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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 September 27, 2014

 

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   No 

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files) Yes   No 

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

Large accelerated filer

 

Accelerated filer

 

 

 

Non-accelerated filer

 

Smaller reporting company

 

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 (September 27, 2014).

 

 

 

 

Class

 

Outstanding

 

 

 

Common Stock, $.69 4/9 par value

 

37,560,992

Class B Common Stock, $.69 4/9 par value

 

22,897,204

 

 

 

 

 


 

TOOTSIE ROLL INDUSTRIES, INC.

 

September 27, 2014

 

INDEX

 

 

 

 

 

 

Page No.

 

 

 

Part I — 

Financial Information

 

 

 

 

Item 1. 

Financial Statements:

 

 

 

 

 

Condensed Consolidated Statements of Financial Position

3-4

 

 

 

 

Condensed Consolidated Statements of Earnings and Retained Earnings

 

 

 

 

Condensed Consolidated Statements of Comprehensive Earnings

 

 

 

 

Condensed Consolidated Statements of Cash Flows

 

 

 

 

Notes to Condensed Consolidated Financial Statements

8-16

 

 

 

Item 2. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

17-21

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

22 

 

 

 

Item 4. 

Controls and Procedures

22 

 

 

 

Part II — 

Other Information

 

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

23 

 

 

 

Item 6. 

Exhibits

23 

 

 

Signatures 

24 

 

 

Certifications

25-27

 

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)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 27, 2014

 

December 31, 2013

 

September 28, 2013

 

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

 

 

Cash & cash equivalents

   

$

45,142 

    

$

88,283 

    

$

32,734 

Investments

 

 

36,062 

 

 

33,572 

 

 

31,579 

Trade accounts receivable, less allowances of $3,391, $2,042 & $3,446

 

 

102,325 

 

 

40,721 

 

 

102,786 

Other receivables

 

 

2,732 

 

 

4,616 

 

 

3,466 

Inventories:

 

 

 

 

 

 

 

 

 

Finished goods & work-in-process

 

 

47,854 

 

 

37,012 

 

 

40,437 

Raw material & supplies

 

 

31,187 

 

 

24,844 

 

 

29,044 

Prepaid expenses

 

 

5,307 

 

 

5,581 

 

 

1,463 

Deferred income taxes

 

 

3,161 

 

 

5,482 

 

 

4,942 

 

 

 

 

 

 

 

 

 

 

Total current assets

 

 

273,770 

 

 

240,111 

 

 

246,451 

 

 

 

 

 

 

 

 

 

 

PROPERTY, PLANT & EQUIPMENT, at cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Land

 

 

22,453 

 

 

21,683 

 

 

21,679 

Buildings

 

 

111,351 

 

 

111,044 

 

 

108,376 

Machinery & equipment

 

 

340,381 

 

 

340,405 

 

 

328,520 

Construction in progress

 

 

10,750 

 

 

3,403 

 

 

12,878 

 

 

 

484,935 

 

 

476,535 

 

 

471,453 

Less-accumulated depreciation

 

 

293,642 

 

 

279,619 

 

 

274,448 

Net property, plant and equipment

 

 

191,293 

 

 

196,916 

 

 

197,005 

 

 

 

 

 

 

 

 

 

 

OTHER ASSETS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

 

73,237 

 

 

73,237 

 

 

73,237 

Trademarks

 

 

175,024 

 

 

175,024 

 

 

175,024 

Investments

 

 

160,175 

 

 

148,532 

 

 

162,371 

Split dollar officer life insurance

 

 

40,296 

 

 

40,296 

 

 

41,394 

Prepaid expenses

 

 

7,201 

 

 

10,260 

 

 

Restricted cash

 

 

1,664 

 

 

 

 

Deferred income taxes

 

 

3,858 

 

 

4,033 

 

 

6,026 

Total other assets

 

 

461,455 

 

 

451,382 

 

 

458,052 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

926,518 

 

$

888,409 

 

$

901,508 

 

(The accompanying notes are an integral part of these statements.)

3


 

(in thousands except per share data) (UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 27, 2014

 

December 31, 2013

 

September 28, 2013

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

   

$

15,572 

    

$

9,153 

    

$

14,801 

Bank loans

 

 

285 

 

 

 

 

Dividends payable

 

 

4,835 

 

 

4,742 

 

 

4,770 

Accrued liabilities

 

 

52,590 

 

 

45,580 

 

 

49,539 

Postretirement health care and life insurance benefits

 

 

111 

 

 

319 

 

 

555 

Income taxes payable

 

 

5,090 

 

 

327 

 

 

11,113 

Total current liabilities

 

 

78,483 

 

 

60,121 

 

 

80,778 

 

 

 

 

 

 

 

 

 

 

NONCURRENT LIABILITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred income taxes

 

 

53,569 

 

 

54,939 

 

 

43,423 

Bank loans

 

 

796 

 

 

 

 

Postretirement health care and life insurance benefits

 

 

9,519 

 

 

8,857 

 

 

29,401 

Industrial development bonds

 

 

7,500 

 

 

7,500 

 

 

7,500 

Liability for uncertain tax positions

 

 

9,474 

 

 

7,167 

 

 

7,794 

Deferred compensation and other liabilities

 

 

75,751 

 

 

69,520 

 

 

64,988 

Total noncurrent liabilities

 

 

156,609 

 

 

147,983 

 

 

153,106 

 

 

 

 

 

 

 

 

 

 

TOOTSIE ROLL INDUSTRIES, INC. SHAREHOLDERS’ EQUITY:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock, $.69-4/9 par value- 120,000 shares authorized; 37,561, 37,011 & 37,376, respectively, issued

 

 

26,084 

 

 

25,702 

 

 

25,955 

Class B common stock, $.69-4/9 par value- 40,000 shares authorized; 22,897, 22,256 & 22,259, respectively, issued

 

 

15,901 

 

 

15,455 

 

 

15,458 

Capital in excess of par value

 

 

607,216 

 

 

572,669 

 

 

584,128 

Retained earnings

 

 

51,709 

 

 

73,109 

 

 

60,478 

Accumulated other comprehensive loss

 

 

(7,905)

 

 

(4,638)

 

 

(16,403)

Treasury stock (at cost)- 78, 76 & 76 shares, respectively

 

 

(1,992)

 

 

(1,992)

 

 

(1,992)

Total Tootsie Roll Industries, Inc. shareholders’ equity

 

 

691,013 

 

 

680,305 

 

 

667,624 

Noncontrolling interests

 

 

413 

 

 

 

 

Total equity

 

 

691,426 

 

 

680,305 

 

 

667,624 

Total liabilities and shareholders’ equity

 

$

926,518 

 

$

888,409 

 

$

901,508 

 

 (The accompanying notes are an integral part of these statements.)

4


 

TOOTSIE ROLL INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF

EARNINGS AND RETAINED EARNINGS

(in thousands except per share amounts)    (UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter Ended

 

Year to Date Ended

 

 

September 27, 2014

 

September 28, 2013

 

September 27, 2014

 

September 28, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

Net product sales

   

$

191,093 

    

$

191,807 

    

$

401,966 

     

$

404,074 

Rental and royalty revenue

 

 

921 

 

 

902 

 

 

2,760 

 

 

2,807 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenue

 

 

192,014 

 

 

192,709 

 

 

404,726 

 

 

406,881 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product cost of goods sold

 

 

123,164 

 

 

125,833 

 

 

256,211 

 

 

264,974 

Rental and royalty cost

 

 

251 

 

 

223 

 

 

732 

 

 

698 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total costs

 

 

123,415 

 

 

126,056 

 

 

256,943 

 

 

265,672 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product gross margin

 

 

67,929 

 

 

65,974 

 

 

145,755 

 

 

139,100 

Rental and royalty gross margin

 

 

670 

 

 

679 

 

 

2,028 

 

 

2,109 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total gross margin

 

 

68,599 

 

 

66,653 

 

 

147,783 

 

 

141,209 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, marketing and administrative expenses

 

 

31,840 

 

 

33,166 

 

 

85,767 

 

 

87,620 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings from operations

 

 

36,759 

 

 

33,487 

 

 

62,016 

 

 

53,589 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income, net

 

 

166 

 

 

3,105 

 

 

4,865 

 

 

7,401 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings before income taxes

 

 

36,925 

 

 

36,592 

 

 

66,881 

 

 

60,990 

Provision for income taxes

 

 

10,316 

 

 

10,549 

 

 

21,958 

 

 

17,509 

Net earnings

 

 

26,609 

 

 

26,043 

 

 

44,923 

 

 

43,481 

Less: Net loss attributable to noncontrolling interests

 

 

59 

 

 

 -

 

 

352 

 

 

 -

Net earnings attributable to Tootsie Roll Industries, Inc.

 

 

26,668 

 

 

26,043 

 

 

45,275 

 

 

43,481 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings attributable to Tootsie Roll Industries, Inc. per share

 

$

0.44 

 

$

0.42 

 

$

0.75 

 

$

0.71 

Dividends per share *

 

$

0.08 

 

$

0.08 

 

$

0.24 

 

$

0.24 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average number of shares outstanding

 

 

60,525 

 

 

61,343 

 

 

60,668 

 

 

61,487 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retained earnings at beginning of period

 

$

29,870 

 

$

39,199 

 

$

73,109 

 

$

80,210 

Net earnings attributable to Tootsie Roll Industries, Inc.

 

 

26,668 

 

 

26,043 

 

 

45,275 

 

 

43,481 

Cash dividends

 

 

(4,829)

 

 

(4,764)

 

 

(14,394)

 

 

(14,185)

Stock dividends

 

 

 -

 

 

 -

 

 

(52,281)

 

 

(49,028)

 

 

 

 

 

 

 

 

 

 

 

 

 

Retained earnings at end of period

 

$

51,709 

 

$

60,478 

 

$

51,709 

 

$

60,478 

 


*Does not include 3% stock dividend to shareholders of record on 4/4/14 and 4/5/13.

 

(The accompanying notes are an integral part of these statements.)

5


 

TOOTSIE ROLL INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE EARNINGS

(in thousands except per share amounts) (UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter Ended

 

Year to Date Ended

 

 

September 27, 2014

 

September 28, 2013

 

September 27, 2014

 

September 28, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

   

$

26,609 

    

$

26,043 

    

$

44,923 

    

$

43,481 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), before tax:

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(1,004)

 

 

(144)

 

 

(2,184)

 

 

(245)

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension and post-retirement reclassification adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) for the period on postretirement and pension benefits

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Less: reclassification adjustment for (gains) losses to net income

 

 

(451)

 

 

 -

 

 

(1,353)

 

 

 -

Unrealized gains (losses) on postretirement and pension benefits

 

 

(451)

 

 

 -

 

 

(1,353)

 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) for the period on investments

 

 

(286)

 

 

400 

 

 

(317)

 

 

219 

Less: reclassification adjustment for (gains) losses to net income

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Unrealized gains (losses) on investments

 

 

(286)

 

 

400 

 

 

(317)

 

 

219 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) for the period on derivatives

 

 

(2,254)

 

 

768 

 

 

(1,699)

 

 

(964)

Less: reclassification adjustment for (gains) losses to net income

 

 

408 

 

 

315 

 

 

918 

 

 

1,216 

Unrealized gains (losses) on derivatives

 

 

(1,846)

 

 

1,083 

 

 

(781)

 

 

252 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other comprehensive income (loss), before tax

 

 

(3,587)

 

 

1,339 

 

 

(4,635)

 

 

226 

Income tax benefit (expense) related to items of other comprehensive income

 

 

934 

 

 

(560)

 

 

1,368 

 

 

(182)

Total comprehensive earnings

 

 

23,956 

 

 

26,822 

 

 

41,656 

 

 

43,525 

Comprehensive earnings attributable to noncontrolling interests

 

 

59 

 

 

 -

 

 

352 

 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive earnings attributable to Tootsie Roll Industries, Inc.

 

$

24,015 

 

$

26,822 

 

$

42,008 

 

$

43,525 

 

(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

 

 

September 27, 2014

 

September 28, 2013

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

   

$

44,923 

    

$

43,481 

Adjustments to reconcile net earnings to net cash used in operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

15,568 

 

 

14,863 

Loss on step acquisition

 

 

529 

 

 

 -

Loss from equity method investment

 

 

 -

 

 

733 

Amortization of marketable security premiums

 

 

2,498 

 

 

2,274 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

(60,434)

 

 

(60,765)

Other receivables

 

 

3,004 

 

 

2,315 

Inventories

 

 

(15,694)

 

 

(7,141)

Prepaid expenses and other assets

 

 

3,344 

 

 

28,193 

Accounts payable and accrued liabilities

 

 

9,153 

 

 

10,301 

Income taxes payable and deferred

 

 

4,982 

 

 

5,124 

Postretirement health care and life insurance benefits

 

 

(691)

 

 

2,575 

Deferred compensation and other liabilities

 

 

2,609 

 

 

2,801 

 

 

 

 

 

 

 

Net cash from operating activities

 

 

9,791 

 

 

44,754 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash acquired in step acquisition

 

 

161 

 

 

-

Restricted cash

 

 

169 

 

 

-

Capital expenditures

 

 

(7,315)

 

 

(10,593)

Net sales (purchases) of trading securities

 

 

(3,062)

 

 

(2,612)

Purchase of available for sale securities

 

 

(37,416)

 

 

(63,992)

Sale and maturity of available for sale securities

 

 

26,375 

 

 

22,436 

 

 

 

 

 

 

 

Net cash used in investing activities

 

 

(21,088)

 

 

(54,761)

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares purchased and retired

 

 

(16,792)

 

 

(11,429)

Dividends paid in cash

 

 

(14,415)

 

 

(9,517)

Repayment of bank loans

 

 

(130)

 

 

-

 

 

 

 

 

 

 

Net cash used in financing activities

 

 

(31,337)

 

 

(20,946)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

 

(507)

 

 

(175)

 

 

 

 

 

 

 

Decrease in cash and cash equivalents

 

 

(43,141)

 

 

(31,128)

Cash and cash equivalents at beginning of year

 

 

88,283 

 

 

63,862 

 

 

 

 

 

 

 

Cash and cash equivalents at end of quarter

 

$

45,142 

 

$

32,734 

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

Income taxes paid, net

 

$

14,835 

 

$

13,173 

Interest paid

 

$

33 

 

$

19 

Stock dividend issued

 

$

52,165 

 

$

48,925 

 

7


 

 (The accompanying notes are an integral part of these statements.)

 

TOOTSIE ROLL INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 27, 2014

(in thousands except per share amounts) (UNAUDITED)

 

Note 1 — Significant Accounting Policies

 

General Information

 

Foregoing data has been prepared from the unaudited financial records of Tootsie Roll Industries, Inc. (the Company) and in the opinion of management all adjustments, which are of a normal recurring nature, necessary for a fair statement of the results for the interim period have been reflected.  Certain amounts previously reported have been reclassified to conform to the current year presentation. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the related notes included in the Company’s 2013 Annual Report on Form 10-K.

 

Results of operations for the period ended September 27, 2014 are not necessarily indicative of results to be expected for the year to end December 31, 2014 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.

 

The results of the Company’s two less than wholly owned Spanish companies are consolidated and a noncontrolling interest has been recorded. (See Note 10.)

 

Accounting Pronouncements

 

In August 2014, the FASB issued ASU 2014-15 which provides guidance about management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures. This guidance will be effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. We do not expect the adoption of this guidance to have a significant impact on our condensed consolidated financial statements.

 

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09 that introduces a new five-step revenue recognition model in which an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU also requires disclosures sufficient to enable users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers, including qualitative and quantitative disclosures about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. This standard is effective for fiscal years beginning after December 15, 2016, including interim periods within that reporting period. The Company is currently evaluating the new guidance to determine the impact it will have on the condensed consolidated financial statements.

 

In April 2014, the FASB issued ASU 2014-08, which includes amendments that change the requirements for reporting discontinued operations. The new guidance requires that the disposal of a component of an entity be reported as discontinued operations only if the action represents a strategic shift that will have a major effect on an entity’s operations and financial results, and would require expanded disclosures. This guidance will be effective beginning in the first quarter 2015. We do not expect the adoption of this guidance to have a significant impact on the condensed consolidated financial statements.

 

8


 

Note 2 — Average Shares Outstanding

 

The average number of shares outstanding for year to date ended September 27, 2014 reflect stock purchases of 575 shares for $16,792 and a 3% stock dividend distributed on April 4, 2014. The average number of shares outstanding for year to date ended September 28, 2013 reflect stock purchases of 384 shares for $11,429 and a 3% stock dividend distributed on April 5, 2013.

 

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 2010 through 2013. With few exceptions, the Company is no longer subject to examination by tax authorities for the year 2009 and prior. The consolidated effective tax rates were 27.9% and 28.8% in third quarter 2014 and 2013, respectively, and 32.8% and 28.7% in nine months 2014 and 2013, respectively. The higher effective income tax rate in nine months 2014 reflects the reversal of deferred tax assets of $2,350 in first quarter 2014 relating to the step acquisition of the Spanish companies as discussed in Note 10.

 

Note 4 — 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 is reflected in the hierarchy assessment disclosed in the table below.

 

As of September 27, 2014, December 31, 2013 and September 28, 2013, 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, including an auction rate security. The Company’s available for sale and trading securities principally consist of municipal bonds and mutual funds that are publicly traded.

9


 

The following table presents information about the Company’s financial assets and liabilities measured at fair value as of September 27, 2014, December 31, 2013 and September 28, 2013, and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated Fair Value September 27, 2014

 

 

Total

 

Input Levels Used

 

 

Fair Value

 

Level 1

 

Level 2

 

Level 3

Cash and cash equivalents

   

$

45,142 

    

$

45,142 

    

$

 -

    

$

 -

Available for sale securities

 

 

126,870 

 

 

 -

 

 

126,870 

 

 

 -

Foreign currency forward contracts

 

 

(1,238)

 

 

 -

 

 

(1,238)

 

 

 -

Commodity futures contracts

 

 

(377)

 

 

(377)

 

 

 -

 

 

 -

Trading securities

 

 

69,367 

 

 

69,367 

 

 

 -

 

 

 -

Total assets measured at fair value

 

$

239,764 

 

$

114,132 

 

$

125,632 

 

$

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated Fair Value December 31, 2013

 

 

 

Total

 

Input Levels Used

 

 

 

Fair Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

Cash and cash equivalents

   

$

88,283 

    

$

88,283 

    

$

 -

    

$

 -

Available for sale securities

 

 

118,647 

 

 

 -

 

 

118,647 

 

 

 -

Foreign currency forward contracts

 

 

(684)

 

 

 -

 

 

(684)

 

 

 -

Commodity futures contracts, net

 

 

(130)

 

 

(130)

 

 

 -

 

 

 -

Trading securities

 

 

63,215 

 

 

63,215 

 

 

 -

 

 

 -

Total assets measured at fair value

 

$

269,331 

 

$

151,368 

 

$

117,963 

 

$

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated Fair Value September 28, 2013

 

 

 

Total

 

Input Levels Used

 

 

 

Fair Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

Cash and cash equivalents

   

$

32,734 

    

$

32,734 

    

$

    

$

Auction rate security

 

 

10,162 

 

 

 

 

 

 

10,162 

Available for sale securities excluding the auction rate security

 

 

123,391 

 

 

 

 

123,391 

 

 

Foreign currency forward contracts

 

 

29 

 

 

 

 

29 

 

 

Commodity futures contracts

 

 

97 

 

 

97 

 

 

 

 

Trading securities

 

 

58,968 

 

 

58,968 

 

 

 

 

Total assets measured at fair value

 

$

225,381 

 

$

91,799 

 

$

123,420 

 

$

10,162 

 

During the fourth quarter 2013, the Company sold its investment in Jefferson County Alabama Sewer Revenue Refunding Warrants for $10,840. This was an auction rate security (ARS) originally purchased for $13,550 in 2008 with an insurance-backed AAA rating. The Company recorded an other-than-temporary pre-tax impairment of $5,140 in 2008 on this ARS investment which resulted in a carrying value of $8,410 at that time. Since recording the initial impairment in 2008, the Company carried this ARS investment at its estimated fair value utilizing a valuation model with Level 3 inputs, as defined by guidance, and resulting changes in the market value since the original impairment charge in 2008 were recorded as changes to accumulated other comprehensive income (loss) each year. The fair value of this instrument at September  28, 2013 was $10,162, with an unrealized loss in other comprehensive earnings of $677 recorded during nine months 2013.

 

The fair value of the Company’s industrial revenue development bonds at September  27, 2014, December 31, 2013 and September 28, 2013 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.

 

10


 

Note 5 — Derivative Instruments and Hedging Activities

 

From time to time, the Company uses derivative instruments, including foreign currency forward contracts, commodity futures contracts and commodity option contracts, to manage its exposures to foreign exchange and commodity prices. Commodity futures contracts and most commodity option 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. The Company does not engage in trading or other speculative use of derivative instruments.

 

The Company recognizes all derivative instruments as either assets or liabilities at fair value in the Condensed Consolidated Statement of Financial Position. Derivative assets are recorded in other receivables and derivative liabilities are recorded in accrued liabilities. The Company uses either hedge accounting or mark-to-market accounting for its derivative instruments. 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. Substantially all amounts reported in accumulated other comprehensive loss for foreign currency derivatives are expected to be reclassified to other income, net.

11


 

 

 

The following table summarizes the Company’s outstanding derivative contracts and their effects on its Condensed Consolidated Statements of Financial Position at September 27, 2014, December 31, 2013 and September 28, 2013:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 27, 2014

 

 

Notional

    

    

    

    

 

 

Amounts

 

Assets

 

Liabilities

 

 

 

 

 

 

 

 

 

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

$

33,291 

 

$

20 

 

$

(1,258)

Commodity futures contracts

 

 

3,352 

 

 

 -

 

 

(377)

Total derivatives designated as hedging instruments

 

 

 

 

 

20 

 

 

(1,635)

Derivatives not designated as hedging instruments:

 

 

 

 

 

 

 

 

 

Commodity futures contracts

 

 

 -

 

 

 -

 

 

 -

Total derivatives not designated as hedging instruments

 

 

 

 

 

 -

 

 

 -

Total derivatives