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 APRIL 3, 2010
OR
[ ] 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 X No ___
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 ___ No ___
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.
Large accelerated filer X Accelerated filer _
Non-accelerated filer __ Smaller reporting company ___
Indicate by check mark whether the Registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act)
Yes No X
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date (April
3, 2010)
Class Outstanding
Common Stock, $.69 4/9 par value 36,858,140
Class B Common Stock, $.69 4/9 par value 20,503,701
TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES
APRIL 3, 2010
INDEX
Page No.
Part I - Financial Information
Item 1. Financial Statements:
Condensed Consolidated Statements of
Financial Position 2-2A
Condensed Consolidated Statements of Earnings,
Comprehensive Earnings and Retained Earnings 3
Condensed Consolidated Statements of Cash Flows 4
Notes to Condensed Consolidated Financial Statements 5-5D
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6-6D
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 6E
Item 4. Controls and Procedures 6E
Part II - Other Information
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds 7
Item 6. Exhibits 7
Signatures 7
Certifications 7A-7C
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 "Information Regarding 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.
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(in thousands of dollars) (UNAUDITED)
ASSETS April 3, April 4, Dec. 31,
CURRENT ASSETS: 2010 2009 2009____
Cash & cash equivalents $ 76,444 $ 53,774 $ 90,990
Investments 8,608 16,257 8,663
Trade accounts receivable,
Less allowances of
$2,192, $2,016 & $2,356 32,661 26,980 37,512
Other receivables 11,801 2,354 8,397
Inventories, at cost
Finished goods & work in process 46,559 47,159 35,570
Raw material & supplies 33,981 23,229 20,817
Prepaid expenses 7,499 7,117 8,562
Deferred income taxes 1,367 - 1,367
Total current assets 218,920 176,870 211,878
PROPERTY, PLANT & EQUIPMENT, at cost:
Land 21,562 19,298 21,559
Buildings 102,379 89,046 102,374
Machinery & equipment 297,517 279,761 296,787
Construction in progress 10,085 26,232 6,877
431,543 414,337 427,597
Less-accumulated depreciation 211,847 193,675 206,876
Net property, plant and equipment 219,696 220,662 220,721
OTHER ASSETS:
Goodwill 73,237 73,237 73,237
Trademarks 175,024 189,024 175,024
Investments 62,020 50,280 58,136
Split dollar life insurance 74,642 74,808 74,642
Prepaid expenses 7,319 10,929 8,068
Investment in joint venture 4,448 8,940 4,961
Deferred income taxes 11,580 - 11,580
408,270 407,218 405,648
Total assets $846,886 $804,750 $838,247
-2-
(The accompanying notes are an integral part of these statements.)
(in thousands except per share data) (UNAUDITED)
LIABILITIES AND SHAREHOLDERS' EQUITY April 3, April 4, Dec. 31,
CURRENT LIABILITIES: 2010 2009 2009___
Accounts payable $ 13,810 $ 15,085 $ 9,140
Dividends payable 123 91 4,458
Accrued liabilities 45,604 36,679 42,468
Income taxes payable 2,010 - -
Deferred income taxes - 631 -
Total current liabilities 61,547 52,486 56,066
NONCURRENT LIABILITIES:
Deferred income taxes 42,825 43,427 44,582
Postretirement health care and life
insurance benefits 17,074 15,847 16,674
Industrial development bonds 7,500 7,500 7,500
Liability for uncertain tax positions 21,509 19,144 21,101
Deferred compensation and other liabilities 41,194 32,234 39,839
Total non current liabilities 130,102 118,152 129,696
SHAREHOLDERS' EQUITY:
Common Stock, $.69-4/9 par value-
120,000 shares authorized; 36,858, 36,514 & 35,802,
respectively, issued 25,596 25,357 24,862
Class B common stock, $.69-4/9 par value-
40,000 shares authorized; 20,504, 19,932 & 19,919,
respectively, issued 14,239 13,842 13,833
Capital in excess of par value 527,081 498,265 482,250
Retained earnings 103,756 114,172 145,928
Accumulated other comprehensive loss (13,443) (15,532) (12,396)
Treasury stock (at cost)-
69, 67 & 67 shares, respectively (1,992) (1,992) (1,992)
Total shareholders' equity 655,237 634,112 $652,485
Total liabilities and
shareholders' equity $846,886 $804,750 $838,247
-2A-
(The accompanying notes are an integral part of these statements.)
TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
EARNINGS, COMPREHENSIVE EARNINGS AND RETAINED EARNINGS
(in thousands except per share amounts) (UNAUDITED)
13 WEEKS ENDED
April 3, 2010 & April 4, 2009
Net product sales $103,244 $ 94,054
Rental and royalty revenues 1,129 977
Total revenues 104,373 95,031
Product cost of goods sold 68,123 60,719
Rental and royalty costs 295 216
Total costs 68,418 60,935
Product gross margin 35,121 33,335
Rental and royalty gross margins 834 761
Total gross margin 35,955 34,096
Selling, marketing and administrative expenses 25,326 22,133
Earnings from operations 10,629 11,963
Other income (expense), net 3,416 (380)
Earnings before income taxes 14,045 11,583
Provision for income taxes 4,960 3,263
Net earnings 9,085 8,320
Other comprehensive income (loss), before tax:
Foreign currency translation adjustments 757 (751)
Unrealized gains on securities 239 153
Unrealized gains (losses) on derivatives (3,282) 386
Other comprehensive loss, before tax (2,286) (212)
Income tax (expense) benefit related to items
of other comprehensive income 1,241 (79)
Other comprehensive loss, net of tax (1,045) (291)
Comprehensive earnings $ 8,040 $ 8,029
Retained earnings at beginning of period $145,928 $142,872
Net earnings 9,085 8,320
Cash dividends (4,452) (4,391)
Stock dividends - 3% (46,805) (32,629)
Retained earnings at end of period $103,756 $114,172
Net earnings per share $0.16 $0.14
Dividends per share * $0.08 $0.08
Average number of shares outstanding 57,312 58,204
*Does not include 3% stock dividend to shareholders of record on 3/09/10 and 3/10/09.
-3-
(The accompanying notes are an integral part of these statements.)
TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars) (UNAUDITED)
13 WEEKS ENDED
April 3, 2010 & April 4, 2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 9,085 $ 8,320
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation 4,646 4,158
Amortization of marketable securities 111 86
Changes in operating assets and liabilities:
Accounts receivable 5,066 4,160
Other receivables (6,686) 1,015
Inventories (23,888) (14,884)
Prepaid expenses and other assets 1,858 3,596
Accounts payable and accrued liabilities 7,684 (2,421)
Income taxes payable and deferred 1,996 (287)
Postretirement health care and life
insurance benefits 400 379
Deferred compensation and other liabilities 23 240
Other 596 (188)
Net cash provided by operating activities 891 4,174
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (3,400) (7,287)
Purchases of trading securities, net (2,174) (693)
Purchase of available for sale securities (347) -
Sale and maturity of available for
sale securities 105 1,669
Net cash used in investing activities (5,816) (6,311)
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid in cash (8,909) (8,792)
Shares repurchased and retired (712) (4,205)
Net cash used in financing activities (9,621) (12,997)
Decrease in cash and cash equivalents (14,546) (15,134)
Cash and cash equivalents beginning of year 90,990 68,908
Cash and cash equivalents end of quarter $ 76,444 $ 53,774
Supplemental cash flow information:
Income taxes paid $ 687 $ 758
Interest paid $ 34 $ 126
Stock dividend issued $ 46,682 $ 32,537
-4-
(The accompanying notes are an integral part of these statements.)
TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
APRIL 3, 2010
(in thousands except per share amounts) (UNAUDITED)
Note 1 - Significant Accounting Policies
General Information
Foregoing data has been prepared from the unaudited financial records of
Tootsie Roll Industries, Inc. and Subsidiaries (the Company) and in the
opinion of management all adjustments necessary for a fair statement of the
results for the interim period have been reflected. All adjustments were of
a normal and recurring nature. Certain reclassifications have been made to
the prior year financial statements 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 2009 Annual Report on Form 10-K.
Results of operations for the period ended April 3, 2010 are not necessarily
indicative of results to be expected for the year to end December 31, 2010
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.
New Accounting Pronouncements
In January 2010, the Financial Accounting Standards Board (FASB) issued
Accounting Standards Update (ASU) 2010-06, "Improving Disclosures about Fair
Value Measurements". ASU 2010-06 requires additional disclosures about fair
value measurements including transfers in and out of Levels 1 and 2 and a
higher level of disaggregation for the different types of financial
instruments. For the reconciliation of Level 3 fair value measurements,
information about purchases, sales, issuances and settlements are presented
separately. This standard is effective for interim and annual reporting
periods beginning after December 15, 2009 with the exception of revised Level
3 disclosure requirements which are effective for interim and annual
reporting periods beginning after December 15, 2010. The Company adopted the
provisions of the standard on January 1, 2010, which did not have a material
impact on its Consolidated Financial Statements.
In June 2009, the FASB issued Accounting Standards Codification (ASC) 810,
"Consolidation", regarding the consolidation of variable interest entities
(formerly SFAS No. 167, "Amendments to FASB Interpretation No. 46(R)"). ASC
810 is intended to improve financial reporting by providing additional
guidance to companies involved with variable interest entities and by
requiring additional disclosures about a company's involvement in variable
interest entities. This standard is effective for interim and annual periods
beginning after November 15, 2009. The Company adopted the provisions of the
standard on January 1, 2010, which had no impact on its Consolidated
Financial Statements.
-5-
Note 2 - Average Shares Outstanding
Average shares outstanding for the period ended April 3, 2010 reflect stock
repurchases of 26 shares for $712 and a 3% stock dividend distributed on
April 8, 2010. Average shares outstanding for the period ended April 4, 2009
reflect stock repurchases of 213 shares for $4,205 and a 3% stock dividend
distributed on April 9, 2009.
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 2006 through 2009. With
few exceptions, the Company is no longer subject to examinations by tax
authorities for year 2005 and prior. The Company experienced a
decrease in state income tax expense in 2009 due to the effective conclusion
of an income tax audit in first quarter 2009 and resulting favorable
adjustment.
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 April 3, 2010 and December 31, 2009, 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, investments in trading securities and available for sale
securities, including auction rate securities (ARS). The Company's available
for sale and trading securities principally consist of municipal bonds and
mutual funds that are publicly traded.
-5A-
The following table presents information about the Company's financial assets
and liabilities measured at fair value as of April 3, 2010 and December 31,
2009, and indicates the fair value hierarchy of the valuation techniques
utilized by the Company to determine such fair value:
Estimated Fair Value April 3, 2010
Total Input Levels Used
Fair Value Level 1 Level 2 Level 3
Cash and equivalents $ 76,444 $ 76,444 $ - $ -
Auction rate security (ARS) 8,010 - - 8,010
Available-for-sale security excluding ARS 26,920 - 26,920 -
Net derivatives contracts (348) (348) - -
Trading securities 35,698 35,698 - -
Total assets measured at fair value $146,724 $111,794 $ 26,920 $ 8,010
Estimated Fair Value December 31, 2009
Total Input Levels Used
Fair Value Level 1 Level 2 Level 3
Cash and equivalents $ 90,990 $ 90,990 $ - $ -
Auction rate security (ARS) 7,710 - - 7,710
Available-for-sale security excluding ARS 26,851 - 26,851 -
Net derivatives contracts 5,360 5,360 - -
Trading securities 32,238 32,238 - -
Total assets measured at fair value $163,149 $128,588 $ 26,851 $ 7,710
As of April 3, 2010, the Company's long term investments include Jefferson
County Alabama Sewer Revenue Refunding Warrants, an auction rate security
(ARS), reported at a fair value of $8,010, after reflecting a $5,140 other
than temporary impairment and a $400 temporary, as defined, decline in market
value against its $13,550 par value. In 2008, this ARS was determined to be
other than temporarily impaired due to the duration and severity of the
decline in fair value. The Company estimated the fair value of this ARS
utilizing a valuation model with Level 3 inputs. This valuation model
considered, among other items, the credit risk of the collateral underlying
the ARS, the credit risk of the bond insurer, interest rates, and the amount
and timing of expected future cash flows including the Company's assumption
about the market expectation of the next successful auction. During the
first quarter of 2010, the Company recorded a $300 increase in the
market value as a credit to accumulated other comprehensive loss.
The Company classified this ARS as non-current and has included it in long
term investments on the Condensed Consolidated Statements of Financial
Position because the Company believes that the current condition of the ARS
market may take more than twelve months to improve.
The following table presents additional information about the Company's
financial instruments (all ARS) measured at fair value on a recurring basis
using significant unobservable inputs (Level 3) at April 3, 2010:
2010
Balance at January 1 $ 7,710
Unrealized gain in other comprehensive loss 300
Balance at April 3, 2010 $ 8,010
-5B-
Note 5 - Derivative Instruments and Hedging Activities
From time to time, the Company uses derivative instruments, including foreign
currency forward contracts, commodity futures contracts and commodity option
contracts, to manage its exposures to foreign exchange and commodity prices.
Commodity futures contracts and most commodity option contracts are intended
and effective as hedges of market price risks associated with the anticipated
purchase of certain raw materials (primarily sugar). Foreign currency
forward contracts are intended and effective as hedges of the Company's
exposure to the variability of cash flows, primarily related to the foreign
exchange rate changes of products manufactured in Canada and sold in the
United States, and periodic equipment purchases from foreign suppliers
denominated in a foreign currency. The Company does not engage in trading or
other speculative use of derivative instruments.
The Company recognizes all derivative instruments as either assets or
liabilities at fair value in the Condensed Consolidated Statement of
Financial Position. 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 (expense), net.
The following table summarizes the Company's outstanding derivative contracts
and their effects on its Condensed Consolidated Statements of Financial
Position at April 3, 2010 and December 31, 2009:
April 3, 2010 December 31, 2009
Notional Notional
Amounts Assets Liabilities Amounts Assets Liabilities
Derivatives designated as hedging instruments:
Foreign currency forward contracts $ 12,255 $ 3,039 $ - $17,772 $ 3,674 $ -
Commodity futures contracts 5,931 (1,202) - -
Commodity option contracts 12,344 673 (1,790) - -
Total derivatives designated as hedges 3,712 (2,992) 3,674 -
Derivatives not designated as hedging instruments:
Commodity option contracts 7,496 4 (1,072) 12,708 1,896 (210)
Total derivatives not designated as hedges 4 (1,072) 1,896 (210)
Total derivatives $ 3,716 $ (4,064) $ 5,570 $ (210)
Derivative assets are recorded in other receivables and derivative
liabilities are recorded in accrued liabilities.
-5C-
The effects of derivative instruments on the Company's Condensed
Consolidated Statement of Earnings, Comprehensive Earnings and
Retained Earnings for the quarters ended April 3, 2010 and April 4, 2009
are as follows:
For the Quarter Ended April 3, 2010
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 $ 611 $ 1,247 $ -
Commodity futures contracts (139) 1,063 -
Commodity option contracts (1,444) - (2,609)
Total $ (972) $ 2,310 $ (2,609)
For the Quarter Ended April 4, 2009
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 $ 446 $ 21 $ -
Commodity futures contracts (37) 2 -
Commodity option contracts - - -
Total $ 409 $ 23 $ -
-5D-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands except per share amounts)
This financial review discusses the Company's financial condition, results of
operations, liquidity and capital resources, new accounting pronouncements,
and other matters. It should be read in conjunction with the accompanying
Consolidated Financial Statements and related footnotes.
Net product sales were $103,244 in first quarter 2010 compared to $94,054 in
first quarter 2009, an increase of $9,190 or 9.8%. First quarter 2010 net
product sales benefited from effective marketing programs as well as the
timing of certain customer sales in the first quarter 2010 and fourth quarter
2009 reporting periods.
First quarter 2010 net product sales were $103,244 compared to $110,318 in
fourth quarter 2009. Other than the factors affecting first quarter 2010 net
product sales discussed above, this decrease in net product sales is not
considered unusual, as the first quarter of the year is historically the
Company's lowest sales quarter.
Product cost of goods sold were $68,123 in first quarter 2010 compared to
$60,719 in first quarter 2009, an increase of $7,404. Product cost of goods
sold reflects a $349 increase in deferred compensation expense in first
quarter 2010 compared to first quarter 2009 resulting from changes in the
market value of investments in trading securities relating to compensation
deferred in previous years, and is not reflective of current operating
results. After adjusting for the aforementioned, product cost of goods sold
increased from $60,788 in first quarter 2009 to $67,843 in first quarter
2010, an increase of $7,056 or 11.6%. As a percentage of net product sales,
product cost of goods sold increased from 64.6% in first quarter 2009 to
66.0% in first quarter 2010, an increase of 1.4% as a percent of sales. This
unfavorable increase principally reflects higher ingredient unit costs,
primarily relating to sugar. The Company expects its sugar and most other
ingredient costs to be significantly higher throughout 2010 compared to 2009.
Selling, marketing and administrative expenses were $25,326 in first quarter
2010 compared to $22,133 in first quarter 2009, an increase of $3,193.
Selling, marketing and administrative expenses reflect a $1,264 increase in
deferred compensation expense in first quarter 2010 compared to first quarter
2009 resulting from changes in the market value of investments in trading
securities relating to compensation deferred in previous years, and is not
reflective of current operating results. Adjusting for the aforementioned,
selling, marketing and administrative expenses increased from $22,391 in
first quarter 2009 to $24,320 in first quarter 2010, an increase of $1,929 or
8.6%. As a percent of net product sales, these adjusted expenses favorably
decreased from 23.8% of net product sales in first quarter 2009 to 23.6% of
product sales in 2010. This favorable decrease in such expenses principally
reflects the favorable benefits of higher sales volumes partially offset by
higher freight, delivery and warehousing and distribution expenses.
Selling, marketing and administrative expenses include $9,568 and $8,333 of
freight, delivery and warehousing and distribution expenses in first quarter
2010 and 2009, respectively. Freight, delivery and warehousing and
distribution expenses increased from 8.9% of net product sales in first
quarter 2009 to 9.3% of net product sales in first quarter 2010, primarily
due to higher energy costs including increased freight fuel surcharges
relating to customer deliveries.
-6-
Earnings from operations were $10,629 in first quarter 2010 compared to
$11,963 in first quarter 2009, a decrease of $1,334. Earnings from
operations includes changes in deferred compensation liabilities relating to
corresponding changes in the market value of trading securities that hedge
these liabilities as discussed above. Adjusting for the aforementioned net
deferred compensation change of $1,613, operating earnings were $11,915 and
$11,636 in first quarter 2010 and first quarter 2009, respectively, an
increase of $279 or 2.4%; and as a percentage of net product sales, adjusted
operating earnings were 11.5% and 12.4% in first quarter 2010 and 2009,
respectively, a decrease of 0.9% as a percent of net product sales.
Management believes this comparison is more reflective of the underlying
operations of the Company. This decrease principally reflects the adverse
effects of higher ingredient costs and higher freight, distribution and
warehousing expenses as discussed above.
Other income (expense), net, was $3,416 in first quarter 2010 compared to
$(380) in first quarter 2009, an increase of $3,796. This increase
principally reflects a $2,425 favorable improvement in foreign exchange
transactions, and a $1,613 favorable net increase in the fair value of
trading securities investments used to hedge deferred compensation
liabilities. The income (expense), on such trading securities was $1,286 and
$(327) in first quarter 2010 and first quarter 2009, respectively. Such
income or (expense)was substantially offset by a like amount of (expense) or
income in aggregate product cost of goods sold and selling, marketing, and
administrative expenses in the respective years as discussed above. The
first quarter 2010 income principally reflects market appreciation in the
equity markets and the first quarter 2009 (expense) principally reflects the
market decline in the equity markets in the respective periods.
The consolidated effective tax rates were 35.3% and 28.2% in 2010 and 2009,
respectively. The unfavorable increase in the effective tax rate in first
quarter 2010 compared to first quarter 2009 principally reflects a decrease
in the state income tax expense in first quarter 2009 due to the effective
conclusion of an income tax audit in first quarter 2009 and resulting
favorable adjustment.
Net earnings were $9,085 in first quarter 2010 compared to $8,320 in first
quarter 2009, and earnings per share were $.16 and $.14 in first quarter 2010
and first quarter 2009, respectively, an increase of $.02 or 14.3%. Earnings
per share did benefit from the reduction in average shares outstanding
resulting from common stock purchases in the open market by the Company.
Average shares outstanding decreased from 58,204 in first quarter 2009 to
57,312 in first quarter 2010.
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 ascertained any
triggering events, as defined, or other adverse information that would
indicate a material impairment of its goodwill or intangibles in first
quarter 2010.
LIQUIDITY AND CAPITAL RESOURCES
Net cash flows provided by (used in) operating activities were $891 and
$4,174 in first quarter 2010 and first quarter 2009, respectively. The
$3,283 decrease in cash flows from operating activities from first quarter
2009 to first quarter 2010 principally reflects changes in other current
assets and liabilities, principally inventories, other accounts receivable,
and accounts payable and accrued liabilities.
-6A-
Net cash used in investing activities was $5,816 in first quarter 2010
compared to $6,311 in first quarter 2009. Cash flows from investing
activities reflect capital expenditures of $3,400 and $7,287 in first quarter
2010 and first quarter 2009, respectively. The first quarter 2010 and 2009
capital additions include $468 and $473, respectively, relating to computer
systems and related implementation. Capital expenditures for the 2010 year
are anticipated to be generally in line with historical annualized spending,
and are to be funded from the Company's cash flow from operations and
internal sources.
The Company had no bank borrowing or repayments in first quarter 2010 or
2009, and had no outstanding bank borrowings as of the end of first quarter
2010 or first quarter 2009.
Financing activities include common stock purchases and retirements of $712
and $4,205 in first quarter 2010 and first quarter 2009, respectively. Cash
dividends of $8,909 and $8,792 were paid in first quarter 2010 and first
quarter 2009, respectively. The increase in cash dividends each year
reflects the annual 3% stock dividend issued in each of these years less the
effects of Company Common Stock purchases and retirements.
The Company's current ratio (current assets divided by current liabilities)
was 3.6 to 1 as of the end of first quarter 2010 as compared to 3.4 to 1 as
of the end of first quarter 2009 and 3.8 to 1 as of the end of fourth quarter
2009. Net working capital was $157,373 as of the end of first quarter 2010
as compared to $124,384 and $155,812 as of the end of first quarter 2009 and
fourth quarter 2009, respectively. The aforementioned net working capital
amounts are principally reflected in aggregate cash and cash equivalents and
short-term investments which totaled $85,052 as of the end of first quarter
2010 compared to $70,031 and $99,653, as of the end of first quarter 2009 and
fourth quarter 2009, respectively. In addition, long term investments,
principally debt securities comprising municipal bonds, were $62,020
(including $8,010 of Jefferson County auction rate securities (ARS) discussed
below) as of the end of first quarter 2010, as compared to $50,280 and
$58,136 as of the end of first quarter 2009 and fourth quarter 2009,
respectively. Aggregate cash and cash equivalents and short and long-term
investments were $147,072, $120,311, $157,789, for first quarter ended 2010
and 2009, and fourth quarter 2009, respectively. Investments in municipal
bonds and other debt securities that matured during first quarters 2010 and
2009 were generally used to purchase the Company's common stock or were
replaced with debt securities of similar maturities.
During 2008, the Company contributed $16,050 to a VEBA trust to fund the
estimated future costs of certain employee health, welfare and other
benefits. The Company used the funds, as well as investment income in this
VEBA trust, to pay the actual cost of such benefits during 2009 and will
continue to do so through 2011. As of the end of first quarter 2010, the
VEBA trust holds $12,198 of aggregate cash, cash equivalents and investments;
this asset value is included in prepaid expenses in the Company's current and
other assets.
As of the end of first quarter 2010 and 2009, the Company's long-term
investments include $8,010 and $8,410 ($13,550 original cost), respectively,
of Jefferson County Alabama Sewer Revenue Refunding Warrants, originally
purchased with an insurance-backed AAA rating. This is an auction rate
security (ARS) that is classified as an available for sale security. Due to
adverse events related to Jefferson County and its bond insurance carrier,
Financial Guaranty Insurance Company (FGIC), as well as events in the credit
markets, the auctions for this ARS failed throughout 2008, 2009 and first
quarter 2010 (and subsequent to first quarter 2010). As such, the Company
continues to estimate the fair value of this ARS utilizing a valuation model
with Level 3 inputs, as defined by guidance. This valuation model
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considered, among others items, the credit risk of the collateral underlying
the ARS, the credit risk of the bond insurer, interest rates, and the amount
and timing of expected future cash flows including assumptions about the
market expectation of the next successful auction.
During the fourth quarter of 2008, the Company determined that the market
decline in fair value of its Jefferson County ARS became other-than-
temporarily impaired, as defined, and recorded a pre-tax impairment of
$5,140. During the fourth quarter of 2009, the Company evaluated this
investment and concluded that an additional decline in the market value was
temporary because it was not related to further credit impairment and
recorded this $700 of additional decline in the market value as a charge to
accumulated other comprehensive loss. During first quarter 2010, the Company
further evaluated this investment and concluded that a portion of the
aforementioned temporary decline had reversed and recorded a $300 increase in
the market value as a credit to accumulated other comprehensive loss.
Notwithstanding, the Company continues to receive all contractual interest
payments on its ARS on a timely basis, there has been no default, it is
insured by FGIC and the Company has the intent and ability to hold this
ARS until recovery of its amortized cost basis.
NEW ACCOUNTING PRONOUNCEMENTS
In January 2010, the Financial Accounting Standards Board (FASB) issued
Accounting Standards Update (ASU) 2010-06, "Improving Disclosures about Fair
Value Measurements". ASU 2010-06 requires additional disclosures about fair
value measurements including transfers in and out of Levels 1 and 2 and a
higher level of disaggregation for the different types of financial
instruments. For the reconciliation of Level 3 fair value measurements,
information about purchases, sales, issuances and settlements are presented
separately. This standard is effective for interim and annual reporting
periods beginning after December 15, 2009 with the exception of revised Level
3 disclosure requirements which are effective for interim and annual
reporting periods beginning after December 15, 2010. The Company adopted the
provisions of the standard on January 1, 2010, which did not have a material
impact on its Consolidated Financial Statements.
In June 2009, the FASB issued Accounting Standards Codification (ASC) 810,
"Consolidation", regarding the consolidation of variable interest entities
(formerly SFAS No. 167, "Amendments to FASB Interpretation No. 46(R)"). ASC
810 is intended to improve financial reporting by providing additional
guidance to companies involved with variable interest entities and by
requiring additional disclosures about a company's involvement in variable
interest entities. This standard is effective for interim and annual periods
beginning after November 15, 2009. The Company adopted the provisions of the
standard on January 1, 2010, which had no impact on its Consolidated
Financial Statements.
RISK FACTORS
The Company's operations and financial results are subject to a number of
risks and uncertainties that could adversely affect the Company's operating
results and financial condition. Significant risk factors, without
limitations that could impact the Company are the following: (i) significant
competitive activity, including advertising, promotional and price
competition, and changes in consumer demand for the Company's products;
(ii) fluctuations in the cost, which are expected to be significantly higher
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in 2010 compared to 2009, of various ingredients, including sugar, and
packaging materials, and the availability of such materials; (iii) inherent
risks in the marketplace, including uncertainties about trade and consumer
acceptance and seasonal events such as Halloween; (iv) the effect of
acquisitions on the Company's results of operations and financial condition;
(v) the effect of changes in foreign currencies on the Company's foreign
subsidiaries operating results, and the effect of the fluctuation of the
Canadian dollar on products manufactured in Canada and marketed and sold in
the United States in U.S. dollars; (vi) the Company's reliance on third party
vendors for various goods and services; (vii) the Company's ability to
successfully implement new production processes and lines; (viii) the effect
of changes in assumptions, including discount rates, sales growth and profit
margins and the capability to pass along higher ingredient and other input
costs through price increases, relating to the Company's impairment testing
and analysis of its goodwill and trademarks; (ix) changes in the
confectionery marketplace including actions taken by major retailers and
customers; (x) customer, consumer and competitor response to marketing
programs and price and product weight adjustments, and new products; (xi)
dependence on significant customers, including the volume and timing of their
purchases, and availability of shelf space; (xii) increases in ingredient and
energy costs, including freight and delivery, that cannot be passed along to
customers through increased prices due to competitive reasons; (xiii) any
significant labor stoppages, strikes or production interruptions; (xiv)
changes in governmental laws and regulations including taxes and tariffs;
(xv) the risk that the market value of Company's investments could decline
including being classified as "other-than-temporary" as defined; and (xvi)
the potential effects of current and future macroeconomic conditions. In
addition, the Company's results may be affected by other general factors,
such as financial and securities' market factors, political developments,
currency exchange rates, interest and inflation rates, accounting standards,
taxes, and laws and regulations affecting the Company in markets where it
competes and those factors described in Part 1, Item 1A "Risk Factors" and
elsewhere in the Company's Annual Report on Form 10-K and in other Company
filings, including quarterly reports on Form 10-Q, with the Securities and
Exchange Commission.
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 the words such as "anticipated," "believe," "expect," "intend,"
"estimate," "project," 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, including 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."
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.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to various market risks, including fluctuations in
sugar, corn syrup, edible oils, including soybean oil, cocoa, dextrose, milk
and whey, and gum-base input ingredients and packaging and fuel costs. 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 operating expenses at its Canadian plants. The Company invests in
securities with maturities or auction dates of up to three years, the
majority of which are held to maturity, which limits the Company's exposure
to interest rate fluctuations. There has been no material change in the
Company's market risks that would significantly affect the disclosures made
in the Form 10-K for the year ended December 31, 2009.
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 April 3, 2010 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 April 3,
2010 that has materially affected, or is reasonably likely to materially
affect, the Company's internal control over financial reporting.
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PART II - OTHER INFORMATION
TOOTSIE ROLL INDUSTRIES, INC.
AND SUBSIDIARIES
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Approximate Dollar
(a) Total (b) Average Shares Value of Shares that
Number of Price Paid per Purchased as Part of May Yet Be Purchased
Shares Share Publicly Announced Plans Under the Plans
Period Purchased Or Programs or Programs
JAN 1 TO JAN 30 - $ - NOT APPLICABLE NOT APPLICABLE
JAN 31 TO FEB 27 - - NOT APPLICABLE NOT APPLICABLE
FEB 28 TO APR 3 26,400 26.92 NOT APPLICABLE NOT APPLICABLE
TOTAL 26,400 $ 26.92
While the Company does not have a formal or publicly announced stock
repurchase program, the Company's board of directors periodically authorizes
a dollar amount for share repurchases. The treasurer executes share
repurchase transactions according to these guidelines.
Item 6. EXHIBITS
Exhibits 31.1 and 31.2 - Certifications 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.
SIGNATURES
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: May 13, 2010 BY:/S/MELVIN J. GORDON
Melvin J. Gordon
Chairman and Chief
Executive Officer
Date: May 13, 2010 BY:/S/G. HOWARD EMBER, JR.
G. Howard Ember, Jr.
V.P./Finance and
Chief Financial Officer
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Exhibit 31.1
CERTIFICATION
I, Melvin J. Gordon, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Tootsie Roll
Industries, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the state-
ments made, in light of the circumstances under which such statements were made,
not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial infor-
mation included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
a) designed such disclosure controls and procedures, or caused such dis-
closure controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Date: May 13, 2010
By: /S/MELVIN J. GORDON
Melvin J. Gordon
Chairman and Chief Executive Officer
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Exhibit 31.2
CERTIFICATION
I, G. Howard Ember, Jr. certify that:
1. I have reviewed this quarterly report on Form 10-Q of Tootsie Roll
Industries, Inc,;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the state-
ments made, in light of the circumstances under which such statements were made,
not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial infor-
mation included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
a) designed such disclosure controls and procedures, or caused such dis-
closure controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Date: May 13, 2010
By: /S/G. HOWARD EMBER, JR.
G. Howard Ember, Jr.
Vice President/Finance and
Chief Financial Officer
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Exhibit 32
Certificate Pursuant to Section 1350 of Chapter 63
Of Title 18 of the United States Code
Each of the undersigned officers of Tootsie Roll Industries, Inc.
Certifies that (i) the Quarterly Report on Form 10-Q of Tootsie Roll
Industries, Inc. for the quarterly period ended April 3, 2010 (the
Form 10-Q) fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934 and (ii) the information
contained in the Form 10-Q fairly presents, in all material respects,
the financial condition and results of operations of Tootsie Roll
Industries, Inc. and its subsidiaries.
Dated: May 13, 2010 /S/MELVIN J. GORDON
Melvin J. Gordon
Chairman and Chief
Executive Officer
Dated: May 13, 2010 /S/G. HOWARD EMBER, JR.
G. Howard Ember, Jr.
V.P./Finance and
Chief Financial Officer
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