TOOTSIE ROLL INDUSTRIES INC - Quarter Report: 2012 June (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 June 30, 2012

 

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 (June 30, 2012).

 

 

 

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TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES

 

June 30, 2012

 

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	19
Part II —	Other Information
Item 1A.	Risk Factors	19
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)    (UNAUDITED)

 

		June 30, 2012			December 31, 2011			July 2, 2011
ASSETS
CURRENT ASSETS
Cash & cash equivalents		$	66,617		$	78,612		$	41,282
Investments		12,820			10,895			10,324
Trade accounts receivable,
Less allowances of $1,502, $1,731 & $1,661		26,010			41,895			26,862
Other receivables		3,654			3,391			7,043
Inventories, at cost
Finished goods & work in process		62,867			42,676			74,506
Raw material & supplies		33,112			29,084			30,784
Prepaid expenses		5,777			5,070			8,103
Deferred income taxes		578			578			682
Total current assets		211,435			212,201			199,586
PROPERTY, PLANT & EQUIPMENT, at cost
Land		21,653			21,939			21,659
Buildings		107,891			107,567			103,002
Machinery & equipment		323,046			322,993			307,325
Construction in progress		7,940			2,598			15,221
		460,530			455,097			447,207
Less-accumulated depreciation		252,784			242,935			234,714
Net property, plant and equipment		207,746			212,162			212,493
OTHER ASSETS
Goodwill		73,237			73,237			73,237
Trademarks		175,024			175,024			175,024
Investments		114,889			96,161			103,835
Split dollar officer life insurance		70,549			74,209			74,441
Prepaid expenses		1,564			3,212			5,034
Equity method investment		3,270			3,935			4,751
Deferred income taxes		7,723			7,715			9,106
Total other assets		446,256			433,493			445,428
Total assets		$	865,437		$	857,856		$	857,507

 

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

 

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(in thousands except per share data)    (UNAUDITED)

 

		June 30, 2012			December 31, 2011			July 2, 2011
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable		$	14,374		$	10,683		$	13,869
Dividends payable		4,714			4,603			4,635
Accrued liabilities		42,889			43,069			41,197
Total current liabilities		61,977			58,355			59,701
NONCURRENT LIABILITIES
Deferred income taxes		43,311			43,521			46,651
Postretirement health care and life insurance benefits		27,625			26,108			21,709
Industrial development bonds		7,500			7,500			7,500
Liability for uncertain tax positions		7,580			8,345			10,074
Deferred compensation and other liabilities		51,644			48,092			48,866
Total noncurrent liabilities		137,660			133,566			134,800
SHAREHOLDERS’ EQUITY
Common stock, $.69-4/9 par value- 120,000 shares authorized; 37,273, 36,479 & 36,890, respectively, issued		25,884			25,333			25,618
Class B common stock, $.69-4/9 par value- 40,000 shares authorized; 21,641, 21,025 & 21,040, respectively, issued		15,028			14,601			14,611
Capital in excess of par value		563,859			533,677			543,503
Retained earnings		82,931			114,269			94,366
Accumulated other comprehensive loss		(19,910		)	(19,953		)	(13,100		)
Treasury stock (at cost)- 73, 71 & 71 shares, respectively		(1,992		)	(1,992		)	(1,992		)
Total shareholders’ equity		665,800			665,935			663,006
Total liabilities and shareholders’ equity		$	865,437		$	857,856		$	857,507

 

(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
		June 30, 2012			July 2, 2011
Net product sales		$	108,156		$	104,884
Rental and royalty revenue		983			936
Total revenue		109,139			105,820
Product cost of goods sold		72,858			70,986
Rental and royalty cost		250			238
Total costs		73,108			71,224
Product gross margin		35,298			33,898
Rental and royalty gross margin		733			698
Total gross margin		36,031			34,596
Selling, marketing and administrative expenses		25,022			26,171
Earnings from operations		11,009			8,425
Other income (expense), net		(444		)	1,001
Earnings before income taxes		10,565			9,426
Provision for income taxes		3,054			2,940
Net earnings		7,511			6,486
Net earnings per share		$	0.13		$	0.11
Dividends per share *		$	0.08		$	0.08
Average number of shares outstanding		58,911			59,725
Other comprehensive income (loss), before tax
Foreign currency translation adjustments		(1,510		)	448
Unrealized gains for the period on investments		514			1,965
Less: reclassification adjustment for gains in net earnings		—			—
Unrealized gains on investments		514			1,965
Unrealized losses for the period on derivatives		(699		)	—
Less: reclassification adjustment for losses in net earnings		(115		)	(1,607		)
Unrealized losses on derivatives		(814		)	(1,607		)
Total other comprehensive income (loss), before tax		(1,810		)	806
Income tax benefit (expense) related to items of other comprehensive income		181			(174		)
Comprehensive earnings		$	5,882		$	7,118
Retained earnings at beginning of period		$	80,128		$	92,509
Net earnings		7,511			6,486
Cash dividends		(4,708		)	(4,629		)
Stock dividends		—			—
Retained earnings at end of period		$	82,931		$	94,366

*Does not include 3% stock dividend to shareholders of record on 3/6/12 and 3/8/11.

 

(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
		June 30, 2012			July 2, 2011
Net product sales		$	217,919		$	213,207
Rental and royalty revenue		2,040			2,008
Total revenue		219,959			215,215
Product cost of goods sold		147,763			144,510
Rental and royalty cost		507			508
Total costs		148,270			145,018
Product gross margin		70,156			68,697
Rental and royalty gross margin		1,533			1,500
Total gross margin		71,689			70,197
Selling, marketing and administrative expenses		52,261			52,135
Earnings from operations		19,428			18,062
Other income, net		2,891			3,993
Earnings before income taxes		22,319			22,055
Provision for income taxes		6,034			7,239
Net earnings		16,285			14,816
Net earnings per share		$	0.28		$	0.25
Dividends per share *		$	0.16		$	0.16
Average number of shares outstanding		58,987			59,764
Other comprehensive income (loss), before tax
Foreign currency translation adjustments		341			1,450
Unrealized gains (losses) for the period on investments		(32		)	1,776
Less: reclassification adjustment for gains (losses) in net earnings		—			—
Unrealized gains (losses) on investments		(32		)	1,776
Unrealized losses for the period on derivatives		(193		)	(859		)
Less: reclassification adjustment for losses in net earnings		(282		)	(6,001		)
Unrealized losses on derivatives		(475		)	(6,860		)
Total other comprehensive loss, before tax		(166		)	(3,634		)
Income tax benefit related to items of other comprehensive income		209			1,747
Comprehensive earnings		$	16,328		$	12,929
Retained earnings at beginning of period		$	114,269		$	135,866
Net earnings		16,285			14,816
Cash dividends		(9,289		)	(9,141		)
Stock dividends		(38,334		)	(47,175		)
Retained earnings at end of period		$	82,931		$	94,366

*Does not include 3% stock dividend to shareholders of record on 3/6/12 and 3/8/11.

 

(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)       (UNAUDITED)

 

		Year to Date Ended
		June 30, 2012			July 2, 2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings		$	16,285		$	14,816
Adjustments to reconcile net earnings to net cash from (used in) operating activities:
Depreciation and amortization		9,844			9,255
(Gain) loss from equity method investment		589			(133		)
Amortization of marketable security premiums		765			513
Changes in operating assets and liabilities:
Accounts receivable		15,954			10,765
Other receivables		(738		)	710
Inventories		(24,114		)	(48,340		)
Prepaid expenses and other assets		5,406			84
Accounts payable and accrued liabilities		3,467			995
Income taxes payable and deferred		(1,548		)	(3,708		)
Postretirement health care and life insurance benefits		1,517			1,020
Deferred compensation and other liabilities		1,235			828
Other		212			385
Net cash from (used in) operating activities		28,874			(12,810		)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures		(5,373		)	(6,067		)
Net purchases of trading securities		(2,167		)	(2,724		)
Purchase of available for sale securities		(20,071		)	(37,142		)
Sale and maturity of available for sale securities		3,094			1,275
Net cash used in investing activities		(24,517		)	(44,658		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Shares purchased and retired		(7,076		)	(8,069		)
Dividends paid in cash		(9,276		)	(9,157		)
Net cash used in financing activities		(16,352		)	(17,226		)
Decrease in cash and cash equivalents		(11,995		)	(74,694		)
Cash and cash equivalents at beginning of year		78,612			115,976
Cash and cash equivalents at end of quarter		$	66,617		$	41,282
Supplemental cash flow information:
Income taxes paid, net		$	8,550		$	7,941
Interest paid		$	20		$	29
Stock dividend issued		$	38,237		$	47,053

 

(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

JUNE 30, 2012

(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.  These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the related notes included in the Company’s 2011 Annual Report on Form 10-K.

 

Results of operations for the period ended June 30, 2012 are not necessarily indicative of results to be expected for the year to end December 31, 2012 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.

 

Accounting Pronouncements

 

In May 2011, the Financial Accounting Standards Board (FASB) issued new accounting rules related to fair value measurements. The new accounting rules clarify some existing concepts, eliminate wording differences between Generally Accepted Accounting Principles in the United States of America (GAAP) and International Financial Reporting Standards (IFRS), and in some limited cases, change some principles to achieve convergence between GAAP and IFRS. The new accounting rules result in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between GAAP and IFRS. The new accounting rules also expand the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. The adoption of the new accounting rules did not have a material effect on the Company’s financial condition, results of operations or cash flows.

 

In June 2011, the FASB issued new accounting rules that require an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income, or in two separate but consecutive statements. The new accounting rules eliminate the option to present components of other comprehensive income as part of the statement of equity. The adoption of the new accounting rules did not have a material effect on the Company’s financial condition, results of operations or cash flows.

 

In December 2011, the FASB issued new accounting rules which deferred certain provisions of the rules issued in June 2011 that required entities to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement in which net income is presented and the statement in which other comprehensive income is presented. Accordingly, this requirement is indefinitely deferred.

 

In September 2011, the FASB issued new accounting rules related to testing goodwill for impairment. The new accounting rules permit an entity to first assess qualitative factors to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, it is necessary to perform the two-step goodwill impairment test prescribed under current accounting rules. Otherwise, the two-step goodwill impairment test is not required. The adoption of the new accounting rules did not have a material effect on the Company’s financial condition, results of operations or cash flows.

 

Note 2 — Average Shares Outstanding

 

Average shares outstanding for the period ended June 30, 2012 reflect stock purchases of 306 shares for $7,076 and a 3% stock dividend distributed on April 5, 2012. Average shares outstanding for the period ended July 2, 2011 reflect stock purchases of 283 shares for $8,069 and a 3% stock dividend distributed on April 7, 2011.

 

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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 2011.  Certain foreign jurisdictions are subject to examinations for the years 2005 through 2011. The Company effectively settled a state tax examination and recovered foreign income taxes from prior years resulting in a reduction in the provision for income taxes and an increase in net earnings of $1,301 during the first half 2012.

 

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 June 30, 2012, December 31, 2011 and July 2, 2011, the Company held certain financial assets that are required to be measured at fair value on a recurring basis.  These included derivative hedging instruments related to the purchase of certain raw materials and foreign currencies, investments in trading securities and available for sale securities, including an auction rate security.  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 June 30, 2012, December 31, 2011 and July 2, 2011, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value:

 

		Estimated Fair Value June 30, 2012
		Total			Input Levels Used
		Fair Value			Level 1			Level 2			Level 3
Cash and cash equivalents		$	66,617		$	66,617		$	—		$	—
Auction rate security		7,453			—			—			7,453
Available-for-sale securities excluding the auction rate security		74,016			—			74,016			—
Foreign currency forward contracts		70			—			70			—
Commodity futures contracts		(132		)	(132		)	—			—
Commodity options contracts		(18		)	(18		)	—			—
Trading securities		46,240			46,240			—			—
Total assets measured at fair value		$	194,246		$	112,707		$	74,086		$	7,453

 

		Estimated Fair Value December 31, 2011
		Total			Input Levels Used
		Fair Value			Level 1			Level 2			Level 3
Cash and cash equivalents		$	78,612		$	78,612		$	—		$	—
Auction rate security		7,453			—			—			7,453
Available-for-sale securities excluding the auction rate security		57,835			—			57,835			—
Foreign currency forward contracts		205			—			205			—
Commodity futures contracts		203			203			—			—
Commodity options contracts		—			—			—			—
Trading securities		41,768			41,768			—			—
Total assets measured at fair value		$	186,076		$	120,583		$	58,040		$	7,453

 

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		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		$	—		$	—
Auction rate security		8,130			—			—			8,130
Available-for-sale securities excluding the auction rate security		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		$	85,496		$	63,321		$	8,130

 

As of June 30, 2012, the Company’s long term investments included an auction rate security, Jefferson County Alabama Sewer Revenue Refunding Warrants, reported at a fair value of $7,453 after reflecting a $5,140 other than temporary impairment and a $957 temporary decline in market value against its $13,550 par value and original cost.  This other-than-temporary impairment was recorded in other income (expense), net in 2008.  In 2008, this auction rate security was determined to be other-than-temporarily impaired due to the duration and severity of the decline in fair value.  At June 30, 2012, the Company estimated the fair value of this auction rate security utilizing market comparable bonds.  The significant unobservable inputs used in the fair value measurement of the reporting entity’s auction rate securities are the market prices on fixed income securities with terms similar to those of the auction rate securities.  Significant increases or decreases in these inputs in isolation would result in a significantly lower or higher fair value measurement. The trading range of these inputs was between 54% and 64%, with a weighted average of 60%, of the original par value.  The Company classified this auction rate security as non-current and has included it in long term investments on the Condensed Consolidated Statements of Financial Position at June 30, 2012, December 31, 2011 and July 2, 2011 because the Company believes that the current condition of the auction rate security market may take more than twelve months to improve.  Jefferson County is in bankruptcy and has asked the bankruptcy court judge to divert some money to municipal sewer repairs that would have otherwise gone to pay debtholders and other creditors. A ruling in favor of the county could further reduce the market value of this auction rate security resulting in an additional other-than-temporary impairments and charges to net earnings. The Company is not currently able to determine the outcome of this bankruptcy, or the amount and timing of the ultimate net proceeds that it may recover. See also Management’s Discussion and Analysis of Financial Condition and Results of Operations regarding Jefferson County auction rate security.

 

The following table presents additional information about the Company’s financial instruments (an auction rate security) measured at fair value on a recurring basis using significant unobservable inputs (Level 3) at June 30, 2012 and July 2, 2011:

 

		2012			2011
Balance at January 1		$	7,453		$	6,775
Unrealized gain in other comprehensive earnings		—			1,355
Balance at June 30 and July 2, respectively		$	7,453		$	8,130

 

Management believes that the economic situation in Spain is likely to result in additional equity method operating losses in the foreseeable future, and consequently, the Company’s equity investment (current carrying value is $3,270) may suffer an other than temporary decline in value at a future date. Should such a decline in value occur, the Company may be required to recognize a partial or full impairment of this investment asset.

 

The $7,500 carrying amount of the Company’s industrial revenue development bonds at June 30, 2012 and July 2, 2011 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

 

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