UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 28, 2008
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, Chicago, Illinois 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 X No ___
Indicate by check mark whether the Registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of "accelerated filer," "large accelerated
filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer X Accelerated filer _
Non-accelerated filer __ Smaller reporting company ___
Indicate by check mark whether the Registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act)
Yes No X
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date (June 28, 2008)
Class Outstanding
Common Stock, $.69 4/9 par value 35,659,234
Class B Common Stock, $.69 4/9 par value 19,405,582
TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES
JUNE 28, 2008
INDEX
Page No.
Part I - Financial Information
Item 1. Financial Statements:
Condensed Consolidated Statements of
Financial Position 2
Condensed Consolidated Statements of Earnings,
Comprehensive Earnings and Retained Earnings 3
Condensed Consolidated Statements of Cash Flows 4
Notes to Condensed Consolidated Financial Statements 5-5C
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6-6E
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 6E
Item 4. Controls and Procedures 6E
Part II - Other Information
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds 7
Item 4. Submission of Matters to a Vote of Security Holders 7
Item 6. Exhibits 7A
Signatures 7A
Certifications 7B-7D
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 "Information Regarding 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.
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(in thousands of dollars) (UNAUDITED)
ASSETS June 28, June 30, Dec. 31,
CURRENT ASSETS 2008 2007 2007__
Cash & cash equivalents $ 31,251 $ 39,761 $ 57,606
Investments 15,778 19,596 41,307
Trade accounts receivable,
Less allowances of
$2,081, $2,090 & $2,287 25,120 27,396 32,371
Other receivables 3,487 2,850 2,913
Inventories, at cost
Finished goods & work in process 74,858 75,333 37,031
Raw material & supplies 27,683 25,735 20,371
Prepaid expenses 2,806 5,114 6,551
Deferred income taxes 1,585 7,150 1,576
Total current assets 182,568 202,935 199,726
PROPERTY, PLANT & EQUIPMENT, at cost
Land 19,417 19,402 19,398
Buildings 88,286 87,273 88,225
Machinery & equipment 279,802 263,034 270,070
387,505 369,709 377,693
Less-accumulated depreciation 184,085 169,100 176,292
Net property, plant and equipment 203,420 200,609 201,401
OTHER ASSETS
Goodwill 73,237 73,237 73,237
Trademarks 189,024 189,024 189,024
Investments 73,217 59,172 65,993
Split dollar life insurance 74,944 75,058 74,944
Investment in joint venture 11,030 9,207 8,400
421,452 405,698 411,598
Total assets $807,440 $809,242 $812,725
-2-
(The accompanying notes are an integral part of these statements.)
(in thousands except per share data) (UNAUDITED)
LIABILITIES AND SHAREHOLDERS' EQUITY June 28, June 30, Dec. 31,
CURRENT LIABILITIES 2008 2007 2007__
Accounts payable $ 26,983 $ 18,817 $ 11,572
Dividends payable 4,425 4,401 4,344
Accrued liabilities 36,829 38,027 42,056
Total current liabilities 68,237 61,245 57,972
NON-CURRENT LIABILITIES
Deferred income taxes 35,794 36,504 35,940
Postretirement health care and life
insurance benefits 13,847 13,201 13,214
Industrial development bonds 7,500 7,500 7,500
Liability for uncertain tax positions 21,009 19,273 20,056
Deferred compensation and other
liabilities 36,934 39,398 39,813
Total non-current liabilities 115,084 115,876 116,523
Total liabilities 183,321 177,121 174,495
SHAREHOLDERS' EQUITY
Common Stock, $.69-4/9 par value-
120,000 shares authorized; 35,659,
36,099 & 35,404, respectively, issued 24,763 25,069 24,586
Class B common stock, $.69-4/9 par value-
40,000 shares authorized; 19,406, 18,916
& 18,892, respectively, issued 13,476 13,136 13,120
Capital in excess of par value 472,067 474,467 457,491
Retained earnings 126,589 133,894 156,752
Accumulated other comprehensive loss (10,784) (12,453) (11,727)
Treasury stock (at cost)-
65, 63 & 63 shares, respectively (1,992) (1,992) (1,992)
Total shareholders' equity 624,119 632,121 638,230
Total liabilities and
shareholders' equity $807,440 $809,242 $812,725
-2A-
(The accompanying notes are an integral part of these statements.)
TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
EARNINGS, COMPREHENSIVE EARNINGS AND RETAINED EARNINGS
(in thousands except per share amounts) (UNAUDITED)
13 WEEKS ENDED
June 28, 2008 & June 30, 2007
Net product sales $101,591 $101,901
Rental and royalty revenues 1,023 1,282
Total revenues 102,614 103,183
Product cost of goods sold 68,741 67,476
Rental and royalty costs 234 294
Total costs 68,975 67,770
Product cost of goods sold 32,850 34,425
Rental and royalty gross margins 789 988
Total gross margin 33,639 35,413
Selling, marketing and administrative expenses 23,188 24,166
Earnings from operations 10,451 11,247
Other income, net 653 3,054
Earnings before income taxes 11,104 14,301
Provision for income taxes 3,858 4,075
Net earnings 7,246 10,226
Other comprehensive income, before tax:
Foreign currency translation adjustments 647 290
Unrealized losses on securities (216) (23)
Unrealized losses on derivatives (856) (169)
Other comprehensive (loss) income, before tax (425) 98
Income tax benefit related to items
of other comprehensive income 399 72
Other comprehensive (loss) income, net of tax (26) 170
Comprehensive earnings $ 7,220 $ 10,396
Retained earnings at beginning of period $123,744 $128,064
Net earnings 7,246 10,226
Cash dividends (4,401) (4,396)
Retained earnings at end of period $126,589 $133,894
Net earnings per share $0.13 $0.18
Dividends per share * $0.08 $0.08
Average number of shares outstanding 55,000 56,745
*Does not include 3% stock dividend to shareholders of record on 3/10/08 and 3/09/07.
-3-
(The accompanying notes are an integral part of these statements.)
TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
EARNINGS, COMPREHENSIVE EARNINGS AND RETAINED EARNINGS
(in thousands except per share amounts) (UNAUDITED)
26 WEEKS ENDED
June 28, 2008 & June 30, 2007
Net product sales $191,932 $194,815
Rental and royalty revenues 2,115 2,791
Total revenues 194,047 197,606
Product cost of goods sold 129,370 127,212
Rental and royalty costs 516 766
Total costs 129,886 127,978
Product gross margin 62,562 67,603
Rental and royalty gross margins 1,599 2,025
Total gross margin 64,161 69,628
Selling, marketing and administrative expenses 43,238 45,222
Earnings from operations 20,923 24,406
Other (loss) income, net (587) 4,528
Earnings before income taxes 20,336 28,934
Provision for income taxes 6,637 8,897
Net earnings 13,699 20,037
Other comprehensive income, before tax:
Foreign currency translation adjustments 3,563 -
Unrealized (losses) gains on securities (2,360) 12
Unrealized (losses) gains on derivatives (282) 118
Other comprehensive income, before tax 921 130
Income tax benefit (expense) related to items
of other comprehensive income 20 (47)
Other comprehensive income, net of tax 941 83
Comprehensive earnings $ 14,640 $ 20,120
Retained earnings at beginning of period $156,752 $169,233
Net earnings 13,699 20,037
Cash dividends (8,697) (8,691)
Stock dividends - 3% (35,165) (46,685)
Retained earnings at end of period $126,589 $133,894
Net earnings per share $0.25 $0.35
Dividends per share * $0.16 $0.16
Average number of shares outstanding 55,310 56,812
*Does not include 3% stock dividend to shareholders of record on 3/10/08 and 3/09/07.
-3A-
(The accompanying notes are an integral part of these statements.)
TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars) (UNAUDITED)
26 WEEKS ENDED
June 28, 2008 & June 30, 2007
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 13,699 $ 20,037
Adjustments to reconcile net earnings to
net cash provided by (used in) operating
activities:
Depreciation and amortization 8,005 7,796
Amortization of marketable securities 202 312
Sales (purchases) of trading securities 97 (326)
Changes in operating assets and liabilities:
Accounts receivable 7,429 7,679
Other receivables (856) 1,202
Inventories (44,872) (37,111)
Prepaid expenses and other assets 3,789 1,019
Accounts payable and accrued liabilities 10,091 (61)
Income taxes payable and deferred 910 8,920
Postretirement health care and life
insurance benefits 633 619
Deferred compensation and other liabilities (1,051) (392)
Other 224 66
Net cash (used in) provided by operating activities (1,700) 9,760
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (9,742) (5,506)
Purchase of available for sale securities (25,456) (15,104)
Sale and maturity of available for
sale securities 39,216 13,463
Net cash provided by (used in) investing activities 4,018 (7,147)
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid in cash (8,738) (8,756)
Shares repurchased and retired (19,935) (9,825)
Net cash used in financing activities (28,673) (18,581)
Decrease in cash and cash equivalents (26,355) (15,968)
Cash and cash equivalents-beginning of year 57,606 55,729
Cash and cash equivalents end of quarter $ 31,251 $ 39,761
Supplemental cash flow information:
Income taxes paid (refunded), net $ 4,531 $ (300)
Interest paid $ 148 $ 319
Stock dividend issued $ 35,043 $ 46,520
(The accompanying notes are an integral part of these statements.)
-4-
TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 28, 2008
(in thousands except per share amounts) (UNAUDITED)
Note 1 - Foregoing data has been prepared from the unaudited financial
records of Tootsie Roll Industries, Inc. and Subsidiaries (the
Company) and in the opinion of management all adjustments
necessary for a fair statement of the results for the interim
period have been reflected. All adjustments were of a normal
and recurring nature. Certain reclassifications have been made
to the prior year financial statements 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 Annual Report on
Form 10-K for the fiscal year ended December 31, 2007.
Note 2 - Average shares outstanding for the 26 week period ended June 28,
2008 reflects stock repurchases and subsequent retirements of 839
shares for $19,934 and a 3% stock dividend distributed on April 10,
2008. Average shares outstanding for the 26 week period ended June
30, 2007 reflects stock repurchases and subsequent retirements of
346 shares for $9,825 and a 3% stock dividend distributed on April 12,
2007.
Note 3 - Results of operations for the period ended June 28, 2008 are not
necessarily indicative of results to be expected for the year to end
December 31, 2008 because of the seasonal nature of the Company's
operations. Historically, the third quarter has been the Company's
largest sales quarter due to Halloween sales.
Note 4 - 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 2004
through 2006. With few exceptions, the Company is no longer subject
to examinations by tax authorities for years 2003 and prior.
Note 5 - New Accounting Pronouncements
In September 2006, the FASB issued statement No. 157, "Fair Value
Measurements" (SFAS 157). SFAS 157 defines fair value, establishes
a framework for measuring fair value in accordance with accounting
principles generally accepted in the United States, and expands
disclosures about fair value measurements. The Company has adopted
the provisions of SFAS 157 as of January 1, 2008, for financial
instruments measured at fair value on recurring and nonrecurring
basis. Although the adoption of SFAS 157 did not materially impact
its financial condition, results of operations, or cash flows, the
Company is now required to provide additional disclosures as part of
its financial statements.
SFAS 157 establishes a three-tier fair value hierarchy, which prior-
itizes the inputs used in measuring fair value. These tiers include:
Level 1, inputs defined as quoted prices (unadjusted) in active
markets for identical assets or liabilities that the reporting entity
has the ability to access at the measurement date; Level 2 inputs
defined as inputs other than quoted prices included within Level 1 that
-5-
are observable for the asset or liability, either directly or
indirectly; and Level 3, defined as unobservable inputs in which little
or no market data exists, therefore requiring an entity to develop its
own assumptions.
In February 2008, the FASB issued FASB Staff Position FAS 157-2,
"Effective Date of FASB Statement No. 157" (FSP SFAS 157-2). FSP SFAS
157-2 delays the effective date SFAS 157 for non-financial assets and
non-financial liabilities, except for items that are recognized or
disclosed at fair value in the financial statements on a recurring
basis. The non-financial assets and non-financial liabilities for
which the Company has not applied the fair value provisions of SFAS 157
include goodwill and other intangible assets. The effective date for
application of SFAS 157 to non-financial assets and non-financial
liabilities will be fiscal and interim periods beginning after November
15, 2008. The Company is currently evaluating the impact of adopting
SFAS 157 for non-financial assets and non-financial liabilities on our
financial statements.
As of June 28, 2008, 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, investments in trading securities and available
for sale securities, including auction rate securities (ARS), and
investments associated with a foreign benefit plan, which were deemed
immaterial for further discussion. The Company's available for sale
and trading securities principally consist of municipal bonds and
mutual funds that are publicly traded.
As of June 28, 2008, the Company's long-term investments include
$11,043 of Jefferson County Alabama Sewer Revenue Refunding Warrants
which is an ARS that is classified as an available for sale security.
Due to recent events in the credit markets, as well as events related
to Jefferson County and its bond insurance carrier, Financial Guaranty
Insurance Company (FGIC), the auction for this ARS failed during the
first half of 2008. As such, the Company estimated the fair value of
this ARS utilizing a valuation model with Level 3 inputs as of June 28,
2008. This valuation model considered, among other items, the credit
risk of the collateral underlying the ARS, the credit risk of the bond
insurer, interest rates, and the amount and timing of expected future
cash flows including our assumption about the market expectation of the
next successful auction.
As of June 28, 2008, the Company has concluded that the market
decline in fair value of its Jefferson County ARS is temporary because
the Company continues to receive interest on its ARS on a timely
basis, there has been no default on this ARS, and this ARS is insured
by FGIC. The Company also has the intent and ability to hold this
ARS until recovery. We expect to receive all contractual cash flows.
Therefore, the Company has recorded an unrealized loss of $2,507
(original cost and par value was $13,550) to accumulated other
comprehensive income as of June 28, 2008.
The Company has also classified this ARS as non-current and has
included it in long-term Investments on the unaudited Condensed
Consolidated Balance Sheet at June 28, 2008 because the Company
believes that the current condition of the auction rate securities
market, as well as the financial conditions of Jefferson County and
FGIC, may take more than twelve months to improve.
-5A-
Any future fluctuation in fair value related to this ARS that the
Company deems to be temporary, including any recoveries of previous
write-downs, would be recorded to accumulated other comprehensive
income. If the Company determines that any future valuation
adjustment is other than temporary, it would record an impairment
charge to earnings as appropriate.
The Company's assets measured at fair value on a recurring basis
subject to the disclosure requirements of SFAS 157 at June 28,
2008, were as follows:
Fair Value Measurements at Reporting
Date Using
Quoted
Prices in
Active
Markets Significant
for Other Significant
Identical Observable Unobservable
(in thousands) Assets Inputs Inputs
Description 6/28/2008 (Level 1) (Level 2) (Level 3)
Auction Rate Security (ARS) $ 11,043 $ - $ - $ 11,043
Available-for-sale Security 47,094 47,094 -
Excluding ARS
Commodity Derivatives 308 308 - -
Trading Securities 30,858 30,858 - -
Total assets measured at fair value $ 89,303 $ 31,166 47,094 $ 11,043
Available for sale securities which utilize Level 2 inputs consist
primarily of municipal bonds, which trade in markets that are not
considered to be active, but are valued based on quoted market
prices or alternative pricing sources with reasonable levels of
price transparency.
Based on market conditions, the Company changed its valuation
methodology for ARS to a discounted cash flow analysis during first
quarter 2008. Accordingly, these securities changed from Level 2 to
Level 3 within SFAS 157's hierarchy since the Company's initial
adoption of SFAS 157 at January 1, 2008.
The following table presents the Company's financial assets measured
at fair value on a recurring basis using significant unobservable
inputs (Level 3) as defined in SFAS 157 at June 28, 2008:
Fair Value Measurements Using Significant
Unobservable Inputs (Level 3)
Auction
Rate
Security
(in thousands)
Balance at 1/1/2008 $ -
Transfers to Level 3 27,250
Included in other comprehensive income (2,507)
Purchases and (sales) net (13,700)
Balance at 6/28/2008 $ 11,043
-5B-
In February 2007, the FASB issued SFAS No. 159, "The Fair
Value Option for Financial Assets and Financial Liabilities-
including an amendment to FASB Statement No. 115" (SFAS No.
159), which permits entities to choose to measure many
financial instruments and certain other items at fair value.
SFAS No. 159 became effective beginning with our first quarter
of 2008. The Company has chosen not to elect the fair value
option for our existing financial instruments.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about
Derivative Instruments and Hedging Activities, an amendment of
FASB Statement No. 133" (SFAS 161), which requires enhanced
disclosures for derivative and hedging activities. SFAS 161 will
become effective beginning with our first quarter of 2009. Early
adoption is permitted. The Company is currently evaluating the
impact of this standard on our Consolidated Financial Statements.
-5C-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(dollars in thousands except per share amounts)
The following is management's discussion of the Company's operating results and
analysis of factors that have affected the accompanying Condensed Consolidated
Statement of Earnings.
NET PRODUCT SALES Net change in
Second Quarter, 2008
Second Quarter vs.
2008 2007 Second Quarter, 2007
$101,591 $101,901 (0.3) %
First Half, 2008
First Half vs.
2008 2007 First Half, 2007
$191,932 $194,815 (1.5) %
Second quarter 2008 net product sales were $101,591 compared to $101,901 in
second quarter 2007, a decrease of $310 or 0.3%. First half 2008 net product
sales of $191,932 decreased $2,883 or 1.5% from first half 2007 net product
sales of $194,815. The sales decline in the first half 2008 reflects the
overall challenging economic conditions and competitive factors during the
period.
PRODUCT COST OF GOODS SOLD:
Second Quarter Percentage of Net Product Sales
2008 2007 2nd Qtr. 2008 2nd Qtr. 2007
$68,741 $67,476 67.7% 66.2%
First Half Percentage of Net Product Sales
2008 2007 1st Half 2008 1st Half 2007
$129,370 $127,212 67.4% 65.3%
Product cost of goods sold as a percentage of net product sales increased from
66.2% in the second quarter 2007 to 67.7% in second quarter 2008, and from
65.3% in first half 2007 to 67.4% in first half 2008. These increases in
product cost of goods sold as a percentage of product net sales are primarily
the result of higher input costs relating to major ingredients, packaging
materials, and less favorable foreign exchange rates with regard to products
manufactured in Canada. Increased plant overhead spending against lower sales
volumes also contributed to increased product cost of goods sold as a percent
of net product sales.
The Company's ability to forecast the direction and scope of changes to its
major input costs is currently impacted by significant volatility in crude oil,
corn, soybean and sugar markets. The prices of these commodities are influenced
by increasing global demand; changes in farm policy, including mandates for
bio- fuels; and fluctuations in the U.S. dollar relative to dollar-denominated
commodities in world markets. The Company believes that its competitors face
the same or similar challenges.
-6-
In order to address the impact of rising input and other costs, the Company
periodically reviews each item in its product portfolio to ascertain if price
increases, weight declines (indirect price increase) or other actions may be
taken. This review includes an evaluation of the risk factors relating to
market place acceptance of such changes and their potential effect on future
sales volumes. In addition, the estimated cost of packaging modifications
associated with weight changes is evaluated.
The Company also maintains ongoing cost reduction programs whereby cost savings
initiatives are encouraged and progress monitored. The Company is not able to
accurately predict the outcome of these cost savings initiatives and their
effects on its future results.
SELLING, MARKETING AND ADMINISTRATIVE EXPENSES:
Second Quarter Percentage of Net Product Sales
2008 2007 2nd Qtr. 2008 2nd Qtr. 2007
$23,188 $24,166 22.8% 23.7%
First Half Percentage of Net Product Sales
2008 2007 1st Half 2008 1st Half 2007
$43,238 $45,222 22.5% 23.2%
Second quarter 2008 selling, marketing and administrative expenses were $23,188
compared to $24,166 in second quarter 2007, a decrease of $978 or 4.0%. These
same expenses decreased from $45,222 in first half 2007 to $43,238 in first
half 2008, a decrease of $1,984 or 4.4%. The aforementioned decreases in
expenses for both periods primarily reflect the change in net product sales, as
well as a decline in deferred compensation expense, which is discussed below.
As a percentage of net product sales, such operating expenses decreased
slightly from 23.7% in second quarter 2007 to 22.8% in second quarter 2008 and
from 23.2% in first half 2007 to 22.5% in first half 2008, principally
reflecting the decrease in deferred compensation expense. However, the Company
was adversely affected by higher freight, delivery and warehousing expenses,
principally reflecting higher fuel costs, during both second quarter and first
half 2008 compared to the corresponding periods in the prior year.
Second quarter 2008 earnings from operations were $10,451 compared to $11,247
in second quarter 2007, a decrease of $796 or 7.1%. First half 2008 earnings
from operations were $20,923 compared to $24,406 a decrease of $3,483 or 14.3%.
The decline in operating earnings during both second quarter and first half
2008 were primarily the result of lower sales volume and higher input costs as
discussed above.
NET EARNINGS:
Second Quarter, 2008
Second Quarter vs.
2008 2007 Second Quarter, 2007
$ 7,246 $10,226 (29.1) %
First Half, 2008
First Half vs.
2008 2007 First Half, 2007
$13,699 $20,037 (31.6) %
-6A-
Second quarter 2008 net earnings were $7,246 compared to second quarter 2007
net earnings of $10,226, a $2,980 or 29.1% decrease. Second quarter 2008
earnings per share were $0.13, compared to $0.18 per share in the prior year
comparative period, a decrease of $0.05 or 27.8%.
First half 2008 net earnings were $13,699 compared to first half 2007 net
earnings of $20,037, a $6,338 or 31.6% decrease. First half net earnings per
share were $0.25 in 2008 compared to $0.35 per share in 2007, a decrease of
$0.10 per share or 28.6%.
Other income (loss), net was $653 in second quarter 2008 compared to $3,054 in
second quarter 2007. Other income (loss), net in second quarter 2008 includes
$79 of investment gains on trading securities relating to deferred compensation
plans. However, other income (loss), net in second quarter 2007 includes $1,476
of investment gains on trading securities relating to such deferred
compensation plans. Other income (loss), net was ($587) in first half 2008
compared to $4,528 in first half 2007. Other income (loss), net in first half
2008 includes $1,890 of investment losses on trading securities relating to
deferred compensation plans. However, other income (loss), net in first half
2007 includes $1,928 of investment gains on trading securities relating to such
deferred compensation plans. These second quarter and first half 2008 losses
resulted in a corresponding decrease in deferred compensation expense included
in aggregate cost of products sold and selling, marketing and administrative
expenses for first half 2008. However, second quarter and first half 2007
gains resulted in a corresponding increase in deferred compensation expense
included in aggregate cost of products sold and selling, marketing and
administrative expenses for the corresponding 2007 periods.
The consolidated effective income tax rate increased from 28.5% in second
quarter 2007 to 34.9% in second quarter 2008 and from 30.9% in first half 2007
to 32.7% in first half 2008. This increase principally reflects higher foreign
taxes and resulting higher overall effective rate.
In addition to the factors discussed above, earnings per share benefited from
fewer shares outstanding as a result of the Company's share repurchases in 2007
and 2008.
LIQUIDITY AND CAPITAL RESOURCES:
The Company's current ratio (current assets divided by current liabilities) was
2.7 to 1 as of the end of second quarter 2008 as compared to 3.3 to 1 as of the
end of second quarter 2007 and 3.4 to 1 as of the end of fourth quarter 2007.
Net working capital was $114,331 as of the end of second quarter 2008 as
compared to $141,690 and $141,754 as of the end of second quarter 2007 and
fourth quarter 2007, respectively. The aforementioned net working capital
amounts include total cash and cash equivalents and short-term investments which
aggregated $47,029 as of the end of second quarter 2008 compared to $59,357 and
$98,913, as of the end of second quarter 2007 and fourth quarter 2007,
respectively. In addition, long-term investments, principally debt securities
comprising municipal bonds, were $73,217 (includes $11,043 of Jefferson County
auction rate securities discussed in Note 5 to the accompanying Condensed
Consolidated Financial Statements) as of the end of second quarter 2008, as
compared to $59,172 and $65,993 as of the end of second quarter 2007 and
fourth quarter 2007, respectively. Aggregate cash and cash equivalents and short
and long-term investments were $120,246, $118,529, $164,906, respectively for
second quarter ended 2008, second quarter 2007 and fourth quarter 2007,
respectively. Except for the Jefferson County auction rate securities referenced
above, investments in municipal bonds and other debt securities that matured
during first half 2008 and 2007 were generally used to purchase the Company's
common stock or were replaced with debt securities of similar maturities.
-6B-
Net cash used in operating activities was $1,700 for first half 2008, as
compared to net cash provided by operating activities of $9,760 for first half
2007. The aforementioned change in net cash (used in) provided by operating
activities principally reflects the $6,338 decline in net earnings for the
comparative periods, and the timing of payments and cash flows relating to
inventories, accounts payable and accrued liabilities, and income taxes payable
and deferred. Capital expenditures for first half 2008 and 2007 were $9,742 and
$5,506, respectively. Capital expenditures for the 2008 year are anticipated to
be generally in line with historical annualized spending, and are to be funded
from the Company's cash flow from operations and internal sources.
Cash dividends paid in first half 2008 and 2007 were $8,738 and $8,756,
respectively.
During first half 2008, the Company also purchased and retired $19,935 of its
shares of common stock compared to $9,825 during the same period of the previous
year.
NEW ACCOUNTING PRONOUNCEMENTS
In September 2006, the FASB issued statement No. 157, "Fair Value Measurements"
(SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring
fair value in accordance with accounting principles generally accepted in the
United States, and expands disclosures about fair value measurements. The
Company has adopted the provisions of SFAS 157 as of January 1, 2008, for
financial instruments. Although the adoption of SFAS 157 did not materially
impact its financial condition, results of operations, or cash flow, the
Company is now required to provide additional disclosures as part of its
financial statements.
SFAS 157 establishes a three-tier fair value hierarchy, which prioritizes the
inputs used in measuring fair value. These tiers include: Level 1, inputs
defined as quoted prices (unadjusted) in active markets for identical assets or
liabilities that the reporting entity has the ability to access at the
measurement date; Level 2 inputs defined as inputs other than quoted prices
included within Level 1 that are observable for the asset or liability, either
directly or indirectly; and Level 3, defined as unobservable inputs in which
little or no market data exists, therefore requiring an entity to develop its
own assumptions.
In February 2008, the FASB issued FASB Staff Position FAS 157-2, "Effective
Date of FASB Statement No. 157" (FSP SFAS 157-2). FSP FAS 157-2 delays the
effective date SFAS 157 for non-financial assets and non-financial liabilities,
except for items that are recognized or disclosed at fair value in the
financial statements on a recurring basis. The non-financial assets and non-
financial liabilities for which the Company has not applied the fair value
provisions of SFAS 157 include goodwill and other intangible assets. The
effective date for application of SFAS 157 to non-financial assets and non-
financial liabilities will be fiscal and interim periods beginning after
November 15, 2008. The Company is currently evaluating the impact of adopting
SFAS 157 for non-financial assets and non-financial liabilities on our
financial statements.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities- including an amendment to FASB
Statement No. 115," (SFAS No. 159), which permits entities to choose to measure
many financial instruments and certain other items at fair value. SFAS No. 159
became effective beginning with our first quarter of 2008. We have chosen not
to adopt the provisions of SFAS 159 for our existing financial instruments.
-6C-
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No. 133"
("SFAS 161"), which requires enhanced disclosures for derivative and hedging
activities. SFAS 161 will become effective beginning with our first quarter of
2009. Early adoption is permitted. We are currently evaluating the impact of
this standard on our Consolidated Financial Statements.
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This discussion and certain other sections of this Form 10-Q contain forward-
looking statements that are based largely on the Company's current expectations
and are made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements can be identified by
the use of words such as "anticipated," "believe," "expect," "intend,"
"estimate," "project," and other words of similar meaning in connection with a
discussion of future operating or financial performance and are subject to
certain factors, risks, trends and uncertainties that could cause actual
results and achievements to differ materially from those expressed in the
forward-looking statements.
Such factors, risks, trends and uncertainties, which in some instances are
beyond the Company's control, including without limitation, the following: (i)
significant competitive activity, including advertising, promotional and price
competition, and changes in consumer demand for the Company's products; (ii)
fluctuations in the cost and availability of various ingredients and packaging
materials; (iii) inherent risks in the marketplace, including uncertainties
about trade and consumer acceptance and seasonal events such as Halloween; (iv)
the effect of acquisitions on the Company's results of operations and financial
condition; (v) the effect of changes in foreign currencies on the Company's
foreign subsidiaries operating results, and the effect of the Canadian dollar
on products manufactured in Canada and marketed and sold in the United States
in U.S. dollars; (vi) the Company's reliance on third-party vendors for various
goods and services; (vii) the Company's ability to successfully implement new
production processes and lines; (viii) the effect of changes in assumptions,
including discount rates, sales growth and profit margins, and the capability
to pass along higher ingredient and other input costs through price increases,
relating to the Company's impairment testing and analysis of its goodwill and
trademarks; (ix) changes in the confectionery marketplace including actions
taken by major retailers and customers; (x) customer and consumer response to
marketing programs and price and product weight adjustments, and new products;
(xi) dependence on significant customers, including volume and timing or
purchases and availability of shelf space; (xii) increases in input costs,
including ingredients, packaging materials, energy and fuel costs related to
freight and delivery, that cannot be passed on to customers through increased
prices due to competitive reasons; (xiii) any significant labor stoppages,
strikes or production interruptions; (xiv) changes in governmental laws and
regulations including taxes and tariffs; (xv) changes in the auction rate
securities markets and issuing municipalities and their insurers. In addition,
the Company's results may be affected by general factors, such as economic
conditions, political developments, currency exchange rates, interest and
inflation rates, accounting standards, taxes, and laws and regulations
affecting the Company in markets where it competes and those factors described
in Part 1, Item 1A "Risk Factors" and elsewhere in the Company's Annual Report
on Form 10-K and in other Company filings, including quarterly reports on Form
10-Q, with the Securities and Exchange Commission.
-6D-
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to various market risks, including fluctuations in
sugar, corn syrup, edible oils, including soybean oil, cocoa, milk and whey,
dextrose, gum base ingredients, packaging and fuel costs. The Company is
exposed to exchange rate fluctuations in the Canadian dollar which is the
currency used for a portion of the raw material and packaging material costs
and operating expenses at its Canadian plants. The Company invests in
securities with maturities of up to three years, the majority of which are held
to maturity, which limits the Company's exposure to interest rate fluctuations.
Except for the Jefferson County auction rate security discussed above, there
has been no material change in the Company's market risks that would
significantly affect the disclosures made in the Form 10-K for the year ended
December 31, 2007.
Item 4. CONTROLS AND PROCEDURES
Under the supervision and with the participation of management, the chief
executive officer and chief financial officer of the Company have evaluated the
effectiveness of the design and operation of the Company's disclosure controls
and procedures as of June 28, 2008 and, based on their evaluation, the chief
executive officer and chief financial officer have concluded that these
controls and procedures are effective. Disclosure controls and procedures are
designed to ensure that information required to be disclosed by the Company in
the reports that it files or submits under the Securities Exchange Act of 1934
is recorded, processed, summarized and reported, within the time periods
specified in the Securities and Exchange Commission's rules and forms.
Disclosure controls and procedures are also designed to ensure that information
is accumulated and communicated to management, including the chief executive
officer and chief financial officer, as appropriate to allow timely decisions
regarding required disclosure.
There has been no change in the Company's internal control over financial
reporting that occurred during the Company's fiscal quarter ended June 28, 2008
that has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
-6E-
PART II - OTHER INFORMATION
TOOTSIE ROLL INDUSTRIES, INC.
AND SUBSIDIARIES
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Approximate Dollar
(a) Total (b) Average Shares Value of Shares that
Number of Price Paid per Purchased as Part of May Yet Be Purchased
Shares Share Publicly Announced Plans Under the Plans
Period Purchased Or Programs or Programs_____
MAR 30 TO JUN 28 NONE NONE NOT APPLICABLE NOT APPLICABLE
While the Company does not have a formal or publicly announced stock
repurchase program, the Company's board of directors periodically authorizes
a dollar amount for share repurchases. The treasurer executes share
repurchase transactions according to these guidelines.
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Shareholders of the Company, held on May 5, 2008,
the following number of votes were cast for the matters indicated:
1. For the election of five directors of the Company by the holders of
Common Shares and Class B Common Shares voting together:
Broker
Nominee For Withheld Abstain Non-Vote
Melvin J. Gordon 209,447,980 9,148,627 -0- -0-
Ellen R. Gordon 209,453,475 9,143,132 -0- -0-
Lana Jane Lewis-Brent 214,719,557 3,877,050 -0- -0-
Barre A. Siebert 214,859,743 3,736,864 -0- -0-
Richard P. Bergeman 215,405,014 3,191,593 -0- -0-
2. Proposal to ratify the appointment of PricewaterhouseCoopers LLP as
auditors for the fiscal year 2008:
Broker
For Withheld Against Non-Vote
Common Shares and Class B
Common Shares voting together 215,835,633 2,637,169 -0- -0-
No other matters were submitted to a vote by ballot at the 2008 Annual
Meeting.
-7-
Item 6. EXHIBITS
Exhibits 31.1 and 31.2 - Certifications Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32 - Certification Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
TOOTSIE ROLL INDUSTRIES, INC.
Date: Aug. 6, 2008 BY:/S/MELVIN J. GORDON
Melvin J. Gordon
Chairman of the Board
Date: Aug. 6, 2008 BY:/S/G. HOWARD EMBER, JR.
G. Howard Ember, Jr.
Vice President Finance
-7A-
Exhibit 31.1
CERTIFICATION
I, Melvin J. Gordon, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Tootsie Roll
Industries, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the state-
ments made, in light of the circumstances under which such statements were made,
not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial infor-
mation included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
a) designed such disclosure controls and procedures, or caused such dis-
closure controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Date: Aug. 6, 2008
By: /S/MELVIN J. GORDON
Melvin J. Gordon
Chairman and Chief Executive Officer
-7B-
Exhibit 31.2
CERTIFICATION
I, G. Howard Ember, Jr. certify that:
1. I have reviewed this quarterly report on Form 10-Q of Tootsie Roll
Industries, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the state-
ments made, in light of the circumstances under which such statements were made,
not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial infor-
mation included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
a) designed such disclosure controls and procedures, or caused such dis-
closure controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Date: Aug. 6, 2008
By: /S/G. HOWARD EMBER, JR.
G. Howard Ember, Jr.
Vice President Finance and
Chief Financial Officer
-7C-
Exhibit 32
Certificate Pursuant to Section 1350 of Chapter 63
Of Title 18 of the United States Code
Each of the undersigned officers of Tootsie Roll Industries, Inc.
Certifies that (i) the Quarterly Report on Form 10-Q of Tootsie Roll
Industries, Inc. for the quarterly period ended June 28, 2008 (the
Form 10-Q) fully complies with the requirements of secton 13(a) or
15(d) of the Securities Exchange Act of 1934 and (ii) the information
contained in the Form 10-Q fairly presents, in all material respects,
the financial condition and results of operations of Tootsie Roll
Industries, Inc. and its subsidiaries.
Dated: Aug. 6, 2008 /S/MELVIN J. GORDON
Melvin J. Gordon
Chairman and Chief
Executive Officer
Dated: Aug. 6, 2008 /S/G. HOWARD EMBER, JR.
G. Howard Ember, Jr.
V.P. Finance and
Chief Financial Officer
-7D-