UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
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
(Exact Name of Registrant as Specified in its Charter)
(State of Incorporation) | (I.R.S. Employer Identification No.) |
(Address of Principal Executive Offices) | (Zip Code) |
(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.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
` | Accelerated filer ☐ | Non-accelerated filer ☐ | Smaller reporting company | Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date (June 30, 2021).
Class | Outstanding | |
Common Stock, $0.69-4/9 par value | ||
Class B Common Stock, $0.69-4/9 par value |
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: |
| Trading Symbol |
| Name of each exchange on which registered: |
TOOTSIE ROLL INDUSTRIES, INC.
JUNE 30, 2021
INDEX
Page No. | ||
3-4 | ||
Condensed Consolidated Statements of Earnings and Retained Earnings | 5 | |
6 | ||
7 | ||
8-16 | ||
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 17-22 | |
22 | ||
22 | ||
24 | ||
24 | ||
24 | ||
25 | ||
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. See “Forward-Looking Statements” under Part I — Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Quarterly Report on Form 10-Q.
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TOOTSIE ROLL INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(in thousands) (Unaudited)
June 30, 2021 | December 31, 2020 | June 30, 2020 | |||||||
ASSETS | |||||||||
CURRENT ASSETS: | |||||||||
Cash and cash equivalents |
| $ | |
| $ | |
| $ | |
Restricted cash | | | | ||||||
Investments | | | | ||||||
Accounts receivable trade, less allowances of $ | | | | ||||||
Other receivables | | | | ||||||
Inventories: | |||||||||
Finished goods and work-in-process | | | | ||||||
Raw materials and supplies | | | | ||||||
Prepaid expenses | | | | ||||||
Total current assets | | | | ||||||
PROPERTY, PLANT AND EQUIPMENT, at cost: | |||||||||
Land | | | | ||||||
Buildings | | | | ||||||
Machinery and equipment | | | | ||||||
Construction in progress | | | | ||||||
Operating lease right-of-use assets | | | | ||||||
| | | |||||||
Less - accumulated depreciation | | | | ||||||
Net property, plant and equipment | | | | ||||||
OTHER ASSETS: | |||||||||
Goodwill | | | | ||||||
Trademarks | | | | ||||||
Investments | | | | ||||||
Split dollar officer life insurance | | | | ||||||
Prepaid expenses and other assets | | | | ||||||
Deferred income taxes | | | | ||||||
Total other assets | | | | ||||||
Total assets | $ | | $ | | $ | | |||
(The accompanying notes are an integral part of these statements.)
3
(in thousands except per share data) (Unaudited)
June 30, 2021 | December 31, 2020 | June 30, 2020 | |||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||||
CURRENT LIABILITIES: | |||||||||
Accounts payable |
| $ | |
| $ | |
| $ | |
Bank loans | | | | ||||||
Dividends payable | | | | ||||||
Accrued liabilities | | | | ||||||
Postretirement health care benefits | | | | ||||||
Operating lease liabilities | | | | ||||||
Deferred compensation | - | - | | ||||||
Income taxes payable | | | | ||||||
Total current liabilities | | | | ||||||
NONCURRENT LIABILITIES: | |||||||||
Deferred income taxes | | | | ||||||
Postretirement health care benefits | | | | ||||||
Industrial development bonds | | | | ||||||
Liability for uncertain tax positions | | | | ||||||
Operating lease liabilities | | | | ||||||
Deferred compensation and other liabilities | | | | ||||||
Total noncurrent liabilities | | | | ||||||
TOOTSIE ROLL INDUSTRIES, INC. SHAREHOLDERS’ EQUITY: | |||||||||
Common stock, $.69-4/9 par value - | | | | ||||||
Class B common stock, $.69-4/9 par value - | | | | ||||||
Capital in excess of par value | | | | ||||||
Retained earnings | | | | ||||||
Accumulated other comprehensive loss | ( | ( | ( | ||||||
Treasury stock (at cost) - | ( | ( | ( | ||||||
Total Tootsie Roll Industries, Inc. shareholders’ equity | | | | ||||||
Noncontrolling interests | ( | ( | ( | ||||||
Total equity | | | | ||||||
Total liabilities and shareholders’ equity | $ | | $ | | $ | | |||
(The accompanying notes are an integral part of these statements.)
4
TOOTSIE ROLL INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF
EARNINGS AND RETAINED EARNINGS
(in thousands except per share amounts) (Unaudited)
Quarter Ended | Year to Date Ended | |||||||||||
June 30, 2021 | June 30, 2020 | June 30, 2021 | June 30, 2020 | |||||||||
Net product sales |
| $ | |
| $ | |
| $ | |
| $ | |
Rental and royalty revenue | | | | | ||||||||
Total revenue | | | | | ||||||||
Product cost of goods sold | | | | | ||||||||
Rental and royalty cost | | | | | ||||||||
Total costs | | | | | ||||||||
Product gross margin | | | | | ||||||||
Rental and royalty gross margin | | | | | ||||||||
Total gross margin | | | | | ||||||||
Selling, marketing and administrative expenses | | | | | ||||||||
Earnings from operations | | | | | ||||||||
Other income (loss), net | | | | | ||||||||
Earnings before income taxes | | | | | ||||||||
Provision for income taxes | | | | | ||||||||
Net earnings | | | | | ||||||||
Less: net earnings (loss) attributable to noncontrolling interests | ( | ( | ( | ( | ||||||||
Net earnings attributable to Tootsie Roll Industries, Inc. | $ | | $ | | $ | | $ | | ||||
Net earnings attributable to Tootsie Roll Industries, Inc. per share | $ | $ | $ | $ | ||||||||
Dividends per share * | $ | $ | $ | $ | ||||||||
Average number of shares outstanding | | | | | ||||||||
Retained earnings at beginning of period | $ | | $ | | $ | | $ | | ||||
Net earnings attributable to Tootsie Roll Industries, Inc. | | | | | ||||||||
Cash dividends | ( | ( | ( | ( | ||||||||
Stock dividends | - | - | ( | ( | ||||||||
Retained earnings at end of period | $ | | $ | | $ | | $ | | ||||
*
(The accompanying notes are an integral part of these statements.)
5
TOOTSIE ROLL INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE EARNINGS
(in thousands except per share amounts) (Unaudited)
Quarter Ended | Year to Date Ended | |||||||||||
June 30, 2021 | June 30, 2020 | June 30, 2021 | June 30, 2020 | |||||||||
Net earnings |
| $ | |
| $ | |
| $ | |
| $ | |
Other comprehensive income (loss), before tax: | ||||||||||||
Foreign currency translation adjustments | | | | ( | ||||||||
Pension and postretirement reclassification adjustments: | ||||||||||||
Unrealized gains (losses) for the period on postretirement and pension benefits | - | - | - | - | ||||||||
Less: reclassification adjustment for (gains) losses to net earnings | ( | ( | ( | ( | ||||||||
Unrealized gains (losses) on postretirement and pension benefits | ( | ( | ( | ( | ||||||||
Investments: | ||||||||||||
Unrealized gains (losses) for the period on investments | ( | | ( | | ||||||||
Less: reclassification adjustment for (gains) losses to net earnings | ( | - | ( | - | ||||||||
Unrealized gains (losses) on investments | ( | | ( | | ||||||||
Derivatives: | ||||||||||||
Unrealized gains (losses) for the period on derivatives | | | | ( | ||||||||
Less: reclassification adjustment for (gains) losses to net earnings | ( | | ( | | ||||||||
Unrealized gains (losses) on derivatives | | | ( | | ||||||||
Total other comprehensive income (loss), before tax | ( | | ( | ( | ||||||||
Income tax benefit (expense) related to items of other comprehensive income | | ( | | ( | ||||||||
Total comprehensive earnings | | | | | ||||||||
Comprehensive earnings (loss) attributable to noncontrolling interests | ( | ( | ( | ( | ||||||||
Total comprehensive earnings attributable to Tootsie Roll Industries, Inc. | $ | | $ | | $ | | $ | | ||||
(The accompanying notes are an integral part of these statements.)
6
TOOTSIE ROLL INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) (Unaudited)
Year to Date Ended | ||||||
June 30, 2021 | June 30, 2020 | |||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||
Net earnings |
| $ | |
| $ | |
Adjustments to reconcile net earnings to net cash used in operating activities: | ||||||
Depreciation | | | ||||
Deferred income taxes | | ( | ||||
Amortization of marketable security premiums | | | ||||
Changes in operating assets and liabilities: | ||||||
Accounts receivable | | | ||||
Other receivables | | ( | ||||
Inventories | ( | ( | ||||
Prepaid expenses and other assets | ( | | ||||
Accounts payable and accrued liabilities | | | ||||
Income taxes payable | ( | | ||||
Postretirement health care benefits | ( | ( | ||||
Deferred compensation and other liabilities | | | ||||
Net cash provided by operating activities | | | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||
Capital expenditures | ( | ( | ||||
Purchases of trading securities | ( | ( | ||||
Sales of trading securities | | | ||||
Purchase of available for sale securities | ( | ( | ||||
Sale and maturity of available for sale securities | | | ||||
Net cash from (used in) investing activities | ( | ( | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||
Shares purchased and retired | ( | ( | ||||
Dividends paid in cash | ( | ( | ||||
Proceeds from bank loans | | | ||||
Repayment of bank loans | ( | ( | ||||
Net cash used in financing activities | ( | ( | ||||
Effect of exchange rate changes on cash | | ( | ||||
Increase (Decrease) in cash and cash equivalents | ( | ( | ||||
Cash, cash equivalents and restricted cash at beginning of year | | | ||||
Cash, cash equivalents and restricted cash at end of quarter | $ | | $ | | ||
Supplemental cash flow information: | ||||||
Income taxes paid/(received), net | $ | | $ | | ||
Interest paid | $ | | $ | | ||
Stock dividend issued | $ | | $ | | ||
(The accompanying notes are an integral part of these statements.)
7
TOOTSIE ROLL INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021
(in thousands except per share amounts) (Unaudited)
Note 1 — Significant Accounting Policies
General Information
Foregoing data has been prepared from the unaudited financial records of Tootsie Roll Industries, Inc. (the “Company”) and in the opinion of Management all adjustments, which are of a normal recurring nature, necessary for a fair statement of the results for the interim period have been reflected. Certain amounts previously reported have been reclassified 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 Form 10-K for the year ended December 31, 2020 (the “2020 Form 10-K”).
Results of operations for the period ended June 30, 2021 are not necessarily indicative of results to be expected for the year to end December 31, 2021 because of the seasonal nature of the Company’s operations. Historically, the third quarter has been the Company’s largest net product sales quarter due to pre-Halloween net product sales.
On March 11, 2020, the World Health Organization designated the recent novel coronavirus ("COVID-19") as a global pandemic. The Company continues to actively monitor COVID-19 and its potential impact on our operations and financial results. The impact that COVID-19 will have on our consolidated financial statements throughout 2021 and beyond remains uncertain and ultimately will be dictated by the length and severity of the pandemic and Covid-19 variants, the pace of the “reopening” of the economy and economic recovery, and federal, state, local and foreign government actions taken in response. The effects of Covid-19 pandemic are unprecedented, and therefore the Company is unable to determine its effects on its net product sales and net earnings for the balance of 2021 and beyond.
Revenue Recognition
The Company’s revenues, primarily net product sales, principally result from the sale of goods, reflect the consideration to which the Company expects to be entitled generally based on customer purchase orders. The Company records revenue based on a five-step model in accordance with Accounting Standards Codification ("ASC") Topic 606 which became effective January 1, 2018. Adjustments for estimated customer cash discounts upon payment, discounts for price adjustments, product returns, allowances, and certain advertising and promotional costs, including consumer coupons, are variable consideration and are recorded as a reduction of net product sales revenue in the same period the related net product sales are recorded. Such estimates are calculated using historical averages adjusted for any expected changes due to current business conditions and experience. A net product sale is recorded when the Company delivers the product to the customer, or in certain instances, the customer picks up the goods at the Company’s distribution center, and thereby obtains control of such product. Amounts billed and due from our customers are classified as accounts receivable trade on the balance sheet and require payment on a short-term basis. Accounts receivable trade are unsecured. Shipping and handling costs of $
Leases
The Company identifies leases by evaluating its contracts to determine if the contract conveys the right to use an identified asset for a stated period of time in exchange for consideration. The Company considers whether it can control the underlying asset and have the right to obtain substantially all of the economic benefits or outputs from the
8
asset. Leases with terms greater than 12 months are classified as either operating or finance leases at the commencement date. For these leases, we capitalize the present value of the minimum lease payments over the lease term as a right-of-use asset with an offsetting lease liability. The discount rate used to calculate the present value of the minimum lease payments is typically our incremental borrowing rate, as the rate implicit in the lease is generally not known or determinable. The lease term includes any noncancelable period for which the Company has the right to use the asset. Currently, all capitalized leases are classified as operating leases and the Company records rental expense on a straight-line basis over the term of the lease.
Recently Adopted Accounting Pronouncements
In March 2020, the FASB issued ASU 2020-04 which provides optional guidance for a limited time to ease the potential burden in accounting for reference rate reform. In January 2021, the FASB issued ASU 2021-1 which clarified the scope of ASU 2020-04. The new guidance provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts and hedging relationships that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. These amendments are effective immediately and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. The Company adopted ASU 2020-04 and ASU 2021-1in first quarter 2021. The adoption of these ASU’s did not have a material impact on the Company’s consolidated financial statements.
In December 2019, the FASB issued ASU No. 2019-12 which is designed to simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. ASU No. 2019-12 is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company adopted ASU 2019-12 in first quarter 2021. The adoption of the ASU did not have a material impact on the Company’s consolidated financial statements.
Note 2 — Average Shares Outstanding
The average number of shares outstanding for six months 2021 reflects aggregate stock purchases of
Note 3 — Income Taxes
The Company is subject to taxation in the U.S. and various state and foreign jurisdictions. The Company remains subject to examination by U.S. federal and state and foreign tax authorities for the years 2017 through 2019. The Company’s consolidated effective income tax rate was
9
NOTE 4—Share Capital and Capital In Excess of Par Value:
Capital in |
| ||||||||||||||||||
Class B | Excess |
| |||||||||||||||||
Common Stock | Common Stock | Treasury Stock | of Par |
| |||||||||||||||
| Shares |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount |
| Value |
| |||||
(000’s) | (000’s) | (000’s) |
| ||||||||||||||||
Balance at March 31, 2021 |
| | $ | |
| | $ | |
| | $ | ( | $ | | |||||
Issuance of |
| — |
| — |
| — |
| — |
| — |
| — |
| — | |||||
Conversion of Class B common shares to common shares |
| — |
| — |
| — |
| — |
| — |
| — |
| — | |||||
Purchase and retirement of common shares and other |
| ( |
| ( |
| — |
| — |
| — |
| — |
| ( | |||||
Balance at June 30, 2021 |
| | $ | |
| | $ | |
| | $ | ( | $ | | |||||
Balance at March 31, 2020 |
| | $ | |
| | $ | |
| | $ | ( | $ | | |||||
Issuance of |
| — |
| — |
| — |
| — |
| — |
| — |
| — | |||||
Conversion of Class B common shares to common shares |
| |
| |
| ( |
| ( |
| — |
| — |
| — | |||||
Purchase and retirement of common shares and other |
| ( |
| ( |
| - |
| — |
| — |
| — |
| ( | |||||
Balance at June 30, 2020 |
| | $ | |
| | $ | |
| | $ | ( | $ | | |||||
Balance at December 31, 2020 | | $ | |
| | $ | |
| | $ | ( | $ | | ||||||
Issuance of |
| | |
| | |
| | — | | |||||||||
Conversion of Class B common shares to common shares |
| — |
| — |
| — |
| — |
| — |
| — |
| — | |||||
Purchase and retirement of common shares and other |
| ( |
| ( |
| — |
| — |
| — |
| — |
| ( | |||||
Balance at June 30, 2021 |
| | $ | |
| | $ | |
| | $ | ( | $ | | |||||
Balance at December 31, 2019 | | $ | |
| | $ | |
| | $ | ( | $ | | ||||||
Issuance of |
| | |
| | |
| | — | | |||||||||
Conversion of Class B common shares to common shares |
| |
| |
| ( |
| ( |
| — |
| — |
| — | |||||
Purchase and retirement of common shares and other |
| ( |
| ( |
| — |
| — |
| — |
| — |
| ( | |||||
Balance at June 30, 2020 |
| | $ | |
| | $ | |
| | $ | ( | $ | | |||||
Note 5 — Fair Value Measurements
Current accounting guidance defines fair value as the price that would be received on the sale of an asset, or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Guidance requires disclosure of the extent to which fair value is used to measure financial assets and liabilities, the inputs utilized in calculating valuation measurements, and the effect of the measurement of significant unobservable inputs on earnings, or changes in net assets, as of the measurement date. Guidance establishes a three-level valuation hierarchy based upon the transparency of inputs utilized in the measurement and valuation of financial assets or liabilities as of the measurement date. Level 1 inputs include quoted prices for identical instruments and are the most observable. Level 2 inputs include quoted prices for similar assets and observable inputs such as interest rates, foreign currency exchange rates, commodity rates and yield curves. Level 3 inputs are not observable in the market and include Management’s own judgments about the assumptions market participants would use in pricing the asset or liability. The use of observable and unobservable inputs are reflected in the hierarchy assessment disclosed in the table below.
10
As of June 30, 2021, December 31, 2020 and June 30, 2020, the Company held certain financial assets that are required to be measured at fair value on a recurring basis. These included derivative hedging instruments related to the purchase of certain raw materials and foreign currencies, investments in trading securities and available for sale securities. The Company’s available for sale securities principally consist of corporate bonds.
The following table presents information about the Company’s financial assets and liabilities measured at fair value as of June 30, 2021, December 31, 2020 and June 30, 2020 and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value:
Estimated Fair Value June 30, 2021 | ||||||||||||
Total | Input Levels Used | |||||||||||
Fair Value | Level 1 | Level 2 | Level 3 | |||||||||
Cash and cash equivalents |
| $ | |
| $ | |
| $ | - |
| $ | - |
Available for sale securities | | | | - | ||||||||
Foreign currency forward contracts | | - | | - | ||||||||
Commodity futures contracts | | | - | - | ||||||||
Trading securities | | | | - | ||||||||
Total assets measured at fair value | $ | | $ | | $ | | $ | - | ||||
Estimated Fair Value December 31, 2020 | ||||||||||||
Total | Input Levels Used | |||||||||||
Fair Value | Level 1 | Level 2 | Level 3 | |||||||||
Cash and cash equivalents |
| $ | |
| $ | |
| $ | - |
| $ | - |
Available for sale securities | | | | - | ||||||||
Foreign currency forward contracts | | - | | - | ||||||||
Commodity futures contracts, net | | | - | - | ||||||||
Trading securities | | |
| | - | |||||||
Total assets measured at fair value | $ | | $ | | $ | | $ | - | ||||
Estimated Fair Value June 30, 2020 | ||||||||||||
Total | Input Levels Used | |||||||||||
Fair Value | Level 1 | Level 2 | Level 3 | |||||||||
Cash and cash equivalents |
| $ | |
| $ | |
| $ | - |
| $ | - |
Available for sale securities | | | | - | ||||||||
Foreign currency forward contracts | | - | | - | ||||||||
Commodity futures contracts | ( | ( | - | - | ||||||||
Trading securities | | | | - | ||||||||
Total assets measured at fair value | $ | | $ | | $ | | $ | - | ||||
The fair value of the Company’s industrial revenue development bonds at June 30, 2021, December 31, 2020 and June 30, 2020 were valued using Level 2 inputs which approximates the carrying value of $
11
Note 6 — Derivative Instruments and Hedging Activities
From time to time, the Company uses derivative instruments, including foreign currency forward contracts and commodity futures contracts to manage its exposures to foreign exchange and commodity prices. Commodity futures contracts are intended and effective as hedges of market price risks associated with the anticipated purchase of certain raw materials (primarily sugar). Foreign currency forward contracts are intended and effective as hedges of the Company’s exposure to the variability of cash flows, primarily related to the foreign exchange rate changes of products manufactured in Canada and sold in the United States, and periodic equipment purchases from foreign suppliers denominated in a foreign currency. The Company does not engage in trading or other speculative use of derivative instruments.
The Company recognizes all derivative instruments as either assets or liabilities at fair value in the Condensed Consolidated Statement of Financial Position. Derivative assets are recorded in other receivables and derivative liabilities are recorded in accrued liabilities. The Company uses hedge accounting for its foreign currency and commodity derivative instruments as discussed above. Derivatives that qualify for hedge accounting are designated as cash flow hedges by formally documenting the hedge relationships, including identification of the hedging instruments, the hedged items and other critical terms, as well as the Company’s risk management objectives and strategies for undertaking the hedge transaction.
Changes in the fair value of the Company’s cash flow hedges are recorded in accumulated other comprehensive loss, net of tax, and are reclassified to earnings in the periods in which earnings are affected by the hedged item. Substantially all amounts reported in accumulated other comprehensive loss for commodity derivatives are expected to be reclassified to cost of goods sold. Approximately $
The following table summarizes the Company’s outstanding derivative contracts and their effects on its Condensed Consolidated Statements of Financial Position at June 30, 2021, December 31, 2020 and June 30, 2020:
June 30, 2021 | |||||||||
Notional |
|
|
|
| |||||
Amounts | Assets | Liabilities | |||||||
Derivatives designated as hedging instruments: | |||||||||
Foreign currency forward contracts | $ | | $ | | $ | - | |||
Commodity futures contracts | | | - | ||||||
Total derivatives | $ | | $ | - | |||||
December 31, 2020 | |||||||||
Notional |
|
|
|
| |||||
Amounts | Assets | Liabilities | |||||||
Derivatives designated as hedging instruments: | |||||||||
Foreign currency forward contracts | $ | | $ | | $ | — | |||
Commodity futures contracts | |
| |
| — | ||||
Total derivatives | $ | | $ | - | |||||
June 30, 2020 | |||||||||
Notional |
|
|
|
| |||||
Amounts | Assets | Liabilities | |||||||
Derivatives designated as hedging instruments: | |||||||||
Foreign currency forward contracts | $ | | $ | | $ | - | |||
Commodity futures contracts | | | ( | ||||||
Total derivatives | $ | | $ | ( | |||||
12
The effects of derivative instruments on the Company’s Condensed Consolidated Statements of Earnings and Retained Earnings and the Condensed Consolidated Statements of Comprehensive Earnings for periods ended June 30, 2021 and June 30, 2020 are as follows:
For Quarter Ended June 30, 2021 | |||||||||
|
|
|
| Gain (Loss) | |||||
Gain (Loss) | on Amount Excluded | ||||||||
Gain (Loss) | Reclassified from | from Effectiveness | |||||||
Recognized | Accumulated OCI | Testing Recognized | |||||||
in OCI | into Earnings | in Earnings | |||||||
Foreign currency forward contracts | $ | | $ | | $ | - | |||
Commodity futures contracts | | | - | ||||||
Total | $ | | $ | | $ | - | |||
For Quarter Ended June 30, 2020 | |||||||||
|
|
|
| Gain (Loss) | |||||
Gain (Loss) | on Amount Excluded | ||||||||
Gain (Loss) | Reclassified from | from Effectiveness | |||||||
Recognized | Accumulated OCI | Testing Recognized | |||||||
in OCI | into Earnings | in Earnings | |||||||
Foreign currency forward contracts | $ | | $ | ( | $ | - | |||
Commodity futures contracts | | - | - | ||||||
Total | $ | | $ | ( | $ | - | |||
For Year to Date Ended June 30, 2021 | |||||||||
|
|
|
| Gain (Loss) | |||||
Gain (Loss) | on Amount Excluded | ||||||||
Gain (Loss) | Reclassified from | from Effectiveness | |||||||
Recognized | Accumulated OCI | Testing Recognized | |||||||
in OCI | into Earnings | in Earnings | |||||||
Foreign currency forward contracts | $ | | $ | | $ | - | |||
Commodity futures contracts | | | - | ||||||
Commodity option contracts | - | - | - | ||||||
Total | $ | | $ | | $ | - | |||
For Year to Date Ended June 30, 2020 | |||||||||
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|
|
| Gain (Loss) | |||||
Gain (Loss) | on Amount Excluded | ||||||||
Gain (Loss) | Reclassified from | from Effectiveness | |||||||
Recognized | Accumulated OCI | Testing Recognized | |||||||
in OCI | into Earnings | in Earnings | |||||||
Foreign currency forward contracts | $ | | $ | ( | $ | - | |||
Commodity futures contracts | ( | ( | - | ||||||
Total | $ | ( | $ | ( | $ | - | |||
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Note 7 — Pension Plans
Beginning in 2012, the Company received periodic notices from the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union Pension Plan (Plan), a multi-employer defined benefit pension plan for certain Company union employees, that the Plan’s actuary certified the Plan to be in “critical status”, as defined by the Pension Protection Act (PPA) and the Pension Benefit Guaranty Corporation (PBGC); and that a plan of rehabilitation was adopted by the trustees of the Plan in 2012. Beginning in 2015, the Company received new annual notices that the Plan was reclassified to “critical and declining status”, as defined by the PPA and PBGC, for the plan year beginning January 1, 2015. A designation of “critical and declining status” implies that the Plan is expected to become insolvent in the next
The Company has been advised that its withdrawal liability would have been $
The amended rehabilitation plan, which continues, requires that employer contributions include
The Company is currently unable to determine the ultimate outcome of the above discussed matter and therefore is unable to determine the effects on its consolidated financial statements, but the ultimate outcome or the effects of any modifications to the current amended rehabilitation plan could be material to its consolidated results of operations or cash flows in one or more future periods.
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Note 8 — Accumulated Other Comprehensive Earnings (Loss)
Accumulated Other Comprehensive Earnings (Loss) consists of the following components:
|
|
|
|
| Accumulated | |||||||||||||
Foreign | Foreign | Postretirement | Other | |||||||||||||||
Currency | Currency | Commodity | and Pension | Comprehensive | ||||||||||||||
Translation | Investments | Derivatives | Derivatives | Benefits | Earnings (Loss) | |||||||||||||
Balance at March 31, 2021 | $ | ( |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | ( | |
Other comprehensive earnings (loss) before reclassifications | | ( | | | - | | ||||||||||||
Reclassifications from accumulated other comprehensive loss | - | ( | ( | ( | ( | ( | ||||||||||||
Other comprehensive earnings (loss) net of tax | | ( | ( | | ( | | ||||||||||||
Balance at June 30, 2021 | $ | ( | $ | | $ | | $ | | $ | | $ | ( | ||||||
Balance at March 31, 2020 | $ | ( |
| $ | |
| $ | ( |
| $ | ( |
| $ | |
| $ | ( | |
Other comprehensive earnings (loss) before reclassifications | | | | | - | | ||||||||||||
Reclassifications from accumulated other comprehensive loss | - | - | | - | ( | ( | ||||||||||||
Other comprehensive earnings (loss) net of tax | | | | | ( | | ||||||||||||
Balance at June 30, 2020 | $ | ( | $ | | $ | | $ | ( | $ | | $ | ( | ||||||
Balance at December 31, 2020 |
| $ | ( | $ | | $ | | $ | | $ | | $ | ( | |||||
Other comprehensive earnings (loss) before reclassifications | | ( | | | - | | ||||||||||||
Reclassifications from accumulated other comprehensive loss | - | ( | ( | ( | ( | ( | ||||||||||||
Other comprehensive earnings (loss) net of tax | | ( | ( | ( | ( | ( | ||||||||||||
Balance at June 30, 2021 | $ | ( | $ | | $ | | $ | | $ | | $ | ( | ||||||
Balance at December 31, 2019 | $ | ( | $ | | $ | | $ | | $ | | $ | ( | ||||||
Other comprehensive earnings (loss) before reclassifications | ( | | | ( | - | ( | ||||||||||||
Reclassifications from accumulated other comprehensive loss | - | - | | | ( | ( | ||||||||||||
Other comprehensive earnings (loss) net of tax | ( | | | ( | ( | ( | ||||||||||||
Balance at June 30, 2020 | $ | ( | $ | | $ | | $ | ( | $ | | $ | ( | ||||||
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The amounts reclassified from accumulated other comprehensive income (loss) consisted of the following:
Details about Accumulated Other | Quarter Ended | Year to Date Ended | Location of (Gain) Loss | |||||||||||
Comprehensive Income Components | June 30, 2021 | June 30, 2020 | June 30, 2021 | June 30, 2020 | Recognized in Earnings | |||||||||
Investments | $ | ( | $ | - | $ | ( | $ | - | Other income, net | |||||
Foreign currency derivatives | ( | | ( | | Other income, net | |||||||||
Commodity derivatives | ( | - | ( | | ||||||||||
Postretirement and pension benefits | ( | ( | ( | ( | Other income, net | |||||||||
Total before tax | ( | ( | ( | ( | ||||||||||
Tax (expense) benefit | | | | | ||||||||||
Net of tax | $ | ( | $ | ( | $ | ( | $ | ( | ||||||
Note 9 — Restricted Cash
Restricted cash comprises certain cash deposits of the Company’s Spanish subsidiary with international banks that are pledged as collateral for letters of credit and bank borrowings.
Note 10 — Bank Loans
Bank loans consist of short term (less than
Note 11 — Leases
The Company leases certain buildings, land and equipment that are classified as operating leases. These leases have remaining lease terms of up to approximately
The Company, as lessor, rents certain commercial real estate to third-party lessees. The June 30, 2021 and 2020 cost related to these leased properties was $
Note 12 — Contingencies
In the ordinary course of business, the Company is, from time to time, subject to a variety of active or threatened legal proceedings and claims. There are also potential claims and employer liability which could result in litigation, including defense costs, relating to the Covid-19 pandemic. While it is not possible to predict the outcome of such matters with certainty, in the Company’s opinion, both individually and in the aggregate, they are not expected to have a material effect on the Company’s financial condition, results of operations or cash flows.
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Note 13 — Subsequent Event
Subsequent to June 30, 2021, the Company received $
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This financial review discusses the Company’s financial condition, results of operations, liquidity and capital resources and other matters. Dollars are presented in thousands, except per share amounts. This review should be read in conjunction with the accompanying Condensed Consolidated Financial Statements and related notes included in this Form 10-Q and with the Company’s Consolidated Financial Statements and related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s Form 10-K for the year ended December 31, 2020 (the “2020 Form 10-K”).
Net product sales were $114,560 in second quarter 2021 compared to $79,796 in second quarter 2020, an increase of $34,764 or 43.6%. First half 2021 net product sales were $216,355 compared to $182,599 in first half 2020, an increase of $33,756 or 18.5%. Domestic (U.S.) net product sales in second quarter and first half 2021 increased 39.3% and 15.5%, respectively, compared to the corresponding period in the prior year, and, foreign net product sales, including exports to foreign markets, increased 103.5% and 59.7%, respectively, compared to the corresponding periods in the prior year. Second quarter sales reflect effective sales and marketing programs as the economy continues to recover and “re-open” from the adverse effects of the Covid-19 pandemic. The Covid-19 pandemic curtailed and limited access to certain channels of trade where the Company has historically sold its products. Response to this pandemic resulted in the disruption and changes in lifestyles and shopping habits which has adversely affected planned consumer purchases of the Company’s products for “sharing” and “give away” occasions. As the effects of the pandemic subsided throughout first half 2021, the Company had continuing improvement in customer orders and sales. Second quarter 2021 sales also exceeded second quarter 2019 sales by 8% which provides a quarterly sales comparison prior to the pandemic, and first half 2021 sales were 4% ahead of first half 2019 sales.
Product cost of goods sold were $75,948 in second quarter 2021 compared to $50,379 in second quarter 2020, and first half 2021 product cost of goods sold were $141,513 compared to $116,822 in first half 2020. Product cost of goods sold includes $263 and $339 of certain deferred compensation expenses in second quarter 2021 and 2020, respectively, and $416 and $20 of certain deferred compensation expenses in first half 2021 and 2020, respectively. These deferred compensation expenses principally result from the changes in the market value of investments and investment income from trading securities relating to compensation deferred in previous years and are not reflective of current operating results. Adjusting for the aforementioned, product cost of goods sold increased from $50,040 in second quarter 2020 to $75,685 in second quarter 2021, an increase of $25,645 or 51.2%; and increased from $116,802 in first half 2020 to $141,097 in first half 2021, an increase of $24,295 or 20.8%. As a percentage of net product sales, adjusted product cost of goods sold was 66.1% and 62.7% in second quarter 2021 and 2020, respectively, an unfavorable increase of 3.4 percentage points; and adjusted product cost of goods sold was 65.2% and 64.0% in first half 2021 and 2020, respectively, an unfavorable increase of 1.2 percentage points. Second quarter and first half 2021 adjusted product cost of goods sold as a percentage of sales were adversely affected by increasing costs for ingredients, packaging materials, and certain manufacturing supplies. These increased costs and expenses were more pronounced in second quarter 2021, and we expect these costs to remain at elevated levels for the balance of the year and into 2022. Second quarter product costs of goods sold were also adversely affected by higher than expected sales demand which resulted in additional costs related to our efforts to meet this higher demand. Such higher costs include additional overtime and the scheduling of additional production shifts to meet this higher demand.
Certain cost and expense reductions, which include Company initiatives to reduce costs, mitigated some of the cost increase in adjusted product cost of goods sold in second quarter and first half 2021 when compared to the corresponding periods in the prior year. In response to these higher costs in 2021, the confectionary industry has announced increases in selling prices in order to restore margins, and we have followed with some price increases as well. These price increases will be phased in during the balance of 2021. The Company is focused on the longer term and therefore is continuing to make investments in plant manufacturing operations to meet new consumer and
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customer demands, achieve product quality improvements, increase operational efficiencies and provide value to consumers.
Selling, marketing and administrative expenses were $32,378 in second quarter 2021 compared to $29,559 in second quarter 2020, and first half 2021 selling, marketing and administrative expenses were $59,187 compared to $45,831 in first half 2020. Selling, marketing and administrative expenses include $5,208 and $9,079 of certain deferred compensation expenses in second quarter 2021 and 2020, respectively, and $8,244 and $23 of certain deferred compensation expenses in first half 2021 and 2020, respectively. As discussed above, these expenses principally result from changes in the market value of investments and investment income from trading securities relating to compensation deferred in previous years, and are not reflective of current operating results. Adjusting for the aforementioned deferred compensation expenses, selling, marketing and administrative expenses increased from $20,480 in second quarter 2020 to $27,170 in second quarter 2021, an increase of $6,690 or 32.7%; and selling, marketing and administrative expenses increased from $45,808 in first half 2020 to $50,943 in first half 2021 an increase of $5,135 or 11.2%. As a percentage of net product sales, adjusted selling, marketing and administrative expenses decreased from 25.7% in second quarter 2020 to 23.7% in second quarter 2021, a favorable decrease of 2.0 percentage points as a percent of net product sales, and adjusted selling, marketing and administrative expenses decreased from 25.1% in first half 2020 to 23.5% in first half 2021, a favorable decrease of 1.6 percentage points as a percent of net sales. The decrease in adjusted selling, marketing and administrative expenses as a percentage of net product sales in second quarter and first half 2021 reflects the benefits of certain operational changes and expense reduction initiatives, as well as reduced business travel due to the Covid-19 pandemic.
Selling, marketing and administrative expenses include $12,437 and $8,397 for customer freight, delivery and warehousing expenses in second quarter 2021 and 2020, respectively, an increase of $4,040 or 48.1%, and $22,576 and $19,069 in first half 2021 and 2020, respectively, an increase of $3,507 or 18.4%. These expenses were 10.9% and 10.5% of net product sales in second quarter 2021 and 2020, respectively, and were 10.4% and 10.4% of net product sales in first half 2021 and 2020, respectively. The aforementioned increase in second quarter 2021 reflects increasing costs for over-the-road carriers relating to customer freight and delivery, including higher diesel fuel prices. We expect these higher freight and delivery costs to also continue through the balance of 2021.
Earnings from operations were $6,904 in second quarter 2021 compared to $493 in second quarter 2020, and were $17,314 in first half 2021 compared to $21,237 in first half 2020. Earnings from operations include $5,471 and $9,418 of certain deferred compensation expenses in second quarter 2021 and 2020, respectively, and include $8,660 and $43 of certain deferred compensation expenses in first half 2021 and 2020, respectively, which are discussed above. Adjusting for these deferred compensation costs and expenses, adjusted earnings from operations were $12,375 and $9,911 in second quarter 2021 and 2020, respectively, an increase of $2,464 or 24.9%; and adjusted operating earnings were $25,974 and $21,280 in first half 2021 and 2020, respectively, an increase of $4,694 or 22.1%. The Company’s increase in second quarter and first half 2021 sales, as discussed above, were the principal drivers of these increased adjusted operating earnings in the respective periods.
As a percentage of net product sales, these adjusted operating earnings were 10.8% and 12.4% in second quarter 2021 and 2020, respectively, an unfavorable decrease of 1.6 percentage points; and as a percentage of net product sales, these adjusted operating earnings were 12.0% and 11.7% in first half 2021 and 2020, respectively, a favorable increase of 0.3 percentage points as a percentage of net product sales. The decrease in adjusted operating earnings as a percent of sales in second quarter 2021 principally reflects the increasing costs and expenses discussed above, including additional costs and expense in meeting higher sales demand.
Management believes the comparisons presented in the preceding paragraphs, after adjusting for changes in deferred compensation, are more reflective of the underlying operations of the Company.
Other income, net was $6,244 in second quarter 2021 compared to $9,727 in second quarter 2020, and $10,060 in first half 2021 compared to $4,233 in first half 2020. Other income, net for second quarter 2021 and 2020 includes net gains and investment income of $5,471 and $9,418, respectively, on trading securities which provide an economic hedge of the Company’s deferred compensation liabilities; and other income, net for first half 2021 and 2020 includes net gains and investment income of $8,660 and $43, respectively, on trading securities which provide an economic hedge of the Company’s deferred compensation liabilities. These changes in market values were substantially offset by a like amount of deferred compensation expense included in product cost of goods sold and selling, marketing, and
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administrative expenses in the respective periods as discussed above. Other income, net for second quarter 2021 and 2020 includes investment income on available for sale securities of $670 and $920 in 2021 and 2020, respectively; and other income, net for first half 2021 and 2020 includes investment income on available for sale securities of $1,386 and $2,101 in 2021 and 2020, respectively. Other income, net also includes pre-tax gain (loss) on foreign exchange of $(268) and $(849) in second quarter 2021 and 2020, respectively, and $(235) and $1,661 in first half 2021 and 2020, respectively.
The consolidated effective tax rates were 25.5% and 27.8% in second quarter 2021 and 2020, respectively, and 24.9% and 24.0% in first half 2021 and 2020, respectively. The Company’s deferred income taxes at June 30, 2021 include $33,444 of U.S. federal deferred income tax liabilities. Should certain proposed U.S. legislation to increase corporate income taxes become law, the Company would record non-cash charge to earnings to reflect the tax effect of higher federal corporate income taxes on its deferred income tax liability effective as of the date that such legislation become law.
Net earnings attributable to Tootsie Roll Industries, Inc. were $9,794 (after $2 net loss attributed to non-controlling interests) in second quarter 2021 compared to $7,388 (after $6 net loss attributed to non-controlling interests) in second quarter 2020, and earnings per share were $0.14 and $0.11 in second quarter 2021 and 2020, respectively, an increase of $0.03 per share, or 27.3%. First half 2021 net earnings attributable to Tootsie Roll Industries, Inc. were $20,561 (after $6 net loss attributed to non-controlling interests) compared to first half 2020 net earnings of $19,370 (after $12 net loss attributed to non-controlling interests), and net earnings per share were $0.30 and $0.28 in first half 2021 and first half 2020, respectively, an increase of $0.02 per share or 7.1%. First half 2021 includes after-tax foreign exchange losses of $176 compared to significant after-tax foreign exchange gains of $1,220 or $0.02 per share in first half 2020, which adversely affects the comparison of first half 2021 net earnings with 2020. Earnings per share attributable to Tootsie Roll Industries, Inc. for second quarter and first half 2021 benefited from the reduction in average shares outstanding resulting from purchases in the open market by the Company of its common stock. Average shares outstanding decreased from 68,641 at second quarter 2020 to 67,564 at second quarter 2021, and from 68,751 in first half 2020 to 67,705 in first half 2021.
Goodwill and intangibles, principally trademarks, are assessed annually as of December 31 or whenever events or circumstances indicate that the carrying values may not be recoverable from future cash flows. The Company has not identified any triggering events, as defined, or other adverse information that would indicate a material impairment of its goodwill or intangibles in first half 2021. The Company’s trademarks have indefinite lives and Company management believes that any adverse effects of the Covid-19 pandemic on net product sales are temporary and do not significantly affect our business model and long-term strategy. Therefore, we do not consider COVID-19 to be a triggering event to accelerate our annual impairments testing. There were no impairments in the comparative first half 2020 period or in calendar year 2020. Although Company management has not identified any trigging events at this time relating to its intangibles, the ultimate effects of the Covid-19 pandemic, including possible longer term effects on consumer lifestyles and behavior, could change this assessment in the future, as discussed below and as outlined in the Company’s risk factors discussed on Form 10-K for the year ended December 31, 2020.
Beginning in 2012, the Company received periodic notices from the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union Pension Plan (Plan), a multi-employer defined benefit pension plan for certain Company union employees, that the Plan’s actuary certified the Plan to be in “critical status”, as defined by the Pension Protection Act (PPA) and the Pension Benefit Guaranty Corporation (PBGC); and that a plan of rehabilitation was adopted by the trustees of the Plan in 2012. Beginning in 2015, the Company received new annual notices that the Plan was reclassified to “critical and declining status”, as defined by the PPA and PBGC, for the plan year beginning January 1, 2015, and that the Plan was projected to have an accumulated funding deficiency for the 2017 through 2024 plan years. A designation of “critical and declining status” implies that the Plan is expected to become insolvent in the next 20 years. The Company has continued to receive annual notices each year (2016 to 2021) that this Plan remains in “critical and declining status” and is projected to become insolvent within the next 20 years. These notices have also advised that the Plan trustees were considering the reduction or elimination of certain retirement benefits and may seek assistance from the PBGC. Plans in “critical and declining status” may elect to suspend (or permanently) some benefits payable to all categories of participants, including retired participants, except retirees that are disabled
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or over the age of 80. Suspensions must be equally distributed and cannot drop below 110% of what would otherwise be guaranteed by the PBGC.
Based on these updated notices, the Plan’s funded percentage (plan investment assets as a percentage of plan liabilities), as defined, were 48.3%, 50.4%, and 51.6% as of the most recent valuation dates available, January 1, 2020, 2019, and 2018, respectively (these valuation dates are as of the beginning of each Plan year). These funded percentages are based on actuarial values, as defined, and do not reflect the actual market value of Plan investments as of these dates. If the market value of investments had been used as of January 1, 2020, the funded percentage would be 51.6% (not 48.3%). As of the January 1, 2020 valuation date (most recent valuation available), only 16% of Plan participants were current active employees, 53% were retired or separated from service and receiving benefits, and 31% were retired or separated from service and entitled to future benefits. The number of current active employee Plan participants as of January 1, 2020 fell 4% from the previous year and 17% over the past two years. When compared to the Plan valuation date of January 1, 2011 (nine years earlier), current active employee participants have declined 49%, whereas participants who were retired or separated from service and receiving benefits increased 4% and participants who were retired or separated from service and entitled to future benefits increased 12%.
The Company has been advised that its withdrawal liability would have been $99,300, $99,800 and $81,600 if it had withdrawn from the Plan during 2020, 2019 and 2018, respectively. The Company’s relative share of the Plan’s contribution base, driven by employer withdrawals, has increased for the last several years, and management believes that this trend could continue indefinitely which will continue to add upward pressure on the Company’s withdrawal liability. In addition, the overall reduction in interest rates in 2020, may increase the value of vested benefits and may increase the Company’s withdrawal liability for 2021.
Based on the Company’s updated actuarial study and certain provisions in ERISA and the law relating to withdrawal liability payments, management believes that the Company’s liability would likely be limited to twenty annual payments of $2,958 which have a present value in the range of $34,700 to $49,300 depending on the interest rate used to discount these payments. While the Company’s actuarial consultant does not believe that the Plan will suffer a future mass withdrawal (as defined in the Plan) of participating employers, in the event of a mass withdrawal, the Company’s annual withdrawal payments would theoretically be payable in perpetuity. Based on the Company’s updated actuarial study, the present value of such perpetuities is in the range of $48,500 to $150,900 and would apply in the unlikely event that substantially all employers withdraw from the Plan. The aforementioned is based on a range of valuations and interest rates, which the Company’s actuary has advised is provided under the statute. Should the Company actually withdraw from the Plan at a future date, a higher withdrawal liability than the above discussed amounts, could be payable to the Plan.
The Company and the union concluded a new labor contract in 2018 which requires the Company’s continued participation in this Plan through September 2022. The amended rehabilitation plan, which also continues, required that employer contributions include 5% compounded annual surcharge increases each year for an unspecified period of time beginning in 2012 as well as certain plan benefit reductions. In fourth quarter 2020, the Plan Trustees advised the Company that the surcharges would no longer increase and therefore be “frozen” at the rates and amounts in effect as of December 31, 2020 provided that the local bargaining union and the Company executed a formal consent agreement by March 31, 2021. The Trustees advised that they have concluded that continuing increases in surcharges would likely have a long-term adverse effect on the solvency of the Plan. The Trustees further concluded that additional increases would result in increasing financial hardships and withdrawals of participating employers, and that this change will not have a material effect on the Plan’s insolvency date. During first quarter 2021, the local bargaining union and the Company executed this agreement which resulted in the “freezing” of such surcharge rates as of December 31, 2020.
The Company’s pension expense for this Plan for first half 2021 and 2020 was $1,557 and $1,504, respectively ($2,866 and $2,961 for twelve months 2020 and 2019, respectively). The aforementioned expense includes surcharges (reflecting the “frozen” surcharge rate) of $549 and $530 for first half 2021 and 2020, respectively ($1,010 and $948 for twelve months 2020 and 2019, respectively), as required under the amended plan of rehabilitation.
Company Management understands that the U.S. American Rescue Plan Act of 2021 legislation passed in first quarter 2021 provides financial assistance to shore up struggling multi-employer plans and forestall insolvency through 2051 for plans in “critical and declining status”. The Company continues to study this legislation with its consulting actuary
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to determine its effects on the Plan and Company withdrawal liability. This is a complex area, however, based on an initial assessment by the Company’s actuary, the Company does not believe that this legislation will result in a material reduction in its withdrawal liability. Nonetheless, the Company is currently unable to determine the ultimate outcome of the above discussed multi-employer union pension matter and therefore is unable to determine the effects on its consolidated financial statements, but the ultimate outcome could be material to its consolidated results of operations or cash flows in one or more future periods. See also Note 7 in the Company’s Consolidated Financial Statements on Form 10-K for the year ended December 31, 2020.
The Company continues to actively monitor Covid-19, including developing variants, and its potential impact on our operations and financial results, prioritizing employee health and safety. Because the Company has a sizable investment in marketable securities (see Liquidity and Capital Resources section above) the Company continues to be well positioned financially to respond to any further adverse effects of this pandemic, and Covid-19 variants, in the short-term, as well as for a longer period of time if necessary.
LIQUIDITY AND CAPITAL RESOURCES
Net cash flows provided by operating activities were $10,778 and $10,880 in first half 2021 and 2020, respectively, an unfavorable decrease of $102. First half 2021 cash flows from operating activities principally benefited from higher net earnings, lower finished goods inventories at June 30, 2021 reflecting higher than planned demand, the timing of production of finished goods, and changes in accounts payable and accrued liabilities in the comparative periods. The aforementioned increases were partially offset by changes in accounts receivable reflecting the timing of net product sales and collections of accounts receivable trade, and changes in income taxes payable, including estimated tax payments in the comparative periods.
Net cash used in investing activities was $52,060 in first half 2021 compared to $17,271 in first half 2020. Cash flows used in investing activities reflect $58,154 and $53,269 of purchases of available for sale securities during first half 2021 and 2020, respectively, and $19,798 and $44,466 of sales and maturities of available for sale securities during first half 2021 and 2020, respectively. First half 2021 and 2020 investing activities include capital expenditures of $12,327 and $6,410, respectively. The Company has committed approximately $25,000 to a rehabilitation upgrade and expansion of one of its manufacturing plants in the U.S. The Company spent approximately $8,000 and $6,000 in 2021 and 2020, respectively, on the aforementioned project. Company management expects future cash outlays for this project to approximate $7,000 during the second half of 2021 and $1,000 in 2022. All capital expenditures are to be funded from the Company’s cash flow from operations and internal sources including available for sale securities.
The Company’s consolidated financial statements include bank borrowings of $986 and $864 at June 30, 2021 and 2020, respectively, all of which relates to its Spanish subsidiary. The Company had no other outstanding bank borrowings at June 30, 2021.
Financing activities include Company common stock purchases and retirements of $17,181 and $12,959 in first half 2021 and 2020, respectively. Cash dividends of $12,034 and $11,853 were paid in first half 2021 and 2020, respectively.
The Company’s current ratio (current assets divided by current liabilities) was 3.7 to 1 at June 30, 2021 compared to 4.6 to 1 at December 31, 2020 and 3.8 to 1 at June 30, 2020. Net working capital was $201,867 at June 30, 2021 compared to $250,851 and $238,517 at December 31, 2020 and June 30, 2020, respectively. The aforementioned net working capital amounts are principally reflected in aggregate cash and cash equivalents and short-term investments of $139,201 at June 30, 2021 compared to $208,931 and $186,385 at December 31, 2020 and June 30, 2020, respectively. In addition, long term investments, principally debt securities comprising corporate bonds, were $264,693 at June 30, 2021, as compared to $220,020 and $186,057 at December 31, 2020 and June 30, 2020, respectively. Aggregate cash and cash equivalents and short and long-term investments were $403,894, $428,951, and $372,442, at June 30, 2021, December 31, 2020 and June 30, 2020, respectively. The aforementioned includes $83,867, $73,828, and $78,285 at June 30, 2021, December 31, 2020 and June 30, 2020, respectively, relating to trading securities which are used as an economic hedge for the Company’s deferred compensation liabilities. Investments in available for sale securities, primarily high quality corporate bonds, that matured during first half 2021 and 2020 were generally used to purchase the Company’s common stock or were replaced with debt securities of similar maturities.
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The Company periodically contributes to a VEBA trust, managed and controlled by the Company, to fund the estimated future costs of certain employee health, welfare and other benefits. The Company is currently using these VEBA funds to pay the actual cost of such benefits through most of 2022. The VEBA trust held $7,549, $8,272 and $10,639 of aggregate cash and cash equivalents at June 30, 2021, December 31, 2020 and June 30, 2020, respectively. This asset value is included in prepaid expenses and long-term other assets in the Company’s Consolidated Statement of Financial Position. These assets are categorized as Level 2 within the fair value hierarchy.
ACCOUNTING PRONOUNCEMENTS
See Note 1 of the Company’s Condensed Consolidated Financial Statements.
FORWARD-LOOKING STATEMENTS
This discussion and certain other sections contain forward-looking statements that are based largely on the Company’s current expectations and are made pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by the use of words such as “anticipated,” “believe,” “expect,” “intend,” “estimate,” “project,” “plan” and other words of similar meaning in connection with a discussion of future operating or financial performance and are subject to certain factors, risks, trends and uncertainties that could cause actual results and achievements to differ materially from those expressed in the forward-looking statements. Such factors, risks, trends and uncertainties, which in some instances are beyond the Company’s control, include the overall competitive environment in the Company’s industry, changes in assumptions and judgments discussed above under the heading “Significant Accounting Policies and Estimates,” and factors identified and referred to above under the heading “Risk Factors” in this report and under the heading “Risk Factors” in the Company’s 2020 Form 10-K.
The risk factors identified and referred to above, including the effects of the Covid-19 pandemic and variants, are believed to be significant factors, but not necessarily all of the significant factors that could cause actual results to differ from those expressed in any forward-looking statement. Readers are cautioned not to place undue reliance on such forward-looking statements, which are made only as of the date of this report. The Company undertakes no obligation to update such forward-looking statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to various market risks, including fluctuations in and sufficient availability of sugar, corn syrup, edible oils, including palm oils, cocoa, dextrose, milk and whey, and gum-base input ingredients and packaging, and fuel costs principally relating to freight and delivery fuel surcharges. The Company is exposed to exchange rate fluctuations in the Canadian dollar which is the currency used for a portion of the raw material and packaging material costs and all labor, benefits and local plant operating costs at its Canadian plants. The Company is exposed to exchange rate fluctuations in Mexico, Canada, and Spain where its subsidiaries sell products in their local currencies. The Company invests in securities with maturities dates of up to approximately three years which are generally held to maturity, and variable rate demand notes where interest rates are generally reset weekly, all of which limits the Company’s exposure to interest rate fluctuations. There have been no material changes in the Company’s market risks that would significantly affect the disclosures made in the Form 10-K for the year ended December 31, 2020.
ITEM 4. CONTROLS AND PROCEDURES
Under the supervision and with the participation of Management, the Chief Executive Officer and Chief Financial Officer of the Company have evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of June 30, 2021 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.
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There has been no change in the Company’s internal control over financial reporting that occurred during the Company’s fiscal quarter ended June 30, 2021 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Information on legal proceedings is included in Note 12 to the Condensed Consolidated Financial Statements.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table summarizes the Company’s purchases of its common stock during the quarter ended June 30, 2021:
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| Approximate Dollar | |||
(a) Total | Shares | Value of Shares that | |||||||
Number of | (b) Average | Purchased as Part of | May Yet Be Purchased | ||||||
Shares | Price Paid per | Publicly Announced Plans | Under the Plans | ||||||
Period | Purchased | Share | Or Programs | or Programs | |||||
Apr 1 to Apr 30 | 104,985 | $ | 32.76 | Not Applicable | Not Applicable | ||||
May 1 to May 31 | 142,446 | 31.81 | Not Applicable | Not Applicable | |||||
Jun 1 to Jun 30 | 54,783 | 32.42 | Not Applicable | Not Applicable | |||||
Total | 302,214 | $ | 32.25 | Not Applicable | Not Applicable | ||||
While the Company does not have a formal or publicly announced stock purchase program, the Company’s board of directors periodically authorizes a dollar amount for share purchases. The treasurer executes share purchase transactions according to these guidelines.
ITEM 6. EXHIBITS
Exhibits 31.1 — Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibits 31.2 — Certification of the Chief Financial Officer 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.
Exhibit 101.INS - XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
Exhibit 101.SCH - XBRL Taxonomy Extension Schema Document.
Exhibit 101.CAL - XBRL Taxonomy Extension Calculation Linkbase Document.
Exhibit 101.LAB - XBRL Taxonomy Extension Label Linkbase Document.
Exhibit 101.PRE - XBRL Taxonomy Extension Presentation Linkbase Document.
Exhibit 101.DEF - XBRL Taxonomy Extension Definition Linkbase Document.
Exhibit 104 - Cover Page Interactive Data File – The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
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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: | August 6, 2021 | BY: | /S/ELLEN R. GORDON | |
Ellen R. Gordon | ||||
Chairman and Chief | ||||
Executive Officer | ||||
Date: | August 6, 2021 | BY: | /S/G. HOWARD EMBER, JR. | |
G. Howard Ember, Jr. | ||||
Vice President Finance and | ||||
Chief Financial Officer | ||||
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