10-Q 1 t30827_10qnov12.txt QUARTER ENDED OCTOBER 2, 2004 ================================================================================ 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 2, 2004 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 001-01361 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 (October 2, 2004) Class Outstanding (In Thousands) ----- -------------------------- Common Stock, $.69 4/9 par value 34,679,676 Class B Common Stock, $.69 4/9 par value 17,595,273 ================================================================================ TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES OCTOBER 2, 2004 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 5-5E Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 6 Item 3. Quantitative and Qualitative Disclosures About Market Risk 6D Item 4. Controls and Procedures 6E Part II - Other Information Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 7 Item 6. Exhibits and Reports on Form 8-K 7 Signatures 7 Certifications 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. 2, Sep. 27, Dec. 31, CURRENT ASSETS 2004 2003 2003 -------------- ----------- ------------ ----------- Cash & cash equivalents $ 29,807 $ 46,845 $ 84,084 Investments 30,399 92,465 86,961 Trade accounts receivable, Less allowances of $3,334, $3,258 & $1,970 90,895 83,137 18,131 Other receivables 6,924 2,849 3,076 Inventories, at cost Finished goods & work in process 40,633 30,194 28,969 Raw material & supplies 22,179 16,522 17,117 Prepaid expenses 6,367 5,446 4,416 Deferred income taxes 951 4,481 951 ------- ------- ------- Total current assets 228,155 281,939 243,705 ------- ------- ------- PROPERTY, PLANT & EQUIPMENT --------------------------- (at cost) Land 14,968 8,277 8,265 Buildings 60,718 44,001 44,960 Machinery & equipment 238,313 205,159 206,697 ------- ------- ------- 313,999 257,437 259,922 Less-accumulated depreciation 139,059 128,264 130,759 ------- ------- ------- Net property, plant and equipment 174,940 129,173 129,163 ------- ------- ------- OTHER ASSETS ------------ Goodwill 75,297 38,151 38,151 Trademarks 191,747 79,348 79,348 Investments 106,761 104,591 112,431 Split dollar officer life insurance and other assets 76,062 57,774 62,499 ------- ------- ------- 449,867 279,864 292,429 ------- ------- ------- Total assets $852,962 $690,976 $665,297 ======= ======= ======= (The accompanying notes are an integral part of these statements)
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(in thousands except per share data) (UNAUDITED) LIABILITIES AND SHAREHOLDERS' EQUITY Oct. 2, Sep. 27, Dec. 31, CURRENT LIABILITIES 2004 2003 2003 ------------------- ----------- ------------ ----------- Notes payable $ 17,000 $ - $ - Accounts payable 23,994 16,037 11,947 Dividends payable 3,659 3,613 3,589 Accrued liabilities 52,981 46,160 38,834 Income taxes payable 22,112 27,717 8,517 ------- ------- ------- Total current liabilities 119,746 93,527 62,887 ------- ------- ------- NON-CURRENT LIABILITIES ----------------------- Notes payable 105,000 - - Industrial development bonds 7,500 7,500 7,500 Postretirement health care and life insurance benefits 9,852 8,690 9,302 Deferred compensation and other liabilities 28,076 24,284 26,396 Deferred income taxes 23,034 19,633 22,631 ------- ------- ------- Total non-current liabilities 173,462 60,107 65,829 ------- ------- ------- Total liabilities 293,208 153,634 128,716 ------- ------- ------- SHAREHOLDERS' EQUITY Common stock, $.69-4/9 par value- 120,000 shares authorized; 34,680, 34,421 & 34,082 respectively, issued 24,083 23,903 23,668 Class B common stock, $.69-4/9 par value- 40,000 shares authorized; 17,595, 17,153 & 17,145 respectively, issued 12,219 11,912 11,906 Capital in excess of par value 397,745 369,446 357,922 Retained earnings 138,833 145,527 156,786 Accumulated other comprehensive earnings (loss) (11,134) (11,454) (11,709) Treasury stock (at cost)- 58, 58 & 58 shares respectively (1,992) (1,992) (1,992) ------- ------- ----- Total shareholders' equity 559,754 537,342 536,581 ------- ------- ------- Total liabilities and Shareholders' equity $852,962 $690,976 $665,297 ======= ======= ======= (The accompanying notes are an integral part of these statements.)
-2A- 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 2, 2004 & Sept 27,2003 -------------------------------- Net sales $156,971 $147,201 Cost of goods sold 92,167 85,269 ------- ------- Gross margin 64,804 61,932 ------- ------ Selling, marketing and administrative expense 25,123 22,568 Earnings from operations 39,681 39,364 Other income, net 1,007 1,337 ------- ------- Earnings before income taxes 40,688 40,701 Provision for income taxes 13,712 13,756 ------- ------- Net earnings 26,976 26,945 ------- ------- Other comprehensive income, before tax: Foreign currency translation adjustments 283 (545) Unrealized gains on securities 95 113 Unrealized gains (losses) on derivatives 283 (497) ------- ------- Other comprehensive income (loss) before tax 661 (929) Income tax (expense) benefit related to items of other comprehensive income (141) 142 ------- ------ Other comprehensive income (loss), net of tax 520 (787) ------- ------ Comprehensive earnings $ 27,496 $ 26,158 ======= ======= Retained earnings at beginning of period $115,512 $122,191 Net earnings 26,976 26,945 Cash dividends (3,655) (3,609) ------- ------- Retained earnings at end of period $138,833 $145,527 ======= ======= Net earnings per share (note 2) $.52 $.51 Dividends per share * $.07 $.07 Average number of shares outstanding 52,217 53,183 *Does not include 3% stock dividend to shareholders of record on 3/02/04 and 3/04/03. (The accompanying notes are an integral part of the statements)
-3- 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 2, 2004 & Sept 27,2003 -------------------------------- Net sales $314,174 $300,496 Cost of goods sold 179,648 170,422 ------- ------- Gross margin 134,526 130,074 ------- ------- Selling, marketing and administrative expense 61,966 58,463 Earnings from operations 72,560 71,611 Other income, net 3,303 4,176 ------- ------- Earnings before income taxes 75,863 75,787 Provision for income taxes 25,566 25,616 ------- ------- Net earnings 50,297 50,171 ------- ------- Other comprehensive income, before tax: Foreign currency translation adjustments (110) (366) Unrealized (losses) gains on securities (176) 388 Unrealized gains (losses) on derivatives 1,262 (445) ------- ------- Other comprehensive income (loss) before tax 976 (423) Income tax (expense) benefit related to items of other comprehensive income (401) 21 ------- ------ Other comprehensive income (loss), net of tax 575 (402) ------- ------ Comprehensive earnings $ 50,872 $ 49,769 ======= ======= Retained earnings at beginning of period $156,786 $148,705 Net earnings 50,297 50,171 Cash dividends (10,891) (10,778) Stock dividends - 3% (57,359) (42,571) ------ ------ Retained earnings at end of period $138,833 $145,527 ======= ======= Net earnings per share (note 2) $.96 $.94 Dividends per share * $.21 $.21 Average number of shares outstanding 52,410 53,460 *Does not include 3% stock dividend to shareholders of record on 3/02/04 and 3/04/03. (The accompanying notes are an integral part of the statements)
-3A- TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ----------------------------------------------- (in thousands of dollars) (UNAUDITED)
39 WEEKS ENDED Oct 2, 2004 & Sept 27, 2003 ------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: ------------------------------------ Net earnings $ 50,297 $ 50,171 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 8,325 8,753 Amortization of marketable securities 1,885 1,886 Purchase of trading securities (2,113) (2,591) (Increase) decrease in assets: Accounts receivable (61,476) (60,540) Other receivables 2,089 943 Inventories (7,245) (3,181) Prepaid expenses and other assets (5,453) (1,153) Increase (decrease) in liabilities: Accounts payable and accrued liabilities 15,544 13,946 Income taxes payable and deferred 13,997 16,510 Postretirement health care and life insurance benefits 550 540 Deferred compensation and other liabilities 1,745 1,933 Other (30) (16) ------ ------- Net cash provided by operating activities 18,115 27,201 ------ ------- CASH FLOWS FROM INVESTING ACTIVITIES: ------------------------------------ Acquisition of business, net of cash acquired (218,229) - Capital expenditures (10,825) (9,272) Purchase of held to maturity securities (22,049) (47,091) Maturity of held to maturity securities 67,657 19,401 Purchase of available for sale securities (81,699) (41,359) Sale and maturity of available for sales securities 98,382 31,593 ------- ------- Net cash used in investing activities (166,763) (46,728) ------- ------ CASH FLOWS FROM FINANCING ACTIVITIES: ------------------------------------ Proceeds from issuance of bank loans 154,000 - Repayment of bank loans (32,000) - Shares repurchased and retired (16,407) (28,332) Dividends paid in cash (11,222) (10,803) ------ ------ Net cash provided by (used in) financing activities 94,371 (39,135) ------ ------ Decrease in cash and cash equivalents (54,277) (58,662) Cash and cash equivalents-beginning of year 84,084 105,507 ------- ------- Cash and cash equivalents end of quarter $ 29,807 $ 46,845 ------- ------- Supplemental cash flow information: Income taxes paid $ 12,402 $ 11,321 ------- ------- Interest paid $ 351 $ 140 ------- ------- Stock dividend issued $ 56,959 $ 42,513 ======= ======= (The accompanying notes are an integral part of the statements)
-4- TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OCT. 2, 2004 (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 2003 Annual Report on Form 10-K. Note 2 - Average shares outstanding for the period from January 1, 2004 to Oct. 2, 2004 reflects stock repurchases of 474 shares for $16,407 and a 3% stock dividend distributed on April 14, 2004. Average shares outstanding for the period from January 1, 2003 to September 27, 2003 reflects stock repurchases of 952 shares for $28,332 and a 3% stock dividend distributed on April 16, 2003. Note 3 - Results of operations for the 13 and 39 week periods ended October 2, 2004 are not necessarily indicative of results to be expected for the year to end December 31, 2004 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's quarterly financial reporting is based on 13 week periods ending on the last Saturday of each period while its annual reporting is based on the twelve months ending December 31st of the calendar year. This quarterly reporting requires that the Company periodically reset its quarter-end dates to maintain 13-week quarterly reporting periods during its calendar year. As a result, the third quarter 2004 and 2003 periods ended on October 2, 2004 and September 27, 2003, respectively. If third quarter 2004 had ended on September 27, 2004 instead of October 2, 2004, the Company estimates that nine months 2004 net sales would have been approximately $4,900 less than the reported 2004 sales amount. -5- Note 5 - In January 2004, the FASB issued Staff Position No. FAS 106-2 "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003" (the "Act"). The Company has elected to adopt accounting for the Act effective as of the beginning of the third quarter of 2004. Accordingly, the Company's accumulated postretirement benefit obligation and net postretirement health care costs included in the consolidated financial statements reflect the effects of the Act. The effect of adoption of the Act were not significant to the Company's financial statements. Note 6 - ACQUISTION On August 30, 2004, Tootsie Roll Industries, Inc. (Tootsie Roll) purchased certain assets and assumed certain liabilities of Concord Confections Inc. and its affiliates (collectively CCI) which comprise (i) Concord Confections Inc., the previous principal manufacturing and operating company, (ii) Terra Rouge Estates Inc., the previous owners of the land and real estate, (iii) Alpharetta Confections, Inc, the previous US sales and distribution company, and (iv) the 50% equity interest in the shares of Fleer Espanola, S.A. and Dr. Torrents, S.A., a Spanish operation. The adjusted purchase price was $214,088, and financed with the liquidation of $64,229 of marketable securities and a bank term loan for $154,000. The results of CCI's operations have been included in the condensed consolidated financial statements since the date of acquisition. CCI holds a strong market position in the bubble gum category and its products are sold primarily under the Dubble Bubble brand name and trademark. The addition of CCI reinforces the Company's commitment to offer well-known consumer brands that contribute to the success of the Company. -5A- Under the purchase method of accounting, the total adjusted estimated purchase price as shown in the table below has been allocated to CCI's tangible and intangible assets and liabilities based on their estimated fair values as of August 30, 2004, the purchase date. The valuation of a significant portion of assets and liabilities is still being determined and accordingly the allocation below is preliminary. The adjusted purchase price was preliminarily allocated as follows (in thousands of U.S.$): Preliminary calculation of adjusted purchase price: Cash consideration paid for net assets acquired $218,229 Estimated direct transactions fees and expenses, and contractual severance 1,000 Less-Adjustment to purchase relating to minimum working capital (5,141) ------- Total adjusted purchase price $214,088 ======== Preliminary allocation of adjusted purchase price: Net working capital based on historical book values $ 9,606 Step up of inventories 1,622 Investment in joint venture 10,000 Property, plant and equipment 41,298 Other assets 2,017 Indefinite trademarks 112,400 Goodwill-deductible 37,145 ------ Total adjusted purchase price $214,088 ======== The following unaudited pro forma condensed combined statements of earnings are presented as if the transaction had been completed on January 1, 2003. The following unaudited pro forma financial information gives effect to (i) the transaction as a purchase of CCI by Tootsie Roll using the purchase method of accounting, (ii) the assumptions and adjustments described in the accompanying notes to the unaudited pro forma condensed combined financial information, (iii) the incurrence by Tootsie Roll of a $154,000 bank term loan and the liquidation by Tootsie Roll of $64,229 of marketable securities and cash equivalents, and (iv) translation of CCI's historical financial statements from Canadian dollars to US dollars. The average US$/C$ exchange rates used to convert information was $0.71 for the year ended December 31, 2003 and $0.75 for the six months ended July 3, 2004. -5B- Pro forma adjustments are necessary to reflect the purchase price and to adjust CCI's net tangible and intangible assets and liabilities to estimated fair values. Pro forma adjustments are also necessary to reflect costs and expenses of financing the purchase, including additional interest expense relating to Tootsie Roll's bank borrowings and decrease in Tootsie Roll's investment income reflecting the sale of marketable securities, changes in depreciation expense resulting from fair value adjustments to net tangible assets, the new capital structure of CCI as a wholly-owned subsidiary of Tootsie Roll, and the income tax effects related to the pro forma adjustments. Certain reclassifications have been made to conform the CCI historical financial information to the pro forma presentation. Historical financial results of CCI were prepared using the Canadian dollar as the functional currency. Tootsie Roll has determined that they will consider the functional currency of CCI to be the US dollar subsequent to the date of acquisition as substantially all of the sales and financing as well as a portion of operating expenses are denominated in US dollars. The CCI financial information was prepared for the six months ended June 27, 2004 compared to the historical Tootsie Roll financial information that was prepared for the six months ended July 3, 2004. The allocation of purchase price is preliminary and is based on management's current estimates of the fair value of the assets acquired and liabilities to be assumed. Preliminary valuations have been considered in management's estimates of the fair values reflected in the unaudited pro forma condensed combined financial information. The final purchase price allocation will be completed after asset and liability valuations are finalized. In addition, the final purchase price could be affected by differences between the determination of the required minimum working capital amount that was to be provided under the terms of the CCI purchase contract. Final adjustments may change the allocation of the purchase price, which could affect the fair value assigned to the assets, including amounts preliminarily allocated to intangible assets with indefinite lives and goodwill, and reported liabilities. The unaudited pro forma condensed combined financial information does not reflect any cost savings or synergies that might be realized, including the anticipated elimination of substantially all of the CCI historical costs and expenses of senior executive compensation and other management expenses which aggregated approximately $12,300 and $2,800 for the year ended December 31, 2003 and six months ended July 3, 2004, respectively. -5C- UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENT OF TOOTSIE ROLL AND CCI FOR THE SIX MONTHS ENDED July 3, 2004 (in thousands of U.S.$ except per share amounts) Combined Pro Forma --------- Net sales $ 196,448 Cost of sales 113,708 Selling, marketing & administration expenses 47,853 Foreign exchange (losses) ( 222) Interest expense (1,712) Investment and other income 2,320 ----- Earnings before income taxes 35,273 Provision for income taxes 11,923 ------ Net income $ 23,350 ====== Earning per share $ 0.44 ==== UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENT OF TOOTSIE ROLL AND CCI FOR THE YEAR ENDED December 31, 2003 (in thousands of U.S.$ except per share amounts) Combined Pro Forma --------- Net sales $ 467,009 Cost of sales 270,684 Selling, marketing & administration expenses 106,663 Foreign exchange gains 17,401 (a) Interest expense (3,252) Investment and other income 4,947 ----- Earnings before income taxes 108,758 Provision for income taxes 36,786 ------ Net income $ 71,972 ====== Earning per share $ 1.39 ==== (a) The pro forma statement of earnings reflects $17,401 of foreign exchange gains for the year ended December 31, 2003. These gains principally comprise the net change in the market value of forward foreign exchange contracts outstanding as of the beginning and end of the indicated periods ($10,159), early settlement of outstanding hedges ($2,708), and net settlement of derivatives on their maturity dates ($4,534). -5D- Note 7 - During the third quarter of 2004, the Company acquired the Concord Confections business (see Note 6). Approximately $64,229 of the purchase price was financed from the liquidation of marketable securities investments, a portion of which were previously classified as held to maturity investments. Because of these actions, the Company has reclassified $101,000 of its held to maturity investments to available for sale investments. The effect of this change in classification was not significant to the Company's 2004 comprehensive earnings and had no effect of the Company's 2004 net earnings. Note 8 - The Company obtained a $154,000 bank loan during the period in order to finance the CCI acquisition. The principal will be repaid in quarterly installments through August, 2006. The loan is subject to a variable interest rate of LIBOR plus 0.175% to 0.225% dependent upon an applicable margin as defined by the loan agreement. As of October 2, 2004, the principal amount outstanding under this bank loan was $122,000. Note 9 - Subsequent events: In October 2004, the Working Families Tax Relief Act of 2004 and the American Jobs Creation Act of 2004 became law. This legislation provides for a number of changes in tax laws. In accordance with SFAS No. 109, "Accounting for Income Taxes" effects of this new legislation will be reflected in the Company's financial statements beginning in the period of their enactment, October 2004. Management is presently reviewing this new legislation to determine the impacts on the Company and its operations. As of November 8, 2004, the outstanding principal balance of the bank loan referenced in Note 8 above was $92,000, a $30,000 reduction from October 2, 2004, reflecting the overall positive cash flows of the Company's business and further liquidation of marketable securities. -5E- 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 which have affected the accompanying statements of earnings and financial position. ACQUISTION On August 30, 2004, Tootsie Roll Industries, Inc. (Tootsie Roll) purchased certain assets and assumed certain liabilities of Concord Confections Inc. and its affiliates (collectively CCI) which comprise (i) Concord Confections Inc., the previous principal manufacturing and operating company, (ii) Terra Rouge Estates Inc., the previous owners of the land and real estate, (iii) Alpharetta Confections, Inc, the previous US sales and distribution company, and (iv) the 50% equity interest in the shares of Fleer Espanola, S.A. and Dr. Torrents, S.A., a Spanish operation. The adjusted purchase price was $214,088, and financed with the liquidation of $64,229 of marketable securities and a bank term loan for $154,000. Under the purchase method of accounting, the total adjusted estimated purchase price has been allocated to CCI's tangible and intangible assets and liabilities based on their estimated fair values as of August 30, 2004, the purchase date. The valuation of a significant portion of assets and liabilities is still being determined, and accordingly, the purchase price allocation reflected in the accompanying financial statements is preliminary. CCI 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 addition of CCI reinforces the Company's commitment to offer well-known consumer brands that contribute to the success of Tootsie Roll. NET SALES: Third Quarter Third Quarter, 2004 ------------- vs. 2004 2003 Third Quarter, 2003 ---- ---- ------------------- $156,971 $147,201 +6.6% Nine Months Nine Months, 2004 ----------- vs. 2004 2003 Nine Months, 2003 ------- -------- ----------------- $314,174 $300,496 +4.6% -6- Third quarter net sales were $156,971 compared to $147,201 in the third quarter 2003, an increase of $9,770 or 6.6%. Nine month sales were $314,174 compared to $300,496 in the prior year corresponding period, an increase of $13,678 or 4.6%. Net sales for the third quarter and nine month periods benefited from $10,485 of net sales from the CCI business which was acquired on August 30, 2004. The Company's quarterly financial reporting is based on 13 week periods ending on the last Saturday of each period while its annual reporting is based on the twelve months ending December 31st of the calendar year. This quarterly reporting requires that the Company periodically reset its quarter-end dates to maintain 13-week quarterly reporting periods during its calendar year. As a result, the Company's nine months 2004 and 2003 reporting periods ended on October 2, 2004 and September 27, 2003, respectively. If nine months 2004 had ended on September 27, 2004, the Company estimates that nine months 2004 net sales would have been approximately $4,900 less than the above reported 2004 net sales amount. Although both third quarterly periods in 2004 and 2003 had 13 weeks, the Company's seasonal Halloween sales at the end of each quarter may have provided some additional sales in third quarter of 2004 compared to 2003; however, this difference is not considered practical to determine. COST OF GOODS SOLD: Cost of Goods Sold as a ----------------------- Third Quarter Percentage of Net Sales ------------- ----------------------- 2004 2003 3rd Qtr. 2004 3rd Qtr. 2003 ---- ---- ------------- ------------- $92,167 $85,269 58.7% 57.9% Cost of Goods Sold as a ----------------------- Nine Months Percentage of Net Sales ---------------------- ----------------------- 2004 2003 Nine Months 2004 Nine Months 2003 ------- -------- ---------------- ---------------- $179,648 $170,422 57.2% 56.7% Cost of goods sold as a percentage of net sales increased from 57.9% in the third quarter of 2003 to 58.7% in the third quarter of 2004. Nine month cost of goods sold as a percentage of net sales increased from 56.7% in 2003 to 57.2% in 2004. The increase in the third quarter and nine month 2004 cost of goods sold as a percentage of sales for the comparative reporting periods reflects the effects of higher manufacturing labor and plant overhead costs, a portion of which relates to a new automated line that is in its start-up phase. Although ingredient costs in the aggregate for the comparative third quarter periods are generally consistent, nine month 2004 costs are slightly favorable to the nine month prior year period. Overall gross margins were affected slightly by the inclusion of the CCI business which has a higher cost of goods sold as a percentage of sales than do most of the Company's core brands. -6A- OPERATING EARNINGS: Third Quarter Third Quarter, 2004 ------------- vs. 2004 2003 Third Quarter, 2003 ---- ---- ------------------- $39,681 $39,364 +0.8% Nine Months Nine Months, 2004 ----------- vs. 2004 2003 Nine Months, 2003 ------ ------ ----------------- $72,560 $71,611 +1.3% Third quarter earnings from operations were $39,681 and $39,364 in 2004 and 2003, respectively, an increase of $317 or 0.8%. Improved third quarter 2004 earnings from operations benefited from higher reported net sales and ongoing cost control programs. However, increased transportation and distribution expenses, principally reflecting higher fuel costs, adversely affected third quarter 2004 reported results. Nine months earnings from operations were $72,560 and $71,611 in 2004 and 2003, respectively, an increase of $949 or 1.3%. Nine month performance was aided by higher sales, however, higher costs of sales and distribution expense, as discussed above, did have an adverse effect on the 2004 results. The reported results for third quarter and nine month 2004 benefited from the inclusion of the CCI business as of August 30, 2004. NET EARNINGS: Third Quarter Third Quarter, 2004 ------------- vs. 2004 2003 Third Quarter, 2003 ---- ---- ------------------- $26,976 $26,945 +0.1% Nine Months Nine Months, 2004 ----------- vs. 2004 2003 Nine Months, 2003 ------ ------ ----------------- $50,297 $50,171 +0.3% Third quarter 2004 net earnings were $26,976 compared to third quarter 2003 net earnings of $26,945. Third quarter 2004 earnings per share were $0.52, compared to $.51 per share in third quarter 2003, an increase of $.01 or 2.0%. Nine months 2004 net earnings were $50,297 compared to nine months 2003 net earnings of $50,171. Nine months 2004 earnings per share were $.96, compared to $.94 for the comparative 2003 period, an increase of $.02 per share or 2%. Net earnings per share in third quarter and nine months 2004 benefited from share repurchases which resulted in a slight reduction in average shares outstanding. However, lower investment income and higher interest expense relating to the financing of -6B- the purchase of the CCI business adversely affected third quarter and nine months 2004 net earnings as compared to the corresponding 2003 periods. The consolidated effective income tax rate was 33.7% in both the third quarter and nine months 2004 compared to 33.8% in both the third quarter and nine months 2003. This improvement generally reflects a reduction in state income taxes. LIQUIDITY AND CAPITAL RESOURCES: The Company's liquidity and capital resources at October 2, 2004 reflects the purchase of the CCI business as discussed in the section entitled "Acquisition" above. Although the Company financed a portion of the CCI acquisition with a bank term loan of $154,000, the outstanding principal on this bank term loan aggregated $122,000 as of October 2, 2004. As of November 8, 2004, the outstanding principal on such term loan was $92,000, a $30,000 reduction reflecting the Company's overall positive cash flows and the maturity and liquidation of additional marketable securities. As of November 8, 2004, minimum payments of outstanding principal that are required under terms of the bank loan are $5,334 in 2005 and $86,666 in 2006. The Company's current ratio (current assets divided by current liabilities) was 1.9 to 1 as of the end of third quarter 2004 as compared to 3.0 to 1 as of third quarter 2003 and 3.9 to 1 as of fourth quarter 2003. Net working capital was $108,409 as of the end of third quarter 2004 as compared to $188,412 and $180,818 as of the end of third quarter 2003 and fourth quarter 2003, respectively. Net working capital amounts include aggregate cash and cash equivalents and short-term investments of $60,206 as of the end of third quarter 2004 compared to $139,310 and $171,045 as of the end of third quarter 2003 and fourth quarter 2003, respectively. The decrease in cash and cash equivalents in the third quarter of 2004 reflects the acquisition of the CCI business on August 30, 2004. In addition, long-term investments, principally debt securities comprising municipal bonds, were $106,761 as of the end of third quarter 2004 as compared to $104,591 and $112,431 as of the end of third quarter 2003 and fourth quarter 2003, respectively. Net cash provided by operating activities was $18,115 in nine months 2004 compared to $27,201 in nine months 2003. The net cash used in 2004 operating activities principally reflects higher inventories and income taxes payable and deferred, as well as the payments of split dollar insurance premiums. -6C- Capital expenditures for nine months 2004 and 2003 were $10,825 and $9,272, respectively. Capital expenditures for the 2004 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 the nine months 2004 and 2003 were $11,222 and $10,803, respectively. The Company repurchased and retired $16,407 and $28,332 of its shares outstanding during nine months 2004 and 2003, 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 and related operating results 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; the overall competitive environment in the Company's industry, and the uncertainties associated with Section 404 of the Sarbanes Oxley Act with regard to assessment of the Company's internal control over financial reporting and the Company's ongoing compliance effort related thereto. 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 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 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, 2003. 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. -6D- 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 2, 2004 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 2, 2004 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.
(a) Total (b) Average (c) Total Number of Shares (d) Maximum Number (or Approximate Number of Price Paid per Purchased as Part of Dollar Value) of Shares that May Yet Shares Share Publicly Announced Plans Be Purchased Under the Plans Period Purchased Or Programs Or Programs ----------- -------------- ------------------------ ------------------------------------ JUL 4 TO JUL 31 -0- AUG 1 TO AUG 28 -0- AUG 29 TO OCT 2 -0- ------- 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 AND REPORTS ON FORM 8-K (a) Exhibits Exhibit 2.1 - Purchase Agreement dated August 11, 2004 among the Company, Concord Confections Inc. ("Concord"), certain of Concord's affiliates and Concord's stockholders* Exhibit 2.2 - First Amendment to Purchase Agreement dated August 27, 2004 among the Company, certain of the Company's affiliates, Concord, certain of Concord's affiliates and Concord's stockholders* Exhibit 10.1 - Loan Agreement dated August 27, 2004 between the Company and Bank of America, N.A. * Exhibit 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. *Incorporated by reference from the Company's 8-K filed on September 2, 2004 (b) Form 8-Ks Form 8-K was filed on September 2, 2004 reporting under Items 1.01, 2.03 and 9.01 the Company's completion of an asset purchase from Concord and certain of its affiliates and the entry by the Company into a loan agreement related to financing for such acquisition. Form 8-K was furnished on July 28, 2004 containing a press release announcing earnings for the second quarter 2004. 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 11, 2004 BY: /s/MELVIN J GORDON ------------ ------------------- Melvin J. Gordon Chairman of the Board Date: NOV 11, 2004 BY: /S/G HOWARD EMBER, JR. ------------ ----------------------- G. Howard Ember, Jr. Vice President - Finance -7-