tr-Current Folio-10Q

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 30, 2016

 

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 30, 2016).

 

 

 

 

Class

 

Outstanding

 

 

 

Common Stock, $.69 4/9 par value

 

38,230,674

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

 

24,226,874

 

 

 

 

 


 

Table of Contents

TOOTSIE ROLL INDUSTRIES, INC.

 

June 30, 2016

 

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

8-14

 

 

 

Item 2. 

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

15-19

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

19 

 

 

 

Item 4. 

Controls and Procedures

19 

 

 

 

Part II — 

Other Information

 

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

20 

 

 

 

Item 6. 

Exhibits

21 

 

 

Signatures 

21 

 

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 30, 2016

 

December 31, 2015

 

June 30, 2015

 

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

 

 

Cash & cash equivalents

   

$

91,950

    

$

126,145

    

$

87,005

Restricted cash

 

 

403

 

 

395

 

 

1,272

Investments

 

 

32,986

 

 

42,155

 

 

51,210

Trade accounts receivable, less allowances of $2,038,  $2,225 & $2,019

 

 

29,061

 

 

51,010

 

 

27,909

Other receivables

 

 

2,419

 

 

2,772

 

 

3,673

Inventories:

 

 

 

 

 

 

 

 

 

Finished goods & work-in-process

 

 

59,764

 

 

35,032

 

 

70,598

Raw material & supplies

 

 

33,899

 

 

27,231

 

 

31,357

Prepaid expenses

 

 

7,722

 

 

5,935

 

 

6,310

Deferred income taxes

 

 

3,155

 

 

3,131

 

 

7,130

Total current assets

 

 

261,359

 

 

293,806

 

 

286,464

 

 

 

 

 

 

 

 

 

 

PROPERTY, PLANT & EQUIPMENT, at cost:

 

 

 

 

 

 

 

 

 

Land

 

 

22,166

 

 

22,188

 

 

22,262

Buildings

 

 

114,504

 

 

114,562

 

 

113,181

Machinery & equipment

 

 

355,212

 

 

357,627

 

 

349,588

Construction in progress

 

 

14,993

 

 

5,158

 

 

8,639

 

 

 

506,875

 

 

499,535

 

 

493,670

Less-accumulated depreciation

 

 

322,270

 

 

314,949

 

 

306,629

Net property, plant and equipment

 

 

184,605

 

 

184,586

 

 

187,041

 

 

 

 

 

 

 

 

 

 

OTHER ASSETS:

 

 

 

 

 

 

 

 

 

Goodwill

 

 

73,237

 

 

73,237

 

 

73,237

Trademarks

 

 

175,024

 

 

175,024

 

 

175,024

Investments

 

 

186,931

 

 

152,930

 

 

158,111

Split dollar officer life insurance

 

 

26,042

 

 

26,042

 

 

30,813

Prepaid expenses

 

 

1,739

 

 

3,050

 

 

4,930

Deferred income taxes

 

 

289

 

 

308

 

 

1,616

Total other assets

 

 

463,262

 

 

430,591

 

 

443,731

Total assets

 

$

909,226

 

$

908,983

 

$

917,236

 

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

3


 

Table of Contents

(in thousands except per share data) (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2016

 

December 31, 2015

 

June 30, 2015

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

 

Accounts payable

   

$

14,621

    

$

11,322

    

$

15,494

Bank loans

 

 

305

 

 

231

 

 

153

Dividends payable

 

 

5,625

 

 

5,486

 

 

5,544

Accrued liabilities

 

 

44,677

 

 

50,117

 

 

46,891

Postretirement health care and life insurance benefits

 

 

448

 

 

448

 

 

328

Income taxes payable

 

 

 -

 

 

4,436

 

 

550

Liability for uncertain tax positions

 

 

 -

 

 

 

 

 

1,001

Deferred compensation

 

 

667

 

 

22

 

 

14,347

Total current liabilities

 

 

66,343

 

 

72,062

 

 

84,308

 

 

 

 

 

 

 

 

 

 

NONCURRENT LIABILITIES:

 

 

 

 

 

 

 

 

 

Deferred income taxes

 

 

49,197

 

 

47,594

 

 

52,154

Bank loans

 

 

317

 

 

383

 

 

467

Postretirement health care and life insurance benefits

 

 

11,158

 

 

10,952

 

 

12,319

Industrial development bonds

 

 

7,500

 

 

7,500

 

 

7,500

Liability for uncertain tax positions

 

 

5,128

 

 

5,101

 

 

6,639

Deferred compensation and other liabilities

 

 

69,185

 

 

66,843

 

 

67,558

Total noncurrent liabilities

 

 

142,485

 

 

138,373

 

 

146,637

 

 

 

 

 

 

 

 

 

 

TOOTSIE ROLL INDUSTRIES, INC. SHAREHOLDERS’ EQUITY:

 

 

 

 

 

 

 

 

 

Common stock, $.69-4/9 par value- 120,000 shares authorized; 38,231,  37,382 & 38,029, respectively, issued

 

 

26,549

 

 

25,960

 

 

26,409

Class B common stock, $.69-4/9 par value- 40,000 shares authorized; 24,227,  23,542 & 23,564, respectively, issued

 

 

16,824

 

 

16,348

 

 

16,364

Capital in excess of par value

 

 

666,322

 

 

622,882

 

 

643,429

Retained earnings

 

 

8,491

 

 

52,349

 

 

17,454

Accumulated other comprehensive loss

 

 

(16,059)

 

 

(17,364)

 

 

(15,809)

Treasury stock (at cost)- 83,  80 & 80 shares, respectively

 

 

(1,992)

 

 

(1,992)

 

 

(1,992)

Total Tootsie Roll Industries, Inc. shareholders’ equity

 

 

700,135

 

 

698,183

 

 

685,855

Noncontrolling interests

 

 

263

 

 

365

 

 

436

Total equity

 

 

700,398

 

 

698,548

 

 

686,291

Total liabilities and shareholders’ equity

 

$

909,226

 

$

908,983

 

$

917,236

 

(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 30, 2016

 

June 30, 2015

 

June 30, 2016

 

June 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

Net product sales

   

$

104,259

    

$

107,528

    

$

207,621

     

$

213,005

Rental and royalty revenue

 

 

910

 

 

908

 

 

1,943

 

 

1,752

Total revenue

 

 

105,169

 

 

108,436

 

 

209,564

 

 

214,757

 

 

 

 

 

 

 

 

 

 

 

 

 

Product cost of goods sold

 

 

65,009

 

 

68,733

 

 

130,833

 

 

135,878

Rental and royalty cost

 

 

245

 

 

230

 

 

547

 

 

458

Total costs

 

 

65,254

 

 

68,963

 

 

131,380

 

 

136,336

 

 

 

 

 

 

 

 

 

 

 

 

 

Product gross margin

 

 

39,250

 

 

38,795

 

 

76,788

 

 

77,127

Rental and royalty gross margin

 

 

665

 

 

678

 

 

1,396

 

 

1,294

Total gross margin

 

 

39,915

 

 

39,473

 

 

78,184

 

 

78,421

Selling, marketing and administrative expenses

 

 

25,618

 

 

25,839

 

 

49,671

 

 

51,823

Earnings from operations

 

 

14,297

 

 

13,634

 

 

28,513

 

 

26,598

Other income (loss), net

 

 

2,239

 

 

1,321

 

 

2,204

 

 

1,794

Earnings before income taxes

 

 

16,536

 

 

14,955

 

 

30,717

 

 

28,392

Provision for income taxes

 

 

5,462

 

 

3,735

 

 

9,787

 

 

8,069

Net earnings

 

 

11,074

 

 

11,220

 

 

20,930

 

 

20,323

Less: Net earnings (loss) attributable to noncontrolling interests

 

 

(62)

 

 

161

 

 

(102)

 

 

110

Net earnings attributable to Tootsie Roll Industries, Inc.

 

$

11,136

 

$

11,059

 

$

21,032

 

$

20,213

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

0.18

 

$

0.17

 

$

0.34

 

$

0.32

Dividends per share *

 

$

0.09

 

$

0.09

 

$

0.18

 

$

0.17

 

 

 

 

 

 

 

 

 

 

 

 

 

Average number of shares outstanding

 

 

62,427

 

 

63,426

 

 

62,466

 

 

63,532

 

 

 

 

 

 

 

 

 

 

 

 

 

Retained earnings at beginning of period

 

$

2,972

 

$

11,922

 

$

52,349

 

$

64,927

Net earnings attributable to Tootsie Roll Industries, Inc.

 

 

11,136

 

 

11,059

 

 

21,032

 

 

20,213

Cash dividends

 

 

(5,617)

 

 

(5,527)

 

 

(11,074)

 

 

(10,327)

Stock dividends

 

 

 -

 

 

 -

 

 

(53,816)

 

 

(57,359)

Retained earnings at end of period

 

$

8,491

 

$

17,454

 

$

8,491

 

$

17,454

 


*Does not include 3% stock dividend to shareholders of record on 3/8/16 and 3/10/15.

 

(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 30, 2016

 

June 30, 2015

 

June 30, 2016

 

June 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

   

$

11,074

    

$

11,220

    

$

20,930

    

$

20,323

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), before tax:

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(1,636)

 

 

(552)

 

 

(1,431)

 

 

(1,711)

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension and postretirement reclassification adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 -

 

 

 -

 

 

 -

 

 

 -

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

 

 

(410)

 

 

(363)

 

 

(821)

 

 

(726)

Unrealized gains (losses) on postretirement and pension benefits

 

 

(410)

 

 

(363)

 

 

(821)

 

 

(726)

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) for the period on investments

 

 

509

 

 

(371)

 

 

999

 

 

 -

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

 

 

 -

 

 

 -

 

 

4

 

 

 -

Unrealized gains (losses) on investments

 

 

509

 

 

(371)

 

 

1,003

 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) for the period on derivatives

 

 

2,162

 

 

522

 

 

3,123

 

 

(2,515)

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

 

 

370

 

 

999

 

 

983

 

 

1,674

Unrealized gains (losses) on derivatives

 

 

2,532

 

 

1,521

 

 

4,106

 

 

(841)

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other comprehensive income (loss), before tax

 

 

995

 

 

235

 

 

2,857

 

 

(3,278)

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

 

 

(953)

 

 

(286)

 

 

(1,552)

 

 

567

Total comprehensive earnings

 

 

11,116

 

 

11,169

 

 

22,235

 

 

17,612

Comprehensive earnings (loss) attributable to noncontrolling interests

 

 

(62)

 

 

161

 

 

(102)

 

 

110

Total comprehensive earnings attributable to Tootsie Roll Industries, Inc.

 

$

11,178

 

$

11,008

 

$

22,337

 

$

17,502

 

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

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Table of Contents

TOOTSIE ROLL INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands) (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year to Date Ended

 

 

June 30, 2016

 

June 30, 2015

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

Net earnings

   

$

20,930

    

$

20,323

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

 

 

 

 

 

 

Depreciation and amortization

 

 

10,069

 

 

10,178

Deferred income taxes

 

 

675

 

 

67

Amortization of marketable security premiums

 

 

1,503

 

 

1,531

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

21,748

 

 

15,112

Other receivables

 

 

1,877

 

 

(65)

Inventories

 

 

(31,639)

 

 

(31,950)

Prepaid expenses and other assets

 

 

1,823

 

 

4,543

Accounts payable and accrued liabilities

 

 

(142)

 

 

3,306

Income taxes payable

 

 

(6,102)

 

 

(1,462)

Postretirement health care and life insurance benefits

 

 

(615)

 

 

(390)

Deferred compensation and other liabilities

 

 

1,521

 

 

1,260

Net cash from operating activities

 

 

21,648

 

 

22,453

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

Restricted cash

 

 

(2)

 

 

235

Capital expenditures

 

 

(10,389)

 

 

(6,805)

Purchases of trading securities

 

 

(2,774)

 

 

(2,978)

Sales of trading securities

 

 

613

 

 

616

Purchase of available for sale securities

 

 

(34,826)

 

 

(17,204)

Sale and maturity of available for sale securities

 

 

12,777

 

 

13,531

Net cash used in investing activities

 

 

(34,601)

 

 

(12,605)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

Shares purchased and retired

 

 

(9,166)

 

 

(11,991)

Dividends paid in cash

 

 

(11,077)

 

 

(9,736)

Proceeds from bank loans

 

 

1,762

 

 

 -

Repayment of bank loans

 

 

(1,764)

 

 

(158)

Net cash used in financing activities

 

 

(20,245)

 

 

(21,885)

Effect of exchange rate changes on cash

 

 

(997)

 

 

(1,066)

Decrease in cash and cash equivalents

 

 

(34,195)

 

 

(13,103)

Cash and cash equivalents at beginning of year

 

 

126,145

 

 

100,108

Cash and cash equivalents at end of quarter

 

$

91,950

 

$

87,005

Supplemental cash flow information:

 

 

 

 

 

 

Income taxes paid, net

 

$

15,390

 

$

9,421

Interest paid

 

$

9

 

$

12

Stock dividend issued

 

$

61,671

 

$

57,220

 

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

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Table of Contents

 

 

TOOTSIE ROLL INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016

(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 2015 Annual Report on Form 10-K.

 

Results of operations for the period ended June 30, 2016 are not necessarily indicative of results to be expected for the year to end December 31, 2016 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.

 

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, 2017, including interim periods within that reporting period. The Company is currently evaluating the new guidance to determine the impact it may have on the consolidated financial statements.

 

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. The Company does not expect the adoption of this guidance to have a significant impact on the consolidated financial statements.

 

In November 2015, the FASB issued ASU 2015-17 which requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected by the amendments in the standard. This standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. Early adoption is permitted and the standard may be applied either retrospectively or on a prospective basis to all deferred tax assets and liabilities. The Company is currently evaluating the new guidance to determine the impact it may have on the consolidated financial statements.

 

In January 2016, the FASB issued ASU 2016-01 which modifies certain aspects of the recognition, measurement, presentation, and disclosure of financial instruments. This standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and early adoption is permitted. The Company is currently evaluating the new guidance to determine the impact it may have on the consolidated financial statements.

 

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

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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 is currently evaluating this new guidance to determine the impact it will have on its consolidated financial statements.

 

In April 2016, the FASB issued ASU 2016-10, which contains amendments to the new revenue recognition standard on identifying performance obligations and accounting for licenses of intellectual property. The amendments related to identifying performance obligations clarify when a promised good or service is separately identifiable and allows entities to disregard items that are immaterial in the context of a contract. The licensing implementation amendments clarify how an entity should evaluate the nature of its promise in granting a license of intellectual property, which will determine whether revenue is recognized over time or at a point in time. This new standard has the same effective date and transition requirements as ASU 2014-09. The Company is currently evaluating this new guidance to determine the impact it will have on its consolidated financial statements.

 

Note 2 — Average Shares Outstanding

 

The average number of shares outstanding for year to date ended June 30, 2016 reflect stock purchases of 283 shares for $9,167 and a 3% stock dividend distributed on April 8, 2016. The average number of shares outstanding for year to date ended June 30, 2015 reflect stock purchases of 378 shares for $11,991 and a 3% stock dividend distributed on April 10, 2015.

 

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 2012 through 2015. With few exceptions, the Company is no longer subject to examination by tax authorities for the year 2011 and prior. The consolidated effective tax rates were 33.0% and 25.0% in second quarter 2016 and 2015, respectively, and 31.9% and 28.4% in first half 2016 and 2015, respectively. The lower effective tax rates in second quarter and first half 2015 compared to second quarter and first half 2016 principally reflects a $1,066 release of an uncertain income tax liability and resulting income tax benefit due to a decision by a foreign court issued in the second quarter 2015. 

 

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 30, 2016, December 31, 2015 and June 30, 2015, 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 and trading securities principally consist of corporate and municipal bonds 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 30, 2016, December 31, 2015 and June 30, 2015 and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated Fair Value June 30, 2016

 

 

Total

 

Input Levels Used

 

 

Fair Value

 

Level 1

 

Level 2

 

Level 3

Cash and cash equivalents

   

$

91,950

    

$

91,950

    

$

 -

    

$

 -

Available for sale securities

 

 

156,051

 

 

2,440

 

 

153,611

 

 

 -

Foreign currency forward contracts

 

 

(911)

 

 

 -

 

 

(911)

 

 

 -

Commodity futures contracts

 

 

2,661

 

 

2,661

 

 

 -

 

 

 -

Trading securities

 

 

63,866

 

 

63,866

 

 

 -

 

 

 -

Total assets measured at fair value

 

$

313,617

 

$

160,917

 

$

152,700

 

$

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated Fair Value December 31, 2015

 

 

 

Total

 

Input Levels Used

 

 

 

Fair Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

Cash and cash equivalents

   

$

126,145

    

$

126,145

    

$

 -

    

$

 -

Available for sale securities

 

 

134,501

 

 

2,430

 

 

132,071

 

 

 -

Foreign currency forward contracts

 

 

(2,626)

 

 

 -

 

 

(2,626)

 

 

 -

Commodity futures contracts, net

 

 

271

 

 

271

 

 

 -

 

 

 -

Trading securities

 

 

60,584

 

 

60,584

 

 

 -

 

 

 -

Total assets measured at fair value

 

$

318,875

 

$

189,430

 

$

129,445

 

$

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated Fair Value June 30, 2015

 

 

 

Total

 

Input Levels Used

 

 

 

Fair Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

Cash and cash equivalents

   

$

87,005

    

$

87,005

    

$

 -

    

$

 -

Available for sale securities

 

 

133,491

 

 

2,454

 

 

131,037

 

 

 -

Foreign currency forward contracts

 

 

(2,494)

 

 

 -

 

 

(2,494)

 

 

 -

Commodity futures contracts

 

 

(1,022)

 

 

(1,022)

 

 

 -

 

 

 -

Trading securities

 

 

75,830

 

 

75,830

 

 

 -

 

 

 -

Total assets measured at fair value

 

$

292,810

 

$

164,267

 

$

128,543

 

$

 -

 

The fair value of the Company’s industrial revenue development bonds at June 30, 2016, December 31, 2015 and June 30, 2015 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.

 

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 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

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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.

 

The following table summarizes the Company’s outstanding derivative contracts and their effects on its Condensed Consolidated Statements of Financial Position at June 30, 2016, December 31, 2015 and June 30, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2016

 

 

Notional

    

    

    

    

 

 

Amounts

 

Assets

 

Liabilities

 

 

 

 

 

 

 

 

 

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

$

9,010

 

$

 -

 

$

(911)

Commodity futures contracts

 

 

11,631

 

 

2,664

 

 

(3)

Total derivatives

 

 

 

 

$

2,664

 

$

(914)

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

 

Notional

    

    

    

    

 

 

Amounts

 

Assets

 

Liabilities

 

 

 

 

 

 

 

 

 

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

$

15,668

 

$

 -

 

$

(2,626)

Commodity futures contracts

 

 

13,202

 

 

484

 

 

(213)

Total derivatives

 

 

 

 

$

484

 

$

(2,839)

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2015

 

 

Notional

    

    

    

    

 

 

Amounts

 

Assets

 

Liabilities

 

 

 

 

 

 

 

 

 

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

$

19,283

 

$

 -

 

$

(2,494)

Commodity futures contracts

 

 

12,799

 

 

86

 

 

(1,108)

Total derivatives

 

 

 

 

$

86

 

$

(3,602)

 

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The effects of derivative instruments on the Company’s Condensed Consolidated Statements of Earnings and Retained Earnings and the Condensed Consolidated Statements of Comprehensive Earnings for periods ended June 30, 2016 and June 30, 2015 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For Quarter Ended June 30, 2016

 

 

    

    

    

    

Gain (Loss)

 

 

 

 

Gain (Loss)

 

on Amount Excluded

 

 

Gain (Loss)

 

Reclassified from

 

from Effectiveness

 

 

Recognized

 

Accumulated OCI

 

Testing Recognized

 

 

in OCI

 

into Earnings

 

in Earnings

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

$

20

 

$

(420)

 

$

 -

Commodity futures contracts

 

 

2,142

 

 

50

 

 

 -

Total

 

$

2,162

 

$

(370)

 

$

 -

 

 

 

 

 

 

 

 

 

 

 

 

For Quarter Ended June 30, 2015

 

 

    

    

    

    

Gain (Loss)

 

 

 

 

Gain (Loss)

 

on Amount Excluded

 

 

Gain (Loss)

 

Reclassified from

 

from Effectiveness

 

 

Recognized

 

Accumulated OCI

 

Testing Recognized

 

 

in OCI

 

into Earnings

 

in Earnings

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

$

326

 

$

(508)

 

$

 -

Commodity futures contracts

 

 

196

 

 

(491)

 

 

 -

Total

 

$

522

 

$

(999)

 

$

 -

 

 

 

 

 

 

 

 

 

 

 

 

For Year to Date Ended June 30, 2016

 

 

    

    

    

    

Gain (Loss)

 

 

 

 

Gain (Loss)

 

on Amount Excluded

 

 

Gain (Loss)

 

Reclassified from

 

from Effectiveness

 

 

Recognized

 

Accumulated OCI

 

Testing Recognized

 

 

in OCI

 

into Earnings

 

in Earnings

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

$

690

 

$

(1,026)

 

$

 -

Commodity futures contracts

 

 

2,433

 

 

43

 

 

 -

Total

 

$

3,123

 

$

(983)

 

$

 -

 

 

 

 

 

 

 

 

 

 

 

 

For Year to Date Ended June 30, 2015

 

 

    

    

    

    

Gain (Loss)

 

 

 

 

Gain (Loss)

 

on Amount Excluded

 

 

Gain (Loss)

 

Reclassified from

 

from Effectiveness

 

 

Recognized

 

Accumulated OCI

 

Testing Recognized

 

 

in OCI

 

into Earnings

 

in Earnings

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

$

(1,577)

 

$

(1,021)

 

$

 -

Commodity futures contracts

 

 

(938)

 

 

(653)

 

 

 -

Total

 

$

(2,515)

 

$

(1,674)

 

$

 -

 

 

 

Note 6 — Pension Plans

 

During 2015 and 2016, the Company received updated notices that the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union Pension Plan (Plan), a multi-employer defined benefit pension plan for certain Company union employees, is in “critical and declining status”, as defined by the Pension Protection Act (PPA) and the Pension Benefit Guaranty Corporation (PBGC), and that the Plan is projected to become insolvent in 14 years. The Company has been advised that its withdrawal liability would have been $61,000 if it had withdrawn from the Plan during 2015. Should the Company actually withdraw from the Plan at a future date, a withdrawal liability, which could be higher than the above discussed amounts, could be payable to the Plan.

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The Company is currently unable to determine the ultimate outcome of the above discussed matter and therefore, is unable to determine the effects on its consolidated financial statements, but the ultimate outcome or the effects of any modifications to the current rehabilitation plan could be material to its consolidated results of operations or cash flows in one or more future periods. See also the Company’s Condensed Consolidated Financial Statements and related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations incorporated into the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

 

Note 7 — Accumulated Other Comprehensive Earnings (Loss)

 

Accumulated Other Comprehensive Earnings (Loss)