UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2020March 31, 2021
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
COMMISSION FILE NUMBER 1-1361
Tootsie Roll Industries, Inc.
(Exact Name of Registrant as Specified in its Charter)
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Virginia | | 22-1318955 |
(State of Incorporation) | | (I.R.S. Employer Identification No.) |
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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 ☒ No ☐
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) Yes ☒ No ☐
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.
` Large accelerated filer ☒ | 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 ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date (June 30, 2020)(March 31, 2021).
| | |
Class | | Outstanding |
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Common Stock, $0.69-4/9 par value | |
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Class B Common Stock, $0.69-4/9 par value | |
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class: |
| Trading Symbol |
| Name of each exchange on which registered: |
Common Stock, par value $0.69-4/9 per share | | TR | | New York Stock Exchange |
TOOTSIE ROLL INDUSTRIES, INC.
JUNE 30, 2020MARCH 31, 2021
INDEX
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| Condensed Consolidated Statements of Earnings and Retained Earnings | 5 |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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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)
| | | | | | | | | |
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| | June 30, 2020 | | December 31, 2019 | | June 30, 2019 | |||
| | | | | | | | | |
ASSETS | | | | | | | | | |
| | | | | | | | | |
CURRENT ASSETS: | | | | | | | | | |
Cash and cash equivalents |
| $ | 106,289 |
| $ | 138,960 |
| $ | 57,857 |
Restricted cash | | | 380 | | | 380 | | | 385 |
Investments | | | 80,096 | | | 100,444 | | | 82,703 |
Accounts receivable trade, less allowances of $1,556, $1,949 and $1,652 | | | 30,010 | | | 45,044 | | | 36,824 |
Other receivables | | | 4,739 | | | 3,418 | | | 3,224 |
Inventories: | | | | | | | | | |
Finished goods and work-in-process | | | 64,176 | | | 35,909 | | | 62,333 |
Raw materials and supplies | | | 30,678 | | | 23,179 | | | 30,011 |
Prepaid expenses | | | 6,341 | | | 5,996 | | | 7,752 |
Total current assets | | | 322,709 | | | 353,330 | | | 281,089 |
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PROPERTY, PLANT AND EQUIPMENT, at cost: | | | | | | | | | |
Land | | | 21,651 | | | 21,740 | | | 21,735 |
Buildings | | | 122,645 | | | 122,843 | | | 121,841 |
Machinery and equipment | | | 414,850 | | | 416,625 | | | 401,153 |
Construction in progress | | | 10,484 | | | 4,427 | | | 11,362 |
Operating lease right-of-use assets | | | 1,265 | | | 1,580 | | | 1,258 |
| | | 570,895 | | | 567,215 | | | 557,349 |
Less - accumulated depreciation | | | 386,674 | | | 378,760 | | | 370,619 |
Net property, plant and equipment | | | 184,221 | | | 188,455 | | | 186,730 |
| | | | | | | | | |
OTHER ASSETS: | | | | | | | | | |
Goodwill | | | 73,237 | | | 73,237 | | | 73,237 |
Trademarks | | | 175,024 | | | 175,024 | | | 175,024 |
Investments | | | 186,057 | | | 153,031 | | | 195,359 |
Split dollar officer life insurance | | | 26,042 | | | 26,042 | | | 26,042 |
Prepaid expenses and other assets | | | 6,650 | | | 8,056 | | | 10,507 |
Deferred income taxes | | | 561 | | | 689 | | | 536 |
Total other assets | | | 467,571 | | | 436,079 | | | 480,705 |
Total assets | | $ | 974,501 | | $ | 977,864 | | $ | 948,524 |
| | | | | | | | | |
| | | | | | | | | |
| | March 31, 2021 | | December 31, 2020 | | March 31, 2020 | |||
| | | | | | | | | |
ASSETS | | | | | | | | | |
| | | | | | | | | |
CURRENT ASSETS: | | | | | | | | | |
Cash and cash equivalents |
| $ | 136,291 |
| $ | 166,841 |
| $ | 139,067 |
Restricted cash | | | 399 | | | 415 | | | 373 |
Investments | | | 42,396 | | | 42,090 | | | 77,510 |
Accounts receivable trade, less allowances of $1,672, $1,694 and $1,887 | | | 34,620 | | | 41,209 | | | 36,006 |
Other receivables | | | 3,183 | | | 3,894 | | | 3,446 |
Inventories: | | | | | | | | | |
Finished goods and work-in-process | | | 42,166 | | | 35,583 | | | 46,683 |
Raw materials and supplies | | | 26,111 | | | 23,996 | | | 24,974 |
Prepaid expenses | | | 7,166 | | | 6,844 | | | 6,231 |
Total current assets | | | 292,332 | | | 320,872 | | | 334,290 |
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PROPERTY, PLANT AND EQUIPMENT, at cost: | | | | | | | | | |
Land | | | 21,711 | | | 21,738 | | | 21,627 |
Buildings | | | 123,836 | | | 123,883 | | | 122,598 |
Machinery and equipment | | | 421,364 | | | 422,506 | | | 414,526 |
Construction in progress | | | 19,575 | | | 14,347 | | | 7,669 |
Operating lease right-of-use assets | | | 653 | | ��� | 858 | | | 1,388 |
| | | 587,139 | | | 583,332 | | | 567,808 |
Less - accumulated depreciation | | | 399,566 | | | 396,004 | | | 381,850 |
Net property, plant and equipment | | | 187,573 | | | 187,328 | | | 185,958 |
| | | | | | | | | |
OTHER ASSETS: | | | | | | | | | |
Goodwill | | | 73,237 | | | 73,237 | | | 73,237 |
Trademarks | | | 175,024 | | | 175,024 | | | 175,024 |
Investments | | | 243,749 | | | 220,020 | | | 153,287 |
Split dollar officer life insurance | | | 2,514 | | | 2,514 | | | 26,042 |
Prepaid expenses and other assets | | | 3,557 | | | 4,525 | | | 7,555 |
Deferred income taxes | | | 1,005 | | | 1,038 | | | 534 |
Total other assets | | | 499,086 | | | 476,358 | | | 435,679 |
Total assets | | $ | 978,991 | | $ | 984,558 | | $ | 955,927 |
(The accompanying notes are an integral part of these statements.)
3
(in thousands except per share data) (Unaudited)
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| | | | | | | | | |
| | June 30, 2020 | | December 31, 2019 | | June 30, 2019 | |||
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LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | | |
| | | | | | | | | |
CURRENT LIABILITIES: | | | | | | | | | |
Accounts payable |
| $ | 12,935 |
| $ | 12,720 |
| $ | 14,326 |
Bank loans | | | 864 | | | 747 | | | 686 |
Dividends payable | | | 6,005 | | | 5,861 | | | 5,901 |
Accrued liabilities | | | 40,235 | | | 41,611 | | | 38,077 |
Postretirement health care benefits | | | 598 | | | 598 | | | 580 |
Operating lease liabilities | | | 1,063 | | | 1,062 | | | 717 |
Deferred compensation | | | 17,139 | | | 16,945 | | �� | - |
Income taxes payable | | | 5,353 | | | - | | | - |
Total current liabilities | | | 84,192 | | | 79,544 | | | 60,287 |
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NONCURRENT LIABILITIES: | | | | | | | | | |
Deferred income taxes | | | 47,174 | | | 47,295 | | | 45,001 |
Postretirement health care benefits | | | 13,247 | | | 13,145 | | | 12,030 |
Industrial development bonds | | | 7,500 | | | 7,500 | | | 7,500 |
Liability for uncertain tax positions | | | 3,811 | | | 4,240 | | | 4,001 |
Operating lease liabilities | | | 202 | | | 518 | | | 541 |
Deferred compensation and other liabilities | | | 65,984 | | | 65,973 | | | 76,539 |
Total noncurrent liabilities | | | 137,918 | | | 138,671 | | | 145,612 |
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TOOTSIE ROLL INDUSTRIES, INC. SHAREHOLDERS’ EQUITY: | | | | | | | | | |
Common stock, $.69-4/9 par value - 120,000 shares authorized; 39,664, 38,836 and 39,233, respectively, issued | | | 27,544 | | | 26,969 | | | 27,245 |
Class B common stock, $.69-4/9 par value - 40,000 shares authorized; 27,025, 26,287 and 26,302, respectively, issued | | | 18,767 | | | 18,254 | | | 18,264 |
Capital in excess of par value | | | 725,605 | | | 696,059 | | | 710,703 |
Retained earnings | | | 4,588 | | | 40,809 | | | 8,121 |
Accumulated other comprehensive loss | | | (21,904) | | | (20,245) | | | (19,537) |
Treasury stock (at cost) - 93, 90 and 90 shares, respectively | | | (1,992) | | | (1,992) | | | (1,992) |
Total Tootsie Roll Industries, Inc. shareholders’ equity | | | 752,608 | | | 759,854 | | | 742,804 |
Noncontrolling interests | | | (217) | | | (205) | | | (179) |
Total equity | | | 752,391 | | | 759,649 | | | 742,625 |
Total liabilities and shareholders’ equity | | $ | 974,501 | | $ | 977,864 | | $ | 948,524 |
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| | March 31, 2021 | | December 31, 2020 | | March 31, 2020 | |||
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LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | | |
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CURRENT LIABILITIES: | | | | | | | | | |
Accounts payable |
| $ | 14,275 |
| $ | 13,025 |
| $ | 15,991 |
Bank loans | | | 965 | | | 832 | | | 781 |
Dividends payable | | | 168 | | | 5,948 | | | 160 |
Accrued liabilities | | | 43,421 | | | 45,099 | | | 38,424 |
Postretirement health care benefits | | | 544 | | | 544 | | | 598 |
Operating lease liabilities | | | 611 | | | 780 | | | 1,063 |
Deferred compensation | | | - | | | - | | | 16,751 |
Income taxes payable | | | 5,957 | | | 3,793 | | | 3,418 |
Total current liabilities | | | 65,941 | | | 70,021 | | | 77,186 |
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NONCURRENT LIABILITIES: | | | | | | | | | |
Deferred income taxes | | | 47,636 | | | 47,900 | | | 45,755 |
Postretirement health care benefits | | | 12,947 | | | 12,943 | | | 13,206 |
Industrial development bonds | | | 7,500 | | | 7,500 | | | 7,500 |
Liability for uncertain tax positions | | | 3,483 | | | 3,351 | | | 3,697 |
Operating lease liabilities | | | 42 | | | 78 | | | 325 |
Deferred compensation and other liabilities | | | 82,856 | | | 79,665 | | | 56,737 |
Total noncurrent liabilities | | | 154,464 | | | 151,437 | | | 127,220 |
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TOOTSIE ROLL INDUSTRIES, INC. SHAREHOLDERS’ EQUITY: | | | | | | | | | |
Common stock, $.69-4/9 par value - 120,000 shares authorized; 40,002, 39,073 and 39,769, respectively, issued | | | 27,779 | | | 27,134 | | | 27,617 |
Class B common stock, $.69-4/9 par value - 40,000 shares authorized; 27,821, 27,012 and 27,037, respectively, issued | | | 19,320 | | | 18,758 | | | 18,776 |
Capital in excess of par value | | | 732,165 | | | 706,930 | | | 729,673 |
Retained earnings | | | 3,121 | | | 32,312 | | | 3,197 |
Accumulated other comprehensive loss | | | (21,577) | | | (19,815) | | | (25,539) |
Treasury stock (at cost) - 96, 93 and 93 shares, respectively | | | (1,992) | | | (1,992) | | | (1,992) |
Total Tootsie Roll Industries, Inc. shareholders’ equity | | | 758,816 | | | 763,327 | | | 751,732 |
Noncontrolling interests | | | (230) | | | (227) | | | (211) |
Total equity | | | 758,586 | | | 763,100 | | | 751,521 |
Total liabilities and shareholders’ equity | | $ | 978,991 | | $ | 984,558 | | $ | 955,927 |
(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)
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| | Quarter Ended | | Year to Date Ended | ||||||||
| | June 30, 2020 | | June 30, 2019 | | June 30, 2020 | | June 30, 2019 | ||||
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Net product sales |
| $ | 79,796 |
| $ | 106,021 |
| $ | 182,599 |
| $ | 207,040 |
Rental and royalty revenue | | | 845 | | | 931 | | | 1,803 | | | 1,889 |
Total revenue | | | 80,641 | | | 106,952 | | | 184,402 | | | 208,929 |
Product cost of goods sold | | | 50,379 | | | 65,945 | | | 116,822 | | | 130,801 |
Rental and royalty cost | | | 210 | | | 276 | | | 512 | | | 531 |
Total costs | | | 50,589 | | | 66,221 | | | 117,334 | | | 131,332 |
Product gross margin | | | 29,417 | | | 40,076 | | | 65,777 | | | 76,239 |
Rental and royalty gross margin | | | 635 | | | 655 | | | 1,291 | | | 1,358 |
Total gross margin | | | 30,052 | | | 40,731 | | | 67,068 | | | 77,597 |
Selling, marketing and administrative expenses | | | 29,559 | | | 28,216 | | | 45,831 | | | 59,324 |
Earnings from operations | | | 493 | | | 12,515 | | | 21,237 | | | 18,273 |
Other income (loss), net | | | 9,727 | | | 3,053 | | | 4,233 | | | 9,070 |
Earnings before income taxes | | | 10,220 | | | 15,568 | | | 25,470 | | | 27,343 |
Provision for income taxes | | | 2,838 | | | 4,024 | | | 6,112 | | | 6,888 |
Net earnings | | | 7,382 | | | 11,544 | | | 19,358 | | | 20,455 |
Less: net earnings (loss) attributable to noncontrolling interests | | | (6) | | | (12) | | | (12) | | | (56) |
Net earnings attributable to Tootsie Roll Industries, Inc. | | $ | 7,388 | | $ | 11,556 | | $ | 19,370 | | $ | 20,511 |
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Net earnings attributable to Tootsie Roll Industries, Inc. per share | | $ | 0.11 | | $ | 0.17 | | $ | 0.29 | | $ | 0.30 |
Dividends per share * | | $ | 0.09 | | $ | 0.09 | | $ | 0.18 | | $ | 0.18 |
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Average number of shares outstanding | | | 66,671 | | | 67,501 | | | 66,781 | | | 67,664 |
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Retained earnings at beginning of period | | $ | 3,197 | | $ | 2,459 | | $ | 40,809 | | $ | 33,767 |
Net earnings attributable to Tootsie Roll Industries, Inc. | | | 7,388 | | | 11,556 | | | 19,370 | | | 20,511 |
Cash dividends | | | (5,997) | | | (5,894) | | | (11,838) | | | (11,651) |
Stock dividends | | | - | | | - | | | (43,753) | | | (34,506) |
Retained earnings at end of period | | $ | 4,588 | | $ | 8,121 | | $ | 4,588 | | $ | 8,121 |
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| | Quarter Ended | ||||
| | March 31, 2021 | | March 31, 2020 | ||
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Net product sales |
| $ | 101,795 |
| $ | 102,803 |
Rental and royalty revenue | | | 1,434 | | | 958 |
Total revenue | | | 103,229 | | | 103,761 |
Product cost of goods sold | | | 65,565 | | | 66,443 |
Rental and royalty cost | | | 445 | | | 302 |
Total costs | | | 66,010 | | | 66,745 |
Product gross margin | | | 36,230 | | | 36,360 |
Rental and royalty gross margin | | | 989 | | | 656 |
Total gross margin | | | 37,219 | | | 37,016 |
Selling, marketing and administrative expenses | | | 26,809 | | | 16,272 |
Earnings from operations | | | 10,410 | | | 20,744 |
Other income (loss), net | | | 3,816 | | | (5,494) |
Earnings before income taxes | | | 14,226 | | | 15,250 |
Provision for income taxes | | | 3,463 | | | 3,274 |
Net earnings | | | 10,763 | | | 11,976 |
Less: net earnings (loss) attributable to noncontrolling interests | | | (4) | | | (6) |
Net earnings attributable to Tootsie Roll Industries, Inc. | | $ | 10,767 | | $ | 11,982 |
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Net earnings attributable to Tootsie Roll Industries, Inc. per share | | $ | 0.16 | | $ | 0.17 |
Dividends per share * | | $ | 0.09 | | $ | 0.09 |
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Average number of shares outstanding | | | 67,852 | | | 68,845 |
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Retained earnings at beginning of period | | $ | 32,312 | | $ | 40,809 |
Net earnings attributable to Tootsie Roll Industries, Inc. | | | 10,767 | | | 11,982 |
Cash dividends | | | (5,925) | | | (5,841) |
Stock dividends | | | (34,033) | | | (43,753) |
Retained earnings at end of period | | $ | 3,121 | | $ | 3,197 |
*Does not include 3% stock dividend to shareholders of record on 3/3/205/21 and 3/5/19.3/20.
(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)
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| | Quarter Ended | | Year to Date Ended | ||||||||
| | June 30, 2020 | | June 30, 2019 | | June 30, 2020 | | June 30, 2019 | ||||
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Net earnings |
| $ | 7,382 |
| $ | 11,544 |
| $ | 19,358 |
| $ | 20,455 |
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Other comprehensive income (loss), before tax: | | | | | | | | | | | | |
Foreign currency translation adjustments | | | 610 | | | 205 | | | (3,064) | | | 596 |
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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 | | | (337) | | | (380) | | | (675) | | | (761) |
Unrealized gains (losses) on postretirement and pension benefits | | | (337) | | | (380) | | | (675) | | | (761) |
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Investments: | | | | | | | | | | | | |
Unrealized gains (losses) for the period on investments | | | 3,419 | | | 1,185 | | | 2,328 | | | 2,652 |
Less: reclassification adjustment for (gains) losses to net earnings | | | - | | | - | | | - | | | - |
Unrealized gains (losses) on investments | | | 3,419 | | | 1,185 | | | 2,328 | | | 2,652 |
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Derivatives: | | | | | | | | | | | | |
Unrealized gains (losses) for the period on derivatives | | | 739 | | | 57 | | | (222) | | | 607 |
Less: reclassification adjustment for (gains) losses to net earnings | | | 169 | | | 162 | | | 422 | | | 258 |
Unrealized gains (losses) on derivatives | | | 908 | | | 219 | | | 200 | | | 865 |
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Total other comprehensive income (loss), before tax | | | 4,600 | | | 1,229 | | | (1,211) | | | 3,352 |
Income tax benefit (expense) related to items of other comprehensive income | | | (965) | | | (248) | | | (448) | | | (667) |
Total comprehensive earnings | | | 11,017 | | | 12,525 | | | 17,699 | | | 23,140 |
Comprehensive earnings (loss) attributable to noncontrolling interests | | | (6) | | | (12) | | | (12) | | | (56) |
Total comprehensive earnings attributable to Tootsie Roll Industries, Inc. | | $ | 11,023 | | $ | 12,537 | | $ | 17,711 | | $ | 23,196 |
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| | | | | | |
| | Quarter Ended | ||||
| | March 31, 2021 | | March 31, 2020 | ||
| | | | | | |
Net earnings |
| $ | 10,763 |
| $ | 11,976 |
| | | | | | |
Other comprehensive income (loss), before tax: | | | | | | |
Foreign currency translation adjustments | | | (397) | | | (3,674) |
| | | | | | |
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 | | | (351) | | | (338) |
Unrealized gains (losses) on postretirement and pension benefits | | | (351) | | | (338) |
| | | | | | |
Investments: | | | | | | |
Unrealized gains (losses) for the period on investments | | | (1,155) | | | (1,091) |
Less: reclassification adjustment for (gains) losses to net earnings | | | - | | | - |
Unrealized gains (losses) on investments | | | (1,155) | | | (1,091) |
| | | | | | |
Derivatives: | | | | | | |
Unrealized gains (losses) for the period on derivatives | | | 476 | | | (961) |
Less: reclassification adjustment for (gains) losses to net earnings | | | (771) | | | 253 |
Unrealized gains (losses) on derivatives | | | (295) | | | (708) |
| | | | | | |
Total other comprehensive income (loss), before tax | | | (2,198) | | | (5,811) |
Income tax benefit (expense) related to items of other comprehensive income | | | 436 | | | 517 |
Total comprehensive earnings | | | 9,001 | | | 6,682 |
Comprehensive earnings (loss) attributable to noncontrolling interests | | | (4) | | | (6) |
Total comprehensive earnings attributable to Tootsie Roll Industries, Inc. | | $ | 9,005 | | $ | 6,688 |
(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, 2020 | | June 30, 2019 | ||
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | |
Net earnings |
| $ | 19,358 |
| $ | 20,455 |
Adjustments to reconcile net earnings to net cash used in operating activities: | | | | | | |
Depreciation | | | 9,219 | | | 9,334 |
Deferred income taxes | | | (568) | | | 393 |
Amortization of marketable security premiums | | | 557 | | | 694 |
Changes in operating assets and liabilities: | | | | | | |
Accounts receivable | | | 14,333 | | | 13,038 |
Other receivables | | | (1,208) | | | (242) |
Inventories | | | (36,863) | | | (37,692) |
Prepaid expenses and other assets | | | 1,183 | | | 1,529 |
Accounts payable and accrued liabilities | | | 40 | | | (167) |
Income taxes payable | | | 5,033 | | | 2,750 |
Postretirement health care benefits | | | (573) | | | (602) |
Deferred compensation and other liabilities | | | 369 | | | 1,531 |
Net cash provided by operating activities | | | 10,880 | | | 11,021 |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | |
Capital expenditures | | | (6,410) | | | (9,945) |
Purchases of trading securities | | | (2,438) | | | (2,641) |
Sales of trading securities | | | 380 | | | 362 |
Purchase of available for sale securities | | | (53,269) | | | (33,558) |
Sale and maturity of available for sale securities | | | 44,466 | | | 12,120 |
Net cash from (used in) investing activities | | | (17,271) | | | (33,662) |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | |
Shares purchased and retired | | | (12,959) | | | (19,186) |
Dividends paid in cash | | | (11,853) | | | (11,699) |
Proceeds from bank loans | | | 2,133 | | | 1,911 |
Repayment of bank loans | | | (2,019) | | | (1,594) |
Net cash used in financing activities | | | (24,698) | | | (30,568) |
Effect of exchange rate changes on cash | | | (1,582) | | | 164 |
Increase (Decrease) in cash and cash equivalents | | | (32,671) | | | (53,045) |
Cash, cash equivalents and restricted cash at beginning of year | | | 139,340 | | | 111,287 |
Cash, cash equivalents and restricted cash at end of quarter | | $ | 106,669 | | $ | 58,242 |
Supplemental cash flow information: | | | | | | |
Income taxes paid/(received), net | | $ | 1,035 | | $ | 4,226 |
Interest paid | | $ | 49 | | $ | 65 |
Stock dividend issued | | $ | 63,402 | | $ | 70,557 |
| | | | | | |
| | | | | | |
| | Quarter Ended | ||||
| | March 31, 2021 | | March 31, 2020 | ||
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | |
Net earnings |
| $ | 10,763 |
| $ | 11,976 |
Adjustments to reconcile net earnings to net cash used in operating activities: | | | | | | |
Depreciation | | | 4,365 | | | 4,647 |
Deferred income taxes | | | 174 | | | (1,013) |
Amortization of marketable security premiums | | | 739 | | | 217 |
Changes in operating assets and liabilities: | | | | | | |
Accounts receivable | | | 6,326 | | | 8,205 |
Other receivables | | | 487 | | | (197) |
Inventories | | | (8,883) | | | (13,676) |
Prepaid expenses and other assets | | | 572 | | | 172 |
Accounts payable and accrued liabilities | | | (1,204) | | | 1,422 |
Income taxes payable | | | 2,295 | | | 2,983 |
Postretirement health care benefits | | | (347) | | | (276) |
Deferred compensation and other liabilities | | | 50 | | | 121 |
Net cash provided by operating activities | | | 15,337 | | | 14,581 |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | |
Capital expenditures | | | (3,787) | | | (3,737) |
Purchases of trading securities | | | (1,835) | | | (2,287) |
Sales of trading securities | | | 582 | | | 380 |
Purchase of available for sale securities | | | (30,031) | | | (21,312) |
Sale and maturity of available for sale securities | | | 8,543 | | | 35,217 |
Net cash from (used in) investing activities | | | (26,528) | | | 8,261 |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | |
Shares purchased and retired | | | (7,423) | | | (8,809) |
Dividends paid in cash | | | (11,874) | | | (11,703) |
Proceeds from bank loans | | | 1,070 | | | 928 |
Repayment of bank loans | | | (896) | | | (880) |
Net cash used in financing activities | | | (19,123) | | | (20,464) |
Effect of exchange rate changes on cash | | | (252) | | | (2,278) |
Increase (Decrease) in cash and cash equivalents | | | (30,566) | | | 100 |
Cash, cash equivalents and restricted cash at beginning of year | | | 167,256 | | | 139,340 |
Cash, cash equivalents and restricted cash at end of quarter | | $ | 136,690 | | $ | 139,440 |
Supplemental cash flow information: | | | | | | |
Income taxes paid/(received), net | | $ | 1,233 | | $ | 794 |
Interest paid | | $ | 2 | | $ | 23 |
Stock dividend issued | | $ | 64,667 | | $ | 63,402 |
(The accompanying notes are an integral part of these statements.)
7
TOOTSIE ROLL INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020MARCH 31, 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)“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, 20192020 (the “2019“2020 Form 10-K”).
Results of operations for the period ended June 30, 2020March 31, 2021 are not necessarily indicative of results to be expected for the year to end December 31, 20202021 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. We continueThe Company continues to actively monitor COVID-19 and its potential impact on our operations and financial results. We expect Covid-19 to adversely affect net earnings in third quarter 2020 and likely to a lesser extent in fourth quarter 2020 as well. The impact that COVID-19 will have on our consolidated financial statements throughout 20202021 and beyond remains uncertain and ultimately will be dictated by the length and severity of the pandemic as well asand 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 2020.2021 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 $8,397$10,139 and $11,185 in second quarter 2020 and 2019, respectively, and $19,069 and $22,217$10,672 in first halfquarter 2021 and 2020, and 2019, respectively, are included in selling, marketing and administrative expenses. A minor amount of royalty income (less than 0.2% of our consolidated net product sales) is also recognized from sales-based licensing arrangements, pursuant to which revenue is recognized as the third-party licensee sales occur. Rental income (less than(approximately 1% of our consolidated net product sales) is not considered revenue from contracts from customers.
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
8
the asset. Leases with terms greater than 12 months are classified as either operating or finance leases at the
8
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 June 2016, the FASB issued ASU No. 2016-13, (ASC Topic 326) which replaces the current incurred loss impairment method with a new method that reflects expected credit losses. Subsequent to the issuance of ASC Topic 326, the FASB clarified and amended guidance through several Accounting Standard Updates; hereinafter the collection of credit loss guidance is referred to as “ASC Topic 326”. Under this new guidance an entity would recognize an impairment allowance equal to its current estimate of credit losses on financial assets measured at amortized cost. The Company adopted ASU 2016-13 and related amendments (ASC Topic 326) on January 1, 2020. The adoption of this ASC did not have a material impact on the Company’s consolidated financial statements.
Recently Issued Accounting Pronouncements - Not Yet Adopted
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; this ASU allows for early adoption in any interim period after issuance of the update. The Company is currently assessing the impact this ASU will have on its consolidated financial statements.
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. We are currently evaluating our contractsThe 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 optional expedients providedCompany’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 new standard.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 monthsfirst quarter 2021 reflects aggregate stock purchases of 234 shares for $7,423 and a 3% stock dividend of 1,970 shares distributed on April 2, 2021. The average number of shares outstanding for first quarter 2020 reflects aggregate stock purchases of 378260 shares for $12,959$8,809 and a 3% stock dividend of 1,942 shares distributed on April 3, 2020. The average number of shares outstanding for six months 2019 reflects aggregate stock purchases of 510 shares for $19,186 and a 3% stock dividend of 1,914 shares distributed on April 5, 2019.
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 20162017 through 2018. 2019.The Company’s consolidated effective income tax rate was 27.8%24.3% and 25.8% in second quarter 2020 and 2019, respectively, and 24.0% and 25.2%21.5% in first halfquarter 2021 and 2020, and 2019, respectively.
9
NOTE 4—Share Capital and Capital In Excess of Par Value:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | Capital in |
| | | | | | | | | | | | | | | | | Capital in |
| ||
| | | | | | | Class B | | | | | | | Excess |
| | | | | | | Class B | | | | | | | Excess |
| ||||||||
| | Common Stock | | Common Stock | | Treasury Stock | | of Par |
| | Common Stock | | Common Stock | | Treasury Stock | | of Par |
| ||||||||||||||||||||
|
| Shares |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount |
| Value |
|
| Shares |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount |
| Value |
| ||||||||
| | (000’s) | | | | | (000’s) | | | | | (000’s) | | | | | | |
| | (000’s) | | | | | (000’s) | | | | | (000’s) | | | | | | |
|
Balance at March 31, 2020 |
| 39,769 | | $ | 27,617 |
| 27,037 | | $ | 18,776 |
| 93 | | $ | (1,992) | | $ | 729,673 | | |||||||||||||||||||
Balance at December 31, 2020 | | 39,073 | | $ | 27,134 |
| 27,012 | | $ | 18,758 |
| 93 | | $ | (1,992) | | $ | 706,930 | | |||||||||||||||||||
Issuance of 3% stock dividend |
| — | |
| — |
| — | |
| — |
| — | |
| — | |
| — | |
| 1,163 | | | 808 |
| 809 | | | 562 |
| 3 | | | — | | | 32,495 | |
Conversion of Class B common shares to common shares |
| 12 | |
| 9 |
| (12) | |
| (9) |
| — | |
| — | |
| — | |
| — | |
| — |
| — | |
| — |
| — | |
| — | |
| — | |
Purchase and retirement of common shares and other |
| (117) | |
| (82) |
| — | |
| — |
| — | |
| — | |
| (4,068) | |
| (234) | |
| (163) |
| — | |
| — |
| — | |
| — | |
| (7,260) | |
Balance at June 30, 2020 |
| 39,664 | | $ | 27,544 |
| 27,025 | | $ | 18,767 |
| 93 | | $ | (1,992) | | $ | 725,605 | | |||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | |||||||||||||||||||
Balance at March 31, 2019 |
| 39,418 | | $ | 27,374 |
| 26,342 | | $ | 18,293 |
| 90 | | $ | (1,992) | | $ | 719,212 | | |||||||||||||||||||
Issuance of 3% stock dividend |
| — | |
| — |
| — | |
| — |
| — | |
| — | |
| — | | |||||||||||||||||||
Conversion of Class B common shares to common shares |
| 40 | |
| 29 |
| (40) | |
| (29) |
| — | |
| — | |
| — | | |||||||||||||||||||
Purchase and retirement of common shares and other |
| (225) | |
| (158) |
| - | |
| — |
| — | |
| — | |
| (8,509) | | |||||||||||||||||||
Balance at June 30, 2019 |
| 39,233 | | $ | 27,245 |
| 26,302 | | $ | 18,264 |
| 90 | | $ | (1,992) | | $ | 710,703 | | |||||||||||||||||||
Balance at March 31, 2021 |
| 40,002 | | $ | 27,779 |
| 27,821 | | $ | 19,320 |
| 96 | | $ | (1,992) | | $ | 732,165 | | |||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2019 | | 38,836 | | $ | 26,969 |
| 26,287 | | $ | 18,254 |
| 90 | | $ | (1,992) | | $ | 696,059 | | | 38,836 | | $ | 26,969 |
| 26,287 | | $ | 18,254 |
| 90 | | $ | (1,992) | | $ | 696,059 | |
Issuance of 3% stock dividend |
| 1,157 | | | 803 |
| 786 | | | 547 |
| 3 | | | — | | | 42,243 | |
| 1,157 | | | 803 |
| 786 | | | 547 |
| 3 | | | — | | | 42,243 | |
Conversion of Class B common shares to common shares |
| 48 | |
| 34 |
| (48) | |
| (34) |
| — | |
| — | |
| — | |
| 36 | |
| 25 |
| (36) | |
| (25) |
| — | |
| — | |
| — | |
Purchase and retirement of common shares and other |
| (377) | |
| (262) |
| — | |
| — |
| — | |
| — | |
| (12,697) | |
| (260) | |
| (180) |
| — | |
| — |
| — | |
| — | |
| (8,629) | |
Balance at June 30, 2020 |
| 39,664 | | $ | 27,544 |
| 27,025 | | $ | 18,767 |
| 93 | | $ | (1,992) | | $ | 725,605 | | |||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | |||||||||||||||||||
Balance at December 31, 2018 | | 38,544 | | $ | 26,767 |
| 25,584 | | $ | 17,767 |
| 88 | | $ | (1,992) | | $ | 696,535 | | |||||||||||||||||||
Issuance of 3% stock dividend |
| 1,150 | | | 798 |
| 767 | | | 532 |
| 2 | | | — | | | 32,999 | | |||||||||||||||||||
Conversion of Class B common shares to common shares |
| 49 | |
| 35 |
| (49) | |
| (35) |
| — | |
| — | |
| — | | |||||||||||||||||||
Purchase and retirement of common shares and other |
| (510) | |
| (355) |
| — | |
| — |
| — | |
| — | |
| (18,831) | | |||||||||||||||||||
Balance at June 30, 2019 |
| 39,233 | | $ | 27,245 |
| 26,302 | | $ | 18,264 |
| 90 | | $ | (1,992) | | $ | 710,703 | | |||||||||||||||||||
Balance at March 31, 2020 |
| 39,769 | | $ | 27,617 |
| 27,037 | | $ | 18,776 |
| 93 | | $ | (1,992) | | $ | 729,673 | |
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.
As of March 31, 2021, December 31, 2020 and March 31, 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.
10
As of June 30, 2020, December 31, 2019 and June 30, 2019, 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, 2020,March 31, 2021, December 31, 20192020 and June 30, 2019March 31, 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, 2020 | | Estimated Fair Value March 31, 2021 | ||||||||||||||||||||
| | Total | | Input Levels Used | | Total | | Input Levels Used | ||||||||||||||||
| | Fair Value | | Level 1 | | Level 2 | | Level 3 | | Fair Value | | Level 1 | | Level 2 | | Level 3 | ||||||||
Cash and cash equivalents |
| $ | 106,289 |
| $ | 106,289 |
| $ | - |
| $ | - |
| $ | 136,291 |
| $ | 136,291 |
| $ | - |
| $ | - |
Available for sale securities | | | 187,868 | | | 3,169 | | | 184,699 | | | - | | | 207,874 | | | 3,144 | | | 204,730 | | | - |
Foreign currency forward contracts | | | 428 | | | - | | | 428 | | | - | | | 755 | | | - | | | 755 | | | - |
Commodity futures contracts | | | (94) | | | (94) | | | - | | | - | | | 670 | | | 670 | | | - | | | - |
Trading securities | | | 78,285 | | | 50,664 | | | 27,621 | | | - | | | 78,271 | | | 65,532 | | | 12,739 | | | - |
Total assets measured at fair value | | $ | 372,776 | | $ | 160,028 | | $ | 212,748 | | $ | - | | $ | 423,861 | | $ | 205,637 | | $ | 218,224 | | $ | - |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Estimated Fair Value December 31, 2019 | | Estimated Fair Value December 31, 2020 | ||||||||||||||||||||
| | | Total | | Input Levels Used | | | Total | | Input Levels Used | ||||||||||||||
| | | Fair Value | | | Level 1 | | | Level 2 | | | Level 3 | | | Fair Value | | | Level 1 | | | Level 2 | | | Level 3 |
Cash and cash equivalents |
| $ | 138,960 |
| $ | 138,960 |
| $ | - |
| $ | - |
| $ | 166,841 |
| $ | 166,841 |
| $ | - |
| $ | - |
Available for sale securities | | | 177,292 | | | 3,588 | | | 173,704 | | | - | | | 188,282 | | | 3,149 | | | 185,133 | | | - |
Foreign currency forward contracts | | | 14 | | | - | | | 14 | | | - | | | 778 | | | - | | | 778 | | | - |
Commodity futures contracts, net | | | 121 | | | 121 | | | - | | | - | | | 941 | | | 941 | | | - | | | - |
Trading securities | | | 76,183 | | | 48,260 | | | 27,923 | | | - | | | 73,828 | | | 61,431 | |
| 12,397 | | | - |
Total assets measured at fair value | | $ | 392,570 | | $ | 190,929 | | $ | 201,641 | | $ | - | | $ | 430,670 | | $ | 232,362 | | $ | 198,308 | | $ | - |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Estimated Fair Value June 30, 2019 | | Estimated Fair Value March 31, 2020 | ||||||||||||||||||||
| | | Total | | Input Levels Used | | | Total | | Input Levels Used | ||||||||||||||
| | | Fair Value | | | Level 1 | | | Level 2 | | | Level 3 | | | Fair Value | | | Level 1 | | | Level 2 | | | Level 3 |
Cash and cash equivalents |
| $ | 57,857 |
| $ | 57,857 |
| $ | - |
| $ | - |
| $ | 139,067 |
| $ | 139,067 |
| $ | - |
| $ | - |
Available for sale securities | | | 206,687 | | | 3,078 | | | 203,609 | | | - | | | 162,080 | | | 3,441 | | | 158,639 | | | - |
Foreign currency forward contracts | | | (17) | | | - | | | (17) | | | - | | | (93) | | | - | | | (93) | | | - |
Commodity futures contracts | | | (112) | | | (112) | | | - | | | - | | | (480) | | | (480) | | | - | | | - |
Trading securities | | | 71,375 | | | 45,110 | | | 26,265 | | | - | | | 68,717 | | | 41,692 | | | 27,025 | | | - |
Total assets measured at fair value | | $ | 335,790 | | $ | 105,933 | | $ | 229,857 | | $ | - | | $ | 369,291 | | $ | 183,720 | | $ | 185,571 | | $ | - |
The fair value of the Company’s industrial revenue development bonds at June 30, 2020,March 31, 2021, December 31, 20192020 and June 30, 2019March 31, 2020 were valued using Level 2 inputs which approximates the carrying value of $7,500 for the respective periods. Interest rates on these bonds are reset weekly based on current market conditions.
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 instrumentsinstruments.
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
11
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 $(199) and $105$670 of this accumulated comprehensive gain (loss) is expected to be reclassified as a charge to earnings in 20202021. Approximately $324 and 2021, respectively. Approximately $114, $161 and $153$431 reported in accumulated other comprehensive gain for foreign currency derivatives are expected to be reclassified to other income, net in 2020, 2021 and2021and 2022, respectively.
The following table summarizes the Company’s outstanding derivative contracts and their effects on its Condensed Consolidated Statements of Financial Position at June 30, 2020,March 31, 2021, December 31, 20192020 and June 30, 2019:March 31, 2020:
| | | | | | | | |||||||||||
| | | | | | | | | | | | | | | ||||
| | June 30, 2020 | | | | | | | | |||||||||
| | Notional |
|
|
|
| | March 31, 2021 | ||||||||||
| | Amounts | | Assets | | Liabilities | | Notional |
|
|
|
| ||||||
| | | | | | | | | Amounts | | Assets | | Liabilities | |||||
Derivatives designated as hedging instruments: | | | | | | | | | | | | | | | ||||
Foreign currency forward contracts | | $ | 8,574 | | $ | 428 | | $ | - | | $ | 5,593 | | $ | 755 | | $ | - |
Commodity futures contracts | | | 7,375 | | | 170 | | | (264) | | | 4,362 | | | 675 | | | (5) |
Total derivatives | | | | | $ | 598 | | $ | (264) | | | | | $ | 1,430 | | $ | (5) |
| | | | | | | | | | | | | | | ||||
| | December 31, 2019 | | December 31, 2020 | ||||||||||||||
| | Notional |
|
|
|
| | Notional |
|
|
|
| ||||||
| | Amounts | | Assets | | Liabilities | | Amounts | | Assets | | Liabilities | ||||||
| | | | | | | | |||||||||||
Derivatives designated as hedging instruments: | | | | | | | | | | | | | | | ||||
Foreign currency forward contracts | | $ | 5,533 | | $ | 14 | | $ | — | | $ | 6,391 | | $ | 778 | | $ | — |
Commodity futures contracts | | | 7,147 | | | 205 | | | (84) | | | 4,010 | |
| 941 | |
| — |
Total derivatives | | | | | $ | 219 | | $ | (84) | | | | | $ | 1,719 | | $ | - |
| | | | | | | | | | | | | | | ||||
| | June 30, 2019 | | March 31, 2020 | ||||||||||||||
| | Notional |
|
|
|
| | Notional |
|
|
|
| ||||||
| | Amounts | | Assets | | Liabilities | | Amounts | | Assets | | Liabilities | ||||||
| | | | | | | | |||||||||||
Derivatives designated as hedging instruments: | | | | | | | | | | | | | | | ||||
Foreign currency forward contracts | | $ | 11,050 | | $ | - | | $ | (17) | | $ | 11,342 | | $ | 117 | | $ | (210) |
Commodity futures contracts | | | 6,911 | | | 120 | | | (232) | | | 3,955 | | | 1 | | | (481) |
Total derivatives | | | | | $ | 120 | | $ | (249) | | | | | $ | 118 | | $ | (691) |
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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,March 31, 2021 and March 31, 2020 and June 30, 2019 are as follows:
| | | | | | | | | | | | | | | ||||
| | | | | | | | | | | | | | | ||||
| | For Quarter Ended June 30, 2020 | | For Quarter Ended March 31, 2021 | ||||||||||||||
| |
|
|
|
| Gain (Loss) | |
|
|
|
| Gain (Loss) | ||||||
| | | | Gain (Loss) | | on Amount Excluded | | | | Gain (Loss) | | on Amount Excluded | ||||||
| | Gain (Loss) | | Reclassified from | | from Effectiveness | | Gain (Loss) | | Reclassified from | | from Effectiveness | ||||||
| | Recognized | | Accumulated OCI | | Testing Recognized | | Recognized | | Accumulated OCI | | Testing Recognized | ||||||
| | in OCI | | into Earnings | | in Earnings | | in OCI | | into Earnings | | in Earnings | ||||||
| | | | | | | | | | | | | | | | | | |
Foreign currency forward contracts | | $ | 352 | | $ | (169) | | $ | - | | $ | 79 | | $ | 103 | | $ | - |
Commodity futures contracts | | | 387 | | | - | | | - | | | 397 | | | 668 | | | - |
Total | | $ | 739 | | $ | (169) | | $ | - | | $ | 476 | | $ | 771 | | $ | - |
| | | | | | | | | | | | | | | ||||
| | For Quarter Ended June 30, 2019 | | For Quarter Ended March 31, 2020 | ||||||||||||||
| |
|
|
|
| Gain (Loss) | |
|
|
|
| Gain (Loss) | ||||||
| | | | Gain (Loss) | | on Amount Excluded | | | | Gain (Loss) | | on Amount Excluded | ||||||
| | Gain (Loss) | | Reclassified from | | from Effectiveness | | Gain (Loss) | | Reclassified from | | from Effectiveness | ||||||
| | Recognized | | Accumulated OCI | | Testing Recognized | | Recognized | | Accumulated OCI | | Testing Recognized | ||||||
| | in OCI | | into Earnings | | in Earnings | | in OCI | | into Earnings | | in Earnings | ||||||
| | | | | | | | | | | | | | | | | | |
Foreign currency forward contracts | | $ | 180 | | $ | - | | $ | - | | $ | (205) | | $ | (98) | | $ | - |
Commodity futures contracts | | | (123) | | | (162) | | | - | | | (756) | | | (155) | | | - |
Total | | $ | 57 | | $ | (162) | | $ | - | | $ | (961) | | $ | (253) | | $ | - |
| | | | | | | | |||||||||||
| | For Year to Date 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 | | $ | 147 | | $ | (267) | | $ | - | |||||||||
Commodity futures contracts | | | (369) | | | (155) | | | - | |||||||||
Total | | $ | (222) | | $ | (422) | | $ | - | |||||||||
| | | | | | | | |||||||||||
| | For Year to Date Ended June 30, 2019 | ||||||||||||||||
| |
|
|
|
| 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 | | $ | 390 | | $ | - | | $ | - | |||||||||
Commodity futures contracts | | | 217 | | | (258) | | | - | |||||||||
Total | | $ | 607 | | $ | (258) | | $ | - |
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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”, the “Red Zone”, 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. DuringBeginning 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 20 years. In 2016, the Company received new notices that the Plan’s trustees adopted an updated Rehabilitation Plan effective January 1, 2016, and all annual notices through 2020to date have continued to classify the Plan in the “critical and declining status” category.
The Company has been advised that its withdrawal liability would have been $99,300, $99,800 $81,600 and $82,200$81,600 if it had withdrawn from the Plan during 2020, 2019 2018 and 2017,2018, respectively. Should the Company actually withdraw from the Plan at a future date, a withdrawal liability, which could be higher than the above discussed amounts, could be payable to the Plan.
The amended rehabilitation plan, which continues, requires that employer contributions include 5% compounded annual surcharge increases each year for an unspecified period of time beginning January 2013 (in addition to the 5% interim surcharge initiated in June 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 consenting agreement by March 31, 2021. During first quarter 2021, the local bargaining union and the Company executed this agreement which resulted in the “freezing” of such surcharges as of December 31, 2020. The Company’s pension expense for this Plan for first halfquarter 2021 and 2020 was $604 and $685, respectively ($2,866 and $2,961 for twelve months 2020 and 2019, was $1,504 and $1,548, respectively ($2,961 and $2,836 for twelve months 2019 and 2018, respectively). The aforementioned expense includes surcharges of $530$213 and $496$241 for first halfquarter 2021 and 2020, and 2019, respectively ($9481,010 and $811$948 for twelve months 20192020 and 2018,2019, respectively), as required under the amended plan of rehabilitation.
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 | |
| | |
| | |
| | |
| | |
| | | Accumulated | ||
| | Foreign | | | | Foreign | | | | Postretirement | | Other | | Foreign | | | | Foreign | | | | Postretirement | | Other | ||||||||||||
| | Currency | | | | Currency | | Commodity | | and Pension | | Comprehensive | | Currency | | | | Currency | | Commodity | | and Pension | | Comprehensive | ||||||||||||
| | Translation | | Investments | | Derivatives | | Derivatives | | Benefits | | Earnings (Loss) | | Translation | | Investments | | Derivatives | | Derivatives | | Benefits | | Earnings (Loss) | ||||||||||||
Balance at March 31, 2020 | | $ | (27,042) |
| $ | 55 |
| $ | (71) |
| $ | (364) |
| $ | 1,883 |
| $ | (25,539) | ||||||||||||||||||
Balance at December 31, 2020 |
| $ | (24,581) | | $ | 1,992 | | $ | 589 | | $ | 713 | | $ | 1,472 | | $ | (19,815) | ||||||||||||||||||
Other comprehensive earnings (loss) before reclassifications | | | 610 | | | 2,592 | | | 267 | | | 294 | | | - | | | 3,763 | | | (397) | | | (876) | | | 61 | | | 301 | | | - | | | (911) |
Reclassifications from accumulated other comprehensive loss | | | - | | | - | | | 128 | | | - | | | (256) | | | (128) | | | - | | | - | | | (78) | | | (506) | | | (267) | | | (851) |
Other comprehensive earnings (loss) net of tax | | | 610 | | | 2,592 | | | 395 | | | 294 | | | (256) | | | 3,635 | | | (397) | | | (876) | | | (17) | | | (205) | | | (267) | | | (1,762) |
Balance at June 30, 2020 | | $ | (26,432) | | $ | 2,647 | | $ | 324 | | $ | (70) | | $ | 1,627 | | $ | (21,904) | ||||||||||||||||||
| | | | | | | | | | | | | | | | | | | ||||||||||||||||||
Balance at March 31, 2019 | | $ | (23,768) |
| $ | (404) |
| $ | (150) |
| $ | (114) |
| $ | 3,918 |
| $ | (20,518) | ||||||||||||||||||
Other comprehensive earnings (loss) before reclassifications | | | 205 | | | 898 | | | 137 | | | (94) | | | - | | | 1,146 | ||||||||||||||||||
Reclassifications from accumulated other comprehensive loss | | | - | | | - | | | - | | | 124 | | | (289) | | | (165) | ||||||||||||||||||
Other comprehensive earnings (loss) net of tax | | | 205 | | | 898 | | | 137 | | | 30 | | | (289) | | | 981 | ||||||||||||||||||
Balance at June 30, 2019 | | $ | (23,563) | | $ | 494 | | $ | (13) | | $ | (84) | | $ | 3,629 | | $ | (19,537) | ||||||||||||||||||
Balance at March 31, 2021 | | $ | (24,978) | | $ | 1,116 | | $ | 572 | | $ | 508 | | $ | 1,205 | | $ | (21,577) | ||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2019 |
| $ | (23,368) | | $ | 882 | | $ | 10 | | $ | 92 | | $ | 2,139 | | $ | (20,245) | | $ | (23,368) | | $ | 882 | | $ | 10 | | $ | 92 | | $ | 2,139 |
| $ | (20,245) |
Other comprehensive earnings (loss) before reclassifications | | | (3,064) | | | 1,765 | | | 112 | | | (280) | | | - | | | (1,467) | | | (3,674) | | | (827) | | | (155) | | | (574) | | | - | | | (5,230) |
Reclassifications from accumulated other comprehensive loss | | | - | | | - | | | 202 | | | 118 | | | (512) | | | (192) | | | - | | | - | | | 74 | | | 118 | | | (256) | | | (64) |
Other comprehensive earnings (loss) net of tax | | | (3,064) | | | 1,765 | | | 314 | | | (162) | | | (512) | | | (1,659) | | | (3,674) | | | (827) | | | (81) | | | (456) | | | (256) | | | (5,294) |
Balance at June 30, 2020 | | $ | (26,432) | | $ | 2,647 | | $ | 324 | | $ | (70) | | $ | 1,627 | | $ | (21,904) | ||||||||||||||||||
| | | | | | | | | | | | | | | | | | | ||||||||||||||||||
Balance at December 31, 2018 | | $ | (24,159) |
| $ | (1,516) |
| $ | (309) |
| $ | (444) |
| $ | 4,206 |
| $ | (22,222) | ||||||||||||||||||
Other comprehensive earnings (loss) before reclassifications | | | 596 | | | 2,010 | | | 296 | | | 164 | | | - | | | 3,066 | ||||||||||||||||||
Reclassifications from accumulated other comprehensive loss | | | - | | | - | | | - | | | 196 | | | (577) | | | (381) | ||||||||||||||||||
Other comprehensive earnings (loss) net of tax | | | 596 | | | 2,010 | | | 296 | | | 360 | | | (577) | | | 2,685 | ||||||||||||||||||
Balance at June 30, 2019 | | $ | (23,563) | | $ | 494 | | $ | (13) | | $ | (84) | | $ | 3,629 | | $ | (19,537) | ||||||||||||||||||
Balance at March 31, 2020 | | $ | (27,042) | | $ | 55 | | $ | (71) | | $ | (364) | | $ | 1,883 | | $ | (25,539) |
15
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 | | Quarter Ended | | Location of (Gain) Loss | ||||||||||||
Comprehensive Income Components | | June 30, 2020 | | June 30, 2019 | | June 30, 2020 | | June 30, 2019 | | Recognized in Earnings | | March 31, 2021 | | March 31, 2020 | | Recognized in Earnings | ||||||
Investments | | $ | - | | $ | - | | Other income, net | ||||||||||||||
Foreign currency derivatives | | $ | 169 | | $ | - | | $ | 267 | | $ | - | | Other income, net | | | (103) | | | 98 | | Other income, net |
Commodity derivatives | | | - | | | 162 | | | 155 | | | 258 | | Product cost of goods sold | | | (668) | | | 155 | | Product cost of goods sold |
Postretirement and pension benefits | | | (337) | | | (380) | | | (675) | | | (761) | | Other income, net | | | (351) | | | (338) | | Other income, net |
Total before tax | | | (168) | | | (218) | | | (253) | | | (503) | | | | | (1,122) | | | (85) | | |
Tax (expense) benefit | | | 40 | | | 53 | | | 61 | | | 122 | | | | | 271 | | | 21 | | |
Net of tax | | $ | (128) | | $ | (165) | | $ | (192) | | $ | (381) | | | | $ | (851) | | $ | (64) | | |
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 120 days) borrowings by the Company’s Spanish subsidiary that are held by international banks. The weighted-average interest rate as of June 30,March 31, 2021 and 2020 and 2019 was 3.0%3.1% and 3.0%, respectively.
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 3 years. In the secondfirst quarter of 2021and first half of 2020 and 2019,, operating lease cost and cash paid for operating lease liabilities totaled $258 and $168, respectively, and $494 and $335,$236, respectively, which is classified in cash flows from
15
operating activities. As of June 30,March 31, 2021 and 2020, operating lease right-of-use 2020assets and 2019, operating lease right-of-use assetsliabilities were $653 and operating lease liabilities were both $1,265 and $1,258,$1,388, respectively. The weighted-average remaining lease term related to these operating leases was 1.31.0 years and 1.91.6 years as of June 30,March 31, 2021 and 2020, and 2019, respectively. The weighted-average discount rate related to the Company’s operating leases was 3.0%3.1% and 3.1% as of June 30,March 31, 2021 and 2020, and 2019, respectively. Maturities of ourthe Company’s operating lease liabilities at June 30, 2020March 31, 2021 are as follows: $506 in 2020, $666$511 in 2021, $88$138 in 2022 and $5$4 in 2023.
The Company, as lessor, rents certain commercial real estate to third partythird-party lessees. The March 31, 2021 and 2020 cost related to these leased properties was $51,402 and $36,368, respectively, and the accumulated depreciation related to these leased properties were $36,378was $15,001 and $10,613, respectively, as of June 30, 2020, and were $36,385 and $9,890, respectively, as of June 30, 2019.$10,433, respectively. Terms of such leases, including renewal options, may be extended for up to sixty years, many of which provide for periodic adjustment of rent payments based on changes in consumer or other price indices. The Company recognizes lease income on a straight-line basis over the lease term. Lease income in secondfirst quarter 2021 and first half 2020 was $1,230 and 2019 was $788 and $751, respectively, and $1,526 and $1,500,$737, respectively, and is classified in cash flows from operating activities.
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.
16
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, 20192020 (the “2019“2020 Form 10-K”).
Net product sales were $79,796$101,795 in secondfirst quarter 20202021 compared to $106,021$102,803 in secondfirst quarter 2019,2020, a decrease of $26,225$1,008 or 24.7%1.0%. First half 2020Domestic (U.S.) net product sales were $182,599in first quarter 2021 declined 3.1% compared to $207,040the corresponding period in first half 2019, a decrease of $24,441 or 11.8%. Second quarter 2020the prior year, however, foreign net product sales, were adversely impacted byincluding exports to foreign markets, increased compared to the corresponding period in the prior year. Although the Covid-19 pandemic including the closure of “nonessential” business, “shelter-in-place” mandates and public health guidelines issued by state, local, federal and foreign governments. The “closing” ofcontinued to have some adverse effects on first quarter 2021 net sales, we are continuing to make progress as the economy “reopens”. In the first quarter 2021, the Covid-19 pandemic has continued to curtail and its gradual “reopening”, has curtailed and at times completely closedlimit access to certain channels of trade where the Company has historically sold its products. Response to this pandemic has resulted in the disruption and changes in lifestyles, and shopping habits, daily work routines, and consumer behaviors, all of which hashave adversely affected planned consumer purchases of the Company’s products for “sharing” and “give away” occasions, as well as impulse purchasesoccasions. Many of the Company’s products are consumed at group events, outings, and other gatherings which have been significantly curtailed or in some cases eliminated due to concern of possible infection or spreading of the Covid-19 virus. Impulse purchases of Company products at retail outlets. Domestic (U.S.)outlets have also been adversely affected by these changes in consumer behavior. As the economy continues to “reopen” and these adverse effects subside, we have seen improvements in our sales inand customer orders. Our second quarter and first half 2020 declined 22.9% and 10.2%, respectively,2021 customer order trend has shown favorable improvement compared to second quarter 2020 when the corresponding periods in the prior year. Foreign sales, including exports to foreign markets,pandemic had a greater rate of decline than domesticsignificant adverse effect on our sales in the comparative periods..
Product cost of goods sold were $50,379$65,565 in secondfirst quarter 20202021 compared to $65,945 in second quarter 2019, and first half 2020 product cost of goods sold were $116,822 compared to $130,801$66,443 in first half 2019.quarter 2020. Product cost of goods sold includes $339$153 and $66$(319) of certain deferred compensation expenses in second quarter 2020 and 2019, respectively, and $20 and $246 of certain deferred compensation expenses(credits) in first halfquarter 2021 and 2020, and 2019, respectively. These deferred compensation expenses (credits) 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 decreased from $65,879$66,762 in secondfirst quarter 20192020 to $50,040$65,412 in secondfirst quarter 2020,2021, a decrease of $15,839$1,350 or 24.0%; and decreased from $130,555 in first half 2019 to $116,802 in first half 2020, a decrease of $13,753 or 10.5%2.0%. As a
16
percentage of net product sales, adjusted product cost of goods sold was 62.7%64.3% and 62.1%64.9% in secondfirst quarter 2021 and 2020, and 2019, respectively, an unfavorable increasea favorable decrease of 0.6 percentage points; and adjusted product cost of goods sold was 64.0% and 63.1% in first half 2020 and 2019, respectively, an unfavorable increase of 0.9 percentage points. Lower sales and production volumes had an unfavorable impact on plant manufacturing overhead costs and resulting gross profit margins because these costs are primarily fixed and recurring each year, and only partially decline with lower volumes. These higher plant overhead costs as a percentage of net product sales were the principal drivers of the above discussed higher adjusted product cost of goods sold as a percentage of sales. Certain cost and expense reductions, which include Company initiatives to reduce costs, partially offsetcontributed to the decrease in second quarterreduction of adjusted product cost of goods sold as a percentage of net product sales The Company is focused on the longer term and first half 2020 gross profit margins. The Companytherefore is continuing to make investments in plant manufacturing operations to meet new consumer and customer demands, achieve product quality improvements, increase operational efficiencies and provide genuine value to consumers.
Selling, marketing and administrative expenses were $29,559$26,809 in secondfirst quarter 20202021 compared to $28,216 in second quarter 2019, and first half 2020 selling, marketing and administrative expenses were $45,831 compared to $59,324$16,272 in first half 2019.quarter 2020. Selling, marketing and administrative expenses include $9,079$3,036 and $1,767$(9,056) of certain deferred compensation expenses in second quarter 2020 and 2019, respectively, and $23 and $6,590 of certain deferred compensation expenses(credits) in first halfquarter 2021 and 2020, and 2019, 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 (credits), selling, marketing and administrative expenses decreased from $26,449$25,328 in secondfirst quarter 20192020 to $20,480$23,773 in secondfirst quarter 2020,2021, a decrease of $5,969$1,555 or 22.6%; and selling, marketing and administrative expenses decreased from $52,734 in first half 2019 to $45,808 in first half 2020 a
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decrease of $6,926 or 13.1%6.1%. As a percentage of net product sales, adjusted selling, marketing and administrative expenses increaseddecreased from 24.9%24.6% in second quarter 2019 to 25.7% in secondfirst quarter 2020 an unfavorable increaseto 23.4% in first quarter 2021, a favorable decrease of 0.81.2 percentage points as a percent of net sales, and adjusted selling, marketing and administrative expenses decreased from 25.5% in first half 2019 to 25.1% in first half 2020, a favorable decrease of 0.4 percentage points as a percent of netproduct sales. The increasedecrease in adjusted selling, marketing and administrative expenses as a percentage of net product sales in secondfirst quarter 2020 principally2021 reflects the adverse effectsbenefits of certain fixed selling, marketingoperational changes and administrative expenses against significantly lower sales in second quarter 2020 comparedexpense reduction initiatives, as well as reduced business travel due to 2019. Decreases in certain selling, marketing and administrative expenses, including Company travel and initiatives to reduce expenses, partially offset the increase in second quarter and first half 2020 expenses.Covid-19 pandemic. Selling, marketing and administrative expenses include $8,397$10,139 and $11,185$10,672 for customer freight, delivery and warehousing expenses in secondfirst quarter 20202021 and 2019,2020, respectively, a decrease of $2,788$533 or 24.9%5.0%. These expenses were $19,06910.0% and $22,217 in first half 2020 and 2019, respectively, a decrease of $3,148 or 14.2%. These expenses were 10.5% of net product sales in both second quarter 2020 and 2019, and were 10.4% and 10.7% of net product sales in first halfquarter 2021 and 2020, respectively, which also contributed to the reduction in adjusted selling, marketing and 2019, respectively.administrative expenses as a percent of net product sales.
Earnings from operations were $493$10,410 in secondfirst quarter 20202021 compared to $12,515 in second quarter 2019, and were $21,237$20,744 in first half 2020 compared to $18,273 in first half 2019.quarter 2020. Earnings from operations include $9,418$3,189 and $1,833$(9,375) of certain deferred compensation expenses in second quarter 2020 and 2019; respectively, and include $43 and $6,836 of certain deferred compensation expenses(credits) in first halfquarter 2021 and 2020, and 2019, respectively, which are discussed above. Adjusting for these deferred compensation costs, expenses and expenses,(credits), earnings from operations were $9,911$13,599 and $14,348 in second quarter 2020 and 2019, respectively, a decrease of $4,437 or 30.9%; and adjusted operating earnings were $21,280 and $25,109$11,369 in first halfquarter 2021 and 2020, and 2019, respectively, a decreasean increase of $3,829$2,230 or 15.2%19.6%. As a percentage of net product sales, these adjusted operating earnings were 12.4%13.4% and 13.5%11.1% in secondfirst quarter 2021 and 2020, respectively, a favorable increase of 2.3 percentage points. The increase in adjusted operating earnings in first quarter 2021 principally reflects the benefits of more favorable product cost of goods sold and 2019, respectively, an unfavorable decrease of 1.1 percentage pointsrelated better gross profit margins, and reductions in selling, marketing and administrative expenses, excluding certain deferred compensation expenses (credits), as a percentage of net product sales; and as a percentage of net product sales these adjusted operating earnings were 11.7% and 12.1% in first half 2020 and 2019, respectively, an unfavorable decrease of 0.4 percentage points as a percentage of net product sales. The decrease in adjusted operating earnings in both second quarter and first half 2020 principally reflects the negative impact of lower sales, including the effects of lower gross profit margins, as discussed above.
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 (loss), net was $9,727$3,816 in secondfirst quarter 20202021 compared to $3,053$(5,494) in secondfirst quarter 2019,2020, a favorable increase of $6,674; and other income, net, was $4,233 in first half 2020 compared to $9,070 in first half 2019, an unfavorable decrease of $4,837.$9,310. Other income (loss), net for secondfirst quarter 20202021 and 20192020 includes net gains (losses) and investment income of $9,418$3,189 and $1,833,$(9,375), respectively, on trading securities which provide an economic hedge of the Company’s deferred compensation liabilities; and other income, net for first half 2020 and 2019 includes net gains and investment income of $43 and $6,836, respectively, on trading securities.liabilities. These changes in trading securities, including mutual fund investments in equity securities, reflect both the overall equity market downturn as of March 31, 2020 in response to Covid-19, and the overall equity market recovery as of March 31, 2021. These changes in market values were substantially offset by a like amount of deferred compensation expense (credits) included in product cost of goods sold and selling, marketing, and administrative expenses in the respective periods as discussed above. Other income (loss), net for secondfirst quarter 20202021 and 20192020 includes investment income on available for sale securities of $920$716 and $1,109$1,181 in 20202021 and 2019, respectively; and other income, net for first half 2020, and 2019 includes investment income on available for sale securities of $2,101 and $2,181 in 2020 and 2019, respectively. Other income (loss), net also includes pre-tax gains (losses) on foreign exchange of $(849)$33 and $(211) in second quarter 2020 and 2019, respectively, and $1,661 and $(446)$2,510 in first halfquarter 2021 and 2020, and 2019, respectively.
The consolidated effective tax rates were 27.8%24.3% and 25.8% in second quarter 2020 and 2019, respectively, and 24.0% and 25.2%21.5% in first halfquarter 2021 and 2020, and 2019, respectively. The changes in tax rates in 2020 compared to 2019 in the second quarter and first half principally reflect changes inLower state income taxes contributed to the lower effective tax expense.rate in first quarter 2020. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was signed into U.S. law. The CARES Act provideshas provided a substantial stimulus and assistance package intended to address the economic impact of the Covid-19 pandemic, including tax relief and government loans, grants and investments. The Canadian government also has enacted a stimulus program, Canadian Emergency Wage Subsidy (“CEWS”), to respond to the economic impact of Covid-19.Covid-19 during 2020. The Company’s financial results in secondfirst quarter 20202021 did reflect some very limited benefits from these stimulus programs. The U.S. government is expected to enact additional stimulus legislation in third quarter 2020 but the Company cannot predict what impact, if any, such additional stimulus would
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have on the Company’s operating results.government stimulus programs, however, no benefits were realized in first quarter 2020. The Company continues to monitor anythe effects and related benefits that may result from the CARESabove-discussed legislation, the American Rescue Plan Act of 2021 legislation passed in first quarter 2021, and successor programs as well as foreignother proposed and enacted stimulus legislation. Based on consultation with its tax advisors, the Company does not believe that it will be eligible for any significant benefits in 2021 under these stimulus programs.
Net earnings attributable to Tootsie Roll Industries, Inc. were $7,388$10,767 (after $4 net loss attributed to non-controlling interests) in first quarter 2021 compared to $11,982 (after $6 net loss attributed to non-controlling interests) in secondfirst quarter 2020, compared to $11,556 (after $12 net loss attributed to non-controlling interests) in second quarter 2019, and earnings per share were $0.11$0.16 and $0.17 in secondfirst quarter 20202021 and 2019, respectively, a decrease of $0.06 per share, or 35.3%. First half 2020, net earnings attributable to Tootsie Roll Industries, Inc. were $19,370 (after $12 net loss attributed to non-controlling interests) compared to first half 2019 net earnings of $20,511 (after $56 net loss attributed to non-controlling interests), and net earnings per share were $0.29 and $0.30 in first half 2020 and first half 2019, respectively, a decrease of $0.01 per share, or 3.3%5.9%. NetThe prior year first quarter 2020 comparative net earnings in second quarter and first half 2020 were principally impacted bybenefitted from foreign exchange after-tax gains of approximately $1,900,000 ($2,510,000 pre- tax gain) or $0.03 per share, which significantly affects the decline in sales as discussed above.comparison of 2021 results with 2020. Earnings per share attributable to Tootsie Roll Industries, Inc. for secondfirst quarter and first half 20202021 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 67,50168,845 at second quarter 2019 to 66,671 at secondfirst quarter 2020 and from 67,664 into 67,852 at first half 2019 to 66,781 in first half 2020.quarter 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 2020.quarter 2021. The Company’s trademarks have indefinite lives and Company management believes that the 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 2019quarter 2020 period or in calendar year 2019.2020. 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, 2019.2020.
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”, the “Red Zone”, 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. DuringBeginning in 2015, the Company received new annual notices that the Plan’s statusPlan was changedreclassified 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 through 2020)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 (temporarily or(or permanently) some benefits payable to all categories of participants, including retired participants, except retirees that are disabled 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 50.4%48.3%, 51.6%50.4%, and 54.7%51.6% as of the most recent valuation dates available, January 1, 2020, 2019, 2018, and 2017,2018, 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 48.8%51.6% (not 50.4%48.3%). Given the recent declines in the equity markets due to the Covid-19 pandemic, the current funded percentage is likely much lower than the aforementioned 48.8%. As of the January 1, 20192020 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, 20192020 fell 14%4% from the previous year and 17% over the past two years. When compared to the Plan valuation date of January 1, 2011 (seven(nine years earlier), current active employee participants have declined 47%, whereas participants who were retired or
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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 14%12%. The Company understands that the Plan is continuing to explore additional restructuring measures which include incentives to participating employers in exchange for providing additional future cash contributions as well as suspension of certain retirement benefits.
The Company has been advised that its withdrawal liability would have been $99,300, $99,800 $81,600, and $82,200$81,600 if it had withdrawn from the Plan during 2020, 2019 and 2018, and 2017, respectively. The increase from 2018 to 2019 was mainly attributable to a decrease in the Plan’s assets during 2018, net of market returns, and the withdrawal of a large contributing employer where their actual withdrawal payments (likely over 20 years as discussed below) are not enough to fully fund their actual withdrawal liability. The Company’s relative share of the Plan’s contribution base, driven by employer withdrawals, has increased for the last several years, and Managementmanagement 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, will increase the value of vested benefits and likely increase the Company’s withdrawal liability for 2021. Based on the above, including the Plan’s projected insolvency in the year 2030, Managementnext 20 years, management believes that the Company’s withdrawal liability couldwill likely increase further in future years.
Based on the Company’s updated actuarial study and certain provisions in ERISA and the law relating to withdrawal liability payments, Managementmanagement believes that the Company’s liability would likely be limited to twenty annual payments of $3,045$2,958 which have a present value in the range of $35,700$34,700 to $46,700$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)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 $49,900$48,500 to $104,500$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 which could be higher 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, requires 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 surcharges as of December 31, 2020.
The Company’s pension expense for this Plan for first halfquarter 2021 and 2020 was $604 and $685, respectively ($2,866 and $2,961 for twelve months 2020 and 2019, was $1,504 and $1,548, respectively, whichrespectively). The aforementioned expense includes surcharges of $530$213 and $496,$241 for first quarter 2021 and 2020, respectively ($1,010 and $948 for twelve months 2020 and 2019, respectively), as required under the amended rehabilitation plan. Such surcharges for calendar years 2019 and 2018 were $948 and $811, respectively.plan of rehabilitation.
The Company Management understands that the U.S Congress and the U.S Senate have proposed variousU.S. American Rescue Plan Act of 2021 legislation including the “Butch Lewis Act,” that would provide varying degrees ofpassed in first quarter 2021 provides financial assistance to troubledshore up struggling multi-employer plans similarfor many future years. The Company continues to study this legislation to determine its effects on the Plan including long-term low interest loans to troubled multi-employer plans. Certain provisions proposed would change theand Company withdrawal liability rules which could increase the Company’s obligation in the event that the Company withdrew from this Plan, resulting in higher annual payment amounts and payments for a longer period of time in excess of the maximum twenty year period discussed above.liability. The Company is currently unable to determine the ultimate outcome of the above discussed multi-employer union pension matter, including the effects of the American Rescue Plan legislation, 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, 2019.2020.
The Company continues to actively monitor Covid-19 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.
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LIQUIDITY AND CAPITAL RESOURCES
Net cash flows provided by operating activities were $10,880$15,337 and $11,021$14,581 in first halfquarter 2021 and 2020, and 2019, respectively, an unfavorable decreasea favorable increase of $141.$756. The decreaseincrease in first half 2020quarter 2021 cash flows from operating activities principally reflects decreased net earningschanges in inventories partially offset by the changea decrease in income taxes payable as well asaccounts receivable which reflects the timing of net product sales and collections of accounts receivable trade.trade, as well as changes in accounts payable and accrued liabilities, and income taxes payable in the comparative periods.
Net cash used infrom (used in) investing activities was $17,271$(26,528) in first half 2020quarter 2021 compared to $33,662$8,261 in first half 2019.quarter 2020. Cash flows used in investing activities reflect $53,269$30,031 and $33,558$21,312 of purchases of available for sale securities during first halfquarter 2021 and 2020, and 2019, respectively, and $44,466$8,543 and $12,120$35,217 of sales and maturities of available for sale securities
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during first halfquarter 2021 and 2020, and 2019, respectively. First halfquarter 2021 and 2020 and 2019 investing activities include capital expenditures of $6,410$3,787 and $9,945,$3,737, respectively. Company Managementmanagement has committed approximately $25,000 to a rehabilitation upgrade and expansion of one of its manufacturing plants in the U.S.A. The Company spent approximately $2,400$6,000 and $2,000 in 2020 and 2019, and Management’s projectedrespectively. Company management expects cash outlays for this project are approximately $12,600 in 2020 and $10,000to approximate $17,000 in 2021. 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 $864$965 and $686$781 at June 30,March 31, 2021 and 2020, and 2019, respectively, all of which relates to its Spanish subsidiary. The Company had no other outstanding bank borrowings at June 30, 2020.March 31, 2021.
Financing activities include Company common stock purchases and retirements of $12,959$7,423 and $19,186$8,809 in first halfquarter 2021 and 2020, and 2019, respectively. Cash dividends of $11,853$11,874 and $11,699$11,703 were paid in first halfquarter 2021 and 2020, and 2019, respectively.
The Company’s current ratio (current assets divided by current liabilities) was 3.84.4 to 1 at June 30, 2020March 31, 2021 compared to 4.44.6 to 1 at December 31, 20192020 and 4.74.3 to 1 at June 30, 2019.March 31, 2020. Net working capital was $238,517$226,391 at June 30, 2020March 31, 2021 compared to $273,786$250,851 and $220,802$257,104 at December 31, 20192020 and June 30, 2019,March 31, 2020, respectively. The aforementioned net working capital amounts are principally reflected in aggregate cash and cash equivalents and short-term investments of $186,385$178,687 at June 30, 2020March 31, 2021 compared to $239,404$208,931 and $140,560$216,577 at December 31, 20192020 and June 30, 2019,March 31, 2020, respectively. In addition, long term investments, principally debt securities comprising corporate bonds, were $186,057$243,749 at June 30, 2020,March 31, 2021, as compared to $153,031$220,020 and $195,359$153,287 at December 31, 20192020 and June 30, 2019,March 31, 2020, respectively. Aggregate cash and cash equivalents and short and long-term investments were $372,442, $392,435,$422,436, $428,951, and $335,919,$369,864, at June 30, 2020,March 31, 2021, December 31, 20192020 and June 30, 2019,March 31, 2020, respectively. The aforementioned includes $78,285, $76,183,$78,271, $73,828, and $71,375$68,717 at June 30, 2020,March 31, 2021, December 31, 20192020 and June 30, 2019,March 31, 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 halfquarter 2021 and 2020 and 2019 were generally used to purchase the Company’s common stock or were replaced with debt securities of similar maturities.
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 $10,639, $12,085$7,543, $8,272 and $14,674$11,762 of aggregate cash and cash equivalents at June 30, 2020,March 31, 2021, December 31, 20192020 and June 30, 2019,March 31, 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.
COVID-19 PANDEMIC
On March 11, 2020, the World Health Organization designated the recent novel coronavirus ("COVID-19") as a global pandemic. We continue to actively monitor COVID-19 and its potential impact on our operations and financial results, prioritizing employee health and safety. To date, there has not been any material disruption to our supply chain or our manufacturing capabilities that has materially affected our ability to meet sales demands.
The Covid-19 pandemic, and resulting “shelter in place” and closures of “nonessential” businesses by many state and local governments, as well as foreign governments, has had a significant adverse impact on the overall economy. The aforementioned has resulted in the curtailment or complete closing of certain trade channels where our products are distributed as well as resulting changes in consumer behavior and shopping habits. Many of the Company’s products are larger confectionary products where a high value is provided to consumers, and such products are often consumed at many “sharing” and “give-a-way” events including group gatherings and activities. However, many of these consumption occasions as well as impulse purchases of our products have been significantly affected or completely curtailed by “shelter in place” mandates, public health guidelines, and consumer fears of returning to their previous lifestyles. As a result, the Company has experienced significant declines in both second quarter 2020 sales, and in its customer orders and sales to date in third quarter 2020 compared to the corresponding periods in 2019. Although the downward sales trend in third quarter 2020 has lessened as steps are
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taken to “reopen our economy”, the Company expects this adverse sales trend to have a material adverse effect on sales and net earnings in third quarter 2020, and possibly fourth quarter 2020.
The Company’s third quarter period is historically its largest quarterly sales period because it also includes pre-Halloween seasonal sales which are very significant in the third quarter. Should Halloween activities not materialize this year, our Halloween sales and/or consumer purchases of our products at retail could be materially adversely affected, including costs relating to customer returns and/or significant price discounting and mark-downs at retail. The effects of this pandemic are unprecedented and its future effects, including the “reopening up the economy”, are very uncertain. Therefore, the Company is not able to predict the effects of this pandemic on the second half of 2020 and beyond.
Although the Company has not yet experienced any material disruptions to its business, the Covid-19 pandemic could also result in the following:
We have prioritized the safety of our employees and therefore the Company has taken many steps to provide our employees with a safe and healthy work environment, including increased sanitation, social distancing measures at all Company locations, having office employees work remotely, curtailing visitors at Company locations, and limiting all airline and other travel by employees. Because the Company has a sizable investment in marketable securities (see Liquidity and Capital Resources section above) it is well positioned financially to respond to the adverse effects of this pandemic in the short-term, as well as for a longer period of time if necessary.
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
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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
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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 20192020 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, 2019.2020.
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, 2020March 31, 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.
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, 2020March 31, 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 1A. RISK FACTORS
The following additional risk factor relates to the Covid-19 pandemic and should be read in conjunction with the risk factors previously disclosed in Part I, Item 1A, “Risk Factors,” of our 2019 Annual Report on Form 10-K (the "2019 Form 10-K") filed with the SEC. The developments described in this additional risk factor have been expanded upon, and in some cases heightened certain of the risks disclosed in the risk factor section of our 2019 Form 10-K. Except as described herein, the Company is not aware of any material changes with respect to the risk factors disclosed in our 2019 Form 10-K.
Supplemental Risk Factor
Our financial results may be negatively impacted by changes in confectionary trade practices and consumer patterns, operational challenges associated with the actual or perceived effects of a disease or pandemic outbreak, and public health concerns such as the Covid-19 pandemic.
Our business and financial results are impacted by consumer spending levels, impulse purchases, shopping habits and behaviors, consumer activities, events and traditions where confectionary products are consumed, the availability of our products at retail, including at large retail customers, and our ability to manufacture and distribute products to our customers and consumers in an effective and efficient manner. The fear of exposure or actual effects of a disease, such as the Covid-19 pandemic, could negatively impact our overall business and financial results. Specific factors that may impact our operations, some of which have had, and in the future could have, an unfavorable impact on our operations as a result of Covid-19, include, but are not limited to:
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With respect to the Covid-19 pandemic, the situation remains fluid and could possibly result in additional material adverse effects on the Company and its financial results. The Company's efforts to manage and mitigate these factors may be unsuccessful, and the effectiveness of these efforts depends on many factors beyond our control, including the duration and severity the Covid-19 pandemic, as well as actions taken to contain its spread and mitigate public health effects and fear.
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, 2020:March 31, 2021:
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| | Shares | | Price Paid per | | Publicly Announced Plans | | Under the Plans | | Shares | | Price Paid per | | Publicly Announced Plans | | Under the Plans | ||
Period | | Purchased | | Share | | Or Programs | | or Programs | | Purchased | | Share | | Or Programs | | or Programs | ||
| | | | | | | | | | | | | | | | | | |
Apr 1 to Apr 30 | | 5,000 | | $ | 37.05 | | Not Applicable | | Not Applicable | |||||||||
Jan 1 to Jan 31 | | 83,374 | | $ | 30.37 | | Not Applicable | | Not Applicable | |||||||||
| | | | | | | | | | | | | | | | | ||
May 1 to May 31 | | 43,435 | | 34.96 | | Not Applicable | | Not Applicable | ||||||||||
Feb 1 to Feb 28 | | 37,500 | | 30.94 | | Not Applicable | | Not Applicable | ||||||||||
| | | | | | | | | | | | | | | | | ||
Jun 1 to Jun 30 | | 69,500 | | 35.14 | | Not Applicable | | Not Applicable | ||||||||||
Mar 1 to Mar 31 | | 113,157 | | 32.88 | | Not Applicable | | Not Applicable | ||||||||||
| | | | | | | | | | | | | | | | | ||
Total | | 117,935 | | $ | 35.15 | | Not Applicable | | Not Applicable | | 234,031 | | $ | 31.67 | | 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.
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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: |
| | BY: | /S/ELLEN R. GORDON |
| | | Ellen R. Gordon | |
| | | Chairman and Chief | |
| | | Executive Officer | |
| | | | |
Date: |
| | BY: | /S/G. HOWARD EMBER, JR. |
| | | G. Howard Ember, Jr. | |
| | | Vice President Finance and | |
| | | Chief Financial Officer |
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