This financial review discusses the Company's financial condition, results of
operations, liquidity and capital resources and other matters. Dollars are
presented in thousands, except per share amounts. This review should be read in
conjunction with the accompanying Condensed Consolidated Financial Statements
and related notes included in this Form 10-Q and with the Company's Consolidated
Financial Statements and related notes and Management's
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Discussion and Analysis of Financial Condition and Results of Operations
included in the Company's Form 10-K for the year ended December 31, 2020 (the
"2020 Form 10-K").
Net product sales were $183,090 in third quarter 2021 compared to $156,962 in
third quarter 2020, an increase of $26,128 or 16.6%. Nine months 2021 net
product sales were $399,445 compared to $339,561 in nine months 2020, an
increase of $59,884 or 17.6%. Domestic (U.S.) net product sales in third quarter
and nine months 2021 increased 13.7% and 14.6%, respectively, compared to the
corresponding period in the prior year, and, foreign net product sales,
including exports to foreign markets, increased 64.8% and 61.8%, respectively,
compared to the corresponding periods in the prior year. For the third quarter
and nine months 2021, domestic sales represented 91.8% and 91.3%, respectively,
of total consolidated net product sales.
Third quarter sales reflect effective sales and marketing programs as the
economy continues to recover and "re-open" from the adverse effects of the
Covid-19 pandemic. The Covid-19 pandemic curtailed and limited access to certain
channels of trade where the Company has historically sold its products. Response
to this pandemic resulted in the disruption and changes in lifestyles and
shopping habits which has adversely affected planned consumer purchases of the
Company's products for "sharing" and "give away" occasions. As the effects of
the pandemic subsided throughout nine months 2021, the Company had continuing
improvement in customer orders and sales. Third quarter 2021 sales also exceeded
third quarter 2019 sales by 0.6% which provides a quarterly sales comparison
prior to the pandemic, and nine months 2021 sales were 2.7% ahead of nine months
2019 sales.
Product cost of goods sold were $118,446 in third quarter 2021 compared to
$99,187 in third quarter 2020, and nine months 2021 product cost of goods sold
were $259,959 compared to $216,009 in nine months 2020. Product cost of goods
sold includes $(5) and $225 of certain deferred compensation expenses (credits)
in third quarter 2021 and 2020, respectively, and $411 and $245 of certain
deferred compensation expenses in nine months 2021 and 2020, respectively. These
deferred compensation expenses (credits) principally result from the changes in
the market value of investments and investment income from trading securities
relating to compensation deferred in previous years and are not reflective of
current operating results. Adjusting for the aforementioned, product cost of
goods sold increased from $98,962 in third quarter 2020 to $118,451 in third
quarter 2021, an increase of $19,489 or 19.7%; and increased from $215,764 in
nine months 2020 to $259,548 in nine months 2021, an increase of $43,784 or
20.3%. As a percentage of net product sales, adjusted product cost of goods sold
was 64.7% and 63.0% in third quarter 2021 and 2020, respectively, an unfavorable
increase of 1.7 percentage points; and adjusted product cost of goods sold was
65.0% and 63.5% in nine months 2021 and 2020, respectively, an unfavorable
increase of 1.5 percentage points. Third quarter and nine months 2021 adjusted
product cost of goods sold as a percentage of sales were adversely affected by
increasing costs for ingredients, packaging materials, and certain manufacturing
supplies. These increased costs and expenses were more pronounced in third
quarter 2021, and we expect these costs to remain at elevated levels for the
balance of the year and into 2022. Third quarter product costs of goods sold
were also adversely affected by higher than expected sales demand coupled with
supply chain challenges, including longer lead times and delays in supplier
deliveries, which resulted in additional costs related to our efforts to meet
this higher demand. Such higher costs include additional overtime and the
scheduling of additional production days and shifts at our manufacturing plants
to meet this higher demand.
Certain cost and expense reductions, which include Company initiatives to reduce
costs, mitigated some of the cost increase in adjusted product cost of goods
sold in third quarter and nine months 2021 compared to the corresponding periods
in the prior year. The Company is focused on the longer term and therefore is
continuing to make investments in plant manufacturing operations to meet new
consumer and customer demands, achieve product quality improvements, increase
operational efficiencies and provide value to consumers.
Selling, marketing and administrative expenses were $35,743 in third quarter
2021 compared to $32,868 in third quarter 2020, and nine months 2021 selling,
marketing and administrative expenses were $94,930 compared to $78,699 in nine
months 2020. Selling, marketing and administrative expenses include $(103) and
$4,622 of certain deferred compensation expenses (credits) in third quarter 2021
and 2020, respectively, and $8,141 and $4,645 of certain deferred compensation
expenses in nine months 2021 and 2020, respectively. As discussed above, these
expenses (credits) principally result from changes in the market value of
investments and investment income from trading securities relating to
compensation deferred in previous years, and are not reflective of current
operating results. Adjusting for the aforementioned deferred compensation
expenses (credits), selling, marketing and administrative expenses increased
from $28,246 in third quarter 2020 to $35,846 in third quarter 2021, an increase
of
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$7,600 or 26.9%; and selling, marketing and administrative expenses increased
from $74,054 in nine months 2020 to $86,789 in nine months 2021 an increase of
$12,735 or 17.2%. As a percentage of net product sales, adjusted selling,
marketing and administrative expenses increased from 18.0% in third quarter 2020
to 19.6% in third quarter 2021, an unfavorable increase of 1.6 percentage points
as a percent of net product sales, and adjusted selling, marketing and
administrative expenses decreased from 21.8% in nine months 2020 to 21.7% in
nine months 2021, a favorable decrease of 0.1 percentage points as a percent of
net sales. The decrease in adjusted selling, marketing and administrative
expenses as a percentage of net product sales in nine months 2021 reflects the
benefits of certain operational changes and expense reduction initiatives.
Selling, marketing and administrative expenses include $17,743 and $12,356 for
customer freight, delivery and warehousing expenses in third quarter 2021 and
2020, respectively, an increase of $5,387 or 43.6%, and $40,319 and $31,425 in
nine months 2021 and 2020, respectively, an increase of $8,894 or 28.3%. These
expenses were 9.7% and 7.9% of net product sales in third quarter 2021 and 2020,
respectively, and were 10.1% and 9.3% of net product sales in nine months 2021
and 2020, respectively. The aforementioned increase in third quarter and nine
months 2021 reflects increasing costs for over-the-road carriers relating to
customer freight and delivery, including higher diesel fuel prices which are
passed on to us in higher fuel surcharges. We expect these higher freight and
delivery costs to continue through the balance of 2021 and may increase further
in 2022.
Earnings from operations were $29,644 in third quarter 2021 compared to $25,529
in third quarter 2020, and were $46,958 in nine months 2021 compared to $46,766
in nine months 2020. Earnings from operations include $(108) and $4,847 of
certain deferred compensation expenses (credits) in third quarter 2021 and 2020,
respectively, and include $8,552 and $4,890 of certain deferred compensation
expenses in nine months 2021 and 2020, respectively, which are discussed above.
Adjusting for these deferred compensation costs and expenses (credits), adjusted
earnings from operations were $29,536 and $30,376 in third quarter 2021 and
2020, respectively, a decrease of $840 or 2.8%; and adjusted operating earnings
were $55,510 and $51,656 in nine months 2021 and 2020, respectively, an increase
of $3,854 or 7.5%. 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. Although the LIFO method generally provides
higher current income tax benefits, this acceleration of increasing costs does
adversely impact reported results until such time as costs stabilize or
decrease.
The Company's input costs continued to escalate in third 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 key
ingredients, packaging materials and energy costs, including the adverse effects
of higher energy costs on freight and delivery fuel surcharges and plant
manufacturing utilities. We expect these higher costs and resulting overall
increases in inflation, some of which is driven by supply chain challenges, to
continue through 2022. In response to these higher input costs, the
confectionary industry, as well as many companies in the broader consumer
products industry, has announced increases in selling prices with the objective
of restoring some of the resulting margin declines, and we have followed with
price increases as well. These price increases will be phased in primarily
during fourth quarter 2021 and the beginning of 2022. Although the Company
continues to monitor these higher 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 percentage of net product sales, these adjusted operating earnings were
16.1% and 19.4% in third quarter 2021 and 2020, respectively, an unfavorable
decrease of 3.3 percentage points; and as a percentage of net product sales,
these adjusted operating earnings were 13.9% and 15.2% in nine months 2021 and
2020, respectively, an unfavorable decrease of 1.3 percentage points as a
percentage of net product sales. Although higher third quarter and nine months
2021 sales contributed to improved operating earnings compared to the
corresponding prior year periods, higher input costs mitigated much of the
benefits of increased sales. The Company's increasing input costs, supply chain
challenges and disruptions, and increased costs to meet higher than expected
demand as discussed above, were the principal drivers of lower adjusted
operating earnings in third quarter 2021.
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 $1,750 in third quarter 2021 compared to $5,863 in third
quarter 2020, and $11,810 in nine months 2021 compared to $10,096 in nine months
2020. Other income, net for third quarter 2021 and 2020 includes net gains
(losses) and investment income of $(108) and $4,847, respectively, on trading
securities which provide an economic hedge of the Company's deferred
compensation liabilities; and other income, net for nine months 2021 and 2020
includes net gains and investment income of $8,552 and $4,890, respectively, on
trading securities which provide an economic hedge of the Company's deferred
compensation liabilities. These changes in market values were substantially
offset by a like amount of deferred compensation expense included in product
cost of goods sold and selling, marketing, and administrative expenses in the
respective periods as discussed above. Other income, net for third quarter 2021
and 2020 includes investment income on available for sale securities of $714 and
$950 in 2021 and 2020, respectively; and other income, net for nine months 2021
and 2020 includes investment income on available for sale securities of $2,100
and $3,051 in 2021 and 2020, respectively. Other income, net also includes
pre-tax gain (loss) on foreign exchange of $742 and $(222) in third quarter 2021
and 2020, respectively, and $507 and $1,440 in nine months 2021 and 2020,
respectively.
The consolidated effective tax rates were 21.3% and 21.4% in third quarter 2021
and 2020, respectively, and 23.0% and 22.6% in nine months 2021 and 2020,
respectively. The Company's deferred income taxes at September 30, 2021 include
approximately $32,000 of U.S. federal deferred income tax liabilities. Should
certain proposed U.S. legislation to increase corporate income taxes become law,
the Company would record non-cash charge to earnings to reflect the tax effect
of higher federal corporate income taxes on its deferred income tax liability
effective as of the date that such legislation becomes law.
Net earnings attributable to Tootsie Roll Industries, Inc. were $24,733 (after
$14 net loss attributed to non-controlling interests) in third quarter 2021
compared to $24,673 (after $10 net loss attributed to non-controlling interests)
in third quarter 2020, and earnings per share were $0.37 and $0.36 in third
quarter 2021 and 2020, respectively, an increase of $0.01 per share, or 2.7%.
Nine months 2021 net earnings attributable to Tootsie Roll Industries, Inc. were
$45,294 (after $20 net loss attributed to non-controlling interests) compared to
nine months 2020 net earnings of $44,043 (after $22 net loss attributed to
non-controlling interests), and net earnings per share were $0.67 and $0.64 in
nine months 2021 and nine months 2020, respectively, an increase of $0.03 per
share or 4.7%. Earnings per share attributable to Tootsie Roll Industries, Inc.
for third quarter and nine months 2021 benefited from the reduction in average
shares outstanding resulting from purchases in the open market by the Company of
its common stock. Average shares outstanding decreased from 68,393 at third
quarter 2020 to 67,244 at third quarter 2021, and from 68,627 in nine months
2020 to 67,549 in nine months 2021.
Goodwill and intangibles, principally trademarks, are assessed annually as of
December 31 or whenever events or circumstances indicate that the carrying
values may not be recoverable from future cash flows. The Company has not
identified any triggering events, as defined, or other adverse information that
would indicate a material impairment of its goodwill or intangibles in nine
months 2021. The Company's trademarks have indefinite lives and Company
management believes that any adverse effects of the Covid-19 pandemic on net
product sales are temporary and do not significantly affect our business model
and long-term strategy. Therefore, we do not consider COVID-19 to be a
triggering event to accelerate our annual impairments testing. There were no
impairments in the comparative nine months 2020 period or in calendar year 2020.
Although Company management has not identified any trigging events at this time
relating to its intangibles, the ultimate effects of the Covid-19 pandemic,
including possible longer term effects on consumer lifestyles and behavior,
could change this assessment in the future, as outlined in the Company's risk
factors discussed on Form 10-K for the year ended December 31, 2020.
Beginning in 2012, the Company received periodic notices from the Bakery,
Confectionery, Tobacco Workers and Grain Millers International Union Pension
Plan (Plan), a multi-employer defined benefit pension plan for certain Company
union employees, that the Plan's actuary certified the Plan to be in "critical
status", as defined by the Pension Protection Act (PPA) and the Pension Benefit
Guaranty Corporation (PBGC); and that a plan of rehabilitation was adopted by
the trustees of the Plan in 2012. Beginning in 2015, the Company received new
annual notices that the Plan was reclassified 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) 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
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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%, 50.4%, and
51.6% as of the most recent valuation dates available, January 1, 2020, 2019,
and 2018, respectively (these valuation dates are as of the beginning of each
Plan year). These funded percentages are based on actuarial values, as defined,
and do not reflect the actual market value of Plan investments as of these
dates. If the market value of investments had been used as of January 1, 2020,
the funded percentage would be 51.6% (not 48.3%). As of the January 1, 2020
valuation date (most recent valuation available), only 16% of Plan participants
were current active employees, 53% were retired or separated from service and
receiving benefits, and 31% were retired or separated from service and entitled
to future benefits. The number of current active employee Plan participants as
of January 1, 2020 fell 4% from the previous year and 17% over the past two
years. When compared to the Plan valuation date of January 1, 2011 (nine years
earlier), current active employee participants have declined 49%, whereas
participants who were retired or separated from service and receiving benefits
increased 4% and participants who were retired or separated from service and
entitled to future benefits increased 12%.
The Company has been advised that its withdrawal liability would have been
$99,300, $99,800 and $81,600 if it had withdrawn from the Plan during 2020, 2019
and 2018, respectively. The Company's relative share of the Plan's contribution
base, driven by employer withdrawals, has increased for the last several years,
and management believes that this trend could continue indefinitely which will
continue to add upward pressure on the Company's withdrawal liability. In
addition, the overall reduction in interest rates in 2020, may increase the
value of vested benefits and may increase the Company's withdrawal liability for
2021.
Based on the Company's updated actuarial study and certain provisions in ERISA
and the law relating to withdrawal liability payments, management believes that
the Company's liability would likely be limited to twenty annual payments of
$2,958 which have a present value in the range of $34,700 to $49,300 depending
on the interest rate used to discount these payments. While the Company's
actuarial consultant does not believe that the Plan will suffer a future mass
withdrawal (as defined in the Plan) of participating employers, in the event of
a mass withdrawal, the Company's annual withdrawal payments would theoretically
be payable in perpetuity. Based on the Company's updated actuarial study, the
present value of such perpetuities is in the range of $48,500 to $150,900 and
would apply in the unlikely event that substantially all employers withdraw from
the Plan. The aforementioned is based on a range of valuations and interest
rates, which the Company's actuary has advised is provided under the statute.
Should the Company actually withdraw from the Plan at a future date, a higher
withdrawal liability than the above discussed amounts, could be payable to the
Plan.
The Company and the union concluded a new labor contract in 2018 which requires
the Company's continued participation in this Plan through September 2022. The
amended rehabilitation plan, which also continues, required 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. 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 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 further concluded that additional 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.
During first quarter 2021, the local bargaining union and the Company executed
this agreement which resulted in the "freezing" of such surcharge rates as of
December 31, 2020.
The Company's pension expense for this Plan for nine months 2021 and 2020 was
$2,419 and $2,226, respectively ($2,866 and $2,961 for twelve months 2020 and
2019, respectively). The aforementioned expense includes surcharges
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(reflecting the "frozen" surcharge rate) of $853 and $785 for nine months 2021
and 2020, respectively ($1,010 and $948 for twelve months 2020 and 2019,
respectively), as required under the amended plan of rehabilitation.
Company Management understands that the U.S. American Rescue Plan Act of 2021
legislation passed in first quarter 2021 provides financial assistance to shore
up struggling multi-employer plans and forestall insolvency through 2051 for
plans in "critical and declining status". The Company continues to study this
legislation with its consulting actuary to determine its effects on the Plan and
Company withdrawal liability. This is a complex area, however, based on an
initial assessment by the Company's actuary, the Company does not believe that
this legislation will result in a material reduction in its withdrawal
liability. Nonetheless, the Company is currently unable to determine the
ultimate outcome of the above discussed multi-employer union pension matter and
therefore is unable to determine the effects on its consolidated financial
statements, but the ultimate outcome could be material to its consolidated
results of operations or cash flows in one or more future periods. See also Note
7 in the Company's Consolidated Financial Statements on Form 10-K for the year
ended December 31, 2020.
The Company continues to actively monitor Covid-19, including existing and
developing variants, and its potential impact on our operations and financial
results, prioritizing employee health and safety. Because the Company has a
sizable investment in marketable securities (see Liquidity and Capital Resources
section above), the Company continues to be well positioned financially to
respond to any further adverse effects of this pandemic, and Covid-19 variants,
in the short and intermediate-terms, as well as for a longer period of time if
necessary.
LIQUIDITY AND CAPITAL RESOURCES
Net cash flows provided by operating activities were $32,153 and $24,088 in nine
months 2021 and 2020, respectively, a favorable increase of $8,065. Nine months
2021 cash flows from operating activities principally benefited from higher net
earnings and changes in accounts payable and accrued liabilities, and deferred
compensation and other liabilities in the comparative periods. The
aforementioned increases were partially offset by changes in accounts receivable
reflecting the timing of net product sales and collections of accounts
receivable trade, and changes in income taxes payable, including estimated tax
payments in the comparative periods.
Net cash used in investing activities was $74,492 in nine months 2021 compared
to $12,117 in nine months 2020. Cash flows used in investing activities reflect
$87,060 and $82,862 of purchases of available for sale securities during nine
months 2021 and 2020, respectively, and $34,510 and $67,215 of sales and
maturities of available for sale securities during nine months 2021 and 2020,
respectively. Nine months 2021 and 2020 investing activities include capital
expenditures of $22,930 and $11,425, respectively. The Company has committed
approximately $25,000 to a rehabilitation upgrade and expansion of one of its
manufacturing plants in the U.S. The Company spent approximately $14,000, $6,000
and $3,000 in 2021, 2020 and 2019, respectively, on the aforementioned project.
Company management expects future cash outlays for this project to approximate
$1,000 during the remainder of 2021 and $1,000 in 2022. All capital expenditures
are to be funded from the Company's cash flow from operations and internal
sources including available for sale securities.
The Company's consolidated financial statements include bank borrowings of $956
and $933 at September 30, 2021 and 2020, respectively, all of which relates to
its Spanish subsidiary. The Company had no other outstanding bank borrowings at
September 30, 2021.
Financing activities include Company common stock purchases and retirements of
$30,184 and $23,505 in nine months 2021 and 2020, respectively. Cash dividends
of $18,100 and $17,850 were paid in nine months 2021 and 2020, respectively.
The Company's current ratio (current assets divided by current liabilities) was
2.9 to 1 at September 30, 2021 compared to 4.6 to 1 at December 31, 2020 and 4.4
to 1 at September 30, 2020. Net working capital was $183,267 at September 30,
2021 compared to $250,851 and $236,718 at December 31, 2020 and September 30,
2020, respectively. The aforementioned net working capital amounts are
principally reflected in aggregate cash and cash equivalents and short-term
investments of $115,701 at September 30, 2021 compared to $208,931 and $166,529
at December 31, 2020 and September 30, 2020, respectively. In addition, long
term investments, principally debt securities comprising corporate bonds, were
$280,326 at September 30, 2021, as compared to $220,020 and $201,698 at December
31, 2020 and September 30, 2020, respectively. Aggregate cash and cash
equivalents and short and long-term investments were
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$396,027, $428,951, and $368,227, at September 30, 2021, December 31, 2020 and
September 30, 2020, respectively. The aforementioned includes $83,905, $73,828,
and $66,120 at September 30, 2021, December 31, 2020 and September 30, 2020,
respectively, relating to trading securities which are used as an economic hedge
for the Company's deferred compensation liabilities. Investments in available
for sale securities, primarily high quality corporate bonds, that matured during
nine months 2021 and 2020 were generally used to purchase the Company's common
stock or were replaced with debt securities of similar maturities.
The Company periodically contributes to a VEBA trust, managed and controlled by
the Company, to fund the estimated future costs of certain employee health,
welfare and other benefits. The Company is currently using these VEBA funds to
pay the actual cost of such benefits through most of 2022. The VEBA trust held
$5,308, $8,272 and $9,826 of aggregate cash and cash equivalents at September
30, 2021, December 31, 2020 and September 30, 2020, respectively. This asset
value is included in prepaid expenses and long-term other assets in the
Company's Consolidated Statement of Financial Position. These assets are
categorized as Level 2 within the fair value hierarchy.
ACCOUNTING PRONOUNCEMENTS
See Note 1 of the Company's Condensed Consolidated Financial Statements.
FORWARD-LOOKING STATEMENTS
This discussion and certain other sections contain forward-looking statements
that are based largely on the Company's current expectations and are made
pursuant to the safe harbor provision of the Private Securities Litigation
Reform Act of 1995. Forward-looking statements can be identified by the use of
words such as "anticipated," "believe," "expect," "intend," "estimate,"
"project," "plan" 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. Such factors, risks, trends and uncertainties, which
in some instances are beyond the Company's control, include the overall
competitive environment in the Company's industry, changes in assumptions and
judgments discussed above under the heading "Significant Accounting Policies and
Estimates," and factors identified and referred to above under the heading "Risk
Factors" in this report and under the heading "Risk Factors" in the Company's
2020 Form 10-K.
The risk factors identified and referred to above, including the effects of the
Covid-19 pandemic and variants, are believed to be significant factors, but not
necessarily all of the significant factors that could cause actual results to
differ from those expressed in any forward-looking statement. Readers are
cautioned not to place undue reliance on such forward-looking statements, which
are made only as of the date of this report. The Company undertakes no
obligation to update such forward-looking statements.
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