10-Q 1 tr-20220630x10q.htm 10-Q
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2022

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to

COMMISSION FILE NUMBER 1-1361

Tootsie Roll Industries, Inc.

(Exact Name of Registrant as Specified in its Charter)

Virginia

22-1318955

(State of Incorporation)

(I.R.S. Employer Identification No.)

7401 South Cicero Avenue, ChicagoIllinois

60629

(Address of Principal Executive Offices)

(Zip Code)

773-838-3400

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   No 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files) Yes   No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

`

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes   No 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date (June 30, 2022).

Class

Outstanding

Common Stock, $0.69-4/9 par value

40,378,647

Class B Common Stock, $0.69-4/9 par value

28,622,730

Securities registered pursuant to Section 12(b) of the Act:

Title of each class:

    

Trading Symbol

    

Name of each exchange on which registered:

Common Stock, par value $0.69-4/9 per share

TR

New York Stock Exchange

TOOTSIE ROLL INDUSTRIES, INC.

JUNE 30, 2022

INDEX

Page No.

Part I —

Financial Information

Item 1.

Financial Statements꞉

Condensed Consolidated Statements of Financial Position

3-4

Condensed Consolidated Statements of Earnings and Retained Earnings

5

Condensed Consolidated Statements of Comprehensive Earnings

6

Condensed Consolidated Statements of Cash Flows

7

Notes to Condensed Consolidated Financial Statements

8-17

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

17-23

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

24

Item 4.

Controls and Procedures

24

Part II —

Other Information

Item 1.

Legal Proceedings

25

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

25

Item 6.

Exhibits

25

Signatures

26

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. See “Forward-Looking Statements” under Part I — Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Quarterly Report on Form 10-Q.

2

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

TOOTSIE ROLL INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

(in thousands) (Unaudited)

June 30, 2022

December 31, 2021

June 30, 2021

ASSETS

CURRENT ASSETS:

Cash and cash equivalents

   

$

46,628

    

$

105,840

    

$

96,617

Restricted cash

355

386

402

Investments

76,462

39,968

42,584

Accounts receivable trade, less allowances of $2,153, $2,281 and $1,767

44,706

54,921

36,133

Other receivables

4,305

3,920

3,652

Inventories:

Finished goods and work-in-process

63,863

31,431

57,811

Raw materials and supplies

37,225

24,074

30,473

Prepaid expenses

7,213

7,761

9,794

Total current assets

280,757

268,301

277,466

PROPERTY, PLANT AND EQUIPMENT, at cost:

Land

21,691

21,704

21,732

Buildings

130,152

130,158

123,880

Machinery and equipment

446,438

446,777

421,420

Construction in progress

26,828

15,344

28,280

Operating lease right-of-use assets

7,019

7,419

6,892

632,128

621,402

602,204

Less - accumulated depreciation

419,998

412,496

403,996

Net property, plant and equipment

212,130

208,906

198,208

OTHER ASSETS:

Goodwill

73,237

73,237

73,237

Trademarks

175,024

175,024

175,024

Investments

258,075

291,175

264,693

Split dollar officer life insurance

-

-

2,514

Prepaid expenses and other assets

494

603

2,771

Deferred income taxes

1,397

1,372

1,045

Total other assets

508,227

541,411

519,284

Total assets

$

1,001,114

$

1,018,618

$

994,958

(The accompanying notes are an integral part of these statements.)

3

(in thousands except per share data) (Unaudited)

June 30, 2022

December 31, 2021

June 30, 2021

LIABILITIES AND SHAREHOLDERS’ EQUITY

CURRENT LIABILITIES:

Accounts payable

   

$

21,618

    

$

14,969

    

$

20,317

Bank loans

1,020

939

986

Dividends payable

6,210

6,042

6,077

Accrued liabilities

52,010

53,896

46,389

Postretirement health care benefits

616

616

544

Operating lease liabilities

1,000

1,072

818

Income taxes payable

-

2,434

468

Total current liabilities

82,474

79,968

75,599

NONCURRENT LIABILITIES:

Deferred income taxes

43,051

45,461

47,664

Postretirement health care benefits

12,601

12,619

12,956

Industrial development bonds

7,500

7,500

7,500

Liability for uncertain tax positions

3,584

3,415

3,608

Operating lease liabilities

6,019

6,347

6,074

Deferred compensation and other liabilities

76,870

94,511

88,971

Total noncurrent liabilities

149,625

169,853

166,773

TOOTSIE ROLL INDUSTRIES, INC. SHAREHOLDERS’ EQUITY:

Common stock, $.69-4/9 par value - 120,000 shares authorized; 40,379, 39,344 and 39,700, respectively, issued

28,041

27,322

27,569

Class B common stock, $.69-4/9 par value - 40,000 shares authorized; 28,623, 27,793 and 27,821, respectively, issued

19,877

19,300

19,320

Capital in excess of par value

746,026

709,880

722,617

Retained earnings

8,692

39,545

6,846

Accumulated other comprehensive loss

(31,368)

(25,013)

(21,541)

Treasury stock (at cost) - 99, 96 and 96 shares, respectively

(1,992)

(1,992)

(1,992)

Total Tootsie Roll Industries, Inc. shareholders’ equity

769,276

769,042

752,819

Noncontrolling interests

(261)

(245)

(233)

Total equity

769,015

768,797

752,586

Total liabilities and shareholders’ equity

$

1,001,114

$

1,018,618

$

994,958

(The accompanying notes are an integral part of these statements.)

4

TOOTSIE ROLL INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF

EARNINGS AND RETAINED EARNINGS

(in thousands except per share amounts) (Unaudited)

Quarter Ended

Year to Date Ended

June 30, 2022

June 30, 2021

June 30, 2022

June 30, 2021

Net product sales

   

$

142,081

    

$

114,560

    

$

281,372

     

$

216,355

Rental and royalty revenue

1,359

898

2,705

2,332

Total revenue

143,440

115,458

284,077

218,687

Product cost of goods sold

95,402

75,948

187,752

141,513

Rental and royalty cost

386

228

765

673

Total costs

95,788

76,176

188,517

142,186

Product gross margin

46,679

38,612

93,620

74,842

Rental and royalty gross margin

973

670

1,940

1,659

Total gross margin

47,652

39,282

95,560

76,501

Selling, marketing and administrative expenses

20,674

32,378

47,747

59,187

Earnings from operations

26,978

6,904

47,813

17,314

Other income (loss), net

(11,137)

6,244

(16,153)

10,060

Earnings before income taxes

15,841

13,148

31,660

27,374

Provision for income taxes

3,860

3,356

7,660

6,819

Net earnings

11,981

9,792

24,000

20,555

Less: net loss attributable to noncontrolling interests

(8)

(2)

(16)

(6)

Net earnings attributable to Tootsie Roll Industries, Inc.

$

11,989

$

9,794

$

24,016

$

20,561

Net earnings attributable to Tootsie Roll Industries, Inc. per share

$

0.17

$

0.14

$

0.35

$

0.29

Dividends per share *

$

0.09

$

0.09

$

0.18

$

0.18

Average number of shares outstanding

68,945

69,570

68,989

69,712

Retained earnings at beginning of period

$

2,904

$

3,121

$

39,545

$

32,312

Net earnings attributable to Tootsie Roll Industries, Inc.

11,989

9,794

24,016

20,561

Cash dividends

(6,201)

(6,069)

(12,235)

(11,994)

Stock dividends

-

-

(42,634)

(34,033)

Retained earnings at end of period

$

8,692

$

6,846

$

8,692

$

6,846

*Does not include 3% stock dividend to shareholders of record on 3/7/22 and 3/5/21.

(The accompanying notes are an integral part of these statements.)

5

TOOTSIE ROLL INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE EARNINGS

(in thousands except per share amounts) (Unaudited)

Quarter Ended

Year to Date Ended

June 30, 2022

June 30, 2021

June 30, 2022

June 30, 2021

Net earnings

   

$

11,981

    

$

9,792

    

$

24,000

    

$

20,555

Other comprehensive income (loss), before tax:

Foreign currency translation adjustments

(106)

590

463

193

Pension and postretirement reclassification adjustments:

Unrealized gains (losses) for the period on postretirement and pension benefits

-

-

-

-

Less: reclassification adjustment for (gains) losses to net earnings

(206)

(352)

(413)

(703)

Unrealized gains (losses) on postretirement and pension benefits

(206)

(352)

(413)

(703)

Investments:

Unrealized gains (losses) for the period on investments

(2,440)

(374)

(8,287)

(1,529)

Less: reclassification adjustment for (gains) losses to net earnings

(5)

(53)

(10)

(53)

Unrealized gains (losses) on investments

(2,445)

(427)

(8,297)

(1,582)

Derivatives:

Unrealized gains (losses) for the period on derivatives

(229)

841

(8)

1,317

Less: reclassification adjustment for (gains) losses to net earnings

(148)

(794)

(277)

(1,565)

Unrealized gains (losses) on derivatives

(377)

47

(285)

(248)

Total other comprehensive income (loss), before tax

(3,134)

(142)

(8,532)

(2,340)

Income tax benefit (expense) related to items of other comprehensive income

733

178

2,177

614

Total comprehensive earnings

9,580

9,828

17,645

18,829

Comprehensive earnings (loss) attributable to noncontrolling interests

(8)

(2)

(16)

(6)

Total comprehensive earnings attributable to Tootsie Roll Industries, Inc.

$

9,588

$

9,830

$

17,661

$

18,835

(The accompanying notes are an integral part of these statements.)

6

TOOTSIE ROLL INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands) (Unaudited)

Year to Date Ended

June 30, 2022

June 30, 2021

CASH FLOWS FROM OPERATING ACTIVITIES:

Net earnings

   

$

24,000

    

$

20,555

Adjustments to reconcile net earnings to net cash provided by operating activities:

Depreciation

8,451

8,757

Deferred income taxes

(233)

378

Amortization of marketable security premiums

2,792

1,644

Changes in operating assets and liabilities:

Accounts receivable

10,165

5,040

Other receivables

(745)

64

Inventories

(45,483)

(28,665)

Prepaid expenses and other assets

2,206

(1,260)

Accounts payable and accrued liabilities

3,214

7,388

Income taxes payable

(3,813)

(3,068)

Postretirement health care benefits

(431)

(690)

Deferred compensation and other liabilities

494

635

Net cash provided by operating activities

617

10,778

CASH FLOWS FROM INVESTING ACTIVITIES:

Capital expenditures

(10,194)

(12,327)

Purchases of trading securities

(1,112)

(1,959)

Sales of trading securities

205

582

Purchase of available for sale securities

(57,731)

(58,154)

Sale and maturity of available for sale securities

25,993

19,798

Net cash from (used in) investing activities

(42,839)

(52,060)

CASH FLOWS FROM FINANCING ACTIVITIES:

Shares purchased and retired

(5,023)

(17,181)

Dividends paid in cash

(12,237)

(12,034)

Proceeds from bank loans

2,182

2,032

Repayment of bank loans

(2,018)

(1,847)

Net cash used in financing activities

(17,096)

(29,030)

Effect of exchange rate changes on cash

75

75

Increase (Decrease) in cash and cash equivalents

(59,243)

(70,237)

Cash, cash equivalents and restricted cash at beginning of year

106,226

167,256

Cash, cash equivalents and restricted cash at end of quarter

$

46,983

$

97,019

Supplemental cash flow information:

Income taxes paid/(received), net

$

11,415

$

13,120

Interest paid

$

13

$

4

Stock dividend issued

$

70,242

$

64,667

(The accompanying notes are an integral part of these statements.)

7

TOOTSIE ROLL INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2022

(in thousands except per share amounts) (Unaudited)

Note 1 — Significant Accounting Policies

General Information

Foregoing data has been prepared from the unaudited financial records of Tootsie Roll Industries, Inc. (the “Company”) and in the opinion of Management all adjustments, which are of a normal recurring nature, necessary for a fair statement of the results for the interim period have been reflected. Certain amounts previously reported have been reclassified to conform to the current year presentation. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the related notes included in the Company’s Form 10-K for the year ended December 31, 2021 (the “2021 Form 10-K”).

Results of operations for the period ended June 30, 2022 are not necessarily indicative of results to be expected for the year to end December 31, 2021 because of the seasonal nature of the Company’s operations. Historically, the third quarter has been the Company’s largest net product sales quarter due to pre-Halloween net product sales.

On March 11, 2020, the World Health Organization designated the recent novel coronavirus ("COVID-19") as a global pandemic. The Company continues to actively monitor COVID-19 and its potential impact on our operations and financial results. The impact that COVID-19 will have on our consolidated financial statements throughout 2022 and beyond remains uncertain and ultimately will be dictated by the length and severity of the pandemic and Covid-19 variants, the pace of the “reopening” of the economy and economic recovery, and federal, state, local and foreign government actions taken in response. The effects of Covid-19 pandemic are unprecedented, and therefore the Company is unable to determine its effects on its net product sales and net earnings for the balance of 2022 and beyond.

Revenue Recognition

The Company’s revenues, primarily net product sales, principally resulting from the sale of goods, reflect the consideration to which the Company expects to be entitled generally based on customer purchase orders. The Company records revenue based on a five-step model in accordance with Accounting Standards Codification ("ASC") Topic 606 which became effective January 1, 2018. Adjustments for estimated customer cash discounts upon payment, discounts for price adjustments, product returns, allowances, and certain advertising and promotional costs, including consumer coupons, are variable consideration and are recorded as a reduction of net product sales revenue in the same period the related net product sales are recorded. Such estimates are calculated using historical averages adjusted for any expected changes due to current business conditions and experience. A net product sale is recorded when the Company delivers the product to the customer, or in certain instances, the customer picks up the goods at the Company’s distribution center, and thereby obtains control of such product. Amounts billed and due from our customers are classified as accounts receivable trade on the balance sheet and require payment on a short-term basis. Accounts receivable trade are unsecured. Shipping and handling costs of $14,156 and $12,437 in second quarter 2022 and 2021, respectively, and $30,694 and $22,576 in first half 2022 and 2021, respectively, are included in selling, marketing and administrative expenses. A minor amount of royalty income (less than 0.2% of our consolidated net product sales) is also recognized from sales-based licensing arrangements, pursuant to which revenue is recognized as the third-party licensee sales occur. Rental income (approximately 1% of our consolidated net product sales) is not considered revenue from contracts from customers.

Leases

The Company identifies leases by evaluating its contracts to determine if the contract conveys the right to use an identified asset for a stated period of time in exchange for consideration. The Company considers whether it can control the underlying asset and have the right to obtain substantially all of the economic benefits or outputs from the

8

asset. Leases with terms greater than 12 months are classified as either operating or finance leases at the commencement date.  For these leases, we capitalize the present value of the minimum lease payments over the lease term as a right-of-use asset with an offsetting lease liability. The discount rate used to calculate the present value of the minimum lease payments is typically our incremental borrowing rate, as the rate implicit in the lease is generally not known or determinable. The lease term includes any noncancelable period for which the Company has the right to use the asset. Currently, all capitalized leases are classified as operating leases and the Company records rental expense on a straight-line basis over the term of the lease.

Recently Adopted Accounting Pronouncements

As of the date of this report, there are no recent accounting pronouncements that have not yet been adopted that Management believes would have a material impact on the Company’s consolidated financial statements.

Note 2 — Average Shares Outstanding

The average number of shares outstanding for six months 2022 reflects aggregate stock purchases of 145 shares for $5,023 and a 3% stock dividend of 2,006 shares distributed on April 8, 2022. The average number of shares outstanding for six months 2021 reflects aggregate stock purchases of 536 shares for $17,181 and a 3% stock dividend of 1,970 shares distributed on April 2, 2021.

Note 3 — Income Taxes

The Company is subject to taxation in the U.S. and various state and foreign jurisdictions. The Company remains subject to examination by U.S. federal and state and foreign tax authorities for the years 2018 through 2020. The Company’s consolidated effective income tax rate was 24.4% and 25.5% in second quarter 2022 and 2021, respectively, and 24.2% and 24.9% in first half 2022 and 2021, respectively.

9

NOTE 4—Share Capital and Capital In Excess of Par Value:

Capital in

 

Class B

Excess

 

Common Stock

Common Stock

Treasury Stock

of Par

 

    

Shares

    

Amount

    

Shares

    

Amount

    

Shares

    

Amount

    

Value

 

(000’s)

(000’s)

(000’s)

 

Balance at March 31, 2022

 

40,487

$

28,116

 

28,626

$

19,879

 

99

$

(1,992)

$

749,819

Issuance of 3% stock dividend

 

 

 

 

 

 

 

Conversion of Class B common shares to common shares

 

4

 

3

 

(4)

 

(3)

 

 

 

Purchase and retirement of common shares and other

 

(112)

 

(78)

 

1

 

1

 

 

 

(3,793)

Balance at June 30, 2022

 

40,379

$

28,041

 

28,623

$

19,877

 

99

$

(1,992)

$

746,026

Balance at March 31, 2021

 

40,002

$

27,779

 

27,821

$

19,320

 

96

$

(1,992)

$

732,165

Issuance of 3% stock dividend

 

 

 

 

 

 

 

Conversion of Class B common shares to common shares

 

 

 

 

 

 

 

Purchase and retirement of common shares and other

 

(302)

 

(210)

 

-

 

 

 

 

(9,548)

Balance at June 30, 2021

 

39,700

$

27,569

 

27,821

$

19,320

 

96

$

(1,992)

$

722,617

Balance at December 31, 2021

39,344

$

27,322

 

27,793

$

19,300

 

96

$

(1,992)

$

709,880

Issuance of 3% stock dividend

 

1,176

817

 

833

579

 

3

41,068

Conversion of Class B common shares to common shares

 

4

 

3

 

(4)

 

(3)

 

 

 

Purchase and retirement of common shares and other

 

(145)

 

(101)

 

1

 

1

 

 

 

(4,922)

Balance at June 30, 2022

 

40,379

$

28,041

 

28,623

$

19,877

 

99

$

(1,992)

$

746,026

Balance at December 31, 2020

39,073

$

27,134

 

27,012

$

18,758

 

93

$

(1,992)

$

706,930

Issuance of 3% stock dividend

 

1,163

808

 

809

562

 

3

32,495

Conversion of Class B common shares to common shares

 

 

 

 

 

 

 

Purchase and retirement of common shares and other

 

(536)

 

(373)

 

 

 

 

 

(16,808)

Balance at June 30, 2021

 

39,700

$

27,569

 

27,821

$

19,320

 

96

$

(1,992)

$

722,617

Note 5 — Fair Value Measurements

Current accounting guidance defines fair value as the price that would be received on the sale of an asset, or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Guidance requires disclosure of the extent to which fair value is used to measure financial assets and liabilities, the inputs utilized in calculating valuation measurements, and the effect of the measurement of significant unobservable inputs on earnings, or changes in net assets, as of the measurement date. Guidance establishes a three-level valuation hierarchy based upon the transparency of inputs utilized in the measurement and valuation of financial assets or liabilities as of the measurement date. Level 1 inputs include quoted prices for identical instruments and are the most observable. Level 2 inputs include quoted prices for similar assets and observable inputs such as interest rates, foreign currency exchange rates, commodity rates and yield curves. Level 3 inputs are not observable in the market and include Management’s own judgments about the assumptions market participants would use in pricing the asset or liability. The use of observable and unobservable inputs is reflected in the hierarchy assessment disclosed in the table below.

10

As of June 30, 2022, December 31, 2021 and June 30, 2021, the Company held certain financial assets that are required to be measured at fair value on a recurring basis. These included derivative hedging instruments related to the purchase of certain raw materials and foreign currencies, investments in trading securities and available for sale securities. The Company’s available for sale securities principally consist of corporate bonds.

The fair value of the Company’s industrial revenue development bonds at June 30, 2022, December 31, 2021 and June 30, 2021 were valued using Level 2 inputs which approximates the carrying value of $7,500 for the respective periods. Interest rates on these bonds are reset weekly based on current market conditions.

11

The following table presents information about the Company’s financial assets and liabilities measured at fair value as of June 30, 2022, December 31, 2021 and June 30, 2021 and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value: