10-Q 1 mar2003filing.txt TOOTSIE ROLL INDUSTRIES, INC. 10-Q 03/29/03 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 MARCH 29, 2003 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 an accelerated filer (as defined in Rule 12b-2 of the Exchange Act) 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 (March 29, 2003) Class Outstanding (In Thousands) Common Stock, $.69 4/9 par value 34,794 Class B Common Stock, $.69 4/9 par value 17,259 TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES MARCH 29, 2003 INDEX Page No. Part I - Financial Information Item 1. Financial Statements: Consolidated Statements of Financial Position 2 Consolidated Statements of Earnings, Comprehensive Earnings and Retained Earnings 3 Consolidated Statements of Cash Flows 4 Notes to Consolidated Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 6 Item 3. Quantitative and Qualitative Disclosures About Market Risk 6B Item 4. Controls and Procedures 6C Part II - Other Information Item 5. Other Information 7 Item 6. Exhibits and reports on Form 8-K Signatures 7 Certifications 7A-B ITEM 1. FINANCIAL INFORMATION TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (in thousands of dollars) (UNAUDITED) ASSETS March 29, March 30, Dec. 31, CURRENT ASSETS 2003 2002 2002____ Cash & Cash Equivalents $ 59,895 $ 75,319 $105,507 Investments 47,888 65,418 40,737 Trade Accounts Receivable, Less Allowances of $2,745, $1,981 & $2,005 28,587 24,814 22,686 Other Receivables 3,825 2,907 4,073 Inventories, at Cost Finished Goods & Work in Process 32,919 32,164 26,591 Raw Material & Supplies 20,896 20,530 17,054 Prepaid Expenses 12,570 12,041 3,819 Deferred Income Taxes 4,481 1,772 4,481 Total Current Assets 211,061 234,965 224,948 PROPERTY, PLANT & EQUIPMENT, (at cost) Land 8,284 8,354 8,297 Buildings 43,909 43,606 43,948 Machinery & Equipment 198,899 191,393 196,706 251,092 243,353 248,951 Less-Accumulated Depreciation 122,676 111,967 120,082 128,416 131,386 128,869 OTHER ASSETS Goodwill 38,151 38,151 38,151 Trademarks 79,348 79,348 79,348 Investments 131,916 85,977 116,501 Split dollar officer life Insurance and Other Assets 58,262 53,066 58,263 307,677 256,542 292,263 Total Assets $647,154 $622,893 $646,080 -2- (The accompanying notes are an integral part of these statements)
(in thousands except per share data) (UNAUDITED) LIABILITY AND SHAREHOLDERS' EQUITY March 29, March 30, Dec. 31, CURRENT LIABILITIES 2003 2002 2002____ Accounts Payable $ 13,764 $ 12,227 $ 12,505 Dividends Payable 3,607 3,866 3,579 Accrued Liabilities 36,187 31,743 35,825 Income Taxes Payable 16,671 16,501 11,187 Total Current Liabilities 70,229 64,337 63,096 NON-CURRENT LIABILITIES Industrial Development Bonds 7,500 7,500 7,500 Postretirement health care and Life insurance benefits 8,317 7,617 8,151 Deferred Compensation and Other Liabilities 21,112 21,100 20,939 Deferred Income Taxes 19,833 16,463 19,654 Total Non-Current Liabilites 56,762 52,680 56,244 SHAREHOLDERS' EQUITY Common Stock, $.69-4/9 par value- 120,000, shares authorized 34,794, 34,878 & 34,248 respectively, issued 24,162 24,220 23,783 Class B Common Stock, $.69-4/9 par value- 40,000, shares authorized 17,259, 16,793 & 16,759, respectively, issued 11,985 11,662 11,638 Capital in Excess of Par Value 383,580 376,283 355,658 Retained Earnings 113,498 105,885 148,705 Accumulated Other Comprehensive Earnings (loss) (11,070) (10,182) (11,052) Treasury Stock (at cost)- 56, 56 & 56, shares respectively (1,992) (1,992) (1,992) Total Shareholders' Equity 520,163 505,876 526,740 Total Liabilities and Shareholders' Equity $647,154 $622,893 $646,080 -2A-
TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS, COMPREHENSIVE EARNINGS AND RETAINED EARNINGS (NOTE 1) (in thousands except per share amounts) (UNAUDITED) 13 Weeks Ended March 29, 2003 & March 30,2002 Net Sales (Note 2) $ 75,570 $ 78,991 Cost of Goods Sold 42,627 43,160 Gross Margin 32,943 35,831 Selling, Marketing and Administrative Expense 17,528 17,496 Earnings from Operations 15,415 18,335 Other Income, Net 1,065 1,163 Earnings before Income Taxes 16,480 19,498 Provision for Income Taxes 5,571 6,726 Net Earnings 10,909 12,772 Other Comprehensive Income, before Tax: Foreign Currency Translation Adjustments (322) 291 Unrealized Gains on Securities: Unrealized holding gains (losses) arising during period $ (67) $(133) Less: Amounts realized in earnings 12 (55) 49 (84) Unrealized Gains on Derivatives: Unrealized holding gains (losses) arising during period 448 (1,010) Less: Amounts realized in earnings 90 538 205 (805) Other comprehensive income (loss), before tax 161 (598) Income tax benefit (expense) related to items of other comprehensive income (179) 329 Other comprehensive income (loss), net of tax (18) (269) Comprehensive Earnings $ 10,891 $ 12,503 Retained Earnings at Beginning of Period $148,705 $161,345 Net Earnings 10,909 12,772 Cash Dividends (3,545) (3,508) Stock Dividends - 3% (42,571) (64,724) Retained Earnings at End of Period $113,498 $105,885 Net Earnings Per Share (Note 3) $.21 $.24 Dividends Per Share * $.07 $.07 Average Number of Shares Outstanding 52,230 53,275 *Does not include 3% Stock Dividend to Shareholders of Record on 3/04/03 and 3/05/02. -3- (The accompanying notes are an integral part of the statements)
TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) 13 WEEKS ENDED March 29, 2003 & March 30, 2002 CASH FLOWS FROM OPERATING ACTIVITIES: Net Earnings $ 10,909 $ 12,772 Adjustments to reconcile net earnings to Net cash provided by operating activities: Depreciation and amortization 2,652 3,047 Purchase of trading securities (1,391) (1,303) (Increase) decrease in assets: Accounts receivable (5,964) (4,357) Other receivables 586 (84) Inventories (10,232) (11,450) Prepaid expenses and other assets (8,784) (9,516) Increase (decrease) in liabilities: Accounts payable and accrued liabilities 1,660 424 Income taxes payable and deferred 5,650 5,398 Postretirement health care and life insurance benefits 166 166 Deferred compensation and other liabilities 173 473 Other (37) 15 Net cash used in operating activities (4,612) (4,415) CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (2,385) (1,708) Purchase of held to maturity securities (82,684) (79,539) Maturity of held to maturity securities 61,791 69,840 Purchase of available for sale securities (6,612) (9,776) Sale and maturity of available for sales securities 6,330 9,144 Net cash used in investing activities (23,560) (12,039) CASH FLOWS FROM FINANCING ACTIVITIES: Dividends paid in cash (3,575) (3,531) Shares repurchased and retired (13,865) (11,228) Net cash used in financing activities (17,440) (14,759) Decrease in cash and cash equivalents (45,612) (31,213) Cash and cash equivalents-beginning of year 105,507 106,532 Cash and cash equivalents end of quarter $ 59,895 $ 75,319 Supplemental cash flow information: Income taxes paid $ 1,885 $ 1,354 Interest paid $ 87 $ 135 (The accompanying notes are an integral part of the statements) -4-
TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 29, 2003 (in thousands except per share amounts) (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. 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 2002 Annual Report on Form 10-K. Note 2 - The Company's unshipped orders amounted to $16,600 and $14,300, at March 29, 2003 and March 30, 2002, respectively. Note 3 - Average shares outstanding for the period ended March 29, 2003 reflects stock repurchases of 473 shares for $13,865 and a 3% stock dividend distributed on April 16, 2003. Average shares outstanding for the period ended March 30, 2002 reflects stock repurchases of 285 for $11,228 and a 3% stock dividend distributed on April 17, 2002. Note 4 - Results of operations for the period ended March 29, 2003 are not necessarily indicative of results to be expected for the year to end December 31, 2003 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 5 - In June 2002, the FASB issued Statement of Financial Accounting Standards No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" (SFAS No. 146). The provisions of SFAS No. 146 are effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of this statement did not have a significant impact on the Company's financial statements. -5- Note 6 - In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarities that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The Company has no significant guarantees which would need to be recognized and measured under the Interpretation and no significant guarantees which meet the disclosure requirements as of March 29, 2003. -5A- ITEM 2. 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. NET SALES: First Quarter, 2003 First Quarter vs. 2003 2002 First Quarter, 2002 $75,570 $78,991 -4.3% First Quarter 2003 net sales of $75,570, were down 4.3% from First Quarter 2002 net sales of $78,991. The decline in net sales is due to the timing of the Easter seasonal product shipments, reduced shipping days in the quarter, and higher sales in the fourth quarter of 2002 resulting from some advance buy-in in December 2002 in anticipation of January 2003 price increases. The increase in April 2003 sales exceeded the sales shortfall in First Quarter 2003 which reflects the timing of shipments as discussed above. Lower Mexican sales also contributed to the sales decline in First Quarter 2003. First Quarter 2003 net sales of $75,570 were down from Fourth Quarter 2002 net sales of $90,766. This is not considered unusual as the First Quarter of the year is historically the Company's lowest sales quarter. COST OF SALES: Cost of Sales as a First Quarter Percentage of Net Sales 2003 2002 1st Qtr. 2003 1st Qtr. 2002 $42,627 $43,160 56.4% 54.6% Cost of sales as a percentage of net sales increased from from 54.6% for First Quarter 2002 to 56.4% for First Quarter 2003. This adverse increase reflects higher ingredient costs and lower sales volume as discussed above. The Company has experienced higher ingredient costs for almost all of its principal ingredients, including sugar, corn syrup, vegetable oil, cocoa and chocolate. Although price increases were initiated for many of the Company's products in January 2003, additional price increases and bag weight declines (indirect selling price increases) on certain items are being further phased-in throughout the balance of 2003 to mitigate some of these higher costs. -6- NET EARNINGS: First Quarter, 2003 First Quarter vs. 2003 2002 First Quarter, 2002 $10,909 $12,772 -14.6% First Quarter earnings from operations were $15,415 and $18,335 in 2003 and 2002, respectively. The decrease in operating earnings principally results from higher ingredient costs and the effects of lower sales volume, as discussed above, as well as an additional $0.5 million pre-tax provision for a customer bankruptcy. First Quarter 2003 net earnings were $10,909 compared to First Quarter 2002 net earnings of $12,772. First Quarter 2003 earnings per share were $0.21, compared to $.24 per share in the prior year comparative period, a decrease of $.03 or 12.5%. In addition to the factors discussed above that affected operating earnings, lower investment income also contributed to lower First Quarter 2003 net earnings as compared to First Quarter 2002. The consolidated effective income tax rate favorably decreased from 34.5% in the First Quarter of 2002 to 33.8% in the First Quarter of 2003. This improvement generally reflects a reduction in state income taxes. LIQUIDITY AND CAPITAL RESOURCES: The Company's current ratio (current assets divided by current liabilities) is 3.0 to 1 as of the end of the First Quarter 2003 as compared to 3.7 to 1 as of the First Quarter 2002 and 3.6 to 1 as of the Fourth Quarter 2002. Net working capital was $140,832 as of the end of the First Quarter 2003 as compared to $161,852 and $170,628 as of the end of the Fourth Quarter 2002 and First Quarter 2002, respectively. These decreases in working capital are principally reflected in long-term investments which were $131,916 as of the First Quareter 2003 compared to $116,501 and $85,977, as of the end of the Fourth Quarter 2002 and First Quarter 2002, respectively. Net cash used in operating activities was $4,612 for the quarter ended March 29, 2003 and $4,415 for the quarter ended March 30, 2002. The change primarily reflects increased accounts receivable levels at March 29, 2003, partially offset by changes in other receivables, inventories, accounts payable and accrued liabilities. Capital expenditures for 2003 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. Investments in debt securities that matured during the quarters ended March 29, 2003 and March 30, 2002 were generally replaced with debt securities of similar maturities. -6A- The Company repurchased and retired $13,865 and $11,228 of its shares outstanding during the First Quarter 2003 and 2002, respectively. 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 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 and consumer preferences, including seasonal events such as Halloween; the effect of ingredient costs; the effect of acquisitions on the Company's results of operations and financial condition; the Company's reliance on third-party vendors for various goods and services; changes in the confectionary market place including action taken by major retailers and customer accounts; customer and consumer response to marketing programs and price adjustments; changes in governmental laws and regulations including taxes; and the overall competitive environment. 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. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK: The Company is exposed to various market risks, including fluctuations in sugar, corn syrup, 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, 2002. -6B- 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 within 90 days of the filing date of this quarterly report and, based on their evaluation, the chief executive officer and chief financial officer have concluded that these controls and procedures are effective. There were no significant changes in internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. 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. -6C- PART II - OTHER INFORMATION TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES______ Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibit 99 - Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes -Oxley Act of 2002. (b) Form 8-K was filed on April 16, 2003 containing a Press Release announcing first quarter 2003 earnings. 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: May 08, 2003 BY:____________________________ Melvin J. Gordon Chairman of the Board BY:____________________________ G. Howard Ember, Jr. Vice President - Finance -7- Section 302 Certification 1. I, Melvin J. Gordon, Chairman and Chief Executive Officer of Tootsie Roll Industries, Inc., certify that I have reviewed this Form 10-Q of Tootsie Roll Industries, Inc. 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures 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 quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the Evaluation Date); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated: May 08, 2003 ______________________ Melvin J. Gordon Chairman and Chief Executive officer -7A- Section 302 Certification 1. I, G Howard Ember, Vice President/Finance and Chief Financial Officer of Tootsie Roll Industries, Inc., certify that I have reviewed this Form 10-Q of Tootsie Roll Industries, Inc. 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures 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 quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the Evaluation Date); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated: May 08, 2003 __________________________ G. Howard Ember, Jr. Vice President/Finance and Chief Financial Officer -7B- Exhibit 99 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 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 March 29, 2003 (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. Dated: May 08, 2003 _______________________ MELVIN J GORDON Chairman and Chief and Executive Officer Dated: May 08, 2003 _______________________ G. Howard Ember, Jr. V.P./Finance and Chief Financial Officer -7C-