579115a75acf455

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 28, 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 (June 28, 2014).

 

 

 

 

Class

 

Outstanding

 

 

 

Common Stock, $.69 4/9 par value

 

37,777,410

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

 

22,909,591

 

 

 

 

 


 

Table of Contents

TOOTSIE ROLL INDUSTRIES, INC.

 

June 28, 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

8-15

 

 

 

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


 

Table of Contents

PART I - FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

TOOTSIE ROLL INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

(in thousands)  (UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 28, 2014

 

December 31, 2013

 

June 29, 2013

 

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

 

 

Cash & cash equivalents

   

$

57,091 

    

$

88,283 

    

$

31,946 

Investments

 

 

38,995 

 

 

33,572 

 

 

24,868 

Trade accounts receivable, less allowances of $1,806, $2,042 & $1,907

 

 

25,698 

 

 

40,721 

 

 

24,888 

Other receivables

 

 

2,240 

 

 

4,616 

 

 

5,292 

Inventories:

 

 

 

 

 

 

 

 

 

Finished goods & work-in-process

 

 

73,747 

 

 

37,012 

 

 

69,715 

Raw material & supplies

 

 

29,651 

 

 

24,844 

 

 

29,841 

Prepaid expenses

 

 

7,200 

 

 

5,581 

 

 

2,221 

Deferred income taxes

 

 

3,186 

 

 

5,482 

 

 

4,935 

 

 

 

 

 

 

 

 

 

 

Total current assets

 

 

237,808 

 

 

240,111 

 

 

193,706 

 

 

 

 

 

 

 

 

 

 

PROPERTY, PLANT & EQUIPMENT, at cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Land

 

 

22,536 

 

 

21,683 

 

 

21,685 

Buildings

 

 

111,418 

 

 

111,044 

 

 

108,387 

Machinery & equipment

 

 

341,672 

 

 

340,405 

 

 

329,861 

Construction in progress

 

 

9,148 

 

 

3,403 

 

 

8,392 

 

 

 

484,774 

 

 

476,535 

 

 

468,325 

Less-accumulated depreciation

 

 

289,248 

 

 

279,619 

 

 

270,827 

Net property, plant and equipment

 

 

195,526 

 

 

196,916 

 

 

197,498 

 

 

 

 

 

 

 

 

 

 

OTHER ASSETS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

 

73,237 

 

 

73,237 

 

 

73,237 

Trademarks

 

 

175,024 

 

 

175,024 

 

 

175,024 

Investments

 

 

162,275 

 

 

148,532 

 

 

170,373 

Split dollar officer life insurance

 

 

40,296 

 

 

40,296 

 

 

41,394 

Prepaid expenses

 

 

8,753 

 

 

10,260 

 

 

Restricted cash

 

 

1,791 

 

 

 

 

Deferred income taxes

 

 

4,030 

 

 

4,033 

 

 

5,926 

Total other assets

 

 

465,406 

 

 

451,382 

 

 

465,954 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

898,740 

 

$

888,409 

 

$

857,158 

 

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

3


 

Table of Contents

(in thousands except per share data) (UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 28, 2014

 

December 31, 2013

 

June 29, 2013

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

   

$

14,040 

    

$

9,153 

    

$

11,630 

Bank loans

 

 

151 

 

 

 

 

Dividends payable

 

 

4,856 

 

 

4,742 

 

 

4,773 

Accrued liabilities

 

 

44,598 

 

 

45,580 

 

 

45,773 

Postretirement health care and life insurance benefits

 

 

111 

 

 

319 

 

 

555 

Income taxes payable

 

 

 -

 

 

327 

 

 

249 

Total current liabilities

 

 

63,756 

 

 

60,121 

 

 

62,980 

 

 

 

 

 

 

 

 

 

 

NONCURRENT LIABILITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred income taxes

 

 

54,503 

 

 

54,939 

 

 

42,862 

Bank loans

 

 

930 

 

 

 

 

Postretirement health care and life insurance benefits

 

 

9,338 

 

 

8,857 

 

 

28,188 

Industrial development bonds

 

 

7,500 

 

 

7,500 

 

 

7,500 

Liability for uncertain tax positions

 

 

9,977 

 

 

7,167 

 

 

8,261 

Deferred compensation and other liabilities

 

 

74,028 

 

 

69,520 

 

 

60,941 

Total noncurrent liabilities

 

 

156,276 

 

 

147,983 

 

 

147,752 

 

 

 

 

 

 

 

 

 

 

TOOTSIE ROLL INDUSTRIES, INC. SHAREHOLDERS’ EQUITY:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock, $.69-4/9 par value- 120,000 shares authorized; 37,777, 37,011 & 37,401, respectively, issued

 

 

26,234 

 

 

25,702 

 

 

25,973 

Class B common stock, $.69-4/9 par value- 40,000 shares authorized; 22,910, 22,256 & 22,261, respectively, issued

 

 

15,909 

 

 

15,455 

 

 

15,459 

Capital in excess of par value

 

 

613,467 

 

 

572,669 

 

 

584,969 

Retained earnings

 

 

29,870 

 

 

73,109 

 

 

39,199 

Accumulated other comprehensive loss

 

 

(5,252)

 

 

(4,638)

 

 

(17,182)

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

 

 

(1,992)

 

 

(1,992)

 

 

(1,992)

Total Tootsie Roll Industries, Inc. shareholders’ equity

 

 

678,236 

 

 

680,305 

 

 

646,426 

Noncontrolling interests

 

 

472 

 

 

 

 

Total equity

 

 

678,708 

 

 

680,305 

 

 

646,426 

Total liabilities and shareholders’ equity

 

$

898,740 

 

$

888,409 

 

$

857,158 

 

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

4


 

Table of Contents

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

 

 

June 28, 2014

 

June 29, 2013

 

June 28, 2014

 

June 29, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

Net product sales

   

$

104,061 

    

$

101,988 

    

$

210,873 

     

$

212,267 

Rental and royalty revenue

 

 

869 

 

 

898 

 

 

1,839 

 

 

1,905 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenue

 

 

104,930 

 

 

102,886 

 

 

212,712 

 

 

214,172 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product cost of goods sold

 

 

66,182 

 

 

66,972 

 

 

133,047 

 

 

139,141 

Rental and royalty cost

 

 

223 

 

 

225 

 

 

481 

 

 

475 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total costs

 

 

66,405 

 

 

67,197 

 

 

133,528 

 

 

139,616 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product gross margin

 

 

37,879 

 

 

35,016 

 

 

77,826 

 

 

73,126 

Rental and royalty gross margin

 

 

646 

 

 

673 

 

 

1,358 

 

 

1,430 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total gross margin

 

 

38,525 

 

 

35,689 

 

 

79,184 

 

 

74,556 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, marketing and administrative expenses

 

 

28,296 

 

 

26,487 

 

 

53,927 

 

 

54,454 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings from operations

 

 

10,229 

 

 

9,202 

 

 

25,257 

 

 

20,102 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income, net

 

 

3,033 

 

 

1,705 

 

 

4,699 

 

 

4,296 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings before income taxes

 

 

13,262 

 

 

10,907 

 

 

29,956 

 

 

24,398 

Provision for income taxes

 

 

4,305 

 

 

2,538 

 

 

11,642 

 

 

6,960 

Net earnings

 

 

8,957 

 

 

8,369 

 

 

18,314 

 

 

17,438 

Less: Net loss attributable to noncontrolling interests

 

 

69 

 

 

 -

 

 

293 

 

 

 -

Net earnings attributable to Tootsie Roll Industries, Inc.

 

 

9,026 

 

 

8,369 

 

 

18,607 

 

 

17,438 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

0.15 

 

$

0.14 

 

$

0.31 

 

$

0.28 

Dividends per share *

 

$

0.08 

 

$

0.08 

 

$

0.16 

 

$

0.16 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average number of shares outstanding

 

 

60,659 

 

 

61,431 

 

 

60,742 

 

 

61,550 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retained earnings at beginning of period

 

$

25,694 

 

$

35,598 

 

$

73,109 

 

$

80,210 

Net earnings attributable to Tootsie Roll Industries, Inc.

 

 

9,026 

 

 

8,369 

 

 

18,607 

 

 

17,438 

Cash dividends

 

 

(4,850)

 

 

(4,768)

 

 

(9,565)

 

 

(9,421)

Stock dividends

 

 

 -

 

 

 -

 

 

(52,281)

 

 

(49,028)

 

 

 

 

 

 

 

 

 

 

 

 

 

Retained earnings at end of period

 

$

29,870 

 

$

39,199 

 

$

29,870 

 

$

39,199 

 


*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


 

Table of Contents

TOOTSIE ROLL INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE EARNINGS

(in thousands except per share amounts) (UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter Ended

 

Year to Date Ended

 

 

June 28, 2014

 

June 29, 2013

 

June 28, 2014

 

June 29, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

   

$

8,957 

    

$

8,369 

    

$

18,314 

    

$

17,438 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), before tax:

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

138 

 

 

(1,223)

 

 

(1,180)

 

 

(101)

 

 

 

 

 

 

 

 

 

 

 

 

 

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)

 

 

 -

 

 

(902)

 

 

 -

Unrealized gains (losses) on postretirement and pension benefits

 

 

(451)

 

 

 -

 

 

(902)

 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) for the period on investments

 

 

185 

 

 

589 

 

 

(31)

 

 

(181)

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

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Unrealized gains (losses) on investments

 

 

185 

 

 

589 

 

 

(31)

 

 

(181)

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) for the period on derivatives

 

 

1,388 

 

 

(802)

 

 

555 

 

 

(1,732)

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

 

 

73 

 

 

546 

 

 

510 

 

 

901 

Unrealized gains (losses) on derivatives

 

 

1,461 

 

 

(256)

 

 

1,065 

 

 

(831)

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other comprehensive income (loss), before tax

 

 

1,333 

 

 

(890)

 

 

(1,048)

 

 

(1,113)

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

 

 

(432)

 

 

(128)

 

 

434 

 

 

378 

Total comprehensive earnings

 

 

9,858 

 

 

7,351 

 

 

17,700 

 

 

16,703 

Comprehensive earnings attributable to noncontrolling interests

 

 

69 

 

 

 -

 

 

293 

 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive earnings attributable to Tootsie Roll Industries, Inc.

 

$

9,927 

 

$

7,351 

 

$

17,993 

 

$

16,703 

 

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

6


 

Table of Contents

TOOTSIE ROLL INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)   (UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year to Date Ended

 

 

June 28, 2014

 

June 29, 2013

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

   

$

18,314 

    

$

17,438 

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

 

 

 

 

 

 

Depreciation and amortization

 

 

10,189 

 

 

9,783 

Loss on step acquisition

 

 

529 

 

 

 -

Loss from equity method investment

 

 

 -

 

 

477 

Amortization of marketable security premiums

 

 

1,689 

 

 

1,468 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

16,520 

 

 

17,207 

Other receivables

 

 

3,710 

 

 

(594)

Inventories

 

 

(39,770)

 

 

(37,188)

Prepaid expenses and other assets

 

 

1,063 

 

 

27,442 

Accounts payable and accrued liabilities

 

 

348 

 

 

3,317 

Income taxes payable and deferred

 

 

(1,119)

 

 

(5,159)

Postretirement health care and life insurance benefits

 

 

(421)

 

 

1,362 

Deferred compensation and other liabilities

 

 

1,764 

 

 

1,620 

Other

 

 

101 

 

 

(80)

 

 

 

 

 

 

 

Net cash from operating activities

 

 

12,917 

 

 

37,093 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash acquired in step acquisition

 

 

161 

 

 

-

Restricted cash

 

 

193 

 

 

-

Capital expenditures

 

 

(5,895)

 

 

(5,960)

Net sales (purchases) of trading securities

 

 

(2,627)

 

 

(2,269)

Purchase of available for sale securities

 

 

(27,331)

 

 

(63,992)

Sale and maturity of available for sale securities

 

 

11,566 

 

 

18,530 

 

 

 

 

 

 

 

Net cash used in investing activities

 

 

(23,933)

 

 

(53,691)

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares purchased and retired

 

 

(10,381)

 

 

(10,568)

Dividends paid in cash

 

 

(9,567)

 

 

(4,750)

Repayment of bank loans

 

 

(228)

 

 

-

 

 

 

 

 

 

 

Net cash used in financing activities

 

 

(20,176)

 

 

(15,318)

 

 

 

 

 

 

 

Decrease in cash and cash equivalents

 

 

(31,192)

 

 

(31,916)

Cash and cash equivalents at beginning of year

 

 

88,283 

 

 

63,862 

 

 

 

 

 

 

 

Cash and cash equivalents at end of quarter

 

$

57,091 

 

$

31,946 

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

Income taxes paid, net

 

$

10,496 

 

$

12,996 

Interest paid

 

$

31 

 

$

17 

Stock dividend issued

 

$

52,165 

 

$

48,925 

 

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

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TOOTSIE ROLL INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 28, 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 June 28, 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 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.

 

In July 2013, the FASB issued ASU 2013-11, which requires presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists.  ASU 2013-11 provides explicit guidance on presentation in financial statements.  The adoption of this guidance did not have a significant impact on the condensed consolidated financial statements.

 

In March 2013, the FASB issued ASU 2013-05, which permits an entity to release cumulative translation adjustments into net income when a reporting entity (parent) ceases to have a controlling financial interest in a subsidiary or group of assets that is a business within a foreign entity. Accordingly, the cumulative translation adjustment should be released into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had

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resided, or, if a controlling financial interest is no longer held. The adoption of this guidance did not have a significant impact on the condensed consolidated financial statements.

Note 2 — Average Shares Outstanding

 

The average number of shares outstanding for year to date ended June 28, 2014 reflect stock purchases of 347 shares for $10,381 and a 3% stock dividend distributed on April 4, 2014. The average number of shares outstanding for year to date ended June 29, 2013 reflect stock purchases of 356 shares for $10,568 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 32.5% and 23.3% in second quarter 2014 and 2013, respectively, and 38.9% and 28.5% in first half 2014 and 2013, respectively. The higher effective income tax rate in first half 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. The more favorable effective income tax rates in prior year second quarter and first half 2013 reflects the benefits of a release of certain tax valuation allowances relating to prior capital losses as a result of capital gains realized on the sale of certain investments primarily in second quarter 2013.

 

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 June 28, 2014, December 31, 2013 and June 29, 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.

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The following table presents information about the Company’s financial assets and liabilities measured at fair value as of June 28, 2014, December 31, 2013 and June 29, 2013, and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated Fair Value June 28, 2014

 

 

Total

 

Input Levels Used

 

 

Fair Value

 

Level 1

 

Level 2

 

Level 3

Cash and cash equivalents

   

$

57,091 

    

$

57,091 

    

$

 -

    

$

 -

Available for sale securities

 

 

132,688 

 

 

 -

 

 

132,688 

 

 

 -

Foreign currency forward contracts

 

 

81 

 

 

 -

 

 

81 

 

 

 -

Commodity futures contracts

 

 

150 

 

 

150 

 

 

 -

 

 

 -

Trading securities

 

 

68,582 

 

 

68,582 

 

 

 -

 

 

 -

Total assets measured at fair value

 

$

258,592 

 

$

125,823 

 

$

132,769 

 

$

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 June 29, 2013

 

 

 

Total

 

Input Levels Used

 

 

 

Fair Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

Cash and cash equivalents

   

$

31,946 

    

$

31,946 

    

$

    

$

Auction rate security

 

 

10,162 

 

 

 

 

 

 

10,162 

Available for sale securities excluding the auction rate security

 

 

127,704 

 

 

 

 

127,704 

 

 

Foreign currency forward contracts

 

 

(759)

 

 

 

 

(759)

 

 

Commodity futures contracts

 

 

(223)

 

 

(223)

 

 

 

 

Trading securities

 

 

55,753 

 

 

55,753 

 

 

 

 

Total assets measured at fair value

 

$

224,583 

 

$

87,476 

 

$

126,945 

 

$

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 June 29, 2013 was $10,162, with an unrealized loss in other comprehensive earnings of $677 recorded during the first half 2013.

 

The fair value of the Company’s industrial revenue development bonds at June 28, 2014, December 31, 2013 and June 29, 2013 were valued using Level 2 inputs which approximates the carrying value of $7,500 for both periods. Interest rates on these bonds are reset weekly based on current market conditions.

 

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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.

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The following table summarizes the Company’s outstanding derivative contracts and their effects on its Condensed Consolidated Statements of Financial Position at June 28, 2014, December 31, 2013 and June 29, 2013:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 28, 2014

 

 

Notional

    

    

    

    

 

 

Amounts

 

Assets

 

Liabilities

 

 

 

 

 

 

 

 

 

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

$

38,978 

 

$

534 

 

$

(453)

Commodity futures contracts

 

 

5,563 

 

 

192 

 

 

(42)

Total derivatives designated as hedging instruments

 

 

 

 

 

726 

 

 

(495)

Derivatives not designated as hedging instruments:

 

 

 

 

 

 

 

 

 

Commodity futures contracts

 

 

 -

 

 

 -

 

 

 -

Total derivatives not designated as hedging instruments

 

 

 

 

 

 -

 

 

 -

Total derivatives

 

 

 

 

$

726 

 

$

(495)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2013

 

 

Notional

    

    

    

    

 

 

Amounts

 

Assets

 

Liabilities

 

 

 

 

 

 

 

 

 

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

$

34,244 

 

$

 -

 

$

(684)

Commodity futures contracts

 

 

5,601 

 

 

41 

 

 

(191)

Total derivatives designated as hedging instruments

 

 

 

 

 

41 

 

 

(875)

Derivatives not designated as hedging instruments:

 

 

 

 

 

 

 

 

 

Commodity futures contracts

 

 

321