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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2022

OR

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

For the transition period from              to

COMMISSION FILE NUMBER 1-1361

Tootsie Roll Industries, Inc.

(Exact Name of Registrant as Specified in its Charter)

Virginia

22-1318955

(State of Incorporation)

(I.R.S. Employer Identification No.)

7401 South Cicero Avenue, ChicagoIllinois

60629

(Address of Principal Executive Offices)

(Zip Code)

773-838-3400

(Registrant’s Telephone Number, Including Area Code)

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

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

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

`

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date (September 30, 2022).

Class

Outstanding

Common Stock, $0.69-4/9 par value

40,293,792

Class B Common Stock, $0.69-4/9 par value

28,622,421

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

Title of each class:

    

Trading Symbol

    

Name of each exchange on which registered:

Common Stock, par value $0.69-4/9 per share

TR

New York Stock Exchange

TOOTSIE ROLL INDUSTRIES, INC.

SEPTEMBER 30, 2022

INDEX

Page No.

Part I —

Financial Information

Item 1.

Financial Statements꞉

Condensed Consolidated Statements of Financial Position

3-4

Condensed Consolidated Statements of Earnings and Retained Earnings

5

Condensed Consolidated Statements of Comprehensive Earnings

6

Condensed Consolidated Statements of Cash Flows

7

Notes to Condensed Consolidated Financial Statements

8-17

Item 2.

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

17-23

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

24

Item 4.

Controls and Procedures

24

Part II —

Other Information

Item 1.

Legal Proceedings

25

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

25

Item 6.

Exhibits

25

Signatures

26

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. See “Forward-Looking Statements” under Part I — Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Quarterly Report on Form 10-Q.

2

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

TOOTSIE ROLL INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

(in thousands) (Unaudited)

September 30, 2022

December 31, 2021

September 30, 2021

ASSETS

CURRENT ASSETS:

Cash and cash equivalents

   

$

57,216

    

$

105,840

    

$

76,210

Restricted cash

332

386

393

Investments

88,510

39,968

39,491

Accounts receivable trade, less allowances of $2,949, $2,281 and $2,706

82,315

54,921

80,877

Other receivables

4,120

3,920

3,392

Inventories:

Finished goods and work-in-process

48,758

31,431

46,887

Raw materials and supplies

40,797

24,074

24,948

Prepaid expenses

2,018

7,761

5,706

Total current assets

324,066

268,301

277,904

PROPERTY, PLANT AND EQUIPMENT, at cost:

Land

21,673

21,704

21,710

Buildings

130,131

130,158

123,844

Machinery and equipment

446,487

446,777

421,233

Construction in progress

32,409

15,344

39,687

Operating lease right-of-use assets

4,746

7,419

7,617

635,446

621,402

614,091

Less - accumulated depreciation

424,600

412,496

407,765

Net property, plant and equipment

210,846

208,906

206,326

OTHER ASSETS:

Goodwill

73,237

73,237

73,237

Trademarks

175,024

175,024

175,024

Investments

241,308

291,175

280,326

Prepaid expenses and other assets

480

603

1,614

Deferred income taxes

1,394

1,372

1,010

Total other assets

491,443

541,411

531,211

Total assets

$

1,026,355

$

1,018,618

$

1,015,441

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

3

(in thousands except per share data) (Unaudited)

September 30, 2022

December 31, 2021

September 30, 2021

LIABILITIES AND SHAREHOLDERS’ EQUITY

CURRENT LIABILITIES:

Accounts payable

   

$

30,728

    

$

14,969

    

$

24,512

Bank loans

949

939

956

Dividends payable

6,200

6,042

6,042

Accrued liabilities

60,330

53,896

57,597

Postretirement health care benefits

616

616

544

Operating lease liabilities

833

1,072

1,102

Income taxes payable

1,863

2,434

3,884

Total current liabilities

101,519

79,968

94,637

NONCURRENT LIABILITIES:

Deferred income taxes

41,351

45,461

45,441

Postretirement health care benefits

12,609

12,619

12,971

Industrial development bonds

7,500

7,500

7,500

Liability for uncertain tax positions

3,540

3,415

3,177

Operating lease liabilities

3,936

6,347

6,515

Deferred compensation and other liabilities

72,577

94,511

88,684

Total noncurrent liabilities

141,513

169,853

164,288

TOOTSIE ROLL INDUSTRIES, INC. SHAREHOLDERS’ EQUITY:

Common stock, $.69-4/9 par value - 120,000 shares authorized; 40,294, 39,344 and 39,332, respectively, issued

27,982

27,322

27,314

Class B common stock, $.69-4/9 par value - 40,000 shares authorized; 28,622, 27,793 and 27,805, respectively, issued

19,877

19,300

19,309

Capital in excess of par value

743,084

709,880

709,880

Retained earnings

29,078

39,545

25,546

Accumulated other comprehensive loss

(34,428)

(25,013)

(23,295)

Treasury stock (at cost) - 99, 96 and 96 shares, respectively

(1,992)

(1,992)

(1,992)

Total Tootsie Roll Industries, Inc. shareholders’ equity

783,601

769,042

756,762

Noncontrolling interests

(278)

(245)

(246)

Total equity

783,323

768,797

756,516

Total liabilities and shareholders’ equity

$

1,026,355

$

1,018,618

$

1,015,441

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

4

TOOTSIE ROLL INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF

EARNINGS AND RETAINED EARNINGS

(in thousands except per share amounts) (Unaudited)

Quarter Ended

Year to Date Ended

September 30, 2022

September 30, 2021

September 30, 2022

September 30, 2021

Net product sales

   

$

211,888

    

$

183,090

    

$

493,260

     

$

399,445

Rental and royalty revenue

1,285

1,075

3,990

3,407

Total revenue

213,173

184,165

497,250

402,852

Product cost of goods sold

141,243

118,446

328,995

259,959

Rental and royalty cost

388

332

1,153

1,005

Total costs

141,631

118,778

330,148

260,964

Product gross margin

70,645

64,644

164,265

139,486

Rental and royalty gross margin

897

743

2,837

2,402

Total gross margin

71,542

65,387

167,102

141,888

Selling, marketing and administrative expenses

35,957

35,743

83,704

94,930

Earnings from operations

35,585

29,644

83,398

46,958

Other income (loss), net

(1,246)

1,750

(17,399)

11,810

Earnings before income taxes

34,339

31,394

65,999

58,768

Provision for income taxes

7,778

6,675

15,438

13,494

Net earnings

26,561

24,719

50,561

45,274

Less: net loss attributable to noncontrolling interests

(16)

(14)

(32)

(20)

Net earnings attributable to Tootsie Roll Industries, Inc.

$

26,577

$

24,733

$

50,593

$

45,294

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

$

0.39

$

0.36

$

0.73

$

0.65

Dividends per share *

$

0.09

$

0.09

$

0.27

$

0.27

Average number of shares outstanding

68,876

69,250

68,952

69,555

Retained earnings at beginning of period

$

8,692

$

6,846

$

39,545

$

32,312

Net earnings attributable to Tootsie Roll Industries, Inc.

26,577

24,733

50,593

45,294

Cash dividends

(6,191)

(6,033)

(18,426)

(18,027)

Stock dividends

-

-

(42,634)

(34,033)

Retained earnings at end of period

$

29,078

$

25,546

$

29,078

$

25,546

*Does not include 3% stock dividend to shareholders of record on 3/7/22 and 3/5/21.

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

5

TOOTSIE ROLL INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE EARNINGS

(in thousands except per share amounts) (Unaudited)

Quarter Ended

Year to Date Ended

September 30, 2022

September 30, 2021

September 30, 2022

September 30, 2021

Net earnings

   

$

26,561

    

$

24,719

    

$

50,561

    

$

45,274

Other comprehensive income (loss), before tax:

Foreign currency translation adjustments

120

(495)

583

(302)

Pension and postretirement reclassification adjustments:

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

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

(207)

(352)

(620)

(1,055)

Unrealized gains (losses) on postretirement and pension benefits

(207)

(352)

(620)

(1,055)

Investments:

Unrealized gains (losses) for the period on investments

(3,321)

(653)

(11,608)

(2,182)

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

(4)

(39)

(14)

(92)

Unrealized gains (losses) on investments

(3,325)

(692)

(11,622)

(2,274)

Derivatives:

Unrealized gains (losses) for the period on derivatives

(542)

307

(550)

1,624

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

(121)

(922)

(398)

(2,487)

Unrealized gains (losses) on derivatives

(663)

(615)

(948)

(863)

Total other comprehensive income (loss), before tax

(4,075)

(2,154)

(12,607)

(4,494)

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

1,015

400

3,192

1,014

Total comprehensive earnings

23,501

22,965

41,146

41,794

Comprehensive earnings (loss) attributable to noncontrolling interests

(16)

(14)

(32)

(20)

Total comprehensive earnings attributable to Tootsie Roll Industries, Inc.

$

23,517

$

22,979

$

41,178

$

41,814

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

6

TOOTSIE ROLL INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands) (Unaudited)

Year to Date Ended

September 30, 2022

September 30, 2021

CASH FLOWS FROM OPERATING ACTIVITIES:

Net earnings

   

$

50,561

    

$

45,274

Adjustments to reconcile net earnings to net cash provided by operating activities:

Depreciation

13,250

12,793

Deferred income taxes

(921)

(1,444)

Amortization of marketable security premiums

4,313

2,645

Changes in operating assets and liabilities:

Accounts receivable

(27,489)

(39,947)

Other receivables

(823)

(291)

Inventories

(34,012)

(12,440)

Prepaid expenses and other assets

5,886

3,980

Accounts payable and accrued liabilities

22,126

22,182

Income taxes payable

(446)

(83)

Postretirement health care benefits

(630)

(1,026)

Deferred compensation and other liabilities

(1,219)

510

Net cash provided by operating activities

30,596

32,153

CASH FLOWS FROM INVESTING ACTIVITIES:

Capital expenditures

(17,552)

(22,930)

Repayment of premiums on split dollar life insurance policies

2,514

Purchases of trading securities

(1,292)

(2,108)

Sales of trading securities

2,567

582

Purchase of available for sale securities

(75,125)

(87,060)

Sale and maturity of available for sale securities

38,439

34,510

Net cash used in investing activities

(52,963)

(74,492)

CASH FLOWS FROM FINANCING ACTIVITIES:

Shares purchased and retired

(8,024)

(30,184)

Dividends paid in cash

(18,438)

(18,100)

Proceeds from bank loans

3,240

2,970

Repayment of bank loans

(3,102)

(2,798)

Net cash used in financing activities

(26,324)

(48,112)

Effect of exchange rate changes on cash

13

(202)

Decrease in cash and cash equivalents

(48,678)

(90,653)

Cash, cash equivalents and restricted cash at beginning of year

106,226

167,256

Cash, cash equivalents and restricted cash at end of quarter

$

57,548

$

76,603

Supplemental cash flow information:

Income taxes paid/(received), net

$

15,580

$

15,237

Interest paid

$

36

$

5

Stock dividend issued

$

70,242

$

64,667

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

7

TOOTSIE ROLL INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2022

(in thousands except per share amounts) (Unaudited)

Note 1 — Significant Accounting Policies

General Information

The foregoing data has been prepared from the unaudited financial records of Tootsie Roll Industries, Inc. (the “Company”). In the opinion of Management, all adjustments, which are of a normal recurring nature, and necessary for a fair statement of the results for the interim period have been reflected. Certain amounts previously reported have been reclassified to conform to the current year presentation. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the related notes included in the Company’s Form 10-K for the year ended December 31, 2021 (the “2021 Form 10-K”).

Results of operations for the period ended September 30, 2022 are not necessarily indicative of results to be expected for the year to end December 31, 2022 because of the seasonal nature of the Company’s operations. Historically, the third quarter has been the Company’s largest net product sales quarter due to pre-Halloween net product sales.

On March 11, 2020, the World Health Organization designated the recent novel coronavirus ("COVID-19") as a global pandemic. The Company continues to actively monitor COVID-19 and its potential impact on our operations and financial results. The impact that COVID-19 will have on our consolidated financial statements throughout 2022 and beyond remains uncertain and ultimately will be dictated by the length and severity of the pandemic and Covid-19 variants, the pace of the “reopening” of the economy and economic recovery, and federal, state, local and foreign government actions taken in response. The effects of Covid-19 pandemic are unprecedented, and therefore the Company is unable to determine its effects on its net product sales and net earnings for the balance of 2022 and beyond.

Revenue Recognition

The Company’s revenues, primarily net product sales resulting from the sale of goods, reflect the consideration to which the Company expects to be entitled generally based on customer purchase orders. The Company records revenue based on a five-step model in accordance with Accounting Standards Codification ("ASC") Topic 606. Adjustments for estimated customer cash discounts upon payment, discounts for price adjustments, product returns, allowances, and certain advertising and promotional costs, including consumer coupons, are variable consideration and are recorded as a reduction of net product sales revenue in the same period the related net product sales are recorded. Such estimates are calculated using historical averages adjusted for any expected changes due to current business conditions and experience. A net product sale is recorded when the Company delivers the product to the customer or, in certain instances, when the customer picks up the goods at the Company’s distribution center and thereby obtains control of such product. Amounts billed and due from our customers are classified as accounts receivable trade on the balance sheet and require payment on a short-term basis. Accounts receivable trade are unsecured. Shipping and handling costs of $19,060 and $17,743 in third quarter 2022 and 2021, respectively, and $49,754 and $40,319 in nine months 2022 and 2021, respectively, are included in selling, marketing and administrative expenses. Royalty income from sales-based licensing arrangements, pursuant to which revenue is recognized as the third-party licensee sales occur,and rental income are not considered revenue from contracts from customers and are presented separately from net product revenue as rental and royalty revenue.

Leases

The Company identifies leases by evaluating its contracts to determine if the contract conveys the right to use an identified asset for a stated period of time in exchange for consideration. The Company considers whether it can control the underlying asset and have the right to obtain substantially all of the economic benefits or outputs from the asset. Leases with terms greater than 12 months are classified as either operating or finance leases at the commencement date.  For these leases, we record the present value of the minimum lease payments over the lease term as a lease liability with an offsetting right-of-use asset that is then presented net of any deferred rent or lease

8

incentives. The discount rate used to calculate the present value of the minimum lease payments is typically our incremental borrowing rate, as the rate implicit in the lease is generally not known or determinable. The lease term includes any noncancelable period for which the Company has the right to use the asset as well as any future periods to which the Company has the right and intent to extend the lease under the terms of the lease agreement. Currently, all capitalized leases are classified as operating leases and the Company records rental expense on a straight-line basis over the term of the lease.

Recently Adopted Accounting Pronouncements

As of the date of this report, there are no recent accounting pronouncements that have not yet been adopted that Management believes would have a material impact on the Company’s consolidated financial statements.

Note 2 — Average Shares Outstanding

The average number of shares outstanding for nine months 2022 reflects aggregate stock purchases of 230 shares for $8,024 and a 3% stock dividend of 2,006 shares distributed on April 8, 2022. The average number of shares outstanding for nine months 2021 reflects aggregate stock purchases of 921 shares for $30,184 and a 3% stock dividend of 1,970 shares distributed on April 2, 2021.

Note 3 — Income Taxes

The Company is subject to taxation in the U.S. and various state and foreign jurisdictions. The Company remains subject to examination by U.S. federal and state and foreign tax authorities for the years 2019 through 2021. The Company’s consolidated effective income tax rate was 22.7% and 21.3% in third quarter 2022 and 2021, respectively, and 23.4% and 23.0% in nine months 2022 and 2021, respectively.

9

NOTE 4—Share Capital and Capital In Excess of Par Value:

Capital in

 

Class B

Excess

 

Common Stock

Common Stock

Treasury Stock

of Par

 

    

Shares

    

Amount

    

Shares

    

Amount

    

Shares

    

Amount

    

Value

 

(000’s)

(000’s)

(000’s)

 

Balance at June 30, 2022

 

40,379

$

28,041

 

28,623

$

19,877

 

99

$

(1,992)

$

746,026

Issuance of 3% stock dividend

 

 

 

 

 

 

 

Conversion of Class B common shares to common shares

 

 

 

 

 

 

 

Purchase and retirement of common shares and other

 

(85)

 

(59)

 

(1)

 

 

 

 

(2,942)

Balance at September 30, 2022

 

40,294

$

27,982

 

28,622

$

19,877

 

99

$

(1,992)

$

743,084

Balance at June 30, 2021

 

39,700

$

27,569

 

27,821

$

19,320

 

96

$

(1,992)

$

722,617

Issuance of 3% stock dividend

 

 

 

 

 

 

 

Conversion of Class B common shares to common shares

 

16

 

11

 

(16)

 

(11)

 

 

 

Purchase and retirement of common shares and other

 

(384)

 

(266)

 

 

 

 

 

(12,737)

Balance at September 30, 2021

 

39,332

$

27,314

 

27,805

$

19,309

 

96

$

(1,992)

$

709,880

Balance at December 31, 2021

39,344

$

27,322

 

27,793

$

19,300

 

96

$

(1,992)

$

709,880

Issuance of 3% stock dividend

 

1,176

817

 

833

579

 

3

41,068

Conversion of Class B common shares to common shares

 

4

 

3

 

(4)

 

(3)

 

 

 

Purchase and retirement of common shares and other

 

(230)

 

(160)

 

 

1

 

 

 

(7,864)

Balance at September 30, 2022

 

40,294

$

27,982

 

28,622

$

19,877

 

99

$

(1,992)

$

743,084

Balance at December 31, 2020

39,073

$

27,134

 

27,012

$

18,758

 

93

$

(1,992)

$

706,930

Issuance of 3% stock dividend

 

1,163

808

 

809

562

 

3

32,495

Conversion of Class B common shares to common shares

 

16

 

11

 

(16)

 

(11)

 

 

 

Purchase and retirement of common shares and other

 

(920)

 

(639)

 

 

 

 

 

(29,545)

Balance at September 30, 2021

 

39,332

$

27,314

 

27,805

$

19,309

 

96

$

(1,992)

$

709,880

Note 5 — Fair Value Measurements

Current accounting guidance defines fair value as the price that would be received on the sale of an asset, or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Guidance requires disclosure of the extent to which fair value is used to measure financial assets and liabilities, the inputs utilized in calculating valuation measurements, and the effect of the measurement of significant unobservable inputs on earnings, or changes in net assets, as of the measurement date. Guidance establishes a three-level valuation hierarchy based upon the transparency of inputs utilized in the measurement and valuation of financial assets or liabilities as of the measurement date. Level 1 inputs include quoted prices for identical instruments and are the most observable. Level 2 inputs include quoted prices for similar assets and observable inputs such as interest rates, foreign currency exchange rates, commodity rates and yield curves. Level 3 inputs are not observable in the market and include Management’s own judgments about the assumptions market participants would use in pricing the asset or liability. The use of observable and unobservable inputs is reflected in the hierarchy assessment disclosed in the table below.

10

As of September 30, 2022, December 31, 2021 and September 30, 2021, the Company held certain financial assets that are required to be measured at fair value on a recurring basis. These included derivative hedging instruments related to the purchase of certain raw materials and foreign currencies, investments in trading securities and available for sale securities. The Company’s available for sale securities principally consist of corporate bonds.

The fair value of the Company’s industrial revenue development bonds at September 30, 2022, December 31, 2021 and September 30, 2021 were valued using Level 2 inputs which approximates the carrying value of $7,500 for the respective periods. Interest rates on these bonds are reset weekly based on current market conditions.

11

The following table presents information about the Company’s financial assets and liabilities measured at fair value as of September 30, 2022, December 31, 2021 and September 30, 2021 and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value:

Estimated Fair Value September 30, 2022

Total

Input Levels Used

Fair Value

Level 1

Level 2

Level 3

Cash and cash equivalents

   

$

57,216

    

$

57,216

    

$

    

$

Available for sale securities

262,159

742

261,417

Foreign currency forward contracts

(366)

(366)

Commodity futures contracts

(31)

(31)

Trading securities

67,659

52,900

14,759

Total assets measured at fair value

$

386,637

$

110,827

$

275,810

$

Estimated Fair Value December 31, 2021

Total

Input Levels Used

Fair Value

Level 1

Level 2

Level 3

Cash and cash equivalents

   

$

105,840

    

$

105,840

    

$

-

    

$

Available for sale securities

241,407

 

1,282

 

240,125

Foreign currency forward contracts

426

 

 

426

Commodity futures contracts

124

 

124

 

Trading securities

89,736

 

76,196

 

13,540

Total assets measured at fair value

$

437,533

$

183,442

$

254,091

$

Estimated Fair Value September 30, 2021

Total

Input Levels Used

Fair Value

Level 1

Level 2

Level 3

Cash and cash equivalents

   

$

76,210

    

$

76,210

    

$

-

    

$

Available for sale securities

235,912

2,313

233,599

Foreign currency forward contracts

504

504

Commodity futures contracts

352

352

Trading securities

83,905

70,762

13,143

Total assets measured at fair value

$

396,883

$

149,637

$

247,246

$

Note 6 — Derivative Instruments and Hedging Activities

From time to time, the Company uses derivative instruments, including foreign currency forward contracts and commodity futures contracts to manage its exposures to foreign exchange and commodity prices. Commodity futures contracts are intended and effective as hedges of market price risks associated with the anticipated purchase of certain raw materials (primarily sugar). Foreign currency forward contracts are intended and effective as hedges of the Company’s exposure to the variability of cash flows, primarily related to the foreign exchange rate changes of products manufactured in Canada and sold in the United States, and periodic equipment purchases from foreign suppliers denominated in a foreign currency. The Company does not engage in trading or other speculative use of derivative instruments.

The Company recognizes all derivative instruments as either assets or liabilities at fair value in the Condensed Consolidated Statement of Financial Position. Derivative assets are recorded in other receivables and derivative liabilities are recorded in accrued liabilities. The Company uses hedge accounting for its foreign currency and commodity derivative instruments as discussed above. Derivatives that qualify for hedge accounting are designated as cash flow hedges by formally documenting the hedge relationships, including identification of the hedging instruments, the hedged items and other critical terms, as well as the Company’s risk management objectives and strategies for undertaking the hedge transaction.

12

Changes in the fair value of the Company’s cash flow hedges are recorded in accumulated other comprehensive loss, net of tax, and are reclassified to earnings in the periods in which earnings are affected by the hedged item. Substantially all amounts reported in accumulated other comprehensive loss for commodity derivatives are expected to be reclassified to cost of goods sold. Approximately $31 of this accumulated comprehensive loss is expected to be reclassified to earnings in 2023. Approximately $41 and $325 reported in accumulated other comprehensive loss for foreign currency derivatives are expected to be reclassified to other income, net in 2022 and 2023, respectively.  

The following table summarizes the Company’s outstanding derivative contracts and their effects on its Condensed Consolidated Statements of Financial Position at September 30, 2022, December 31, 2021 and September 30, 2021:

September 30, 2022

Notional

    

    

    

    

Amounts

Assets

Liabilities

Derivatives designated as hedging instruments:

Foreign currency forward contracts

$

6,782

$

26

$

(392)

Commodity futures contracts

1,009

1

(32)

Total derivatives

$

27

$

(424)

December 31, 2021

Notional

    

    

    

    

Amounts

Assets

Liabilities

Derivatives designated as hedging instruments:

Foreign currency forward contracts

$

6,729

$

426

$

Commodity futures contracts

6,012

 

231

 

(107)

Total derivatives

$

657

$

(107)

September 30, 2021

Notional

    

    

    

    

Amounts

Assets

Liabilities

Derivatives designated as hedging instruments:

Foreign currency forward contracts

$

3,995

$

504

$

Commodity futures contracts

2,730

352

Total derivatives

$

856

$

13

The effects of derivative instruments on the Company’s Condensed Consolidated Statements of Earnings and Retained Earnings and the Condensed Consolidated Statements of Comprehensive Earnings for periods ended September 30, 2022 and September 30, 2021 are as follows:

For Quarter Ended September 30, 2022

    

    

    

    

Gain (Loss)

Gain (Loss)

on Amount Excluded

Gain (Loss)

Reclassified from

from Effectiveness

Recognized

Accumulated OCI

Testing Recognized

in OCI

into Earnings

in Earnings

Foreign currency forward contracts

$

(483)

$

48

$

Commodity futures contracts

(59)

73

Total

$

(542)

$

121

$

For Quarter Ended September 30, 2021

    

    

    

    

Gain (Loss)

Gain (Loss)

on Amount Excluded

Gain (Loss)

Reclassified from

from Effectiveness

Recognized

Accumulated OCI

Testing Recognized

in OCI

into Earnings

in Earnings

Foreign currency forward contracts

$

(107)

$

106

$

Commodity futures contracts

414

816

Total

$

307

$

922

$

For Year to Date Ended September 30, 2022

    

    

    

    

Gain (Loss)

Gain (Loss)

on Amount Excluded

Gain (Loss)

Reclassified from

from Effectiveness

Recognized

Accumulated OCI

Testing Recognized

in OCI

into Earnings

in Earnings

Foreign currency forward contracts

$

(556)

$

236

$

Commodity futures contracts

6

162

Total

$

(550)

$

398

$

For Year to Date Ended September 30, 2021

    

    

    

    

Gain (Loss)

Gain (Loss)

on Amount Excluded

Gain (Loss)

Reclassified from

from Effectiveness

Recognized

Accumulated OCI

Testing Recognized

in OCI

into Earnings

in Earnings

Foreign currency forward contracts

$

66

$

340

$

Commodity futures contracts

1,558

2,147

Total

$

1,624

$

2,487

$

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Note 7 — Pension Plans

Beginning in 2012, the Company received periodic notices from the Bakery and Confectionery Union and Industry International Pension Fund (Plan), a multi-employer defined benefit pension plan for certain Company union employees, that the Plan’s actuary certified the Plan to be in “critical status”, as defined by the Pension Protection Act (PPA) and the Pension Benefit Guaranty Corporation (PBGC); and that a plan of rehabilitation was adopted by the trustees of the Plan in 2012. Beginning in 2015, the Plan was reclassified to “critical and declining status”, as defined by the PPA and PBGC, for the plan year beginning January 1, 2015. A designation of “critical and declining status” implies that the Plan is expected to become insolvent in the next 20 years. In 2016, the Company received new notices that the Plan’s trustees adopted an updated Rehabilitation Plan effective January 1, 2016, and all annual notices through 2021 have continued to classify the Plan in the “critical and declining status” category.

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. 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 amended rehabilitation plan, which continues, requires that employer contributions include 5% compounded annual surcharge increases each year for an unspecified period of time beginning January 2013 (in addition to the 5% interim surcharge initiated in 2012) as well as certain plan benefit reductions. In fourth quarter 2020, the Plan Trustees advised the Company that the surcharges would no longer increase 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 consenting agreement by March 31, 2021. During first quarter 2021, the local bargaining union and the Company executed this agreement which resulted in the “freezing” of such surcharges as of December 31, 2020. The Company’s pension expense for this Plan for nine months 2022 and 2021 was $2,754 and $2,419, respectively. The aforementioned expense includes surcharges of $971 and $853 for nine months 2022 and 2021, respectively, as required under the amended plan of rehabilitation. The Company’s twelve months pension expense for this Plan for 2021 and 2020 was $3,156 and $2,866, respectively, which includes surcharges of $1,112 and $1,010, respectively.

The Company is currently unable to determine the ultimate outcome of the above discussed 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 amended rehabilitation plan could be material to its consolidated results of operations or cash flows in one or more future periods.

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