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

Delayed Quote. Delayed  - 11/24 07:02:01 pm
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10/26 TOOTSIE ROLL IN : posts 3Q profit
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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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11/07/2017 | 01:10pm 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, 2016 (the "2016 Form 10-K").

Net product sales were $182,173 in third quarter 2017 compared to $185,473 in third quarter 2016, a decrease of $3,300 or 1.8%. Nine months 2017 net product sales were $390,495 compared to $393,094 in nine months 2016, a decrease of $2,599 or 0.7%. Third quarter sales continue to be the Company's largest quarterly sales period due to back-to-school and pre-Halloween seasonal sales. The timing of sales to certain customers had some adverse impact on third quarter and nine months 2017 sales compared to the prior year corresponding periods.

Product cost of goods sold were $114,848 in third quarter 2017 compared to $114,748 in third quarter 2016, and nine months 2017 product cost of goods sold were $245,523 compared to $245,581 in nine months 2016. Product cost of goods sold includes $560 and $522 of certain deferred compensation expenses in third quarter 2017 and 2016, respectively, and $1,845 and $816 of certain deferred compensation expenses in nine months 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 increased from $114,226 in third quarter 2016 to $114,288 in third quarter 2017, an increase of $62 or 0.1%; but decreased from $244,765 in nine months 2016 to $243,678 in nine months 2017, a decrease of $1,087 or 0.4%. As a percentage of net product sales, adjusted product cost of goods sold was 62.7% and 61.6% in third quarter 2017 and 2016, respectively, an unfavorable increase of 1.1%; and adjusted product cost of goods sold was 62.4% and 62.3% in nine months 2017 and 2016, respectively, an unfavorable increase of 0.1%. Adjusted cost of goods sold as a percent of sales reflects higher ingredients costs, but some of these higher costs were mitigated by continuing improvements in manufacturing operating efficiencies driven by capital improvements and ongoing cost containment programs. Adjusted costs of goods sold in prior year third quarter and nine months 2016 were adversely affected by higher manufacturing costs relating to uncertainties surrounding certain changes in state and national product labeling.

Selling, marketing and administrative expenses were $33,095 in third quarter 2017 compared to $32,101 in third quarter 2016, and nine months 2017 selling, marketing and administrative expenses were $86,122 compared to $81,772 in nine months 2016. Selling, marketing and administrative expenses includes $1,717 and $1,439 of certain deferred compensation expenses in third quarter 2017 and 2016, respectively, and $5,131 and $2,266 of certain deferred compensation expenses in nine months 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 $30,662 in third quarter 2016 to $31,378 in third quarter 2017, an increase of $716 or 2.3%; and adjusted selling, marketing and administrative expenses increased from $79,506 in nine months 2016 to $80,991 in nine months 2017, an increase of $1,485 or 1.9%.

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As a percentage of net product sales, adjusted selling, marketing and administrative expenses increased from 16.5% in third quarter 2016 to 17.2% in 2017, an unfavorable increase of 0.7% as a percent of net sales, and adjusted selling, marketing and administrative expenses increased from 20.2% in nine months 2016 to 20.7% in nine months 2017, an unfavorable increase of 0.5% as a percent of net sales. Selling, marketing and administrative expenses include $12,699 and $11,620 for customer freight, delivery and warehousing expenses in third quarter 2017 and 2016, respectively, and $31,775 and $30,265 for customer freight, delivery and warehousing expenses in nine months 2017 and 2016, respectively. These expenses were 7.0% and 6.3% of net product sales in third quarter 2017 and 2016, respectively, and 8.1% and 7.7% of net product sales in nine months 2017 and 2016, respectively, and are the principal reasons for the above discussed increases in 2017 adjusted selling, marketing and administrative expenses.

Earnings from operations were $34,832 in third quarter 2017 compared to $39,273 in third quarter 2016, and were $60,864 in nine months 2017 compared to $67,786 in nine months 2016. Earnings from operations include $2,277 and $1,961 of certain deferred compensation expenses in third quarter 2017 and 2016, respectively, and include $6,976 and $3,082 of certain deferred compensation expenses in nine months 2017 and 2016, respectively, which are discussed above. Adjusting for these deferred compensation costs and expenses, operating earnings were $37,109 and $41,234 in third quarter 2017 and 2016, respectively, a decrease of $4,125 or 10.0%; and adjusted operating earnings were $67,840 and $70,868 in nine months 2017 and 2016, respectively, a decrease of $3,028 or 4.3%. As a percentage of net product sales, these adjusted operating earnings were 20.4% and 22.2% in third quarter 2017 and 2016, respectively, an unfavorable decrease of 1.8% as a percentage of net product sales; and as a percentage of net product sales, these adjusted operating earnings were 17.4% and 18.0% in nine months 2017 and 2016, respectively, an unfavorable decrease of 0.6% as a percentage of net product sales. These declines in operating earnings principally reflect the adverse effects of lower sales, higher ingredient costs and increases in customer freight, delivery and warehousing 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, net was $4,121 in third quarter 2017 compared to $1,943 in third quarter 2016, a favorable increase of $2,178; and other income, net, was $8,565 in nine months 2017 compared to $4,147 in nine months 2016, a favorable increase of $4,418. Other income, net for third quarter 2017 and 2016 includes net gains and investment income of $2,277 and $1,961, respectively, on trading securities which provide an economic hedge of the Company's deferred compensation liabilities; and other income, net for nine months 2017 and 2016 includes net gains and investment income of $6,976 and $3,082, respectively, on trading securities relating to these programs. These changes 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 $1,082 and $(582) in third quarter 2017 and 2016, respectively, and $(527) and $(572) in nine months 2017 and 2016, respectively.

The consolidated effective tax rates were 31.0% and 30.6% in third quarter 2017 and 2016, respectively, and 29.8% and 31.1% in nine months 2017 and 2016, respectively. The lower effective tax rates for nine months 2017 compared to nine months 2016 principally reflect certain benefits resulting from filing amended federal and state income tax returns, including a state income tax carry forward benefit.

Net earnings attributable to Tootsie Roll Industries, Inc. were $26,933 (after $46 net loss attributed to non-controlling interests) in third quarter 2017 compared to $28,637 (after $40 net loss attributed to non-controlling interests) in third quarter 2016, and earnings per share were $0.43 and $0.45 in third quarter 2017 and 2016, respectively, a decrease of $0.02 per share, or 4%. Nine months 2017 net earnings attributable to Tootsie Roll Industries, Inc. were $48,879 (after $131 net loss attributed to non-controlling interests) compared to nine months 2016 net earnings of $49,669 (after $142 net earnings attributed to non-controlling interests), and net earnings per share were $0.77 in both nine months 2017 and nine months 2016. Earnings per share attributable to Tootsie Roll Industries, Inc. for third quarter and nine months 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 64,021 in third quarter 2016 to 62,986 in third quarter 2017, and from 64,205 in nine months 2016 to 63,286 in nine months 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

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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 2017. There were also no impairments in the comparative nine months 2016 period or calendar 2016.

Beginning in 2012, the Company received periodic notices from the Bakery and Confectionery Union and Industry International 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 Internal Revenue Service recently issued updated mortality tables (increasing life expectancy) effective January 1, 2018 which will likely increase the Plan's liabilities and further decrease the above discussed funding percentages.

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 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. The Company's labor contract expired on September 30, 2017 but has provisions for automatic extensions unless the one of the parties provides a 60 day notice that they will not extend. Both parties are currently continuing under this automatic extension provision. 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 nine months 2017 and 2016 was $2,064 and $1,959 respectively, which includes surcharges of $517 and $417 respectively.

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During third quarter 2017, Plan representatives informed the Company that they had received preliminary approval from the PBGC that would transform the Plan into a "hybrid plan" which would comprise both an "old pool" and a "new pool" for participating employers. The "hybrid plan" would allow current participating employers to enter a "new pool" and withdraw from the "old pool" if they agree to 30 years of additional annual installment payments to discharge their existing withdrawal liability of the "old pool". The "new pool" option would provide certain protections from future withdrawal liabilities and reduced surcharges relating to future plan contributions, but would require employers to remain a participating employer in the "new pool" Plan for 30 years. The Plan believes that this "hybrid plan" as restructured will avoid insolvency. If the Company were to exercise this option, it would be required to make additional annual installment payments (which are in addition to the annual pension expense and surcharges discussed above) to the Plan of $2.1 million for 30 years ($63.0 million total) beginning in 2019, or a lump-sum payment of approximately $40.7 million in 2019. The Company is currently evaluating this proposal with its actuaries and legal counsel. If the Company were to decide to enter this "hybrid plan" agreement, it would record a charge to net after-tax earnings of approximately $25.6 million which reflects the aforementioned lump-sum pre-tax payment of $40.7 million (or the present value of the $2.1 million annual payments for 30 years discussed above), net of the Company's estimated future income tax benefits.

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 $18,420 and $47,032 in nine months 2017 and 2016, respectively, a decrease of $28,612. The decrease in nine months 2017 cash flows from operating activities principally reflects the timing of sales and collections of account receivables including the effects of seasonal (pre-Halloween) sales payment terms, the effects of higher finished goods inventories at September 30, 2017 reflecting the timing of pre-Halloween shipments during the comparative September and October periods, and changes in other receivables primarily due to increased broker margin deposit requirements on commodity hedges.

Net cash used in investing activities was $42,166 in nine months 2017 compared to $34,267 in nine months 2016. Cash flows from investing activities reflect $51,935 and $45,298 of purchases of available for sale securities during nine months 2017 and 2016, respectively, and $21,328 and $26,517 of sales and maturities of available for sale securities during nine months 2017 and 2016, respectively. Nine months 2017 and 2016 investing activities include capital expenditures of $11,699 and $13,067, 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 approximate $500 in 2017, $6,000 in 2018, $6,000 in 2019 and $2,500 in 2020.

The Company's consolidated financial statements include bank borrowings of $404 and $447 at September 30, 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 September 30, 2017.

Financing activities include Company common stock purchases and retirements of $30,027 and $26,293 in nine months 2017 and 2016, respectively. Cash dividends of $16,965 and $16,694 were paid in nine months 2017 and 2016, respectively.

The Company's current ratio (current assets divided by current liabilities) was 3.8 to 1 at September 30, 2017 compared to 4.7 to 1 at December 31, 2016 and 3.6 to 1 at September 30, 2016. Net working capital was $217,650 at September 30, 2017 compared to $235,739 and $202,304 at December 31, 2016 and September 30, 2016, respectively.

The aforementioned net working capital amounts are principally reflected in aggregate cash and cash equivalents and short-term investments of $123,784 at September 30, 2017 compared to $186,658 and $122,144 at December 31, 2016

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and September 30, 2016, respectively. In addition, long term investments, principally debt securities comprising corporate and municipal bonds were $193,991 at September 30, 2017, as compared to $164,665 and $189,956 at December 31, 2016 and September 30, 2016, respectively. Aggregate cash and cash equivalents and short and long-term investments were $317,775, $351,323, and $312,100, at September 30, 2017, December 31, 2016 and September 30, 2016, respectively. The aforementioned includes $75,094, $67,995, and $66,085 at September 30, 2017, December 31, 2016 and September 30, 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 nine months 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 most of 2017. The VEBA trust held $602, $3,027 and $3,379 of aggregate cash and cash equivalents at September 30, 2017, December 31, 2016 and September 30, 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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Managers
NameTitle
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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