10-Q 1 sep05filing.txt TOOTSIE ROLL INDUSTRIES, INC. 10-Q ENDING 10/1/05 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 OCTOBER 1, 2005 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 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 (October 12, 2005) Class Outstanding Common Stock, $.69 4/9 par value 35,574,325 Class B Common Stock, $.69 4/9 par value 18,005,706 TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES OCTOBER 1, 2005 INDEX Page No. Part I - Financial Information Item 1. Unaudited 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 5-5A Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 6-6C Item 3. Quantitative and Qualitative Disclosures About Market Risk 6D Item 4. Controls and Procedures 6D Part II - Other Information Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 7 Item 6. Exhibits 7 Signatures 7 Certifications 7A 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 Oct. 01, Oct. 02, Dec. 31, CURRENT ASSETS 2005 2004 2004 Cash & cash equivalents $ 32,361 $ 29,807 $ 56,989 Investments 46,027 30,399 32,369 Trade accounts receivable, Less allowances of $3,528, $3,334 & $2,440 87,078 90,895 28,456 Other receivables 1,666 6,924 9,001 Inventories, at cost Finished goods & work in process 45,069 40,633 37,384 Raw material & supplies 21,086 22,179 21,393 Prepaid expenses 3,754 6,367 5,719 Deferred income taxes 1,410 951 1,382 Total current assets 238,451 228,155 192,693 PROPERTY, PLANT & EQUIPMENT, at cost Land 14,991 14,968 14,973 Buildings 61,776 60,718 61,714 Machinery & equipment 255,713 238,313 244,367 332,480 313,999 321,054 Less-accumulated depreciation 152,208 139,059 142,304 Net property, plant and equipment 180,272 174,940 178,750 OTHER ASSETS Goodwill 74,619 75,297 74,002 Trademarks 193,342 191,747 193,342 Investments 65,265 106,761 96,640 Split dollar life insurance 69,528 66,062 66,094 Investment in joint venture 11,041 10,000 10,232 413,795 449,867 440,310 Total assets $832,518 $852,962 $811,753 -2- (The accompanying notes are an integral part of these statements.)
(in thousands except per share data) (UNAUDITED) LIABILITIES AND SHAREHOLDERS' EQUITY Oct. 1, Oct. 02, Dec. 31, CURRENT LIABILITIES 2005 2004 2004 Bank loan $ 60,000 $ 17,000 $ 6,333 Accounts payable 17,546 23,994 19,315 Dividends payable 3,751 3,659 3,659 Accrued liabilities 52,603 52,981 44,722 Income taxes payable 17,159 22,112 8,288 Total current liabilities 151,059 119,746 82,317 NON-CURRENT LIABILITIES Bank loan - 105,000 85,667 Deferred income taxes 25,974 23,034 25,995 Postretirement health care and life insurance benefits 10,579 9,852 10,075 Industrial development bonds 7,500 7,500 7,500 Deferred compensation and other liabilities 31,488 28,076 30,020 Total non-current liabilities 75,541 173,462 159,257 Total liabilities 226,600 293,208 241,574 SHAREHOLDERS' EQUITY Common Stock, $.69-4/9 par value- 120,000 shares authorized; 35,574, 34,680 & 34,760 respectively, issued 24,704 24,083 24,139 Class B common stock, $.69-4/9 par value- 40,000 shares authorized; 18,006, 17,595 & 17,515, respectively, issued 12,504 12,219 12,163 Capital in excess of par value 435,675 397,745 397,745 Retained earnings 145,169 138,833 149,055 Accumulated other comprehensive loss (10,142) (11,134) (10,931) Treasury stock (at cost)- 60, 60 & 60 shares, respectively (1,992) (1,992) (1,992) Total shareholders' equity 605,918 559,754 570,179 Total liabilities and shareholders' equity $832,518 $852,962 $811,753 -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 Oct. 1, 2005 & Oct. 2, 2004 Net sales $173,692 $156,971 Cost of goods sold 106,197 92,167 Gross margin 67,495 64,804 Selling, marketing and administrative expenses 28,507 25,123 Earnings from operations 38,988 39,681 Other income, net 1,543 1,007 Earnings before income taxes 40,531 40,688 Provision for income taxes 12,866 13,712 Net earnings 27,665 26,976 Other comprehensive income, before tax: Foreign currency translation adjustments 195 283 Unrealized gains on securities 54 95 Unrealized gains on derivatives 529 283 Other comprehensive income, before tax 778 661 Income tax expense related to items of other comprehensive income (215) (141) Other comprehensive income, net of tax 563 520 Comprehensive earnings $ 28,228 $ 27,496 Retained earnings at beginning of period $121,251 $115,512 Net earnings 27,665 26,976 Cash dividends (3,747) (3,655) Retained earnings at end of period $145,169 $138,833 Net earnings per share $0.52 $0.50 Dividends per share * $0.07 $0.07 Average number of shares outstanding 53,520 53,772 *Does not include 3% stock dividend to shareholders of record on 3/11/05 and 3/02/04. -3- (The accompanying notes are an integral part of the statements.)
TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS, COMPREHENSIVE EARNINGS AND RETAINED EARNINGS (in thousands except per share amounts) (UNAUDITED) 39 WEEKS ENDED Oct. 1, 2005 & Oct. 2, 2004 Net sales $375,244 $314,174 Cost of goods sold 226,559 179,648 Gross margin 148,685 134,526 Selling, marketing and administrative expenses 73,617 61,966 Earnings from operations 75,068 72,560 Other income, net 3,934 3,303 Earnings before income taxes 79,002 75,863 Provision for income taxes 25,100 25,566 Net earnings 53,902 50,297 Other comprehensive income, before tax: Foreign currency translation adjustments 806 (110) Unrealized losses on securities (152) (176) Unrealized gains on derivatives 124 1,262 Other comprehensive income, before tax 778 976 Income tax benefit (expense) related to items of other comprehensive income 11 (401) Other comprehensive income, net of tax 789 575 Comprehensive earnings $ 54,691 $ 50,872 Retained earnings at beginning of period $149,055 $156,786 Net earnings 53,902 50,297 Cash dividends (11,148) (10,891) Stock dividends - 3% (46,640) (57,359) Retained earnings at end of period $145,169 $138,833 Net earnings per share $1.01 $0.93 Dividends per share * $0.21 $0.21 Average number of shares outstanding 53,600 53,966 *Does not include 3% stock dividend to shareholders of record on 3/11/05 and 3/02/04. -3A- (The accompanying notes are an integral part of the statements.)
TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands of dollars) (UNAUDITED) 39 WEEKS ENDED Oct. 1, 2005 & Oct. 2, 2004 CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 53,902 $ 50,297 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Depreciation and amortization 10,860 8,325 Amortization of marketable securities 1,332 1,885 Purchase of trading securities (1,770) (2,113) Changes in operating assets and liabilities: Accounts receivable (58,359) (61,476) Other receivables 658 2,089 Inventories (7,219) (7,245) Prepaid expenses and other assets (2,862) (5,453) Accounts payable and accrued liabilities 5,964 15,544 Income taxes payable and deferred 8,930 13,997 Postretirement health care and life insurance benefits 504 550 Deferred compensation and other liabilities 1,620 1,745 Other 164 (30) Net cash provided by operating activities 13,724 18,115 CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of business, net of cash acquired - (218,229) Working capital adjustment from acquisition 6,755 - Capital expenditures (12,097) (10,825) Purchase of held to maturity securities - (22,049) Maturity of held to maturity securities - 67,657 Purchase of available for sale securities (15,086) (81,699) Sale and maturity of available for sale securities 32,936 98,382 Net cash provided by (used in) investing activities 12,508 (166,763) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from bank loan 6,400 154,000 Repayment of bank loan (38,400) (32,000) Dividends paid in cash (11,386) (11,222) Shares repurchased and retired (7,474) (16,407) Net cash (used in) provided by financing activities (50,860) 94,371 Decrease in cash and cash equivalents (24,628) (54,277) Cash and cash equivalents at the beginning of year 56,989 84,084 Cash and cash equivalents at the end of quarter $ 32,361 $ 29,807 Supplemental cash flow information: Income taxes paid $ 17,044 $ 12,402 Interest paid $ 1,961 $ 351 Stock dividend issued $ 46,311 $ 56,959 (The accompanying notes are an integral part of the statements.) -4-
TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OCTOBER 1, 2005 (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. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the related notes included in the company's 2004 Annual Report on Form 10-K. Note 2 - Average shares outstanding for the nine month period ended October 1, 2005 reflects stock repurchases of 252 shares for $7,474 and a 3% stock dividend distributed on April 14, 2005. Average shares outstanding for the nine month period ended October 2, 2004 reflects stock repurchases of 474 shares for $16,407 and a 3% stock dividend distributed on April 14, 2004. Note 3 - Results of operations for the period ended October 1, 2005 are not necessarily indicative of results to be expected for the full year ended December 31, 2005 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 consolidated effective income tax rate favorably decreased in both the quarter and nine months from 33.7% in 2004 to 31.8% in 2005. This improvement generally reflects the statutory reduction in the U.S. federal income tax rate in 2005 for US manufacturing activities, lower effective rates for foreign taxes, and research and development credits against federal income taxes. On October 22, 2004, the President signed the American Jobs Creation Act of 2004 (the "Act"). The Act creates a temporary incentive for U.S. corporations to repatriate accumulated income earned abroad by providing an 85% dividends received deduction for certain dividends from controlled foreign corporations. The company has not completed its evaluation of the Act. As such, the company has not yet determined whether, and to what extent, it may repatriate earnings that have not yet been remitted to the U.S. and therefore makes no estimate as to the amount of future remittances. The company has determined that to the extent that foreign earnings are repatriated, the tax effect of such repatriation will not be material to its financial statements. The Act also provides for a deduction from income for qualified domestic production activities, which will be phased in from 2005 through 2010. This provision also is subject to a number of limitations which affect the effective tax rate in 2005 and later. The accompanying financial statements reflect the company's estimate of the Act on its effective tax rate and income tax expense in 2005. -5- Note 5 - On August 30, 2004, the company purchased certain assets and assumed certain liabilities from Concord Confections, Inc. and its affiliates (collectively Concord) including its 50% equity interest in a Spanish joint venture. Cash consideration paid of $218,229 was funded by the liquidation of $64,229 of marketable securities and a bank term loan of $154,000. During the second quarter 2005, the company finalized a working capital calculation required under terms of the purchase contract, and collected $6,755. The results of Concord's operations have been included in the company's condensed consolidated financial statements since August 30, 2004. Concord holds a strong market position in the bubble gum category and its products are sold primarily under the Dubble Bubble brand name and trademark. The following table includes the unaudited pro forma net sales, net earnings and net earnings per share for the third quarter and nine months of 2004, respectively, as if the company had acquired Concord as of January 1, 2004. Pro forma adjustments are necessary to reflect costs and expenses of financing the purchase, including additional interest expense on bank borrowings, decrease in investment income reflecting the sale of marketable securities, and changes in depreciation expense resulting from fair value adjustments to net tangible assets. The pro forma results do not reflect any cost savings or synergies that might be realized, including the anticipated elimination of substantially all of the Concord historical senior executive compensation and other management expenses which aggregated $1,601 and $4,026 net of income taxes for the third quarter and nine months, respectively. Following is a summary of the unaudited pro forma combined results for Tootsie Roll Industries, Inc. and the Concord Confections business for the third quarter and nine months 2004: Combined Pro Forma 13 WEEKS ENDED 39 WEEKS ENDED OCTOBER 1, 2004 OCTOBER 1,2004 Net sales $177,210 $373,342 Net earnings $ 27,412 $ 51,506 Earnings per share $ 0.51 $ 0.95 The pro forma results are not necessarily indicative of what actually would have occurred if the acquisition had been completed as of January 1, 2004, nor are they necessarily indicative of future consolidated results. Note 6 - The bank loan is payable in quarterly installments through August of 2006. As a result of prepayments, the next quarterly installment is due in March, 2006. The loan is collateralized by investments in marketable securities and is subject to other terms and conditions, none of which are significant. Interest is LIBOR based, and the average rate was 3.5% in 2005. -5A- 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 SALES: Net change in Third Quarter, 2005 Third Quarter vs. 2005 2004 Third Quarter, 2004 $173,692 $156,971 10.7% Nine Months, 2005 Nine Months vs. 2005 2004 Nine Months, 2004 $375,244 $314,174 19.4% Third quarter 2005 net sales were $173,692 compared to $156,971 in third quarter 2004, an increase of $16,721 or 10.7%. Nine months 2005 net sales of $375,244 increased $61,070 or 19.4% from nine months 2004 net sales of $314,174. Third quarter and nine months 2005 sales benefited from $23,200 and $62,200, respectively, of sales from Concord Confections which was acquired on August 30,2004. In addition, many of the Company's core brands had sales increases in the third quarter and nine month 2005 period as a result of successful marketing programs, including those related to "back-to-school" and pre-Halloween programs. The Company also had selective price increases in early 2005 which aided the third quarter and nine months sales results. COST OF SALES: Cost of Sales as a Third Quarter Percentage of Net Sales 2005 2004 3rd Qtr. 2005 3rd Qtr. 2004 $106,197 $92,167 61.1% 58.7% Cost of Sales as a Nine Months Percentage of Net Sales 2005 2004 Nine Months 2005 Nine Months 2004 $226,559 $179,648 60.4% 57.2% Cost of sales as a percentage of net sales increased from 58.7% in the third quarter 2004 to 61.1% in third quarter 2005, and from 57.2% in nine months 2004 to 60.4% in nine months 2005. These increases in cost of sales as a percentage of net sales are the result of the inclusion of Concord Confections, which has lower gross margins, combined with the impact of increases in certain ingredient and packaging costs, higher energy, fuel and transportation costs, and additional costs associated with the relocation and implementation of new production lines. Significant cost increases are anticipated during 2006 in many commodities and packaging materials widely used in the confectionary industry, including sugar, corn syrup, dextrose, milk, whey and energy. The company is currently assessing the effects of these cost increases as well as how they can be mitigated in 2006. -6- OPERATING EARNINGS: Third Quarter, 2005 Third Quarter vs. 2005 2004 Third Quarter, 2004 $38,988 $39,681 (1.7)% Nine Months, 2005 Nine Months vs. 2005 2004 Nine Months, 2004 $75,068 $72,560 3.5% Third quarter 2005 selling, marketing and administrative expenses were $28,507 compared to $25,123 in third quarter 2004, an increase of $3,384 or 13.5%. In the comparative nine month periods, these expenses rose from $61,966 in 2004 to $73,617 in 2005, an increase of $11,651 or 18.8%. These increases principally reflect the additional expenses associated with increased sales, including the incremental operating expenses of Concord Confections, in the respective 2005 periods. As a percentage of net sales, total selling, marketing and administrative expenses increased from 16.0% in third quarter 2004 to 16.4% in third quarter 2005, however, such expenses decreased from 19.7% in nine months 2004 to 19.6% in nine months 2005. The aforementioned decrease in nine months operating expenses as a percentage of sales reflects various cost efficiencies achieved year-to-date from increased consolidated net sales, including the sales from Concord Confections, partially offset by generally higher operating expenses. The Company has substantially completed the integration of the Concord Confections branch into its confectionary product portfolio. Third quarter 2005 earnings from operations were $38,988 compared to $39,681 in third quarter 2004, a decrease of $693 or 1.7%. Nine months 2005 earnings from operations were $75,068 compared to $72,560, an increase of $2,508 or 3.5%. Improved operating earnings in nine months 2005 principally resulted from higher reported consolidated sales, including the inclusion of the Concord Confections results as discussed above. However, the effects of higher sales were partially mitigated by those adverse factors that affected cost of sales as discussed above, particularly in third quarter 2005. NET EARNINGS: Third Quarter, 2005 Third Quarter vs. 2005 2004 Third Quarter, 2004 $27,665 $26,976 2.6% Nine Months, 2005 Nine Months vs. 2005 2004 Nine Months, 2004 $53,902 $50,297 7.2% Third quarter 2005 net earnings were $27,665 compared to third quarter 2004 net earnings of $26,976, a $689 or 2.6% increase. Third quarter 2005 earnings per share were $0.52, compared to $0.50 per share in the prior year comparative period, an increase of $0.02 or 4.0%. -6A- Nine months 2005 net earnings were $53,902 compared to nine months 2004 net earnings of $50,297. Nine months net earnings per share were $1.01 in 2005 compared to $0.93 per share in 2004, an increase of $0.08 per share or 8.6%. Other income, net was $1,543 in third quarter 2005 compared to $1,007 in third quarter 2004, an increase of $536. The aforementioned increase includes $457 of increased interest expense and $293 of decreased investment income reflecting the financing costs of Concord Confections acquired on August 30, 2004. However, third quarter 2005 other income, net benefited from an increased real estate rental income from Concord Confections and higher net income from the company's Spanish joint venture acquired as part of the Concord Confections acquisition. In addition, third quarter 2005 other income, net benefited from $684 of foreign exchange gains compared to a $68 loss in third quarter 2004. Other income, net was $3,934 in nine months 2005 compared to $3,303 in nine months 2004, an increase of $631. Nine months other income, net reflects $1,637 of increased interest expense and $1,171 of decreased investment income reflecting the financing costs of the Concord Confections acquisition. However, nine months 2005 other income, net benefited from an increased real estate rental income from Concord Confections and higher net income from the company's Spanish joint venture. In addition, nine months 2005 other income, net benefited from $744 of foreign exchange gains compared to $45 of gains in nine months 2004. The consolidated effective income tax rate favorably decreased in both the quarter and nine months from 33.7% in 2004 to 31.8% in 2005. This improvement generally reflects the statutory reduction in the U.S. federal income tax rate in 2005 for US manufacturing activities, lower effective rates for foreign taxes, and research and development credits against federal income taxes. In addition to the factors discussed above, earnings per share benefited from fewer shares outstanding as a result of the company's share repurchases. LIQUIDITY AND CAPITAL RESOURCES: The company's current ratio (current assets divided by current liabilities) was 1.6 to 1 as of the end of third quarter 2005 as compared to 1.9 to 1 as of the end of third quarter 2004 and 2.3 to 1 as of the end of fourth quarter 2004. Net working capital was $87,392 as of the end of third quarter 2005 as compared to $110,376 and $108,409 as of the end of fourth quarter 2004 and third quarter 2004, respectively. The aforementioned net working capital amounts are principally reflected in aggregate cash and cash equivalents and short-term investments which totaled $78,388 as of the end of third quarter 2005 compared to $89,358 and $60,206, as of the end of fourth quarter 2004 and third quarter 2004, respectively. Net working capital was also affected by the classification of $60,000 of the bank loan as a short-term liability as of the end of third quarter 2005. In addition, long-term investments, principally debt securities comprising municipal bonds, were $65,265 as of the end of third quarter 2005 as compared to $96,640 and $106,761 as of the end of fourth quarter 2004 and third quarter 2004, respectively. The decreases in aggregate cash and cash equivalents, and short-term and long-term investments from third quarter 2004 reflect the Company's partial repayment of the bank term loan related to the acquisition of Concord Confections on August 30,2004 for an adjusted purchase price of approximately $212,500. The aforementioned adjusted purchase price reflects the Company's recovery during second quarter 2005 of approximately $6,800 relating to the final determination of the required minimum working capital amount under terms of the Concord purchase contract. -6B- Investments in municipal bonds and other debt securities that matured during nine months 2004 were generally replaced with debt securities of similar maturities. Investments that matured or were sold during nine months 2005 were generally used to repay the bank loan relating to the Concord acquisition. Net cash provided by operating activities was $13,724 for nine months 2005, compared to $18,115 of net cash provided by operating activities in nine months 2004. The aforementioned net change in net cash provided by operating activities principally reflects higher net income and higher depreciation in 2005, and the Company's pre-funding of the annual cost of certain defined contribution employee benefit plans in 2004, reflected as a prepaid expense, which was not pre-funded in 2005. However, the timing of payments in 2005 compared to 2004 relating to income taxes and accounts payable and accrued liabilities more than offset the aforementioned effects of net cash provided by operating activities. Capital expenditures for nine months 2005 and 2004 were $12,097 and $10,825, respectively. Capital expenditures for the 2005 year are anticipated to be generally in line with historical annualized spending after adjusting for the addition of Concord Confections, and are to be funded from the company's cash flow from operations and internal sources. As of the end of third quarter 2005, the company has $60,000 outstanding relating to its bank loan in connection with the financing of the Concord Confections acquisition on August 30,2004. As a result of prepayments on this loan, the next required installments of $11,000 and $49,000 are due in the second and third quarters of 2006, respectively. The company anticipates making substantial prepayments on this loan in 2005 and 2006 which will be funded from cash flows from operations and maturities of investments in marketable securities. Cash dividends paid in nine months 2005 and 2004 were $11,386 and $11,222, respectively. The company also repurchased and retired $7,474 and $16,407 of its shares outstanding during nine months 2005 and 2004, respectively. The company has entered into a contract to sell a surplus parcel of real estate. This transaction, which is subject to customary closing conditions, is expected to close in the fourth quarter of 2005 or first quarter 2006 and will result in a net after-tax gain of approximately $13.0 million. Because the company expects to defer substantially all of the current income taxes related to this gain by entering into an IRC Section 1031 Like-Kind Exchange for alternate real estate, the aforementioned net gain of $13.0 million reflects a provision for deferred income taxes. The Company will recognize this gain in the period of the real estate closing including the receipt of the proceeds. 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 changes; the effect of acquisitions on the company's results of operations and financial condition; the effect of changes in foreign currencies on the company's foreign subsidiaries; the company's reliance on third-party vendors for various goods and services; the company's ability to successfully implement new production processes and lines; the effect of changes in assumptions, including discount rates, sales growth and profit -6C- margins, relating to the company's impairment testing and analysis of its goodwill and trademarks; changes in the confectionary market place including actions taken by major retailers and customers; customer and consumer response to marketing programs and price adjustments; changes in governmental laws and regulations including taxes; the overall competitive environment in the company's industry; and changes in assumptions and judgments discussed under the heading "Critical Accounting Policies of the company's MD&A" included in the 2004 annual report and 10-K. 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 DISCLOSURES ABOUT MARKET RISK: The company is exposed to various market risks, including fluctuations in sugar, corn syrup, edible oils, cocoa and packaging costs. The company is also exposed to exchange rate fluctuations in the Canadian dollar which is the currency used for a portion of the operating expenses at its Canadian plants. 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, 2004. 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 October 1, 2005 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 October 1, 2005 that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting. -6D- 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 JUL 3 TO JUL 30 -0- $ - NOT APPLICABLE NOT APPLICABLE JUL 31 TO AUG 27 -0- - NOT APPLICABLE NOT APPLICABLE AUG 28 TO OCT 1 -0- - NOT APPLICABLE NOT APPLICABLE TOTAL -0- $ - 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 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: Nov. 9, 2005 BY:/s/Melvin J. Gordon Melvin J. Gordon Chairman of the Board Date: Nov. 9, 2005 BY:/s/G. Howard Ember, Jr. G. Howard Ember, Jr. Vice President/Finance -7-
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 disclosure controls 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 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: 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: Nov. 9, 2005 By: /s/Melvin J. Gordon Melvin J. Gordon Chairman and Chief Executive Officer -7A- 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 disclosure controls 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 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: 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: Nov. 9, 2005 By: /s/G. Howard Ember, Jr. G. Howard Ember, Jr. Vice President/Finance and Chief Financial Officer -7B- 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 October 1, 2005 (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: Nov. 9, 2005 /s/Melvin J. Gordon Melvin J. Gordon Chairman and Chief Executive Officer Dated: Nov. 9, 2005 /s/G. Howard Ember, Jr. G. Howard Ember, Jr. V.P./Finance and Chief Financial Officer -7C-