TOOTSIE ROLL INDUSTRIES INC - Quarter Report: 2014 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 29, 2014

 

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 29, 2014).

 

Class		Outstanding
Common Stock, $.69 4/9 par value		37,861,229
Class B Common Stock, $.69 4/9 par value		22,915,279

 

 

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TOOTSIE ROLL INDUSTRIES, INC.

 

March 29, 2014

 

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	8-13
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14-17
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	17
Item 4.	Controls and Procedures	17
Part II —	Other Information
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.

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

(in thousands) (UNAUDITED)

 

		March 29, 2014			December 31, 2013			March 30, 2013
ASSETS
CURRENT ASSETS:
Cash & cash equivalents		$	51,179		$	88,283		$	50,887
Investments		37,772			33,572			22,356
Trade accounts receivable, less allowances of $2,068, $2,042 & $2,187		45,292			40,721			37,708
Other receivables		3,925			4,616			5,352
Inventories:
Finished goods & work-in-process		50,354			37,012			42,205
Raw material & supplies		29,913			24,844			34,770
Prepaid expenses		5,962			5,581			3,413
Deferred income taxes		2,955			5,482			4,951
Total current assets		227,352			240,111			201,642
PROPERTY, PLANT & EQUIPMENT, at cost:
Land		22,540			21,683			21,723
Buildings		111,409			111,044			108,453
Machinery & equipment		342,217			340,405			330,914
Construction in progress		5,393			3,403			4,716
		481,559			476,535			465,806
Less-accumulated depreciation		284,724			279,619			266,979
Net property, plant and equipment		196,835			196,916			198,827
OTHER ASSETS:
Goodwill		73,237			73,237			73,237
Trademarks		175,024			175,024			175,024
Investments		163,865			148,532			159,394
Split dollar officer life insurance		40,296			40,296			41,394
Prepaid expenses		9,375			10,260			—
Restricted cash		1,805			—			—
Deferred income taxes		4,121			4,033			6,151
Total other assets		467,723			451,382			455,200
Total assets		$	891,910		$	888,409		$	855,669

 

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

 

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(in thousands except per share data) (UNAUDITED)

 

		March 29, 2014			December 31, 2013			March 30, 2013
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable		$	14,566		$	9,153		$	12,328
Bank loan		226			—			—
Dividends payable		115			4,742			103
Accrued liabilities		45,038			45,580			43,322
Postretirement health care and life insurance benefits		319			319			555
Income taxes payable		3,783			327			4,846
Total current liabilities		64,047			60,121			61,154
NONCURRENT LIABILITIES:
Deferred income taxes		54,072			54,939			42,734
Bank loans		1,011			—			—
Postretirement health care and life insurance benefits		8,999			8,857			27,558
Industrial development bonds		7,500			7,500			7,500
Liability for uncertain tax positions		9,826			7,167			8,013
Deferred compensation and other liabilities		70,238			69,520			58,940
Total noncurrent liabilities		151,646			147,983			144,745
TOOTSIE ROLL INDUSTRIES, INC. SHAREHOLDERS’ EQUITY:
Common stock, $.69-4/9 par value- 120,000 shares authorized; 37,861, 37,011 & 37,593, respectively, issued		26,293			25,702			26,106
Class B common stock, $.69-4/9 par value- 40,000 shares authorized; 22,915, 22,256 & 22,263, respectively, issued		15,913			15,455			15,460
Capital in excess of par value		615,922			572,669			590,762
Retained earnings		25,694			73,109			35,598
Accumulated other comprehensive loss		(6,153		)	(4,638		)	(16,164		)
Treasury stock (at cost)- 78, 76 & 76 shares, respectively		(1,992		)	(1,992		)	(1,992		)
Total Tootsie Roll Industries, Inc. shareholders’ equity		675,677			680,305			649,770
Noncontrolling interests		540			—			—
Total equity		676,217			680,305			649,770
Total liabilities and shareholders’ equity		$	891,910		$	888,409		$	855,669

 

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

 

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TOOTSIE ROLL INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF

EARNINGS AND RETAINED EARNINGS

(in thousands except per share amounts)   (UNAUDITED)

 

		Quarter Ended
		March 29, 2014			March 30, 2013
Net product sales		$	106,812		$	110,279
Rental and royalty revenue		970			1,007
Total revenue		107,782			111,286
Product cost of goods sold		66,865			72,169
Rental and royalty cost		258			250
Total costs		67,123			72,419
Product gross margin		39,947			38,110
Rental and royalty gross margin		712			757
Total gross margin		40,659			38,867
Selling, marketing and administrative expenses		25,631			27,967
Earnings from operations		15,028			10,900
Other income, net		1,666			2,591
Earnings before income taxes		16,694			13,491
Provision for income taxes		7,337			4,422
Net earnings		9,357			9,069
Less: Net loss attributable to noncontrolling interests		224			—
Net earnings attributable to Tootsie Roll Industries, Inc.		9,581			9,069
Net earnings attributable to Tootsie Roll Industries, Inc. per share		$	0.16		$	0.15
Dividends per share *		$	0.08		$	0.08
Average number of shares outstanding		60,814			61,667
Retained earnings at beginning of period		$	73,109		$	80,210
Net earnings attributable to Tootsie Roll Industries, Inc.		9,581			9,069
Cash dividends		(4,715		)	(4,653		)
Stock dividends		(52,281		)	(49,028		)
Retained earnings at end of period		$	25,694		$	35,598

 

*Does not include 3% stock dividend to shareholders of record on 3/4/14 and 3/5/13.

 

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

 

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TOOTSIE ROLL INDUSTRIES, INC

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE EARNINGS

(in thousands except per share amounts) (UNAUDITED)

 

		Quarter Ended
		March 29, 2014			March 30, 2013
Net earnings		$	9,357		$	9,069
Other comprehensive income (loss), before tax:
Foreign currency translation adjustments		(1,318		)	1,122
Pension and postretirement reclassification adjustment:
Unrealized gains (losses) for the period on postretirement and pension benefits		—			—
Less: reclassification adjustment for (gains) losses to net income		(451		)	—
Unrealized gains (losses) on postretirement and pension benefits		(451		)	—
Investments:
Unrealized gains (losses) for the period on investments		(216		)	(770		)
Less: reclassification adjustment for (gains) losses to net income		—			—
Unrealized gains (losses) on investments		(216		)	(770		)
Derivatives:
Unrealized gains (losses) for the period on derivatives		(833		)	(930		)
Less: reclassification adjustment for (gains) losses to net income		437			355
Unrealized gains (losses) on derivatives		(396		)	(575		)
Total other comprehensive income (loss), before tax		(2,381		)	(223		)
Income tax benefit (expense) related to items of other comprehensive income		866			506
Total comprehensive earnings		7,842			9,352
Comprehensive earnings attributable to noncontrolling interests		224			—
Total comprehensive earnings attributable to Tootsie Roll Industries, Inc.		$	8,066		$	9,352

 

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

 

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TOOTSIE ROLL INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands) (UNAUDITED)

 

		Year to Date Ended
		March 29, 2014			March 30, 2013
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings		$	9,357		$	9,069
Adjustments to reconcile net earnings to net cash used in operating activities:
Depreciation and amortization		5,124			4,901
Loss on step acquisition		529			—
Loss from equity method investment		—			282
Amortization of marketable security premiums		829			632
Changes in operating assets and liabilities:
Accounts receivable		(3,088		)	4,644
Other receivables		563			(399		)
Inventories		(16,663		)	(14,370		)
Prepaid expenses and other assets		534			26,299
Accounts payable and accrued liabilities		1,544			1,467
Income taxes payable and deferred		3,787			(1,001		)
Postretirement health care and life insurance benefits		(309		)	732
Deferred compensation and other liabilities		441			633
Other		(15		)	542
Net cash from operating activities		2,633			33,431
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash acquired in step acquisition		161			—
Restricted cash		179			—
Capital expenditures		(2,138		)	(2,241		)
Net sales (purchases) of trading securities		80			(1,945		)
Purchase of available for sale securities		(25,034		)	(47,335		)
Sale and maturity of available for sale securities		4,410			14,409
Net cash used in investing activities		(22,342		)	(37,112		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Shares purchased and retired		(7,864		)	(4,641		)
Dividends paid in cash		(9,458		)	(4,653		)
Repayment of bank loans		(73		)	—
Net cash used in financing activities		(17,395		)	(9,294		)
Decrease in cash and cash equivalents		(37,104		)	(12,975		)
Cash and cash equivalents at beginning of year		88,283			63,862
Cash and cash equivalents at end of quarter		$	51,179		$	50,887
Supplemental cash flow information:
Income taxes paid, net		$	1,419		$	5,990
Interest paid		$	30		$	13
Stock dividend issued		$	52,165		$	48,925

 

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

 

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TOOTSIE ROLL INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 29, 2014

(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. (the Company) and in the opinion of management all adjustments, which are of a normal recurring nature, necessary for a fair statement of the results for the interim period have been reflected. 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 2013 Annual Report on Form 10-K.

 

Results of operations for the period ended March 29, 2014 are not necessarily indicative of results to be expected for the year to end December 31, 2014 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.

 

The results of the Company’s two 50% owned Spanish companies are consolidated and a noncontrolling interest has been recorded. (See Note 10.)

 

Accounting Pronouncements

 

In July 2013, the Financial Accounting Standards Board (“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 adoption of this guidance did not have a significant impact on the condensed 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 adoption of this guidance did not have a significant impact on the condensed consolidated financial statements.

 

In April 2014, the FASB issued updated guidance on the reporting and disclosures of discontinued operations. The new guidance requires that the disposal of a component of an entity be reported as discontinued operations only if the action represents a strategic shift that will have a major effect on an entity’s operations and financial results, and would require expanded disclosures. This guidance will be effective beginning in the first quarter 2015. We do not expect the adoption of this guidance to have a significant impact on the condensed consolidated financial statements.

 

Note 2 — Average Shares Outstanding

 

The average number of shares outstanding for year to date ended March 29, 2014 reflect stock purchases of 257 shares for $7,864 and a 3% stock dividend distributed on April 4, 2014. The average number of shares outstanding for year to date ended March 30, 2013 reflect stock purchases of 163 shares for $4,641 and a 3% stock dividend distributed on April 5, 2013.

 

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 2010 through 2013. With few exceptions, the Company is no longer subject to examination by tax authorities for the year 2009 and prior. The consolidated effective tax rates were 43.9% and 32.8% in first quarter 2014 and 2013, respectively. The higher effective income tax rate in first quarter 2014 reflects a reversal of deferred tax assets of $2,350 as discussed in Note 10 relating to the step acquisition of the Spanish companies.

 

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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 29, 2014, December 31, 2013 and March 30, 2013, the Company held certain financial assets and liabilities 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. 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 29, 2014, December 31, 2013 and March 30, 2013, and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value:

 

		Estimated Fair Value March 29, 2014
		Total			Input Levels Used
		Fair Value			Level 1			Level 2			Level 3
Cash and cash equivalents		$	51,179		$	51,179		$	—		$	—
Available for sale securities		138,225			—			138,225			—
Foreign currency forward contracts		(1,613		)	—			(1,613		)	—
Commodity futures contracts		388			388			—			—
Trading securities		63,412			63,412			—			—
Total assets measured at fair value		$	251,591		$	114,979		$	136,612		$	—

 

		Estimated Fair Value December 31, 2013
		Total			Input Levels Used
		Fair Value			Level 1			Level 2			Level 3
Cash and cash equivalents		$	88,283		$	88,283		$	—		$	—
Available for sale securities		118,647			—			118,647			—
Foreign currency forward contracts		(684		)	—			(684		)	—
Commodity futures contracts, net		(130		)	(130		)	—			—
Trading securities		63,215			63,215			—			—
Total assets measured at fair value		$	269,331		$	151,368		$	117,963		$	—

 

		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

 

During the fourth quarter 2013, the Company sold its investment in Jefferson County Alabama Sewer Revenue Refunding Warrants for $10,840. This was an auction rate security (ARS) originally purchased for $13,550 in 2008 with an insurance-backed AAA rating. The Company recorded an other-than-temporary pre-tax impairment of $5,140 in 2008 on this ARS investment which resulted in a carrying value of $8,410 at that time. Since recording the initial impairment in 2008, the Company carried this ARS investment at its estimated fair value utilizing a valuation model with Level 3 inputs, as defined by guidance, and resulting changes in the market value since the original impairment charge in 2008 were recorded as changes to

 

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accumulated other comprehensive income (loss) each year. The fair value of this instrument at March 30, 2013 was $8,808, with an unrealized loss in other comprehensive earnings of $677 recorded during the first quarter 2013.

 

The fair value of the Company’s industrial revenue development bonds at March 29, 2014, December 31, 2013 and March 30, 2013 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

 

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.

 

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. 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 29, 2014, December 31, 2013 and March 30, 2013:

 

		March 29, 2014
		Notional
		Amounts			Assets			Liabilities
Derivatives designated as hedging instruments:
Foreign currency forward contracts		$	44,665		$	—		$	(1,613	)
Commodity futures contracts		5,154			382			—
Total derivatives designated as hedging instruments					382			(1,613		)
Derivatives not designated as hedging instruments:
Commodity futures contracts		195			6			—
Total derivatives not designated as hedging instruments					6			—
Total derivatives					$	388		$	(1,613	)

 

		December 31, 2013
		Notional
		Amounts			Assets			Liabilities
Derivatives designated as hedging instruments:
Foreign currency forward contracts		$	34,244		$	—		$	(684	)
Commodity futures contracts		5,601			41			(191		)
Total derivatives designated as hedging instruments					41			(875		)
Derivatives not designated as hedging instruments:
Commodity futures contracts		321			20			—
Total derivatives not designated as hedging instruments					20			—
Total derivatives					$	61		$	(875	)

 

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