UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 29, 2007
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ----to----
COMMISSION FILE NUMBER 1-1361
Tootsie Roll Industries, Inc.
(Exact Name of Registrant as Specified in its Charter)
VIRGINIA 22-1318955
(State of Incorporation) (I.R.S. Employer Identification No.)
7401 South Cicero Avenue, Chicago, Illinois 60629
(Address of Principal Executive Offices) (Zip Code)
773-838-3400
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No ___
Indicate by check mark whether the Registrant is a large accelerated
filer, an accelerated filer or a non-accelerated filer. See definition
of "accelerated filer and large accelerated filer" in Rule 12b-2 of the
Exchange Act.
Large accelerated filer X Accelerated filer _ Non-accelerated filer __
Indicate by check mark whether the Registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act)
Yes No X
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date (October
5, 2007)
Class Outstanding
Common Stock, $.69 4/9 par value 36,032,350
Class B Common Stock, $.69 4/9 par value 18,908,781
TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES
SEPTEMBER 29, 2007
INDEX
Page No.
Part I - Financial Information
Item 1. Unaudited Financial Statements:
Condensed Consolidated Statements of
Financial Position 2-2A
Condensed Consolidated Statements of Earnings,
Comprehensive Earnings and Retained Earnings 3-3A
Condensed Consolidated Statements of Cash Flows 4
Notes to Condensed Consolidated Financial Statements 5-5B
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6-6E
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 6E
Item 4. Controls and Procedures 6E
Part II - Other Information
Item 1A. Risk Factors 7
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds 7
Item 6. Exhibits 7A
Signatures 7A
Certifications 7B-D
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(in thousands of dollars) (UNAUDITED)
ASSETS Sep. 29, Sep. 30, Dec. 31,
CURRENT ASSETS 2007 2006 2006___
<s> <c> <c> <c>
Cash & cash equivalents $ 25,139 $ 13,176 $ 55,729
Investments 31,439 32,364 23,531
Trade accounts receivable,
Less allowances of
$3,378, $3,548 & $2,322 93,239 90,780 35,075
Other receivables 2,549 1,875 3,932
Inventories
Finished goods & work in process 47,901 47,937 42,146
Raw material & supplies 22,460 23,044 21,811
Prepaid expenses 3,419 3,349 6,489
Deferred income taxes 6,646 6,374 2,204
Total current assets 232,792 218,899 190,917
PROPERTY, PLANT & EQUIPMENT, at cost
Land 19,402 19,401 19,402
Buildings 87,273 84,241 87,273
Machinery & equipment 267,148 257,580 259,049
373,823 361,222 365,724
Less-accumulated depreciation 173,054 160,472 162,826
Net property, plant and equipment 200,769 200,750 202,898
OTHER ASSETS
Goodwill 73,237 74,194 74,194
Trademarks 189,024 189,024 189,024
Investments 62,762 42,234 51,581
Split dollar life insurance 75,048 72,857 73,357
Investment in joint venture 9,168 11,168 9,668
409,239 389,477 397,824
Total assets $842,800 $809,126 $791,639
-2-
(The accompanying notes are an integral part of these statements.)
(in thousands except per share data) (UNAUDITED)
LIABILITIES AND SHAREHOLDERS' EQUITY Sep. 29, Sep. 30, Dec. 31,
CURRENT LIABILITIES 2007 2006 2006__
<s> <c> <c> <c>
Accounts payable $ 18,573 $ 20,359 $ 13,102
Dividends payable 4,395 4,300 4,300
Accrued liabilities 46,067 52,096 43,802
Income taxes payable 7,560 17,443 1,007
Total current liabilities 76,595 94,198 62,211
NON-CURRENT LIABILITIES
Deferred income taxes 36,512 38,086 40,864
Postretirement health care and life
insurance benefits 13,529 11,114 12,582
Industrial development bonds 7,500 7,500 7,500
Liability for uncertain tax positions 18,903 - -
Deferred compensation and other liabilities 40,444 33,371 37,801
Total non-current liabilities 116,888 90,071 98,747
Total liabilities 193,483 184,269 160,958
SHAREHOLDERS' EQUITY
Common Stock, $.69-4/9 par value-
120,000 shares authorized; 36,032,
35,360 & 35,364 respectively, issued 25,022 24,555 24,558
Class B common stock, $.69-4/9 par value-
40,000 shares authorized; 18,909, 18,414
& 18,390, respectively, issued 13,131 12,788 12,771
Capital in excess of par value 472,605 439,232 438,648
Retained earnings 152,936 161,856 169,233
Accumulated other comprehensive loss (12,385) (11,582) (12,537)
Treasury stock (at cost)-
63, 61 & 62 shares, respectively (1,992) (1,992) (1,992)
Total shareholders' equity 649,317 624,857 630,681
Total liabilities and
shareholders' equity $842,800 $809,126 $791,639
-2A-
(The accompanying notes are an integral part of these statements.)
TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
EARNINGS, COMPREHENSIVE EARNINGS AND RETAINED EARNINGS
(in thousands except per share amounts) (UNAUDITED)
13 WEEKS ENDED
Sep. 29, 2007 & Sep. 30, 2006
<s> <c> <c>
Net product sales $182,917 $186,403
Rental and royalty revenue 1,231 1,428
Total revenue 184,148 187,831
Product cost of goods sold 122,159 116,311
Rental and royalty cost 354 447
Total costs 122,513 116,758
Product gross margin 60,758 70,092
Rental and royalty gross margin 877 981
Total gross margin 61,635 71,073
Selling, marketing and administrative expenses 28,181 30,390
Earnings from operations 33,454 40,683
Other income, net 1,704 1,511
Earnings before income taxes 35,158 42,194
Provision for income taxes 11,726 13,225
Net earnings 23,432 28,969
Other comprehensive income, before tax:
Foreign currency translation adjustments (197) 317
Unrealized gains on securities 210 290
Unrealized gains (losses) on derivatives 212 (2,009)
Other comprehensive income (loss), before tax 225 (1,402)
Income tax benefit (expense) related to items
of other comprehensive income (157) 635
Other comprehensive income (loss), net of tax 68 (767)
Comprehensive earnings $ 23,500 $ 28,202
Retained earnings at beginning of period $133,894 $137,182
Net earnings 23,432 28,969
Cash dividends (4,390) (4,295)
Retained earnings at end of period $152,936 $161,856
Net earnings per share $ .43 $0.52
Dividends per share * $ .08 $0.08
Average number of shares outstanding 54,920 55,630
*Does not include 3% stock dividend to shareholders of record on 3/09/07 and
3/10/06.
-3-
(The accompanying notes are an integral part of the statements.)
TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
EARNINGS, COMPREHENSIVE EARNINGS AND RETAINED EARNINGS
(in thousands except per share amounts) (UNAUDITED)
39 WEEKS ENDED
Sep. 29, 2007 & Sep. 30, 2006
<s> <c> <c>
Net product sales $377,732 $385,169
Rental and royalty revenue 4,021 3,750
Total revenue 381,753 388,919
Product cost of goods sold 249,173 237,734
Rental and royalty cost 1,223 1,050
Total costs 250,396 238,784
Product gross margin 128,559 147,435
Rental and royalty gross margin 2,798 2,700
Total gross margin 131,357 150,135
Selling, marketing and administrative expenses 73,403 76,253
Earnings from operations 57,954 73,882
Other income, net 6,138 4,724
Earnings before income taxes 64,092 78,606
Provision for income taxes 20,623 24,417
Net earnings 43,469 54,189
Other comprehensive income, before tax:
Foreign currency translation adjustments (197) (381)
Unrealized gains (losses) on securities 222 (450)
Unrealized gains (losses) on derivatives 330 (4,713)
Other comprehensive income (loss), before tax 355 (5,544)
Income tax benefit (expense) related to items
of other comprehensive income (204) 1,909
Other comprehensive income (loss), net of tax 151 (3,635)
Comprehensive earnings $ 43,620 $ 50,554
Retained earnings at beginning of period $169,233 $164,236
Net earnings 43,469 54,189
Cash dividends (13,081) (12,875)
Stock dividends - 3% (46,685) (43,694)
Retained earnings at end of period $152,936 $161,856
Net earnings per share $ .79 $0.97
Dividends per share * $ .24 $0.24
Average number of shares outstanding 55,118 55,951
*Does not include 3% stock dividend to shareholders of record on 3/09/07 and
3/10/06.
-3A-
(The accompanying notes are an integral part of the statements.)
TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars) (UNAUDITED)
39 WEEKS ENDED
Sep. 29, 2007 & Sep. 30, 2006
CASH FLOWS FROM OPERATING ACTIVITIES:
<s> <c> <c>
Net earnings $ 43,469 $ 54,189
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 11,997 11,557
Amortization of marketable securities 420 762
Purchase of trading securities (1,901) (1,994)
Sales of trading securities 1,256 1,473
Changes in operating assets and liabilities:
Accounts receivable (58,236) (60,082)
Other receivables 1,714 (2,076)
Inventories (6,470) (16,045)
Prepaid expenses and other assets 1,371 (1,282)
Accounts payable and accrued liabilities 7,783 10,123
Income taxes payable and deferred 17,788 8,124
Postretirement health care and life
insurance benefits 947 331
Deferred compensation and other liabilities 72 (103)
Other 96 (3)
Net cash provided by operating activities 20,306 4,974
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (9,935) (33,702)
Decrease in restricted cash - 22,330
Purchase of available for sale securities (34,685) (9,539)
Sale and maturity of available for
sale securities 18,615 35,173
Net cash provided by (used in) investing activities (26,005) 14,262
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of bank loan - (32,001)
Dividends paid in cash (13,153) (12,969)
Shares repurchased and retired (11,738) (30,096)
Net cash used in financing activities (24,891) (75,066)
Decrease in cash and cash equivalents (30,590) (55,830)
Cash and cash equivalents at the beginning of year 55,729 69,006
Cash and cash equivalents at the end of quarter $ 25,139 $ 13,176
Supplemental cash flow information:
Income taxes paid, net of refunds $ 2,685 $ 13,339
Interest paid $ 441 $ 665
Stock dividend issued $ 46,520 $ 43,563
(The accompanying notes are an integral part of the statements.)
-4-
TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 29, 2007
(in thousands except per share amounts) (UNAUDITED)
Note 1 - Foregoing data has been prepared from the unaudited
financial records of Tootsie Roll Industries, Inc. and
Subsidiaries (the Company) and in the opinion
of management all adjustments necessary for a fair
statement of the results for the interim period have
been reflected. All adjustments were of a normal
and recurring nature. These consolidated financial
statements should be read in conjunction with the
consolidated financial statements and the related notes
included in the Company's 2006 Annual Report on Form 10-K.
The 2006 Condensed Consolidated Statements of Earnings
for both the 13 and 39 weeks ended September 30, 2006
have been revised to (1) reflect rental and royalty
revenues and related costs in Earnings from operations
from Other income, net and (2) reflect compensation
expense (benefit) in Product cost of goods sold and
Selling, marketing, and administrative expenses and the
related appreciation (depreciation) of investments held
by the Company to fund deferred compensation plans in
Other income, net in accordance with EITF 97-14,
"Accounting for Deferred Compensation Arrangements
Where Amounts Earned Are Held in a Rabbi Trust and
Invested" to conform to the current year presentation.
Note 2 - Average shares outstanding for the 39 week period ended
September 29, 2007 reflects stock repurchases of 419
shares for $11,738 and a 3% stock dividend distributed
on April 12, 2007. Average shares outstanding for the
39 week period ended September 30, 2006 reflects stock
repurchases of 1,068 shares for $30,096 and a 3% stock
dividend distributed on April 13, 2006.
Note 3 - Results of operations for the period ended September 29,
2007 are not necessarily indicative of results to be
expected for the year ending December 31, 2007 because
of the seasonal nature of the Company's operations.
Historically, the third quarter has been the Company's
largest sales quarter due to Halloween sales.
Note 4 - The bank loan, a demand note issued in December 2005, was
fully repaid in May 2006.
Note 5 - As disclosed in the Company's Annual Report on Form 10-K for
the year ended December 31, 2006, the Company performs its
annual impairment review of goodwill and other intangible
assets not subject to amortization in the fourth quarter of
each year in accordance with FASB Statement No. 142, "Goodwill
and Other Intangible Assets" ("FAS No. 142"). Under FAS No. 142,
the impairment review of goodwill, trademarks and other
-5-
intangible assets not subject to amortization must be based on
estimated fair values. The valuation of intangible assets
requires assumptions and estimates of many critical factors,
including revenue and market growth, gross profit margins,
operating cash flows, market multiples, and discount rates.
The Company has experienced declines in its consolidated operating
results compared to the prior year principally due to higher input
costs including higher costs of ingredients and packaging materials,
and higher costs for products manufactured in Canada resulting from
the appreciation of the Canadian dollar relative to the U.S. dollar.
The Company will be performing its annual impairment testing in
fourth quarter 2007 which will include long-term financial and cash
flow projections, including assumptions as to future revenue growth,
price increases and cost and expense reductions that are necessary
to recover these higher input costs. Adverse changes in expected
operating results and/or unfavorable changes in other economic
factors used to estimate fair values could result in a non-cash
impairment charge in the future under FAS No. 142.
Note 6 - The Company adopted the provisions of FASB Interpretation
No. 48, "Accounting for Uncertainty in Income Taxes" (FIN 48)
effective January 1, 2007. 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 2004 through 2006.
With few exceptions, the Company is no longer subject to
examinations by tax authorities for the year 2003 and prior.
As of January 1, 2007, the Company had $14,961 of unrecognized tax
benefits. Included in this balance is $7,160 of unrecognized tax
benefits that, if recognized, would favorably affect the annual
effective income tax rate. As of September 29, 2007, the Company
had $15,205 of unrecognized tax benefits ($7,403 represented those
unrecognized tax benefits that, if recognized, would favorably
affect the annual effective income tax rate). During the third
quarter and nine months 2007, the Company recorded approximately
$(127) and $243, respectively, of income tax (benefit) expense
relating to its uncertain tax positions.
The Company recognizes interest and penalties related to
unrecognized tax benefits in the provision for income taxes on
the Condensed Consolidated Statement of Earnings. As of January 1,
2007, $3,382 of interest and penalties were included in the
Liability for Uncertain Tax Positions account on the Condensed
Consolidated Statement of Financial Position. As of September 29,
2007, $3,698 of interest and penalties were included in the
aforementioned account. During the third quarter and nine months
2007, the Company recorded approximately $(244) and $316,
respectively, of additional income tax expense (benefit) related
to interest and penalties.
The Company is not currently subject to a U.S. federal income tax
examination, however, the Company is currently subject to various
state tax examinations. Although the Company is unable to determine
the ultimate outcome of these examinations, the Company believes
that its liability for uncertain tax positions relating to these
jurisdictions for such years is adequate.
-5A-
It is expected that the liability for uncertain tax positions will
change in the next 12 months; however, the Company does not expect
the change to have a significant impact on the Company's financial
position, results of operations, and related cash flows from
operating activities. The related cash flows in future periods with
respect to the liability for uncertain tax positions are not readily
determinable.
Note 7 - New Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, "Fair Value
Measurements" (SFAS No. 157). SFAS No. 157 establishes a
common definition for fair value to be applied to U.S. GAAP
guidance requiring use of fair value, establishes a framework
for measuring fair value, and expands disclosure about such
fair value measurements. SFAS No. 157 is effective for fiscal
years beginning after November 15, 2007. The Company is
currently assessing the impact of SFAS No. 157 and has not
yet made any determination as to the effects, if any, that it
may have on the Company's financial position and results of
operations.
In February 2007, the FASB issued SFAS No. 159, "The Fair
Value Option for Financial Assets and Financial Liabilities-
including an amendment to FASB Statement No. 115" (SFAS No.
159), which permits entities to choose to measure many
financial instruments and certain other items at fair value
that are not currently required to be measured at fair value.
SFAS No. 159 is effective for fiscal years beginning after
November 15, 2007. The Company is currently assessing the
impact of SFAS No. 159 and has not yet made any determination
as to the effects, if any, that it may have on the Company's
financial position and results of operations.
-5B-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(dollars in thousands except per share amounts)
The following is management's discussion of the Company's operating results
and analysis of factors that have affected the accompanying Condensed
Consolidated Financial Statements.
NET PRODUCT SALES: Net change in
Third Quarter, 2007
Third Quarter vs.
2007 2006 Third Quarter, 2006
$182,917 $186,403 (1.9%)
Nine Months, 2007
Nine Months vs.
2007 2006 Nine Months, 2006
$377,732 $385,169 (1.9%)
Third quarter 2007 net product sales were $182,917 compared to $186,403 in
third quarter 2006, a decrease of $3,486 or 1.9%. Nine months 2007 net product
sales of $377,732 decreased $7,437 or 1.9% from nine months 2006 net product
sales of $385,169. The decrease in third quarter 2007 net product sales was
primarily the result of the timing of shipments near the end of the quarter.
The nine months 2007 net product sales decline reflects the conclusion of a
contract to manufacture product under a private label for a third party and a
non-recurring sale of certain inventory to a new foreign distributor both
during the prior year first quarter.
PRODUCT COST OF GOODS SOLD:
Product Cost of Goods Sold as a
Third Quarter Percentage of Net Product Sales
2007 2006 3rd Qtr. 2007 3rd Qtr. 2006
$122,159 $116,311 66.8% 62.4%
Product Cost of Goods Sold as a
Nine Months Percentage of Net Product Sales
2007 2006 Nine Months 2007 Nine Months 2006
$249,173 $237,734 66.0% 61.7%
Product cost of goods sold as a percentage of net product sales increased
from 62.4% in the third quarter 2006 to 66.8% in third quarter 2007, and
from 61.7% in nine months 2006 to 66.0% in nine months 2007. These increases
in product cost of goods sold as a percentage of net product sales are
primarily the result of higher input costs relating to major ingredients,
packaging materials and products manufactured in Canada due to less favorable
foreign exchange rates. Substantially all of the Company's principal
ingredient costs were significantly higher in third quarter and nine months
2007 compared to the corresponding period of the prior year. In addition,
third quarter and nine months 2007 periods were also adversely affected by
lower sales volumes and the resulting effects on certain fixed costs,
principally plant overhead related costs.
-6-
SELLING, MARKETING AND ADMINISTRATIVE EXPENSES:
Third Quarter Percentage of Net Product Sales
2007 2006 3rd Qtr. 2007 3rd Qtr. 2006
$28,181 $30,390 15.4% 16.3%
Nine Months Percentage of Net Product Sales
2007 2006 9 Months 2007 9 Months 2006
$73,403 $76,253 19.4% 19.8%
Third quarter 2007 selling, marketing and administrative expenses were $28,181
compared to $30,390 in third quarter 2006, a decrease of $2,209 or 7.37%. The
same expenses decreased from $76,253 in nine months 2006 to $73,403 in nine
months 2007, a decrease of $2,850 or 3.7%. The changes for both periods
primarily reflect the change in net product sales. Although the Company was
adversely affected by higher expenses for freight and delivery in nine months
2007, the Company's initiatives to reduce costs in freight and delivery did
show progress and resulting lower costs in third quarter 2007 compared to the
corresponding period in 2006. In addition, the Company reduced marketing and
administrative expenses for both third quarter and nine months 2007 compared to
2006. The prior year third quarter and nine months 2006 marketing expenses
reflected new artwork and plates associated with packaging related to changes
in pack sizes and government mandated labeling. As a percentage of net product
sales, total selling, marketing and administrative expenses favorably decreased
from 16.3% in third quarter 2006 to 15.4% in third quarter 2007, and from 19.8%
in nine months 2006 to 19.4% in nine months 2007.
Third quarter 2007 earnings from operations were $33,454 compared to $40,683 in
third quarter 2006, a decrease of $7,229 or 17.8%. Nine months 2007 earnings
from operations were $57,954 compared to $73,882 for nine months 2006, a
decrease of $15,928 or 21.6%. The decline in operating earnings during both
third quarter and nine months 2007 principally resulted from lower sales and
higher input costs as discussed above. The Company took actions and implemented
programs, including selected price increases as well as cost reduction programs
with the objective to recover some of these higher input costs. However, these
actions did not result in a recovery all of the increases in ingredient and
other input costs during the third quarter and nine months 2007.
NET EARNINGS:
Third Quarter, 2007
Third Quarter vs.
2007 2006 Third Quarter, 2006
$23,432 $28,969 (19.1)%
Nine Months, 2007
Nine Months vs.
2007 2006 Nine Months, 2006
$43,469 $54,189 (19.8)%
Third quarter 2007 net earnings were $23,432 compared to third quarter 2006 net
earnings of $28,969, a decrease of $5,537 or 19.1%. Third quarter 2007
earnings per share were $0.43, compared to $0.52 per share in the prior year
comparative period, a decrease of $0.09 or 17.3%.
-6A-
Nine months 2007 net earnings were $43,469 compared to nine months 2006 net
earnings of $54,189, a decrease of $10,720 or 19.8%. Nine months net earnings
per share were $0.79 in 2007 compared to $0.97 per share in 2006, a decrease of
$0.18 per share or 18.6%.
Other income, net was $1,704 in third quarter 2007 compared to $1,511 in third
quarter 2006. Other income, net was $6,138 in nine months 2007 compared to
$4,724 in nine months 2006. The increase in both periods is primarily the
result of higher investment income. During the nine months 2007 period the
increase was partially offset by a gain on the sale of securities during
second quarter 2006.
The consolidated effective income tax rate increased from 31.3% in third
quarter 2006 to 33.4% in third quarter 2007 and from 31.1% in nine months 2006
to 32.2% in nine months 2007. The increase in the effective income tax rate
principally reflects higher effective rates for foreign taxes.
In addition to the factors discussed above, earnings per share benefited from
the Company's common stock purchases in the open market in 2006 and 2007 and
resulting few shares outstanding.
LIQUIDITY AND CAPITAL RESOURCES:
The Company's current ratio (current assets divided by current liabilities) was
3.0 to 1 as of the end of third quarter 2007 as compared to 2.3 to 1 as of the
end of third quarter 2006 and 3.1 to 1 as of the end of fourth quarter 2006.
Net working capital was $156,197 as of the end of third quarter 2007 as
compared to $128,706 and $124,701 as of the end of fourth quarter 2006 and
third quarter 2006, respectively. The aforementioned net working capital
amounts include aggregate cash and cash equivalents and short-term investments,
less short-term bank loans, which aggregated $56,578 as of the end of third
quarter 2007 compared to $79,260 and $45,540, as of the end of fourth quarter
2006 and third quarter 2006, respectively. In addition, long-term investments,
principally debt securities comprising municipal bonds, were $62,762 as of the
end of third quarter 2007 as compared to $51,581 and $42,234 as of the end of
fourth quarter 2006 and third quarter 2006, respectively. Investments in
municipal bonds and other debt securities that matured during nine months 2007
and 2006 were generally used to pay down bank loans or replaced with debt
securities of similar maturities.
Net cash provided by operating activities was $20,306 for nine months 2007,
compared to cash used of $4,974 in nine months 2006. The aforementioned change
in net cash from operating activities principally reflects the timing of
payments and cash flows related to income taxes payable and deferred combined
with reduced cash used to increase inventories, partially offset by reduced
cash flows provided by lower net income.
Capital expenditures for nine months 2007 and 2006 were $9,935 and $33,702,
respectively. Nine months 2006 capital expenditures reflect $25,241 of
investments in rental income producing real estate which was funded from the
Company's restricted cash. Capital expenditures for the 2007 year are
anticipated to be generally in line with historical annualized spending, and
are to be funded from the Company's cash flow from operations and internal
sources.
-6B-
All of the $22,330 in proceeds from the sale of surplus real estate during 2005
and held as restricted cash as of December 31, 2005, was reinvested in "like
kind" real estate during first half 2006 in compliance with U.S. Internal
Revenue Code Section 1031.
During first half 2006, the Company fully repaid $32,001 of short-term bank
loans. These bank loans were paid down through a combination of cash flows
provided by operating activities and investment maturities.
Cash dividends paid in nine months 2007 and 2006 were $13,153 and $12,969,
respectively. The Company also repurchased and retired $11,738 and $30,086 of
its shares outstanding during nine months 2007 and 2006, respectively.
NEW ACCOUNTING PRONOUNCEMENTS
The Company adopted the provisions of FASB Interpretation No. 48, "Accounting
for Uncertainty in Income Taxes" (FIN 48) effective January 1, 2007. 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 2004 through 2006. With few
exceptions, the Company is no longer subject to examinations by tax authorities
for the year 2003 and prior.
As of January 1, 2007, the Company had $14,961 of unrecognized tax benefits.
Included in this balance is $7,160 of unrecognized tax benefits that, if
recognized, would favorably affect the annual effective income tax rate. As of
September 29, 2007, the Company had $15,205 of unrecognized tax benefits
($7,403 represented those unrecognized tax benefits that, if recognized, would
favorably affect the annual effective income tax rate). During the third
quarter and nine months 2007, the Company recorded approximately $(127) and
$243, respectively, of income tax (benefit) expense relating to its uncertain
tax positions.
The Company recognizes interest and penalties related to unrecognized tax
benefits in the provision for income taxes on the Condensed Consolidated
Statement of Earnings. As of January 1, 2007, $3,382 of interest and penalties
were included in the Liability for Uncertain Tax Positions account on the
Condensed Consolidated Statement of Financial Position. As of September 29,
2007, $3,698 of interest and penalties were included in the aforementioned
account. During the third quarter and nine months 2007, the Company recorded
approximately $(244) and $316, respectively, of additional income tax expense
(benefit) related to interest and penalties.
The Company is not currently subject to a U.S. federal income tax examination,
however, the Company is currently subject to various state tax examinations.
Although the Company is unable to determine the ultimate outcome of these
examinations, the Company believes that its liability for uncertain tax
positions relating to these jurisdictions for such years is adequate.
It is expected that the liability for uncertain tax positions will change in
the next 12 months; however, the Company does not expect the change to have a
significant impact on the Company's financial position, results of operations,
and related cash flows from operating activities. The related cash flows in
future periods with respect to the liability for uncertain tax positions are
not readily determinable.
-6C-
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
(SFAS No. 157). SFAS No. 157 establishes a common definition for fair value to
be applied to U.S. GAAP guidance requiring use of fair value, establishes a
framework for measuring fair value, and expands disclosure about such fair
value measurements. SFAS No. 157 is effective for fiscal years beginning after
November 15, 2007. The Company is currently assessing the impact of SFAS No.
157 and has not yet made any determination as to the effects, if any, that it
may have on the Company's financial position and results of operations.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities-including an amendment to FSAB
Statement No. 115," (SFAS No. 159), which permits entities to choose to measure
many financial instruments and certain other items at fair value that are not
currently required to be measured at fair value. SFAS No. 159 is effective for
fiscal years beginning after November 15, 2007. The Company is currently
assessing the impact of SFAS No. 159 and has not yet made any determination as
to the effects, if any, that it may have on the Company's financial position
and results of operations.
FORWARD-LOOKING STATEMENTS
From time to time, in the Company's statements and written reports, including
this report, the Company discusses its expectations regarding future
performance by making certain "forward-looking statements." These forward-
looking statements are based on currently available competitive, financial and
economic data and management's views and assumptions regarding future events.
Such forward-looking statements are inherently uncertain, and actual results
may differ materially from those expressed or implied herein. Consequently,
the Company wishes to caution readers not to place undue reliance on any
forward-looking statements. In connection with the "safe harbor provisions" of
the Private Securities Litigation Reform Act of 1995, the Company notes
following factors which, among others, could cause future results to differ
materially from the forward-looking statements, expectations and assumptions
expressed or implied herein. Among the factors that could impact the Company's
ability to achieve its stated goals are the following: (i) significant
competitive activity, including advertising, promotional and price competition,
and changes in consumer demand for the Company's products; (ii) fluctuations in
the cost and availability of various ingredients and packaging materials; (iii)
inherent risks in the marketplace associated with new product introductions,
including uncertainties about trade and consumer acceptance and seasonal events
such as Halloween (iv) the effect of acquisitions on the Company's results of
operations and financial condition; (v) the effect of changes in foreign
currencies on the Company's foreign subsidiaries operating results, and the
effect of the Canadian dollar on products manufactured in Canada and marketed
and sold in the United States in U.S. dollars; (vi) the Company's reliance on
third-party vendors for various goods and services; (vii) the Company's ability
to successfully implement new production processes and lines; (viii) the effect
of changes in assumptions, including discount rates, sales growth and profit
margins, and the capability to pass along higher ingredient and other input
costs through price increases relating to the Company's impairment testing and
analysis of its goodwill and trademarks; (ix) changes in the confectionary
market place including actions taken by major retailers and customers; (x)
customer and consumer response to marketing programs and price and product
weight adjustments; (xi) dependence on significant customers, including the
volume and timing of their purchases; (xii) increases in energy costs,
including freight and delivery, we are not able to pass along to our customers
through increased prices; (xiii) any significant labor stoppages or production
interruptions; and (xiv) changes in governmental laws and regulations including
taxes and tariffs. In addition, the Company's results may be affected by
-6D-
general factors, such as economic conditions, political developments, currency
exchange rates, interest and inflation rates, accounting standards, taxes, and
laws and regulations affecting the Company in markets where it competes and
those factors described in Item 1A "Risk Factors" and elsewhere in the
Company's Annual Report on Form 10-K and in other Company filings with the
Securities and Exchange Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK:
The Company is exposed to various market risks, including fluctuations in
sugar, corn syrup, edible oils, cocoa, milk and whey, dextrose, gum base
ingredients and packaging costs. The Company is also exposed to exchange rate
fluctuations in the Canadian dollar which is the currency used for a portion of
the raw material and packaging material costs and operating expenses at its
Canadian plants. The Company also invests in securities with maturities of up
to three years, the majority of which are held to maturity, which limits the
Company's exposure to interest rate fluctuations. There has been no material
change in the Company's market risks that would significantly affect the
disclosures made in the Form 10-K for the year ended December 31, 2006.
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 September 29, 2007 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 September 29,
2007 that has materially affected, or is reasonably likely to materially
affect, the Company's internal control over financial reporting.
-6E-
PART II - OTHER INFORMATION
TOOTSIE ROLL INDUSTRIES, INC.
AND SUBSIDIARIES
Item 1A. Risk Factors
In addition to the Risk Factors included in the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 2006, the following is a
significant factor that could impact the Company's financial condition or
results of operations.
As disclosed in the Company's Annual Report on Form 10-K for the year
ended December 31, 2006, the Company performs its annual impairment review
of goodwill and other intangible assets not subject to amortization in the
fourth quarter of each year in accordance with FASB Statement No. 142,
"Goodwill and Other Intangible Assets" ("FAS No. 142"). Under FAS No. 142,
the impairment review of goodwill, trademarks and other intangible assets not
subject to amortization must be based on estimated fair values. The
valuation of intangible assets requires assumptions and estimates of many
critical factors, including revenue and market growth, gross profit margins,
operating cash flows, market multiples, and discount rates. The Company has
experienced declines in its consolidated operating results compared to the
prior year principally due to higher input costs including higher costs of
ingredients and packaging materials, and higher costs for products
manufactured in Canada resulting from the appreciation of the Canadian dollar
relative to the U.S. dollar. The Company will be performing its annual
impairment testing in fourth quarter 2007 which will include long-term
financial and cash flow projections, including assumptions as to future
revenue growth, price increases and cost and expense reductions that are
necessary to recover these higher input costs. Adverse changes in expected
operating results and/or unfavorable changes in other economic factors used
to estimate fair values could result in a non-cash impairment charge in the
future under FAS No. 142.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Approximate Dollar
(a) Total (b) Average Shares Value of Shares that
Number of Price Paid per Purchased as Part of May Yet Be Purchased
Shares Share Publicly Announced Plans Under the Plans
Period Purchased Or Programs or Programs_____
<s> <s> <c> <c> <c>
JUL 1 TO JUL 28 - $ - NOT APPLICABLE NOT APPLICABLE
JUL 29 TO AUG 25 51,300 25.37 NOT APPLICABLE NOT APPLICABLE
AUG 26 TO SEP 29 22,600 26.96 NOT APPLICABLE NOT APPLICABLE
TOTAL 73,900 $ 25.85
While the Company does not have a formal or publicly announced stock
repurchase program, the Company's board of directors periodically authorizes
a dollar amount for share repurchases. The treasurer executes share
repurchase transactions according to these guidelines.
-7-
Item 6. EXHIBITS
Exhibits 31.1 and 31.2 - Certifications Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32 - Certification Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
TOOTSIE ROLL INDUSTRIES, INC.
Date: Nov. 7, 2007 BY:/S/MELVIN J. GORDON
Melvin J. Gordon
Chairman of the Board
Date: Nov. 7, 2007 BY:/S/G. HOWARD EMBER, JR.
G. Howard Ember, Jr.
Vice President Finance
-7A-
Exhibit 31.1
CERTIFICATION
I, Melvin J. Gordon, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Tootsie Roll
Industries, Inc,;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the state-
ments made, in light of the circumstances under which such statements were made,
not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial infor-
mation included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
a) designed such disclosure controls and procedures, or caused such dis-
closure controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Date: Nov. 7, 2007
By: /S/MELVIN J. GORDON
Melvin J. Gordon
Chairman and Chief Executive Officer
-7B-
Exhibit 31.2
CERTIFICATION
I, G. Howard Ember, Jr. certify that:
1. I have reviewed this quarterly report on Form 10-Q of Tootsie Roll
Industries, Inc,;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the state-
ments made, in light of the circumstances under which such statements were made,
not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial infor-
mation included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
a) designed such disclosure controls and procedures, or caused such dis-
closure controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Date: Nov. 7, 2007
By: /S/G. HOWARD EMBER, JR.
G. Howard Ember, Jr.
Vice President Finance and
Chief Financial Officer
-7C-
Exhibit 32
Certificate Pursuant to Section 1350 of Chapter 63
Of Title 18 of the United States Code
Each of the undersigned officers of Tootsie Roll Industries, Inc.
Certifies that (i) the Quarterly Report on Form 10-Q of Tootsie Roll
Industries, Inc. for the quarterly period ended September 29, 2007 (the
Form 10-Q) fully complies with the requirements of secton 13(a) or
15(d) of the Securities Exchange Act of 1934 and (ii) the information
contained in the Form 10-Q fairly presents, in all material respects,
the financial condition and results of operations of Tootsie Roll
Industries, Inc. and its subsidiaries.
Dated: Nov. 7, 2007 /S/MELVIN J. GORDON
Melvin J. Gordon
Chairman and Chief
Executive Officer
Dated: Nov. 7, 2007 /S/G. HOWARD EMBER, JR.
G. Howard Ember, Jr.
V.P. Finance and
Chief Financial Officer
-7D-