TOOTSIE ROLL INDUSTRIES INC - Quarter Report: 2013 March (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 March 30, 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 (March 30, 2013).

 

 

 

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TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES

 

MARCH 30, 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, Comprehensive Earnings and Retained Earnings		5
	Condensed Consolidated Statements of Cash Flows		6
	Notes to Condensed Consolidated Financial Statements		7-12
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		13-17
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		17
Item 4.	Controls and Procedures		17
Part II —	Other Information
Item 1.	Legal Proceedings		18
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		18
Item 6.	Exhibits		18
Signatures			19
Certifications			20-22

 

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.  See “Forward-Looking Statements” under Part I — Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Quarterly Report on Form 10-Q.

 

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PART I - FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

(in thousands) (UNAUDITED)

 

		March 30, 2013			December 31, 2012			March 31, 2012
ASSETS
CURRENT ASSETS
Cash & cash equivalents		$	50,887		$	63,862		$	79,909
Investments		22,356			18,746			10,994
Trade accounts receivable,
Less allowances of $2,187, $2,142 & $1,618		37,708			42,108			37,227
Other receivables		5,352			5,528			2,966
Inventories, at cost
Finished goods & work in process		42,205			37,046			41,617
Raw material & supplies		34,770			25,337			30,737
Prepaid expenses		3,413			4,148			5,312
Deferred income taxes		4,951			466			593
Total current assets		201,642			197,241			209,355
PROPERTY, PLANT & EQUIPMENT, at cost
Land		21,723			21,687			21,697
Buildings		108,453			108,391			107,968
Machinery & equipment		330,914			331,110			323,612
Construction in progress		4,716			2,539			5,797
		465,806			463,727			459,074
Less-accumulated depreciation		266,979			262,437			248,369
Net property, plant and equipment		198,827			201,290			210,705
OTHER ASSETS
Goodwill		73,237			73,237			73,237
Trademarks		175,024			175,024			175,024
Investments		157,600			124,685			101,866
Split dollar officer life insurance		41,394			66,911			74,209
Prepaid expenses		—			—			2,389
Equity method investment		1,794			2,127			3,937
Deferred income taxes		6,151			6,222			7,914
Total other assets		455,200			448,206			438,576
Total assets		$	855,669		$	846,737		$	858,636

 

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

 

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(in thousands except per share data) (UNAUDITED)

 

		March 30, 2013			December 31, 2012			March 31, 2012
LIABILITIES AND SHAREHOLDERS’ EQUITY CURRENT LIABILITIES
Accounts payable		$	12,328		$	8,942		$	10,398
Dividends payable		103			—			97
Accrued liabilities		43,322			45,150			40,890
Postretirement health care and life insurance benefits		555			555			574
Income taxes payable		4,846			6,118			2,376
Total current liabilities		61,154			60,765			54,335
NONCURRENT LIABILITIES
Deferred income taxes		42,734			38,748			43,493
Postretirement health care and life insurance benefits		27,558			26,826			26,338
Industrial development bonds		7,500			7,500			7,500
Liability for uncertain tax positions		8,013			7,866			7,548
Deferred compensation and other liabilities		58,940			55,217			51,967
Total noncurrent liabilities		144,745			136,157			136,846
SHAREHOLDERS’ EQUITY
Common stock, $.69-4/9 par value- 120,000 shares authorized; 37,593, 36,649 & 37,390, respectively, issued		26,106			25,450			25,965
Class B common stock, $.69-4/9 par value- 40,000 shares authorized; 22,263, 21,627 & 21,652, respectively, issued		15,460			15,018			15,036
Capital in excess of par value		590,762			547,576			566,599
Retained earnings		35,598			80,210			80,128
Accumulated other comprehensive loss		(16,164		)	(16,447		)	(18,281		)
Treasury stock (at cost)- 76, 73 & 73 shares, respectively		(1,992		)	(1,992		)	(1,992		)
Total shareholders’ equity		649,770			649,815			667,455
Total liabilities and shareholders’ equity		$	855,669		$	846,737		$	858,636

 

(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
		March 30, 2013			March 31, 2012
Net product sales		$	110,279		$	109,763
Rental and royalty revenue		1,007			1,057
Total revenue		111,286			110,820
Product cost of goods sold		72,169			74,905
Rental and royalty cost		250			257
Total costs		72,419			75,162
Product gross margin		38,110			34,858
Rental and royalty gross margin		757			800
Total gross margin		38,867			35,658
Selling, marketing and administrative expenses		27,967			27,239
Earnings from operations		10,900			8,419
Other income, net		2,591			3,335
Earnings before income taxes		13,491			11,754
Provision for income taxes		4,422			2,980
Net earnings		9,069			8,774
Net earnings per share		$	0.15		$	0.14
Dividends per share *		$	0.08		$	0.08
Average number of shares outstanding		59,903			60,800
Other comprehensive income (loss), before tax
Foreign currency translation adjustments		1,122			1,851
Unrealized gains (losses) for the period on investments		(770		)	(546		)
Less: reclassification adjustment for (gains) losses to net income		—			—
Unrealized gains (losses) on investments		(770		)	(546		)
Unrealized gains (losses) for the period on derivatives		(930		)	506
Less: reclassification adjustment for (gains) losses to net income		355			(167		)
Unrealized gains (losses) on derivatives		(575		)	339
Total other comprehensive income (loss), before tax		(223		)	1,644
Income tax benefit related to items of other comprehensive income		506			28
Comprehensive earnings		$	9,352		$	10,446
Retained earnings at beginning of period		$	80,210		$	114,269
Net earnings		9,069			8,774
Cash dividends		(4,653		)	(4,581		)
Stock dividends		(49,028		)	(38,334		)
Retained earnings at end of period		$	35,598		$	80,128

 

*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 STATEMENTS OF CASH FLOWS

(in thousands)   (UNAUDITED)

 

		Year to Date Ended
		March 30, 2013			March 31, 2012
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings		$	9,069		$	8,774
Adjustments to reconcile net earnings to net cash used in operating activities:
Depreciation and amortization		4,901			4,953
(Gain) loss from equity method investment		282			122
Amortization of marketable security premiums		632			370
Changes in operating assets and liabilities:
Accounts receivable		4,644			4,955
Other receivables		(399		)	764
Inventories		(14,370		)	(175		)
Prepaid expenses and other assets		26,299			503
Accounts payable and accrued liabilities		1,467			(2,621		)
Income taxes payable and deferred		(1,001		)	1,724
Postretirement health care and life insurance benefits		732			804
Deferred compensation and other liabilities		633			511
Other		542			703
Net cash from operating activities		33,431			21,387
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures		(2,241		)	(3,250		)
Net purchases of trading securities		(1,945		)	(1,949		)
Purchase of available for sale securities		(47,335		)	(2,805		)
Sale and maturity of available for sale securities		14,409			1,346
Net cash used in investing activities		(37,112		)	(6,658		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Shares purchased and retired		(4,641		)	(4,247		)
Dividends paid in cash		(4,653		)	(9,185		)
Net cash used in financing activities		(9,294		)	(13,432		)
Increase(decrease) in cash and cash equivalents		(12,975		)	1,297
Cash and cash equivalents at beginning of year		63,862			78,612
Cash and cash equivalents at end of quarter		$	50,887		$	79,909
Supplemental cash flow information:
Income taxes paid, net		$	5,990		$	1,657
Interest paid		$	13		$	14
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

MARCH 30, 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 March 30, 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 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

 

Average shares outstanding for the period ended March 30, 2013 reflect stock purchases of 163 shares for $4,641 and a 3% stock dividend distributed on April 5, 2013. Average shares outstanding for the period ended March 31, 2012 reflect stock purchases of 179 shares for $4,247 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 consolidated effective tax rates were 32.8% and 25.4% in first quarter 2013 and 2012, respectively. The increase in the effective tax rate in first quarter 2013 principally reflects the reduction of uncertain tax positions resulting from the effective settlement of a state income tax examination in first quarter 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 March 30, 2013, December 31, 2012 and March 31, 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 March 30, 2013, December 31, 2012 and March 31, 2012, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value:

 

		Estimated Fair Value March 30, 2013
		Total			Input Levels Used
		Fair Value			Level 1			Level 2			Level 3
Cash and cash equivalents		$	50,887		$	50,887		$	—		$	—
Auction rate security		8,808			—			—			8,808
Available-for-sale securities excluding the auction rate security		116,771			—			116,771			—
Foreign currency forward contracts		(247		)	—			(247		)	—
Commodity futures contracts		(449		)	(449		)	—			—
Trading securities		54,377			54,377			—			—
Total assets measured at fair value		$	230,147		$	104,815		$	116,524		$	8,808

 

		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 March 31, 2012
		Total			Input Levels Used
		Fair Value			Level 1			Level 2			Level 3
Cash and cash equivalents		$	79,909		$	79,909		$	—		$	—
Auction rate security		6,775			—			—			6,775
Available-for-sale securities excluding the auction rate security		59,054			—			59,054			—
Foreign currency forward contracts		308			—			308			—
Commodity futures contracts		440			440			—			—
Commodity options contracts		33			33			—			—
Trading securities		47,031			47,031			—			—
Total assets measured at fair value		$	193,550		$	127,413		$	59,362		$	6,775

 

As of March 30, 2013, the Company’s long-term investments include $8,808 ($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 the County and debt holders.  The trading range of these inputs was between 64.4% and 76.0% of the original par value. Both Jefferson County and FGIC are in bankruptcy. 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 the outcome of this bankruptcy, 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 March 30, 2013 and March 31,2012:

 

		2013			2012
Balance at January 1		$	9,485		$	7,453
Unrealized loss in other comprehensive earnings		(677		)	(678		)
Balance at March 30 and March 31, respectively		$	8,808		$	6,775

 

The fair value of the Company’s industrial revenue development bonds at March 30, 2013 and March 31, 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.

 

The Company recognizes all derivative instruments as either assets or liabilities at fair value in the Condensed Consolidated Statement of Financial Position. Derivative assets are recorded in other receivables and derivative liabilities are recorded in accrued liabilities. The Company uses either hedge accounting or mark-to-market accounting for its derivative instruments.

 

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Derivatives that qualify for hedge accounting are designated as cash flow hedges by formally documenting the hedge relationships, including identification of the hedging instruments, the hedged items and other critical terms, as well as the Company’s risk management objectives and strategies for undertaking the hedge transaction.

 

Changes in the fair value of the Company’s cash flow hedges are recorded in accumulated other comprehensive loss, net of tax, and are reclassified to earnings in the periods in which earnings are affected by the hedged item. Substantially all amounts reported in accumulated other comprehensive loss for commodity derivatives are expected to be reclassified to cost of goods sold. Substantially all amounts reported in accumulated other comprehensive loss for foreign currency derivatives are expected to be reclassified to other income, net.

 

The following table summarizes the Company’s outstanding derivative contracts and their effects on its Condensed Consolidated Statements of Financial Position at March 30, 2013, December 31, 2012 and March 31, 2012:

 

		March 30, 2013
		Notional
		Amounts			Assets			Liabilities
Derivatives designated as hedging instruments:
Foreign currency forward contracts		$	14,449		$	—		$	(247	)
Commodity futures contracts		6,454			4			(507		)
Total derivatives designated as hedging instruments					4			(754		)
Derivatives not designated as hedging instruments:
Commodity futures contracts		481			54			—
Total derivatives not designated as hedging instruments					54			—
Total derivatives					$	58		$	(754	)

 

		December 31, 2012
		Notional
		Amounts			Assets			Liabilities
Derivatives designated as hedging instruments:
Commodity futures contracts		$	7,868		$	127		$	(301	)
Total derivatives designated as hedging instruments					127			(301		)
Derivatives not designated as hedging instruments:
Commodity futures contracts		627			62			—
Total derivatives not designated as hedging instruments					62			—
Total derivatives					$	189		$	(301	)

 

		March 31, 2012
		Notional
		Amounts			Assets			Liabilities
Derivatives designated as hedging instruments:
Foreign currency forward contracts		$	8,698		$	308		$	—
Commodity futures contracts		5,623			499			(59		)
Commodity option contracts		1,701			33			—
Total derivatives designated as hedging instruments					840			(59		)
Derivatives not designated as hedging instruments:
Commodity futures contracts		850			—			—
Total derivatives not designated as hedging instruments					—			—
Total derivatives					$	840		$	(59	)

 

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