TOOTSIE ROLL INDUSTRIES INC - Quarter Report: 2011 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 2, 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 (July 2, 2011)

 

Class		Outstanding
Common Stock, $.69 4/9 par value		36,889,948
Class B Common Stock, $.69 4/9 par value		21,039,591

 

 

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TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES

 

JULY 2, 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	8-12
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13-16
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	17
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	20
Signatures		20
Certifications		21-23

 

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)

 

		July 2,			December 31,			July 3,
		2011			2010			2010
		(unaudited)						(unaudited)
ASSETS
CURRENT ASSETS
Cash & cash equivalents		$	41,282		$	115,976		$	60,006
Investments		10,324			7,996			7,082
Trade accounts receivable,
Less allowances of $1,661, $1,531 & $1,879		26,862			37,394			23,566
Other receivables		7,043			9,961			7,471
Inventories, at cost
Finished goods & work in process		75,385			36,935			71,604
Raw material & supplies		31,308			22,141			34,055
Prepaid expenses		8,103			6,499			8,001
Deferred income taxes		682			689			1,367
Total current assets		200,989			237,591			213,152
PROPERTY, PLANT & EQUIPMENT, at cost
Land		21,659			21,619			21,570
Buildings		103,002			102,934			102,395
Machinery & equipment		307,325			307,178			297,919
Construction in progress		15,221			9,243			12,624
		447,207			440,974			434,508
Less-accumulated depreciation		234,714			225,482			216,129
Net property, plant and equipment		212,493			215,492			218,379
OTHER ASSETS
Goodwill		73,237			73,237			73,237
Trademarks		175,024			175,024			175,024
Investments		103,835			64,461			61,721
Split dollar life insurance		74,441			74,441			74,638
Prepaid expenses		5,034			6,680			6,444
Investment in joint venture		4,751			4,254			3,930
Deferred income taxes		9,106			9,203			11,580
Total other assets		445,428			407,300			406,574
Total assets		$	858,910		$	860,383		$	838,105

 

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

 

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(in thousands except per share data)

 

		July 2,			December 31,			July 3,
		2011			2010			2010
		(unaudited)						(unaudited)
LIABILITIES AND SHAREHOLDERS’ EQUITY CURRENT LIABILITIES
Accounts payable		$	13,869		$	9,791		$	13,671
Dividends payable		4,635			4,529			4,560
Accrued liabilities		41,197			44,185			44,292
Total current liabilities		59,701			58,505			62,523
NONCURRENT LIABILITIES
Deferred income taxes		47,159			48,743			42,842
Postretirement health care and life insurance benefits		21,709			20,689			17,489
Industrial development bonds		7,500			7,500			7,500
Liability for uncertain tax positions		10,074			9,835			17,695
Deferred compensation and other liabilities		48,866			46,157			39,217
Total noncurrent liabilities		135,308			132,924			124,743
SHAREHOLDERS’ EQUITY
Common Stock, $.69-4/9 par value- 120,000 shares authorized; 36,890, 36,057 & 36,517, respectively, issued		25,618			25,040			25,358
Class B common stock, $.69-4/9 par value- 40,000 shares authorized; 21,040, 20,466 & 20,488, respectively, issued		14,611			14,212			14,228
Capital in excess of par value		543,503			505,495			518,013
Retained earnings		95,261			137,412			110,420
Accumulated other comprehensive loss		(13,100		)	(11,213		)	(15,188		)
Treasury stock (at cost)- 71, 69 & 69 shares, respectively		(1,992		)	(1,992		)	(1,992		)
Total shareholders’ equity		663,901			668,954			650,839
Total liabilities and shareholders’ equity		$	858,910		$	860,383		$	838,105

 

(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
		July 2, 2011			July 3, 2010
Net product sales		$	104,884		$	105,026
Rental and royalty revenue		936			997
Total revenue		105,820			106,023
Product cost of goods sold		71,490			69,360
Rental and royalty cost		238			254
Total costs		71,728			69,614
Product gross margin		33,394			35,666
Rental and royalty gross margin		698			743
Total gross margin		34,092			36,409
Selling, marketing and administrative expenses		26,171			22,544
Earnings from operations		7,921			13,865
Other income (expense), net		1,001			(2,058		)
Earnings before income taxes		8,922			11,807
Provision for income taxes		2,757			3,360
Net earnings		6,165			8,447
Other comprehensive income, before tax:
Foreign currency translation adjustments		448			(1,342		)
Unrealized gains on securities		1,965			273
Reclassifications to earnings and changes in fair value of derivatives		(1,607		)	(1,257		)
Other comprehensive income (loss), before tax		806			(2,326		)
Income tax benefit related to items of other comprehensive income		(175		)	579
Other comprehensive income (loss), net of tax		631			(1,747		)
Comprehensive earnings		$	6,796		$	6,700
Retained earnings at beginning of period		$	93,725		$	106,529
Net earnings		6,165			8,447
Cash dividends		(4,629		)	(4,556		)
Retained earnings at end of period		$	95,261		$	110,420
Net earnings per share		$	0.11		$	0.14
Dividends per share *		$	0.08		$	0.08
Average number of shares outstanding		58,012			58,792

 

*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
		July 2, 2011			July 3, 2010
Net product sales		$	213,207		$	208,270
Rental and royalty revenue		2,008			2,126
Total revenue		215,215			210,396
Product cost of goods sold		145,531			137,483
Rental and royalty cost		508			549
Total costs		146,039			138,032
Product gross margin		67,676			70,787
Rental and royalty gross margin		1,500			1,577
Total gross margin		69,176			72,364
Selling, marketing and administrative expenses		52,135			47,870
Earnings from operations		17,041			24,494
Other income, net		3,993			1,358
Earnings before income taxes		21,034			25,852
Provision for income taxes		6,869			8,201
Net earnings		14,165			17,651
Other comprehensive income, before tax:
Foreign currency translation adjustments		1,450			(585		)
Unrealized gains on securities		1,776			512
Reclassifications to earnings and changes in fair value of derivatives		(6,860		)	(4,539		)
Other comprehensive loss, before tax		(3,634		)	(4,612		)
Income tax benefit related to items of other comprehensive income		1,747			1,820
Other comprehensive loss, net of tax		(1,887		)	(2,792		)
Comprehensive earnings		$	12,278		$	14,859
Retained earnings at beginning of period		$	137,412		$	148,582
Net earnings		14,165			17,651
Cash dividends		(9,141		)	(9,008		)
Stock dividends — 3%		(47,175		)	(46,805		)
Retained earnings at end of period		$	95,261		$	110,420
Net earnings per share		$	0.24		$	0.30
Dividends per share *		$	0.16		$	0.16
Average number of shares outstanding		58,050			58,884

 

*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
		July 2, 2011			July 3, 2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings		$	14,165		$	17,651
Adjustments to reconcile net earnings to net cash used in operating activities:
Depreciation and amortization		9,255			9,184
(Gain) loss from equity method investment		(133		)	139
Amortization of marketable securities		513			232
Changes in operating assets and liabilities:
Accounts receivable		10,765			13,989
Other receivables		710			(3,612		)
Inventories		(47,319		)	(49,183		)
Prepaid expenses and other assets		84			2,201
Accounts payable and accrued liabilities		995			6,322
Income taxes payable and deferred		(4,078		)	(645		)
Postretirement health care and life insurance benefits		1,020			815
Deferred compensation and other liabilities		828			550
Other		385			120
Net cash used in operating activities		(12,810		)	(2,237		)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures		(6,067		)	(6,781		)
Net purchases of trading securities		(2,724		)	(2,369		)
Purchase of available for sale securities		(37,142		)	(3,039		)
Sale and maturity of available for sale securities		1,275			2,498
Net cash used in investing activities		(44,658		)	(9,691		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid in cash		(9,157		)	(9,028		)
Shares purchased and retired		(8,069		)	(10,028		)
Net cash used in financing activities		(17,226		)	(19,056		)
Decrease in cash and cash equivalents		(74,694		)	(30,984		)
Cash and cash equivalents at beginning of year		115,976			90,990
Cash and cash equivalents at end of quarter		$	41,282		$	60,006
Supplemental cash flow information:
Income taxes paid, net		$	7,941		$	8,470
Interest paid		$	29		$	41
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

JULY 2, 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 July 2, 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 $2,773 and $2,654, respectively.  The revised financial statements also reflect changes to the provision for income tax expense which resulted in an increase (decrease) in net earnings of $(24) and $95, for the second quarter and year to date 2010, 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.

 

Note 2 — Average Shares Outstanding

 

Average shares outstanding for the first half ended July 2, 2011 reflect stock purchases of 283 shares for $8,069 and a 3% stock dividend distributed on April 7, 2011. 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.

 

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 2007 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

 

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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 2, 2011, December 31, 2010 and July 3, 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 July 2, 2011, December 31, 2010 and July 3, 2010, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value:

 

		Estimated Fair Value July 2, 2011
		Total			Input Levels Used
		Fair Value			Level 1			Level 2			Level 3
Cash and cash equivalents		$	41,282		$	41,282		$	—		$	—
ARS		8,130			—			—			8,130
Available-for-sale securities excluding ARS		62,953			—			62,953			—
Foreign currency forward contracts		368			368			—			—
Commodity futures contracts		573			573			—			—
Commodity options contracts		565			565			—			—
Trading securities		43,076			43,076			—			—
Total assets measured at fair value		$	156,947		$	85,864		$	62,953		$	8,130

 

		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		$	163,101		$	27,178		$	6,775

 

		Estimated Fair Value July 3, 2010
		Total			Input Levels Used
		Fair Value			Level 1			Level 2			Level 3
Cash and cash equivalents		$	60,006		$	60,006		$	—		$	—
ARS		8,279			—			—			8,279
Available-for-sale securities excluding ARS		27,102			—			27,102			—
Foreign currency forward contracts		1,371			1,371			—			—
Commodity futures contracts		(823		)	(823		)	—			—
Commodity options contracts		(1,339		)	(1,339		)	—			—
Trading securities		33,422			33,422			—			—
Total assets measured at fair value		$	128,018		$	92,637		$	27,102		$	8,279

 

As of July 2, 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

 

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