Company’s sales results in the United States continue to reflect the challenges of many of the Company’s retail customers including their profit margin pressures and other competitive factors.2019.

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Product cost of goods sold were $325,924$299,710 in 20172020 compared to $320,290$329,102 in 2016, an increase2019, a decrease of $5,634$29,392 or 1.8%8.9%. Product cost of goods sold includes $1,953$610 and $1,137$408 in certain deferred compensation expenses in 20172020 and 2016,2019, 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 increaseddecreased from $319,153$328,694 in 20162019 to $323,971$299,100 in 2017, an increase2020, a decrease of $4,818$29,594 or 1.5%9.0%. As a percent of net product sales, these adjusted costs increased from 61.7% in 2016 to 62.8% in 2017,2019 to 64.0% in 2020, a 1.2 unfavorable percentage point change. Lower sales and production volumes had an unfavorable increase of 1.1% as a percent of net product sales. Higherimpact on plant manufacturing overhead costs for ingredients, packaging materials, and manufacturing plant overhead, including increasesincluded in wages, salaries and benefits, contributed to higherthe aforementioned adjusted product cost of goods soldsold. These plant overhead costs are primarily fixed and recurring each year, and only partially decline with lower volumes.

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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 affectedimpacted gross profit margins in 2017 compared2020. Certain cost and expense reductions, including Company initiatives to 2016. Continuing improvements in manufacturing plant efficiencies driven by capital investments and ongoing cost containment programs mitigatedreduce costs did provide some of these higher costs and expenses.benefit to 2020 gross profit margins. The Company is continuing its focus on capital expenditures that will resultinvestments in its plant manufacturing operations to meet new consumer and customer demands, achieve quality improvements, provide genuine value to consumers, and increase operational efficiencies and cost reductions, as well as product improvements.efficiencies.

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Selling, marketing and administrative expenses were $120,977$112,117 in 20172020 compared to $107,377$127,802 in 2016, an increase2019, a decrease of $13,600$15,685 or 12.7%12.3%. Selling, marketing and administrative expenses include $8,024$11,909 and $3,138$10,884 in certain deferred compensation expenses in 20172020 and 2016,2019, 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, theseselling, marketing and administrative expenses increaseddecreased from $104,239$116,918 in 20162019 to $112,953$100,208 in 2017, an increase2020, a decrease of $8,714$16,710 or 8.4%14.3%. As a percent of net product sales, these adjusted expenses increaseddecreased from 20.1%22.3% of net product sales in 20162019 to 21.9%21.4% of net product sales in 2017,2020, a 1.7% unfavorable increase0.9 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.sales in 2020.

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Selling, marketing and administrative expenses include freight, delivery and warehousing expenses. These expenses increaseddecreased from $40,629$49,288 in 20162019 to $43,973$42,593 in 2017, an increase2020, a decrease of $3,344$6,695 or 8.2%13.6%. As a percent of net product sales, these adjusted expenses increaseddecreased from 7.9%9.4% in 20162019 to 8.5%9.1% in 2017, an unfavorable increase of 0.6% as2020, a percent of net product sales. Increasing demand for over-the-road truck0.3 favorable percentage point change. More favorable freight and delivery rates from third-party over-the-road truck carriers, and an imbalance in supplycertain operational and demand for freight carriers, has resulted in higher prices for these services, particularly in fourth quarter 2017. There is a shortage of over-the-road trucks and truck drivers, and the Company expects these related cost pressures to continue in 2018. Increases in marketing and sales expenses relating to new product development and packaging changes to comply with product labeling requirements alsoreduction initiatives, contributed to higher selling, marketing and administrative expenses in 2017 compared to 2016, and these expenses also were much higher in fourth quarter 2017.this favorable change.

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The Company has foreign operating businesses in Mexico, Canada and Spain, and exports products to many foreign markets. Such foreign sales were $43,452 and comprised 8%The Company’s Spanish subsidiary (97% owned by the Company) incurred an operating loss of the Company’s consolidated net product sales$691 in 2017. In fourth quarter 2017, the Company recorded a pre-tax impairment charge of $2,371 relating2020 which was an improvement compared to its Spanish subsidiaries.$1,102 loss in 2019. The Company currently has a 97% ownership of two Spanish companies (93% ownership at December 31, 2016). During 2017 and 2016, these Spanish subsidiaries incurred operating losses of $3,212 and $1,689, respectively, and the Company provided approximately $2,734$889 and $886, respectively,$1,399 of additional cash to finance these losses.losses and certain capital expenditures in 2020 and 2019, respectively. Company management expects the competitive and business challenges in Spain to continue and expectsbut believes that there will be continued reductions in operating losses in 20182021 compared to 2020. Nonetheless, management believes that operating losses will likely continue beyond 2021 and likely beyond; andthat these future losses, as well as some capital expenditures, will likely require some additional cash financing.

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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 2017, 20162020, 2019 or 2015. 2018.

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 suchthese trademarks by approximately 16%18% and 10%, respectively. Individually, a 100 basis point increase in the discount rate or a 100 basis point decrease in the royalty rate would not result in a potential impairment of these trademarks as of December 31, 2017.2020. 

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Earnings from operations were $71,416$58,244 in 20172020 compared to $92,414$69,214 in 2016,2019, a decrease of $20,998.$10,970. Earnings from operations include $9,977$12,519 and $4,275$11,292 in certain deferred compensation expense in 20172020 and 2016,2019, respectively, which are discussed above. Adjusting for these deferred compensation expenses, adjusted earnings from operations decreased from $96,689$80,506 in 20162019 to $81,393$70,763 in 2017,2019, a decrease of $15,296$9,743 or 15.8%12.1%. Twelve months results were adversely affected byThe above discussed decline in net product sales was the principal driver of lower gross profit margins, including the effects of higher costsoperating income in 2020 compared to 2019, however, 2020 earnings from operations did benefit from some cost and expenses for ingredients, packaging materials, and manufacturing plant overheadexpense reductions as discussed above. In addition, earnings from operations were also adversely affected by higher selling, marketing and administrative expenses, primarily freight and delivery, marketing and sales expenses relating to new product development and packaging changes to comply with product labeling requirements, and declines in foreign results and an impairment of foreign subsidiaries, all of which are discussed above. Many of these increased costs and expenses accelerated in fourth quarter 2017. 

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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.

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Other income, net was $13,145$18,018 in 20172020 compared to $5,498$16,190 in 2016,2019, an increase of $7,647.$1,828. Other income, net principally reflects $9,977$12,519 and $4,275$11,292 of aggregate net gains and investment income on trading securities in 20172020 and 2016,2019, 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 including variable rate demand notes, of $2,851$4,005 and $2,130$4,423 in 20172020 and 2016,2019, respectively. Other income, net also includes foreign exchange gains/gains (losses) of $259$534 and $(955)$(533) in 20172020 and 2016,2019, respectively.

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In connection with enactment of the U.S. Tax Cuts and Jobs Act (Tax Reform Act) in December 2017, the Company recorded a favorable accounting adjustment of $20,318, or $0.32 per share, during the fourth quarter of 2017. This reflects the estimated benefit from the revaluation of net deferred income tax liabilities based on the new lower U.S. corporateThe Company’s effective income tax rate effective January 1, 2018. U.S. tax reform also includes a one-time toll charge resulting fromwas 22.7% and 24.1% in 2020 and 2019, respectively. The decrease in the mandatory deemed repatriation of undistributed foreign earnings and profits. The Company determined that there were no net undistributed foreign earnings and profits subject to this toll charge. Based on SEC guidance in Staff Accounting Bulletin No. 118, the Company considers its accounting for the effects of U.S. tax reform to be provisional as of December 31, 2017. The ultimate impact may differ from these provisional amounts, possibly materially, due to, among other things, additional regulatory guidance that may be issued by the Internal Revenue Service and state authorities.

The consolidated effective tax rate was 4.6%in 2020 reflects more favorable foreign tax rates, income tax credits and 31.2% in 2017 and 2016, respectively. The principal drivers of the lower 2017 effectiveadjustments for reserves for uncertain tax rate are the effects of U.S. tax reform and a worthless stock deduction relating to the Company’s Spanish subsidiaries, which favorably reduced the Company’s effective 2017 tax rate by 24.2% and 3.8%, respectively.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.

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The Company utilized $617 and $1,227 of Canadian tax carry-forward benefits in 2020 and 2019, respectively. At December 31, 2017 and 2016,2019, the Company’s deferred tax assets include $3,740 and $6,346included $617 of income tax benefits relating to its Canadian subsidiary tax loss carry-forwards which the Company expects to realize before their expiration dates (2029 through 2031).carry-forwards. The Company fully utilized $2,606 and $1,776 of these tax carry-forward benefits in 2017 and 2016, respectively. The Company has concluded that it is more-likely-than-not that it would realize thesethis deferred tax assets relating to its Canadian tax loss carry-forwards because it is expected that sufficient levels of taxable income will be generated during the carry-forward periods.asset in 2020 as expected. The Company has provided a full valuation allowance on its Spanish subsidiaries’ tax loss carry-forward benefits of $3,038$4,508 and $2,106$4,584 as of December 31, 20172020 and 2016,2019, 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 subsidiaries havesubsidiary has a history of net operating losses and it is not known when and if they will generate taxable income in the future.

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U.S. tax reform changes(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 the U.S. tax reform significantly impact the accounting for the undistributed earnings of foreign subsidiaries, and as a result the Company intends to distribute approximately $10,000distributed $8,200 of the earnings held in excess cash by its foreign subsidiaries in 2018.2019. 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 has been advised that its withdrawal liability would have been $82,200, $72,700,$99,300, $99,800 and $61,000$81,600 if it had withdrawn from the Plan during 2017, 20162020, 2019 and 2015,2018, respectively. The increase from 2016 to 2017 principally reflects a decrease in the PBGC interest rates, a decrease in the assets and increase in the Plan’s unfunded vested benefits during 2016 and the Company comprising a largerCompany’s relative share of the Plan’s contribution base.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 year 2030,next 20 years, management believes that the Company’s withdrawal liability will likely increase further in future years.

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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 $3,059$2,958 which have a present value in the range of $35,900$34,700 to $46,900$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 valuationvaluations and interest rates which management understandsthe 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 are currently inconcluded a new labor contract negotiations and are continuing to operate under extensions of the recently expired contractin 2018 which requires the Company’s continued participation in this Plan.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 2017, 20162020, 2019 and 20152018 was $2,617,  $2,541$2,866, $2,961 and $2,574,$2,836, respectively. The aforementioned expense includes surcharges of $656,  $542$1,010, $948 and $447$811 in 2017, 20162020, 2019 and 2015,2018, respectively, as required under the planamended rehabilitation plan.

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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 rehabilitationDecember 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 amended.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 or the effects of any modifications to the current rehabilitation plan 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, 2017.2020.

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in order to reducepackaging lines and minimize finished goods inventory levels and additional costs to meet new product labeling requirements. This inventory reduction was in response to uncertainties surrounding changes in state and national labeling regulations and requirements during 2016. The Company is continuing its focus on cost reductions and savings, including savings resulting operational inefficiencies, as well as unfavorable experience from capital investments, in order to achieve manufacturing efficiencies and productivity improvements. The Company has made progress on restoring margins to their historical levels before the increases in commodity and other input costs in past years.self-insurance programs.

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Selling, marketing and administrative expenses were $107,377$127,802 in 20162019 compared to $108,051$117,691 in 2015, a decrease2018, an increase of $674$10,111 or 0.6%8.6%. Selling, marketing and administrative expenses include $3,138$10,884 and $953$(1,064) in certain deferred compensation expenses (credits) in 20162019 and 2015,2018, 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, theseselling, marketing and administrative expenses decreased from $107,098$118,755 in 20152018 to $104,239$116,918 in 2016,2019, a decrease of $2,859$1,837 or 2.7%1.5%. As a percent of net product sales, these adjusted expenses increased slightlydecreased from 20.0%23.0% of net product sales in 20152018 to 20.1%22.3% of net product sales in 2016,2019, a 0.1% unfavorable increase0.7 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. sales, in 2019.

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Selling, marketing and administrative expenses include $40,629 and $42,619 of freight, delivery and warehousing expenses. These expenses decreased from $49,527 in 2016 and 2015, respectively, were 7.9%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 both 20162018 to 9.4% in 2019, a 0.2 favorable percentage point change. During 2019, the Company implemented additional freight and 2015. Internal expensedelivery computer systems and carrier selection processes, including enhanced competitive bidding, which facilitated this favorable unit cost reduction initiatives mitigated some of the higher costs of freight, delivery and warehousing in 2016 compared to 2015.2019.

The Company has foreign operating businesses in Mexico, Canada and Spain, and exports products to many foreign markets. The strength of the U.S. dollar and related devaluations of most these related foreign currencies, primarily Mexico and Canada, have adversely affected these foreign and export operations in 2016 compared to 2015. The operating income of these foreign and export operations decreased by $3,269 in 2016 compared to 2015. The Company currently has a 93% ownership of two Spanish companies (93% and 83% ownership at December 31, 2016 and 2015, respectively) which had operating losses for each of the years 2008 through 2016. Company management has restructured the Spanish operations and made other changes to its business plan but these companies continue to have operating losses. 

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Earnings from operations were $92,414$69,214 in 20162019 compared to $91,082$70,482 in 2015, an increase2018, a decrease of $1,332.$1,268. Earnings from operations include $4,275$11,292 and $1,450$(1,103) in certain deferred compensation expense (credits) in 20162019 and 2015,2018, respectively, which are discussed above. Adjusting for these deferred compensation expenses, adjusted earnings from operations increased from $92,532$69,379 in 20152018 to $96,689$80,506 in 2016,2019, an increase of $4,157$11,127 or 4.5%16.0%. Although ingredient costsIncreased sales and results from foreign operations adversely affected adjusted 2016 earnings from operations, higher price realization on salesin 2019, as well as reductions in certain costs and the cost and expense reductions, asexpenses discussed above, allowed the Companycontributed to achieve these higher adjusted operating earnings in 2016 despite the decline in 2016 net sales compared to 2015.improved results.

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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.

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Other income, net was $5,498$16,190 in 20162019 compared to $1,496$2,724 in 2015,2018, an increase of $4,002.$13,466. Other income, net principally reflects $4,275$11,292 and $1,450$(1,103) of aggregate net gains (losses) and investment income on trading securities in 20162019 and 2015,

reinvested. The Company estimates thatfully realized in the federal income tax liability on such undistributed earnings would approximate 30% of these amounts.future.

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Net earnings attributable to Tootsie Roll Industries, Inc. were $67,510$64,920 in 20162019 compared to $66,089$56,893 in 2015,2018, and net earnings per share were $1.05$0.96 and $1.02$0.84 in 20162019 and 2015,2018, respectively, an increase of $0.03$0.12 per share or 2.9%14%. As discussed above, net earnings principally benefited fromHigher sales, including higher pricesales realization, on domestic sales and cost and expense reductions, although higher ingredient costs, lower foreign operating income, andreduction discussed above, were the adverse effectsprincipal drivers of lower sales mitigated some of these benefits. In addition, a lower effective income tax ratethis improvement in prior year 2015 adversely affects the comparison2019 compared to 2016 net earnings.2018. Earnings per share in 20162019 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 65,10368,072 in 20152018 to 64,08667,416 in 2016. Fourth quarter 2016 net2019 which reflects share repurchases of $34,116 during 2019. Net earnings attributable to Tootsie Roll Industries, Inc. were $17,841 compared to $19,705$14,555 in fourth quarter 2015,2019 compared to $12,175 in fourth quarter 2018, and net earnings per share were $.28$0.22 and $.30$0.18 in fourth quarter 20162019 and 2015,2018, respectively a decreasean increase of $.02$0.04 per share or 6%22%.

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LIQUIDITY AND CAPITAL RESOURCES

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Cash flows from operating activities were $42,973, $98,550$74,710, $100,221 and $91,073$100,929 in 2017, 20162020, 2019 and 2015,2018, respectively. The $55,577$25,511 decrease in cash flows from operating activities from 20162019 to 20172020 primarily reflects increasesdecreases in income taxes receivable and prepaid expenses and other assets; and  a decrease in income taxes payablenet earnings and payments of deferred compensation during 2017. Cashin 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 2016 benefited from decreasesprepaid expenses and inventories, offset by a decrease in accounts receivable and inventories, netas of a decrease in income taxes payable.  December 31, 2019.

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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 during fourth quarterin 2017; no contribution was made to the trust during 2016.2018, 2019 or 2020. The Company uses these funds to pay the actual cost of such benefits over each union contract period. At December 31, 20172020 and 2016,2019, the VEBA trust held $19,713$8,272 and $3,027,$12,085, respectively, of aggregate cash and cash equivalents.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.

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Cash flows from investing activities reflect capital expenditures of $16,673, $16,090,$17,970, $20,258, and $15,534$27,612 in 2017, 20162020, 2019 and 2015,2018, respectively. The changes in amounts each yearfrom 2018 to 2019 principally reflectsreflect new manufacturing packaging lines in 2018 and the timing of expenditures relating to other plant manufacturing capital projects. Company management has recently committed approximately $15,000$25,000 to a manufacturing plant rehabilitation upgrade and expansion of one of its manufacturing plants in the U.S.A. Management’s projectedThe Company spent approximately $6,000 and 2,000 in 2020 and 2019, respectively. Company management expects cash outlays for this project are approximately $6,000to approximate $17,000 in each of 2018 and 2019 and  $3,000 in 2020. In addition, Company management has committed approximately $13,000 to new packaging lines in 2018 which will result in additional capital spending in 2018 in excess of historical levels.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).

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Other than the bank loans and the related restricted cash of the Company’s Spanish subsidiaries,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 2015, 2016,

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.

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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.

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Revenue recognition

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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 of applicable provisions for discounts, returns, allowances and certain advertising and promotional costs, isproduct sales continues to be recognized at a point in time when products are delivered to customers based on an acceptedor picked up by the customer, as designated by customers’ purchase order. These include quantity, sales price and other relevant terms of sale, and collectability is reasonably assured. The accounting for promotional costs isorders, as discussed under “Customer incentive programs, advertising and marketing” below. Accounts receivable are unsecured.in Note 1.

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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 2017, 20162020, 2019 and 2015,2018, and accordingly, have not been significant to the Company’s financial position or results of operations.

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Customer freight and delivery, and finished goods warehousing and handling expenses are included in selling, marketing and administrative expenses.

The Company is continuing its review and evaluation of revenue recognition under new guidance (ASC 606, “Revenue with Contracts from Customers”) which is effective at the beginning of the first quarter 2018. The Company will adopt this new guidance via the modified retrospective approach with the initial adoption impacting opening retained earnings effective January 1, 2018. Company management does not believe that the adoption of this new guidance will have a material effect on its consolidated statements of earnings, but management is expecting to reduce certain accrued liabilities (and increase retained earnings) relating to variable consideration, as defined by the new guidance on its consolidated statement financial position (balance sheet) of January 1, 2018.

Intangible assets

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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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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.

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Customer incentive programs, advertising and marketing

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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.

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Split dollar officer life insurance

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The Company provides split dollar life insurance benefits to certainan executive officersofficer and records an asset principally equal to the cumulative premiums paid. TheDuring 2020, the Company recovered $23,527 of previously paid premiums on certain policies and will fully recover thesethe 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.

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Valuation of long-lived assets

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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.

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Income taxes

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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

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 such level.Level 3.

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Other matters

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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, 2017,2020, all of which are generally normal and recurring in nature, are summarized in the chart which follows below.

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RECENT ACCOUNTING PRONOUNCEMENTS

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

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MARKET RISKS

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

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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 possible 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.

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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.

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Changes in U.S.A. tax policy, including a “border tax” and possible new tariffs on foreign imports which are under discussion, could have an adverse impact on such products made in Canada and sold in the U.S.A. as well as certain other ingredients and materials which are imported.

Commodity future and foreign currency forward contracts

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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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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.

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The potential change in fair value of commodity and foreign currency derivative instruments held by the Company at December 31, 2017,2020, assuming a 10% change in the underlying contract price, was $1,476.$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.

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Interest rates

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

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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, 2017.2020.

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