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

Delayed Quote. Delayed  - 05/25 10:02:03 pm
35.35 USD   +0.86%
04/25 TOOTSIE ROLL IN : posts 1Q profit
03/20 TOOTSIE ROLL IN : Form 3 - Filing - S Green
03/03 TOOTSIE ROLL IN : 3% Stock Dividend; 3% Stock Dividend
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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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05/05/2017 | 10:35pm CEST

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, 2016 (the "2016 Form 10-K").

Net product sales were $103,425 in first quarter 2017 compared to $103,362 in first quarter 2016, an increase of $63 or 0.1%. The timing of sales to certain customers as well as currency translation of foreign sales had some adverse impact on first quarter 2017 sales compared to the prior year first quarter period.

Product cost of goods sold were $65,416 in first quarter 2017 compared to $65,824 in first quarter 2016. Product cost of goods sold includes $787 and $13 of certain deferred compensation expenses in first quarter 2017 and 2016, 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 decreased from $65,811 in first quarter 2016 to $64,629 in first quarter 2017, a decrease of $1,182 or 1.8%. As a percentage of net product sales, adjusted product cost of goods sold was 62.5% and 63.7% in first quarter 2017 and 2016, respectively, a favorable decrease of 1.2%. Adjusted cost of goods sold as a percent of sales benefited from continuing improvements in manufacturing operations driven by capital improvements and ongoing cost containment programs. However, adjusted costs of goods sold in prior year first quarter 2016 were adversely affected by higher manufacturing costs to comply with changes to new product labeling requirements, including the adverse effects of lower production volumes and inventory reductions which resulted in reduced efficiencies during first quarter 2016. The inventory reductions were in response to uncertainties surrounding certain changes in state and national labeling regulations as well as other new labeling requirements which had specific compliance dates.

Selling, marketing and administrative expenses were $26,598 in first quarter 2017 compared to $24,053 in first quarter 2016. Selling, marketing and administrative expenses includes $2,095 and $40 of certain deferred compensation expenses in first quarter 2017 and 2016, 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 $24,013 in first quarter 2016 to $24,503 in first quarter 2017, an increase of $490 or 2.0%. As a percentage of net product sales, adjusted selling, marketing and administrative expenses increased from 23.2% in first quarter 2016 to 23.7% in 2017, an unfavorable increase of 0.5% as a percent of net sales. Selling, marketing and administrative expenses include $9,668 and $9,186 for freight, delivery and warehousing expenses in first quarter 2017 and 2016, respectively. These expenses were 9.3% and 8.9% of net product sales in first quarter 2017 and 2016, respectively.

Earnings from operations were $12,175 in first quarter 2017 compared to $14,216 in first quarter 2016. Earnings from operations include $2,882 and $53 of certain deferred compensation expenses in first quarter 2017 and 2016, respectively, which are discussed above. Adjusting for these deferred compensation costs and expenses, operating earnings were $15,057 and $14,269 in first quarter 2017 and 2016, respectively, an increase of $788 or 5.5%. As a percentage of net product sales, these adjusted operating earnings were 14.6% and 13.8% in first quarter 2017 and 2016, respectively, a favorable increase of 0.8% as a percentage of net product sales. This increase as a percentage of net product sales principally reflects the benefits of improved plant operating efficiencies in first quarter 2017 when compared to the adverse effects of additional costs and operational inefficiencies incurred in first quarter 2016 to the uncertainties of product labeling laws in that period. 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.

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Other income (loss), net was $1,979 in first quarter 2017 compared to $(35) in first quarter 2016, a favorable increase of $2,014. Other income (loss), net for first quarter 2017 and 2016 includes net gains and investment income of $2,882 and $53, respectively, on trading securities which provide an economic hedge of the Company's deferred compensation liabilities. 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 losses on foreign exchange of $1,545 and $634 in first quarter 2017 and 2016, respectively.

The consolidated effective tax rates were 29.3% and 30.5% in first quarter 2017 and 2016, respectively. The lower effective tax rate in first quarter 2017 compared to first quarter 2016 principally reflects a lower effective state income tax rate, including a benefit relating to a state income tax carry-forward.

Net earnings attributable to Tootsie Roll Industries, Inc. were $10,051 (after $40 net loss attributed to non-controlling interests) in first quarter 2017 compared to $9,896 (after $40 net loss attributed to non-controlling interests) in first quarter 2016, and earnings per share were $0.16 and $0.15 in first quarter 2017 and 2016, respectively, an increase of $0.01 per share, or 7%. Higher net earnings for first quarter 2017 were principally the result of higher earnings from operations after adjusting for the effects of certain deferred compensation and a lower effective state income tax rate as discussed above. Earnings per share attributable to Tootsie Roll Industries, Inc. for first quarter 2017 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 64,347 in first quarter 2016 to 63,605 in first quarter 2017.

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 quarter 2017. There were also no impairments in the comparative first quarter 2016 period or calendar 2016.

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 2012 (and was further amended in 2016). 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 2017, the Company received new notices that the Plan remains in "critical and declining status" and is projected to become insolvent in 13 years. These 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 57.0%, 62.8% and 65.1% as of January 1, 2016 (most recent valuation date available), 2015, and 2014, 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, 2016, the funded percentage would be 53.0% (not 57.0%). As of the January 1, 2016 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, 2016 fell 2% from the previous year and 4% over the past two years. When compared to the Plan valuation date of January 1, 2011 (five years earlier), current active employees participants have declined 31%, 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 8%. 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 $72,700, $61,000 and $56,400 if it had withdrawn from the Plan during 2016, 2015 and 2014, respectively. The increase from 2015 to 2016 principally reflects poor investment returns of the plan in 2015, a decrease in the PBGC interest rates, and a higher share of the

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Plan's unfunded vested benefits allocated to the Company. Based on the above, including the Plan's projected insolvency in 13 years, management believes that the Company's withdrawal liability will likely increase further in future years. 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 likely be limited to twenty annual payments of $2,914 which have a present value in the range of $34,200 to $44,700. The aforementioned is 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 amended rehabilitation plan, which continues, requires that employer contributions include 5% compounded annual surcharge increases each year for an unspecified period of time beginning in 2012 as well as certain plan benefit reductions. The Company's pension expense for this Plan for calendar years 2016 and 2015 was $2,541 and $2,574, respectively. The aforementioned expense includes surcharges of $542 and $447 in calendar years 2016 and 2015, respectively, as required under the plan of rehabilitation as amended. The Company's pension expense for this Plan for first quarter 2017 and 2016 was $495 and $499 respectively, which includes surcharges of $124 and $106 respectively.

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 in the Company's 2016 Form 10-K.

LIQUIDITY AND CAPITAL RESOURCES

Net cash flows provided by operating activities were $11,862 and $14,980 in first quarter 2017 and 2016, respectively, a decrease of $3,118. The decrease in first quarter 2017 cash flows from operating activities principally reflects the timing of sales and collections of account receivables as well as the effects of higher inventories reflecting changes in the annual production plans in the comparative periods.

Net cash used in investing activities was $32,458 in first quarter 2017 compared to $28,724 in first quarter 2016. Cash flows from investing activities reflect $27,227 and $23,348 of purchases of available for sale securities during first quarter 2017 and 2016, respectively, and $1,759 and $4,871 of sales and maturities of available for sale securities during first quarter 2017 and 2016, respectively. First quarter 2017 and 2016 investing activities include capital expenditures of $4,845 and $8,376, respectively. All capital expenditures in 2017 are expected to be funded from the Company's cash flow from operations and internal sources. In addition, Company management has committed approximately $15,000 to a manufacturing plant rehabilitation upgrade and expansion of one of its manufacturing facilities in the U.S.A. Management anticipates capital outlays for this project to be $5,000 in 2017, $9,000 in 2018 and $1,000 in 2019.

The Company's consolidated financial statements include bank borrowings of $330 and $853 at March 31, 2017 and 2016, respectively, all of which relates to its two majority-owned and controlled Spanish companies. The Company had no other outstanding bank borrowings at March 31, 2017.

Financing activities include Company common stock purchases and retirements of $9,985 and $6,576 in first quarter 2017 and 2016, respectively. Cash dividends of $11,128 and $10,943 were paid in first quarter 2017 and 2016, respectively.

The Company's current ratio (current assets divided by current liabilities) was 4.5 to 1 at March 31, 2017 compared to 4.7 to 1 at December 31, 2016 and 4.3 to 1 at March 31, 2016. Net working capital was $202,749 at March 31, 2017 compared to $235,739 and $195,504 at December 31, 2016 and March 31, 2016, respectively.

The aforementioned net working capital amounts are principally reflected in aggregate cash and cash equivalents and short-term investments of $145,557 at March 31, 2017 compared to $186,658 and $133,807 at December 31, 2016

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and March 31, 2016, respectively. In addition, long term investments, principally debt securities comprising corporate and municipal bonds were $195,312 at March 31, 2017, as compared to $164,665 and $176,483 at December 31, 2016 and March 31, 2016, respectively. Aggregate cash and cash equivalents and short and long-term investments were $340,869, $351,323, and $310,290, at March 31, 2017, December 31, 2016 and March 31, 2016, respectively. The aforementioned includes $73,025, $67,995, and $62,509 at March 31, 2017, December 31, 2016 and March 31, 2016, respectively, relating to trading securities which are used as an economic hedge for the Company's deferred compensation liabilities. Investments in corporate and municipal bonds, variable rate demand notes, and other debt securities that matured during first quarter 2017 and 2016 were generally used to purchase the Company's common stock or were replaced with debt securities of similar maturities.

The Company periodically contributes to a VEBA trust, managed and controlled by the Company, to fund the estimated future costs of certain employee health, welfare and other benefits. The Company is currently using these VEBA funds to pay the actual cost of such benefits through a portion of 2017. The VEBA trust held $1,855, $3,027 and $5,216 of aggregate cash and cash equivalents at March 31, 2017, December 31, 2016 and March 31, 2016, respectively. This asset value is included in prepaid expenses in the Company's Consolidated Statement of Financial Position. These assets are categorized as Level 1 within the fair value hierarchy. The Company is planning to make a contribution to this VEBA in the range of $10,000 to $15,000 in fourth quarter 2017. This contribution would result in the prepayment of these employee benefits.







ACCOUNTING PRONOUNCEMENTS


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



RISK FACTORS


There were no material changes to the risk factors disclosed in the Company's 2016 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.

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© Edgar Online, source Glimpses

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Ellen R. Gordon Chairman & Chief Executive Officer
G. Howard Ember CFO, Principal Accounting Officer & VP-Finance
Barre A. Seibert Independent Director
Lana Jane Lewis-Brent Independent Director
Paula M. Wardynski Independent Director
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