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4-Traders Homepage  >  Shares  >  Nyse  >  Tootsie Roll Industries, Inc.    TR

Delayed Quote. Delayed  - 08/31 04:07:31 pm
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TOOTSIE ROLL : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

08/07/2015 | 07:30am US/Eastern

This financial review discusses the Company's financial condition, results of operations, liquidity and capital resources, new accounting pronouncements and other matters. Dollars are presented in thousands, except per share amounts. This review should be read in conjunction with the accompanying Condensed Consolidated Financial Statements and related notes and with the Company's Condensed Consolidated Financial Statements and related notes and Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Company's 2014 Form 10-K.

Net product sales were $107,528 in second quarter 2015 compared to $104,061 in second quarter 2014, an increase of $3,467 or 3.3%. First half 2015 net product sales were $213,005 compared to $210,873 in first half 2014, an increase of $2,132 or 1.0%. Second quarter and first half 2015 net sales benefited from successful marketing and sales programs, product line extensions, and new products.

Product cost of goods sold were $68,733 in second quarter 2015 compared to $66,182 in second quarter 2014, and first half 2015 product cost of goods sold were $135,878 compared to $133,047 in first half 2014. Product cost of goods sold includes $86 and $564 of certain deferred compensation expenses in second quarter 2015 and 2014, respectively, and $418 and $632 of certain deferred compensation expenses in first half 2015 and 2014, respectively. These deferred compensation expenses principally result from the changes in the market value of investments and investment income from trading securities relating to compensation deferred in previous years and are not reflective of current operating results. Adjusting for the aforementioned, product cost of goods sold increased from $65,618 in second quarter 2014 to $68,647 in second quarter 2015, an increase of $3,029 or 4.6%; and increased from $132,415 in first half 2014 to $135,460 in first half 2015, an increase of $3,045 or 2.3%. As a percentage of net product sales, adjusted product cost of goods sold was 63.8% and 63.1% in second quarter 2015 and 2014, respectively, an unfavorable increase of 0.7%; and adjusted product cost of goods sold was 63.6% and 62.8% in first half 2015 and 2014, respectively, an unfavorable increase of 0.8%. The increases in both second quarter and first half 2015 adjusted cost of goods sold as a percent of net product sales principally reflects higher plant overhead costs. However, plant efficiencies driven by capital investments and ongoing cost containment programs mitigated some of the increases in these costs. Although our overall comparative ingredient costs in second quarter and first half 2015 were generally in line with second quarter and first half 2014, certain key ingredient costs are higher this year.

Selling, marketing and administrative expenses were $25,839 in second quarter 2015 compared to $28,296 in second quarter 2014, and first half 2015 selling, marketing and administrative expenses were $51,823 compared to $53,927 in first half 2014. Selling, marketing and administrative expenses includes $282 and $1,899 of certain deferred compensation expenses in second quarter 2015 and 2014, respectively, and $1,368 and $2,109 of certain deferred compensation expenses in first half 2015 and 2013, respectively. As discussed above, these expenses principally result from changes in the market value of investments and investment income from trading securities relating to compensation deferred in previous years, and are not reflective of current operating results. Adjusting for the aforementioned, selling, marketing and administrative expenses decreased from $26,397 in second quarter 2014 to $25,557 in second quarter 2015, a decrease of $840 or 3.2%; and selling, marketing and administrative expenses decreased from $51,818 in first half 2014 to $50,455 in first half 2015, a decrease of $1,363 or 2.6%. As a percentage of net product sales, adjusted selling, marketing and administrative expenses decreased from 25.4% in second quarter 2014 to 23.8% in second quarter 2015, a favorable decrease of 1.6% as a percent of net sales; and selling, marketing and administrative expenses decreased from 24.6% in first half 2014 to 23.7% in first half 2015, a decrease of 0.9% as a percent of net sales. Selling, marketing and administrative expenses include $9,158 and $10,693 for freight, delivery and warehousing expenses in second quarter 2015 and 2014, respectively, and $19,082 and $20,889 for freight, delivery and warehousing expenses in first half 2015 and 2014, respectively. These expenses were 8.5% and 10.3% of net product sales in second quarter 2015 and 2014, respectively, and 9.0% and 9.9% of net product sales in first half 2015 and 2014, respectively, and contributed to the above discussed decrease in selling, marketing and administrative expenses in both second quarter and first half 2015. Lower freight and delivery expenses reflect the effects more favorable energy and diesel fuel costs.

Earnings from operations were $13,634 in second quarter 2015 compared to $10,229 in second quarter 2014, and were $26,598 in first half 2015 compared to $25,257 in first half 2014. Earnings from operations include $368 and

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$2,463 of certain deferred compensation expenses in second quarter 2015 and 2014, respectively, and include $1,786 and $2,741 of certain deferred compensation expenses in first half 2015 and 2014, respectively which are discussed above. Adjusting for these deferred compensation costs and expenses, operating earnings were $14,002 and $12,692 in second quarter 2015 and 2014, respectively, an increase of $1,310 or 10.3%; and adjusted operating earnings were $28,384 and $27,998 in first half 2015 and 2014, respectively, an increase of $386 or 1.4%. As a percentage of net product sales, these adjusted operating earnings were 13.0% and 12.2% in second quarter 2015 and 2014, respectively, a favorable increase of 0.8% as a percentage of net product sales; and were 13.3%

in both first half 2015 and 2014. The above discussed increases in adjusted operating earnings principally reflect the effects of higher sales as well as the effects of slightly higher product cost of goods sold as discussed above. Management believes the presentation in this and the preceding paragraphs relating to amounts adjusted for deferred compensation expense are more reflective of the underlying operations of the Company.

Other income net, was $1,321 in second quarter 2015 compared to $3,033 in second quarter 2014, an unfavorable decrease of $1,712; and other income (expense), net, was $1,794 in first half 2015 compared to $4,699 in first half 2014, an unfavorable decrease of $2,905. Other income, net for second quarter 2015 and 2014 includes net gains and investment income of $368 and $2,463, respectively, on trading securities which provide an economic hedge of the Company's deferred compensation liabilities; and other income, net for first half 2015 and 2014 includes net gains and investment income of $1,786 and $2,741, respectively, on trading securities relating to these programs. These increases in trading securities were substantially offset by a like amount of deferred compensation expense included in product cost of goods sold and selling, marketing, and administrative expenses in the respective periods as discussed above. Other income net, includes gains (losses) on foreign exchange of $587 and $211 in second quarter 2015 and 2014, respectively, and $(767) and $(789) in first half 2015 and 2014, respectively. In addition, prior year first quarter and first half 2014 other income, net includes a pre-tax gain of approximately $1,800 ($529 after-tax loss) resulting from the step acquisition of the two Spanish companies discussed below and in Note 10 of the Notes to the Condensed Consolidated Financial Statements.

The consolidated effective tax rates were 25.0% and 32.5% in second quarter 2015 and 2014, respectively, and 28.4% and 38.9% in first half 2015 and 2014, respectively. The lower effective tax rates in second quarter and first half 2015 principally reflect a $1,066 release of an uncertain income tax liability, and resulting income tax benefit, due to a decision by a foreign court issued in second quarter 2015, and the reversal of deferred tax assets of $2,350 in first quarter 2014 relating to the step acquisition of the Spanish companies as discussed in Note 10.

Net earnings attributable to Tootsie Roll Industries, Inc. were $11,059 (after $161 net earnings attributed to non-controlling interests) in second quarter 2015 compared to $9,026 (after $69 net loss attributed to non-controlling interests) in second quarter 2014, and earnings per share were $0.18 and $0.14 in second quarter 2015 and second quarter 2014, respectively, an increase of $0.04 per share or 28.6%. First half 2015 net earnings attributable to Tootsie Roll Industries, Inc. were $20,213 (after $110 net loss attributed to non-controlling interests) compared to first half net earnings of $18,607 (after $293 net loss attributed to non-controlling interests), and net earnings per share were $0.33 and $0.30 in first half 2015 and first half 2014, respectively, an increase of $0.03 per share or 10%. As discussed above, net earnings were favorably impacted by the release of an uncertain income tax liability which added $1,066 or approximately $0.02 per share to both second quarter and first half 2015 net earnings attributable to Tootsie Roll Industries, Inc. Earnings per share attributable to Tootsie Roll Industries, Inc. for second quarter and first half 2015 did benefit from the reduction in average shares outstanding resulting from purchases in the open market by the Company of its common stock. As a result, average shares outstanding decreased from 62,455 in second quarter 2014 to 61,611 in second quarter 2015, and from 62,538 in first half 2014 to 61,717 in first half 2015.

Goodwill and intangibles are assessed annually as of December 31 or whenever events or circumstances indicate that the carrying values may not be recoverable from future cash flows. The Company has not identified any triggering events, as defined, or other adverse information that would indicate a material impairment of its goodwill or intangibles in first half 2015. There were also no impairments in the comparative first half 2014 period.

During first quarter 2014, the Company gained operating control of its two 50% owned Spanish companies when Company employee representatives assumed all positions on their boards of directors. This was considered a step acquisition, whereby the Company remeasured the previously held investment to fair value in first quarter 2014. As a result, the Company's first quarter 2014 net earnings include a net after-tax loss of $529, including an additional

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income tax provision of $2,350 relating to deferred income taxes. The Company further increased its ownership and control to 83% in fourth quarter 2014 by subscribing to additional common shares for approximately $1,400. These Spanish companies had operating losses for each of the years 2008 through 2014 and for six months 2015. The Spanish companies were restructured during 2014 to reduce costs and expenses, but they did not achieve their business plan and financial objectives in second quarter and first half 2015. Company management believes that it is likely that additional financing and investment will be required in 2015 in light of the competitive challenges and economic conditions in Spain.

As discussed in Note 6 to the Company's Condensed Consolidated Financial Statements, the Company received notices beginning in 2012 from the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union (BC&T) Pension Plan (Plan), a multi-employer defined benefit pension plan for certain Company union employees. The notices indicated that the Plan's actuary certified the Plan to be in "critical status", the "Red Zone", as defined by the Pension Protection Act (PPA) and the Pension Benefit Guaranty Corporation (PBGC), and that a plan of rehabilitation was adopted by the trustees of the Plan in fourth quarter 2012. In fourth quarter 2014, the Company was advised by the Plan that its withdrawal liability would have been $56,400 if it had withdrawn from the Plan during 2014. The Company was previously advised by the Plan that if the Company had withdrawn from the Plan during 2012, its estimated withdrawal liability would have been $37,200. The increase from 2012 to 2014 principally reflects changes in key actuarial assumptions, including the effects of a lower interest rates proscribed by PBGC which were partially used to determine the present value of vested benefits, and a change to a more conservative mortality table. Based on the Company's actuarial study and certain provisions in ERISA relating to withdrawal liability payments, management believes that the Company's liability would be limited to twenty annual payments of $2,999 which have a present value of $35,193 based on the minimum funding interest rate of 6.5%. Should the Company actually withdraw from the Plan at a future date, a withdrawal liability, which could be higher than the above discussed amounts, could be payable to the Plan. During second quarter 2015, the Company received new notices that the Plan is in "critical and declining status", as defined by the PPA and PBGC, for the plan year beginning January 1, 2015, and that the Plan is projected to have an accumulated funding deficiency for the 2017 through 2024 plan years.

The Company's existing labor contract with the local BC&T commits the Company's participation in this Plan through third quarter 2017. The Company is currently unable to determine the ultimate outcome of the above discussed matter and therefore is unable to determine the effects on its consolidated financial statements, but the ultimate outcome or the effects of any modifications to the current rehabilitation plan could be material to its consolidated results of operations or cash flows in one or more future periods. See also the Company's Condensed Consolidated Financial Statements and related notes and Management's Discussion and Analysis of Financial Condition and Results of Operations incorporated into the Company's Annual Report on Form 10-K for the year ended December 31, 2014 (the "2014 Form 10-K").

LIQUIDITY AND CAPITAL RESOURCES

Net cash flows provided by operating activities were $22,453 and $12,816 in first half 2015 and 2014, respectively, an increase of $9,637. This increase principally reflects higher net earnings and a smaller increase in inventories during first half 2015 compared to first half 2014, as well as changes in prepaid expense and other assets, and changes in accounts payable and accrued expenses during the comparative periods.

Net cash used in investing activities was $12,605 in first half 2015 compared to $23,933 in first half 2014. Cash flows from investing activities reflect $17,204 and $27,331 relating to the purchase of available for sale securities during first half 2015 and 2014, respectively. First half 2015 and 2014 investing activities also include capital expenditures of $6,805 and $5,895, respectively. Capital expenditures for the 2015 year are likely to be higher than historical annualized spending reflecting a significant production line replacement and renovation of approximately $10,000 planned for the second half of 2015 and early 2016. All capital expenditures in 2015 are expected to be funded from the Company's cash flow from operations and internal sources.

The Company's consolidated financial statements include bank borrowings of $620 and $1,081 as of the end of second quarter 2015 and 2014, respectively, all of which relates to its two majority owned and controlled Spanish companies. The Company had no other outstanding bank borrowings as of the end of second quarter 2015.




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Financing activities include Company common stock purchases and retirements of $11,991 and $10,381 in first half 2015 and 2014, respectively. Cash dividends of $9,736 and $9,567 were paid in first half 2015 and 2014, respectively.

The Company's current ratio (current assets divided by current liabilities) was 3.4 to 1 as of the end of second quarter 2015 as compared to 4.1 to 1 as of the end of fourth quarter 2014 and 3.7 to 1 as of the end of second quarter 2014. Net working capital was $202,156 as of the end of second quarter 2015 as compared to $200,162 and $174,052 as of the end of fourth and second quarters

2014, respectively.

The aforementioned net working capital amounts are principally reflected in aggregate cash and cash equivalents and short-term investments of $138,215 (including $14,347 of short-term trading securities) as of the end of second quarter 2015 compared to $139,558 and $96,086 as of the end of fourth and second quarters 2014, respectively. In addition, long term investments, principally debt securities comprising municipal bonds and long-term trading securities, were $158,111 as of the end of second quarter 2015, as compared to $163,579 and $162,275 as of the end of fourth and second quarters 2014, respectively. Aggregate cash and cash equivalents and short and long-term investments were $296,326, $303,137, and $258,361, as of the end of second quarter 2015, and as of the end of fourth and second quarters 2014, respectively. The aforementioned includes $75,830, $71,682, and $68,582 as of the end of the second quarter 2015, and fourth and second quarters 2014, respectively, relating to trading securities which are used as an economic hedge for the Company's deferred compensation liabilities. The Company expects to payout approximately $14,347 of deferred compensation liabilities, and sell a like amount of trading securities, during 2015; and therefore, has included $14,347 in both current investments and current deferred compensation in the Company's Consolidated Statement of Financial Position. Investments in municipal bonds and other debt securities that matured during first half 2015 and 2014 were generally used to purchase the Company's common stock or were replaced with debt securities of similar maturities.

During fourth quarter 2014 and 2013, the Company contributed $1,000 and $15,000 to a VEBA trust, managed and controlled by the Company, to fund the estimated future costs of certain employee health, welfare and other benefits. The Company is using these funds to pay the actual cost of such benefits through 2017. The VEBA trust held $8,774, $10,845 and $12,111 of aggregate cash and cash equivalents as of the end of second quarter 2015, and as of the end of fourth and second quarters 2014, respectively. This asset value is included in prepaid expenses and long-term other assets in the Company's Consolidated Statement of Financial Position. These assets are categorized as Level 1 within the fair value hierarchy.




ACCOUNTING PRONOUNCEMENTS



See Note 1 of the Company's condensed consolidated financial statements.



RISK FACTORS


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 limitation, 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 and availability of commodities and ingredients, including the effects adverse weather and climate change, and the ability to recover cost increases through product sales price increases; (iii) inherent risks in the marketplace, including uncertainties about trade and consumer acceptance of product pricing changes and seasonal events such as Halloween, the Company's largest sales season; (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, including commodities used for ingredients that are primarily grown or sourced from foreign locations; (vii) the Company's ability to successfully implement new production processes and manufacturing automation and computer systems without disruption or quality problems; (viii) the effect of changes in assumptions, including discount rates, sales growth and profit margins, which could affect 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, including retail shelf space allocated to

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confectionary products; (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, availability of shelf space, pricing and discount demands, and competitive products; (xii) any significant labor stoppages, strikes or production interruptions; (xiii) changes in governmental laws or regulations that affect ingredients used in products, or taxes, tariffs or other government restrictions and guidelines on confectionary products sold; (xiv) the adverse effects should the Company either voluntarily or involuntarily recall its product(s) from the marketplace; (xv) the risk that the market value of Company's investments could decline including being classified as "other-than-temporary" as defined; (xvi) the Company's dependence on its enterprise resource planning computer system to manage its supply chain and customer deliveries, and the risk that the Company's information technology systems fail to perform properly; (xvii) the adverse effects if the Company is unable to protect such information technology systems against data corruption, cyber-based attacks or network security breaches; (xviii) the potential adverse effects on the Company as to changes to improve the funding status of the Bakery and Confectionery Union and Industry Pension Plan, a multi-employer plan which covers certain Company union employees, including future increases in labor and benefit costs; (xix) the adverse effects if restructuring efforts and changes in business plans with respect to the Company's Spanish subsidiaries are not fully successful; and (xx) the potential effects of current and future macroeconomic conditions and geopolitical events.

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FORWARD-LOOKING STATEMENTS


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

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.

© Edgar Online, source Glimpses

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