TOOTSIE ROLL INDUSTRIES INC - Quarter Report: 2019 September (Form 10-Q)

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019

☐

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)


Virginia		22-1318955
(State of Incorporation)		(I.R.S. Employer Identification No.)


7401 South Cicero Avenue, Chicago, Illinois		60629
(Address of Principal Executive Offices)		(Zip Code)

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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files) Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☒

Accelerated filer ☐

Non-accelerated filer ☐

Smaller reporting company ☐

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) 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 ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date (September 30, 2019).


Class		Outstanding

Common Stock, $0.69-4/9 par value		39,019,205
Class B Common Stock, $0.69-4/9 par value		26,299,531

Securities registered pursuant to Section 12(b) of the Act:


Title of each class:	Trading Symbol	Name of each exchange on which registered:
Common Stock, par value $0.69-4/9 per share	TR	New York Stock Exchange

Table of Contents

TOOTSIE ROLL INDUSTRIES, INC.

SEPTEMBER 30, 2019

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	8-16

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17-21

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	22

Item 4.	Controls and Procedures	22

Part II —	Other Information

Item 1.	Legal Proceedings	23
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	23

Item 6.	Exhibits	23

Signatures		24

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.

Table of Contents

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

TOOTSIE ROLL INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

(in thousands) (Unaudited)



	September 30, 2019		December 31, 2018		September 30, 2018

ASSETS

CURRENT ASSETS:
Cash and cash equivalents	$	87,400	$	110,899	$	64,333
Restricted cash		369		388		393
Investments		76,766		75,140		68,373
Accounts receivable trade, less allowances of $2,728, $1,820 and $2,873		88,241		49,777		93,616
Other receivables		3,616		2,941		5,802
Inventories:
Finished goods and work-in-process		41,627		32,159		37,148
Raw materials and supplies		28,783		22,365		26,172
Prepaid expenses		5,504		10,377		6,439
Total current assets		332,306		304,046		302,276

PROPERTY, PLANT AND EQUIPMENT, at cost:
Land		21,712		21,726		21,968
Buildings		121,802		121,780		118,581
Machinery and equipment		400,885		401,037		381,522
Construction in progress		15,497		3,408		21,106
Operating lease right-of-use assets		1,770		-		-
		561,666		547,951		543,177
Less - accumulated depreciation		374,924		361,850		361,079
Net property, plant and equipment		186,742		186,101		182,098

OTHER ASSETS:
Goodwill		73,237		73,237		73,237
Trademarks		175,024		175,024		175,024
Investments		178,808		170,409		188,393
Split dollar officer life insurance		26,042		26,042		26,042
Prepaid expenses and other assets		9,411		11,980		13,249
Deferred income taxes		522		522		445
Total other assets		463,044		457,214		476,390
Total assets	$	982,092	$	947,361	$	960,764

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

Table of Contents

(in thousands except per share data) (Unaudited)



	September 30, 2019		December 31, 2018		September 30, 2018

LIABILITIES AND SHAREHOLDERS’ EQUITY

CURRENT LIABILITIES:
Accounts payable	$	18,020	$	11,817	$	18,637
Bank loans		768		373		190
Dividends payable		5,876		5,772		5,777
Accrued liabilities		44,982		42,849		45,787
Postretirement health care benefits		580		580		603
Operating lease liabilities		1,061		-		-
Income taxes payable		6,122		-		3,516
Total current liabilities		77,409		61,391		74,510

NONCURRENT LIABILITIES:
Deferred income taxes		44,867		43,941		41,382
Postretirement health care benefits		12,129		11,871		13,167
Industrial development bonds		7,500		7,500		7,500
Liability for uncertain tax positions		3,537		3,816		4,148
Operating lease liabilities		709		-		-
Deferred compensation and other liabilities		77,801		68,345		73,321
Total noncurrent liabilities		146,543		135,473		139,518

TOOTSIE ROLL INDUSTRIES, INC. SHAREHOLDERS’ EQUITY:
Common stock, $.69-4/9 par value - 120,000 shares authorized; 39,019, 38,544 and 38,621, respectively, issued		27,096		26,767		26,820
Class B common stock, $.69-4/9 par value - 40,000 shares authorized; 26,300, 25,584 and 25,599, respectively, issued		18,264		17,767		17,777
Capital in excess of par value		702,806		696,535		699,140
Retained earnings		32,107		33,767		27,356
Accumulated other comprehensive loss		(19,952)		(22,222)		(22,261)
Treasury stock (at cost) - 90, 88 and 88 shares, respectively		(1,992)		(1,992)		(1,992)
Total Tootsie Roll Industries, Inc. shareholders’ equity		758,329		750,622		746,840
Noncontrolling interests		(189)		(125)		(104)
Total equity		758,140		750,497		746,736
Total liabilities and shareholders’ equity	$	982,092	$	947,361	$	960,764

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

Table of Contents

TOOTSIE ROLL INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF

EARNINGS AND RETAINED EARNINGS

(in thousands except per share amounts) (Unaudited)



	Quarter Ended				Year to Date Ended
	September 30, 2019		September 30, 2018		September 30, 2019		September 30, 2018

Net product sales	$	181,913	$	181,505	$	388,953	$	387,987
Rental and royalty revenue		811		798		2,700		2,925
Total revenue		182,724		182,303		391,653		390,912
Product cost of goods sold		112,867		115,246		243,668		248,561
Rental and royalty cost		241		211		772		686
Total costs		113,108		115,457		244,440		249,247
Product gross margin		69,046		66,259		145,285		139,426
Rental and royalty gross margin		570		587		1,928		2,239
Total gross margin		69,616		66,846		147,213		141,665
Selling, marketing and administrative expenses		33,578		36,620		92,902		91,229
Earnings from operations		36,038		30,226		54,311		50,436
Other income (loss), net		1,846		2,987		10,916		6,871
Earnings before income taxes		37,884		33,213		65,227		57,307
Provision for income taxes		8,038		7,134		14,926		12,657
Net earnings		29,846		26,079		50,301		44,650
Less: net earnings (loss) attributable to noncontrolling interests		(8)		(25)		(64)		(68)
Net earnings attributable to Tootsie Roll Industries, Inc.	$	29,854	$	26,104	$	50,365	$	44,718

Net earnings attributable to Tootsie Roll Industries, Inc. per share	$	0.46	$	0.40	$	0.77	$	0.68
Dividends per share *	$	0.09	$	0.09	$	0.27	$	0.27

Average number of shares outstanding		65,344		66,069		65,598		66,182

Retained earnings at beginning of period	$	8,121	$	7,020	$	33,767	$	57,225
Net earnings attributable to Tootsie Roll Industries, Inc.		29,854		26,104		50,365		44,718
Adoption of ASU 2014-09 and 2018-02		-		-		-		2,726
Cash dividends		(5,868)		(5,768)		(17,519)		(17,164)
Stock dividends		-		-		(34,506)		(60,149)
Retained earnings at end of period	$	32,107	$	27,356	$	32,107	$	27,356

*Does not include 3% stock dividend to shareholders of record on 3/5/19 and 3/6/18.

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

Table of Contents

TOOTSIE ROLL INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE EARNINGS

(in thousands except per share amounts) (Unaudited)



	Quarter Ended				Year to Date Ended
	September 30, 2019		September 30, 2018		September 30, 2019		September 30, 2018

Net earnings	$	29,846	$	26,079	$	50,301	$	44,650

Other comprehensive income (loss), before tax:
Foreign currency translation adjustments		(353)		1,164		243		1,102

Pension and postretirement reclassification adjustments:
Unrealized gains (losses) for the period on postretirement and pension benefits		-		-		-		-
Less: reclassification adjustment for (gains) losses to net earnings		(380)		(331)		(1,141)		(993)
Unrealized gains (losses) on postretirement and pension benefits		(380)		(331)		(1,141)		(993)

Investments:
Unrealized gains (losses) for the period on investments		364		209		3,016		(1,071)
Less: reclassification adjustment for (gains) losses to net earnings		34		-		34		-
Unrealized gains (losses) on investments		398		209		3,050		(1,071)

Derivatives:
Unrealized gains (losses) for the period on derivatives		(492)		(573)		115		(2,422)
Less: reclassification adjustment for (gains) losses to net earnings		390		795		648		1,630
Unrealized gains (losses) on derivatives		(102)		222		763		(792)

Total other comprehensive income (loss), before tax		(437)		1,264		2,915		(1,754)
Income tax benefit (expense) related to items of other comprehensive income		22		(24)		(645)		691
Total comprehensive earnings		29,431		27,319		52,571		43,587
Comprehensive earnings (loss) attributable to noncontrolling interests		(8)		(25)		(64)		(68)
Total comprehensive earnings attributable to Tootsie Roll Industries, Inc.	$	29,439	$	27,344	$	52,635	$	43,655

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

Table of Contents

TOOTSIE ROLL INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands) (Unaudited)



	Year to Date Ended
	September 30, 2019		September 30, 2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings	$	50,301	$	44,650
Adjustments to reconcile net earnings to net cash used in operating activities:
Depreciation		14,112		13,933
Deferred income taxes		279		(443)
Amortization of marketable security premiums		976		1,351
Changes in operating assets and liabilities:
Accounts receivable		(38,516)		(45,881)
Other receivables		(702)		(649)
Inventories		(15,867)		(8,333)
Prepaid expenses and other assets		3,384		8,268
Accounts payable and accrued liabilities		10,635		10,932
Income taxes payable		9,863		15,821
Postretirement health care benefits		(883)		(720)
Deferred compensation and other liabilities		2,594		2,051
Net cash provided by operating activities		36,176		40,980
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures		(14,151)		(16,812)
Purchases of trading securities		(2,835)		(3,807)
Sales of trading securities		362		817
Purchase of available for sale securities		(49,999)		(65,098)
Sale and maturity of available for sale securities		51,580		45,379
Net cash used in investing activities		(15,043)		(39,521)
CASH FLOWS FROM FINANCING ACTIVITIES:
Shares purchased and retired		(27,232)		(16,650)
Dividends paid in cash		(17,592)		(17,208)
Proceeds from bank loans		2,662		1,264
Repayment of bank loans		(2,233)		(1,506)
Net cash used in financing activities		(44,395)		(34,100)
Effect of exchange rate changes on cash		(256)		647
Decrease in cash and cash equivalents		(23,518)		(31,994)
Cash, cash equivalents and restricted cash at beginning of year		111,287		96,720
Cash, cash equivalents and restricted cash at end of quarter	$	87,769	$	64,726
Supplemental cash flow information:
Income taxes paid/(received), net	$	5,182	$	(2,811)
Interest paid	$	95	$	81
Stock dividend issued	$	70,557	$	60,538

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

Table of Contents

TOOTSIE ROLL INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2019

(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 Form 10-K for the year ended December 31, 2018 (the “2018 Form 10-K”).

Results of operations for the period ended September 30, 2019 are not necessarily indicative of results to be expected for the year to end December 31, 2019 because of the seasonal nature of the Company’s operations. Historically, the third quarter has been the Company’s largest sales quarter due to pre-Halloween sales.

Revenue Recognition

The Company’s revenues, primarily net product sales, principally result from the sale of goods, reflect the consideration to which the Company expects to be entitled generally based on customer purchase orders. The Company records revenue based on a five-step model in accordance with Accounting Standards Codification ("ASC") Topic 606 which became effective January, 1, 2018. Adjustments for estimated customer cash discounts upon payment, discounts for price adjustments, product returns, allowances, and certain advertising and promotional costs, including consumer coupons, are variable consideration and are recorded as a reduction of product sales revenue in the same period the related product sales are recorded. Such estimates are calculated using historical averages adjusted for any expected changes due to current business conditions and experience. A net product sale is recorded when the Company delivers the product to the customer, or in certain instances, the customer picks up the goods at the Company’s distribution center, and thereby obtains control of such product. Amounts billed and due from our customers are classified as accounts receivable trade on the balance sheet and require payment on a short-term basis. Accounts receivable trade are unsecured. Shipping and handling costs of $14,536 and $14,698 in third quarter 2019 and 2018, respectively, and $36,753 and $36,304 in nine months 2019 and 2018, respectively, are included in selling, marketing and administrative expenses. A minor amount of royalty income (less than 0.2% of our consolidated net sales) is also recognized from sales-based licensing arrangements, pursuant to which revenue is recognized as the third-party licensee sales occur. Rental income (less than 1% of our consolidated net sales) is not considered revenue from contracts from customers.

Leases

The Company identifies leases by evaluating our contracts to determine if the contract conveys the right to use an identified asset for a stated period of time in exchange for consideration. The Company considers whether it can control the underlying asset and have the right to obtain substantially all of the economic benefits or outputs from the asset. Leases with terms greater than 12 months are classified as either operating or finance leases at the commencement date. For these leases, we capitalize the present value of the minimum lease payments over the lease term as a right-of-use asset with an offsetting lease liability. The discount rate used to calculate the present value of the minimum lease payments is typically our incremental borrowing rate, as the rate implicit in the lease is generally not known or determinable. The lease term includes any noncancelable period for which we have the right to use the asset. Currently, all capitalized leases are classified as operating leases and the Company records rental expense on a straight-line basis over the term of the lease.

Table of Contents

Recently Adopted Accounting Pronouncements

At the beginning of 2019, the Company adopted Accounting Standards Update No. 2016-02 (ASU 2016-02), Leases (Subtopic 842), which requires lessees to recognize all leases with a term greater than 12 months on the balance sheet as right-of-use assets and lease liabilities. Upon adoption, the impact was the recognition of $1,482 in right-of-use assets and lease liabilities for operating leases. The Company adopted ASU 2016-02 utilizing the current-period adjustment method and did not recast comparative periods upon adoption of the new standard. In addition, we elected certain practical expedients which permitted us to not reassess whether existing contracts are or contain leases, to not reassess the lease classification of any existing leases, to not reassess initial direct costs for any existing leases, and to not separate lease components for all classes of underlying assets. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

In August 2017, the FASB issued ASU 2017-12, guidance that amends hedge accounting. Under the new guidance, more hedging strategies are eligible for hedge accounting and the application of hedge accounting is simplified. The new guidance amends presentation and disclosure requirements, and how effectiveness is assessed. The guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those years. On January 1, 2019, the Company adopted ASU 2017-12. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

Recently Issued Accounting Pronouncements - Not Yet Adopted

In June 2016, the FASB issued ASU No. 2016-13, which replaces the current incurred loss impairment method with a new method that reflects expected credit losses. Under this new model an entity would recognize an impairment allowance equal to its current estimate of credit losses on financial assets measured at amortized cost. This guidance is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements.

Note 2 — Average Shares Outstanding

The average number of shares outstanding for nine months 2019 reflects aggregate stock purchases of 726 shares for $27,232 and a 3% stock dividend of 1,914 shares distributed on April 5, 2019. The average number of shares outstanding for nine months 2018 reflects aggregate stock purchases of 502 shares for $16,650 and a 3% stock dividend of 1,869 shares distributed on April 6, 2018.

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 2015 through 2017. The Company’s consolidated effective income tax rate was 21.2% and 21.5% in third quarter 2019 and 2018, respectively, and 22.9% and 22.1% in nine months 2019 and 2018, respectively. The higher tax rate in nine months 2019 principally reflects higher state income tax expense.

Table of Contents

NOTE 4—Share Capital and Capital In Excess of Par Value:


										Capital in
				Class B						Excess
	Common Stock			Common Stock			Treasury Stock			of Par
	Shares	Amount		Shares	Amount		Shares	Amount		Value
	(000’s)			(000’s)			(000’s)
Balance at June 30, 2019	39,233	$	27,245	26,302	$	18,264	90	$	(1,992)	$	710,703
Issuance of 3% stock dividend	—		—	—		—	—		—		—
Conversion of Class B common shares to common shares	2		—	(2)		—	—		—		—
Purchase and retirement of common shares and other	(216)		(149)	—		—	—		—		(7,897)
Balance at September 30, 2019	39,019	$	27,096	26,300	$	18,264	90	$	(1,992)	$	702,806

Balance at June 30, 2018	38,645	$	26,837	25,605	$	17,781	88	$	(1,992)	$	699,965
Issuance of 3% stock dividend	—		—	—		—	—		—		—
Conversion of Class B common shares to common shares	6		5	(6)		(5)	—		—		—
Purchase and retirement of common shares and other	(30)		(22)	-		1	—		—		(825)
Balance at September 30, 2018	38,621	$	26,820	25,599	$	17,777	88	$	(1,992)	$	699,140

Balance at December 31, 2018	38,544	$	26,767	25,584	$	17,767	88	$	(1,992)	$	696,535
Issuance of 3% stock dividend	1,150		798	767		532	2		—		32,999
Conversion of Class B common shares to common shares	51		35	(51)		(35)	—		—		—
Purchase and retirement of common shares and other	(726)		(504)	—		—	—		—		(26,728)
Balance at September 30, 2019	39,019	$	27,096	26,300	$	18,264	90	$	(1,992)	$	702,806

Balance at December 31, 2017	37,960	$	26,361	24,891	$	17,285	85	$	(1,992)	$	656,752
Issuance of 3% stock dividend	1,125		781	746		519	3		—		58,689
Conversion of Class B common shares to common shares	38		27	(38)		(27)	—		—		—
Purchase and retirement of common shares and other	(502)		(349)	—		—	—		—		(16,301)
Balance at September 30, 2018	38,621	$	26,820	25,599	$	17,777	88	$	(1,992)	$	699,140

Note 5 — Fair Value Measurements

Current accounting guidance defines fair value as the price that would be received on 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.

Table of Contents

As of September 30, 2019, December 31, 2018 and September 30, 2018, 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. The Company’s available for sale securities principally consist of municipal bonds and variable rate demand notes.

The following table presents information about the Company’s financial assets and liabilities measured at fair value as of September 30, 2019, December 31, 2018 and September 30, 2018 and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value:



	Estimated Fair Value September 30, 2019
	Total		Input Levels Used
	Fair Value		Level 1		Level 2		Level 3
Cash and cash equivalents	$	87,400	$	87,400	$	-	$	-
Available for sale securities		183,784		3,584		180,200		-
Foreign currency forward contracts		(122)		-		(122)		-
Commodity futures contracts		(108)		(108)		-		-
Trading securities		71,790		71,790		-		-
Total assets measured at fair value	$	342,744	$	162,666	$	180,078	$	-


	Estimated Fair Value December 31, 2018
		Total	Input Levels Used
		Fair Value		Level 1		Level 2		Level 3
Cash and cash equivalents	$	110,899	$	110,899	$	-	$	-
Available for sale securities		183,289		3,000		180,289		-
Foreign currency forward contracts		(407)		-		(407)		-
Commodity futures contracts, net		(587)		(587)		-		-
Trading securities		62,260		62,260		-		-
Total assets measured at fair value	$	355,454	$	175,572	$	179,882	$	-


	Estimated Fair Value September 30, 2018
		Total	Input Levels Used
		Fair Value		Level 1		Level 2		Level 3
Cash and cash equivalents	$	64,333	$	64,333	$	-	$	-
Available for sale securities		189,172		732		188,440		-
Foreign currency forward contracts		177		-		177		-
Commodity futures contracts		(859)		(859)		-		-
Trading securities		67,594		67,594		-		-
Total assets measured at fair value	$	320,417	$	131,800	$	188,617	$	-

The fair value of the Company’s industrial revenue development bonds at September 30, 2019, December 31, 2018 and September 30, 2018 were valued using Level 2 inputs which approximates the carrying value of $7,500 for the respective periods. Interest rates on these bonds are reset weekly based on current market conditions.

Table of Contents

Note 6 — Derivative Instruments and Hedging Activities

From time to time, the Company uses derivative instruments, including foreign currency forward contracts and commodity futures contracts to manage its exposures to foreign exchange and commodity prices. Commodity futures 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 hedge accounting for its foreign currency and commodity derivative instruments as discussed above. 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. Approximately $108 of this accumulated comprehensive loss is expected to be reclassified as a charge to earnings in 2020. Approximately $38 and $84 reported in accumulated other comprehensive loss for foreign currency derivatives are expected to be reclassified to other income, net in 2019 and 2020, respectively.

The following table summarizes the Company’s outstanding derivative contracts and their effects on its Condensed Consolidated Statements of Financial Position at September 30, 2019, December 31, 2018 and September 30, 2018:



	September 30, 2019
	Notional
	Amounts		Assets		Liabilities

Derivatives designated as hedging instruments:
Foreign currency forward contracts	$	8,294	$	-	$	(122)
Commodity futures contracts		4,726		26		(134)
Total derivatives			$	26	$	(256)

	December 31, 2018
	Notional
	Amounts		Assets		Liabilities

Derivatives designated as hedging instruments:
Foreign currency forward contracts	$	11,050	$	-	$	(407)
Commodity futures contracts		9,580		92		(679)
Total derivatives			$	92	$	(1,086)

	September 30, 2018
	Notional
	Amounts		Assets		Liabilities

Derivatives designated as hedging instruments:
Foreign currency forward contracts	$	11,050	$	177	$	-
Commodity futures contracts		8,285		3		(862)
Total derivatives			$	180	$	(862)

Table of Contents

The effects of derivative instruments on the Company’s Condensed Consolidated Statements of Earnings and Retained Earnings and the Condensed Consolidated Statements of Comprehensive Earnings for periods ended September 30, 2019 and September 30, 2018 are as follows:



	For Quarter Ended September 30, 2019
					Gain (Loss)
			Gain (Loss)		on Amount Excluded
	Gain (Loss)		Reclassified from		from Effectiveness
	Recognized		Accumulated OCI		Testing Recognized
	in OCI		into Earnings		in Earnings

Foreign currency forward contracts	$	(138)	$	(33)	$	-
Commodity futures contracts		(354)		(357)		-
Total	$	(492)	$	(390)	$	-

	For Quarter Ended September 30, 2018
					Gain (Loss)
			Gain (Loss)		on Amount Excluded
	Gain (Loss)		Reclassified from		from Effectiveness
	Recognized		Accumulated OCI		Testing Recognized
	in OCI		into Earnings		in Earnings

Foreign currency forward contracts	$	177	$	-	$	-
Commodity futures contracts		(750)		(795)		-
Total	$	(573)	$	(795)	$	-

	For Year to Date Ended September 30, 2019
					Gain (Loss)
			Gain (Loss)		on Amount Excluded
	Gain (Loss)		Reclassified from		from Effectiveness
	Recognized		Accumulated OCI		Testing Recognized
	in OCI		into Earnings		in Earnings

Foreign currency forward contracts	$	252	$	(33)	$	-
Commodity futures contracts		(137)		(615)		-
Total	$	115	$	(648)	$	-

	For Year to Date Ended September 30, 2018
					Gain (Loss)
			Gain (Loss)		on Amount Excluded
	Gain (Loss)		Reclassified from		from Effectiveness
	Recognized		Accumulated OCI		Testing Recognized
	in OCI		into Earnings		in Earnings

Foreign currency forward contracts	$	166	$	67	$	-
Commodity futures contracts		(2,588)		(1,697)		-
Total	$	(2,422)	$	(1,630)	$	-

Table of Contents

Note 7 — Pension Plans

From 2012 to 2014, the Company received periodic notices from the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union Pension Plan (Plan), a multi-employer defined benefit pension plan for certain Company union employees, that the Plan’s actuary certified the Plan to be in “critical status” as defined by the Pension Protection Act (PPA) and the Pension Benefit Guaranty Corporation (PBGC); and that a plan of rehabilitation was adopted by the trustees of the Plan in fourth quarter 2012. Since 2015, the Company has received annual notices that the Plan is in “critical and declining status”, as defined by the PPA and PBGC, and that amendments to the rehabilitation plan were adopted. A designation of “critical and declining status” implies that the Plan is expected to become insolvent in the next 20 years. The Plan’s trustees project that the Plan will be insolvent in 2030.

The Company has been advised that its withdrawal liability would have been $81,600, $82,200 and $72,700 if it had withdrawn from the Plan during 2018, 2017 and 2016, respectively. Subsequent to September 30, 2019, the Company requested and was advised by the Plan that its withdrawal liability would be $99,800 if it withdrew from the Plan during 2019. Should the Company actually withdraw from the Plan at a future date, a withdrawal liability, which could be higher than the above discussed amounts, could be payable to the Plan.

The amended rehabilitation plan requires that employer contributions include 5% compounded annual surcharge increases each year for an unspecified period of time beginning January 2013 (in addition to the 5% interim surcharge initiated in June 2012) as well as certain plan benefit reductions. The Company’s pension expense for this Plan for nine months 2019 and 2018 was $2,307 and $2,201, respectively ($2,836 and $2,617 for twelve months 2018 and 2017, respectively). The aforementioned expense includes surcharges of $738 and $630 for nine months 2019 and 2018, respectively ($811 and $656 for twelve months 2018 and 2017, respectively), as required under the amended plan of rehabilitation.

The Company is currently unable to determine the ultimate outcome of the above discussed matter and therefore is unable to determine the effects on its consolidated financial statements, but the ultimate outcome or the effects of any modifications to the current amended rehabilitation plan could be material to its consolidated results of operations or cash flows in one or more future periods.

Table of Contents

Note 8 — Accumulated Other Comprehensive Earnings (Loss)

Accumulated Other Comprehensive Earnings (Loss) consists of the following components:



											Accumulated
	Foreign				Foreign				Postretirement		Other
	Currency				Currency		Commodity		and Pension		Comprehensive
	Translation		Investments		Derivatives		Derivatives		Benefits		Earnings (Loss)
Balance at June 30, 2019	$	(23,563)	$	494	$	(13)	$	(84)	$	3,629	$	(19,537)
Other comprehensive earnings (loss) before reclassifications		(353)		278		(105)		(268)		-		(448)
Reclassifications from accumulated other comprehensive loss		-		26		25		270		(288)		33
Other comprehensive earnings (loss) net of tax		(353)		304		(80)		2		(288)		(415)
Balance at September 30, 2019	$	(23,916)	$	798	$	(93)	$	(82)	$	3,341	$	(19,952)

Balance at June 30, 2018	$	(24,324)	$	(2,027)	$	-	$	(685)	$	3,535	$	(23,501)
Other comprehensive earnings (loss) before reclassifications		1,164		158		134		(568)		-		888
Reclassifications from accumulated other comprehensive loss		-		-		-		602		(250)		352
Other comprehensive earnings (loss) net of tax		1,164		158		134		34		(250)		1,240
Adoption of ASU 2018-02		-		-		-		-		-		-
Balance at September 30, 2018	$	(23,160)	$	(1,869)	$	134	$	(651)	$	3,285	$	(22,261)

Balance at December 31, 2018	$	(24,159)	$	(1,516)	$	(309)	$	(444)	$	4,206	$	(22,222)
Other comprehensive earnings (loss) before reclassifications		243		2,288		191		(104)		-		2,618
Reclassifications from accumulated other comprehensive loss		-		26		25		466		(865)		(348)
Other comprehensive earnings (loss) net of tax		243		2,314		216		362		(865)		2,270
Balance at September 30, 2019	$	(23,916)	$	798	$	(93)	$	(82)	$	3,341	$	(19,952)

Balance at December 31, 2017	$	(24,262)	$	(889)	$	51	$	20	$	3,289	$	(21,791)
Other comprehensive earnings (loss) before reclassifications		1,102		(812)		125		(1,961)		-		(1,546)
Reclassifications from accumulated other comprehensive loss		-		-		(51)		1,286		(752)		483
Other comprehensive earnings (loss) net of tax		1,102		(812)		74		(675)		(752)		(1,063)
Adoption of ASU 2018-02		-		(168)		9		4		748		593
Balance at September 30, 2018	$	(23,160)	$	(1,869)	$	134	$	(651)	$	3,285	$	(22,261)

Table of Contents

The amounts reclassified from accumulated other comprehensive income (loss) consisted of the following:


Details about Accumulated Other	Quarter Ended				Year to Date Ended				Location of (Gain) Loss
Comprehensive Income Components	September 30, 2019		September 30, 2018		September 30, 2019		September 30, 2018		Recognized in Earnings
Investments	$	34	$	-	$	34	$	-	Other income, net
Foreign currency derivatives		33		-		33		(67)	Other income, net
Commodity derivatives		357		795		615		1,697	Product cost of goods sold
Postretirement and pension benefits		(380)		(331)		(1,141)		(993)	Other income, net
Total before tax		44		464		(459)		637
Tax (expense) benefit		(11)		(112)		111		(154)
Net of tax	$	33	$	352	$	(348)	$	483

Note 9 — Restricted Cash

Restricted cash comprises certain cash deposits of the Company’s Spanish subsidiary with international banks that are pledged as collateral for letters of credit and bank borrowings.

Note 10 — Bank Loans

Bank loans consist of short term (less than 120 days) borrowings by the Company’s Spanish subsidiary that are held by international banks. The weighted-average interest rate as of September 30, 2019 and 2018 was 3.0% and 2.0%, respectively.

Note 11 — Leases

The Company leases certain buildings, land and equipment that are classified as operating leases. Our leases have remaining lease terms of up to approximately 3 years. In the third quarter and nine months of 2019, our operating lease cost and cash paid for operating lease liabilities totaled $411 and $746, respectively, which is classified in cash flows from operating activities. As of September 30, 2019, operating lease right-of-use assets and operating lease liabilities were both $1,770. The weighted-average remaining lease term related to our operating leases was 1.9 years as of September 30, 2019. The weighted-average discount rate related to our operating leases was 3.1% as of September 30, 2019. Maturities of our operating lease liabilities at September 30, 2019 are as follows: $236 in 2019, $934 in 2020, $540 in 2021, and $60 in 2022.

The Company, as lessor, rents certain commercial real estate to third party lessees. The cost and accumulated depreciation related to these leased properties were $36,362 and $10,071, respectively, as of September 30, 2019. Terms of such leases, including renewal options, may be extended for up to sixty years, many of which provide for periodic adjustment of rent payments based on changes in consumer or other price indices. The Company recognizes lease income on a straight-line basis over the lease term. Lease income in third quarter and nine months 2019 was $733 and $2,232, respectively, and is classified in cash flows from operating activities.

Note 12 — Contingencies

In the ordinary course of business, the Company is, from time to time, subject to a variety of active or threatened legal proceedings and claims. While it is not possible to predict the outcome of such matters with certainty, in the Company’s opinion, both individually and in the aggregate, they are not expected to have a material effect on the Company’s financial condition, results of operations or cash flows.

Table of Contents

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This financial review discusses the Company’s financial condition, results of operations, liquidity and capital resources and other matters. Dollars are presented in thousands, except per share amounts. This review should be read in conjunction with the accompanying Condensed Consolidated Financial Statements and related notes included in this Form 10-Q and with the Company’s Consolidated Financial Statements and related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s Form 10-K for the year ended December 31, 2018 (the “2018 Form 10-K”).

Net product sales were $181,913 in third quarter 2019 compared to $181,505 in third quarter 2018, an increase of $408 or 0.2%. Nine months 2019 net product sales were $388,953 compared to $387,987 in nine months 2018, an increase of $966 or 0.2%. Third quarter and nine months 2019 net product sales include increases in domestic sales of 0.7% and 0.7%, respectively. Lower foreign net product sales adversely affected reported consolidated net product sales in both third quarter and nine months 2019 compared to the corresponding periods in 2018. A stronger U.S. dollar and the related translation of foreign sales also adversely affected third quarter and nine months sales in 2019 compared to the corresponding periods in the prior year. Net product sales, including foreign sales, were unfavorably impacted by the timing of certain sales in the comparative periods because certain comparative sales in third quarter 2018 were shipped and delivered in fourth quarter 2019. Third quarter and nine months 2019 net product sales benefited from higher price realization which allowed the Company to recover some product margin decline resulting from increasing input costs.

Product cost of goods sold were $112,867 in third quarter 2019 compared to $115,246 in third quarter 2018, and nine months 2019 product cost of goods sold were $243,668 compared to $248,561 in nine months 2018. Product cost of goods sold includes $8 and $83 of certain deferred compensation expenses in third quarter 2019 and 2018, respectively, and $254 and $150 of certain deferred compensation expenses in nine months 2019 and 2018, respectively. These deferred compensation expenses principally result from the changes in the market value of investments and investment income from trading securities relating to compensation deferred in previous years and are not reflective of current operating results. Adjusting for the aforementioned, product cost of goods sold declined from $115,163 in third quarter 2018 to $112,859 in third quarter 2019, a decrease of $2,304 or 2.0%; and declined from $248,411 in nine months 2018 to $243,414 in nine months 2019, a decrease of $4,997 or 2.0%. As a percentage of net product sales, adjusted product cost of goods sold was 62.0% and 63.5% in third quarter 2019 and 2018, respectively, a favorable decrease of 1.5 percentage points; and adjusted product cost of goods sold was 62.6% and 64.0% in nine months 2019 and 2018, respectively, a favorable decrease of 1.4 percentage points. Higher price realization contributed to the aforementioned favorable decrease in cost of goods sold as a percentage of net product cost in third quarter and nine months 2019.

The Company is continuing its investments in its plant manufacturing operations to meet new consumer and customer demands, achieve quality improvements, and increase operational efficiencies. Plant efficiencies driven by capital investments and ongoing cost containment programs contributed to the improved gross profit margins discussed above. The prior year 2018 product cost of goods sold was adversely affected by the implementation and start-up of new manufacturing packaging lines and resulting operational inefficiencies as well as unfavorable experience from certain employee benefit self-insurance programs.

Selling, marketing and administrative expenses were $33,578 in third quarter 2019 compared to $36,620 in third quarter 2018, and nine months 2019 selling, marketing and administrative expenses were $92,909 compared to $91,229 in nine months 2018. Selling, marketing and administrative expenses include $213 and $2,267 of certain deferred compensation expenses in third quarter 2019 and 2018, respectively, and $6,803 and $4,215 of certain deferred compensation expenses in nine months 2019 and 2018, respectively. As discussed above, these expenses principally result from changes in the market value of investments and investment income from trading securities relating to compensation deferred in previous years, and are not reflective of current operating results. Adjusting for the aforementioned deferred compensation expenses, selling, marketing and administrative expenses decreased from $34,353 in third quarter 2018 to $33,365 in third quarter 2019, a decrease of $988 or 2.9%; and selling, marketing and administrative expenses decreased from $87,014 in nine months 2018 to $86,099 in nine months 2019, a decrease of $915 or 1.1%. As a percentage of net product sales, adjusted selling, marketing and administrative expenses decreased from 18.9% in third quarter 2018 to 18.3% in third quarter 2019, a favorable decrease of 0.6

Table of Contents

percentage points as a percent of net sales, and adjusted selling, marketing and administrative expenses decreased from 22.4% in nine months 2018 to 22.1% in nine months 2019, a favorable decrease of 0.3 percentage points as a percent of net sales. The decrease in adjusted selling, marketing and administrative expenses in third quarter and nine months 2019 principally reflects decreases in general and administrative expenses, primarily legal and professional fees, in 2019 when compared to the corresponding periods in 2018.

Selling, marketing and administrative expenses include $14,536 and $14,698 for customer freight, delivery and warehousing expenses in third quarter 2019 and 2018, respectively, a decrease of $162 or 1.1%, and expenses were $36,753 and $36,304 in nine months 2019 and 2018, respectively, an increase of $449 or 1.2%. These expenses were 8.0% and 8.1% of net product sales in third quarter 2019 and 2018, respectively, and were 9.4% of net product sales in both nine months 2019 and 2018.

Earnings from operations were $36,038 in third quarter 2019 compared to $30,226 in third quarter 2018, and were $54,311 in nine months 2019 compared to $50,436 in nine months 2018. Earnings from operations include $221 and $2,350 of certain deferred compensation expenses in third quarter 2019 and 2018; respectively, and include $7,057 and $4,365 of certain deferred compensation expenses in nine months 2019 and 2018, respectively, which are discussed above. Adjusting for these deferred compensation costs and expenses, earnings from operations were $36,259 and $32,576 in third quarter 2019 and 2018, respectively, an increase of $3,683 or 11.3%; and adjusted operating earnings were $61,368 and $54,801 in nine months 2019 and 2018, respectively, an increase of $6,567 or 12.0%. As a percentage of net product sales, these adjusted operating earnings were 19.9% and 17.9% in third quarter 2019 and 2018, respectively, a favorable increase of 2.0 percentage points as a percentage of net product sales; and as a percentage of net product sales, these adjusted operating earnings were 15.8% and 14.1% in nine months 2019 and 2018, respectively, a favorable increase of 1.7 percentage points as a percentage of net product sales. The improvement in adjusted earnings from operations principally reflects the benefits of higher price realization as well as the reduction and containment of certain costs and expense as discussed above.

Management believes the comparisons presented in the preceding paragraphs, after adjusting for changes in deferred compensation, are more reflective of the underlying operations of the Company.

Other income, net was $1,846 in third quarter 2019 compared to $2,987 in third quarter 2018, an unfavorable decrease of $1,141; and other income, net, was $10,916 in nine months 2019 compared to $6,871 in nine months 2018, a favorable increase of $4,045. Other income, net for third quarter 2019 and 2018 includes net gains and investment income of $221 and $2,350, respectively, on trading securities which provide an economic hedge of the Company’s deferred compensation liabilities; and other income, net for nine months 2019 and 2018 includes net gains and investment income of $7,057 and $4,365, respectively, on trading securities. These changes in trading securities were substantially offset by a like amount of deferred compensation expense included in product cost of goods sold and selling, marketing, and administrative expenses in the respective periods as discussed above. Other income, net for third quarter 2019 and 2018 includes investment income on available for sale securities of $1,160 and $799 in 2019 and 2018, respectively; and other income, net for nine months 2019 and 2018 includes investment income on available for sale securities of $3,341 and $2,520 in 2019 and 2018, respectively. Other income, net also includes gains (losses) on foreign exchange of $181 and $(506) in third quarter 2019 and 2018, respectively, and $(265) and $(783) in nine months 2019 and 2018, respectively.

The consolidated effective tax rates were 21.2% and 21.5% in third quarter 2019 and 2018, respectively, and 22.9% and 22.1% in nine months 2019 and 2018, respectively. The higher tax rates in nine months 2019 principally reflect higher state and foreign income tax expense, including the effects of certain international tax provisions relating to U.S. tax reform legislation that became effective at the beginning of 2018.

Net earnings attributable to Tootsie Roll Industries, Inc. were $29,854 (after $8 net loss attributed to non-controlling interests) in third quarter 2019 compared to $26,104 (after $25 net loss attributed to non-controlling interests) in third quarter 2018, and earnings per share were $0.46 and $0.40 in third quarter 2019 and 2018, respectively, an increase of $0.06 per share, or 15.0%. Nine months 2019 net earnings attributable to Tootsie Roll Industries, Inc. were $50,365 (after $64 net loss attributed to non-controlling interests) compared to nine months 2018 net earnings of $44,718 (after $68 net loss attributed to non-controlling interests), and net earnings per share were $0.77 and $0.68 in nine months 2019 and nine months 2018, respectively, an increase of $0.09 per share or 13.2%. Earnings per share attributable to Tootsie Roll Industries, Inc. for third quarter and nine months 2019 did benefit from the

Table of Contents

reduction in average shares outstanding resulting from purchases in the open market by the Company of its common stock. Average shares outstanding decreased from 66,069 in third quarter 2018 to 65,344 in third quarter 2019, and from 66,182 in nine months 2018 to 65,598 in nine months 2019.

Goodwill and intangibles are assessed annually as of December 31 or whenever events or circumstances indicate that the carrying values may not be recoverable from future cash flows. The Company has not identified any triggering events, as defined, or other adverse information that would indicate a material impairment of its goodwill or intangibles in nine months 2019. There were also no impairments in the comparative nine months 2018 period or in calendar year 2018.

As more fully discussed in Note 1, the Company adopted the new accounting revenue recognition guidance (ASC 606) effective January 1, 2018. As a result of adoption, the cumulative impact to retained earnings at January 1, 2018 was a net after-tax increase of $3,319 ($4,378 pre-tax). The adoption principally changed the timing of recognition of certain trade promotions and related adjustments thereto which affect net product sales. Revenue for net product sales continues to be recognized at a point in time when products are delivered to or picked up by the customer, as designated by customers’ purchase orders, as discussed in Note 1.

From 2012 to 2014, the Company received periodic annual notices from the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union Pension Plan (Plan), a multi-employer defined benefit pension plan for certain Company union employees, that the Plan’s actuary certified the Plan to be in “critical status”, as defined by the Pension Protection Act (PPA) and the Pension Benefit Guaranty Corporation (PBGC) and that plans of rehabilitation were adopted by the trustees of the Plan during these years. In 2015, the Plan’s status was changed to “critical and declining status”, as defined by the PPA and PBGC, for the plan year beginning January 1, 2015. A designation of “critical and declining status” implies that the Plan is expected to become insolvent in the next 20 years, and the Plan is projected to become insolent in 2030. During second quarter 2019, the Company received updated notices that the Plan remains in “critical and declining status for the plan year beginning January 1, 2019. These new notices also advised that the Plan trustees were considering the reduction or elimination of certain retirement benefits and may seek assistance from the PBGC. Plans in “critical and declining status” may elect to suspend (temporarily or permanently) some benefits payable to all categories of participants, including retired participants, except retirees that are disabled or over the age of 80. Suspensions must be equally distributed and cannot drop below 110% of what would otherwise be guaranteed by the PBGC.

Based on these updated notices, the Plan’s funded percentage (plan investment assets as a percentage of plan liabilities), as defined, were 51.6%, 54.7%, and 57.0% as of the most recent valuation dates available, January 1, 2018, 2017, and 2016, respectively (these valuation dates are as of the beginning of each Plan year). These funded percentages are based on actuarial values, as defined, and do not reflect the actual market value of Plan investments as of these dates. If the market value of investments had been used as of January 1, 2018, the funded percentage would be 54.2% (not 51.6%). As of the January 1, 2018 valuation date (most recent valuation available), only 18% of Plan participants were current active employees, 52% were retired or separated from service and receiving benefits, and 30% were retired or separated from service and entitled to future benefits. The Company understands that the Plan is currently exploring additional restructuring measures which include incentives to participating employers in exchange for providing additional future cash contributions as well as suspension of certain retirement benefits.

The Company has been advised by the Plan that its withdrawal liability would have been $81,600, $82,200, and $72,700 if it had withdrawn from the Plan during 2018, 2017 and 2016, respectively. The decrease from 2017 to 2018 was driven by an increase in the PBGC interest rate, resulting in a decrease in the value of vested benefits, and an increase in the Plan’s assets, as well as some decrease in the Plan’s affected benefits; however, the aforementioned was offset by effects of the Company comprising a larger share of the Plan’s contribution base. The Company’s relative share of the Plan’s contribution base has increased over the last several years, and management believes that this trend could continue indefinitely which will add upward pressure on the Company’s withdrawal liability. Subsequent to September 30, 2019, the Company requested and was advised by the Plan that its withdrawal liability would be $99,800 if it withdrew from the Plan during 2019. The Company has not yet made any analysis or evaluation as to the drivers which contributed to this increase in the Company’s withdrawal liability. Based on the above, including the Plan’s projected insolvency in the year 2030, management believes that the Company’s withdrawal liability could increase further in future years.

Table of Contents

Based on the Company’s updated actuarial study and certain provisions in ERISA and the law relating to withdrawal liability payments, management believes that the Company’s liability would likely be limited to twenty annual payments of $3,059 which have a present value in the range of $35,900 to $46,900 depending on the interest rate used to discount these payments. While the Company’s actuarial consultant does not believe that the Plan will suffer a future mass withdrawal (as defined) of participating employers, in the event of a mass withdrawal, the Company’s annual withdrawal payments would theoretically be payable in perpetuity. Based on the Company’s updated actuarial study, the present value of such perpetuities is in the range of $50,100 to $105,000 and would apply in the unlikely event that substantially all employers withdraw from the Plan. The aforementioned is based on a range of valuations and interest rates which the Company’s actuary has advised is provided under the statute. Should the Company actually withdraw from the Plan at a future date, a withdrawal liability, which could be higher than the above discussed amounts, could be payable to the Plan.

The Company’s current labor contract requires the Company’s continued participation in this Plan through September 2022. The amended rehabilitation plan requires that employer contributions include 5% compounded annual surcharge increases each year for an unspecified period of time beginning in 2012 as well as certain plan benefit reductions. The Company’s pension expense for this Plan for nine months 2019 and 2018 was $2,307 and $2,201, respectively, which includes surcharges of $738 and $630, respectively.

The U.S. Congress has continued to explore and discuss various solutions, including financial assistance, for multi-employer pension plans (HR 397, the Butch Lewis Act). The Company is currently unable to determine the ultimate outcome of the above discussed multi-employer union pension matter and therefore is unable to determine the effects on its consolidated financial statements, but the ultimate outcome could be material to its consolidated results of operations or cash flows in one or more future periods. See also the Company’s Consolidated Financial Statements and related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s 2018 Form 10-K.

LIQUIDITY AND CAPITAL RESOURCES

Net cash flows provided by operating activities were $36,176 and $40,980 in nine months 2019 and 2018, respectively, an unfavorable decrease of $4,804. The decrease in nine months 2019 cash flows from operating activities principally reflects changes in inventories and related timing of sales and production in the third and fourth quarter periods, as well as the timing of sales and collections of accounts receivable trade. The timing of payments relating to income taxes payable and prepaid expenses also had some adverse impact on cash flows from operating activities.

Net cash used in investing activities was $15,043 in nine months 2019 compared to $39,521 in nine months 2018. Cash flows from investing activities reflect $49,999 and $65,098 of purchases of available for sale securities during nine months 2019 and 2018, respectively, and $51,580 and $45,379 of sales and maturities of available for sale securities during nine months 2019 and 2018, respectively. Nine months 2019 and 2018 investing activities include capital expenditures of $14,151 and $16,812, respectively. All capital expenditures in 2019 are expected to be funded from the Company’s cash flow from operations and internal sources. The higher capital expenditures in the prior year’s nine months 2018 reflects the purchase of new packaging lines at several manufacturing plants. Company management has committed approximately $17,000 to a manufacturing plant rehabilitation upgrade and expansion of one of its manufacturing facilities in the U.S. Management expects the projected cash outlays for this project to be approximately $3,000 in 2019, $6,000 in 2020 and $8,000 in 2021.

The Company’s consolidated financial statements include bank borrowings of $768 and $190 at September 30, 2019 and 2018, respectively, all of which relates to its Spanish subsidiary. The Company had no other outstanding bank borrowings at September 30, 2019.

Financing activities include Company common stock purchases and retirements of $27,232 and $16,650 in nine months 2019 and 2018, respectively. Cash dividends of $17,592 and $17,208 were paid in nine months 2019 and 2018, respectively.

Table of Contents

The Company’s current ratio (current assets divided by current liabilities) was 4.3 to 1 at September 30, 2019 compared to 5.0 to 1 at December 31, 2018 and 4.1 to 1 at September 30, 2018. Net working capital was $254,897 at September 30, 2019 compared to $242,655 and $227,766 at December 31, 2018 and September 30, 2018, respectively. The aforementioned net working capital amounts are principally reflected in aggregate cash and cash equivalents and short-term investments of $164,166 at September 30, 2019 compared to $186,039 and $132,706 at December 31, 2018 and September 30, 2018, respectively. In addition, long term investments, principally debt securities comprising corporate and municipal bonds were $178,808 at September 30, 2019, as compared to $170,409 and $188,393 at December 31, 2018 and September 30, 2018, respectively. Aggregate cash and cash equivalents and short and long-term investments were $342,974, $356,448, and $321,099, at September 30, 2019, December 31, 2018 and September 30, 2018, respectively. The aforementioned includes $71,790, $62,260, and $67,594 at September 30, 2019, December 31, 2018 and September 30, 2018, respectively, relating to trading securities which are used as an economic hedge for the Company’s deferred compensation liabilities. Investments in corporate and municipal bonds, variable rate demand notes, and other debt securities that matured during nine months 2019 and 2018 were generally used to purchase the Company’s common stock or were replaced with debt securities of similar maturities.

The Company periodically contributes to a VEBA trust, managed and controlled by the Company, to fund the estimated future costs of certain employee health, welfare and other benefits. The Company is currently using these VEBA funds to pay the actual cost of such benefits through most of 2022. The VEBA trust held $13,594, $15,921 and $17,152 of aggregate cash and cash equivalents at September 30, 2019, December 31, 2018 and September 30, 2018, respectively. This asset value is included in prepaid expenses and long-term other assets in the Company’s Consolidated Statement of Financial Position. These assets are categorized as Level 1 within the fair value hierarchy.

ACCOUNTING PRONOUNCEMENTS

See Note 1 of the Company’s Condensed Consolidated Financial Statements.

RISK FACTORS

There were no material changes to the risk factors disclosed in the Company’s 2018 Form 10-K.

FORWARD-LOOKING STATEMENTS

This discussion and certain other sections contain forward-looking statements that are based largely on the Company’s current expectations and are made pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by the use of words such as “anticipated,” “believe,” “expect,” “intend,” “estimate,” “project,” “plan” and other words of similar meaning in connection with a discussion of future operating or financial performance and are subject to certain factors, risks, trends and uncertainties that could cause actual results and achievements to differ materially from those expressed in the forward-looking statements. Such factors, risks, trends and uncertainties, which in some instances are beyond the Company’s control, include the overall competitive environment in the Company’s industry, changes in assumptions and judgments discussed above under the heading “Significant Accounting Policies and Estimates,” and factors identified and referred to above under the heading “Risk Factors” in this report and under the heading “Risk Factors” in the Company’s 2018 Form 10-K.

The risk factors identified and referred to above are believed to be significant factors, but not necessarily all of the significant factors that could cause actual results to differ from those expressed in any forward-looking statement. Readers are cautioned not to place undue reliance on such forward-looking statements, which are made only as of the date of this report. The Company undertakes no obligation to update such forward-looking statements.

Table of Contents

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The Company is exposed to various market risks, including fluctuations in and sufficient availability of sugar, corn syrup, edible oils, including palm oils, cocoa, dextrose, milk and whey, and gum-base input ingredients and packaging, and fuel costs principally relating to freight and delivery fuel surcharges. The Company is exposed to exchange rate fluctuations in the Canadian dollar which is the currency used for a portion of the raw material and packaging material costs and all labor, benefits and local plant operating costs at its Canadian plants. The Company is exposed to exchange rate fluctuations in Mexico, Canada, and Spain where its subsidiaries sell products in their local currencies. The Company invests in securities with maturities dates of up to approximately three years which are generally held to maturity, and variable rate demand notes where interest rates are generally reset weekly, all of which limits the Company’s exposure to interest rate fluctuations. There have been no material changes in the Company’s market risks that would significantly affect the disclosures made in the Form 10-K for the year ended December 31, 2018.

ITEM 4. CONTROLS AND PROCEDURES

Under the supervision and with the participation of management, the Chief Executive Officer and Chief Financial Officer of the Company have evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of September 30, 2019 and, based on their evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these controls and procedures are effective. Disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures are also designed to ensure that information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

There has been no change in the Company’s internal control over financial reporting that occurred during the Company’s fiscal quarter ended September 30, 2019 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Table of Contents

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Information on legal proceedings is included in Note 12 to the Condensed Consolidated Financial Statements.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table summarizes the Company’s purchases of its common stock during the quarter ended September 30, 2019:



					Approximate Dollar
	(a) Total			Shares	Value of Shares that
	Number of	(b) Average		Purchased as Part of	May Yet Be Purchased
	Shares	Price Paid per		Publicly Announced Plans	Under the Plans
Period	Purchased	Share		Or Programs	or Programs

Jul 1 to Jul 31	68,038	$	37.48	Not Applicable	Not Applicable

Aug 1 to Aug 31	49,246		37.21	Not Applicable	Not Applicable

Sep 1 to Sep 30	98,900		36.96	Not Applicable	Not Applicable

Total	216,184	$	37.18	Not Applicable	Not Applicable

While the Company does not have a formal or publicly announced stock purchase program, the Company’s board of directors periodically authorizes a dollar amount for share purchases. The treasurer executes share purchase transactions according to these guidelines.

ITEM 6. EXHIBITS

Exhibits 31.1 — Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Exhibits 31.2 — Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Exhibit 32 — Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Exhibit 101.INS - XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

Exhibit 101.SCH - XBRL Taxonomy Extension Schema Document.

Exhibit 101.CAL - XBRL Taxonomy Extension Calculation Linkbase Document.

Exhibit 101.LAB - XBRL Taxonomy Extension Label Linkbase Document.

Exhibit 101.PRE - XBRL Taxonomy Extension Presentation Linkbase Document.

Exhibit 101.DEF - XBRL Taxonomy Extension Definition Linkbase Document.

Exhibit 104 - Cover Page Interactive Data File – The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

Table of Contents

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		TOOTSIE ROLL INDUSTRIES, INC.

Date:	November 8, 2019	BY:	/S/ELLEN R. GORDON
			Ellen R. Gordon
			Chairman and Chief
			Executive Officer

Date:	November 8, 2019	BY:	/S/G. HOWARD EMBER, JR.
			G. Howard Ember, Jr.
			Vice President Finance and
			Chief Financial Officer