10-Q 1 sep00.txt TOOTSIE ROLL INDUSTRIES, INC. 10-Q ENDING 09/30/00 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10 - Q QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended September 30, 2000 Commission File Number 1 - 1361 TOOTSIE ROLL INDUSTRIES, INC. (Exact name of registrant as specified in its charter) VIRGINIA 22 - 1318955 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 7401 South Cicero Avenue Chicago, Illinois 60629 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (773) 838 - 3400 None Former name, former address and former fiscal year, if changed since last report. 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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding Common Stock, $.69 4/9 par value 33,181,053 Class B Common Stock, $.69 4/9 par value 16,075,136 PART I - FINANCIAL INFORMATION TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (UNAUDITED) ASSETS Sept 30, Oct 2, Dec 31, CURRENT ASSETS 2000 1999 1999 Cash & Cash Equivalents $ 26,987,031 $ 61,001,611 $ 88,503,731 Investments 67,580,914 48,625,057 71,002,420 Trade Accounts Receivable, Less Allowances of $3,363,000, $3,230,000 & $2,032,000 78,096,019 66,604,454 19,031,958 Other Receivables 2,029,844 5,834,852 5,716,150 Inventories, at Cost (Last-in,First-out): Finished Goods & Work in Process 28,707,521 23,278,453 20,688,894 Raw Material & Supplies 13,791,673 14,418,155 14,395,996 Prepaid Expenses 5,281,356 5,304,182 3,123,428 Deferred Income Taxes 2,069,000 2,584,000 2,069,000 Total Current Assets 224,543,358 227,650,764 224,531,577 PROPERTY, PLANT & EQUIPMENT, (at cost) Land 8,340,160 7,785,843 7,981,419 Buildings 32,622,229 28,401,308 30,329,791 Machinery & Equipment 183,451,767 142,680,394 145,789,056 224,414,156 178,867,545 184,100,266 Less-Accumulated Depreciation 95,641,646 86,805,965 88,202,899 128,772,510 92,061,580 95,897,367 OTHER ASSETS Intangible Assets, net of accumulated amortization of $26,098,000, $22,821,000 & $23,497,000 122,081,549 85,813,279 85,136,703 Investments 64,260,579 96,148,042 87,166,551 Cash Surrender Value of Life Insurance and Other Assets 44,032,039 36,179,769 36,683,965 230,374,167 218,141,090 208,987,219 Total Assets $583,690,035 $537,853,434 $529,416,163 (The accompanying notes are an integral part of these statements)
(UNAUDITED) LIABILITIES AND SHAREHOLDERS' EQUITY Sept 30, Oct 2, Dec 31, CURRENT LIABILITIES 2000 1999 1999 Accounts Payable $18,277,970 $14,966,655 $12,845,180 Dividends Payable 3,451,853 3,045,932 3,035,496 Accrued Liabilities 41,613,647 38,029,931 31,944,769 Income Taxes Payable 20,248,583 19,136,425 8,283,501 Total Current Liabilities 83,592,053 75,178,943 56,108,946 NON-CURRENT LIABILITIES Industrial Development Bonds 7,500,000 7,500,000 7,500,000 Post Retirement Benefits 6,727,941 6,381,938 6,556,860 Deferred Compensation and Other Liabilities 20,548,272 16,941,859 19,084,505 Deferred Income Taxes 9,521,250 8,473,105 9,519,818 Total Non-Current Liabilities 44,297,463 39,296,902 42,661,183 SHAREHOLDERS' EQUITY Common Stock, $.69-4/9 par value- 120,000,000 shares authorized 33,181,053, 33,005,122 & 32,853,761 respectively, issued 23,042,191 22,920,017 22,814,906 Class B Common Stock, $.69-4/9 par value- 40,000,000 shares authorized 16,075,136, 15,729,526 & 15,706,907 respectively, issued 11,163,196 10,923,183 10,907,476 Capital in Excess of Par Value 264,740,799 254,455,479 249,236,182 Retained Earnings 168,047,585 146,699,796 158,619,140 Accumulated Other Comprehensive Earnings (9,201,849) (9,629,483) (8,940,267) Treasury Stock (at cost)- 51,500, 51,500 & 51,500, shares respectively (1,991,403) (1,991,403) (1,991,403) Total Shareholders' Equity 455,800,519 423,377,589 430,646,034 Total Liabilities and Shareholders' Equity $583,690,035 $537,853,434 $529,416,163 (The accompanying notes are an integral part of these statements)
TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS, COMPREHENSIVE EARNINGS AND RETAINED EARNINGS (NOTE 1) (UNAUDITED) 13 Weeks Ended 39 Weeks Ended Sept 30, 2000 & Oct 2, 1999 Sept 30, 2000 & Oct 2, 1999 Net Sales (Note 2) $165,873,251 $152,667,380 $334,264,488 $315,131,948 Cost of goods sold 82,647,914 75,016,227 161,763,072 152,763,953 Gross Margin 83,225,337 77,651,153 172,501,416 162,367,995 Selling, Marketing and Administrative Expense 34,640,850 32,321,005 81,557,762 76,830,026 Amortization of Intangible Assets 992,063 676,575 2,600,684 2,029,725 Earnings from Operations 47,592,424 44,653,573 88,342,970 83,508,244 Other Income, Net 1,332,572 1,183,473 5,382,744 4,834,364 Earnings before Income Taxes 48,924,996 45,837,046 93,725,714 88,342,608 Provision for Income Taxes 17,411,000 16,554,000 33,497,000 31,984,000 Net Earnings (Note 5) $ 31,513,996 $ 29,283,046 $ 60,228,714 $ 56,358,608 Net Earnings $ 31,513,996 $ 29,283,046 $ 60,228,714 $ 56,358,608 Other Comprehensive Earnings, Net of Tax 671,789 (134,091) (261,582) 893,283 Comprehensive Earnings $ 32,185,785 $ 29,148,955 $ 59,967,132 $ 57,251,891 Retained Earnings at Beginning of Period $139,981,837 $120,459,556 $158,619,140 $164,652,120 Net Earnings 31,513,996 29,283,046 60,228,714 56,358,608 Cash Dividends (3,448,248) (3,042,806) (9,917,114) (8,621,400) Stock Dividends - 3% -- -- (40,883,155) (65,689,532) Retained Earnings at End of Period $168,047,585 $146,699,796 $168,047,585 $146,699,796 Net Earnings per Share (Note 3) $ .64 $ .58 $1.22 $1.12 Dividends per Share * $ .07 $ .0625 $ .2025 $ .1775 Average Number of Shares Outstanding (Notes 3 & 4) 49,411,689 50,268,369 49,553,179 50,519,319 *Does not include 3% Stock Dividend to Shareholders of Record on 3/07/00 and 3/09/99. (The accompanying notes are an integral part of the statements)
TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) 39 Weeks Ended Sept 30, 2000 & Oct. 2, 1999 CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $60,228,714 $56,358,608 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Depreciation and amortization 9,852,682 8,088,517 Gain on disposal of equipment 11,750 - (Increase) decrease in assets excluding effects from acquisitions: Accounts receivable (59,054,295) (47,270,080) Other receivables 3,686,306 (2,510,707) Inventories ( 1,428,575) (850,546) Prepaid expenses and other assets (13,676,631) (9,355,764) Increase (decrease) in liabilities excluding effects from acquisitions: Accounts payable and accrued liabilities 14,497,492 9,163,579 Income taxes payable and deferred 11,967,848 11,537,679 Postretirement health care and life insurance benefits 171,081 236,995 Deferred compensation and other liabilities 1,463,767 2,018,962 Other 1,411 261,167 Net cash provided by operating activities 27,721,550 27,678,410 CASH FLOWS FROM INVESTING ACTIVITIES: Business acquisitions acquired, net of cash and cash equivalents (74,293,419) -- Capital expenditures (10,919,299) (15,276,792) Purchase of held to maturity securities (101,547,876) (169,907,134) Maturity of held to maturity securities 127,124,081 169,524,189 Purchase of available for sale securities (62,965,414) (105,675,624) Sale and maturity of available for sale securities 67,759,967 103,713,944 Net cash used in investing activities (54,841,960) (17,621,417) CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of notes payable 43,625,000 -- Repayment of notes payable (43,625,000) -- Purchase of treasury stock -- (1,018,815) Shares repurchased and retired (24,753,244) (20,509,802) Dividends paid in cash (9,643,046) (8,270,356) Net cash used in financing activities (34,396,290) (29,798,973) Decrease in cash and cash equivalents (61,516,700) (19,741,980) Cash and cash equivalents-beginning of year 88,503,731 80,743,591 Cash and cash equivalents-end of quarter $26,987,031 $61,001,611 Supplemental cash flow information: Income taxes paid $21,012,000 $20,316,000 Interest paid $ 905,000 $ 448,000 (The accompanying notes are an integral part of the statements)
TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2000 (UNAUDITED) Note 1 - Foregoing data has been prepared from the unaudited financial records of 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. These consolidated financial statements should be read in conjunction with the financial statements and the related notes included in the Company's 1999 Annual Report on Form 10-K. Note 2 - The Company's unshipped orders at September 30, 2000 amounted to $35,900,000. Note 3 - Based on Average Shares outstanding adjusted for Stock Dividends. Note 4 - Includes 3% stock dividends distributed on April 19, 2000 and April 21, 1999. Note 5 - Results of operations for the period ended September 30, 2000 are not necessarily indicative of results to be expected for the year to end December 31, 2000 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 6 - On May 12, 2000, the Company acquired the assets of Andes Candies, Inc. from Brach & Brock Confections, Inc. In February 2000, the Company acquired the assets of a small confectionery company. The cost of these acquisitions was $74.3 million in cash, which was funded through existing cash, and the issuance of $38.8 million of floating rate short term notes drawn on Company lines of credit due on 6/30/01. The Company repaid $22.7 million of the notes payable prior to the end of the second quarter. The remaining balance of notes payable amounting to $16.1 million was repaid by the end of the third quarter. The acquisition cost has been allocated to the assets acquired and liabilities assumed based on their respective appraised values as follows (in millions): Current assets $ 6.4 Property, plant and equipment 29.4 Intangible assets - primarily trademarks 39.5 Liabilities 1.0 Total purchase price $74.3 Intangible assets are being amortized over periods ranging from 15 to 40 years on a straight-line basis. The acquitions were accounted for by the purchase method. Accordingly, the operating results of the acquired businesses have been included in the consolidated financial statements since the date of acquisition. The operating results of the acquired businesses did not have a material effect on the consolidated statement of earnings, comprehensive earnings and retained earnings for the third quarter or nine months of 2000. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is Management's discussion of the Company's operating results and analysis of factors which have affected the accompanying Statement of Earnings. This discussion, the information contained in the preceding notes to the financial statements and the information contained in "Quantitative and Qualitative Disclosures About Market Risk," contain certain forward-looking statements that are based largely on the Company's current expectations. Forward-looking statements are subject to certain risks, trends and uncertainties that could cause actual results and achievements to differ materially from those expressed in the forward-looking statements. Such risks, trends and uncertainties, which in some instances are beyond the Company's control, include changes in demand; raw material prices; competition; the effect of acquisitions on the Company's results of operations and financial condition; and the Company's reliance on third-party vendors for various services. The words "believe," "expect," "anticipate," "estimate," "intend," and similar expressions generally identify forward-looking statements. Readers are cautioned not to place undue reliance on such forward-looking statements, which are as of the date of this filing. NET SALES: Third Quarter, 2000 Third Quarter vs. 2000 1999 Third Quarter, 1999 $165,873,251 $152,667,380 + 8.7 % Nine Months, 2000 Nine Months vs. 2000 1999 Nine Months, 1999 $334,264,488 $315,131,948 + 6.1 % Third Quarter 2000 net sales of $165.9 million were up 8.7% from the Third Quarter 1999 net sales of $152.7 million. Nine months 2000 net sales of $334.3 million were up 6.1% from Nine Months 1999 net sales of $315.1 million. Third Quarter 2000 net sales of $165.9 million were up 83.5% from Second Quarter 2000 net sales of $90.4 million. Historically, the Third Quarter includes pre-Halloween sales and is the company's largest quarterly sales period of the year. Record sales for the Third Quarter and Nine Months of 2000 were the result of approximately equal effects of sales volume growth in core products/product line extensions and new products. COST OF SALES: Cost of Sales as a Third Quarter Percentage of Net Sales 2000 1999 3rd Qtr. 2000 3rd Qtr. 1999 $82,647,914 $75,016,227 49.8% 49.1% Cost of Sales as a Nine Months Percentage of Net Sales 2000 1999 9 Months 2000 9 Months 1999 $161,763,072 $152,763,953 48.4% 48.5% Cost of sales as a percentage of net sales increased from 49.1% in the Third Quarter 1999 to 49.8% in the Third Quarter 2000. Nine Months cost of sales decreased from 48.5% in 1999 to 48.4% in 2000. The quarterly percentage increase is primarily due to higher manufacturing overhead costs including such costs associated with the companies acquired in 2000. The year to date percentage decrease reflects lower raw costs of major ingredients. NET EARNINGS: Third Quarter, 2000 Third Quarter vs. 2000 1999 Third Quarter, 1999 $31,513,996 $29,283,046 7.6% Nine Months, 2000 Nine Months vs 2000 1999 Nine Months, 1999 $60,228,714 $56,358,608 6.9% Third Quarter 2000 net earnings were $31.5 million, compared to $29.3 million in the Third Quarter 1999. Third Quarter 2000 earnings per share of $.64 were up 10.3% over Third Quarter 1999 earning per share of $.58. Nine Months 2000 net earnings were $60.2 million compared to prior year's Nine Months 1999 net earnings of $56.4 million. Nine months 2000 earnings per share of $1.22 were up 8.9% over Nine Months 1999 earnings per share of $1.12. Third Quarter 2000 net earnings of $31.5 million increased $15.8 million or 100.6% from Second Quarter 2000 net earnings of $15.7 million. As discussed above, the Third Quarter has historically been the Company's largest sales and earnings period because of pre-Halloween sales. The increase in net earnings for the Third Quarter and Nine Months 2000 is the result of higher sales and ongoing cost control programs. Selling, Marketing, and Administrative Expense for the Third Quarter and Nine Months 2000 increased by 7.2% and 6.2%, respectively, over the comparative periods in the prior year. These increases principally reflect higher expenses relating to the increased sales, including the acquired brands, in the respective periods. Amortization of intangible assets was $1.0 million and $2.6 million for the Third Quarter and Nine Months of 2000, respectively, compared to $.7 million and $2.0 million for the Third Quarter and Nine Months of 1999, respectively. The increase reflects additional amortization expense relating to the businesses acquired in 2000. Other income in the Third Quarter and Nine Months benefited from increased investment income and capital gains. The consolidated effective income tax rate favorably decreased from 36.2% in the Nine Months of 1999 to 35.7% in the Nine Months of 2000. This improvement generally reflects increased tax-free investment income and a favorable judgement in a state income tax matter. LIQUIDITY AND CAPITAL RESOURCES: Historically, the Company's principal source of financing has been cash generated from operations. Net cash flow provided by operating activities for the Nine Month 2000 period was $27.7 million, the same as the comparable period in 1999. The Company's current ratio (current assets divided by current liabilities) is 2.7 to 1 as of the end of the Third Quarter 2000 as compared to 3.0 to 1 as of the Third Quarter 1999 and 4.0 to 1 as of the Fourth Quarter 1999. Net working Capital was $141.0 million as of the end of the Third Quarter 2000 as compared to $152.5 million and $168.4 million as of the end of the Third Quarter 1999 and Fourth Quarter 1999, respectively. The decrease in net working capital reflects the businesses acquired in 2000, including Andes Candies, Inc. Capital expenditures for 2000 are anticipated to be generally in line with historical spending and are to be funded from the Company's cash flow from operations and internal sources. In the nine months of 2000, the Company repurchased 743,000 shares of its common stock for $24.8 million. On May 12, 2000, the Company acquired the assets of Andes Candies, Inc. from Brach & Brock Confections, Inc. In February 2000, the Company acquired the assets of a small confectionery company. The cost of these acquisitions was $74.3 million in cash, which was funded through existing cash, and the issuance of $38.8 million of floating rate short term notes drawn on Company lines of credit due on 6/30/01. The Company repaid $22.7 million of the notes payable prior to the end of the second quarter. The remaining notes payables of $16.1 million were repaid by the end of the third quarter. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK: The Company is exposed to various market risks, including fluctuations in sugar, corn, edible oils, cocoa and packaging costs. The Company also 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. 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, 1999. OTHER MATTERS: In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS No. 133). SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument be recorded in the balance sheet as either an asset or liability measured at its fair value. The Company anticipates the adoption of SFAS No. 133 as of Q1 2001. The adoption of SFAS No. 133 is not expected to have a material impact on the Company's results of operations. The SEC has issued SAB 101 Revenue Recognition, EITF 00-10, Accounting for Shipping and Handling Revenues and Costs and EITF 00-14, Accounting for Coupons, Rebates and Discounts. Adoption of these pronouncements is not expected to have a material impact on the Company's results of operations. PART II - OTHER INFORMATION TOOTSIE ROLL INDUSTRIES, INC AND SUBSIDIARIES - NONE - 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: November 14, 2000 BY: Melvin J. Gordon Chairman of the Board BY: G. Howard Ember Vice President - Finance