ITEM 7. Management’s Discussion and Analysis of Financial Conditio n 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. This section of this Form 10-K generally discusses the twelve months ended December 31, 2025 as compared to the same period of 2024. Discussions comparing the results of the twelve months ended December 31, 2024 as compared to same period of 2023 can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Form 10-K for the year ended December 31, 2024.
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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 $613,747 at December 31, 2025, including $121,541 in trading securities discussed below. Cash flows from 2025 operating activities totaled $130,614 compared to $138,889 in 2024, and are discussed in the section entitled Liquidity and Capital Resources. During 2025, the Company paid cash dividends of $26,066, purchased and retired $6,482 of its outstanding shares, and made capital expenditures of $34,263, all of which was financed from internal sources.
The Company’s net working capital was $223,016 at December 31, 2025 compared to $246,319 at December 31, 2024. As of December 31, 2025, the Company’s total cash, cash equivalents and investments, including all long-term investments, was $613,747 compared to $526,968 at December 31, 2024, an increase of $86,779. See Liquidity And Capital Resources section below for discussion. The aforementioned includes $121,541 and $105,067 of investments in trading securities as of December 31, 2025 and 2024, 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 $870,743 at December 31, 2024 to $940,972 as of December 31, 2025, which principally reflects 2025 net earnings of $100,052, less cash dividends of $26,066 and share repurchases of $6,482.
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 investments are expected to be adequate to meet the Company’s overall financing needs, including capital expenditures, in 2026. The Company is continuously alert to possible acquisitions, and if the Company were to pursue and complete such an acquisition, that could result in the sale of marketable securities held for investment, bank borrowings or other financing.
RESULTS OF OPERATIONS
The consolidated net product sales for the twelve months of 2025 were $724,675 compared to the twelve months 2024 of $715,530, an increase of $9,145 or 1.3%. Fourth quarter 2025 net product sales were $194,350 compared to $191,356 in fourth quarter 2024, an increase of $2,994, or 1.6%. The sales increase in fourth quarter and twelve months 2025 was driven primarily by price increases taken during the year, as well as successful marketing and sales programs. The Company continued to face some challenges in 2025 as customers and consumers became more resistant to higher prices, and these headwinds had some adverse effects on sales throughout 2025.
Product cost of goods sold were $472,127 in 2025 compared to $468,056 in 2024, an increase of $4,071 or 0.9%. Product cost of goods sold includes $698 and $803 in certain deferred compensation expenses in 2025 and 2024, 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 increased from $467,253 in 2024 to $471,429 in 2025, an increase of $4,176 or 0.9%. As a percent of net product sales, these adjusted costs decreased from 65.3% in 2024 to 65.1% in 2025, a 0.2 favorable percentage point change. Higher price realizations, as well as certain cost and expense reductions, benefited cost of goods sold and gross profit margins in both 2025 and 2024.
Many companies in the consumer products industry have increased selling prices in order to improve price realization in response to increasing input costs in recent years. We have implemented price increases as well during this period in order to mitigate certain input cost increases and recover our margin declines. Although we made progress in restoring our
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margins in 2025, certain ingredients and packaging materials unit costs, particularly cocoa and chocolate, continued to increase in 2025. Cocoa commodities markets have now retreated from their recent high price levels, but still remain above historical levels. As these lower costs begin to be reflected in our supply chain costs, we expect to realize lower cocoa and chocolate costs in late 2026 and into 2027. Although the Company continues to monitor its input costs, we are mindful of the effects and limits when passing on the above-discussed higher input costs to our customers as well as the final consumers of our products.
The Company uses the Last-In-First-Out (LIFO) method of accounting for inventory and costs of goods sold which generally results in lower current net earnings and income taxes during such periods of increasing costs and higher inflation. As a result, the above discussed higher input costs have had some adverse effects on our gross profit margins in 2025 and 2024. During the prior year fourth quarter 2024, the Company reduced inventories which resulted in a LIFO liquidation. The liquidated inventory was carried at lower costs prevailing in prior years as compared with current costs in 2024, and therefore provided a benefit to the prior year fourth quarter and twelve months 2024 results.
Selling, marketing and administrative expenses were $157,503 in 2025 compared to $152,675 in 2024, an increase of $4,828 or 3.2%. Selling, marketing and administrative expenses include $15,653 and $15,521 in certain deferred compensation expenses in 2025 and 2024, 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 increased from $137,154 in 2024 to $141,850 in 2025, an increase of $4,696 or 3.4%. As a percent of net product sales, these adjusted expenses increased from 19.2% of net product sales in 2024 to 19.6% of net product sales in 2025, a 0.4 unfavorable percentage point change. The increase in these expenses in 2025, as a percentage of net product sales, was principally driven by increases in advertising and marketing expenses, and higher expenses relating to international operations.
As outlined in Note 1 to the consolidated financial statements, the Company records revenue from net product sales based on accounting guidance. Adjustments for estimated customer cash discounts upon payment, discounts for price adjustments, product returns, allowances, and certain advertising and promotional costs, including consumer coupons, are variable considerations and are recorded as a reduction of net product sales revenue in the same period the related net product sales are recorded. These estimates are calculated using historical averages adjusted for any expected changes due to current business conditions and experience. The Company identified changes in business conditions in each of the periods presented that changed Management’s estimated current and future liabilities for prior period obligations resulting in a reduction in accrued liabilities and an increase in net product sales of $2,700 and $5,665 in 2025 and 2024, respectively.
Selling, marketing and administrative expenses include freight, delivery and warehousing expenses. These expenses decreased from $57,581 in 2024 to $56,780 in 2025, a decrease of $801 or 1.4%. As a percent of net product sales, these adjusted expenses decreased from 8.0% in 2024 to 7.8% in 2025, a 0.2 favorable percentage point change, which generally reflects the benefits of sales price increases.
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 $2,244 in 2025 compared to its $611 loss in 2024. Company management expects the competitive and business challenges in Spain to continue, but is undertaking an in-depth evaluation of the business to ascertain the best course of action for this business. Nonetheless, Management believes that operating losses at its Spanish subsidiary will continue in 2026 and that these future losses, as well as some capital expenditures, will likely require 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 2025, 2024 or 2023. 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 2025
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(and fourth quarters 2024 and 2023), the Company performed a “step zero” test of its goodwill and certain trademarks, and concluded that there was no impairment based on this guidance. Although the “step-zero” analysis performed for the fair value assessment of certain trademarks concluded that there was no impairment, the Company proceeded to “step-one” and performed additional analysis in fourth quarter 2025 and 2024 for significant indefinite-lived intangible assets that have been impaired in the past. Using discounted cash flows and estimated royalty rates, the Company concluded that the trademarks were not impaired. For these trademarks, holding all other assumptions constant, as of December 31, 2025, a 100 basis point increase in the discount rate would reduce the fair value of these trademarks by approximately 11% and a 100 basis point decrease in the royalty rate would reduce the fair value of these trademarks by approximately 9%. Individually, a 100 basis point increase in the discount rate or a 100 basis point decrease in the royalty rate would not resul t in a potential impairment as of December 31, 2025.
Earnings from operations were $100,939 in 2025 compared to $100,505 in 2024, an increase of $434. Earnings from operations include $16,351 and $16,324 in certain deferred compensation expense in 2025 and 2024, respectively, which are discussed above. Adjusting for these deferred compensation expenses, adjusted earnings from operations increased from $116,829 in 2024 to $117,290 in 2025, an increase of $461 or 0.4%. The above discussed increase in net product sales, as well as cost and expense reduction programs and actions, were the principal drivers of higher adjusted operating earnings in 2025 compared to 2024.
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 $36,297 in 2025 compared to $26,366 in 2024, an increase of $9,931. Other income, net principally reflects $16,351 and $16,324 of aggregate net gains and investment income on trading securities in 2025 and 2024, respectively. These trading securities provide an economic hedge of the Company’s deferred compensation liabilities; and the related net gains and investment income were offset by a like amount of expense in aggregate product cost of goods sold and selling, marketing, and administrative expenses in the respective years as discussed above. Other income, net includes investment income from available for sale securities of $20,186 and $9,598 in 2025 and 2024, respectively, which reflects both higher interest rates and related investment returns on the Company’s available for sale investments in marketable securities, as well as an increase in the average balances in 2025 compared to 2024 on such securities. As discussed in Note 1 to the Consolidated Financial Statements, we determined that we were not accreting bond discounts to income as part of our investment portfolio and under-recognized income relating to available for sale investments. We evaluated the error, both qualitatively and quantitatively, and determined that no prior interim or annual periods were materially misstated. Therefore, to correct the cumulative error, Other Income, net includes pre-tax out-of-period adjustments of $3,231 for 2025 which resulted from reclassifying unrealized from Accumulated Other Comprehensive Income/. Other income, net also includes foreign exchange () of ($1,711) and $511 in 2025 and 2024, respectively.
In December 2024, the Board of Directors (the “Board”) of the Company revoked its prior action in December 2018 that permitted management to take appropriate action to preserve the full income tax deductibility of certain amounts under its nonqualified deferred compensation plans in light of changes to Section 162(m) of Internal Revenue Code made by the Tax Cuts and Jobs Act of 2017 (“TCJA”). The Board revoked its authorization after determining that it was no longer feasible, after considering the purpose of these plans, to secure tax deductions on all accrued deferred compensation by further deferring payment amounts, in large part, due to interpretations of TCJA later adopted by the IRS and the subsequent growth of plan account balances due to sustained equity market appreciation. Given this Board action and the resulting expectation that certain additional amounts of deferred compensation will not be tax deductible in future years, the Company concluded that it should write off the related deferred tax assets based on accounting guidance. The adjustment to the deferred tax assets resulted in a non-cash tax charge of $11,010 in fourth quarter 2024.
The Company’s effective income tax rates were 27.1% and 48.8% in fourth quarter 2025 and 2024, respectively, and 27.1% and 31.6% in twelve months 2025 and 2024, respectively. These effective tax rates reflect the adverse effect of the above discussed deferred compensation that will not be deductible for income taxes when paid in future periods. The higher effective tax rates in fourth quarter and twelve months 2024 also reflect the write off of deferred tax assets relating to prior years’ deferred compensation which was no longer determined as tax deductible in fourth quarter 2024 as discussed above. A reconciliation of the differences between the U.S. statutory rate and these effective tax rates is provided in Note
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4 of the Company’s Notes to Consolidated Financial Statements. Excluding the effects of the write-off of deferred tax assets as discussed above, the Company’s effective income tax rates were 26.2% and 23.8% in fourth quarter 2025 and 2024, respectively, and 24.9% and 22.9% in twelve months 2025 and 2024, respectively.
U.S. tax reform (the TCJA) changed the United States approach to the taxation of foreign earnings to a territorial system by providing a one hundred percent dividends received deduction for certain qualified dividends received from foreign subsidiaries. These provisions of U.S. tax reform significantly impact the accounting for the undistributed earnings of foreign subsidiaries. After carefully considering these facts, the Company determined that it asserts the permanent reinvestment of all of its foreign subsidiaries’ earnings as of December 31, 2025.
Net earnings attributable to Tootsie Roll Industries, Inc. were $100,052 in twelve months 2025 compared to $86,827 in 2024, and net earnings per share were $1.37 and $1.18 in 2025 and 2024, respectively, an increase of $0.19 per share or 16.1%. Fourth quarter 2025 and 2024 net earnings attributable to Tootsie Roll Industries, Inc. were $28,791 and $22,509, respectively, and net earnings per share were $0.40 and $0.31, respectively, an increase of $0.09 per share or 29.0%. Adjusting for the above-discussed write-off of deferred tax assets relating to deferred compensation, net earnings in fourth quarter 2025 would have been $29,116 compared to $33,519 in fourth quarter 2024, a decrease of $4,403 or 13%, and net earnings in twelve months 2025 would have been $103,148 compared to $97,837 in 2024, an increase of $5,311 or 5%. The decline in the aforementioned adjusted net earnings in fourth quarter 2025 reflects the favorable effects of the prior year’s LIFO liquidation as discussed above, higher ingredient costs, primarily cocoa and chocolate, unfavorable sales mix, higher advertising expense, and adverse results of foreign operations in fourth quarter 2025. Earnings per share in both fourth quarter and twelve months 2025 benefited by the reduction in average shares outstanding resulting from purchases of the Company’s common stock in the open market by the Company. Average shares outstanding decreased from 73,438 in 2024 to 72,905 in 2025 which reflects share repurchases of $6,482 during 2025.
Our operations and sales are principally in North America, and our cross-border transactions with Canada and Mexico qualify under the USMCA free-trade agreement. Certain ingredients, including cocoa, chocolate and edible oils, as well as some packaging and other purchases, do have foreign origins outside of USMCA and the related higher tariffs on these purchases added to our costs in 2025. During fourth quarter 2025, tariffs on cocoa were rescinded and therefore we should realize some additional cost reductions on these purchases in 2026. However, due to the recent Supreme Court rulings and subsequent actions taken by the Executive Branch regarding new tariffs, management is not able to determine the effect of tariffs on its business in 2026. We have estimated that our 2025 incremental cost of tariffs was approximately $3.7 million, which includes estimates of tariffs that were paid directly by our suppliers and passed on to us.
We are focused on the longer term and therefore are continuing to make investments in plant manufacturing operations to meet new customer and consumer product demands, achieve product quality improvements, expand capacity in certain product lines, and increase operational efficiencies in order to provide genuine value to consumers.
Beginning in 2012, the Company received periodic notices from the Bakery and Confectionery Union and Industry International Pension Fund (Plan), a multi-employer defined benefit pension plan for certain Company union employees, that the Plan’s actuary certified the Plan to be in “critical status”, as defined by the Pension Protection Act (PPA) and the Pension Benefit Guaranty Corporation (PBGC); and that a plan of rehabilitation was adopted by the trustees of the Plan in 2012. Beginning in 2015, the Plan was reclassified to “critical and declining status”, as defined by the PPA and PBGC, for the plan year beginning January 1, 2015. A designation of “critical and declining status” implies that the Plan is expected to become insolvent in the next 20 years. In 2016, the Company received new notices that the Plan’s trustees adopted an updated Rehabilitation Plan effective January 1, 2016, and all annual notices through 2024, prior to receipt of Special Financial Assistance, have continued to classify the Plan in the “critical and status” category. As discussed below, in July 2024 the Plan received Special Financial Assistance of $3.4 billion. As required by federal law, the Plan is certified to be in status for plan year 2025 and will be until the plan year ending in 2051 as a result of the Special Financial Assistance received.
Based on these updated notices, the Plan’s funded percentage (plan investment assets as a percentage of plan liabilities), as defined, were 45.2%, 47.0%, and 49.3% as of January 1, 2024, 2023, and 2022, respectively (these valuation dates are as of the beginning of each Plan year). 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
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of January 1, 2024, the funded percentage would be 41.7% (not 45.2%). Note that these funded percentages do not include the Special Financial Assistance. As of the most recent measurement provided in the Annual Funding Notice, only 14.9% of Plan participants were current active employees, 54.8% were retired or separated from service and receiving benefits, and 30.3% were retired or separated from service and entitled to future benefits. The number of current active employee Plan participants as of the most recent measurement increased 2% from the previous year and remained consistent over the past two years. When compared to the Plan valuation date of January 1, 2011 (just prior to the Plan being certified to be in “critical status”), current active employee participants have declined 54%, whereas participants who were retired or separated from service and receiving benefits increased 1% and participants who were retired or separated from service and entitled to future benefits increased 2%.
The Company has been advised that its withdrawal liability would have been $102,800, $97,500 and $102,200 if it had withdrawn from the Plan during 2025, 2024 and 2023 respectively (most recent information provided by the Plan). The most recent increase in the withdrawal liability as advised by the Plan was primarily due to the full present value of vested benefits being valued at the PBGC interest rates, as required for plans that receive Special Financial Assistance, rather than a blended interest rate assumption used in previous years. As discussed below, the Plan was granted $3.4 billion in Special Financial Assistance in July 2024. After receiving the Special Financial Assistance, the Plan was required to use PBGC interest rates to value all, instead of a portion, of the present value of vested benefits to provide an estimate of the Company’s withdrawal liability. The net impact of the interest rate assumption change was a decrease in the effective interest rate, which resulted in a higher vested Plan benefit liability. In addition, for withdrawal liability purposes, PBGC regulations require the Special Financial Assistance to be phased-in over a period of time instead of fully recognized immediately.
Based on the Company’s most recent actuarial estimates using the information provided by the Plan with respect to its 2025 withdrawal liability (based on most recent information provided to the Company) and certain provisions in ERISA and laws relating to withdrawal liability payments, management believes that the Company’s liability had the Company withdrawn in 2025 would likely be limited to twenty annual payments of $2,706 which have a present value in the range of $32,904 to $35,413 depending on the interest rate used to discount these payments. While the Company’s actuarial consultant does not anticipate that the Plan will incur a future mass withdrawal (as defined) of participating employers, in the event of a mass withdrawal, the Company’s annual withdrawal payments would theoretically be payable in perpetuity. Based on the same actuarial estimates, had a mass withdrawal occurred in 2025, the present value of such perpetuities is in the range of $47,812 to $56,833 and would apply in the unlikely event that substantially all employers withdraw from the Plan. The aforementioned is based on a range of interest rates which the Company’s actuary has advised is provided under the statute. Should the Company actually withdraw from the Plan at a future date, a withdrawal liability, which could be higher than the above discussed amounts, could be payable to the Plan.
In fourth quarter 2020, the Plan Trustees advised the Company that the surcharges would no longer increase annually and therefore be “frozen” at the rates and amounts in effect as of December 31, 2020 provided that the local bargaining union and the Company executed a formal consent agreement by March 31, 2021. The Trustees advised that they have concluded that continuing increases in surcharges would likely have a long-term adverse effect on the solvency of the Plan. The Trustees also concluded that further increases would result in increasing financial hardships and withdrawals of participating employers, and that this change will not have a material effect on the Plan’s insolvency date. In first quarter 2021, the local bargaining union and the Company executed this agreement which resulted in the “freezing” of such surcharges as of December 31, 2020.
The Company’s pension expense for this Plan for twelve months 2025 and 2024 was $3,290 and $3,332, respectively. The aforementioned expense includes surcharges of $1,160 and $1,174 for twelve months 2025 and 2024, respectively, as required under the amended plan of rehabilitation.
In June 2024, the PBGC announced that it had approved the Plan’s application for Special Financial Assistance under the American Rescue Plan Act of 2021. Company management understands and believes that this legislation would provide financial assistance from the PBGC to shore up financially distressed multi-employer plans to ensure that they can remain solvent and continue to pay benefits to retirees through 2051 without any reduction in retiree benefits. The Plan advised the Company that it was granted approximately $3.4 billion in Special Financial Assistance funds and received those funds in July 2024. According to the Company’s actuary, it remains unclear if the Plan can remain solvent through the targeted
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date of 2051, although as a requirement of the American Rescue Plan Act of 2021, the Plan must remain in “critical status” through 2051 regardless of solvency. The regulations under the aforementioned PBGC financial assistance could result in a higher withdrawal liability even with PBGC financial assistance since those regulations require use of settlement interest rates to value all, instead of a portion, of the present value of vested benefits in determining the Company’s withdrawal liability. In addition, for withdrawal liability purposes, PBGC regulations require the Special Financial Assistance to be phased-in over a period of time instead of fully recognized immediately. While it is uncertain how the requirements imposed by the Special Financial Assistance will impact the Company’s withdrawal liability in the future, the Company’s actuary believes any withdrawal will continue to be limited to the twenty annual payments previously discussed and that those payments will not be affected by Special Financial Assistance regulation.
During second quarter 2023, the Company and the union associated with the Plan concluded negotiations and entered into a new labor contract which expires in September 2027. Under terms of the union contract the Company is obligated to continue its participation in the Plan during the contract period. The Company is unable to determine the ultimate outcome of the above discussed multi-employer union pension matter and therefore is unable to determine the effects on its consolidated financial statements, but the ultimate outcome could have a material adverse effect on the Company’s consolidated results of operations or cash flows in one or more future periods. See also Note 7 of the Company’s Notes to Consolidated Financial Statements on Form 10-K for the year ended December 31, 2025.
The Company is focused on the longer term and therefore is continuing to make investments in plant manufacturing operations to meet new consumer and customer product demands, achieve product quality improvements, expand capacity in certain product lines, and increase operational efficiencies in order to provide genuine value to consumers.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operating activities were $130,614, $138,889 and $94,611 in 2025, 2024 and 2023, respectively. The $8,275 decrease in cash flows from operating activities from 2024 to 2025 principally reflects changes in accounts receivable, inventories, and amortization of marketable securities and discounts, net, which was partially offset by changes in income taxes payable. The $44,278 increase in cash flows from operating activities from 2023 to 2024 primarily reflects a lower investment in net working capital as well as lower inventories to better meet demand.
The Company manages and controls a VEBA trust, to fund the estimated future costs of certain union employee health, welfare and other benefits. Contributions of $20,000 were made to this trust in 2023; no contribution was made to the trust during 2024 and 2025. The Company uses these funds to pay the actual cost of such benefits over each union contract period. At December 31, 2025 and 2024, the VEBA trust held $8,953 and $13,926 respectively, of aggregate cash and cash equivalents, which the Company expects to use to pay certain union employee benefits through part or all of 2027. This asset value is included in prepaid expenses and long-term other assets in the Company’s Consolidated Statement of Financial Position and is categorized as Level 1 within the fair value hierarchy.
Cash flows from investing activities reflect capital expenditures of $34,263, $17,997, and $26,796 in 2025, 2024 and 2023, respectively. The Company is currently undergoing a plant expansion at one of its manufacturing facilities in the USA, including additional and replacement of certain processing and packaging lines, to better meet its higher level of forecasted demand for certain products on a timelier and more cost-effective basis. The Company expects that this will take place over the next seven years, however, most of the actual expenditures, which related to the building construction, are expected to occur in 2026. During 2025, we incurred $10,700 of capital expenditures relating to this expansion. Company management believes that the total cost of this expansion, including new machinery and equipment, some of which is normal and recurring replacements over the next seven years, food processing infrastructure, and raw materials warehousing will approximate $75,000 to $85,000. All capital expenditures have been and are expected to be funded from the Company’s cash flow from operations and internal sources including investments in available for sale securities.
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 2023, 2024, or 2025. Nonetheless, the Company would consider bank borrowing or other financing in the event that a business acquisition is completed.
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Financing activities include Company common stock purchases and retirements of $6,482, $13,534, and $33,114 in 2025, 2024 and 2023, respectively. Cash dividends of $26,066, $25,515, and $25,076 were paid in 2025, 2024 and 2023, 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 further discussed in Note 1 of the Company’s Notes to Consolidated Financial Statements, the Company follows the revenue recognition guidance in ASC 606. ASC 606 requires adjustments for estimated customer cash discounts upon payment, discounts for price adjustments, product returns, allowances, and certain advertising and promotional costs, including consumer coupons, which are variable consideration and are recorded as a reduction of product sales revenue in the same period the related product sales are recorded. Such estimates are calculated using historical averages adjusted for any expected changes due to current business conditions and experience. Revenue for net product sales is recognized at a point in time when products are delivered to or picked up by the customer, as designated by customers’ purchase orders, as discussed in Note 1 of the Company’s Notes to Consolidated Financial Statements.
Provisions for bad debts are recorded as selling, marketing and administrative expenses. Write-offs of bad debts did not exceed 0.2% of net product sales in each of 2025, 2024 and 2023, 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 fourth quarter 2025, the Company performed a “step zero” test of its goodwill and certain trademarks, and concluded that there was no 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 are reduced to fair value. The Company utilizes third-party professional valuation firms to assist in the determination of valuation of certain trademarks. Impairments have not generally been material to the Company’s historical operating results. Cash flow projections require the Company to make assumptions and estimates regarding the Company’s future plans, including sales projections and profit margins, market based discount rates, competitive factors, and economic conditions; and the Company’s actual
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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. Media advertising is recorded as an expense in the period in which the media is run (e.g. a commercial is aired in the chosen media) based on accounting guidance. The Company does not defer the recognition of any amounts on its consolidated balance sheet with respect to such costs. The expected cost of future payments to customers for incentives and other trade promotional programs is recorded at the time sale as a reduction of Net Product Sales. The liabilities associated with these programs are reviewed quarterly and adjusted if the expected utilization rate differs from management’s original estimates.
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, or may actually adjust or write-off deferred tax assets, in situations where the realization of deferred tax assets is not more-likely-than-not; and the Company adjusts and releases such valuation allowances when realization becomes more-likely-than-not as defined by accounting guidance. The Company periodically reviews assumptions and estimates of the Company’s probable tax obligations and effects on its liability for uncertain tax positions, using informed judgment which may include the use of third-party consultants, advisors and legal counsel, as well as historical experience.
Valuation of investments
Investments are classified as either available for sale or trading. Investments classified as available for sale primarily comprise high quality corporate bonds which are generally not sold prior to maturity, with maturities typically three to five years. The Company uses a “ladder” approach to its maturities so that approximately 20% to 35% of the portfolio matures each year with the objective of achieving higher yields with limited interest rate risk. Available for sale investments are reviewed for impairment at each reporting period by comparing the carrying value or amortized cost to the fair market value. In the event that the Company determines that a security’s fair value is permanently impaired, the Company will record the amount of the impairment attributable to credit factors in earnings as credit loss expense or, as applicable, a reversal of that expense, with the amount attributable to non-credit factors in other comprehensive income, net of applicable taxes. The Company’s investment policy, which guides investment decisions, is focused on high quality investments which mitigates the risk of impairment. Investments classified as trading securities primarily comprise mutual funds which are used as an economic hedge against our deferred compensation liabilities. Trading securities are carried at fair value with or included in Other Income, Net. The Company does not invest in Level 3 securities, as defined, but may utilize third-party professional valuation firms as necessary to assist in the determination of the value of investments that utilize Level 3 inputs (as defined by guidance) should any of its investments ever be 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, operational services, and
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capital expenditures, all entered into in the ordinary course of business, the Company does not have any significant contractual obligations or future commitments.
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 and military conflict 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, and continuously reviews automation and productivity opportunities requiring capital investments. The Company is not able to accurately predict the outcome of these cost savings initiatives and their effects on its future results.
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 realization to mitigate rising input costs for ingredients, packaging, labor and fringe benefits, energy, freight and delivery, and plant manufacturing maintenance, supplies and services. Although management seeks to substantially recover cost increases over the long-term, there is risk that higher price realization cannot be fully passed on to customers and, to the extent they are passed on, they could adversely affect customer and consumer acceptance and resulting sales volume.
The Company utilizes commodity futures contracts, as well as annual supply agreements, to hedge (primarily sugar) and plan for anticipated purchases of certain ingredients 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 USA, 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, 2025, assuming a 10% change in the underlying contract price, was $3,209. The analysis only includes commodity and foreign currency derivative instruments and, therefore, does not consider the offsetting effect of changes in the price of the underlying commodity or foreign currency. This amount is not significant compared with the net earnings and shareholders’ equity of the Company.
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Interest rates
Interest rate risks primarily relate to the Company’s investments in available for sale marketable securities with maturity dates of generally three to five years.
The majority of the Company’s investments which are classified as available for sale have generally not been sold prior to their maturity, which is typically three to five years. Approximately 20% to 35% of this investment portfolio matures each year. This “ladder” approach to investing limits the Company’s exposure to interest rate fluctuations. The accompanying chart summarizes the maturities of the Company’s investments in debt securities at December 31, 2025.
Less than 1 year
1 – 2 years
2 – 5 years
Total
The Company’s outstanding debt at December 31, 2025 and 2024 was $7,500 in an industrial development bond in which interest rates reset each week based on the current market rate. Therefore, the Company does not believe that it has significant interest rate risk with respect to its interest bearing debt.
Investment in marketable securities
As stated above, the Company’s investments classified as available for sale primarily include marketable securities which mature in three to five years. The Company’s marketable securities are generally not sold prior to maturity. The Company utilizes a professional money manager and maintains investment policy guidelines which emphasize high quality and liquidity in order to minimize the potential loss exposures that could result in the event of higher interest rates, a default or other adverse event. The Company continues to monitor these investments and markets, as well as its investment policies, however, the financial markets could experience unanticipated or unprecedented events and future outcomes may be less predictable than in the past.
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 10 of the Company’s Notes to Consolidated Financial Statements for outstanding foreign exchange forward contracts as of December 31, 2025.
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