TOOTSIE ROLL INDUSTRIES INC - Quarter Report: 2011 October (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 October 1, 2011

 

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 (October 1, 2011).

 

 

 

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TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES

 

OCTOBER 1, 2011

 

INDEX

 

			Page No.
Part I —	Financial Information
Item 1.	Financial Statements:
	Condensed Consolidated Statements of Financial Position		3-4
	Condensed Consolidated Statements of Earnings, Comprehensive Earnings and Retained Earnings		5-6
	Condensed Consolidated Statements of Cash Flows		7
	Notes to Condensed Consolidated Financial Statements		8-13
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		14-18
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		18
Item 4.	Controls and Procedures		18
Part II —	Other Information
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		19
Item 6.	Exhibits		19
Signatures			19
Certifications			20-22

 

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)

 

		October 1, 2011			December 31, 2010			October 2, 2010
		(Unaudited)						(Unaudited)
ASSETS
CURRENT ASSETS
Cash & cash equivalents		$	25,690		$	115,976		$	58,862
Investments		9,440			7,996			8,841
Trade accounts receivable,
Less allowances of $2,621, $1,531 & $2,949		96,743			37,394			100,602
Other receivables		4,386			9,961			4,999
Inventories, at cost
Finished goods & work in process		52,174			36,935			43,835
Raw material & supplies		30,835			22,141			31,061
Prepaid expenses		4,516			6,499			4,780
Deferred income taxes		621			689			1,237
Total current assets		224,405			237,591			254,217
PROPERTY, PLANT & EQUIPMENT, at cost
Land		21,542			21,619			21,605
Buildings		102,798			102,934			102,419
Machinery & equipment		305,582			307,178			298,102
Construction in progress		21,831			9,243			15,237
		451,753			440,974			437,363
Less-accumulated depreciation		238,395			225,482			220,923
Net property, plant and equipment		213,358			215,492			216,440
OTHER ASSETS
Goodwill		73,237			73,237			73,237
Trademarks		175,024			175,024			175,024
Investments		98,523			64,461			60,480
Split dollar life insurance		74,429			74,441			74,627
Prepaid expenses		4,029			6,680			7,534
Investment in joint venture		4,325			4,254			3,522
Deferred income taxes		8,291			9,203			10,476
Total other assets		437,858			407,300			404,900
Total assets		$	875,621		$	860,383		$	875,557

 

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

 

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(in thousands except per share data)

 

		October 1, 2011			December 31, 2010			October 2, 2010
		(Unaudited)						(Unaudited)
LIABILITIES AND SHAREHOLDERS’ EQUITY CURRENT LIABILITIES
Accounts payable		$	17,421		$	9,791		$	17,553
Dividends payable		4,627			4,529			4,554
Accrued liabilities		47,773			44,185			49,552
Income taxes payable		3,661			—			5,074
Total current liabilities		73,482			58,505			76,733
NONCURRENT LIABILITIES
Deferred income taxes		46,560			48,743			42,734
Postretirement health care and life insurance benefits		22,256			20,689			17,837
Industrial development bonds		7,500			7,500			7,500
Liability for uncertain tax positions		9,560			9,835			16,183
Deferred compensation and other liabilities		45,110			46,157			42,470
Total noncurrent liabilities		130,986			132,924			126,724
SHAREHOLDERS’ EQUITY
Common Stock, $.69-4/9 par value- 120,000 shares authorized; 36,807, 36,057 & 36,459, respectively, issued		25,560			25,040			25,319
Class B common stock, $.69-4/9 par value- 40,000 shares authorized; 21,032, 20,466 & 20,476, respectively, issued		14,606			14,212			14,219
Capital in excess of par value		541,362			505,495			516,369
Retained earnings		108,977			137,412			132,356
Accumulated other comprehensive loss		(17,360		)	(11,213		)	(14,171		)
Treasury stock (at cost)- 71, 69 & 69 shares, respectively		(1,992		)	(1,992		)	(1,992		)
Total shareholders’ equity		671,153			668,954			672,100
Total liabilities and shareholders’ equity		$	875,621		$	860,383		$	875,557

 

(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)

 

		Quarter Ended
		October 1, 2011			October 2, 2010
Net product sales		$	186,784		$	191,045
Rental and royalty revenue		1,072			1,080
Total revenue		187,856			192,125
Product cost of goods sold		133,041			129,021
Rental and royalty cost		264			274
Total costs		133,305			129,295
Product gross margin		53,743			62,024
Rental and royalty gross margin		808			806
Total gross margin		54,551			62,830
Selling, marketing and administrative expenses		25,425			31,242
Earnings from operations		29,126			31,588
Other income (expense), net		(3,777		)	4,618
Earnings before income taxes		25,349			36,206
Provision for income taxes		7,011			9,722
Net earnings		18,338			26,484
Other comprehensive income (loss):
Foreign currency translation adjustments		(3,554		)	183
Unrealized losses on securities		(68		)	(2,322		)
Unrealized gains on derivatives		314			4,451
Reclassification of realized gains on derivatives to net earnings		(1,551		)	(906		)
Other comprehensive income (loss), before tax		(4,859		)	1,406
Income tax (expense) benefit related to items of other comprehensive income		599			(388		)
Other comprehensive income (loss), net of tax		(4,260		)	1,018
Comprehensive earnings		$	14,078		$	27,502
Retained earnings at beginning of period		$	95,261		$	110,420
Net earnings		18,338			26,484
Cash dividends		(4,622		)	(4,548		)
Retained earnings at end of period		$	108,977		$	132,356
Net earnings per share		$	0.32		$	0.45
Dividends per share *		$	0.08		$	0.08
Average number of shares outstanding		57,822			58,596

 

*Does not include 3% stock dividend to shareholders of record on 3/8/11 and 3/9/10.

 

(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)

 

		Year to Date Ended
		October 1, 2011			October 2, 2010
Net product sales		$	399,991		$	399,315
Rental and royalty revenue		3,080			3,206
Total revenue		403,071			402,521
Product cost of goods sold		278,572			266,504
Rental and royalty cost		772			823
Total costs		279,344			267,327
Product gross margin		121,419			132,811
Rental and royalty gross margin		2,308			2,383
Total gross margin		123,727			135,194
Selling, marketing and administrative expenses		77,560			79,112
Earnings from operations		46,167			56,082
Other income, net		216			5,976
Earnings before income taxes		46,383			62,058
Provision for income taxes		13,880			17,923
Net earnings		32,503			44,135
Other comprehensive income (loss):
Foreign currency translation adjustments		(2,104		)	(402		)
Unrealized gains (losses) on securities		1,708			(1,810		)
Unrealized gains (losses) on derivatives		(545		)	1,449
Reclassification of gains on derivatives to net earnings		(7,552		)	(2,443		)
Other comprehensive loss, before tax		(8,493		)	(3,206		)
Income tax benefit related to items of other comprehensive income		2,346			1,432
Other comprehensive loss, net of tax		(6,147		)	(1,774		)
Comprehensive earnings		$	26,356		$	42,361
Retained earnings at beginning of period		$	137,412		$	148,582
Net earnings		32,503			44,135
Cash dividends		(13,763		)	(13,556		)
Stock dividends — 3%		(47,175		)	(46,805		)
Retained earnings at end of period		$	108,977		$	132,356
Net earnings per share		$	0.56		$	0.75
Dividends per share *		$	0.24		$	0.24
Average number of shares outstanding		57,978			58,795

 

*Does not include 3% stock dividend to shareholders of record on 3/8/11 and 3/9/10.

 

(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)

 

		Year to Date Ended
		October 1, 2011			October 2, 2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings		$	32,503		$	44,135
Adjustments to reconcile net earnings to net cash used in operating activities:
Depreciation and amortization		14,465			13,802
(Gain) loss from equity method investment		(24		)	372
Amortization of marketable securities		893			367
Changes in operating assets and liabilities:
Accounts receivable		(60,001		)	(62,889		)
Other receivables		2,692			1,027
Inventories		(24,544		)	(18,333		)
Prepaid expenses and other assets		4,571			4,356
Accounts payable and accrued liabilities		11,609			15,389
Income taxes payable and deferred		(809		)	5,061
Postretirement health care and life insurance benefits		1,567			1,163
Deferred compensation and other liabilities		1,447			1,388
Other		(789		)	206
Net cash from (used in) operating activities		(16,420		)	6,044
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures		(12,677		)	(9,389		)
Net purchases of trading securities		(2,967		)	(2,699		)
Purchase of available for sale securities		(38,722		)	(5,283		)
Sale and maturity of available for sale securities		4,559			4,503
Net cash used in investing activities		(49,807		)	(12,868		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid in cash		(13,788		)	(13,583		)
Shares purchased and retired		(10,271		)	(11,721		)
Net cash used in financing activities		(24,059		)	(25,304		)
Decrease in cash and cash equivalents		(90,286		)	(32,128		)
Cash and cash equivalents at beginning of year		115,976			90,990
Cash and cash equivalents at end of quarter		$	25,690		$	58,862
Supplemental cash flow information:
Income taxes paid, net		$	9,385		$	12,581
Interest paid		$	33		$	129
Stock dividend issued		$	47,053		$	46,682

 

(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

OCTOBER 1, 2011

(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 2010 Annual Report on Form 10-K.

 

Results of operations for the period ended October 1, 2011 are not necessarily indicative of results to be expected for the year to end December 31, 2011 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.

 

Revision

 

During 2010, the Company identified certain liabilities for uncertain tax positions that should not have been recorded based on a reevaluation of the related facts. Management has concluded that the effects of the correcting adjustments were not material to the Company’s previously issued quarterly and annual financial statements.  The Company has revised the previously issued financial statements in this quarterly report and will do so in future filings.  The revised financial statements reflect an increase in retained earnings at the beginning of the quarter and year 2010 of $2,749 and $2,654, respectively.  The revised financial statements also reflect changes to the provision for income tax expense which resulted in a decrease in net earnings for the third quarter and year to date 2010 of $867 and $772,  respectively.

 

Accounting Pronouncements

 

In May 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (IFRS).”  ASU 2011-04 represents converged guidance between U.S. GAAP and IFRS resulting in common requirements for measuring fair value and for disclosing information about fair value measurements.  This new guidance will be effective for fiscal years beginning after December 15, 2011 and subsequent interim periods.  The Company is currently assessing the impact, if any, on the consolidated financial statements.

 

In June 2011, the FASB issued ASU 2011-05, “Presentation of Comprehensive Income.” ASU 2011-05 requires us to present components of other comprehensive income and of net income in one continuous statement of comprehensive income or in two separate, but consecutive, statements.  The option to report other comprehensive income within the statement of equity has been removed.  This new presentation of comprehensive income will be effective for fiscal years beginning after December 15, 2011 and subsequent interim periods.

 

In September 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2011-08, “Testing Goodwill for Impairment”.  The revised standard is intended to reduce the cost and complexity of the annual goodwill impairment test by providing entities an option to perform a “qualitative” assessment to determine whether further impairment testing is necessary.  An entity has the option to first assess qualitative factors to determine whether it is necessary to perform the current two-step test.  If an entity believes, as a result of its qualitative assessment, that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is required. Otherwise, no further testing is required.  The revised standard is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company currently believes there will be no impact on its consolidated financial statements.

 

In September 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2011-09, “Compensation-Retirement Benefits-Multiemployer Plans” which amends the guidance in ASC 715-80. The amendments in ASU 2011-09 provide additional disclosure requirements for entities which participate in multi-employer pension plans. The purpose of the new disclosures is to provide financial statement users with information about an employer’s level of

 

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participation in and the financial health of significant plans. The new disclosures are effective for annual periods ending after December 15, 2011. There will be no impact on the Company’s consolidated financial statements as the changes relate only to additional disclosures.

 

Note 2 — Average Shares Outstanding

 

Average shares outstanding for the nine months ended October 1, 2011 reflect stock purchases of 373 shares for $10,271 and a 3% stock dividend distributed on April 7, 2011. Average shares outstanding for the nine months ended October 2, 2010 reflect stock purchases of 454 shares for $11,721 and a 3% stock dividend distributed on April 8, 2010.

 

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 2008 through 2010.  Certain foreign jurisdictions are subject to examinations for the years 2004 through 2010.

 

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 October 1, 2011, December 31, 2010 and October 2, 2010, 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.

 

The following table presents information about the Company’s financial assets and liabilities measured at fair value as of October 1, 2011, December 31, 2010 and October 2, 2010, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value:

 

		Estimated Fair Value October 1, 2011
		Total			Input Levels Used
		Fair Value			Level 1			Level 2			Level 3
Cash and cash equivalents		$	25,690		$	25,690		$	—		$	—
ARS		8,130			—			—			8,130
Available-for-sale securities excluding ARS		60,802			—			60,802			—
Foreign currency forward contracts		(108		)	—			(108		)	—
Commodity futures contracts		345			345			—			—
Commodity options contracts		—			—			—			—
Trading securities		39,031			39,031			—			—
Total assets measured at fair value		$	133,890		$	65,066		$	60,694		$	8,130

 

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		Estimated Fair Value December 31, 2010
		Total			Input Levels Used
		Fair Value			Level 1			Level 2			Level 3
Cash and cash equivalents		$	115,976		$	115,976		$	—		$	—
ARS		6,775			—			—			6,775
Available-for-sale securities excluding ARS		27,178			—			27,178			—
Foreign currency forward contracts		942			—			942			—
Commodity futures contracts		2,310			2,310			—			—
Commodity options contracts		5,369			5,369			—			—
Trading securities		38,504			38,504			—			—
Total assets measured at fair value		$	197,054		$	162,159		$	28,120		$	6,775
		Estimated Fair Value October 2, 2010
		Total			Input Levels Used
		Fair Value			Level 1			Level 2			Level 3
Cash and cash equivalents		$	58,862		$	58,862		$	—		$	—
ARS		5,960			—			—			5,960
Available-for-sale securities excluding ARS		27,203			—			27,203			—
Foreign currency forward contracts		820			—			820			—
Commodity futures contracts		647			647			—			—
Commodity options contracts		1,486			1,486			—			—
Trading securities		36,158			36,158			—			—
Total assets measured at fair value		$	131,136		$	97,153		$	28,023		$	5,960

 

As of October 1, 2011, the Company’s long term investments included an ARS, Jefferson County Alabama Sewer Revenue Refunding Warrants, reported at a fair value of $8,130 after reflecting a $5,140 other than temporary impairment and a $280 temporary 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, a limited number of market trades, 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.  See Management’s Discussion and Analysis of Financial Condition and Results of Operations regarding Jefferson County ARS.  The Company classified this ARS as non-current and has included it in long term investments on the Condensed Consolidated Statements of Financial Position at October 1, 2011, December 31, 2010 and October 2, 2010 because the Company believes that the current condition of the ARS market may take more than twelve months to improve.

 

The following table presents additional information about the Company’s financial instruments (all ARS) measured at fair value on a recurring basis using significant unobservable inputs (Level 3) at October 1, 2011 and October 2, 2010:

 

		2011			2010
Balance at January 1		$	6,775		$	7,710
Unrealized gain (loss) in other comprehensive loss		1,355			(1,750		)
Balance at October 1 and October 2, respectively		$	8,130		$	5,960

 

The $7,500 carrying amount of the Company’s industrial revenue development bonds at October 1, 2011 and October 2, 2010 approximates its estimated fair value as the bonds have a floating interest rate.

 

Note 5 — Derivative Instruments and Hedging Activities

 

From time to time, the Company uses derivative instruments, including foreign currency forward contracts, commodity futures contracts and commodity option contracts  to manage its exposures to foreign exchange and commodity prices. Commodity futures contracts and most commodity option 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

 

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