TOOTSIE ROLL INDUSTRIES INC - Quarter Report: 2010 July (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended JULY 3, 2010

 

OR

 

o         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)

 

 

 

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 x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files) Yes x  No o

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 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 o  No x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date (July 3, 2010)

 

 

 

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TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES

 

JULY 3, 2010

 

INDEX

 

		Page No.
Part I —	Financial Information
Item 1.	Financial Statements:
	Condensed Consolidated Statements of Financial Position	2-2A
	Condensed Consolidated Statements of Earnings, Comprehensive Earnings and Retained Earnings	3-3A
	Condensed Consolidated Statements of Cash Flows	4
	Notes to Condensed Consolidated Financial Statements	5-5E
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	6-6E
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	6E
Item 4.	Controls and Procedures	6F
Part II —	Other Information
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	7
Item 6.	Exhibits	7A
Signatures		7A
Certifications		7B-D

 

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.

 

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PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

(in thousands of dollars)       (UNAUDITED)

 

		July 3,			July 4,			Dec. 31,
		2010			2009			2009
ASSETS
CURRENT ASSETS
Cash & cash equivalents		$	60,006		$	33,149		$	90,990
Investments		7,082			15,854			8,663
Trade accounts receivable,
Less allowances of $1,879, $2,202 & $2,356		23,566			28,191			37,512
Other receivables		7,471			4,028			8,397
Inventories, at cost
Finished goods & work in process		71,604			63,218			35,570
Raw material & supplies		34,055			26,605			20,817
Prepaid expenses		8,001			8,139			8,562
Deferred income taxes		1,367			—			1,367
Total current assets		213,152			179,184			211,878
PROPERTY, PLANT & EQUIPMENT, at cost
Land		21,570			19,323			21,559
Buildings		102,395			89,130			102,374
Machinery & equipment		297,919			280,316			296,787
Construction in progress		12,624			32,582			6,877
		434,508			421,351			427,597
Less-accumulated depreciation		216,129			198,102			206,876
Net property, plant and equipment		218,379			223,249			220,721
OTHER ASSETS
Goodwill		73,237			73,237			73,237
Trademarks		175,024			189,024			175,024
Investments		61,721			49,488			58,136
Split dollar life insurance		74,638			74,808			74,642
Prepaid expenses		6,444			9,994			8,068
Investment in joint venture		3,930			9,286			4,961
Deferred income taxes		11,580			—			11,580
Total other assets		406,574			405,837			405,648
Total assets		$	838,105		$	808,270		$	838,247

 

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

 

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(in thousands except per share data)      (UNAUDITED)

 

		July 3,			July 4,			Dec. 31,
		2010			2009			2009
LIABILITIES AND SHAREHOLDERS’ EQUITY CURRENT LIABILITIES
Accounts payable		$	13,671		$	12,501		$	9,140
Dividends payable		4,560			4,498			4,458
Accrued liabilities		44,292			36,703			42,468
Deferred income taxes		—			631			—
Total current liabilities		62,523			54,333			56,066
NONCURRENT LIABILITIES
Deferred income taxes		42,842			44,031			44,582
Postretirement health care and life insurance benefits		17,489			16,208			16,674
Industrial development bonds		7,500			7,500			7,500
Liability for uncertain tax positions		20,444			19,623			21,101
Deferred compensation and other liabilities		39,217			33,983			39,839
Total noncurrent liabilities		127,492			121,345			129,696
SHAREHOLDERS’ EQUITY
Common Stock, $.69-4/9 par value- 120,000 shares authorized; 36,517, 36,100 & 35,802, respectively, issued		25,358			25,069			24,862
Class B common stock, $.69-4/9 par value- 40,000 shares authorized; 20,488, 19,927 & 19,919, respectively, issued		14,228			13,838			13,833
Capital in excess of par value		518,013			489,107			482,250
Retained earnings		107,671			120,018			145,928
Accumulated other comprehensive loss		(15,188		)	(13,448		)	(12,396		)
Treasury stock (at cost)- 69, 67 & 67 shares, respectively		(1,992		)	(1,992		)	(1,992		)
Total shareholders’ equity		648,090			632,592			652,485
Total liabilities and shareholders’ equity		$	838,105		$	808,270		$	838,247

 

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

 

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TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF

EARNINGS, COMPREHENSIVE EARNINGS AND RETAINED EARNINGS

(in thousands except per share amounts)       (UNAUDITED)

 

		13 WEEKS ENDED
		July 3, 2010		&	July 4, 2009
Net product sales		$	105,026		$	107,812
Rental and royalty revenue		997			860
Total revenue		106,023			108,672
Product cost of goods sold		69,360			68,807
Rental and royalty cost		254			211
Total costs		69,614			69,018
Product gross margin		35,666			39,005
Rental and royalty gross margin		743			649
Total gross margin		36,409			39,654
Selling, marketing and administrative expenses		22,544			25,728
Earnings from operations		13,865			13,926
Other income (loss), net		(2,058		)	1,821
Earnings before income taxes		11,807			15,747
Provision for income taxes		3,336			5,409
Net earnings		8,471			10,338
Other comprehensive income, before tax:
Foreign currency translation adjustments		(1,342		)	1,534
Unrealized gains (losses) on securities		273			(82		)
Unrealized gains (losses) on derivatives		(1,257		)	1,182
Other comprehensive income (loss), before tax		(2,326		)	2,634
Income tax benefit (expense) related to items of other comprehensive income		579			(550		)
Other comprehensive income (loss), net of tax		(1,747		)	2,084
Comprehensive earnings		$	6,724		$	12,422
Retained earnings at beginning of period		$	103,756		$	114,172
Net earnings		8,471			10,338
Cash dividends		(4,556		)	(4,492		)
Retained earnings at end of period		$	107,671		$	120,018
Net earnings per share		$	0.15		$	0.18
Dividends per share *		$	0.08		$	0.08
Average number of shares outstanding		57,105			57,910

 

*Does not include 3% stock dividend to shareholders of record on 3/09/10 and 3/10/09.

 

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

 

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TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF

EARNINGS, COMPREHENSIVE EARNINGS AND RETAINED EARNINGS

(in thousands except per share amounts)     (UNAUDITED)

 

		26 WEEKS ENDED
		July 3, 2010		&	July 4, 2009
Net product sales		$	208,270		$	201,866
Rental and royalty revenue		2,126			1,837
Total revenue		210,396			203,703
Product cost of goods sold		137,483			129,526
Rental and royalty cost		549			427
Total costs		138,032			129,953
Product gross margin		70,787			72,340
Rental and royalty gross margin		1,577			1,410
Total gross margin		72,364			73,750
Selling, marketing and administrative expenses		47,870			47,861
Earnings from operations		24,494			25,889
Other income, net		1,358			1,441
Earnings before income taxes		25,852			27,330
Provision for income taxes		8,296			8,672
Net earnings		17,556			18,658
Other comprehensive income, before tax:
Foreign currency translation adjustments		(585		)	783
Unrealized gains on securities		512			71
Unrealized gains (losses) on derivatives		(4,539		)	1,568
Other comprehensive income (loss), before tax		(4,612		)	2,422
Income tax benefit (expense) related to items of other comprehensive income		1,820			(629		)
Other comprehensive income (loss), net of tax		(2,792		)	1,793
Comprehensive earnings		$	14,764		$	20,451
Retained earnings at beginning of period		$	145,928		$	142,872
Net earnings		17,556			18,658
Cash dividends		(9,008		)	(8,883		)
Stock dividends – 3%		(46,805		)	(32,629		)
Retained earnings at end of period		$	107,671		$	120,018
Net earnings per share		$	0.31		$	0.32
Dividends per share *		$	0.16		$	0.16
Average number of shares outstanding		57,197			58,059

 

*Does not include 3% stock dividend to shareholders of record on 3/09/10 and 3/10/09.

 

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

 

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TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands of dollars)       (UNAUDITED)

 

		26 WEEKS ENDED
		July 3, 2010		&	July 4, 2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings		$	17,556		$	18,658
Adjustments to reconcile net earnings to net cash used in operating activities:
Depreciation and amortization		9,184			8,261
Amortization of marketable securities		232			173
Changes in operating assets and liabilities:
Accounts receivable		13,989			3,118
Other receivables		(3,612		)	523
Inventories		(49,183		)	(34,058		)
Prepaid expenses and other assets		2,201			3,560
Accounts payable and accrued liabilities		6,322			(5,073		)
Income taxes payable and deferred		(550		)	307
Postretirement health care and life insurance benefits		815			740
Deferred compensation and other liabilities		550			721
Other		259			351
Net cash used in operating activities		(2,237		)	(2,719		)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures		(6,781		)	(13,719		)
Net purchases of trading securities		(2,369		)	(1,144		)
Purchase of available for sale securities		(3,039		)	—
Sale and maturity of available for sale securities		2,498			4,355
Net cash used in investing activities		(9,691		)	(10,508		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid in cash		(9,028		)	(8,878		)
Shares repurchased and retired		(10,028		)	(13,654		)
Net cash used in financing activities		(19,056		)	(22,532		)
Decrease in cash and cash equivalents		(30,984		)	(35,759		)
Cash and cash equivalents-beginning of year		90,990			68,908
Cash and cash equivalents end of quarter		$	60,006		$	33,149
Supplemental cash flow information:
Income taxes paid, net		$	8,470		$	6,833
Interest paid		$	41		$	168
Stock dividend issued		$	46,682		$	32,537

 

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

 

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TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JULY 3, 2010

(in thousands except per share amounts) (UNAUDITED)

 

Note 1 — Significant Accounting Policies

 

General Information

 

Foregoing data has been prepared from the unaudited financial records of Tootsie Roll Industries, Inc. and Subsidiaries (the Company) and in the opinion of management all adjustments necessary for a fair statement of the results for the interim period have been reflected.  All adjustments were of a normal and recurring nature.  Certain reclassifications have been made to the prior year financial statements 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 2009 Annual Report on Form 10-K.

 

Results of operations for the period ended July 3, 2010 are not necessarily indicative of results to be expected for the year to end December 31, 2010 because of the seasonal nature of the Company’s operations.  Historically, the third quarter has been the Company’s largest sales quarter due to Halloween sales.

 

New Accounting Pronouncements

 

In January 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2010-06, “Improving Disclosures about Fair Value Measurements”.  ASU 2010-06 requires additional disclosures about fair value measurements including transfers in and out of Levels 1 and 2 and a higher level of disaggregation for the different types of financial instruments.  For the reconciliation of Level 3 fair value measurements, information about purchases, sales, issuances and settlements are presented separately.  This standard is effective for interim and annual reporting periods beginning after December 15, 2009 with the exception of revised Level 3 disclosure requirements which are effective for interim and annual reporting periods beginning after December 15, 2010.  The Company adopted the provisions of the standard on January 1, 2010, which did not have a material impact on its Consolidated Financial Statements.

 

In June 2009, the FASB issued Accounting Standards Codification (ASC) 810, “Consolidation”, regarding the consolidation of variable interest entities (formerly SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)”). ASC 810 is intended to improve financial reporting by providing additional guidance to companies involved with variable interest entities and by requiring additional disclosures about a company’s involvement in variable interest entities.  This standard is effective for interim and annual periods beginning after November 15, 2009.  The Company adopted the provisions of the standard on January 1, 2010, which had no impact on its Consolidated Financial Statements.

 

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Note 2 — Average Shares Outstanding

 

Average shares outstanding for the first half ended July 3, 2010 reflect stock purchases of 384 shares for $10,028 and a 3% stock dividend distributed on April 8, 2010. Average shares outstanding for the first half ended July 4, 2009 reflect stock purchases of 632 shares for $13,654 and a 3% stock dividend distributed on April 9, 2009.

 

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 2006 through 2009.  With few exceptions, the Company is no longer subject to examinations by tax authorities for year 2005 and prior.

 

Note 4 — Fair Value Measurements

 

Current accounting guidance defines fair value as the price that would be received in 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.

 

As of July 3, 2010, July 4, 2009 and December 31, 2009, 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, investments in trading securities and available for sale securities, including auction rate securities (ARS).  The Company’s available for sale and trading securities principally consist of municipal bonds and mutual funds that are publicly traded.

 

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The following table presents information about the Company’s financial assets and liabilities measured at fair value as of July 3, 2010, July 4, 2009 and December 31, 2009, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value:

 

		Estimated Fair Value July 3, 2010
		Total			Input Levels Used
		Fair Value			Level 1			Level 2			Level 3
Cash and equivalents		$	60,006		$	60,006		$	—		$	—
Auction rate security (ARS)		8,279			—			—			8,279
Available-for-sale securities excluding ARS		27,102			—			27,102			—
Net derivatives contracts		(791		)	(791		)	—			—
Trading securities		33,422			33,422			—			—
Total assets measured at fair value		$	128,018		$	92,637		$	27,102		$	8,279

 

		Estimated Fair Value July 4, 2009
		Total			Input Levels Used
		Fair Value			Level 1			Level 2			Level 3
Cash and equivalents		$	33,149		$	33,149		$	—		$	—
Auction rate security (ARS)		8,410			—			—			8,410
Available-for-sale securities excluding ARS		28,905			—			28,905			—
Net derivatives contracts		1,916			1,916			—			—
Trading securities		28,027			28,027			—			—
Total assets measured at fair value		$	100,407		$	63,092		$	28,905		$	8,410

 

		Estimated Fair Value December 31, 2009
		Total			Input Levels Used
		Fair Value			Level 1			Level 2			Level 3
Cash and equivalents		$	90,990		$	90,990		$	—		$	—
Auction rate security (ARS)		7,710			—			—			7,710
Available-for-sale securities excluding ARS		26,851			—			26,851			—
Net derivatives contracts		5,360			5,360			—			—
Trading securities		32,238			32,238			—			—
Total assets measured at fair value		$	163,149		$	128,588		$	26,851		$	7,710

 

As of July 3, 2010, the Company’s long term investments include Jefferson County Alabama Sewer Revenue Refunding Warrants, an auction rate security (ARS), reported at a fair value of $8,279, after reflecting a $5,140 other than temporary impairment and a $131 temporary, as defined, decline in market value against its $13,550 par value.  In 2008, this ARS was determined to be other than temporarily impaired due to the duration and severity of the decline in fair value.  The Company estimated the fair value of this ARS utilizing a valuation model with Level 3 inputs.  This valuation model considered, among other items, the credit risk of the collateral underlying the ARS, the credit risk of the bond insurer, interest rates, and the amount and timing of expected future cash flows including the Company’s assumption about the market expectation of the next successful auction.

 

The Company classified this ARS as non-current and has included it in long term investments on the Condensed Consolidated Statements of Financial Position because the Company believes that the current condition of the ARS market may take more than twelve months to improve.

 

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