TOOTSIE ROLL INDUSTRIES INC - Quarter Report: 2013 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 29, 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     (June 29, 2013).

 

 

 

 

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TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES

 

June 29, 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 1.		Legal Proceedings	22
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)

 

		June 29, 2013			December 31, 2012			June 30, 2012
ASSETS
CURRENT ASSETS:
Cash & cash equivalents		$	31,946		$	63,862		$	66,617
Investments		24,868			18,746			12,820
Trade accounts receivable, less allowances of $1,907, $2,142 & $1,502		24,888			42,108			26,010
Other receivables		5,292			5,528			3,654
Inventories:
Finished goods & work-in-process		69,715			37,046			62,867
Raw material & supplies		29,841			25,337			33,112
Prepaid expenses		2,221			4,148			5,777
Deferred income taxes		4,935			466			578
Total current assets		193,706			197,241			211,435
PROPERTY, PLANT & EQUIPMENT, at cost:
Land		21,685			21,687			21,653
Buildings		108,387			108,391			107,891
Machinery & equipment		329,861			331,110			323,046
Construction in progress		8,392			2,539			7,940
		468,325			463,727			460,530
Less-accumulated depreciation		270,827			262,437			252,784
Net property, plant and equipment		197,498			201,290			207,746
OTHER ASSETS:
Goodwill		73,237			73,237			73,237
Trademarks		175,024			175,024			175,024
Investments		168,751			124,685			114,889
Split dollar officer life insurance		41,394			66,911			70,549
Prepaid expenses		—			—			1,564
Equity method investment		1,622			2,127			3,270
Deferred income taxes		5,926			6,222			7,723
Total other assets		465,954			448,206			446,256
Total assets		$	857,158		$	846,737		$	865,437

 

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

 

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(in thousands except per share data) (UNAUDITED)

 

		June 29, 2013			December 31, 2012			June 30, 2012
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable		$	11,630		$	8,942		$	14,374
Dividends payable		4,773			—			4,714
Accrued liabilities		45,773			45,150			42,889
Postretirement health care and life insurance benefits		555			555			574
Income taxes payable		249			6,118			—
Total current liabilities		62,980			60,765			62,551
NONCURRENT LIABILITIES:
Deferred income taxes		42,862			38,748			43,311
Postretirement health care and life insurance benefits		28,188			26,826			27,051
Industrial development bonds		7,500			7,500			7,500
Liability for uncertain tax positions		8,261			7,866			7,580
Deferred compensation and other liabilities		60,941			55,217			51,644
Total noncurrent liabilities		147,752			136,157			137,086
SHAREHOLDERS’ EQUITY:
Common stock, $.69-4/9 par value- 120,000 shares authorized; 37,401, 36,649 & 37,273, respectively, issued		25,973			25,450			25,884
Class B common stock, $.69-4/9 par value- 40,000 shares authorized; 22,261, 21,627 & 21,641, respectively, issued		15,459			15,018			15,028
Capital in excess of par value		584,969			547,576			563,859
Retained earnings		39,199			80,210			82,931
Accumulated other comprehensive loss		(17,182		)	(16,447		)	(19,910		)
Treasury stock (at cost)- 76, 73 & 73 shares, respectively		(1,992		)	(1,992		)	(1,992		)
Total shareholders’ equity		646,426			649,815			665,800
Total liabilities and shareholders’ equity		$	857,158		$	846,737		$	865,437

 

(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
		June 29, 2013			June 30, 2012			June 29, 2013			June 30, 2012
Net product sales		$	101,988		$	108,156		$	212,267		$	217,919
Rental and royalty revenue		898			983			1,905			2,040
Total revenue		102,886			109,139			214,172			219,959
Product cost of goods sold		66,972			72,858			139,141			147,763
Rental and royalty cost		225			250			475			507
Total costs		67,197			73,108			139,616			148,270
Product gross margin		35,016			35,298			73,126			70,156
Rental and royalty gross margin		673			733			1,430			1,533
Total gross margin		35,689			36,031			74,556			71,689
Selling, marketing and administrative expenses		26,487			25,022			54,454			52,261
Earnings from operations		9,202			11,009			20,102			19,428
Other income (expense), net		1,705			(444		)	4,296			2,891
Earnings before income taxes		10,907			10,565			24,398			22,319
Provision for income taxes		2,538			3,054			6,960			6,034
Net earnings		8,369			7,511			17,438			16,285
Net earnings per share		$	0.14		$	0.12		$	0.29		$	0.27
Dividends per share *		$	0.08		$	0.08		$	0.16		$	0.16
Average number of shares outstanding		59,667			60,652			59,785			60,728
Retained earnings at beginning of period		$	35,598		$	80,128		$	80,210		$	114,269
Net earnings		8,369			7,511			17,438			16,285
Cash dividends		(4,768		)	(4,708		)	(9,421		)	(9,289		)
Stock dividends		—			—			(49,028		)	(38,334		)
Retained earnings at end of period		$	39,199		$	82,931		$	39,199		$	82,931

*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
		June 29, 2013			June 30, 2012			June 29, 2013			June 30, 2012
Net earnings		$	8,369		$	7,511		$	17,438		$	16,285
Other comprehensive income (loss), before tax:
Foreign currency translation adjustments		(1,223		)	(1,510		)	(101		)	341
Pension and post-retirement reclassification adjustment		—			—			—			—
Investments:
Unrealized gains (losses) for the period on investments		589			514			(181		)	(32		)
Less: reclassification adjustment for (gains) losses to net income		—			—			—			—
Unrealized gains (losses) on investments		589			514			(181		)	(32		)
Derivatives:
Unrealized gains (losses) for the period on derivatives		(802		)	(699		)	(1,732		)	(193		)
Less: reclassification adjustment for (gains) losses to net income		546			(115		)	901			(282		)
Unrealized gains (losses) on derivatives		(256		)	(814		)	(831		)	(475		)
Total other comprehensive income (loss), before tax		(890		)	(1,810		)	(1,113		)	(166		)
Income tax benefit (expense) related to items of other comprehensive income		(128		)	181			378			209
Comprehensive earnings		$	7,351		$	5,882		$	16,703		$	16,328

(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 29, 2013			June 30, 2012
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings		$	17,438		$	16,285
Adjustments to reconcile net earnings to net cash used in operating activities:
Depreciation and amortization		9,783			9,844
(Gain) loss from equity method investment		477			589
Amortization of marketable security premiums		1,468			765
Changes in operating assets and liabilities:
Accounts receivable		17,207			15,954
Other receivables		(594		)	(738		)
Inventories		(37,188		)	(24,114		)
Prepaid expenses and other assets		27,442			5,406
Accounts payable and accrued liabilities		3,317			3,467
Income taxes payable and deferred		(5,159		)	(1,548		)
Postretirement health care and life insurance benefits		1,362			1,517
Deferred compensation and other liabilities		1,620			1,235
Other		(80		)	212
Net cash from operating activities		37,093			28,874
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures		(5,960		)	(5,373		)
Net purchases of trading securities		(2,269		)	(2,167		)
Purchase of available for sale securities		(63,992		)	(20,071		)
Sale and maturity of available for sale securities		18,530			3,094
Net cash used in investing activities		(53,691		)	(24,517		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Shares purchased and retired		(10,568		)	(7,076		)
Dividends paid in cash		(4,750		)	(9,276		)
Net cash used in financing activities		(15,318		)	(16,352		)
Increase(decrease) in cash and cash equivalents		(31,916		)	(11,995		)
Cash and cash equivalents at beginning of year		63,862			78,612
Cash and cash equivalents at end of quarter		$	31,946		$	66,617
Supplemental cash flow information:
Income taxes paid, net		$	12,996		$	8,550
Interest paid		$	17		$	20
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

June 29, 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 June 29, 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 certain 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 statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income 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 its 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 June 29, 2013 reflect stock purchases of 356 shares for $10,568 and a 3% stock dividend distributed on April 5, 2013. The average number of shares outstanding for year to date ended June 30, 2012 reflect stock purchases of 306 shares for $7,076 and a 3% stock dividend distributed on April 5, 2012.

 

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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 examinations by tax authorities for the year 2008 and prior. The lower effective income tax rate in second quarter 2013 compared to second quarter 2012 reflects the release of certain tax valuation allowances relating to prior capital losses as a result of capital gains realized in second quarter 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% 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 June 29, 2013, December 31, 2012 and June 30, 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 June 29, 2013, December 31, 2012 and June 30, 2012, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value:

 

		Estimated Fair Value June 29, 2013
		Total			Input Levels Used
		Fair Value			Level 1			Level 2			Level 3
Cash and cash equivalents		$	31,946		$	31,946		$	—		$	—
Auction rate security		10,162			—			—			10,162
Available-for-sale securities excluding the auction rate security		127,704			—			127,704			—
Foreign currency forward contracts		(759		)	—			(759		)	—
Commodity futures contracts		(223		)	(223		)	—			—
Trading securities		55,753			55,753			—			—
Total assets measured at fair value		$	224,583		$	87,476		$	126,945		$	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 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

 

As of June 29, 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 67.4% and 82.8% 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 and 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 June 29, 2013 and June 30, 2012:

 

		2013			2012
Balance at January 1		$	9,485		$	7,453
Unrealized loss in other comprehensive earnings		677			—
Balance at June 29 and June 30, respectively		$	10,162		$	7,453

 

The fair value of the Company’s industrial revenue development bonds at June 29, 2013 and June 30, 2012 were valued using Level 2 inputs which approximates the carrying value of $7,500 for both periods. Interest rates on these bonds 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, and periodic equipment purchases 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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