TOOTSIE ROLL INDUSTRIES INC - Quarter Report: 2013 September (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 September 28, 2013

 

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     (September 28, 2013).

 

Class		Outstanding
Common Stock, $.69 4/9 par value		37,376,085
Class B Common Stock, $.69 4/9 par value		22,259,270

 

 

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TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES

 

September 28, 2013

 

INDEX

 

		Page No.
Part I —	Financial Information
Item 1.	Financial Statements:
	Condensed Consolidated Statements of Financial Position	3-4
	Condensed Consolidated Statements of Earnings and Retained Earnings	5
	Condensed Consolidated Statements of Comprehensive Earnings	6
	Condensed Consolidated Statements of Cash Flows	7
	Notes to Condensed Consolidated Financial Statements	8-15
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16-20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	21
Item 4.	Controls and Procedures	21
Part II —	Other Information
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	22
Item 6.	Exhibits	22
Signatures		23
Certifications		24-26

 

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)

 

		September 28, 2013			December 31, 2012			September 29, 2012
ASSETS
CURRENT ASSETS:
Cash & cash equivalents		$	32,734		$	63,862		$	37,124
Investments		31,579			18,746			14,563
Trade accounts receivable, less allowances of $3,446, $2,142 & $3,501		102,786			42,108			111,578
Other receivables		3,466			5,528			6,539
Inventories:
Finished goods & work-in-process		40,437			37,046			36,506
Raw material & supplies		29,044			25,337			28,925
Prepaid expenses		1,463			4,148			4,167
Deferred income taxes		4,942			466			600
Total current assets		246,451			197,241			240,002
PROPERTY, PLANT & EQUIPMENT, at cost:
Land		21,679			21,687			21,694
Buildings		108,376			108,391			107,962
Machinery & equipment		328,520			331,110			323,277
Construction in progress		12,878			2,539			9,566
		471,453			463,727			462,499
Less-accumulated depreciation		274,448			262,437			258,112
Net property, plant and equipment		197,005			201,290			204,387
OTHER ASSETS:
Goodwill		73,237			73,237			73,237
Trademarks		175,024			175,024			175,024
Investments		162,371			126,812			129,345
Split dollar officer life insurance		41,394			66,911			70,549
Prepaid expenses		—			—			680
Deferred income taxes		6,026			6,222			8,015
Total other assets		458,052			448,206			456,850
Total assets		$	901,508		$	846,737		$	901,239

 

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

 

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(in thousands except per share data) (UNAUDITED)

 

		September 28, 2013			December 31, 2012			September 29, 2012
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable		$	14,801		$	8,942		$	18,050
Dividends payable		4,770			—			4,689
Accrued liabilities		49,539			45,150			49,891
Postretirement health care and life insurance benefits		555			555			574
Income taxes payable		11,113			6,118			8,137
Total current liabilities		80,778			60,765			81,341
NONCURRENT LIABILITIES:
Deferred income taxes		43,423			38,748			43,265
Postretirement health care and life insurance benefits		29,401			26,826			27,788
Industrial development bonds		7,500			7,500			7,500
Liability for uncertain tax positions		7,794			7,866			8,019
Deferred compensation and other liabilities		64,988			55,217			54,665
Total noncurrent liabilities		153,106			136,157			141,237
SHAREHOLDERS’ EQUITY:
Common stock, $.69-4/9 par value- 120,000 shares authorized; 37,376, 36,649 & 36,998, respectively, issued		25,955			25,450			25,693
Class B common stock, $.69-4/9 par value- 40,000 shares authorized; 22,259, 21,627 & 21,629, respectively, issued		15,458			15,018			15,020
Capital in excess of par value		584,128			547,576			556,771
Retained earnings		60,478			80,210			101,171
Accumulated other comprehensive loss		(16,403		)	(16,447		)	(18,002		)
Treasury stock (at cost)- 76, 73 & 73 shares, respectively		(1,992		)	(1,992		)	(1,992		)
Total shareholders’ equity		667,624			649,815			678,661
Total liabilities and shareholders’ equity		$	901,508		$	846,737		$	901,239

 

(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 AND RETAINED EARNINGS

(in thousands except per share amounts)    (UNAUDITED)

 

		Quarter Ended						Year to Date Ended
		September 28, 2013			September 29, 2012			September 28, 2013			September 29, 2012
Net product sales		$	191,807		$	200,274		$	404,074		$	418,193
Rental and royalty revenue		902			908			2,807			2,948
Total revenue		192,709			201,182			406,881			421,141
Product cost of goods sold		125,833			135,852			264,974			283,615
Rental and royalty cost		223			232			698			739
Total costs		126,056			136,084			265,672			284,354
Product gross margin		65,974			64,422			139,100			134,578
Rental and royalty gross margin		679			676			2,109			2,209
Total gross margin		66,653			65,098			141,209			136,787
Selling, marketing and administrative expenses		33,166			32,685			87,620			84,946
Earnings from operations		33,487			32,413			53,589			51,841
Other income, net		3,105			1,537			7,401			4,428
Earnings before income taxes		36,592			33,950			60,990			56,269
Provision for income taxes		10,549			11,027			17,509			17,061
Net earnings		26,043			22,923			43,481			39,208
Net earnings per share		$	0.44		$	0.38		$	0.73		$	0.65
Dividends per share *		$	0.08		$	0.08		$	0.24		$	0.24
Average number of shares outstanding		59,579			60,456			59,723			60,634
Retained earnings at beginning of period		$	39,199		$	82,931		$	80,210		$	114,269
Net earnings		26,043			22,923			43,481			39,208
Cash dividends		(4,764		)	(4,683		)	(14,185		)	(13,972		)
Stock dividends		—			—			(49,028		)	(38,334		)
Retained earnings at end of period		$	60,478		$	101,171		$	60,478		$	101,171

 

*Does not include 3% stock dividend to shareholders of record on 3/5/13 and 3/6/12.

 

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

 

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TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE EARNINGS

(in thousands except per share amounts) (UNAUDITED)

 

		Quarter Ended						Year to Date Ended
		September 28, 2013			September 29, 2012			September 28, 2013			September 29, 2012
Net earnings		$	26,043		$	22,923		$	43,481		$	39,208
Other comprehensive income (loss), before tax:
Foreign currency translation adjustments		(144		)	1,303			(245		)	1,644
Pension and post-retirement reclassification adjustment		—			—			—			—
Investments:
Unrealized gains (losses) for the period on investments		400			869			219			837
Less: reclassification adjustment for (gains) losses to net income		—			—			—			—
Unrealized gains (losses) on investments		400			869			219			837
Derivatives:
Unrealized gains (losses) for the period on derivatives		768			73			(964		)	(120		)
Less: reclassification adjustment for (gains) losses to net income		315			41			1,216			(241		)
Unrealized gains (losses) on derivatives		1,083			114			252			(361		)
Total other comprehensive income (loss), before tax		1,339			2,286			226			2,120
Income tax benefit (expense) related to items of other comprehensive income		(560		)	(378		)	(182		)	(169		)
Comprehensive earnings		$	26,822		$	24,831		$	43,525		$	41,159

(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
		September 28, 2013			September 29, 2012
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings		$	43,481		$	39,208
Adjustments to reconcile net earnings to net cash used in operating activities:
Depreciation and amortization		14,863			14,992
Loss from equity method investment		733			963
Amortization of marketable security premiums		2,274			1,318
Changes in operating assets and liabilities:
Accounts receivable		(60,765		)	(69,113		)
Other receivables		2,315			(3,508		)
Inventories		(7,141		)	6,696
Prepaid expenses and other assets		28,193			7,009
Accounts payable and accrued liabilities		10,301			13,906
Income taxes payable and deferred		5,124			7,272
Postretirement health care and life insurance benefits		2,575			2,254
Deferred compensation and other liabilities		2,801			2,403
Other		(175		)	715
Net cash from operating activities		44,579			24,115
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures		(10,593		)	(7,008		)
Net purchases of trading securities		(2,612		)	(2,489		)
Purchase of available for sale securities		(63,992		)	(33,502		)
Sale and maturity of available for sale securities		22,436			5,743
Net cash used in investing activities		(54,761		)	(37,256		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Shares purchased and retired		(11,429		)	(14,363		)
Dividends paid in cash		(9,517		)	(13,984		)
Net cash used in financing activities		(20,946		)	(28,347		)
Decrease in cash and cash equivalents		(31,128		)	(41,488		)
Cash and cash equivalents at beginning of year		63,862			78,612
Cash and cash equivalents at end of quarter		$	32,734		$	37,124
Supplemental cash flow information:
Income taxes paid, net		$	13,173		$	10,651
Interest paid		$	19		$	27
Stock dividend issued		$	48,925		$	38,237

 

(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

September 28, 2013

(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 amounts previously reported have been reclassified 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 2012 Annual Report on Form 10-K.

 

Results of operations for the period ended September 28, 2013 are not necessarily indicative of results to be expected for the year to end December 31, 2013 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 July 2013, the FASB issued ASU 2013-11, which requires presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists.  ASU 2013-11 provides explicit guidance on presentation in financial statements.  The amendment is effective for reporting periods beginning after December 15, 2013.  The Company does not expect adoption of this ASU to significantly impact its consolidated financial statements.

 

In February 2013, the FASB issued ASU 2013-02 which requires additional disclosures regarding the reporting of reclassifications out of accumulated other comprehensive income. ASU 2013-02 requires an entity to present, either on the face of the income statement or in the notes, significant amounts reclassified out of accumulated other comprehensive income if the amount is reclassified in its entirety in the same reporting period. This guidance is effective for reporting periods beginning after December 15, 2012. The Company adopted this guidance effective January 1, 2013. The Company’s adoption of this standard did not have a significant impact on its consolidated financial statements.

 

In July 2012, the FASB issued ASU 2012-02, which allows an entity to first assess qualitative factors to determine whether it is necessary to perform a quantitative impairment test of an indefinite-lived intangible asset.  Per the terms of this ASU, an entity would not be required to calculate the fair value of an indefinite-lived intangible asset unless the entity determines, based on qualitative assessment, that it is not more likely than not, the indefinite-lived intangible asset is impaired.  The revised standard is effective for annual and interim impairment tests performed for fiscal years beginning after December 15, 2012; however, early adoption is permitted. The Company does not expect adoption of this ASU to significantly impact the notes to the consolidated financial statements.

 

In March 2013, the FASB issued ASU 2013-05, which permits an entity to release cumulative translation adjustments into net income when a reporting entity (parent) ceases to have a controlling financial interest in a subsidiary or group of assets that is a business within a foreign entity. Accordingly, the cumulative translation adjustment should be released into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided, or, if a controlling financial interest is no longer held. The revised standard is effective for fiscal years beginning after December 15, 2013; however, early adoption is permitted. The Company does not expect adoption of this ASU to significantly impact its consolidated financial statements.

 

Note 2 — Average Shares Outstanding

 

The average number of shares outstanding for year to date ended September 28, 2013 reflect stock purchases of 384 shares for $11,429 and a 3% stock dividend distributed on April 5, 2013. The average number of shares outstanding for year to date ended September 29, 2012 reflect stock purchases of 593 shares for $14,363 and a 3% stock dividend distributed on April 5, 2012. The average number of shares for third quarter 2013 and 2012 reflect stock purchases of 28 shares for $861 and 287 shares for $7,287, respectively.

 

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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 2009 through 2012. With few exceptions, the Company is no longer subject to examination by tax authorities for the year 2008 and prior. The consolidated effective tax rates were 28.8% and 32.5% in third quarter 2013 and 2012, respectively, and 28.7% and 30.3% in nine months 2013 and 2012, respectively. The lower effective income tax rate in third quarter 2013 compared to third quarter 2012 reflects lower state income tax expense including the settlement of certain state income tax issues. The lower effective tax rate in the nine months 2013 period is primarily due to the release of certain tax valuation allowances relating to prior capital losses as a result of capital gains realized during nine months 2013. In addition, the Company’s overall effective tax rate on foreign earnings, primarily Canada and Mexico, reflect statutory rates which are lower than the 35.0% U.S. statutory corporate income tax rate.

 

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 September 28, 2013, December 31, 2012 and September 29, 2012, 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 September 28, 2013, December 31, 2012 and September 29, 2012, and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value:

 

		Estimated Fair Value September 28, 2013
		Total			Input Levels Used
		Fair Value			Level 1			Level 2			Level 3
Cash and cash equivalents		$	32,734		$	32,734		$	—		$	—
Auction rate security		10,162			—			—			10,162
Available for sale securities excluding the auction rate security		123,391			—			123,391			—
Foreign currency forward contracts		29			—			29			—
Commodity futures contracts		97			97			—			—
Trading securities		58,968			58,968			—			—
Total assets measured at fair value		$	225,381		$	91,799		$	123,420		$	10,162

 

		Estimated Fair Value December 31, 2012
		Total			Input Levels Used
		Fair Value			Level 1			Level 2			Level 3
Cash and cash equivalents		$	63,862		$	63,862		$	—		$	—
Auction rate security		9,485			—			—			9,485
Available for sale securities excluding the auction rate security		84,568			—			84,568			—
Commodity futures contracts, net		(112		)	(112		)	—			—
Trading securities		49,378			49,378			—			—
Total assets measured at fair value		$	207,181		$	113,128		$	84,568		$	9,485

 

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		Estimated Fair Value September 29, 2012
		Total			Input Levels Used
		Fair Value			Level 1			Level 2			Level 3
Cash and cash equivalents		$	37,124		$	37,124		$	—		$	—
Auction rate security		8,130			—			—			8,130
Available for sale securities excluding the auction rate security		84,437			—			84,437			—
Foreign currency forward contracts		—			—			—			—
Commodity futures contracts		48			48			—			—
Commodity options contracts		100			100			—			—
Trading securities		48,382			48,382			—			—
Total assets measured at fair value		$	178,221		$	85,654		$	84,437		$	8,130

 

As of September 28, 2013, the Company’s long-term investments include $10,162 ($13,550 original cost) of Jefferson County Alabama Sewer Revenue Refunding Warrants, originally purchased with an insurance-backed AAA rating.  This is an auction rate security that is classified as an available for sale security.  Due to adverse events related to Jefferson County and its bond insurance carrier, Financial Guaranty Insurance Company (FGIC), as well as events in the credit markets, the auctions for this auction rate security have failed since 2008.  As such, the Company continues to estimate the fair value of this auction rate security utilizing a valuation model with Level 3 inputs, as defined by guidance.  This valuation model considered, among others items, a limited number of market trades, the credit risk of the collateral underlying the auction rate security, the credit risk of the bond insurer, interest rates, and the amount and timing of expected future cash flows including assumptions about the market expectation of the next successful auction or possible negotiated settlement between Jefferson County and the debt holders.  The trading range of these inputs was between 65.2% and 73.0% of the original par value. Both Jefferson County and FGIC are in bankruptcy. During the second quarter 2013, Jefferson County and the holders of its bonds and warrants reached an agreement whereby Jefferson County would issue replacement securities with a value of approximately 80% of the face value of the original bonds and warrants. The agreement is subject to approval by the bankruptcy court which is scheduled to meet at a future date. Nonetheless, future rulings by the bankruptcy courts could have adverse effects to the holders of warrants and other debt, and 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 with certainty the outcome of this matter, or the amount and timing of the ultimate net proceeds that it may recover. See also the Company’s consolidated financial statements and related notes and Management’s Discussion and Analysis included in the Company’s 2012 Form 10-K and annual report.

 

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 September 28, 2013 and September 29, 2012:

 

		2013			2012
Balance at January 1		$	9,485		$	7,453
Unrealized gain in other comprehensive earnings		677			677
Balance at September 28 and September 29, respectively		$	10,162		$	8,130

 

The fair value of the Company’s industrial revenue development bonds at September 28, 2013 and September 29, 2012 were valued using Level 2 inputs which approximates the carrying value of $7,500 for both periods. Interest rates on these bonds are reset weekly based on current market conditions.

 

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 from foreign suppliers denominated in a foreign currency. The Company does not engage in trading or other speculative use of derivative instruments.

 

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