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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended OCTOBER 2, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ----to----
COMMISSION FILE NUMBER 001-01361
Tootsie Roll Industries, Inc.
(Exact Name of Registrant as Specified in its Charter)
VIRGINIA 22-1318955
-------- ----------
(State of Incorporation) (I.R.S. Employer Identification No.)
7401 South Cicero Avenue, Chicago, Illinois 60629
- ------------------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
773-838-3400
------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ___
---
Indicate by check mark whether the Registrant is an accelerated filer (as
Defined in Rule 12b-2 of the Exchange Act)
Yes X No ___
---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date (October 2, 2004)
Class Outstanding (In Thousands)
- ----- --------------------------
Common Stock, $.69 4/9 par value 34,679,676
Class B Common Stock, $.69 4/9 par value 17,595,273
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TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES
OCTOBER 2, 2004
INDEX
Page No.
Part I - Financial Information
Item 1. Financial Statements:
Condensed Consolidated Statements of
Financial Position 2
Condensed Consolidated Statements of Earnings,
Comprehensive Earnings and Retained Earnings 3
Condensed Consolidated Statements of Cash Flows 4
Notes to Condensed Consolidated Financial Statements 5-5E
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 6D
Item 4. Controls and Procedures 6E
Part II - Other Information
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds 7
Item 6. Exhibits and Reports on Form 8-K 7
Signatures 7
Certifications
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(in thousands of dollars) (UNAUDITED)
ASSETS Oct. 2, Sep. 27, Dec. 31,
CURRENT ASSETS 2004 2003 2003
-------------- ----------- ------------ -----------
Cash & cash equivalents $ 29,807 $ 46,845 $ 84,084
Investments 30,399 92,465 86,961
Trade accounts receivable,
Less allowances of $3,334, $3,258 & $1,970 90,895 83,137 18,131
Other receivables 6,924 2,849 3,076
Inventories, at cost
Finished goods & work in process 40,633 30,194 28,969
Raw material & supplies 22,179 16,522 17,117
Prepaid expenses 6,367 5,446 4,416
Deferred income taxes 951 4,481 951
------- ------- -------
Total current assets 228,155 281,939 243,705
------- ------- -------
PROPERTY, PLANT & EQUIPMENT
---------------------------
(at cost)
Land 14,968 8,277 8,265
Buildings 60,718 44,001 44,960
Machinery & equipment 238,313 205,159 206,697
------- ------- -------
313,999 257,437 259,922
Less-accumulated depreciation 139,059 128,264 130,759
------- ------- -------
Net property, plant and equipment 174,940 129,173 129,163
------- ------- -------
OTHER ASSETS
------------
Goodwill 75,297 38,151 38,151
Trademarks 191,747 79,348 79,348
Investments 106,761 104,591 112,431
Split dollar officer life insurance and other assets 76,062 57,774 62,499
------- ------- -------
449,867 279,864 292,429
------- ------- -------
Total assets $852,962 $690,976 $665,297
======= ======= =======
(The accompanying notes are an integral part of these statements)
-2-
(in thousands except per share data) (UNAUDITED)
LIABILITIES AND SHAREHOLDERS' EQUITY Oct. 2, Sep. 27, Dec. 31,
CURRENT LIABILITIES 2004 2003 2003
------------------- ----------- ------------ -----------
Notes payable $ 17,000 $ - $ -
Accounts payable 23,994 16,037 11,947
Dividends payable 3,659 3,613 3,589
Accrued liabilities 52,981 46,160 38,834
Income taxes payable 22,112 27,717 8,517
------- ------- -------
Total current liabilities 119,746 93,527 62,887
------- ------- -------
NON-CURRENT LIABILITIES
-----------------------
Notes payable 105,000 - -
Industrial development bonds 7,500 7,500 7,500
Postretirement health care and life
insurance benefits 9,852 8,690 9,302
Deferred compensation and other liabilities 28,076 24,284 26,396
Deferred income taxes 23,034 19,633 22,631
------- ------- -------
Total non-current liabilities 173,462 60,107 65,829
------- ------- -------
Total liabilities 293,208 153,634 128,716
------- ------- -------
SHAREHOLDERS' EQUITY
Common stock, $.69-4/9 par value-
120,000 shares authorized; 34,680, 34,421 & 34,082
respectively, issued 24,083 23,903 23,668
Class B common stock, $.69-4/9 par value-
40,000 shares authorized; 17,595, 17,153 & 17,145
respectively, issued 12,219 11,912 11,906
Capital in excess of par value 397,745 369,446 357,922
Retained earnings 138,833 145,527 156,786
Accumulated other comprehensive earnings (loss) (11,134) (11,454) (11,709)
Treasury stock (at cost)-
58, 58 & 58 shares respectively (1,992) (1,992) (1,992)
------- ------- -----
Total shareholders' equity 559,754 537,342 536,581
------- ------- -------
Total liabilities and
Shareholders' equity $852,962 $690,976 $665,297
======= ======= =======
(The accompanying notes are an integral part of these statements.)
-2A-
TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
EARNINGS, COMPREHENSIVE EARNINGS AND RETAINED EARNINGS
------------------------------------------------------
(in thousands except per share amounts) (UNAUDITED)
13 Weeks Ended
Oct 2, 2004 & Sept 27,2003
--------------------------------
Net sales $156,971 $147,201
Cost of goods sold 92,167 85,269
------- -------
Gross margin 64,804 61,932
------- ------
Selling, marketing and administrative expense 25,123 22,568
Earnings from operations 39,681 39,364
Other income, net 1,007 1,337
------- -------
Earnings before income taxes 40,688 40,701
Provision for income taxes 13,712 13,756
------- -------
Net earnings 26,976 26,945
------- -------
Other comprehensive income, before tax:
Foreign currency translation adjustments 283 (545)
Unrealized gains on securities 95 113
Unrealized gains (losses) on derivatives 283 (497)
------- -------
Other comprehensive income (loss) before tax 661 (929)
Income tax (expense) benefit related to items of other
comprehensive income (141) 142
------- ------
Other comprehensive income (loss), net of tax 520 (787)
------- ------
Comprehensive earnings $ 27,496 $ 26,158
======= =======
Retained earnings at beginning of period $115,512 $122,191
Net earnings 26,976 26,945
Cash dividends (3,655) (3,609)
------- -------
Retained earnings at end of period $138,833 $145,527
======= =======
Net earnings per share (note 2) $.52 $.51
Dividends per share * $.07 $.07
Average number of shares outstanding 52,217 53,183
*Does not include 3% stock dividend to shareholders of record on 3/02/04 and 3/04/03.
(The accompanying notes are an integral part of the statements)
-3-
TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
EARNINGS, COMPREHENSIVE EARNINGS AND RETAINED EARNINGS
------------------------------------------------------
(in thousands except per share amounts) (UNAUDITED)
39 Weeks Ended
Oct 2, 2004 & Sept 27,2003
--------------------------------
Net sales $314,174 $300,496
Cost of goods sold 179,648 170,422
------- -------
Gross margin 134,526 130,074
------- -------
Selling, marketing and administrative expense 61,966 58,463
Earnings from operations 72,560 71,611
Other income, net 3,303 4,176
------- -------
Earnings before income taxes 75,863 75,787
Provision for income taxes 25,566 25,616
------- -------
Net earnings 50,297 50,171
------- -------
Other comprehensive income, before tax:
Foreign currency translation adjustments (110) (366)
Unrealized (losses) gains on securities (176) 388
Unrealized gains (losses) on derivatives 1,262 (445)
------- -------
Other comprehensive income (loss) before tax 976 (423)
Income tax (expense) benefit related to items of other
comprehensive income (401) 21
------- ------
Other comprehensive income (loss), net of tax 575 (402)
------- ------
Comprehensive earnings $ 50,872 $ 49,769
======= =======
Retained earnings at beginning of period $156,786 $148,705
Net earnings 50,297 50,171
Cash dividends (10,891) (10,778)
Stock dividends - 3% (57,359) (42,571)
------ ------
Retained earnings at end of period $138,833 $145,527
======= =======
Net earnings per share (note 2) $.96 $.94
Dividends per share * $.21 $.21
Average number of shares outstanding 52,410 53,460
*Does not include 3% stock dividend to shareholders of record on 3/02/04 and 3/04/03.
(The accompanying notes are an integral part of the statements)
-3A-
TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(in thousands of dollars) (UNAUDITED)
39 WEEKS ENDED
Oct 2, 2004 & Sept 27, 2003
-------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
- ------------------------------------
Net earnings $ 50,297 $ 50,171
Adjustments to reconcile net earnings to
net cash provided by operating
activities:
Depreciation and amortization 8,325 8,753
Amortization of marketable securities 1,885 1,886
Purchase of trading securities (2,113) (2,591)
(Increase) decrease in assets:
Accounts receivable (61,476) (60,540)
Other receivables 2,089 943
Inventories (7,245) (3,181)
Prepaid expenses and other assets (5,453) (1,153)
Increase (decrease) in liabilities:
Accounts payable and accrued liabilities 15,544 13,946
Income taxes payable and deferred 13,997 16,510
Postretirement health care and life
insurance benefits 550 540
Deferred compensation and other liabilities 1,745 1,933
Other (30) (16)
------ -------
Net cash provided by operating activities 18,115 27,201
------ -------
CASH FLOWS FROM INVESTING ACTIVITIES:
- ------------------------------------
Acquisition of business, net of cash acquired (218,229) -
Capital expenditures (10,825) (9,272)
Purchase of held to maturity securities (22,049) (47,091)
Maturity of held to maturity securities 67,657 19,401
Purchase of available for sale securities (81,699) (41,359)
Sale and maturity of available for
sales securities 98,382 31,593
------- -------
Net cash used in investing activities (166,763) (46,728)
------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
- ------------------------------------
Proceeds from issuance of bank loans 154,000 -
Repayment of bank loans (32,000) -
Shares repurchased and retired (16,407) (28,332)
Dividends paid in cash (11,222) (10,803)
------ ------
Net cash provided by (used in) financing activities 94,371 (39,135)
------ ------
Decrease in cash and cash equivalents (54,277) (58,662)
Cash and cash equivalents-beginning of year 84,084 105,507
------- -------
Cash and cash equivalents end of quarter $ 29,807 $ 46,845
------- -------
Supplemental cash flow information:
Income taxes paid $ 12,402 $ 11,321
------- -------
Interest paid $ 351 $ 140
------- -------
Stock dividend issued $ 56,959 $ 42,513
======= =======
(The accompanying notes are an integral part of the statements)
-4-
TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCT. 2, 2004
(in thousands except per share amounts) (UNAUDITED)
Note 1 - Foregoing data has been prepared from the unaudited financial records
of the Company and in the opinion of management all adjustments
necessary for a fair statement of the results for the interim period
have been reflected. All adjustments were of a normal and recurring
nature. Certain reclassifications have been made to the prior year
financial statements to conform to the current year presentation. These
consolidated financial statements should be read in conjunction with
the consolidated financial statements and the related notes included in
the Company's 2003 Annual Report on Form 10-K.
Note 2 - Average shares outstanding for the period from January 1, 2004 to Oct.
2, 2004 reflects stock repurchases of 474 shares for $16,407 and a 3%
stock dividend distributed on April 14, 2004. Average shares
outstanding for the period from January 1, 2003 to September 27, 2003
reflects stock repurchases of 952 shares for $28,332 and a 3% stock
dividend distributed on April 16, 2003.
Note 3 - Results of operations for the 13 and 39 week periods ended October 2,
2004 are not necessarily indicative of results to be expected for the
year to end December 31, 2004 because of the seasonal nature of the
Company's operations. Historically, the Third Quarter has been the
Company's largest sales quarter due to Halloween sales.
Note 4 - The Company's quarterly financial reporting is based on 13 week periods
ending on the last Saturday of each period while its annual reporting
is based on the twelve months ending December 31st of the calendar
year. This quarterly reporting requires that the Company periodically
reset its quarter-end dates to maintain 13-week quarterly reporting
periods during its calendar year. As a result, the third quarter 2004
and 2003 periods ended on October 2, 2004 and September 27, 2003,
respectively. If third quarter 2004 had ended on September 27, 2004
instead of October 2, 2004, the Company estimates that nine months 2004
net sales would have been approximately $4,900 less than the reported
2004 sales amount.
-5-
Note 5 - In January 2004, the FASB issued Staff Position No. FAS 106-2
"Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003" (the
"Act"). The Company has elected to adopt accounting for the Act
effective as of the beginning of the third quarter of 2004.
Accordingly, the Company's accumulated postretirement benefit
obligation and net postretirement health care costs included in the
consolidated financial statements reflect the effects of the Act. The
effect of adoption of the Act were not significant to the Company's
financial statements.
Note 6 - ACQUISTION
On August 30, 2004, Tootsie Roll Industries, Inc. (Tootsie Roll)
purchased certain assets and assumed certain liabilities of Concord
Confections Inc. and its affiliates (collectively CCI) which comprise
(i) Concord Confections Inc., the previous principal manufacturing and
operating company, (ii) Terra Rouge Estates Inc., the previous owners
of the land and real estate, (iii) Alpharetta Confections, Inc, the
previous US sales and distribution company, and (iv) the 50% equity
interest in the shares of Fleer Espanola, S.A. and Dr. Torrents, S.A.,
a Spanish operation. The adjusted purchase price was $214,088, and
financed with the liquidation of $64,229 of marketable securities and a
bank term loan for $154,000. The results of CCI's operations have been
included in the condensed consolidated financial statements since the
date of acquisition. CCI holds a strong market position in the bubble
gum category and its products are sold primarily under the Dubble
Bubble brand name and trademark. The addition of CCI reinforces the
Company's commitment to offer well-known consumer brands that
contribute to the success of the Company.
-5A-
Under the purchase method of accounting, the total adjusted estimated
purchase price as shown in the table below has been allocated to CCI's
tangible and intangible assets and liabilities based on their estimated
fair values as of August 30, 2004, the purchase date. The valuation of
a significant portion of assets and liabilities is still being
determined and accordingly the allocation below is preliminary. The
adjusted purchase price was preliminarily allocated as follows (in
thousands of U.S.$):
Preliminary calculation of adjusted purchase price:
Cash consideration paid for net assets acquired $218,229
Estimated direct transactions fees and expenses,
and contractual severance 1,000
Less-Adjustment to purchase relating to minimum
working capital (5,141)
-------
Total adjusted purchase price $214,088
========
Preliminary allocation of adjusted purchase price:
Net working capital based on historical book values $ 9,606
Step up of inventories 1,622
Investment in joint venture 10,000
Property, plant and equipment 41,298
Other assets 2,017
Indefinite trademarks 112,400
Goodwill-deductible 37,145
------
Total adjusted purchase price $214,088
========
The following unaudited pro forma condensed combined statements of
earnings are presented as if the transaction had been completed on
January 1, 2003. The following unaudited pro forma financial
information gives effect to (i) the transaction as a purchase of CCI by
Tootsie Roll using the purchase method of accounting, (ii) the
assumptions and adjustments described in the accompanying notes to the
unaudited pro forma condensed combined financial information, (iii) the
incurrence by Tootsie Roll of a $154,000 bank term loan and the
liquidation by Tootsie Roll of $64,229 of marketable securities and
cash equivalents, and (iv) translation of CCI's historical financial
statements from Canadian dollars to US dollars. The average US$/C$
exchange rates used to convert information was $0.71 for the year ended
December 31, 2003 and $0.75 for the six months ended July 3, 2004.
-5B-
Pro forma adjustments are necessary to reflect the purchase price and
to adjust CCI's net tangible and intangible assets and liabilities to
estimated fair values. Pro forma adjustments are also necessary to
reflect costs and expenses of financing the purchase, including
additional interest expense relating to Tootsie Roll's bank borrowings
and decrease in Tootsie Roll's investment income reflecting the sale of
marketable securities, changes in depreciation expense resulting from
fair value adjustments to net tangible assets, the new capital
structure of CCI as a wholly-owned subsidiary of Tootsie Roll, and the
income tax effects related to the pro forma adjustments. Certain
reclassifications have been made to conform the CCI historical
financial information to the pro forma presentation.
Historical financial results of CCI were prepared using the Canadian
dollar as the functional currency. Tootsie Roll has determined that
they will consider the functional currency of CCI to be the US dollar
subsequent to the date of acquisition as substantially all of the sales
and financing as well as a portion of operating expenses are
denominated in US dollars. The CCI financial information was prepared
for the six months ended June 27, 2004 compared to the historical
Tootsie Roll financial information that was prepared for the six months
ended July 3, 2004.
The allocation of purchase price is preliminary and is based on
management's current estimates of the fair value of the assets acquired
and liabilities to be assumed. Preliminary valuations have been
considered in management's estimates of the fair values reflected in
the unaudited pro forma condensed combined financial information. The
final purchase price allocation will be completed after asset and
liability valuations are finalized. In addition, the final purchase
price could be affected by differences between the determination of the
required minimum working capital amount that was to be provided under
the terms of the CCI purchase contract. Final adjustments may change
the allocation of the purchase price, which could affect the fair value
assigned to the assets, including amounts preliminarily allocated to
intangible assets with indefinite lives and goodwill, and reported
liabilities.
The unaudited pro forma condensed combined financial information does
not reflect any cost savings or synergies that might be realized,
including the anticipated elimination of substantially all of the CCI
historical costs and expenses of senior executive compensation and
other management expenses which aggregated approximately $12,300 and
$2,800 for the year ended December 31, 2003 and six months ended July
3, 2004, respectively.
-5C-
UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENT
OF TOOTSIE ROLL AND CCI
FOR THE SIX MONTHS ENDED July 3, 2004
(in thousands of U.S.$ except per share amounts)
Combined
Pro Forma
---------
Net sales $ 196,448
Cost of sales 113,708
Selling, marketing & administration expenses 47,853
Foreign exchange (losses) ( 222)
Interest expense (1,712)
Investment and other income 2,320
-----
Earnings before income taxes 35,273
Provision for income taxes 11,923
------
Net income $ 23,350
======
Earning per share $ 0.44
====
UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENT
OF TOOTSIE ROLL AND CCI
FOR THE YEAR ENDED December 31, 2003
(in thousands of U.S.$ except per share amounts)
Combined
Pro Forma
---------
Net sales $ 467,009
Cost of sales 270,684
Selling, marketing & administration expenses 106,663
Foreign exchange gains 17,401 (a)
Interest expense (3,252)
Investment and other income 4,947
-----
Earnings before income taxes 108,758
Provision for income taxes 36,786
------
Net income $ 71,972
======
Earning per share $ 1.39
====
(a) The pro forma statement of earnings reflects $17,401 of foreign exchange
gains for the year ended December 31, 2003. These gains principally comprise the
net change in the market value of forward foreign exchange contracts outstanding
as of the beginning and end of the indicated periods ($10,159), early settlement
of outstanding hedges ($2,708), and net settlement of derivatives on their
maturity dates ($4,534).
-5D-
Note 7 - During the third quarter of 2004, the Company acquired the Concord
Confections business (see Note 6). Approximately $64,229 of the
purchase price was financed from the liquidation of marketable
securities investments, a portion of which were previously classified
as held to maturity investments. Because of these actions, the Company
has reclassified $101,000 of its held to maturity investments to
available for sale investments. The effect of this change in
classification was not significant to the Company's 2004 comprehensive
earnings and had no effect of the Company's 2004 net earnings.
Note 8 - The Company obtained a $154,000 bank loan during the period in order to
finance the CCI acquisition. The principal will be repaid in quarterly
installments through August, 2006. The loan is subject to a variable
interest rate of LIBOR plus 0.175% to 0.225% dependent upon an
applicable margin as defined by the loan agreement. As of October 2,
2004, the principal amount outstanding under this bank loan was
$122,000.
Note 9 - Subsequent events:
In October 2004, the Working Families Tax Relief Act of 2004 and the
American Jobs Creation Act of 2004 became law. This legislation
provides for a number of changes in tax laws. In accordance with SFAS
No. 109, "Accounting for Income Taxes" effects of this new legislation
will be reflected in the Company's financial statements beginning in
the period of their enactment, October 2004. Management is presently
reviewing this new legislation to determine the impacts on the Company
and its operations.
As of November 8, 2004, the outstanding principal balance of the bank
loan referenced in Note 8 above was $92,000, a $30,000 reduction from
October 2, 2004, reflecting the overall positive cash flows of the
Company's business and further liquidation of marketable securities.
-5E-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(dollars in thousands except per share amounts)
-----------------------------------------------
The following is management's discussion of the company's operating results and
analysis of factors which have affected the accompanying statements of earnings
and financial position.
ACQUISTION
On August 30, 2004, Tootsie Roll Industries, Inc. (Tootsie Roll) purchased
certain assets and assumed certain liabilities of Concord Confections Inc. and
its affiliates (collectively CCI) which comprise (i) Concord Confections Inc.,
the previous principal manufacturing and operating company, (ii) Terra Rouge
Estates Inc., the previous owners of the land and real estate, (iii) Alpharetta
Confections, Inc, the previous US sales and distribution company, and (iv) the
50% equity interest in the shares of Fleer Espanola, S.A. and Dr. Torrents,
S.A., a Spanish operation. The adjusted purchase price was $214,088, and
financed with the liquidation of $64,229 of marketable securities and a bank
term loan for $154,000. Under the purchase method of accounting, the total
adjusted estimated purchase price has been allocated to CCI's tangible and
intangible assets and liabilities based on their estimated fair values as of
August 30, 2004, the purchase date. The valuation of a significant portion of
assets and liabilities is still being determined, and accordingly, the purchase
price allocation reflected in the accompanying financial statements is
preliminary.
CCI holds a strong market position in the bubble gum category and its products
are sold primarily under the Dubble Bubble brand name and trademark. The
addition of CCI reinforces the Company's commitment to offer well-known consumer
brands that contribute to the success of Tootsie Roll.
NET SALES:
Third Quarter Third Quarter, 2004
------------- vs.
2004 2003 Third Quarter, 2003
---- ---- -------------------
$156,971 $147,201 +6.6%
Nine Months Nine Months, 2004
----------- vs.
2004 2003 Nine Months, 2003
------- -------- -----------------
$314,174 $300,496 +4.6%
-6-
Third quarter net sales were $156,971 compared to $147,201 in the third quarter
2003, an increase of $9,770 or 6.6%. Nine month sales were $314,174 compared to
$300,496 in the prior year corresponding period, an increase of $13,678 or 4.6%.
Net sales for the third quarter and nine month periods benefited from $10,485 of
net sales from the CCI business which was acquired on August 30, 2004.
The Company's quarterly financial reporting is based on 13 week periods ending
on the last Saturday of each period while its annual reporting is based on the
twelve months ending December 31st of the calendar year. This quarterly
reporting requires that the Company periodically reset its quarter-end dates to
maintain 13-week quarterly reporting periods during its calendar year. As a
result, the Company's nine months 2004 and 2003 reporting periods ended on
October 2, 2004 and September 27, 2003, respectively. If nine months 2004 had
ended on September 27, 2004, the Company estimates that nine months 2004 net
sales would have been approximately $4,900 less than the above reported 2004 net
sales amount. Although both third quarterly periods in 2004 and 2003 had 13
weeks, the Company's seasonal Halloween sales at the end of each quarter may
have provided some additional sales in third quarter of 2004 compared to 2003;
however, this difference is not considered practical to determine.
COST OF GOODS SOLD:
Cost of Goods Sold as a
-----------------------
Third Quarter Percentage of Net Sales
------------- -----------------------
2004 2003 3rd Qtr. 2004 3rd Qtr. 2003
---- ---- ------------- -------------
$92,167 $85,269 58.7% 57.9%
Cost of Goods Sold as a
-----------------------
Nine Months Percentage of Net Sales
---------------------- -----------------------
2004 2003 Nine Months 2004 Nine Months 2003
------- -------- ---------------- ----------------
$179,648 $170,422 57.2% 56.7%
Cost of goods sold as a percentage of net sales increased from 57.9% in the
third quarter of 2003 to 58.7% in the third quarter of 2004. Nine month cost of
goods sold as a percentage of net sales increased from 56.7% in 2003 to 57.2% in
2004. The increase in the third quarter and nine month 2004 cost of goods sold
as a percentage of sales for the comparative reporting periods reflects the
effects of higher manufacturing labor and plant overhead costs, a portion of
which relates to a new automated line that is in its start-up phase. Although
ingredient costs in the aggregate for the comparative third quarter periods are
generally consistent, nine month 2004 costs are slightly favorable to the nine
month prior year period. Overall gross margins were affected slightly by the
inclusion of the CCI business which has a higher cost of goods sold as a
percentage of sales than do most of the Company's core brands.
-6A-
OPERATING EARNINGS:
Third Quarter Third Quarter, 2004
------------- vs.
2004 2003 Third Quarter, 2003
---- ---- -------------------
$39,681 $39,364 +0.8%
Nine Months Nine Months, 2004
----------- vs.
2004 2003 Nine Months, 2003
------ ------ -----------------
$72,560 $71,611 +1.3%
Third quarter earnings from operations were $39,681 and $39,364 in 2004 and
2003, respectively, an increase of $317 or 0.8%. Improved third quarter 2004
earnings from operations benefited from higher reported net sales and ongoing
cost control programs. However, increased transportation and distribution
expenses, principally reflecting higher fuel costs, adversely affected third
quarter 2004 reported results. Nine months earnings from operations were $72,560
and $71,611 in 2004 and 2003, respectively, an increase of $949 or 1.3%. Nine
month performance was aided by higher sales, however, higher costs of sales and
distribution expense, as discussed above, did have an adverse effect on the 2004
results. The reported results for third quarter and nine month 2004 benefited
from the inclusion of the CCI business as of August 30, 2004.
NET EARNINGS:
Third Quarter Third Quarter, 2004
------------- vs.
2004 2003 Third Quarter, 2003
---- ---- -------------------
$26,976 $26,945 +0.1%
Nine Months Nine Months, 2004
----------- vs.
2004 2003 Nine Months, 2003
------ ------ -----------------
$50,297 $50,171 +0.3%
Third quarter 2004 net earnings were $26,976 compared to third quarter 2003 net
earnings of $26,945. Third quarter 2004 earnings per share were $0.52, compared
to $.51 per share in third quarter 2003, an increase of $.01 or 2.0%. Nine
months 2004 net earnings were $50,297 compared to nine months 2003 net earnings
of $50,171. Nine months 2004 earnings per share were $.96, compared to $.94 for
the comparative 2003 period, an increase of $.02 per share or 2%. Net earnings
per share in third quarter and nine months 2004 benefited from share repurchases
which resulted in a slight reduction in average shares outstanding. However,
lower investment income and higher interest expense relating to the financing of
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the purchase of the CCI business adversely affected third quarter and nine
months 2004 net earnings as compared to the corresponding 2003 periods.
The consolidated effective income tax rate was 33.7% in both the third quarter
and nine months 2004 compared to 33.8% in both the third quarter and nine months
2003. This improvement generally reflects a reduction in state income taxes.
LIQUIDITY AND CAPITAL RESOURCES:
The Company's liquidity and capital resources at October 2, 2004 reflects the
purchase of the CCI business as discussed in the section entitled "Acquisition"
above. Although the Company financed a portion of the CCI acquisition with a
bank term loan of $154,000, the outstanding principal on this bank term loan
aggregated $122,000 as of October 2, 2004. As of November 8, 2004, the
outstanding principal on such term loan was $92,000, a $30,000 reduction
reflecting the Company's overall positive cash flows and the maturity and
liquidation of additional marketable securities. As of November 8, 2004, minimum
payments of outstanding principal that are required under terms of the bank loan
are $5,334 in 2005 and $86,666 in 2006.
The Company's current ratio (current assets divided by current liabilities) was
1.9 to 1 as of the end of third quarter 2004 as compared to 3.0 to 1 as of third
quarter 2003 and 3.9 to 1 as of fourth quarter 2003. Net working capital was
$108,409 as of the end of third quarter 2004 as compared to $188,412 and
$180,818 as of the end of third quarter 2003 and fourth quarter 2003,
respectively. Net working capital amounts include aggregate cash and cash
equivalents and short-term investments of $60,206 as of the end of third quarter
2004 compared to $139,310 and $171,045 as of the end of third quarter 2003 and
fourth quarter 2003, respectively. The decrease in cash and cash equivalents in
the third quarter of 2004 reflects the acquisition of the CCI business on August
30, 2004. In addition, long-term investments, principally debt securities
comprising municipal bonds, were $106,761 as of the end of third quarter 2004 as
compared to $104,591 and $112,431 as of the end of third quarter 2003 and fourth
quarter 2003, respectively.
Net cash provided by operating activities was $18,115 in nine months 2004
compared to $27,201 in nine months 2003. The net cash used in 2004 operating
activities principally reflects higher inventories and income taxes payable and
deferred, as well as the payments of split dollar insurance premiums.
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Capital expenditures for nine months 2004 and 2003 were $10,825 and $9,272,
respectively. Capital expenditures for the 2004 year are anticipated to be
generally in line with historical annualized spending and are to be funded from
the Company's cash flow from operations and internal sources.
Cash dividends paid in the nine months 2004 and 2003 were $11,222 and $10,803,
respectively. The Company repurchased and retired $16,407 and $28,332 of its
shares outstanding during nine months 2004 and 2003, respectively.
This discussion and certain other sections of this Form 10-Q contain
forward-looking statements that are based largely on the Company's current
expectations and are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements are subject
to certain risks, trends and uncertainties that could cause actual results and
achievements to differ materially from those expressed in the forward-looking
statements. Such risks, trends and uncertainties, which in some instances are
beyond the Company's control, include changes in demand and consumer
preferences, including seasonal events such as Halloween; the effect of
ingredient costs; the effect of acquisitions and related operating results on
the Company's results of operations and financial condition; the Company's
reliance on third-party vendors for various goods and services; changes in the
confectionary market place including action taken by major retailers and
customer accounts; customer and consumer response to marketing programs and
price adjustments; changes in governmental laws and regulations including taxes;
the overall competitive environment in the Company's industry, and the
uncertainties associated with Section 404 of the Sarbanes Oxley Act with regard
to assessment of the Company's internal control over financial reporting and the
Company's ongoing compliance effort related thereto. The words "believe,"
"expect," "anticipate," "estimate," "intend" and similar expressions generally
identify forward-looking statements. Readers are cautioned not to place undue
reliance on such forward-looking statements, which are as of the date of this
filing.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK:
The Company is exposed to various market risks, including fluctuations in sugar,
corn syrup, edible oils, cocoa and packaging costs. The Company also invests in
securities with maturities of up to three years, the majority of which are held
to maturity, which limits the Company's exposure to interest rate fluctuations.
There has been no material change in the Company's market risks that would
significantly affect the disclosures made in the Form 10-K for the year ended
December 31, 2003. The Company is also exposed to exchange rate fluctuations in
the Canadian dollar which is the currency used for a portion of the operating
expenses at its Canadian plants.
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Item 4. CONTROLS AND PROCEDURES
Under the supervision and with the participation of management, the chief
executive officer and chief financial officer of the Company have evaluated the
effectiveness of the design and operation of the Company's disclosure controls
and procedures as of October 2, 2004 and, based on their evaluation, the chief
executive officer and chief financial officer have concluded that these controls
and procedures are effective. Disclosure controls and procedures are designed to
ensure that information required to be disclosed by the Company in the reports
that it files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported, within the time periods specified in the
Securities and Exchange Commission's rules and forms. Disclosure controls and
procedures are also designed to ensure that information is accumulated and
communicated to management, including the chief executive officer and chief
financial officer, as appropriate to allow timely decisions regarding required
disclosure.
There has been no change in the Company's internal control over financial
reporting that occurred during the Company's fiscal quarter ended October 2,
2004 that has materially affected, or is reasonably likely to materially affect,
the Company's internal control over financial reporting.
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PART II - OTHER INFORMATION
TOOTSIE ROLL INDUSTRIES, INC.
AND SUBSIDIARIES
-----------------------------
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds.
(a) Total (b) Average (c) Total Number of Shares (d) Maximum Number (or Approximate
Number of Price Paid per Purchased as Part of Dollar Value) of Shares that May Yet
Shares Share Publicly Announced Plans Be Purchased Under the Plans
Period Purchased Or Programs Or Programs
----------- -------------- ------------------------ ------------------------------------
JUL 4 TO JUL 31 -0-
AUG 1 TO AUG 28 -0-
AUG 29 TO OCT 2 -0-
-------
TOTAL -0-
=======
While the Company does not have a formal or publicly announced stock
repurchase program, the Company's board of directors periodically authorizes a
dollar amount for share repurchases. The treasurer executes share repurchase
transactions according to these guidelines.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 2.1 - Purchase Agreement dated August 11, 2004 among the Company,
Concord Confections Inc. ("Concord"), certain of Concord's
affiliates and Concord's stockholders*
Exhibit 2.2 - First Amendment to Purchase Agreement dated August 27, 2004 among
the Company, certain of the Company's affiliates, Concord,
certain of Concord's affiliates and Concord's stockholders*
Exhibit 10.1 - Loan Agreement dated August 27, 2004 between the Company and Bank
of America, N.A. *
Exhibit 31.1
and 31.2 - Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
Exhibit 32 - Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
*Incorporated by reference from the Company's 8-K filed on September 2, 2004
(b) Form 8-Ks
Form 8-K was filed on September 2, 2004 reporting under Items 1.01, 2.03 and
9.01 the Company's completion of an asset purchase from Concord and certain of
its affiliates and the entry by the Company into a loan agreement related to
financing for such acquisition.
Form 8-K was furnished on July 28, 2004 containing a press release announcing
earnings for the second quarter 2004.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TOOTSIE ROLL INDUSTRIES, INC.
Date: NOV 11, 2004 BY: /s/MELVIN J GORDON
------------ -------------------
Melvin J. Gordon
Chairman of the Board
Date: NOV 11, 2004 BY: /S/G HOWARD EMBER, JR.
------------ -----------------------
G. Howard Ember, Jr.
Vice President - Finance
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