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

Delayed Quote. Delayed  - 12/05 10:02:02 pm
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10/26 TOOTSIE ROLL IN : Third Qtr Earning
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10/05 TOOTSIE ROLL IN : ex-dividend day
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TOOTSIE ROLL INDUSTRIES : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

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11/04/2016 | 11:12am CET

This financial review discusses the Company's financial condition, results of operations, liquidity and capital resources and other matters. Dollars are presented in thousands, except per share amounts. This review should be read in conjunction with the accompanying Condensed Consolidated Financial Statements and related notes included in this Form 10-Q and with the Company's Consolidated Financial Statements and related notes and Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Company's Form 10-K for the year ended December 31, 2015 (the "2015 Form 10-K").

Net product sales were $185,473 in third quarter 2016 compared to $183,806 in third quarter 2015, an increase of $1,667 or 0.9%. Nine months 2016 net product sales were $393,094 compared to $396,811 in nine months 2015, a decrease of $3,717 or 0.9%. Third quarter and nine months 2016 net product sales were adversely impacted by the effects of a stronger U.S. dollar and related currency translation of foreign sales, but benefited from the timing of certain customer sales between third and fourth quarters in the comparative 2016 and 2015 periods. A stronger U.S. dollar and unfavorable currency translation resulted in $716 and $2,265 of lower foreign sales in third quarter and nine months 2016, respectively.

Product cost of goods sold were $114,748 in third quarter 2016 compared to $117,046 in third quarter 2015, and nine months 2016 product cost of goods sold were $245,581 compared to $252,924 in nine months 2015. Product cost of goods sold includes $522 and $(671) of certain deferred compensation expenses (credits) in third quarter 2016 and 2015, respectively, and $816 and $(253) of certain deferred compensation expenses (credits) in nine months 2016 and 2015, respectively. These deferred compensation expenses (credits) 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 decreased from $117,717 in third quarter 2015 to $114,226 in third quarter 2016, a decrease of $3,491 or 3.0%; and decreased from $253,177 in nine months 2015 to $244,765 in nine months 2016, a decrease of $8,412 or 3.3%. As a percentage of net product sales, adjusted product cost of goods sold was 61.6% and 64.0% in third quarter 2016 and 2015, respectively, a favorable decrease of 2.4%; and adjusted product cost of goods sold was 62.3% and 63.8% in nine months 2016 and 2015, respectively, a favorable decrease of 1.5%. Adjusted cost of goods sold as a percent of sales benefited from higher price realization, continuing improvements in manufacturing operations driven by capital improvements and ongoing cost containment programs. However, adjusted costs of goods sold for third quarter and nine months 2016 were adversely affected by higher costs for ingredients and increased manufacturing costs. These higher manufacturing costs reflect efforts to comply with changes to new product labeling requirements, including the adverse effects of lower production volumes and inventory reductions and resulting reduced efficiencies during nine months 2016. This inventory reduction was in response to uncertainties surrounding certain changes in state and national labeling regulations as well as other new labeling requirements which have specific compliance dates. Higher costs for wages and benefits also adversely affected adjusted cost of goods sold in third quarter and nine months 2016 compared to third quarter and nine months 2015.

Selling, marketing and administrative expenses were $32,101 in third quarter 2016 compared to $26,338 in third quarter 2015, and nine months 2016 selling, marketing and administrative expenses were $81,772 compared to $78,161 in nine months 2015. Selling, marketing and administrative expenses includes $1,439 and $(2,485) of certain deferred compensation expenses (credits) in third quarter 2016 and 2015, respectively, and $2,266 and $(1,117) of certain deferred compensation expenses (credits) in nine months 2016 and 2015, 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 increased from $28,823 in third quarter 2015 to $30,662 in third quarter 2016, an increase of $1,839 or 6.4%; and selling, marketing and administrative expenses increased from $79,278 in nine months 2015 to $79,506 in nine months 2016, an increase of $228 or 0.3%. The increase in adjusted selling, marketing and administrative expenses for the third quarter 2016 reflects increases in expenses associated with higher sales, as well as increases in expenses relating to compensation and employee benefits and meeting new product labeling requirements. As a percentage of net product sales, adjusted selling, marketing and administrative expenses increased from 15.7% in third quarter 2015 to 16.5% in 2016, an unfavorable

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increase of 0.8% as a percent of net sales; and selling, marketing and administrative expenses increased from 20.0% in nine months 2015 to 20.2% in nine months 2016, an unfavorable increase of 0.2% as a percent of net sales. Selling, marketing and administrative expenses include $11,620 and $11,624 for freight, delivery and warehousing expenses in third quarter 2016 and 2015, respectively, and $30,265 and $30,706 for freight, delivery and warehousing expenses in nine months 2016 and 2015, respectively. These expenses were 6.3% of net product sales in both third quarter 2016 and 2015, respectively, and 7.7% of net product sales in both nine months 2016 and 2015, respectively.

Earnings from operations were $39,273 in third quarter 2016 compared to $41,028 in third quarter 2015, and were $67,786 in nine months 2016 compared to $67,626 in nine months 2015. Earnings from operations include $1,961 and $(3,156) of certain deferred compensation expenses (credits) in third quarter 2016 and 2015, respectively, and include $3,082 and $(1,370) of certain deferred compensation expenses (credits) in nine months 2016 and 2015, respectively, which are discussed above. Adjusting for these deferred compensation costs and expenses, operating earnings were $41,234 and $37,872 in third quarter 2016 and 2015, respectively, an increase of $3,362 or 8.9%; and adjusted operating earnings were $70,868 and $66,256 in nine months 2016 and 2015, respectively, an increase of $4,612 or 7.0%. As a percentage of net product sales, these adjusted operating earnings were 22.2% and 20.6% in third quarter 2016 and 2015, respectively, a favorable increase of 1.6% as a percentage of net product sales; and as a percentage of net product sales, these adjusted operating earnings were 18.0% and 16.7% in nine months 2016 and 2015, respectively, a favorable increase of 1.3% as a percentage of net product sales. Third quarter and nine months 2016 operating earnings principally reflect the benefits of higher price realization on sales, but were adversely impacted by higher ingredient costs and increases in manufacturing costs and selling, marketing and administrative expenses 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 (loss), net was $1,943 in third quarter 2016 compared to $(2,879) in third quarter 2015, a favorable increase of $4,822; and other income (loss), net was $4,147 in nine months 2016 compared to $(1,085) in nine months 2015, a favorable increase of $5,232. Other income (loss), net for third quarter 2016 and 2015 includes net gains (losses) and investment income of $1,961 and $(3,156), respectively, on trading securities which provide an economic hedge of the Company's deferred compensation liabilities; and other income (loss), net for nine months 2016 and 2015 includes net gains (losses) and investment income of $3,082 and $(1,370), respectively, on trading securities relating to these programs. These changes in trading securities were substantially offset by a like amount of deferred compensation expense or credit included in product cost of goods sold and selling, marketing, and administrative expenses in the respective periods as discussed above. Other income (loss), net includes gains (losses) on foreign exchange of $(582) and $(51) in third quarter 2016 and 2015, respectively, and $(572) and $(818) in nine months 2016 and 2015, respectively.

The consolidated effective tax rates were 30.6% and 31.5% in third quarter 2016 and 2015, respectively, and 31.1% and 30.2% in nine months 2016 and 2015, respectively. The lower effective tax rate in the prior year nine months 2015 compared to nine months 2016 principally reflects 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 the second quarter 2015.

Net earnings attributable to Tootsie Roll Industries, Inc. were $28,637 (after $40 net loss attributed to non-controlling interests) in third quarter 2016 compared to $26,171 (after $30 net loss attributed to non-controlling interests) in third quarter 2015, and earnings per share were $0.46 and $0.41 in third quarter 2016 and 2015, respectively, an increase of $0.05 per share, or 12%. Nine months 2016 net earnings attributable to Tootsie Roll Industries, Inc. were $49,669 (after $142 net loss attributed to non-controlling interests) compared to nine months 2015 net earnings of $46,384 (after $80 net earnings attributed to non-controlling interests), and net earnings per share were $0.80 and $0.73 in nine months 2016 and nine months 2015, respectively, an increase of $0.07 per share or 10%. Higher net earnings for third quarter and nine months 2016 were principally the result of higher earnings from operations, including the effects of certain deferred compensation as discussed above. Earnings per share attributable to Tootsie Roll Industries, Inc. for third quarter and nine months 2016 did benefit from the reduction in average shares outstanding resulting from purchases in the open market by the Company of its common stock. Average shares outstanding decreased from 63,172 in third quarter 2015 to 62,174 in third quarter 2016, and from 63,408 in nine months 2015 to 62,358 in nine months 2016.

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

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events, as defined, or other adverse information that would indicate a material impairment of its goodwill or intangibles in nine months 2016. There were also no impairments in the comparative nine months 2015 period.

Beginning in 2012, the Company received periodic notices from the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union Pension Plan (Plan), a multi-employer defined benefit pension plan for certain Company union employees, that the Plan's actuary certified the Plan to be in "critical status", 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. During 2015, the Company received notices that the Plan's status was changed to "critical and declining status", as defined by the PPA and PBGC, for the plan year beginning January 1, 2015, and that the Plan was projected to have an accumulated funding deficiency for the 2017 through 2024 plan years. A designation of "critical and declining status" implies that the Plan is expected to become insolvent in the next 20 years. In April 2016, the Company received new notices that the Plan's trustees adopted an updated Rehabilitation Plan effective January 1, 2016, and that the Plan remains in "critical and declining status" and is projected to become insolvent in 14 years. These new notices also advise that the Plan trustees are considering the reduction or elimination of certain retirement benefits and may seek assistance from the PBGC.

Based on these updated notices, the Plan's funded percentages (plan investment assets as a percentage of plan liabilities), as defined, were 62.8%, 65.1% and 66.4% as of the most recent valuation dates available, January 1, 2015, 2014, and 2013, respectively (these valuation dates are as of the beginning of each Plan year). These funded percentages are based on actuarial values, as defined, and do not reflect the actual market value of Plan investments as of these dates. If the market value of investments had been used as of January 1, 2015 the funded percentage would be 59.8% (not 62.8%). As of the January 1, 2015 valuation date (most recent valuation available), 20% of Plan participants were current active employees, 51% were retired or separated from service and receiving benefits, and 29% were retired or separated from service and entitled to future benefits. The number of current active employee Plan participants as of January 1, 2015 fell 3% from the previous year and 6% over the past two years. When compared to the Plan valuation date of January 1, 2011 (four years earlier), current active employees participants have declined 30%, whereas participants who were retired or separated from service and receiving benefits increased 6% and participants who were retired or separated from service and entitled to future benefits increased 9%. The bankruptcy of a major participating employer in the Plan contributed to the above discussed Plan results.

The Company has been advised that its withdrawal liability would have been $61,000 and $56,400 if it had withdrawn from the Plan during 2015 and 2014, respectively. The increase from 2014 to 2015 principally reflects a higher share of the Plan's unfunded vested benefits allocated to the Company. Based on the above, including the Plan's projected insolvency in 14 years, management believes that the Company's withdrawal liability will likely increase further in 2016. Based on the Company's actuarial study and certain provisions in ERISA and the law relating to withdrawal liability payments, management believes that the Company's liability would be limited to twenty annual payments of $2,966 which have a present value in the range of $34,800 to $45,400 based on a range of valuation interest rates which management understands is provided under the statute. Should the Company actually withdraw from the Plan at a future date, a withdrawal liability, which could be higher than the above discussed amounts, could be payable to the Plan.

The Company's existing labor contract with the local union commits the Company's participation in this Plan through third quarter 2017. The rehabilitation plans require that employer contributions include 5% compounded annual surcharge increases each year for an unspecified period of time beginning in June 2012 as well as certain plan benefit reductions. The Company's pension expense for this Plan for nine months 2016 and 2015 was $1,959 and $2,013, respectively. The aforementioned expense includes surcharges of $417 and $349 in nine months 2016 and 2015, respectively, as required under the plan of rehabilitation as amended.

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 Consolidated Financial Statements and related notes and Management's Discussion and Analysis of Financial Condition and Results of Operations incorporated into the Company's 2015 Form 10-K.

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LIQUIDITY AND CAPITAL RESOURCES

Net cash flows provided by operating activities were $47,032 and $30,260 in nine months 2016 and 2015, respectively, an increase of $16,772. Nine months operating cash flows were favorably affected by the timing of sales and collections, and resulting changes in accounts receivable during nine months 2016 compared to nine months 2015.

Net cash used in investing activities was $34,267 in nine months 2016 compared to $18,688 in nine months 2015. Cash flows from investing activities reflect $45,298 and $45,826 of purchases of available for sale securities during nine months 2016 and 2015, respectively, and $26,517 and $40,390 of sales and maturities of available for sale securities during nine months 2016 and 2015, respectively. Nine months 2016 and 2015 investing activities include capital expenditures of $13,067 and $12,421, respectively. All capital expenditures in 2016 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 $447 and $683 as of September 30, 2016 and 2015, respectively, all of which relates to its two majority-owned and controlled Spanish companies. The Company had no other outstanding bank borrowings as of September 30, 2016.

Financing activities include Company common stock purchases and retirements of $26,293 and $22,998 in nine months 2016 and 2015, respectively. Cash dividends of $16,694 and $15,269 were paid in nine months 2016 and 2015, respectively.

The Company's current ratio (current assets divided by current liabilities) was 3.6 to 1 at September 30, 2016 compared to 4.1 to 1 at December 31, 2015 and 3.1 to 1 at September 30, 2015. Net working capital was $202,304 at September 30, 2016 compared to $221,744 and $216,752 at December 31, 2015 and September 30, 2015, respectively.

The aforementioned net working capital amounts are principally reflected in aggregate cash and cash equivalents and short-term investments of $122,144 at September 30, 2016 compared to $168,300 and $124,148 at December 31, 2015 and September 30, 2015, respectively. In addition, long term investments, principally debt securities comprising corporate and municipal bonds and long-term trading securities, were $189,956 at September 30, 2016, as compared to $152,930 and $152,491 at December 31, 2015 and September 30, 2015, respectively. Aggregate cash and cash equivalents and short and long-term investments were $312,100, $321,230, and $276,639, as of September 30, 2016, December 31, 2015 and September 30, 2015, respectively. The aforementioned includes $66,085, $60,584, and $71,371 as of September 30, 2016, December 31, 2015 and September 30, 2015, respectively, relating to trading securities which are used as an economic hedge for the Company's deferred compensation liabilities. At September 30, 2015, the Company expected to pay out $13,514 of deferred compensation liabilities and sell a like amount of trading securities during fourth quarter 2015, and therefore, had included $13,514 in both current investments and current deferred compensation in the Company's Consolidated Statement of Financial Position. Investments in corporate and municipal bonds and other debt securities that matured during nine months 2016 and 2015 were generally used to purchase the Company's common stock or were replaced with debt securities of similar maturities.

The Company periodically contributes to a VEBA trust, managed and controlled by the Company, to fund the estimated future costs of certain employee health, welfare and other benefits. The Company is currently using these VEBA funds to pay the actual cost of such benefits in 2015 and 2016, and through part of 2017. The VEBA trust held $3,379, $6,727 and $7,364 of aggregate cash and cash equivalents as of September 30, 2016, December 31, 2015 and September 30, 2015, 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.

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RISK FACTORS


There were no material changes to the risk factors disclosed in the Company's 2015 Form 10-K.




FORWARD-LOOKING STATEMENTS



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

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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Ellen R. Gordon Chairman & Chief Executive Officer
G. Howard Ember Chief Financial Officer & Vice President-Finance
Barre A. Seibert Independent Director
Lana Jane Lewis-Brent Independent Director
Paula M. Wardynski Independent Director
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