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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 10-K

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(Mark One)

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For the fiscal year ended December 31, 20212022

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OR

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For the transition period from                    to                   

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Commission file number 1-1361

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TOOTSIE ROLL INDUSTRIES, INC.

(Exact name of Registrant as specified in its charter)

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7401 South Cicero Avenue, Chicago, Illinois 60629

(Address of principal executive offices) (Zip Code)

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

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

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

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

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

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

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

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

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

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

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If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐

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Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐

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

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As of February 18, 2022,13, 2023, there were outstanding 39,344,65139,684,473 shares of Common Stock par value $.69-4/9 per share, and 27,792,17528,606,918 shares of Class B Common Stock par value $.69-4/9 per share.

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As of June 30, 20212022 the aggregate market value of the Common Stock (based upon the closing price of the stock on the New York Stock Exchange on such date) held by non-affiliates was approximately $569,327,000.$611,433,000. Class B Common Stock is not traded on any exchange, is restricted as to transfer or other disposition, but is convertible into Common Stock on a share-for-share basis. Upon such conversion, the resulting shares of Common Stock are freely transferable and publicly traded. Assuming all 27,821,45328,622,730 shares of outstanding Class B Common Stock were converted into Common Stock, the aggregate market value of Common Stock held by non-affiliates on June 30, 2021 (based upon the closing price of the stock on the New York Stock Exchange on such date) would have been approximately $726,131,000.$768,227,000. Determination of stock ownership by non-affiliates was made solely for the purpose of this requirement, and the Registrant is not bound by these determinations for any other purpose.

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DOCUMENTS INCORPORATED BY REFERENCE

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Portions of the Company’s Definitive Proxy Statement for the Company’s Annual Meeting of Shareholders (the “2022 Proxy“Proxy Statement”) scheduled to be held on May 2, 20221, 2023 are incorporated by reference in Part III of this report.

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Forward-Looking Information

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

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PART I

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ITEM 1.               Business.

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

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The Company’s products are marketed in a variety of packages designed to be suitable for display and sale in different types of retail outlets. They are sold through approximately 25 food and grocery brokers andor directly by the Company itself to approximately 3,000 customers throughout the United States, Canada and Mexico. These customers include wholesale distributors of candy, food and groceries, supermarkets, variety stores, dollar stores, chain grocers, drug chains, discount chains, cooperative grocery associations, mass merchandisers, warehouse and membership club stores, vending machine operators, e-commerce merchants, the U.S. military and fund-raising charitable organizations.

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

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

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The Company’s backlog of orders increased from approximately $3.5 million atas of December 31, 2020 to $16.02022 was approximately $16 million at December 31, 2021, which reflectsand is consistent with the need to reschedule some sales from fourth quarter 2021 to first quarter 2022 principally due to supply chain disruptions.prior year.  

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

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quotations, if available, and/or historical costs. The Company has historically hedged some of these major ingredients with derivatives, primarilygenerally entered into commodity futures contracts before the commencement of the next calendar year to better ascertain the need formanage product pricing changes or product weight decline (indirect price change) adjustments to its product sales portfolio and better manage ingredient costs. The Company will generally purchase forward derivative contracts (i.e., “long” position) in selected future months that correspond to the Company’s estimated procurement and usage needs of the respective commodity in the respective forward periods.

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From time to time, the Company will increase its sales prices to recover higher input costs, primarily ingredients, packaging materials, and freight and delivery. The Company may also changeschange the size and weight of certain of its products in response to significant changes in ingredient and other input costs.

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

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

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

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

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The Company employs approximately 2,0002,300 full-time persons at all locations. Our business has seasonality which results in bringing on some additional employees to meet seasonal production demands.demands principally in advance of the Halloween selling season in the third quarter each year. The Company experiences a relatively consistent sales level throughout the year except for an increase in the third quarter which reflects pre-Halloween and back-to-school sales. In anticipation of this seasonal sales period, the Company generally begins building inventories, and its seasonal workforce, in the second and third quarter of each year. Although Halloween is the most significant season in sales and related production, other seasons, including Christmas, Valentines, and Easter also have some impact on workforce levels. The Company’s union labor agreement at its Chicago plant was executed in 2018 and willexpired in September 2022. The Company and the union have agreed to continue through September 2022.the existing contract on a month to month basis while negotiations continue (see also risk factor below), which is consistent with past contract negotiation timelines.

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We believe our employees are among our most important resources and are critical to our continued success. We focus significant attention on attracting and retaining talented and experienced individuals to manage and support our operations. We pay our employees competitively and offer a broad range of company-paid benefits, which we believe are competitive with others in our industry. Our management teams and all of our employees are expected to exhibit and promote honest, ethical and respectful conduct in the workplace. All of our employees must adhere to a code of conduct that sets standards for appropriate behavior. A copy of our code of conduct can be found on our website, Tootsie.com. We have prioritized the safety of our employees and therefore implemented safety protocols during 2020 and continuing into 2022,2023, to respond to the Covid-19 pandemic. We have taken many steps to provide our employees with a safe and healthy work environment, including increased sanitation, requiring face masks for employees, social distancing measures at all Company locations, employee temperature checks, curtailing visitors at Company locations and having office employees work remotely where possible and when appropriate based on a risk assessment.pandemic as needed.

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Our net product sales from Wal-Mart Stores, Inc. aggregated approximately 23.0%, 22.7%, and 23.5% of net product sales during the years ended December 31, 2022, 2021 and 2020, respectively. Our net sales from Dollar

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Our net product sales from Wal-Mart Stores, Inc. aggregated approximately 22.7%, 23.5%, and 24.2% of net product sales during the years ended December 31, 2021, 2020 and 2019, respectively. Our net sales from Dollar Tree, Inc. (which includes net sales from Family Dollar which is owned by Dollar Tree) aggregated approximately 12.1%12.4%, 11.7%12.1%, and 11.3%11.7% of net product sales during the years ended December 31, 2022, 2021 2020 and 2019,2020, respectively. Some of the aforementioned sales to Wal-Mart and Dollar Tree were sold to McLane Company, a large national grocery wholesaler, which services and delivers certain of the Company’s products to Wal-Mart, Dollar Tree and other retailers in the U.S.A. Net product sales revenues from McLane, which includes these Wal-Mart and Dollar Tree sales as well as sales and deliveries to other Company customers, were 20.4% in 2022 and 21.0% in 2021 and 22.1% in 2020 and 17.7% in 2019.2020. At December 31, 20212022 and 2020,2021, the Company’s three largest customers discussed above accounted for approximately 36%39% and 21%36% of total accounts receivable, respectively. Although no customer, other than McLane Company, Inc., Wal-Mart Stores, Inc. and Dollar Tree, accounted for more than 10% of net product sales, the loss of one or more significant customers could have a material adverse effect on the Company’s business. The Company historically offers extended credit terms for sales made under seasonal sales programs, including Halloween. Each year, after accounts receivables related to third quarter sales have been collected, the Company invests such funds in various marketable securities.

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For a summary of sales and long-lived assets of the Company by geographic area see Note 98 of the Notes to Consolidated Financial Statements which is incorporated herein by reference.

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

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ITEM 1A.            Risk Factors.

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

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Risk factors which we believe affect all competitors in our industry

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

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

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

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c. Significant adverse changes in the political conditions and government mandates or directives - In markets in which we manufacture, sell or distribute our products, governmental or regulatory actions in response to pandemics, including Covid-19, closures or other restrictions such as quarantine or travel restrictions, that limit or close our manufacturing, distribution or office facilities, or otherwise prevent our third-party suppliers, sales brokers, or customers from achieving the level of operations necessary for the production, distribution, sale, and support of our products, could negatively impact our results.

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

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

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

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

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ITEM 1B.            Unresolved Staff Comments.

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None.

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ITEM 2.               Properties.

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The Company owns its principal manufacturing, warehousing and distribution, and officesoffice facilities.  The Company’s largest operating facility in Chicago, Illinois also serves as the Corporate headquarters. The Company also owns domestic manufacturing, warehousing and distribution facilities in Tennessee (Covington), Massachusetts (Cambridge), and Wisconsin (Delavan) and international manufacturing facilities in Mexico (Mexico City), Spain (Barcelona) and two in Canada (Concord, Ontario).  In addition, the Company leases manufacturing and warehousing facilities at a second location in Chicago. The lease is renewable by the Company every five years through June 2041.

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

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ITEM 3.               Legal Proceedings.

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

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ADDITIONAL ITEM.     Executive Officers of the Registrant.

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

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ITEM 4.               Mine Safety Disclosures.

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None.

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ITEM 6.               [RESERVED]

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

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

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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, 2022 as compared to the same period of 2021.  Discussions comparing the results of the twelve months ended December 31, 2021 as compared to same period of 2020 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, 2021.

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FINANCIAL REVIEW

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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.

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FINANCIAL CONDITION

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The Company’s overall financial position remains strong given that aggregate cash, cash equivalents and investments is $436,983$396,926 at December 31, 2021,2022, including $89,736$71,208 in trading securities discussed below. Cash flows from 20212022 operating activities totaled $85,298$72,051 compared to $74,710$85,298 in 2020,2021, and are discussed in the section entitled Liquidity and Capital Resources. During 2021,2022, the Company paid cash dividends of $24,136,$24,629, purchased and retired $30,184$31,910 of its outstanding shares, and made capital expenditures of $31,426.$23,356.

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The Company’s net working capital was $218,894 at December 31, 2022 compared to $188,333 at December 31, 2021 compared to $250,851 at December 31, 2020.2021. This changeincrease principally reflects the effects of a $71,155 increases in long-termincreased short-term investments because more of our investments have maturities greater than one year at December 31, 2021 compared to December 31, 2020.and inventories which is discussed below. As of December 31, 2021,2022, the Company’s total cash, cash equivalents and investments, including all long-term investments, was $436,983$396,926 compared to $428,951$436,983 at December 31, 2020, an increase2021, a decrease of $8,032.$40,057. See Liquidity And Capital Resources section below.below for discussion. The aforementioned includes $89,736$71,208 and $73,828$89,736 of investments in trading securities as of December 31, 20212022 and 2020,2021, respectively. The Company invests in trading securities to provide an economic hedge for its deferred compensation liabilities, as further discussed herein and in Note 79 of the Company’s Notes to Consolidated Financial Statements.

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Shareholders’ equity increased from $763,327$769,042 at December 31, 20202021 to $769,041$783,171 as of December 31, 2021,2022, which principally reflects 20212022 net earnings of $65,326,$75,937, less cash dividends of $24,136$24,629 and share repurchases of $30,184.$31,910.

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The Company has a relatively straight-forward financial structure and has historically maintained a conservative financial position. The Company has no special financing arrangements or “off-balance sheet” special purpose entities. Cash flows from operations plus maturities of short-term investments are expected to be adequate to meet the Company’s overall financing needs, including capital expenditures, in 2021.2023. Periodically, the Company considers possible acquisitions, and if the Company were to pursue and complete such an acquisition, that could result in bank borrowings or other financing.

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RESULTS OF OPERATIONS

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20212022 vs. 20202021

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Twelve months 20212022 consolidated net product sales were $566,043$681,440 compared to $467,427$566,043 in twelve months 2020,2021, an increase of $98,616$115,397 or 21.1%20.4%. Fourth quarter 20212022 net product sales were $166,598$188,180 compared to $127,866$166,598 in fourth quarter 2020,2021, an increase of $38,732,$21,582, or 30%13.0%. The sales growth in fourth quarter and twelve months 20212022 was driven by

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an overall increase in demand and higher sales reflect effectiveprice realization. Effective sales and marketing programs, as well as the favorable effects of the continuing economic recovery from the adverse effects of the Covid-19 pandemic. The Company had continuing improvementincluding Halloween and other seasonal sales programs, contributed to higher sales volumes in customer ordersfourth quarter and sales throughout 2021 as consumerstwelve months 2022. Consumers returned to more activities which includedand lifestyles during 2021 and throughout 2022 that they experienced prior to the Covid-19 pandemic. These activities include planned purchases of the Company’s products for “sharing” and “give-a-way” occasions. Many of the Company’s products are consumed at group events, outings, and other gatherings, including Halloween events, which had been significantly curtailed or in some cases eliminated in response to the Covid-19 virus. Fourth quarter 2021pandemic.  Twelve months 2022 sales also exceeded fourth quartertwelve months 2019 sales by 24%30% which provides a quarterly sales comparison to a period prior to the

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products in 2023. Nonetheless, we were able to meet substantially all of our labor needs in 2022, including for our seasonal increases in production. However, the tight labor market has created much more uncertainty than in the past.

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Selling, marketing and administrative expenses were $121,976 in 2022 compared to $132,108 in 2021, compared to $112,117 in 2020, an increasea decrease of $19,991$10,132 or 17.8%7.7%. Selling, marketing and administrative expenses include $13,521$(16,370) and $11,909$13,521 in certain deferred compensation (credits) expenses in 20212022 and 2020,2021, respectively. These deferred compensation (credits) expenses principally result from increaseschanges 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 $100,208 in 2020 to $118,587 in 2021 to $138,346 in 2022, an increase of $18,379$19,759 or 18.3%16.7%. This increase was principally driven by the increase in certain variable expenses, primarily freight and delivery and direct selling expenses, relating to the increase in sales as discussed above. However, as a percent of net product sales, these adjusted expenses decreased from 21.4% of net product sales in 2020 to 21.0% of net product sales in 2021 to 20.3% of net product sales in 2022, a 0.40.7 favorable percentage point change.

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Selling, marketing and administrative expenses include freight, delivery and warehousing expenses. These expenses increased from $42,593 in 2020 to $55,289 in 2021 to $67,342 in 2022, an increase of $12,696$12,053 or 29.8%21.8%. As a percent of net product sales, these adjusted expenses increased from 9.1% in 2020 to 9.8% in 2021 to 9.9% in 2022, a 0.70.1 unfavorable percentage point change. Increasing energy costs and related effects on fuel surcharges, and the adverse effects of the continuing shortage of over-the-road drivers and high demand for carriers, were the principal drivers of these higher freight and delivery expenses in 20212022 compared to 2020.2021.

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In response to thethese higher input costs discussed above, the confectionary industry, as well as many companies in the broader consumer products industry announced increases inhave increased selling prices.prices throughout 2021 and 2022. We have followed with price increases as well with the objective of improving sales price realization and restoring some of our margin declines. Price increases whichwere phased in principally became effective during fourth quarterbeginning in second half 2021 contributed to the improved resultsand continued throughout 2022 and into 2023. The improvement in fourth quarter 2021 as well as2022 margins and net earnings reflects the twelve months 2021. Pricecumulative benefits of this higher price realization. Although our price increases for certain products that were not increased in 2021 have also been announced for first half 2022generally reflected the overall price increases in our industry, they have not as yet resulted in fully restoring our margins to historical levels. The Company believes that we should be able to make more progress in restoring our margins in 2023 when all of our price increases take full effect. However, continuing efforts to restore margins.  

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Our input costs continued to remain elevatedincreases in fourth quarter 2021 and we expect even higher costs in 2022 as our 2021 supply contracts and hedging programs come to closure and new contracts and hedging at higher 2022 costs begin to take effect.  Higher commodity markets are driving up our costs for key ingredients, packaging materials and energy, including the adverse effects of higher energy costs on freight and delivery fuel surcharges and plant manufacturing utilities. We expect these higher input costs and overall high inflation may not allow us to fully restore our margins to historical levels prior to the overall increase in inflation, some of which is driven by supply chain problems, to continue through most of, and possibly all of, 2022. The Company uses the Last-In-First-Out (LIFO) method of accounting for inventory and costs of goods sold which results in lower current income taxes during such periods of increasing costs, but this method does charge the most current costs to cost of goods sold and thereby accelerates the realization of these higher costs.pandemic. Although the Company continues to monitor these higher input costs and price increases in the industry, we are mindful of the effects and limits of passing on all of the above discussed higher input costs to consumers of our products. As a result, we believe that margins for part or all of 2022 will not fully recover to historical norms.

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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 as of December 31, 2021.2022. 

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Earnings from operations were $110,755 in 2022 compared to $67,133 in 2021, compared to $58,244 in 2020, an increase of $8,889.$43,622. Earnings from operations include $14,208$(17,263) and $12,519$14,208 in certain deferred compensation (credits) expense in 20212022 and 2020,2021, respectively, which are discussed above. Adjusting for these deferred compensation expenses, adjusted earnings from operations increased from $70,763 in 2020 to $81,341 in 2021 to $93,492 in 2022, an increase of $10,578$12,151 or 14.9%. The above discussed increase in net product sales was the principal driver of higher operating earnings in 20212022 compared to 2020.2021. Although higher 20212022 sales contributed to improved operating earnings compared to the corresponding prior year periods, higher input costs mitigated much of the benefits of increased sales.

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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 (expense), net was $(12,614) in 2022 compared to $18,596 in 2021, compared to $18,018 in 2020, an increasea decrease of $578.$31,210. Other income, net principally reflects $14,208$(17,263) and $12,519$14,207 of aggregate net (losses) gains and investment income on trading securities in 20212022 and 2020,2021, respectively. These trading securities provide an economic hedge of the Company’s deferred compensation liabilities; and the related net (losses) gains and investment income were offset by a like amount of (credit) expense in aggregate product cost of goods sold and selling, marketing, and administrative expenses in the respective years as discussed above. Other income (expense), net includes investment income on available for sale securities of $2,641 and $2,740 in 2022 and $4,005 in 2021, and 2020, respectively. Other income, net also includes foreign exchange gains of $1,307 and $667 in 2022 and $534 in 2021, and 2020, respectively.

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The Company’s effective income tax rate was 23.8%rates were 21.2% and 25.7% in fourth quarter 2022 and 2021, respectively, and 22.7% and 23.8% in twelve months 2022 and 2021, and 2020, respectively.respectively The increasedecrease in the effective tax rates in 20212022 generally reflects higherlower rates for state and international income tax provisions. 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 has provided a full valuation allowance on its Spanish subsidiaries’ tax loss carry-forward benefits of $4,376$4,497 and $4,508$4,376 as of December 31, 20212022 and 2020,2021, respectively, because the Company has concluded that it is not more-likely-than-not that these losses will be utilized before their expiration dates. The Spanish subsidiary has a history of net operating losses and it is not known when and if they will generate taxable income in the future.

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Beginning in 2012, the Company has received periodic notices from the Bakery and Confectionery Union and Industry International Pension Fund (Plan), a multi-employer defined benefit pension plan for certain Company union employees, that the Plan’s actuary certified the Plan to be in “critical status”, as defined by the Pension Protection Act (PPA) and the Pension Benefit Guaranty Corporation (PBGC); and that a plan of rehabilitation was adopted by the trustees of the Plan in 2012. The Plan’s status was changed to “critical and declining status”, as defined by the PPA and PBGC, for the plan year beginning January 1, 2015, and that the Plan was projected to have an accumulated funding deficiency for the 2017 through 2024 plan years. A designation of “critical and declining status” implies that the Plan is expected to become insolvent in the next 20 years. The Company has continued to receive annual notices each year (2016 to 2021)2022) that this Plan remains in “critical and declining status” and is projected to become insolvent within the next 20 years. These notices have also advised that the Plan trustees were considering the reduction or elimination of certain retirement benefits and may seek assistance from the PBGC. Plans in “critical and declining status” may elect to suspend (temporarily or permanently) some benefits payable to all categories of participants, including retired participants, except retirees that are disabled or over the age of 80. Suspensions must be equally distributed and cannot drop below 110% of what would otherwise be guaranteed by the PBGC.  

Based on these updated notices, the Plan’s funded percentage (plan investment assets as a percentage of plan liabilities), as defined, were 48.3%48.5%, 50.4%48.3%, and 51.6%50.4% as of the most recent valuation dates available, January 1, 2021, 2020, 2019, and 2018,2019, respectively (these valuation dates are as of the beginning of each Plan year). The Plan has recently advised that the all Plan information discussed herein, including the Company’s withdrawal liability, is the most current available information, and that more current information should be available in second quarter 2023. These funded percentages are based on actuarial values, as defined, and do not reflect the actual market value of Plan investments as of these dates. If the market value of investments had been used as of January 1, 20202021 the funded percentage would be 51.6%52.8% (not 48.3%48.5%). As of the January 1, 20202021 valuation date (most recent valuation available), only 16%15% of Plan participants were current active employees, 53%54% were retired or separated from service and receiving benefits, and 31% were retired or separated from service and entitled to future benefits. The number of current active employee Plan participants as of January 1, 20202021 fell 4%6% from the previous year and 17%22% over the past twothree 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 49%52%, whereas participants who were retired or separated from service and receiving benefits increased 4%3% and participants who were retired or separated from service and entitled to future benefits increased 12%10%.

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The Company has been advised that its withdrawal liability would have been $104,300, $99,300 and $99,800 if it had withdrawn from the Plan during 2021, 2020 and 2019, respectively. As discussed above, the Plan has advised the Company that more current information, including an update on the Company’s withdrawal, should be available in second quarter 2023. The Company’s relative share of the Plan’s contribution base, driven by employer withdrawals, has increased for the last several years, and management believes that this trend, could continue indefinitely which will continue to add upward pressure on the Company’s withdrawal liability. Based on the above, including the Company’s increase in such union labor hours to meet its higher 2022 demand and the Plan’s projected insolvency in the next 20 years, management believes that the Company’s withdrawal liability could increase further in future years.

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the Company’s continued participation in this Plan through September 2022 (the expiration of this union contract).Plan. 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 2022, 2021 and 2020 was $3,510, $3,156 and 2019 was $3,156, $2,866, and $2,961, respectively. The aforementioned expense includes surcharges of $1,237, $1,112 and $1,010 in 2022, 2021 and $948 in 2021, 2020, and 2019, respectively, as required under the amended 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 December 31, 2020 provided that the local bargaining union and the Company executed a formal consent agreement by March 31, 2021. The Trustees advised that they have concluded that continuing increases in surcharges would likely have a long-term adverse effect on the solvency of the Plan. The Trustees concluded that further increases would result in increasing financial hardships and withdrawals of participating employers, and that this change will not have a material effect on the Plan’s insolvency date. In first quarter 2021, the local bargaining union and the Company executed this agreement which resulted in the “freezing” of such surcharges as of December 31, 2020.

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The Plan recently advised the Company that it will be applying for benefits available to financial troubled plans under the American Rescue Plan Act of 2021. Company management understands that this legislation would provide financial assistance from the PBGC to shore up financially distressed multi-employer plans to ensure that they can remain solvent and continue to pay benefits to retirees through 2051 without any reduction in retiree benefits. Nonetheless,The PBGC final ruling lifts certain investment restrictions imposed by the Company’s actuary believesinterim rule and now allows for a split interest rate structure between existing assets and assets acquired with PBGC assistance that givenshould substantially increase the amount of financial assistance available to the Plan.  While the Plan’s future solvency will depend significantly on future investment experience and contribution levels even if financial assistance is awarded, many plans previously projected insolvency dateto go insolvent prior to 2051 are now projected to go insolvent closer to, or even beyond 2051, as a result of 2031 as well as other factors, that it still remains unclear if the Plan can remain solvent through the targeted date of 2051.final rule. The Company’s actuary also advised that the regulations under the aforementioned PBGC financial assistance could result in a higher withdrawal liability even with PBGC financial assistance. The Company is currently unable to determine the ultimate outcome of the above discussed multi-employer union pension matter and therefore is unable to determine the effects on its consolidated financial statements, but the ultimate outcome could be material to its consolidated results of operations or cash flows in one or more future periods. See also Note 7 of the Company’s Note to Consolidated Financial Statements on Form 10-K for the year ended December 31, 2021.2022.

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As discussed in the Risk Factors section above, the Company’s union contract at its Chicago manufacturing and distribution center is expired in September 2022, and the pre-existing contract continues to be extended on a month-to-month basis while negotiations continue. Company management believes that progress in these negotiations is continuing and we are cautiously optimistic that a new contract will be concluded in the first half of 2023. Nonetheless, as outlined in the Risk Factors above, a work stoppage, slow-down, disruption or strike could develop if the parties are not successful in these negotiations which could have a material effect on the Company’s sales and profits.  

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from $80,506 in 2019 to $70,763 in 2019, a decrease of $9,743 or 12.1%. The above discussed decline in net product sales was the principal driver of lower operating income in 2020 compared to 2019, however, 2020 earnings from operations did benefit from some cost and expense reductions as discussed above.

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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 $18,018 in 2020 compared to $16,190 in 2019, an increase of $1,828. Other income, net principally reflects $12,519 and $11,292 of aggregate net gains and investment income on trading securities in 2020 and 2019, respectively. These trading securities provide an economic hedge of the Company’s deferred compensation liabilities; and the related net gains and investment income were offset by a like amount of expense in aggregate product cost of goods sold and selling, marketing, and administrative expenses in the respective years as discussed above. Other income, net includes investment income on available for sale securities of $4,005 and $4,423 in 2020 and 2019, respectively. Other income, net also includes foreign exchange gains (losses) of $534 and $(533) in 2020 and 2019, respectively.

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The Company’s effective income tax rate was 22.7% and 24.1% in 2020 and 2019, respectively. The decrease in the effective tax rate in 2020 reflects more favorable foreign tax rates, income tax credits and adjustments for reserves for uncertain tax positions.

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

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On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was signed into U.S. law. The CARES Act has provided a substantial stimulus and assistance package intended to address the economic impact of the Covid-19 pandemic, including tax relief and government loans, grants and investments. The Canadian government also enacted a stimulus program, Canadian Emergency Wage Subsidy (“CEWS”), to respond to the economic impact of Covid-19 during 2020. The Company’s financial results in 2020 did reflect some benefits, primarily in the second and third quarters of 2020, from these stimulus programs.

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Net earnings were $58,995 in 2020 compared to $64,920 in 2019, and net earnings per share were $0.86 and $0.94 in 2020 and 2019, respectively, a decrease of $0.08 per share of 9%. Earnings per share in 2020 benefited from the reduction in average shares outstanding resulting from purchases of the Company’s common stock in the open market by the Company. Average shares outstanding decreased from 69,386 in 2019 to 68,482 in 2020 which reflects share repurchases of $32,055 during 2020.

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Fourth quarter 2020 and 2019 net earnings attributable to Tootsie Roll Industries, Inc. were $14,952 and $14,555, respectively, and net earnings per share were $0.22 and $0.21, respectively, an increase of $0.01 per share or 5%. Certain cost and expense reductions, including Company operational changes and initiatives to reduce costs as discussed above, did provide some benefit to fourth quarter 2020 results. Although unfavorable foreign exchange adversely affected fourth quarter 2020 results, a lower effective income tax rate contributed to the increase in net earnings in fourth quarter 2020 compared to fourth quarter 2019.

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Our Company is focused on the longer term and therefore we are continuing to make investments in plant manufacturing operations to meet new consumer and customer product demands, achieve product quality improvements, and increase operational efficiencies in order to provide genuine value to consumers. We are continuing to focus on the supply chain and possible delays and disruptions, but this area continues to have much less predictability compared to past history. The effects of the Covid-19 pandemic, including variants and sub-variants, are unprecedented, and therefore the Company is unable to determine the related effects on its sales and net earnings in 2022 and beyond.

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Revenue recognition

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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.

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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 2022, 2021 2020 and 2019,2020, and accordingly, have not been significant to the Company’s financial position or results of operations.

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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 fourth quarter 2021,2022, the Company performed a “step zero” test of its goodwill and certain trademarks, and concluded that there was no impairment based on this guidance.

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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 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 trade promotional program costs includingand 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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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 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.

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Valuation of investments

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Investments primarily comprise high quality corporate bonds includingwhich are held to maturity, generally approximately 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 minimum interest rate risk. The Company also invests in variable rate demand notes (generally long term bonds where interest rates are reset weekly, and provide a weekly “put” which allows the holder to also sell each week with no loss in principal), which. All 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 an investment security’s fair value is below carrying value or amortized cost,permanently impaired, the Company will record an other-than-temporarythe amount of the impairment attributable to credit factors in earnings as credit loss expense or, as applicable, a temporary impairment based on accounting guidance.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. The Company does not invest in Level 3 securities, as defined, but may utilize third-party professional valuation firms as necessary to assist in the determination of the value of investments that utilize Level 3 inputs (as defined by guidance) should any of its investments be downgraded to Level 3.

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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, operational services, and capital expenditures, all entered into in the ordinary course of business, the Company does not have any significant contractual obligations or future commitments.

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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

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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.

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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, 2021.2022.

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QUARTERLY FINANCIAL DATA

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Net earnings per share is based upon average outstanding shares as adjusted for 3% stock dividends issued during the second quarter of each year as discussed above. The sum of the quarterly per share amounts may not equal annual amounts due to rounding.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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Board of Directors and Shareholders

Tootsie Roll Industries, Inc.

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Opinions on the financial statements and internal control over financial reporting

We have audited the accompanying consolidated financial position of Tootsie Roll Industries, Inc. (a Virginia corporation) and subsidiaries (the “Company”) as of December 31, 20212022 and 2020,2021, and the related consolidated statements of comprehensive earnings, earnings and retained earnings, comprehensive earnings, and cash flows for each of the three years in the period ended December 31, 2021,2022, and the related notes and financial statement scheduleschedule(s) included under Item 15(a) (collectively referred to as the “financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2021,2022, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

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In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 20212022 and 2020,2021, and the results of itsoperations and itscash flows for each of the three years in the period ended December 31, 20212022 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021,2022, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO.

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Basis for opinions

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

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

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

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and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

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

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Critical audit mattersmatter

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

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Trademark Impairment Assessment

As described in Note 1 and Note 1312 to the consolidated financial statements, the Company’s consolidated trademark balance was $175 million at December 31, 2021,2022 which is allocated to the Company’s brands that were purchased. Indefinite-lived trademarks are tested for impairment at least annually. For several trademarks, a
Step 0 approach is used to test for impairment based on relevant qualitative factors, as outlined within Accounting Standards Codifications (ASC) 350-20 and 350-30. For the fair value assessment of certain other trademarks where a Step 0 analysis was not considered appropriate, Step 1 impairment testing is performed annually using discounted cash flows, derived from inputs including but not limited to projected revenue, operating margins and estimated discount rates. The determination of the fair value of the trademarks subjected to a Step 1 impairment test requires management to make significant estimates and assumptions related to forecasts of future revenues, operating margins and discount rates. As disclosed by management, changes in these assumptions could have a significant impact on either the fair value of the trademark, the amount of any trademark impairment charge, or both.

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

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The primaryOur audit procedures we performedrelated to address this critical audit matter included:the Trademark Impairment Assessment included the following, among others:

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/s/ GRANT THORNTON LLP

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

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Chicago, Illinois

March 1, 20222023

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CONSOLIDATED STATEMENTS OF

Earnings and Retained Earnings

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

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CONSOLIDATED STATEMENTS OF

Comprehensive Earnings

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