SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended September 29, 2001 Commission File Number 1 - 1361 TOOTSIE ROLL INDUSTRIES, INC. (Exact name of registrant as specified in its charter) VIRGINIA 22 - 1318955 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 7401 South Cicero Avenue Chicago, Illinois 60629 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (773) 838 - 3400 No Changes Former name, former address and former fiscal year, if changed since last report. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practible date. Class Outstanding Common Stock, $.69 4/9 par value 34,039,257 Class B Common Stock, $.69 4/9 par value 16,469,065 TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES SEPTEMBER 29, 2001 I N D E X Part I - Financial Information Page No Financial Statements: Consolidated Statements of Financial Position 2 Consolidated Statements of Earnings, Comprehensive Earnings and Retained Earnings 3 Consolidated Statements of Cash Flows 4 Notes to Consolidated Financial Statements 5 Management's Discussion and Analysis of Financial Condition and Results of Operations 6 Part II - Other Information Other Information 7 Signatures 7 <TABLE> PART I - FINANCIAL INFORMATION TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (UNAUDITED) ASSETS Sept. 29, Sept. 30, Dec. 31, CURRENT ASSETS 2001 2000 2000 <S> <C> <C> <C> Cash & Cash Equivalents $ 76,596,668 $ 26,987,031 $ 60,882,142 Investments 50,844,943 67,580,914 71,605,091 Trade Accounts Receivable, Less Allowances of $3,181,000, $3,363,000 & $2,147,000 80,036,328 78,096,019 23,567,411 Other Receivables 4,003,135 2,029,844 1,229,701 Inventories, at Cost (Last-in,First-out): Finished Goods & Work in Process 29,152,649 28,707,521 24,984,361 Raw Material & Supplies 15,916,532 13,791,673 16,906,199 Prepaid Expenses 8,833,340 5,281,356 2,684,738 Deferred Income Taxes 1,351,000 2,069,000 1,351,000 Total Current Assets 266,734,595 224,543,358 203,210,643 PROPERTY, PLANT & EQUIPMENT, (at cost) Land 8,358,060 8,340,160 8,327,400 Buildings 37,214,057 32,622,229 36,936,658 Machinery & Equipment 193,952,769 183,451,767 183,858,538 239,524,886 224,414,156 229,122,596 Less-Accumulated Depreciation 106,840,003 95,641,646 98,004,162 132,684,883 128,772,510 131,118,434 OTHER ASSETS Intangible Assets, net of Accumulated Amortization of $29,750,000, $26,098,000 & $26,917,000 118,443,991 122,081,549 121,262,726 Investments 72,056,132 64,260,579 62,548,257 Cash Surrender Value of Life Insurance and Other Assets 50,994,112 44,032,039 44,301,529 241,494,235 230,374,167 228,112,512 Total Assets $640,913,713 $583,690,035 $562,441,589 (The accompanying notes are an integral part of these statements) </TABLE> <TABLE> <CAPTION> (UNAUDITED) LIABILITIES AND SHAREHOLDERS' EQUITY Sept. 29, Sept. 30, Dec. 31, CURRENT LIABILITIES 2001 2000 2000 <S> <C> <C> <C> Accounts Payable $ 13,493,532 $ 18,277,970 $ 10,296,197 Dividends Payable 3,535,583 3,451,853 3,436,103 Accrued Liabilities 40,199,269 41,613,647 33,336,341 Income Taxes Payable 36,681,835 20,248,583 10,377,643 Total Current Liabilities 93,910,219 83,592,053 57,446,284 NON-CURRENT LIABILITIES Industrial Development Bonds 7,500,000 7,500,000 7,500,000 Post Retirement Benefits 7,344,084 6,727,941 6,956,094 Deferred Compensation and Other Liabilities 18,717,137 20,548,272 19,421,338 Deferred Income Taxes 12,226,048 9,521,250 12,422,248 Total Non-Current Liabilities 45,787,269 44,297,463 46,299,680 SHAREHOLDERS' EQUITY Common Stock, $.69-4/9 par value- 120,000,000 shares authorized 34,039,257, 33,181,053 & 32,985,805 respectively, issued 23,638,172 23,042,191 22,906,603 Class B Common Stock, $.69-4/9 par value- 40,000,000 shares authorized 16,469,065, 16,075,136 & 16,056,384 respectively, issued 11,436,753 11,163,196 11,150,174 Capital in Excess of Par Value 325,878,304 264,740,799 256,698,004 Retained Earnings 152,482,948 168,047,585 180,123,036 Accumulated Other Comprehensive Earnings (10,228,549) (9,201,849) (10,190,789) Treasury Stock (at cost)- 53,045, 53,045 & 53,045 shares, respectively (1,991,403) (1,991,403) (1,991,403) Total Shareholders' Equity 501,216,225 455,800,519 458,695,625 Total Liabilities and Shareholders' Equity $640,913,713 $583,690,035 $562,441,589 </TABLE> <TABLE> TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS, COMPREHENSIVE EARNINGS AND RETAINED EARNINGS (NOTE 1) (UNAUDITED) 13 Weeks Ended 39 Weeks Ended Sept. 29, 2001 & Sept. 30, 2000 Sept 29, 2001 & Sept 30, 2000 <S> <C> <C> <C> <C> NET SALES (Note 2) $158,780,862 $165,873,251 $328,284,209 $334,264,488 Cost of Goods Sold 82,476,398 82,647,914 165,504,786 161,763,072 Gross Margin 76,304,464 83,225,337 162,779,423 172,501,416 Selling, Marketing & Administrative Expense 35,010,079 34,640,850 83,592,150 81,557,762 Amortization of Intangible Assets 944,578 992,063 2,833,736 2,600,684 Earnings from Operations 40,349,807 47,592,424 76,353,537 88,342,970 Other Income, Net 1,142,690 1,332,572 5,517,667 5,382,744 Earnings before Income Taxes 41,492,497 48,924,996 81,871,204 93,725,714 Provision for Income Taxes 14,482,000 17,411,000 28,574,000 33,497,000 Net Earnings (Note 5) $ 27,010,497 $ 31,513,996 $ 53,297,204 $ 60,228,714 Net Earnings $ 27,010,497 $ 31,513,996 $ 53,297,204 $ 60,228,714 Other Comprehensive Earnings, Net of Tax (1,209,504) 671,789 (37,760) (261,582) Comprehensive Earnings $ 25,800,993 $ 32,185,785 $ 53,259,444 $ 59,967,132 Retained Earnings at Beginning of Period $129,004,320 $139,981,837 $180,123,036 $158,619,140 Net Earnings 27,010,497 31,513,996 53,297,204 60,228,714 Cash Dividends (3,531,869) (3,448,248) (10,493,087) (9,917,114) Stock Dividends - 3% -- -- (70,444,205) (40,883,155) Retained Earnings at End of Period $152,482,948 $168,047,585 $152,482,948 $168,047,585 Net Earnings per Share (Note 3) $ .54 $ .62 $1.06 $1.18 Dividends per Share * $ .07 $ .07 $ .21 $ .2025 Average Number of Shares Outstanding (Notes 3 & 4) 50,455,277 50,876,277 50,455,277 51,017,767 *Does not include 3% Stock Dividend to Shareholders of Record on 3/06/01 and 3/07/00. (The accompanying notes are an integral part of the statements) </TABLE> <TABLE> TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) 39 Weeks Ended Sept. 29, 2001 & Sept. 30, 2000 <S> CASH FLOWS FROM OPERATING ACTIVITIES: <C> <C> Net earnings $53,297,204 $60,228,714 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Depreciation and amortization 11,669,819 9,852,682 Gain on disposal of equipment 11,750 (Increase) decrease in assets: Accounts receivable (56,393,550) (59,054,295) Other receivables (2,730,466) 3,686,306 Inventories (3,090,120) (1,428,575) Prepaid expenses and other assets (13,233,910) (13,676,631) Increase (decrease) in liabilities: Accounts payable and accrued liabilities 10,031,436 14,497,492 Income taxes payable and deferred 26,122,697 11,967,848 Postretirement health care and life insurance benefits 387,990 171,081 Deferred compensation and other liabilities (704,201) 1,463,767 Other 13,194 1,411 Net cash provided by operating activities 25,370,093 27,721,550 CASH FLOWS FROM INVESTING ACTIVITIES: Business acquisitions acquired, net of cash and cash equivalents -- (74,293,419) Capital expenditures (10,268,476) (10,919,299) Purchase of held to maturity securities (140,392,471) (101,547,876) Maturity of held to maturity securities 140,665,130 127,124,081 Purchase of available for sale securities (50,870,031) (62,965,414) Sale of available for sale securities 61,849,645 67,759,967 Net cash provided by (used in) investing activities 983,797 (54,841,960) CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of notes payable -- 43,625,000 Repayment of notes payable -- (43,625,000) Shares repurchased and retired -- (24,753 244) Dividends paid in cash (10,639,364) (9,643,046) Net cash used in financing activities (10,639,364) (34,396,290) Increase (decrease) in cash & cash equivalents 15,714,526 (61,516,700) Cash and cash equivalents-beginning of year 60,882,142 88,503,731 Cash and cash equivalents-end of quarter $76,596,668 $26,987,031 Supplemental cash flow information: Income taxes paid $ 2,558,000 $21,012,000 Interest paid $ 694,000 $ 905,000 (The accompanying notes are an integral part of the statements) </TABLE> TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 29, 2001 (UNAUDITED) Note 1 - Foregoing data has been prepared from the unaudited financial records of the Company and in the opinion of Management, all adjustments necessary for a fair statement of the results for the interim period have been reflected. All adjustments were of a normal and recurring nature. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the related notes included in the Company's 2000 Annual Report on Form 10-K. Note 2 - The Company's unshipped orders at September 29, 2001 amounted to $35,500,000 and $35,900,000 at September 30, 2000. Note 3 - Based on Average Shares outstanding adjusted for Stock Dividends. Note 4 - Includes 3% stock dividends distributed on April 18, 2001 and April 19, 2000. Note 5 - Results of operations for the period ended September 29, 2001 are not necessarily indicative of results to be expected for the year to end December 31, 2001 because of the seasonal nature of the Company's operations. Historically, the Third Quarter has been the Company's largest sales quarter due to Halloween sales. Note 6 - On May 12, 2000, the Company acquired the assets of Andes Candies, Inc. from Brach & Brock Confections, Inc. In February 2000, the Company acquired the assets of a small confectionery company. The cost of these acquisitions was $74.3 million. The acquisitions were accounted for by the purchase method. Accordingly, the operating results of the acquired businesses have been included in the consolidated financial statements since the date of acquisition. Note 7 - Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" and its related amendment, Statement of Financial Accounting Standards No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities." These standards require that every derivative instrument be recorded in the balance sheet as either an asset or liability measured at its fair value. Changes in the fair value of derivatives are recorded each period in earnings or accumulated other comprehensive earnings, depending on whether a derivative is designated and effective as part of a hedge transaction and, if it is, the type of hedge transaction. Gains and losses on derivative instruments reported in accumulated other comprehensive earnings are reclassified as earnings in the periods in which earnings are affected by the hedged item. The adoption of these new standards did not affect net earnings and increased comprehen- sive earnings by $229,000, net of income taxes, as of January 1, 2001. The Company utilizes commodity futures contracts to manage variability in cash flows associated with certain commodities (primarily sugar). Commodity futures contracts are entered into for varying periods and are intended and effective as hedges of market price risks associated with the anticipated purchase of raw materials. To qualify as a hedge, the Company evaluates the the nature and relationships between the hedging instrument and hedged items, as well as its risk-management objectives, strategies for undertaking the various hedge transactions and method of assessing hedge effectiveness. In addition, the significant characteristics and expected terms of the anticip- ated transaction must be specifically identified and it must be probable that the anticipated transaction will occur. If the anticipated transaction were not to occur, the gain or loss would be recognized in earnings currently. Financial instru- ments qualifying for hedge accounting must maintain a high correlation between the hedging instrument and the item being hedged, both at inception and throughout the hedged period. The Company does not engage in trading or other speculative use of derivative instruments. In entering into these contracts, the Company has assumed the risk that might arise from the possible inability of counterparties to meet the terms of their con- tracts. The Company does not expect any losses as a result of counterparty defaults. The company uses foreign exchange contracts to hedge the impact of foreign currency fluctuations on certain committed capital expenditures. Upon payment of each commitment, the underlying contract is closed and the corresponding gain or loss is included in the measurement of the cost of the acquired asset. During the quarter ended September 29, 2001, accumulated other comprehensive earnings decreased by $26,000 due to hedging transactions, and increased by $57,000 as a result of the net amount reclassified to the consolidated statement of earnings, comprehensive earnings and retained earnings. As of September 29, 2001, $69,000 of deferred net gains on derivative instruments accumulated in other comprehensive earnings are expected to be reclassified to earnings during the next twelve months. NOTE 8 - In April 2001, a consensus was reached by the Emerging Issues Task Force (EITF) on Issue No. 00-25, "Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products." The Company's cooperative advertising programs are covered by this issue. In May 2000, a consensus was reached by the EITF on Issue 00-14, "Accounting for Certain Sales Incentives." These issues require that cooperative advertising and certain sales incentives costs currently being reported as selling, marketing and administrative expense to be recorded as a reduction of net sales beginning with the quarter ended March 31, 2002. The total potential impact of such reclassifications has not yet been determined. The reclassifi- cations will not affect the Company's financial position or net income. In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations". This standard prohibits the use of pooling-of-interest method of accounting for business combinations initiated after June 30, 2001 and applies to all business combinations accounted for under the purchase method that are completed after June 30, 2001. The standard also requires that identifiable intangible assets shall be recognized as assets apart from goodwill. The Company does not expect that implemen- tation of this standard will have a significant impact on its financial statements. In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142 (SFAS 142), "Goodwill and Other Intangible Assets." This statement requires that amortization be ceased on all indefinite-lived intangible assets and goodwill, with impairment tests being performed on an annual basis. The provisions of SFAS 142 are effective for fiscal years beginning after December 15, 2001, thus, the Company will adopt SFAS 142 on January 1, 2002. Management is currently assessing the impact of the adoption of this statement. In October 2001, the Financial Accounting Standards Board issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long- Lived Assets." The objectives of SFAS 144 are to address signifi- cant issues relating to the implementation of FASB Statement No. 121 (FAS 121), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and to develop a single accounting model, based on the framework established in SFAS 121, for long-lived assets to disposed of by sale, whether previously held and used or newly acquired. Generally, the provisions of SFAS 144 are effective for financial statements issued for (1) fiscal years beginning after December 15, 2001 and (2) interim periods within those fiscal years. The Company does not expect the implementation of this standard will have a significant impact on our financial statements. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is Management's discussion of the Company's operating results and analysis of factors which have affected the accompanying Statement of Earnings. This discussion, the information contained in the preceding notes to the finan- cial statements and the information contained in "Quantitative and Qualitative Disclosures About Market Risk," contain certain forward-looking statements that are based largely on the Company's current expectations. Forward-looking statements are subject to certain risks, trends and uncertainties that could cause actual results and achievements to differ materially from those expressed in the forward-looking statements. Such risks, trends and uncertainties, which in some instances are beyond the Company's control, include changes in demand and consumer preferences; raw material prices; competition; the effect of acquisitions on the Company's results of operations and financial condition; the Company's reliance on third-party vendors for various services; and changes in the confectionary environment including action taken by major retailers and customer accounts, and consumer candy purchases and resulting retailer sell- throughs during the Halloween buying season. The words "believe," "expect," "anticipate," "estimate," "intend" and similar expressions generally identify forward-looking statements. Readers are cautioned not to place undue reliance on such forward-looking statements, which are as of the date of this filing. NET SALES: Third Quarter, 2001 Third Quarter vs. 2001 2000 Third Quarter, 2000 $158,780,862 $165,873,251 - 4.3% Nine Months, 2001 Nine Months vs. 2001 2000 Nine Months, 2000 $328,284,209 $334,264,488 - 1.8% Third Quarter 2001 net sales of $158,781,000 were down 4.3% from Third Quarter 2000 net sales of $165,873,000. Nine Months 2001 net sales of $328,284,000 were down 1.8% from Nine Months 2000 net sales of $334,264,000. The slowing economy and increased competitive pressures affected both the Third Quarter and Nine Months 2001 sales results. Declining consumer confidence and slowdown in consumer spending in the retail sector contributed to the softness in the Company's Third Quarter and Nine Months 2001 sales results. Third Quarter 2001 net sales of $158,781,000 were up 82.8% from Second Quarter 2001 net sales of $86,882,000. Historically, the Third Quarter includes pre-Halloween sales and is the Company's largest quarterly sales period of the year. COST OF SALES: Cost of Sales as a Third Quarter Percentage of Net Sales 2001 2000 3rd Qtr. 2001 3rd Qtr. 2000 $82,476,398 $82,647,914 51.9% 49.8% Cost of Sales as a Nine Months Percentage of Net Sales 2001 2000 Nine Months 2001 Nine Months 2000 $165,504,786 $161,763,072 50.4% 48.4% Cost of sales as a percentage of net sales increased from 49.8% in the Third Quarter 2000 to 51.9% in the Third Quarter 2001. Nine Months cost of sales also increased from 48.4% to 50.4% in 2001. These increases are the result of changes in the sales and product mix, lower profit margins of the acquired brands, and higher overhead costs from multiple plant locations including increased energy costs. In addition, inventory adjustments of a nonrecurring nature increased Third Quarter 2001 cost of sales by $1,100,000. NET EARNINGS: Third Quarter, 2001 Third Quarter vs. 2001 2000 Third Quarter, 2000 $27,010,497 $31,513,996 -14.3% Nine Months, 2001 Nine Months vs 2001 2000 Nine Months, 2000 $53,297,204 $60,228,714 -11.5% Third Quarter net earnings were $27,010,000, compared to $31,514,000 in the Third Quarter 2000. Third Quarter 2001 earnings per share were $.54, a decrease of $.08 or 12.9% from Third Quarter 2000 earnings per share of $.62. Nine Months 2001 net earnings were $53,297,000 compared to the prior year's Nine Months 2000 net earnings of $60,229,000. Nine months 2001 earnings per share of $1.06 decreased $.12 or 10.2% from Nine Months 2000 earnings per share of $1.18. Third Quarter earnings from operations were $40,350,000 and $47,592,000 in 2001 and 2000 respectively, a decline of $7,242,000 or 15.2% . This decrease reflects the effects of lower sales and gross margins as explained above, coupled with higher distribution and delivery expenses relating to higher fuel costs, and higher trade promotion spending and customer dedutions. These factors also had an adverse impact on the Nine Months 2001 operating earnings. Other Income, Net, was $1,143,000 and $1,333,000 in the Third Quarter 2001 and 2000, respectively, a decrease of $190,000. This decrease represents lower net investment income from dividends and interest. Third Quarter 2001 net earnings of $27,010,000 increased $13,108,000 or 94.3% from Second Quarter 2001 net earnings of $13,902,000. As discussed above, the Third Quarter has historically been the Company's largest sales and earnings period because of pre-Halloween sales. The consolidated effective income tax rate favorably decreased from 35.74% in the Nine Months of 2000 to 34.9% in the Nine Months of 2001. This improvement generally reflects increased tax-free investment income as well as some reduction in state income taxes. LIQUIDITY AND CAPITAL RESOURCES: The Company's current ratio (current assets divided by current liabilities) is 2.8 to 1 as of the end of the Third Quarter 2001 as compared to 2.7 to 1 as of the Third Quarter 2000 and 3.5 to 1 as of the Fourth Quarter 2000. Net Working Capital was $172,824,000 as of the end of the Third Quarter 2001 as compared to $140,951,000 as of the Third Quarter 2000 and $145,764,000 at the end of the Fourth Quarter 2000. Net cash provided by operating activities was $25,370,000 for the 39 weeks ended Sept. 29, 2001 compared to $27,722,000 for the Quarter ended Sept. 30, 2000. The change primarily reflects lower net income partially offset by a change in the timing of the funding of certain medical benefit costs and tax liabilities. Capital expenditures for 2001 are anticipated to be generally in line with historical spending and are to be funded from the Company's cash flow from operations and internal sources. Debt securities that matured during the quarters ended September 29, 2001 and September 30, 2000 were replaced with debt securities of similar maturities. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK: The Company is exposed to various market risks, including fluctuations in sugar,corn, edible oils, cocoa and packaging costs. The Company also invests in securities with maturities of up to three years, the majority of which are held to maturity, which limits the Company's exposure to interest rate fluctu- ations. There has been no material change in the Company's market risks that would significantly affect the disclosures made in the Form 10-K for the year ended December 31, 2000. PART II - OTHER INFORMATION TOOTSIE ROLL INDUSTRIES, INC AND SUBSIDIARIES - NONE - SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TOOTSIE ROLL INDUSTRIES, INC. Date: November 7, 2001 BY: Melvin J. Gordon Chairman of the Board BY: G. Howard Ember Vice President - Finance