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EX-32 - EX-32 - TOOTSIE ROLL INDUSTRIES INCtr-20180930xex32.htm
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EX-31.1 - EX-31.1 - TOOTSIE ROLL INDUSTRIES INCtr-20180930ex311ac8777.htm

 

 

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 30, 2018

 

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files) Yes ☒  No ☐

 

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

 

`

Large accelerated filer ☒

Accelerated filer ☐

Non-accelerated filer ☐

Smaller reporting company ☐

Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ☐  No ☒

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date (September 30, 2018).

 

 

 

 

Class

 

Outstanding

 

 

 

Common Stock, $.69 4/9 par value

 

38,621,418

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

 

25,599,198

 

 

 

 


 

TOOTSIE ROLL INDUSTRIES, INC.

 

SEPTEMBER 30, 2018

 

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

5

 

 

 

 

Condensed Consolidated Statements of Comprehensive Earnings

6

 

 

 

 

Condensed Consolidated Statements of Cash Flows

7

 

 

 

 

Notes to Condensed Consolidated Financial Statements

8-15

 

 

 

Item 2. 

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

15-20

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

20

 

 

 

Item 4. 

Controls and Procedures

20

 

 

 

Part II — 

Other Information

 

 

 

 

Item 1. 

Legal Proceedings

21

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

21

 

 

 

Item 6. 

Exhibits

21

 

 

Signatures 

22

 

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 30, 2018

 

December 31, 2017

 

September 30, 2017

 

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

 

 

Cash & cash equivalents

   

$

64,333

    

$

96,314

    

$

49,512

Restricted cash

 

 

393

 

 

406

 

 

400

Investments

 

 

68,373

 

 

41,606

 

 

74,272

Trade accounts receivable, less allowances of $2,873,  $1,921 & $3,225

 

 

93,616

 

 

47,354

 

 

95,341

Other receivables

 

 

5,802

 

 

5,425

 

 

6,405

Inventories:

 

 

 

 

 

 

 

 

 

Finished goods & work-in-process

 

 

37,148

 

 

31,922

 

 

41,273

Raw material & supplies

 

 

26,172

 

 

22,905

 

 

26,767

Income taxes receivable and prepaid

 

 

 -

 

 

12,974

 

 

 -

Prepaid expenses

 

 

6,439

 

 

12,014

 

 

2,489

Total current assets

 

 

302,276

 

 

270,920

 

 

296,459

 

 

 

 

 

 

 

 

 

 

PROPERTY, PLANT & EQUIPMENT, at cost:

 

 

 

 

 

 

 

 

 

Land

 

 

21,968

 

 

21,962

 

 

22,222

Buildings

 

 

118,581

 

 

118,491

 

 

116,555

Machinery & equipment

 

 

381,522

 

 

381,665

 

 

369,753

Construction in progress

 

 

21,106

 

 

4,866

 

 

14,328

 

 

 

543,177

 

 

526,984

 

 

522,858

Less-accumulated depreciation

 

 

361,079

 

 

348,012

 

 

344,809

Net property, plant and equipment

 

 

182,098

 

 

178,972

 

 

178,049

 

 

 

 

 

 

 

 

 

 

OTHER ASSETS:

 

 

 

 

 

 

 

 

 

Goodwill

 

 

73,237

 

 

73,237

 

 

73,237

Trademarks

 

 

175,024

 

 

175,024

 

 

175,024

Investments

 

 

188,393

 

 

190,510

 

 

193,991

Split dollar officer life insurance

 

 

26,042

 

 

26,042

 

 

26,042

Prepaid expenses and other assets

 

 

13,249

 

 

15,817

 

 

34

Deferred income taxes

 

 

445

 

 

424

 

 

 -

Total other assets

 

 

476,390

 

 

481,054

 

 

468,328

Total assets

 

$

960,764

 

$

930,946

 

$

942,836

 

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

3


 

(in thousands except per share data) (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

December 31, 2017

 

September 30, 2017

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

 

Accounts payable

   

$

18,637

    

$

11,928

    

$

14,037

Bank loans

 

 

190

 

 

440

 

 

404

Dividends payable

 

 

5,777

 

 

5,660

 

 

5,667

Accrued liabilities

 

 

45,787

 

 

45,157

 

 

50,552

Postretirement health care

 

 

603

 

 

603

 

 

513

Income taxes payable

 

 

3,516

 

 

 -

 

 

7,636

Total current liabilities

 

 

74,510

 

 

63,788

 

 

78,809

 

 

 

 

 

 

 

 

 

 

NONCURRENT LIABILITIES:

 

 

 

 

 

 

 

 

 

Deferred income taxes

 

 

41,382

 

 

41,457

 

 

44,316

Postretirement health care

 

 

13,167

 

 

12,894

 

 

11,941

Industrial development bonds

 

 

7,500

 

 

7,500

 

 

7,500

Liability for uncertain tax positions

 

 

4,148

 

 

4,817

 

 

4,811

Deferred compensation and other liabilities

 

 

73,321

 

 

66,686

 

 

80,936

Total noncurrent liabilities

 

 

139,518

 

 

133,354

 

 

149,504

 

 

 

 

 

 

 

 

 

 

TOOTSIE ROLL INDUSTRIES, INC. SHAREHOLDERS’ EQUITY:

 

 

 

 

 

 

 

 

 

Common stock, $.69-4/9 par value- 120,000 shares authorized; 38,621,  37,960 & 38,046, respectively, issued

 

 

26,820

 

 

26,361

 

 

26,421

Class B common stock, $.69-4/9 par value- 40,000 shares authorized; 25,599,  24,891 & 24,918, respectively, issued

 

 

17,777

 

 

17,285

 

 

17,304

Capital in excess of par value

 

 

699,140

 

 

656,752

 

 

660,779

Retained earnings

 

 

27,356

 

 

57,225

 

 

30,890

Accumulated other comprehensive loss

 

 

(22,261)

 

 

(21,791)

 

 

(18,921)

Treasury stock (at cost)- 88,  85 & 85 shares, respectively

 

 

(1,992)

 

 

(1,992)

 

 

(1,992)

Total Tootsie Roll Industries, Inc. shareholders’ equity

 

 

746,840

 

 

733,840

 

 

714,481

Noncontrolling interests

 

 

(104)

 

 

(36)

 

 

42

Total equity

 

 

746,736

 

 

733,804

 

 

714,523

Total liabilities and shareholders’ equity

 

$

960,764

 

$

930,946

 

$

942,836

 

(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 30, 2018

 

September 30, 2017

 

September 30, 2018

 

September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

Net product sales

   

$

181,505

    

$

182,173

    

$

387,987

     

$

390,495

Rental and royalty revenue

 

 

798

 

 

842

 

 

2,925

 

 

2,771

Total revenue

 

 

182,303

 

 

183,015

 

 

390,912

 

 

393,266

 

 

 

 

 

 

 

 

 

 

 

 

 

Product cost of goods sold

 

 

115,246

 

 

114,970

 

 

248,561

 

 

245,889

Rental and royalty cost

 

 

211

 

 

240

 

 

686

 

 

757

Total costs

 

 

115,457

 

 

115,210

 

 

249,247

 

 

246,646

 

 

 

 

 

 

 

 

 

 

 

 

 

Product gross margin

 

 

66,259

 

 

67,203

 

 

139,426

 

 

144,606

Rental and royalty gross margin

 

 

587

 

 

602

 

 

2,239

 

 

2,014

Total gross margin

 

 

66,846

 

 

67,805

 

 

141,665

 

 

146,620

Selling, marketing and administrative expenses

 

 

36,620

 

 

33,222

 

 

91,229

 

 

86,502

Earnings from operations

 

 

30,226

 

 

34,583

 

 

50,436

 

 

60,118

Other income (loss), net

 

 

2,987

 

 

4,370

 

 

6,871

 

 

9,311

Earnings before income taxes

 

 

33,213

 

 

38,953

 

 

57,307

 

 

69,429

Provision for income taxes

 

 

7,134

 

 

12,066

 

 

12,657

 

 

20,681

Net earnings

 

 

26,079

 

 

26,887

 

 

44,650

 

 

48,748

Less: Net earnings (loss) attributable to noncontrolling interests

 

 

(25)

 

 

(46)

 

 

(68)

 

 

(131)

Net earnings attributable to Tootsie Roll Industries, Inc.

 

$

26,104

 

$

26,933

 

$

44,718

 

$

48,879

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

0.41

 

$

0.42

 

$

0.70

 

$

0.75

Dividends per share *

 

$

0.09

 

$

0.09

 

$

0.27

 

$

0.27

 

 

 

 

 

 

 

 

 

 

 

 

 

Average number of shares outstanding

 

 

64,155

 

 

64,855

 

 

64,268

 

 

65,155

 

 

 

 

 

 

 

 

 

 

 

 

 

Retained earnings at beginning of period

 

$

7,020

 

$

9,615

 

$

57,225

 

$

43,833

Net earnings attributable to Tootsie Roll Industries, Inc.

 

 

26,104

 

 

26,933

 

 

44,718

 

 

48,879

Adopted ASU's (See Note 1)

 

 

 -

 

 

 -

 

 

2,726

 

 

 -

Cash dividends

 

 

(5,768)

 

 

(5,658)

 

 

(17,164)

 

 

(16,898)

Stock dividends

 

 

 -

 

 

 -

 

 

(60,149)

 

 

(44,924)

Retained earnings at end of period

 

$

27,356

 

$

30,890

 

$

27,356

 

$

30,890

 

*Does not include 3% stock dividend to shareholders of record on 3/6/18 and 3/7/17.

 

(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 30, 2018

 

September 30, 2017

 

September 30, 2018

 

September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

   

$

26,079

    

$

26,887

    

$

44,650

    

$

48,748

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), before tax:

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

1,164

 

 

(216)

 

 

1,102

 

 

2,875

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension and postretirement reclassification adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 -

 

 

 4

 

 

 -

 

 

95

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

 

 

(331)

 

 

(366)

 

 

(993)

 

 

(1,097)

Unrealized gains (losses) on postretirement and pension benefits

 

 

(331)

 

 

(362)

 

 

(993)

 

 

(1,002)

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) for the period on investments

 

 

209

 

 

121

 

 

(1,071)

 

 

500

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

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Unrealized gains (losses) on investments

 

 

209

 

 

121

 

 

(1,071)

 

 

500

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) for the period on derivatives

 

 

(573)

 

 

19

 

 

(2,422)

 

 

(1,735)

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

 

 

795

 

 

28

 

 

1,630

 

 

(109)

Unrealized gains (losses) on derivatives

 

 

222

 

 

47

 

 

(792)

 

 

(1,844)

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other comprehensive income (loss), before tax

 

 

1,264

 

 

(410)

 

 

(1,754)

 

 

529

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

 

 

(24)

 

 

70

 

 

691

 

 

796

Total comprehensive earnings

 

 

27,319

 

 

26,547

 

 

43,587

 

 

50,073

Comprehensive earnings (loss) attributable to noncontrolling interests

 

 

(25)

 

 

(46)

 

 

(68)

 

 

(131)

Total comprehensive earnings attributable to Tootsie Roll Industries, Inc.

 

$

27,344

 

$

26,593

 

$

43,655

 

$

50,204

 

(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 30, 2018

 

September 30, 2017

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

Net earnings

   

$

44,650

    

$

48,748

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

 

 

 

 

 

 

Depreciation and amortization

 

 

13,933

 

 

14,364

Deferred income taxes

 

 

(443)

 

 

153

Amortization of marketable security premiums

 

 

1,351

 

 

1,840

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

(45,881)

 

 

(51,270)

Other receivables

 

 

(649)

 

 

(4,265)

Inventories

 

 

(8,333)

 

 

(10,018)

Prepaid expenses and other assets

 

 

8,268

 

 

3,313

Accounts payable and accrued liabilities

 

 

10,932

 

 

8,249

Income taxes payable

 

 

15,821

 

 

8,706

Postretirement health care benefits

 

 

(720)

 

 

(677)

Deferred compensation and other liabilities

 

 

2,051

 

 

(723)

Net cash from operating activities

 

 

40,980

 

 

18,420

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

Capital expenditures

 

 

(16,812)

 

 

(11,699)

Purchases of trading securities

 

 

(3,807)

 

 

(3,387)

Sales of trading securities

 

 

817

 

 

3,544

Purchase of available for sale securities

 

 

(65,098)

 

 

(51,935)

Sale and maturity of available for sale securities

 

 

45,379

 

 

21,328

Net cash used in investing activities

 

 

(39,521)

 

 

(42,149)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

Shares purchased and retired

 

 

(16,650)

 

 

(30,027)

Dividends paid in cash

 

 

(17,208)

 

 

(16,965)

Proceeds from bank loans

 

 

1,264

 

 

1,182

Repayment of bank loans

 

 

(1,506)

 

 

(1,345)

Net cash used in financing activities

 

 

(34,100)

 

 

(47,155)

Effect of exchange rate changes on cash

 

 

647

 

 

1,269

Decrease in cash and cash equivalents

 

 

(31,994)

 

 

(69,615)

Cash, cash equivalents and restricted cash at beginning of year

 

 

96,720

 

 

119,527

Cash, cash equivalents and restricted cash at end of quarter

 

$

64,726

 

$

49,912

Supplemental cash flow information:

 

 

 

 

 

 

Income taxes paid/(received), net

 

$

(2,811)

 

$

12,360

Interest paid

 

$

81

 

$

49

Stock dividend issued

 

$

60,538

 

$

69,739

 

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

7


 

 

 

TOOTSIE ROLL INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2018

(in thousands except per share amounts) (Unaudited)

 

Note 1 — Significant Accounting Policies

 

General Information

 

Foregoing data has been prepared from the unaudited financial records of Tootsie Roll Industries, Inc. (the Company) and in the opinion of management all adjustments, which are of a normal recurring nature, necessary for a fair statement of the results for the interim period have been reflected. Certain amounts previously reported have been reclassified to conform to the current year presentation. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the related notes included in the Company’s Form 10-K for the year ended December 31, 2017 (the “2017 Form 10-K”).

 

Results of operations for the period ended September 30, 2018 are not necessarily indicative of results to be expected for the year to end December 31, 2018 because of the seasonal nature of the Company’s operations. Historically, the third quarter has been the Company’s largest sales quarter due to pre-Halloween sales.

 

Revenue Recognition

 

The Company’s revenues, primarily net product sales, principally result from the sale of goods, reflect the consideration to which the Company expects to be entitled generally based on customer purchase orders. The Company records revenue based on a five-step model in accordance with Accounting Standards Codification ("ASC") Topic 606 which became effective January, 1, 2018. Adjustments for estimated customer cash discounts upon payment, discounts for price adjustments, product returns, allowances, and certain advertising and promotional costs, including consumer coupons, are variable consideration and are recorded as a reduction of product sales revenue in the same period the related product sales are recorded. Such estimates are calculated using historical averages adjusted for any expected changes due to current business conditions and experience. A net product sale is recorded when the Company delivers the product to the customer, or in certain instances, the customer picks up the goods at the Company’s distribution center, and thereby obtains control of such product. Amounts billed and due from our customers are classified as accounts receivables on the balance sheet and require payment on a short-term basis. Accounts receivable are unsecured. Shipping and handling costs are included in selling, marketing and administrative expenses. We also recognize a minor amount of royalty income (less than 0.2% of our consolidated net sales) from sales-based licensing arrangements, pursuant to which revenue is recognized as the third-party licensee sales occur. Rental income (less than 1% of our consolidated net sales) is not considered revenue from contracts from customers. See “Recently Adopted Accounting Pronouncements” for further discussion.

 

Recently Adopted Accounting Pronouncements

 

In May 2014, the FASB issued ASU 2014-09, (ASC Topic 606) which supersedes nearly all existing revenue recognition guidance. Subsequent to the issuance of ASC Topic 606, the FASB clarified and amended the guidance through several Accounting Standard Updates; hereinafter the collection of revenue guidance is referred to as “ASC 606”. The core principle of ASC 606 is that revenue should be recognized 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. The Company adopted ASU 2014-09 and related amendments (ASC 606) as of January 1, 2018 using the modified retrospective method. As a result of adoption, the cumulative impact to retained earnings at January 1, 2018 was a net after-tax increase of $3,319  ($4,378 pre-tax). The adoption principally changed the timing of recognition of certain trade promotions and related adjustments thereto which affect net product sales. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. The Company expects the impact of the adoption of the new standard to be immaterial to its net income on an ongoing basis. Revenue continues to be recognized at a point in time for product sales when products are delivered to or picked up by the customer as discussed above.

8


 

 

In February 2018, the FASB issued ASU 2018-02 which provides financial statement preparers with an option to reclassify stranded tax effects within Accumulated Other Comprehensive Income (AOCI) to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act (or portion thereof) is recorded. The guidance is effective for all organizations for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in any interim period. The amendments should be applied either in the period adopted or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. The Company early adopted ASU 2018-02 on January 1, 2018 with a $593 cumulative-effect adjustment from AOCI to decrease retained earnings related to certain tax effects of unrealized gains and losses on available-for-sale securities and other post-retirement benefits. No other income tax effects related to the application of the Tax Cuts and Jobs Act were reclassified from AOCI to retained earnings.

 

In March 2018, the FASB issued ASU 2018-05 which adds various Securities and Exchange Commission (“SEC”) paragraphs pursuant to the issuance of the December 2017 SEC Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”), which was effective immediately. The SEC issued SAB 118 to address concerns about reporting entities’ ability to timely comply with the accounting requirements to recognize all of the effects of the Tax Cuts and Jobs Act in the period of enactment. SAB 118 allows disclosure that timely determination of some or all of the income tax effects from the Tax Cuts and Jobs Act are incomplete by the due date of the financial statements and if possible to provide a reasonable estimate. The Company has accounted for the tax effects of the Tax Cuts and Jobs Act under the guidance of SAB 118, on a provisional basis. The accounting for certain income tax effects is incomplete, but the Company has determined reasonable estimates for those effects and has recorded provisional amounts in the condensed consolidated financial statements as of September 30, 2018 and December 31, 2017.

 

In January 2016, the FASB issued ASU 2016-01, as amended by ASU 2018-03,  issued in February 2018, which among other changes in accounting and disclosure requirements, replaces the cost method of accounting for non-marketable equity securities with a model for recognizing impairments and observable price changes, and also eliminates the available-for-sale classification for marketable equity securities. The Company adopted this guidance as of January 1, 2018. The Company does not have any non-marketable securities, and therefore, the adoption of this guidance did not have any impact on its consolidated financial statements.

 

In August 2016, the FASB issued ASU 2016-15, which clarifies how entities should classify certain cash receipts and cash payments on the statement of cash flows. The standard will be effective for fiscal years beginning after December 15, 2017, including interim periods within those years. The Company retrospectively adopted this guidance effective January 1, 2018. The Company’s adoption of this guidance did not have a material impact on its consolidated financial statements.

 

In November 2016, the FASB issued ASU 2016-18  which requires amounts generally described as restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the total beginning and ending amounts for the periods shown on the statement of cash flows. The standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those years using a retrospective transition method to each period presented. The Company retrospectively adopted this guidance as of January 1, 2018. The Company’s adoption of this guidance did not have a material impact on its consolidated financial statements.

 

In March 2017, the FASB issued ASU 2017-07 which requires companies with other postretirement employee benefit plans to present the service cost component of net periodic benefit cost in the same income statement line item as other compensation costs. The other components of net periodic benefit cost will be presented separately and not included in operating income. The standard will be effective for fiscal years beginning after December 15, 2017, including interim periods within those years. The Company retrospectively adopted this guidance effective January 1, 2018. The Company’s adoption of this guidance did not have a material impact on its consolidated financial statements.

 

 

 

 

9


 

Recently Issued Accounting Pronouncements - Not Yet Adopted

 

In February 2016, the FASB issued ASU 2016-02 which amends existing guidance to require lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by long-term leases and to disclose additional quantitative and qualitative information about leasing arrangements. This ASU also provides clarifications surrounding the presentation of the effects of leases in the income statement and statement of cash flows. This guidance will be effective for the Company on January 1, 2019. The Company owns substantially all of its personal property and real estate. However, the Company expects the new lease standard to increase its total assets and liabilities. The Company is currently evaluating the magnitude of the impact that this guidance will have on its consolidated financial statements upon adoption.

 

In August 2017, the FASB issued ASU 2017-12, guidance that amends hedge accounting. Under the new guidance, more hedging strategies will be eligible for hedge accounting and the application of hedge accounting is simplified. The new guidance amends presentation and disclosure requirements, and how effectiveness is assessed. The guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those years. Early adoption is permitted. The Company has completed its initial assessment and does not expect adoption of this guidance to have a material impact on its consolidated financial statements.

 

Note 2 — Average Shares Outstanding

 

The average number of shares outstanding for nine months 2018 reflects stock purchases of 502 shares for $16,650 and a 3% stock dividend of 1,869 shares distributed on April 6, 2018. The average number of shares outstanding for nine months 2017 reflects stock purchases of 809 shares for $30,027 and a 3% stock dividend of 1,847 shares distributed on April 17, 2017.

 

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 2015 through 2017. With few exceptions, the Company is no longer subject to examination by tax authorities for the year 2014 and prior. The consolidated effective tax rates were 21.5% and 31.0% in third quarter 2018 and 2017, respectively, and 22.1% and 29.8% in nine months 2018 and 2017, respectively.  The lower effective tax rate in third quarter and nine months 2018 compared to third quarter and nine months 2017 principally reflects the lower U.S. federal statutory tax rate of 21% effective for 2018.

 

The Company believes it has obtained and analyzed all reasonably available information necessary to record the effects of the change in tax law and considers its accounting for the effects of the 2017 Tax Reform Act to be provisional as of September 30, 2018. The ultimate impact may differ from these provisional amounts, possibly materially, due to, among other things, additional regulatory guidance that may be issued by the Internal Revenue Service, and actions the Company may take as a result of the Tax Reform Act.

 

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.

 

 

10


 

As of September 30, 2018,  December 31, 2017 and September 30, 2017, the Company held certain financial assets that are required to be measured at fair value on a recurring basis. These included derivative hedging instruments related to the purchase of certain raw materials and foreign currencies, investments in trading securities and available for sale securities. The Company’s available for sale securities principally consist of corporate and municipal bonds that are publicly traded and variable rate demand notes and obligations with interest rates that generally reset weekly and the security can be “put” back and sold weekly. Trading securities principally consist of equity mutual funds that are publicly traded.

 

The following table presents information about the Company’s financial assets and liabilities measured at fair value as of September 30, 2018,  December 31, 2017 and September 30, 2017 and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated Fair Value September 30, 2018

 

 

Total

 

Input Levels Used

 

 

Fair Value

 

Level 1

 

Level 2

 

Level 3

Cash and cash equivalents

   

$

64,333

    

$

64,333

    

$

 -

    

$

 -

Available for sale securities

 

 

189,172

 

 

732

 

 

188,440

 

 

 -

Foreign currency forward contracts

 

 

177

 

 

 -

 

 

177

 

 

 -

Commodity futures contracts

 

 

(859)

 

 

(859)

 

 

 -

 

 

 -

Trading securities

 

 

67,594

 

 

67,594

 

 

 -

 

 

 -

Total assets measured at fair value

 

$

320,417

 

$

131,800

 

$

188,617

 

$

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated Fair Value December 31, 2017

 

 

 

Total

 

Input Levels Used

 

 

 

Fair Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

Cash and cash equivalents

   

$

96,314

    

$

96,314

    

$

 -

    

$

 -

Available for sale securities

 

 

171,596

 

 

1,200

 

 

170,396

 

 

 -

Foreign currency forward contracts

 

 

79

 

 

 -

 

 

79

 

 

 -

Commodity futures contracts, net

 

 

32

 

 

32

 

 

 -

 

 

 -

Trading securities

 

 

60,520

 

 

60,520

 

 

 -

 

 

 -

Total assets measured at fair value

 

$

328,541

 

$

158,066

 

$

170,475

 

$

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated Fair Value September 30, 2017

 

 

 

Total

 

Input Levels Used

 

 

 

Fair Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

Cash and cash equivalents

   

$

49,512

    

$

49,512

    

$

 -

    

$

 -

Available for sale securities

 

 

193,169

 

 

2,402

 

 

190,767

 

 

 -

Foreign currency forward contracts

 

 

147

 

 

 -

 

 

147

 

 

 -

Commodity futures contracts

 

 

(364)

 

 

(364)

 

 

 -

 

 

 -

Trading securities

 

 

75,094

 

 

75,094

 

 

 -

 

 

 -

Total assets measured at fair value

 

$

317,558

 

$

126,644

 

$

190,914

 

$

 -

 

The fair value of the Company’s industrial revenue development bonds at September 30, 2018,  December 31, 2017 and September 30, 2017 were valued using Level 2 inputs which approximates the carrying value of $7,500 for the respective periods. Interest rates on these bonds are reset weekly based on current market conditions.

 

11


 

Note 5 — Derivative Instruments and Hedging Activities

 

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 hedge accounting for its foreign currency and commodity derivative instruments as discussed above. Derivatives that qualify for hedge accounting are designated as cash flow hedges by formally documenting the hedge relationships, including identification of the hedging instruments, the hedged items and other critical terms, as well as the Company’s risk management objectives and strategies for undertaking the hedge transaction.

 

Changes in the fair value of the Company’s cash flow hedges are recorded in accumulated other comprehensive loss, net of tax, and are reclassified to earnings in the periods in which earnings are affected by the hedged item. Substantially all amounts reported in accumulated other comprehensive loss for commodity derivatives are expected to be reclassified to cost of goods sold. Approximately $816 of this accumulated comprehensive loss is expected to be reclassified as a charge to earnings in 2019 and $43 of this accumulated comprehensive loss is expected to be reclassified as a charge to earnings in 2020. Approximately $90 and $87 reported in accumulated other comprehensive loss for foreign currency derivatives are expected to be reclassified to other income, net in 2019 and 2020, respectively.  

 

The following table summarizes the Company’s outstanding derivative contracts and their effects on its Condensed Consolidated Statements of Financial Position at September 30, 2018,  December 31, 2017 and September 30, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

 

Notional

    

    

    

    

 

 

Amounts

 

Assets

 

Liabilities

 

 

 

 

 

 

 

 

 

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

$

11,050

 

$

177

 

$

 -

Commodity futures contracts

 

 

8,285

 

 

 3

 

 

(862)

Total derivatives

 

 

 

 

$

180

 

$

(862)

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

Notional

    

    

    

    

 

 

Amounts

 

Assets

 

Liabilities

 

 

 

 

 

 

 

 

 

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

$

919

 

$

79

 

$

 -

Commodity futures contracts