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 September 27, 2008
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 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 (October 3, 2008)
Class Outstanding
Common Stock, $.69 4/9 par value 35,693,626
Class B Common Stock, $.69 4/9 par value 19,371,190
TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES
SEPTEMBER 27, 2008
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 3-3A
Condensed Consolidated Statements of Cash Flows 4
Notes to Condensed Consolidated Financial Statements 5-5C
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6-6E
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 Sep. 27, Sep. 29, Dec. 31,
CURRENT ASSETS 2008 2007 2007___
Cash & cash equivalents $ 28,944 $ 25,139 $ 57,606
Investments 14,520 31,439 41,307
Trade accounts receivable,
Less allowances of
$3,437, $3,378 & $2,287 90,250 93,239 32,371
Other receivables 3,867 2,549 2,913
Inventories, at cost
Finished goods & work in process 45,884 47,901 37,031
Raw material & supplies 23,923 22,460 20,371
Prepaid expenses 1,095 3,419 6,551
Deferred income taxes 1,981 6,646 1,576
Total current assets 210,464 232,792 199,726
PROPERTY, PLANT & EQUIPMENT, at cost
Land 19,416 19,402 19,398
Buildings 88,286 87,273 88,225
Machinery & equipment 285,133 267,148 270,070
392,835 373,823 377,693
Less-accumulated depreciation 188,194 173,054 176,292
Net property, plant and equipment 204,641 200,769 201,401
OTHER ASSETS
Goodwill 73,237 73,237 73,237
Trademarks 189,024 189,024 189,024
Investments 59,368 62,762 65,993
Split dollar life insurance 74,944 75,048 74,944
Investment in joint venture 9,953 9,168 8,400
406,526 409,239 411,598
Total assets $821,631 $842,800 $812,725
-2-
(The accompanying notes are an integral part of these statements.)
(in thousands except per share data) (UNAUDITED)
LIABILITIES AND SHAREHOLDERS' EQUITY Sep. 27, Sep. 29, Dec. 31,
CURRENT LIABILITIES 2008 2007 2007__
Accounts payable $ 17,828 $ 18,573 $ 11,572
Dividends payable 4,405 4,395 4,344
Accrued liabilities 43,867 46,067 42,056
Income taxes payable 4,609 7,560 -
Total current liabilities 70,709 76,595 57,972
NON-CURRENT LIABILITIES
Deferred income taxes 34,309 36,512 35,940
Postretirement health care and life
insurance benefits 14,123 13,529 13,214
Industrial development bonds 7,500 7,500 7,500
Liability for uncertain tax positions 21,609 18,903 20,056
Deferred compensation and other liabilities 36,034 40,444 39,813
Total non-current liabilities 113,575 116,888 116,523
Total liabilities 184,284 193,483 174,495
SHAREHOLDERS' EQUITY
Common Stock, $.69-4/9 par value-
120,000 shares authorized; 35,693,
36,032 & 35,404 respectively, issued 24,787 25,022 24,586
Class B common stock, $.69-4/9 par value-
40,000 shares authorized; 19,372, 18,909
& 18,892, respectively, issued 13,453 13,131 13,120
Capital in excess of par value 472,066 472,605 457,491
Retained earnings 141,904 152,936 156,752
Accumulated other comprehensive loss (12,871) (12,385) (11,727)
Treasury stock (at cost)-
65, 63 & 63 shares, respectively (1,992) (1,992) (1,992)
Total shareholders' equity 637,347 649,317 638,230
Total liabilities and
shareholders' equity $821,631 $842,800 $812,725
-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
Sep. 27, 2008 & Sep. 29, 2007
Net product sales $184,687 $182,917
Rental and royalty revenues 1,015 1,231
Total revenues 185,702 184,148
Product cost of goods sold 125,394 122,159
Rental and royalty costs 247 354
Total costs 125,641 122,513
Product gross margin 59,293 60,758
Rental and royalty gross margins 768 877
Total gross margin 60,061 61,635
Selling, marketing and administrative expenses 29,669 28,181
Earnings from operations 30,392 33,454
Other income (expense), net (986) 1,704
Earnings before income taxes 29,406 35,158
Provision for income taxes 9,691 11,726
Net earnings 19,715 23,432
Other comprehensive income (loss), before tax
Foreign currency translation adjustments (1,527) (197)
Unrealized gains (losses) on securities (1,320) 210
Unrealized gains (losses) on derivatives (29) 212
Other comprehensive income (loss), before tax (2,876) 225
Income tax benefit (expense) related to items
of other comprehensive income 790 (157)
Other comprehensive income (loss), net of tax (2,086) 68
Comprehensive earnings $ 17,629 $ 23,500
Retained earnings at beginning of period $126,589 $133,894
Net earnings 19,715 23,432
Cash dividends (4,400) (4,390)
Retained earnings at end of period $141,904 $152,936
Net earnings per share $0.36 $0.41
Dividends per share * $0.08 $0.08
Average number of shares outstanding 55,000 56,526
*Does not include 3% stock dividend to shareholders of record on 3/10/08 and
3/09/07.
-3-
(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)
39 WEEKS ENDED
Sep. 27, 2008 & Sep. 29, 2007
Net product sales $376,619 $377,732
Rental and royalty revenues 3,130 4,021
Total revenues 379,749 381,753
Product cost of goods sold 254,764 249,173
Rental and royalty costs 763 1,223
Total costs 255,527 250,396
Product gross margin 121,855 128,559
Rental and royalty gross margins 2,367 2,798
Total gross margin 124,222 131,357
Selling, marketing and administrative expenses 72,907 73,403
Earnings from operations 51,315 57,954
Other income (expense), net (1,573) 6,138
Earnings before income taxes 49,742 64,092
Provision for income taxes 16,328 20,623
Net earnings 33,414 43,469
Other comprehensive income (loss), before tax
Foreign currency translation adjustments 2,036 (197)
Unrealized gains (losses) on securities (3,680) 222
Unrealized gains (losses) on derivatives (311) 330
Other comprehensive income (loss), before tax (1,955) 355
Income tax benefit (expense) related to items
of other comprehensive income 810 (204)
Other comprehensive income (loss), net of tax (1,145) 151
Comprehensive earnings $ 32,269 $ 43,620
Retained earnings at beginning of period $156,752 $169,233
Net earnings 33,414 43,469
Cash dividends (13,097) (13,081)
Stock dividends - 3% (35,165) (46,685)
Retained earnings at end of period $141,904 $152,936
Net earnings per share $0.61 $0.77
Dividends per share * $0.24 $0.24
Average number of shares outstanding 55,217 56,723
*Does not include 3% stock dividend to shareholders of record on 3/10/08 and
3/09/07.
-3A-
(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)
39 WEEKS ENDED
Sep. 27, 2008 & Sep. 29, 2007
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 33,414 $ 43,469
Adjustments to reconcile net earnings to
net cash provided by (used in) operating activities
Depreciation and amortization 12,362 11,997
Amortization of marketable securities 306 420
Purchase of trading securities (1,862) (1,901)
Sales of trading securities 1,730 1,256
Changes in operating assets and liabilities
Accounts receivable (57,796) (58,236)
Other receivables (1,265) 1,714
Inventories (12,354) (6,470)
Prepaid expenses and other assets 5,465 1,371
Accounts payable and accrued liabilities 8,030 7,783
Income taxes payable and deferred 4,957 17,788
Postretirement health care and life
insurance benefits 909 947
Deferred compensation and other liabilities (624) 72
Other 306 96
Net cash provided by (used in) operating activities (6,422) 20,306
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (15,540) (9,935)
Purchase of available for sale securities (30,326) (34,685)
Sale and maturity of available for
sale securities 56,718 18,615
Net cash provided by (used in) investing activities 10,852 (26,005)
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid in cash (13,157) (13,153)
Shares repurchased and retired (19,935) (11,738)
Net cash used in financing activities (33,092) (24,891)
Decrease in cash and cash equivalents (28,662) (30,590)
Cash and cash equivalents at the beginning of year 57,606 55,729
Cash and cash equivalents at the end of quarter $ 28,944 $ 25,139
Supplemental cash flow information
Income taxes paid, net of refunds $ 10,001 $ 2,685
Interest paid $ 191 $ 441
Stock dividend issued $ 35,043 $ 46,520
(The accompanying notes are an integral part of these statements.)
-4-
TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 27, 2008
(in thousands except per share amounts) (UNAUDITED)
Note 1 - 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 Annual Report on
Form 10-K for the fiscal year ended December 31, 2007.
Note 2 - Average shares outstanding for the 39 week period ended September 27,
2008 reflect stock repurchases and subsequent retirements of 839
shares for $19,934 and a 3% stock dividend distributed on April 10,
2008. Average shares outstanding for the 39 week period ended
September 29, 2007 reflect stock repurchases and subsequent
retirements of 419 shares for $11,738 and a 3% stock dividend
distributed on April 12, 2007.
Note 3 - Results of operations for the period ended September 27, 2008 are not
necessarily indicative of results to be expected for the year to end
December 31, 2008 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.
Note 4 - 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 2004
through 2006. With few exceptions, the Company is no longer subject
to examinations by tax authorities for years 2003 and prior.
Note 5 - New Accounting Pronouncements
In September 2006, the FASB issued statement No. 157, "Fair Value
Measurements" (SFAS 157). SFAS 157 defines fair value, establishes
a framework for measuring fair value in accordance with accounting
principles generally accepted in the United States, and expands
disclosures about fair value measurements. The Company has adopted
the provisions of SFAS 157 as of January 1, 2008, for financial
instruments measured at fair value on recurring and nonrecurring
basis. Although the adoption of SFAS 157 did not materially impact
its financial condition, results of operations, or cash flows, the
Company is now required to provide additional disclosures as part of
its financial statements.
SFAS 157 establishes a three-tier fair value hierarchy, which prior-
itizes the inputs used in measuring fair value. These tiers include:
Level 1, inputs defined as quoted prices (unadjusted) in active
markets for identical assets or liabilities that the reporting entity
has the ability to access at the measurement date; Level 2 inputs
defined as inputs other than quoted prices included within Level 1 that
-5-
are observable for the asset or liability, either directly or
indirectly; and Level 3, defined as unobservable inputs in which little
or no market data exists, therefore requiring an entity to develop its
own assumptions.
In February 2008, the FASB issued FASB Staff Position SFAS 157-2,
"Effective Date of FASB Statement No. 157" (FSP FAS 157-2). FSP FAS
157-2 delays the effective date SFAS 157 for non-financial assets and
non-financial liabilities, except for items that are recognized or
disclosed at fair value in the financial statements on a recurring
basis. The non-financial assets and non-financial liabilities for
which the Company has not applied the fair value provisions of SFAS 157
include long lived assets, goodwill and other intangible assets. The
effective date for application of SFAS 157 to non-financial assets and
non-financial liabilities will be fiscal and interim periods beginning
after November 15, 2008. The Company is currently evaluating the
impact of adopting SFAS 157 for non-financial assets and non-financial
liabilities on our financial statements.
In October 2008, the FASB issued FASB Staff Position SFAS 157-3,
"Determining the Fair Value of a Financial Asset When the Market for
That Asset Is Not Active" (FSP FAS 157-3). FSP FAS 157-3 clarifies the
application of SFAS 157 in a market that is not active. The Company
has considered this guidance when determining the fair value of its
financial assets as of September 27, 2008.
As of September 27, 2008, 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),
and investments associated with a foreign benefit plan, which were
deemed immaterial for further discussion. The Company's available for
sale and trading securities principally consist of municipal bonds and
mutual funds that are publicly traded.
As of September 27, 2008, the Company's long-term investments include
$9,943 of Jefferson County Alabama Sewer Revenue Refunding Warrants
which is an ARS that is classified as an available for sale security.
Due to recent events in the credit markets, as well as events related
to Jefferson County and its bond insurance carrier, Financial Guaranty
Insurance Company (FGIC), the auction for this ARS failed during the
first nine months of 2008. As such, the Company estimated the fair
value of this ARS utilizing a valuation model with Level 3 inputs as of
September 27, 2008. 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 our assumption about the market
expectation of the next successful auction.
As of September 27, 2008, the Company has concluded that the market
decline in fair value of its Jefferson County ARS is temporary because
the Company continues to receive all contractual interest payments on
its ARS on a timely basis, there has been no default on this ARS, and
this ARS is insured by FGIC. The Company also has the intent and
ability to hold this ARS until recovery. We expect to continue to
receive all contractual cash flows. Therefore, the Company has
recorded an unrealized loss of $3,607 (original cost and par value was
$13,550) to accumulated other comprehensive income as of September 27,
2008.
-5A-
The Company has also classified this ARS as non-current and has
included it in long-term Investments on the unaudited Condensed
Consolidated Balance Sheet at September 27, 2008 because the Company
believes that the current condition of the auction rate securities
market, as well as the financial conditions of Jefferson County and
FGIC, may take more than twelve months to improve.
Any future fluctuation in fair value related to this ARS that the
Company deems to be temporary, including any recoveries of previous
write-downs, would be recorded to accumulated other comprehensive
income. If the Company determines that any future valuation
adjustment is other than temporary, it would record an impairment
charge to earnings as appropriate.
The Company's assets measured at fair value on a recurring basis
subject to the disclosure requirements of SFAS 157 at September 27,
2008, were as follows:
Fair Value Measurements at Reporting
Date Using
Quoted
Prices in
Active
Markets Significant
for Other Significant
Identical Observable Unobservable
(in thousands) Assets Inputs Inputs
Description 9/27/2008 (Level 1) (Level 2) (Level 3)
Auction Rate Security (ARS) $ 9,943 $ - $ - $ 9,943
Available-for-sale Security 34,136 34,136 -
Excluding ARS
Commodity Derivatives 40 40 - -
Trading Securities 29,809 29,809 - -
Total assets measured at fair value $ 73,928 $ 29,849 $ 34,136 $ 9,943
Available for sale securities which utilize Level 2 inputs consist
primarily of municipal bonds, which are valued based on quoted
market prices or alternative pricing sources with reasonable levels
of price transparency.
Based on market conditions, the Company changed its valuation
methodology for ARS to a discounted cash flow analysis during first
quarter 2008. Accordingly, these securities changed from Level 2 to
Level 3 within SFAS 157's hierarchy since the Company's initial
adoption of SFAS 157 at January 1, 2008.
The following table presents the Company's financial assets measured
at fair value on a recurring basis using significant unobservable
inputs (Level 3) as defined in SFAS 157 at September 27, 2008:
-5B-
Fair Value Measurements Using Significant
Unobservable Inputs (Level 3)
Auction
Rate
Security
(in thousands)
Balance at 1/1/2008 $ -
Transfers to Level 3 27,250
Included in other comprehensive income (3,607)
Purchases and (sales) net (13,700)
Balance at 9/27/2008 $ 9,943
In February 2007, the FASB issued SFAS No. 159, "The Fair Value
Option for Financial Assets and Financial Liabilities- including
an amendment to FASB Statement No. 115" (SFAS No. 159), which
permits entities to choose to measure many financial instruments
and certain other items at fair value. SFAS No. 159 became
effective beginning with our first quarter of 2008. The Company has
chosen not to elect the fair value option for our existing financial
instruments.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about
Derivative Instruments and Hedging Activities, an amendment of FASB
Statement No. 133" (SFAS 161), which requires enhanced disclosures
for derivative and hedging activities. SFAS 161 will become
effective beginning with our first quarter of 2009. Early adoption
is permitted. The Company is currently evaluating the impact of this
standard on our Consolidated Financial Statements.
-5C-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(dollars in thousands except per share amounts)
The following is management's discussion of the Company's operating results
and analysis of factors that have affected the accompanying Condensed
Consolidated Statements of Earnings.
NET PRODUCT SALES: Net change in
Third Quarter, 2008
Third Quarter vs.
2008 2007 Third Quarter, 2007
$184,687 $182,917 1.0 %
Nine Months, 2008
Nine Months vs.
2008 2007 Nine Months, 2007
$376,619 $377,732 (0.3) %
Third quarter 2008 net product sales were $184,687 compared to $182,917 in
third quarter 2007, an increase of $1,770 or 1.0%. Nine months 2008 net
product sales of $376,619 decreased $1,113 or 0.3% from nine months 2007 net
product sales of $377,732. The sales decline in the nine months 2008 reflects
the overall challenging economic conditions and competitive factors during the
period.
PRODUCT COST OF GOODS SOLD:
Third Quarter Percentage of Net Product Sales
2008 2007 3rd Qtr. 2008 3rd Qtr. 2007
$125,394 $122,159 67.9% 66.8%
Nine Months Percentage of Net Product Sales
2008 2007 Nine Months 2008 Nine Months 2007
$254,764 $249,173 67.6% 66.0%
Product cost of goods sold as a percentage of net product sales increased from
66.8% in the third quarter 2007 to 67.9% in third quarter 2008, and from 66.0%
in nine months 2007 to 67.6% in nine months 2008. These increases in product
cost of goods sold as a percentage of net product sales are primarily the
result of higher input costs relating to major ingredients, packaging materials
and less favorable foreign exchange rates on products manufactured in Canada.
Increased plant overhead spending against lower sales volumes also contributed
to increased product cost of goods sold as a percent of net product sales.
The Company's ability to forecast the direction and scope of changes to its
major input costs is currently impacted by significant volatility in crude oil,
corn, soybean, sugar and cocoa markets. The prices of these commodities are
influenced by increasing global demand; changes in farm policy, including
mandates for bio-fuels; and fluctuations in the U.S. dollar relative to dollar-
denominated commodities in world markets. The Company believes that its
competitors face the same or similar challenges.
-6-
In order to address the impact of rising input and other costs, the Company
periodically reviews each item in its product portfolio to ascertain if price
increases, weight declines (indirect price increases) or other actions may be
taken. These reviews include an evaluation of the risk factors relating to
market place acceptance of such changes and their potential effect on future
sales volumes. In addition, the estimated cost of packaging modifications
associated with weight changes is evaluated.
The Company also maintains ongoing cost reduction programs whereby cost savings
initiatives are encouraged and progress monitored. The Company is not able to
accurately predict the outcome of these cost savings initiatives and their
effects on its future results.
SELLING, MARKETING AND ADMINISTRATIVE EXPENSES:
Third Quarter Percentage of Net Product Sales
2008 2007 3rd Qtr. 2008 3rd Qtr. 2007
$29,669 $28,181 16.1% 15.4%
Nine Months Percentage of Net Product Sales
2008 2007 9 Months 2008 9 Months 2007
$72,907 $73,403 19.4% 19.4%
Third quarter 2008 selling, marketing and administrative expenses were $29,669
compared to $28,181 in third quarter 2007, an increase of $1,488 or 5.3%. These
same expenses decreased from $73,403 in nine months 2007 to $72,907 in nine
months 2008, a decrease of $496 or 0.7%. The increase in expenses for the third
quarter primarily reflects higher freight and delivery expense, which was
partially offset by a decline in deferred compensation expense which is
discussed below. The decrease in expenses for the nine months principally
reflects decreases in certain operating expenses relating to lower net product
sales for the comparative nine month periods, and the decline in deferred
compensation expense; these decreases more than offset increases in freight and
delivery expenses in the comparative nine month periods. As a percentage of net
product sales, operating expenses increased slightly from 15.4% in third quarter
2007 to 16.1% in third quarter 2008. However, the same expenses as a percentage
of net product sales were unchanged at 19.4% for both nine month periods. The
adverse affect of higher freight and delivery principally reflects higher fuel
costs, during both third quarter and nine months 2008 compared to the
corresponding periods in the prior year.
Third quarter 2008 earnings from operations were $30,392 compared to $33,454 in
third quarter 2007, a decrease of $3,062 or 9.2%. Nine months 2008 earnings
from operations were $51,315 compared to $57,954 a decrease of $6,639 or 11.5%.
The decline in operating earnings during both third quarter and nine months
2008 were primarily the result of higher input costs as discussed above.
NET EARNINGS:
Third Quarter, 2008
Third Quarter vs.
2008 2007 Third Quarter, 2007
$19,715 $23,432 (15.9)%
Nine Months, 2008
Nine Months vs.
2008 2007 Nine Months, 2007
$33,414 $43,469 (23.1)%
-6A-
Third quarter 2008 net earnings were $19,715 compared to third quarter 2007 net
earnings of $23,432, a $3,717 or 15.9% decrease. Third quarter 2008 earnings
per share were $0.36, compared to $0.41 per share in the prior year comparative
period, a decrease of $0.05 or 12.2%.
Nine months 2008 net earnings were $33,414 compared to nine months 2007 net
earnings of $43,469, a $10,055 or 23.1% decrease. Nine months net earnings per
share were $0.61 in 2008 compared to $0.77 per share in 2007, a decrease of
$0.16 per share or 20.8%.
Other income(expense), net was $(986) in third quarter 2008 compared to $1,704
in third quarter 2007. Other income(expense), net in third quarter 2008
includes $(1,277) of investment losses on trading securities relating to
deferred compensation plans. However, other income(expense), net in third
quarter 2007 includes $644 of investment gains on trading securities relating
to such deferred compensation plans. Other income(expense), net was $(1,573) in
nine months 2008 compared to $6,138 in nine months 2007. Other income
(expense), net in nine months 2008 includes $(3,167) of investment losses on
trading securities relating to deferred compensation plans. However, other
income (expense), net in nine months 2007 includes $2,572 of investment gains
on trading securities relating to such deferred compensation plans. These
third quarter and nine months 2008 losses resulted in a corresponding decrease
in deferred compensation expense included in aggregate cost of products sold
and selling, marketing and administrative expenses for third quarter and nine
months 2008. However, third quarter and nine months 2007 gains resulted in a
corresponding increase in deferred compensation expense included in aggregate
cost of products sold and selling, marketing and administrative expenses for
the corresponding 2007 periods.
The consolidated effective income tax rate decreased from 33.4% in third
quarter 2007 to 33.0% in third quarter 2008 but increased from 32.2% in nine
months 2007 to 32.8% in nine months 2008. The decrease in the rate for the
third quarter is primarily the result of federal and state tax credits. The
increase in the rate for nine months principally reflects higher foreign taxes
and resulting higher overall effective rate.
In addition to the factors discussed above, earnings per share benefited from
fewer shares outstanding as a result of the Company's share repurchases in 2007
and 2008.
LIQUIDITY AND CAPITAL RESOURCES:
The Company's current ratio (current assets divided by current liabilities) was
3.0 to 1 as of the end of third quarter of both 2008 and 2007 and was 3.4 to 1
as of the end of fourth quarter 2007. Net working capital was $139,755 as of
the end of third quarter 2008 as compared to $156,197 and $141,754 as of the end
of third quarter 2007 and fourth quarter 2007, respectively. The aforementioned
net working capital amounts include total cash and cash equivalents and short-
term investments which aggregated $43,464 as of the end of third quarter 2008
compared to $56,578 and $98,913, as of the end of third quarter 2007 and fourth
quarter 2007, respectively. In addition, long-term investments, principally
debt securities comprising municipal bonds, were $59,368 (including $9,943 of
Jefferson County auction rate securities discussed in Note 5 to the accompanying
Condensed Consolidated Financial Statements) as of the end of third quarter
2008, as compared to $62,762 and $65,993 as of the end of third quarter 2007 and
fourth quarter 2007, respectively. Aggregate cash and cash equivalents and
short and long-term investments were $102,832, $119,340 and $164,906 for third
quarter 2008, third quarter 2007 and fourth quarter 2007, respectively. Except
for the Jefferson County auction rate securities referenced above, investments
in municipal bonds and other debt securities that matured during nine months
-6B-
2008 and 2007 were generally used to purchase the Company's common stock or
were replaced with debt securities of similar maturities.
Net cash used in operating activities was $(6,422) for nine months 2008, as
compared to $20,306 net cash provided by operating activities in nine months
2007. The aforementioned change in net cash provided by (used in) operating
activities principally reflects the $10,055 decline in net earnings for the
comparative periods, and the timing of payments and cash flows relating to
other receivables, inventories, prepaid expenses, and income taxes payable.
Capital expenditures for nine months 2008 and 2007 were $15,540 and $9,935,
respectively. Capital expenditures for the 2008 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.
Cash dividends paid in nine months 2008 and 2007 were $13,157 and $13,153,
respectively.
During nine months 2008, the Company also purchased and retired $19,935 of its
shares of common stock compared to $11,738 during the same period of the
previous year.
NEW ACCOUNTING PRONOUNCEMENTS
In September 2006, the FASB issued statement No. 157, "Fair Value Measurements"
(SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring
fair value in accordance with accounting principles generally accepted in the
United States, and expands disclosures about fair value measurements. The
Company has adopted the provisions of SFAS 157 as of January 1, 2008, for
financial instruments. Although the adoption of SFAS 157 did not materially
impact its financial condition, results of operations, or cash flow, the
Company is now required to provide additional disclosures as part of its
financial statements.
SFAS 157 establishes a three-tier fair value hierarchy, which prioritizes the
inputs used in measuring fair value. These tiers include: Level 1, inputs
defined as quoted prices (unadjusted) in active markets for identical assets or
liabilities that the reporting entity has the ability to access at the
measurement date; Level 2 inputs defined as inputs other than quoted prices
included within Level 1 that are observable for the asset or liability, either
directly or indirectly; and Level 3, defined as unobservable inputs in which
little or no market data exists, therefore requiring an entity to develop its
own assumptions.
In February 2008, the FASB issued FASB Staff Position SFAS 157-2, "Effective
Date of FASB Statement No. 157" (FSP FAS 157-2). FSP FAS 157-2 delays the
effective date SFAS 157 for non-financial assets and non-financial liabilities,
except for items that are recognized or disclosed at fair value in the
financial statements on a recurring basis. The non-financial assets and non-
financial liabilities for which the Company has not applied the fair value
provisions of SFAS 157 include long lived assets, goodwill and other intangible
assets. The effective date for application of SFAS 157 to non-financial assets
and non-financial liabilities will be fiscal and interim periods beginning
after November 15, 2008. The Company is currently evaluating the impact of
adopting SFAS 157 for non-financial assets and non-financial liabilities on our
financial statements.
In October 2008, the FASB issued FASB Staff Position SFAS 157-3, "Determining
the Fair Value of a Financial Asset When the Market for That Asset Is Not
Active" (FSP FAS 157-3). FSP FAS 157-3 clarifies the application of SFAS 157
in a market that is not active. The Company has considered this guidance when
determining the fair value of its financial assets as of September 27, 2008.
-6C-
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities- including an amendment to FASB
Statement No. 115," (SFAS No. 159), which permits entities to choose to measure
many financial instruments and certain other items at fair value. SFAS No. 159
became effective beginning with our first quarter of 2008. We have chosen not
to adopt the provisions of SFAS 159 for our existing financial instruments.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No. 133"
("SFAS 161"), which requires enhanced disclosures for derivative and hedging
activities. SFAS 161 will become effective beginning with our first quarter of
2009. Early adoption is permitted. We are currently evaluating the impact of
this standard on our Consolidated Financial Statements.
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This discussion and certain other sections of this Form 10-Q contain forward-
looking statements that are based largely on the Company's current expectations
and are made pursuant to the safe harbor provisions 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," 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 without limitation, 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 and availability of various ingredients and packaging
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 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 and consumer response to
marketing programs and price and product weight adjustments, and new products;
(xi) dependence on significant customers, including volume and timing or
purchases and availability of shelf space; (xii) increases in input costs,
including ingredients, packaging materials, energy and fuel costs related to
freight and delivery, that cannot be passed on 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) changes in the auction rate
securities markets and issuing municipalities and their insurers. In addition,
the Company's results may be affected by general factors, such as economic
conditions, 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
-6D-
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.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to various market risks, including fluctuations in
sugar, corn syrup, edible oils, including soybean oil, cocoa, milk and whey,
dextrose, gum base ingredients, 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 of up to three years, the majority of which are held
to maturity, which limits the Company's exposure to interest rate fluctuations.
Except for the Jefferson County auction rate security discussed above, 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, 2007.
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 27, 2008 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 27,
2008 that has materially affected, or is reasonably likely to materially
affect, the Company's internal control over financial reporting.
-6E-
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_____
JUN 29 TO SEP 27 NONE NONE NOT APPLICABLE NOT APPLICABLE
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: Nov. 5, 2008 BY:/S/MELVIN J. GORDON
Melvin J. Gordon
Chairman of the Board
Date: Nov. 5, 2008 BY:/S/G. HOWARD EMBER, JR.
G. Howard Ember, Jr.
Vice President Finance
-7-
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: Nov. 5, 2008
By: /S/MELVIN J. GORDON
Melvin J. Gordon
Chairman and Chief Executive Officer
-7A-
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: Nov. 5, 2008
By: /S/G. HOWARD EMBER, JR.
G. Howard Ember, Jr.
Vice President Finance and
Chief Financial Officer
-7B-
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 September 27, 2008 (the
Form 10-Q) fully complies with the requirements of secton 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: Nov. 5, 2008 /S/MELVIN J. GORDON
Melvin J. Gordon
Chairman and Chief
Executive Officer
Dated: Nov. 5, 2008 /S/G. HOWARD EMBER, JR.
G. Howard Ember, Jr.
V.P. Finance and
Chief Financial Officer
-7C-