayments in

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2018, 2019, or 2020, and had no outstanding bank borrowings as of December 31, 2019 or 2020. Nonetheless, the Company would consider bank borrowing or other financing in the event that a business acquisition is completed.

Financing activities include Company common stock purchases and retirements of $32,055, $34,116, and $19,317 in 2020, 2019 and 2018, respectively. Cash dividends of $23,810, $23,460, and $22,978 were paid in 2020, 2019 and 2018, respectively.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

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

Revenue recognition

As more fully discussed in Note 1, the Company adopted the new accounting revenue recognition guidance (ASC 606) effective January 1, 2018. As a result of adoption, the cumulative impact to retained earnings at January 1, 2018 was a net after-tax increase of $3,319 ($4,378 pre-tax). The adoption principally changed the timing of recognition of certain trade promotions and related adjustments thereto which affect net product sales. The comparative prior information has not been restated and continues to be reported under the accounting standards in effect for such period. The adoption of the new standard in 2018 did not have a material effect on 2018, 2019 and 2020 results, and management does not believe that it will have a material effect on results in future years. Revenue for net product sales continues to be recognized at a point in time when products are delivered to or picked up by the customer, as designated by customers’ purchase orders, as discussed in Note 1.

Provisions for bad debts are recorded as selling, marketing and administrative expenses. Write-offs of bad debts did not exceed 0.1% of net product sales in each of 2020, 2019 and 2018, and accordingly, have not been significant to the Company’s financial position or results of operations.

Intangible assets

The Company’s intangible assets consist primarily of goodwill and acquired trademarks. In accordance with accounting guidance, goodwill and other indefinite-lived assets, trademarks, are not amortized, but are instead subjected to annual testing for impairment unless certain triggering events or circumstances are noted. The Company performs its annual impairment review and assessment as of December 31. All trademarks have been assessed by management to have indefinite lives because they are expected to generate cash flows indefinitely. The Company reviews and assesses certain trademarks (non-amortizable intangible assets) for impairment by comparing the fair value of each trademark with its carrying value. Current accounting guidance provides entities an option of performing a qualitative assessment (a "step-zero" test) before performing a quantitative analysis. If the entity determines, on the basis of certain qualitative factors, that it is more-likely-than-not that the intangibles (goodwill and certain trademarks) are not impaired, the entity would not need to proceed to the two step impairment testing process (quantitative analysis) as prescribed in the guidance. During

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fourth quarter 2020, the Company performed a “step zero” test of its goodwill and certain trademarks, and concluded that there was no impairment based on this guidance.

The Company determines the fair value of certain trademarks using discounted cash flows and estimates of royalty rates. If the carrying value exceeds fair value, such trademarks are considered impaired and is reduced to fair value. The Company utilizes third-party professional valuation firms to assist in the determination of valuation of certain trademarks. Impairments have not generally been material to the Company’s historical operating results.

Cash flow projections require the Company to make assumptions and estimates regarding the Company’s future plans, including sales projections and profit margins, market based discount rates, competitive factors, and economic conditions; and the Company’s actual results and conditions may differ over time. A change in the assumptions relating to the impairment analysis including but not limited to a reduction in projected cash flows, the use of a different discount rate to discount future cash flows or a different royalty rate applied to such trademarks, could cause impairment in the future.

Customer incentive programs, advertising and marketing

Advertising and marketing costs are recorded in the period to which such costs relate. The Company does not defer the recognition of any amounts on its consolidated balance sheet with respect to such costs. Customer incentives and other promotional costs, including consumer coupon (price reduction) incentives, are recorded in accordance with ASU 606 at the time of the Company’s sale based upon incentive program terms and historical utilization statistics, which are generally consistent from year to year. The liabilities associated with these programs are reviewed quarterly and adjusted if utilization rates differ from management’s original estimates. Such adjustments have not historically been material to the Company’s operating results.

Split dollar officer life insurance

The Company provides split dollar life insurance benefits to an executive officer and records an asset principally equal to the cumulative premiums paid. During 2020, the Company recovered $23,527 of previously paid premiums on certain policies and will fully recover the remaining premiums in future years under the terms of the plan. The Company retains a collateral assignment of the cash surrender values and policy death benefits payable to insure recovery of these premiums.

Valuation of long-lived assets

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

Income taxes

Deferred income taxes are recognized for future tax effects of temporary differences between financial and income tax reporting using tax rates in effect for the years in which the differences are expected to reverse. The Company records valuation allowances in situations where the realization of deferred tax assets, including those relating to net operating tax losses, is not more-likely-than-not; and the Company adjusts and releases such valuation allowances when realization becomes more-likely-than-not as defined by accounting guidance. The Company periodically reviews assumptions and

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estimates of the Company’s probable tax obligations and effects on its liability for uncertain tax positions, using informed judgment which may include the use of third-party consultants, advisors and legal counsel, as well as historical experience.

Valuation of investments

Investments primarily comprise high quality corporate bonds, including variable rate demand notes (generally long term bonds where interest rates are reset weekly, and provide a weekly “put” which allows the holder to also sell each week with no loss in principal), which are reviewed for impairment at each reporting period by comparing the carrying value or amortized cost to the fair market value. In the event that an investment security’s fair value is below carrying value or amortized cost, the Company will record an other-than-temporary impairment or a temporary impairment based on accounting guidance. The Company’s investment policy, which guides investment decisions, is focused on high quality investments which mitigates the risk of impairment. The Company does not invest in Level 3 securities, as defined, but may utilize third-party professional valuation firms as necessary to assist in the determination of the value of investments that utilize Level 3 inputs (as defined by guidance) should any of its investments be downgraded to Level 3.

Other matters

In the opinion of management, other than contracts for foreign currency forwards and raw materials, including currency and commodity hedges and outstanding purchase orders for packaging, ingredients, supplies, and operational services, all entered into in the ordinary course of business, the Company does not have any significant contractual obligations or future commitments. The Company’s outstanding contractual commitments as of December 31, 2020, all of which are generally normal and recurring in nature, are summarized in the chart which follows below.

RECENT ACCOUNTING PRONOUNCEMENTS

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

MARKET RISKS

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

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

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

Commodity future and foreign currency forward contracts

Commodity price risks relate to ingredients, primarily sugar, cocoa and cocoa powder, chocolate, corn syrup, dextrose, edible oils, milk, whey and gum base ingredients. The Company believes its competitors face similar risks, and the industry has historically adjusted prices, and/or product weights, to compensate for adverse fluctuations in commodity costs. The Company, as well as competitors in the confectionery industry, has historically taken actions, including higher price

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realization to mitigate rising input costs for ingredients, packaging, labor and fringe benefits, energy, and freight and delivery. Although management seeks to substantially recover cost increases over the long-term, there is risk that higher price realization cannot be fully passed on to customers and, to the extent they are passed on, they could adversely affect customer and consumer acceptance and resulting sales volume.

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

The potential change in fair value of commodity and foreign currency derivative instruments held by the Company at December 31, 2020, assuming a 10% change in the underlying contract price, was $1,040. The analysis only includes commodity and foreign currency derivative instruments and, therefore, does not consider the offsetting effect of changes in the price of the underlying commodity or foreign currency. This amount is not significant compared with the net earnings and shareholders’ equity of the Company.

Interest rates

Interest rate risks primarily relate to the Company’s investments in marketable securities with maturities dates of generally up to three years.

The majority of the Company’s investments, which are classified as available for sale, have historically been held until their maturity which is up to about 3 years, which limits the Company’s exposure to interest rate fluctuations. The Company also invests in variable rate demand notes which have interest rates which are reset weekly and can be “put back” and sold each week through a remarketing agent, generally a large financial broker, which also substantially eliminates the Company’s exposure to interest rate fluctuations on the principal invested. The accompanying chart summarizes the maturities of the Company’s investments in debt securities at December 31, 2020.

Less than 1 year

    

$

42,090

1 – 2 years

 

42,022

2 – 3 years

 

104,170

Total

$

188,282

The Company’s outstanding debt at December 31, 2020 and 2019 was $7,500 in an industrial revenue bond in which interest rates reset each week based on the current market rate. Therefore, the Company does not believe that it has significant interest rate risk with respect to its interest bearing debt.

Investment in marketable securities

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

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Equity price

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

Foreign currency

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

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

From time to time, the Company may use foreign exchange forward contracts and derivative instruments to mitigate its exposure to foreign exchange risks, as well as those related to firm commitments to purchase equipment from foreign vendors. See Note 11 of the Company’s Notes to Consolidated Financial Statements for outstanding foreign exchange forward contracts as of December 31, 2020.

Open Contractual Commitments as of December 31, 2020:

    

    

Less than

    

1 to 3

    

3 to 5

    

More than

 

Payable in

Total

1 Year

Years

Years

5 Years

 

Commodity hedges

$

4,010

$

4,010

$

$

$

Foreign currency hedges

 

6,391

 

3,195

 

3,196

 

 

Purchase obligations

 

5,958

 

5,958

 

 

 

Interest bearing debt

 

7,500

 

 

 

 

7,500

Operating leases

 

869

 

684

 

185

 

 

Total

$

24,728

$

13,847

$

3,381

$

$

7,500

Note: Commodity hedges and foreign currency hedges reflect the amounts at which the Company will settle the related contracts. The above amounts exclude deferred income tax liabilities of $47,900, liabilities for uncertain tax positions of $3,351, postretirement health care benefits of $13,487 and noncurrent deferred compensation of $79,665 because the timing of payments relating to these items cannot be reasonably determined.

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ITEM 7A.           Quantitative and Qualitative Disclosures About Market Risk.

The information required by this item is included under the caption “Market Risk” in Item 7 above.

See also Note 1 of the Notes to Consolidated Financial Statements.

ITEM 8.               Financial Statements and Supplementary Data.

Management’s Report on Internal Control Over Financial Reporting

The management of Tootsie Roll Industries, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in the Securities Exchange Act of 1934 (SEC) Rule 13a-15(f). Company management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2020 as required by SEC Rule 13a-15(c). In making this assessment, the Company used the criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Based on the Company’s evaluation under the COSO criteria, Company management concluded that its internal control over financial reporting was effective as of December 31, 2020.

The effectiveness of the Company’s internal control over financial reporting as of December 31, 2020 has been audited by Grant Thornton LLP, an independent registered public accounting firm, as stated in their report which is included herein.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders

Tootsie Roll Industries, Inc.

Opinions on the financial statements and internal control over financial reporting

We have audited the accompanying consolidated balance sheets of Tootsie Roll Industries, Inc. (a Virginia corporation) and subsidiaries (the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of earnings and retained earnings, comprehensive income, changes in shareholders’ equity, and cash flows for the three years ended December 31, 2020, 2019 and 2018, and the related notes and financial statement schedule included under Item 15(a) (collectively referred to as the “financial statements”).  We also have audited the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in the 2013 Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the periods ended December 31, 2020, 2019 and 2018 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in the 2013 Internal Control - Integrated Framework issued by COSO.

Basis for opinions

The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

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Definition and limitations of internal control over financial reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Critical audit matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Trademark Impairment Assessment

As described in Note 1 and Note 13 to the consolidated financial statements, the Company’s consolidated trademark balance was $175 million at December 31, 2020, which is allocated to the Company’s brands that were purchased. Indefinite-lived trademarks are tested for impairment at least annually. For several trademarks, a Step 0 approach is used to test for impairment based on relevant qualitative factors, as outlined within Accounting Standards Codifications (ASC) 350-20 and 350-30. For the fair value assessment of certain other trademarks where a Step 0 analysis was not considered appropriate, Step 1 impairment testing is performed annually using discounted cash flows, derived from projected revenue, operating margins and estimated discount rates. The determination of the fair value of the trademarks subjected to a Step 1 impairment test requires management to make significant estimates and assumptions related to forecasts of future revenues, operating margins and discount rates. As disclosed by management, changes in these assumptions could have a significant impact on either the fair value of the trademark, the amount of any trademark impairment charge, or both.

We identified the Step 1 trademark impairment assessment as a critical audit matter, as auditing management’s judgments regarding forecasts of future revenue, operating margin and discount rate involves a high degree of subjectivity.  

The primary procedures we performed to address this critical audit matter included:

Testing the operating effectiveness of controls relating to management’s impairment tests, including controls over the determination of the fair value of these specific trademarks. Through these tests, we evaluated management’s review controls over the financial projections, including reperformance and approval of the reasonableness of the key assumptions and inputs to the analysis, such as discount rates, growth rates, and key performance indicators such as sales forecast and operating margins.
Testing management’s process for determining the fair value of the trademarks. We evaluated the reasonableness of management’s forecasts of future revenue and operating margin by considering the impact that COVID-19 had on the year ended December 31, 2020, and its expected impact on future periods. We also considered whether such assumptions were consistent with historical forecasts and operating results for the Company, as well as evidence obtained in other areas of the audit. Additionally, a sensitivity analysis was performed using a Capital

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Asset Pricing Model in order to ensure the assumptions used in management’s model fell within reasonable ranges based on third-party industry market data.
Utilizing a valuation specialist to assist in evaluating the reasonableness of and testing the methodology used in the Company’s discounted cash flow model for the trademarks and certain significant assumptions, including the discount rate.

/s/ GRANT THORNTON LLP

We have served as the Company’s auditor since 2018.

Chicago, Illinois

March 1, 2021

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CONSOLIDATED STATEMENTS OF

Earnings and Retained Earnings

TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES  

(in thousands except per share data)

For the year ended December 31,

    

2020

    

2019

    

2018

Net product sales

$

467,427

$

523,616

$

515,251

Rental and royalty revenue

 

3,636

 

3,497

 

3,669

Total revenue

 

471,063

 

527,113

 

518,920

Product cost of goods sold

 

299,710

 

329,102

 

329,880

Rental and royalty cost

 

992

 

995

 

867

Total costs

 

300,702

 

330,097

 

330,747

Product gross margin

 

167,717

 

194,514

 

185,371

Rental and royalty gross margin

 

2,644

 

2,502

 

2,802

Total gross margin

 

170,361

 

197,016

 

188,173

Selling, marketing and administrative expenses

 

112,117

 

127,802

 

117,691

Earnings from operations

 

58,244

 

69,214

 

70,482

Other income, net

 

18,018

 

16,190

 

2,724

Earnings before income taxes

 

76,262

 

85,404

 

73,206

Provision for income taxes

 

17,288

 

20,565

 

16,401

Net earnings

 

58,974

 

64,839

 

56,805

Less: net earnings (loss) attributable to noncontrolling interests

 

(21)

 

(81)

 

(88)

Net earnings attributable to Tootsie Roll Industries, Inc.

$

58,995

$

64,920

$

56,893

Net earnings attributable to Tootsie Roll Industries, Inc. per share

$

0.89

$

0.96

$

0.84

Average number of shares outstanding

 

66,512

 

67,416

 

68,072

Retained earnings at beginning of period

$

40,809

$

33,767

$

57,225

Net earnings attributable to Tootsie Roll Industries, Inc.

 

58,995

 

64,920

 

56,893

Adopted ASU's (See Note 1)

2,726

Cash dividends

 

(23,739)

 

(23,371)

 

(22,929)

Stock dividends

 

(43,753)

 

(34,507)

 

(60,148)

Retained earnings at end of period

$

32,312

$

40,809

$

33,767

(The accompanying notes are an integral part of these statements.)

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CONSOLIDATED STATEMENTS OF

Comprehensive Earnings

TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES  

(in thousands)

For the year ended December 31,

    

2020

    

2019

    

2018

    

Net earnings

$

58,974

$

64,839

$

56,805

Other comprehensive income (loss), before tax:

Foreign currency translation adjustments

 

(1,213)

 

791

 

103

Pension and postretirement reclassification adjustments:

Unrealized gains (losses) for the period on postretirement and pension benefits

 

467

 

(1,230)

 

1,558

Less: reclassification adjustment for (gains) losses to net earnings

 

(1,349)

 

(1,522)

 

(1,324)

Unrealized gains (losses) on postretirement and pension benefits

 

(882)

 

(2,752)

 

234

Investments:

Unrealized gains (losses) for the period on investments

 

1,463

 

3,130

 

(606)

Less: reclassification adjustment for (gains) losses to net earnings

 

 

34

 

Unrealized gains (losses) on investments

 

1,463

 

3,164

 

(606)

Derivatives:

Unrealized gains (losses) for the period on derivatives

 

1,259

 

451

 

(2,734)

Less: reclassification adjustment for (gains) losses to net earnings

 

325

 

677

 

1,630

Unrealized gains (losses) on derivatives

 

1,584

 

1,128

 

(1,104)

Total other comprehensive income (loss), before tax

 

952

 

2,331

 

(1,373)

Income tax benefit (expense) related to items of other comprehensive income

 

(522)

 

(354)

 

349

Total comprehensive earnings

59,404

66,816

55,781

Comprehensive earnings (loss) attributable to noncontrolling interests

(21)

(81)

(88)

Total comprehensive earnings attributable to Tootsie Roll Industries, Inc.

$

59,425

$

66,897

$

55,869

(The accompanying notes are an integral part of these statements.)

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CONSOLIDATED STATEMENTS OF

Financial Position

TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES

(in thousands)

Assets

December 31,

    

2020

    

2019

    

CURRENT ASSETS:

Cash and cash equivalents

$

166,841

$

138,960

Restricted cash

415

380

Investments

 

42,090

 

100,444

Accounts receivable trade, less allowances of $1,694 and $1,949

 

41,209

 

45,044

Other receivables

 

3,894

 

3,418

Inventories:

Finished goods and work-in-process

 

35,583

 

35,909

Raw materials and supplies

 

23,996

 

23,179

Prepaid expenses

 

6,844

 

5,996

Total current assets

 

320,872

 

353,330

PROPERTY, PLANT AND EQUIPMENT, at cost:

Land

 

21,738

 

21,740

Buildings

 

123,883

 

122,843

Machinery and equipment

 

422,506

 

416,625

Construction in progress

 

14,347

 

4,427

Operating lease right-of-use assets

 

858

 

1,580

 

583,332

 

567,215

Less — accumulated depreciation

 

396,004

 

378,760

Net property, plant and equipment

 

187,328

 

188,455

OTHER ASSETS:

Goodwill

 

73,237

 

73,237

Trademarks

 

175,024

 

175,024

Investments

 

220,020

 

153,031

Split dollar officer life insurance

 

2,514

 

26,042

Prepaid expenses and other assets

 

4,525

 

8,056

Deferred income taxes

 

1,038

 

689

Total other assets

 

476,358

 

436,079

Total assets

$

984,558

$

977,864

(The accompanying notes are an integral part of these statements.)

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(in thousands except per share data)

Liabilities and Shareholders’ Equity

December 31,

2020

    

2019

    

CURRENT LIABILITIES:

Accounts payable

$

13,025

$

12,720

Bank loans

832

747

Dividends payable

 

5,948

 

5,861

Accrued liabilities

 

45,099

 

41,611

Postretirement health care benefits

 

544

 

598

Operating lease liabilities

780

1,062

Income taxes payable

3,793

 

Deferred compensation

 

16,945

Total current liabilities

 

70,021

 

79,544

NONCURRENT LIABILITIES:

Deferred income taxes

 

47,900

 

47,295

Postretirement health care benefits

 

12,943

 

13,145

Industrial development bonds

 

7,500

 

7,500

Liability for uncertain tax positions

 

3,351

 

4,240

Operating lease liabilities

78

518

Deferred compensation and other liabilities

 

79,665

 

65,973

Total noncurrent liabilities

 

151,437

 

138,671

TOOTSIE ROLL INDUSTRIES, INC. SHAREHOLDERS’ EQUITY:

Common stock, $.69-4/9 par value — 120,000 shares authorized —  39,073 and 38,836, respectively, issued

 

27,134

 

26,969

Class B common stock, $.69-4/9 par value — 40,000 shares authorized — 27,012 and 26,287, respectively, issued

 

18,758

 

18,254

Capital in excess of par value

 

706,930

 

696,059

Retained earnings

 

32,312

 

40,809

Accumulated other comprehensive loss

 

(19,815)

 

(20,245)

Treasury stock (at cost) — 93 shares and 90 shares, respectively

 

(1,992)

 

(1,992)

Total Tootsie Roll Industries, Inc. shareholders’ equity

 

763,327

 

759,854

Noncontrolling interests

(227)

(205)

Total equity

763,100

759,649

Total liabilities and shareholders' equity

$

984,558

$

977,864

(The accompanying notes are an integral part of these statements.)

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CONSOLIDATED STATEMENTS OF

Cash Flows

TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES

(in thousands)