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 September 30, 2019
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
COMMISSION FILE NUMBER 1-1361
Tootsie Roll Industries, Inc.
(Exact Name of Registrant as Specified in its Charter)
Virginia
22-1318955
(State of Incorporation)
(I.R.S. Employer Identification No.)
7401 South Cicero Avenue, Chicago, Illinois
60629
(Address of Principal Executive Offices)
(Zip Code)
773-838-3400
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files) Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
`
Large accelerated filer ☒
Accelerated filer ☐
Non-accelerated filer ☐
Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date (September 30, 2019).
Class
Outstanding
Common Stock, $0.69-4/9 par value
39,019,205
Class B Common Stock, $0.69-4/9 par value
26,299,531
Securities registered pursuant to Section 12(b) of the Act:
Title of each class:
Trading Symbol
Name of each exchange on which registered:
Common Stock, par value $0.69-4/9 per share
TR
New York Stock Exchange
TOOTSIE ROLL INDUSTRIES, INC.
SEPTEMBER 30, 2019
INDEX
Page No.
Part I —
Financial Information
Item 1.
Financial Statements꞉
Condensed Consolidated Statements of Financial Position
3-4
Condensed Consolidated Statements of Earnings and Retained Earnings
5
Condensed Consolidated Statements of Comprehensive Earnings
6
Condensed Consolidated Statements of Cash Flows
7
Notes to Condensed Consolidated Financial Statements
8-16
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
17-21
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
22
Item 4.
Controls and Procedures
Part II —
Other Information
Legal Proceedings
23
Unregistered Sales of Equity Securities and Use of Proceeds
Item 6.
Exhibits
Signatures
24
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. See “Forward-Looking Statements” under Part I — Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Quarterly Report on Form 10-Q.
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(in thousands) (Unaudited)
September 30, 2019
December 31, 2018
September 30, 2018
ASSETS
CURRENT ASSETS:
Cash and cash equivalents
$
87,400
110,899
64,333
Restricted cash
369
388
393
Investments
76,766
75,140
68,373
Accounts receivable trade, less allowances of $2,728, $1,820 and $2,873
88,241
49,777
93,616
Other receivables
3,616
2,941
5,802
Inventories:
Finished goods and work-in-process
41,627
32,159
37,148
Raw materials and supplies
28,783
22,365
26,172
Prepaid expenses
5,504
10,377
6,439
Total current assets
332,306
304,046
302,276
PROPERTY, PLANT AND EQUIPMENT, at cost:
Land
21,712
21,726
21,968
Buildings
121,802
121,780
118,581
Machinery and equipment
400,885
401,037
381,522
Construction in progress
15,497
3,408
21,106
Operating lease right-of-use assets
1,770
-
561,666
547,951
543,177
Less - accumulated depreciation
374,924
361,850
361,079
Net property, plant and equipment
186,742
186,101
182,098
OTHER ASSETS:
Goodwill
73,237
Trademarks
175,024
178,808
170,409
188,393
Split dollar officer life insurance
26,042
Prepaid expenses and other assets
9,411
11,980
13,249
Deferred income taxes
522
445
Total other assets
463,044
457,214
476,390
Total assets
982,092
947,361
960,764
(The accompanying notes are an integral part of these statements.)
3
(in thousands except per share data) (Unaudited)
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable
18,020
11,817
18,637
Bank loans
768
373
190
Dividends payable
5,876
5,772
5,777
Accrued liabilities
44,982
42,849
45,787
Postretirement health care benefits
580
603
Operating lease liabilities
1,061
Income taxes payable
6,122
3,516
Total current liabilities
77,409
61,391
74,510
NONCURRENT LIABILITIES:
44,867
43,941
41,382
12,129
11,871
13,167
Industrial development bonds
7,500
Liability for uncertain tax positions
3,537
3,816
4,148
709
Deferred compensation and other liabilities
77,801
68,345
73,321
Total noncurrent liabilities
146,543
135,473
139,518
TOOTSIE ROLL INDUSTRIES, INC. SHAREHOLDERS’ EQUITY:
Common stock, $.69-4/9 par value - 120,000 shares authorized; 39,019, 38,544 and 38,621, respectively, issued
27,096
26,767
26,820
Class B common stock, $.69-4/9 par value - 40,000 shares authorized; 26,300, 25,584 and 25,599, respectively, issued
18,264
17,767
17,777
Capital in excess of par value
702,806
696,535
699,140
Retained earnings
32,107
33,767
27,356
Accumulated other comprehensive loss
(19,952)
(22,222)
(22,261)
Treasury stock (at cost) - 90, 88 and 88 shares, respectively
(1,992)
Total Tootsie Roll Industries, Inc. shareholders’ equity
758,329
750,622
746,840
Noncontrolling interests
(189)
(125)
(104)
Total equity
758,140
750,497
746,736
Total liabilities and shareholders’ equity
4
CONDENSED CONSOLIDATED STATEMENTS OF
EARNINGS AND RETAINED EARNINGS
(in thousands except per share amounts) (Unaudited)
Quarter Ended
Year to Date Ended
Net product sales
181,913
181,505
388,953
387,987
Rental and royalty revenue
811
798
2,700
2,925
Total revenue
182,724
182,303
391,653
390,912
Product cost of goods sold
112,867
115,246
243,668
248,561
Rental and royalty cost
241
211
772
686
Total costs
113,108
115,457
244,440
249,247
Product gross margin
69,046
66,259
145,285
139,426
Rental and royalty gross margin
570
587
1,928
2,239
Total gross margin
69,616
66,846
147,213
141,665
Selling, marketing and administrative expenses
33,578
36,620
92,902
91,229
Earnings from operations
36,038
30,226
54,311
50,436
Other income (loss), net
1,846
2,987
10,916
6,871
Earnings before income taxes
37,884
33,213
65,227
57,307
Provision for income taxes
8,038
7,134
14,926
12,657
Net earnings
29,846
26,079
50,301
44,650
Less: net earnings (loss) attributable to noncontrolling interests
(8)
(25)
(64)
(68)
Net earnings attributable to Tootsie Roll Industries, Inc.
29,854
26,104
50,365
44,718
Net earnings attributable to Tootsie Roll Industries, Inc. per share
0.46
0.40
0.77
0.68
Dividends per share *
0.09
0.27
Average number of shares outstanding
65,344
66,069
65,598
66,182
Retained earnings at beginning of period
8,121
7,020
57,225
Adoption of ASU 2014-09 and 2018-02
2,726
Cash dividends
(5,868)
(5,768)
(17,519)
(17,164)
Stock dividends
(34,506)
(60,149)
Retained earnings at end of period
*Does not include 3% stock dividend to shareholders of record on 3/5/19 and 3/6/18.
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE EARNINGS
Other comprehensive income (loss), before tax:
Foreign currency translation adjustments
(353)
1,164
243
1,102
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
(380)
(331)
(1,141)
(993)
Unrealized gains (losses) on postretirement and pension benefits
Investments:
Unrealized gains (losses) for the period on investments
364
209
3,016
(1,071)
34
Unrealized gains (losses) on investments
398
3,050
Derivatives:
Unrealized gains (losses) for the period on derivatives
(492)
(573)
115
(2,422)
390
795
648
1,630
Unrealized gains (losses) on derivatives
(102)
222
763
(792)
Total other comprehensive income (loss), before tax
(437)
1,264
2,915
(1,754)
Income tax benefit (expense) related to items of other comprehensive income
(24)
(645)
691
Total comprehensive earnings
29,431
27,319
52,571
43,587
Comprehensive earnings (loss) attributable to noncontrolling interests
Total comprehensive earnings attributable to Tootsie Roll Industries, Inc.
29,439
27,344
52,635
43,655
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES:
Adjustments to reconcile net earnings to net cash used in operating activities:
Depreciation
14,112
13,933
279
(443)
Amortization of marketable security premiums
976
1,351
Changes in operating assets and liabilities:
Accounts receivable
(38,516)
(45,881)
(702)
(649)
Inventories
(15,867)
(8,333)
3,384
8,268
Accounts payable and accrued liabilities
10,635
10,932
9,863
15,821
(883)
(720)
2,594
2,051
Net cash provided by operating activities
36,176
40,980
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures
(14,151)
(16,812)
Purchases of trading securities
(2,835)
(3,807)
Sales of trading securities
362
817
Purchase of available for sale securities
(49,999)
(65,098)
Sale and maturity of available for sale securities
51,580
45,379
Net cash used in investing activities
(15,043)
(39,521)
CASH FLOWS FROM FINANCING ACTIVITIES:
Shares purchased and retired
(27,232)
(16,650)
Dividends paid in cash
(17,592)
(17,208)
Proceeds from bank loans
2,662
Repayment of bank loans
(2,233)
(1,506)
Net cash used in financing activities
(44,395)
(34,100)
Effect of exchange rate changes on cash
(256)
647
Decrease in cash and cash equivalents
(23,518)
(31,994)
Cash, cash equivalents and restricted cash at beginning of year
111,287
96,720
Cash, cash equivalents and restricted cash at end of quarter
87,769
64,726
Supplemental cash flow information:
Income taxes paid/(received), net
5,182
(2,811)
Interest paid
95
81
Stock dividend issued
70,557
60,538
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 — Significant Accounting Policies
General Information
Foregoing data has been prepared from the unaudited financial records of Tootsie Roll Industries, Inc. (the Company) and in the opinion of management all adjustments, which are of a normal recurring nature, necessary for a fair statement of the results for the interim period have been reflected. Certain amounts previously reported have been reclassified to conform to the current year presentation. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the related notes included in the Company’s Form 10-K for the year ended December 31, 2018 (the “2018 Form 10-K”).
Results of operations for the period ended September 30, 2019 are not necessarily indicative of results to be expected for the year to end December 31, 2019 because of the seasonal nature of the Company’s operations. Historically, the third quarter has been the Company’s largest sales quarter due to pre-Halloween sales.
Revenue Recognition
The Company’s revenues, primarily net product sales, principally result from the sale of goods, reflect the consideration to which the Company expects to be entitled generally based on customer purchase orders. The Company records revenue based on a five-step model in accordance with Accounting Standards Codification ("ASC") Topic 606 which became effective January, 1, 2018. Adjustments for estimated customer cash discounts upon payment, discounts for price adjustments, product returns, allowances, and certain advertising and promotional costs, including consumer coupons, are variable consideration and are recorded as a reduction of product sales revenue in the same period the related product sales are recorded. Such estimates are calculated using historical averages adjusted for any expected changes due to current business conditions and experience. A net product sale is recorded when the Company delivers the product to the customer, or in certain instances, the customer picks up the goods at the Company’s distribution center, and thereby obtains control of such product. Amounts billed and due from our customers are classified as accounts receivable trade on the balance sheet and require payment on a short-term basis. Accounts receivable trade are unsecured. Shipping and handling costs of $14,536 and $14,698 in third quarter 2019 and 2018, respectively, and $36,753 and $36,304 in nine months 2019 and 2018, respectively, are included in selling, marketing and administrative expenses. A minor amount of royalty income (less than 0.2% of our consolidated net sales) is also recognized from sales-based licensing arrangements, pursuant to which revenue is recognized as the third-party licensee sales occur. Rental income (less than 1% of our consolidated net sales) is not considered revenue from contracts from customers.
Leases
The Company identifies leases by evaluating our contracts to determine if the contract conveys the right to use an identified asset for a stated period of time in exchange for consideration. The Company considers whether it can control the underlying asset and have the right to obtain substantially all of the economic benefits or outputs from the asset. Leases with terms greater than 12 months are classified as either operating or finance leases at the commencement date. For these leases, we capitalize the present value of the minimum lease payments over the lease term as a right-of-use asset with an offsetting lease liability. The discount rate used to calculate the present value of the minimum lease payments is typically our incremental borrowing rate, as the rate implicit in the lease is generally not known or determinable. The lease term includes any noncancelable period for which we have the right to use the asset. Currently, all capitalized leases are classified as operating leases and the Company records rental expense on a straight-line basis over the term of the lease.
8
Recently Adopted Accounting Pronouncements
At the beginning of 2019, the Company adopted Accounting Standards Update No. 2016-02 (ASU 2016-02), Leases (Subtopic 842), which requires lessees to recognize all leases with a term greater than 12 months on the balance sheet as right-of-use assets and lease liabilities. Upon adoption, the impact was the recognition of $1,482 in right-of-use assets and lease liabilities for operating leases. The Company adopted ASU 2016-02 utilizing the current-period adjustment method and did not recast comparative periods upon adoption of the new standard. In addition, we elected certain practical expedients which permitted us to not reassess whether existing contracts are or contain leases, to not reassess the lease classification of any existing leases, to not reassess initial direct costs for any existing leases, and to not separate lease components for all classes of underlying assets. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.
In August 2017, the FASB issued ASU 2017-12, guidance that amends hedge accounting. Under the new guidance, more hedging strategies are eligible for hedge accounting and the application of hedge accounting is simplified. The new guidance amends presentation and disclosure requirements, and how effectiveness is assessed. The guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those years. On January 1, 2019, the Company adopted ASU 2017-12. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.
Recently Issued Accounting Pronouncements - Not Yet Adopted
In June 2016, the FASB issued ASU No. 2016-13, which replaces the current incurred loss impairment method with a new method that reflects expected credit losses. Under this new model an entity would recognize an impairment allowance equal to its current estimate of credit losses on financial assets measured at amortized cost. This guidance is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements.
Note 2 — Average Shares Outstanding
The average number of shares outstanding for nine months 2019 reflects aggregate stock purchases of 726 shares for $27,232 and a 3% stock dividend of 1,914 shares distributed on April 5, 2019. The average number of shares outstanding for nine months 2018 reflects aggregate stock purchases of 502 shares for $16,650 and a 3% stock dividend of 1,869 shares distributed on April 6, 2018.
Note 3 — Income Taxes
The Company is subject to taxation in the U.S. and various state and foreign jurisdictions. The Company remains subject to examination by U.S. federal and state and foreign tax authorities for the years 2015 through 2017. The Company’s consolidated effective income tax rate was 21.2% and 21.5% in third quarter 2019 and 2018, respectively, and 22.9% and 22.1% in nine months 2019 and 2018, respectively. The higher tax rate in nine months 2019 principally reflects higher state income tax expense.
9
NOTE 4—Share Capital and Capital In Excess of Par Value:
Capital in
Class B
Excess
Common Stock
Treasury Stock
of Par
Shares
Amount
Value
(000’s)
Balance at June 30, 2019
39,233
27,245
26,302
90
710,703
Issuance of 3% stock dividend
—
Conversion of Class B common shares to common shares
(2)
Purchase and retirement of common shares and other
(216)
(149)
(7,897)
Balance at September 30, 2019
39,019
26,300
Balance at June 30, 2018
38,645
26,837
25,605
17,781
88
699,965
(6)
(5)
(30)
(22)
1
(825)
Balance at September 30, 2018
38,621
25,599
Balance at December 31, 2018
38,544
25,584
1,150
767
532
32,999
51
35
(51)
(35)
(726)
(504)
(26,728)
Balance at December 31, 2017
37,960
26,361
24,891
17,285
85
656,752
1,125
781
746
519
58,689
38
27
(38)
(27)
(502)
(349)
(16,301)
Note 5 — Fair Value Measurements
Current accounting guidance defines fair value as the price that would be received on the sale of an asset, or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Guidance requires disclosure of the extent to which fair value is used to measure financial assets and liabilities, the inputs utilized in calculating valuation measurements, and the effect of the measurement of significant unobservable inputs on earnings, or changes in net assets, as of the measurement date. Guidance establishes a three-level valuation hierarchy based upon the transparency of inputs utilized in the measurement and valuation of financial assets or liabilities as of the measurement date. Level 1 inputs include quoted prices for identical instruments and are the most observable. Level 2 inputs include quoted prices for similar assets and observable inputs such as interest rates, foreign currency exchange rates, commodity rates and yield curves. Level 3 inputs are not observable in the market and include management’s own judgments about the assumptions market participants would use in pricing the asset or liability. The use of observable and unobservable inputs is reflected in the hierarchy assessment disclosed in the table below.
10
As of September 30, 2019, December 31, 2018 and September 30, 2018, the Company held certain financial assets that are required to be measured at fair value on a recurring basis. These included derivative hedging instruments related to the purchase of certain raw materials and foreign currencies, investments in trading securities and available for sale securities. The Company’s available for sale securities principally consist of municipal bonds and variable rate demand notes.
The following table presents information about the Company’s financial assets and liabilities measured at fair value as of September 30, 2019, December 31, 2018 and September 30, 2018 and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value:
Estimated Fair Value September 30, 2019
Total
Input Levels Used
Fair Value
Level 1
Level 2
Level 3
Available for sale securities
183,784
3,584
180,200
Foreign currency forward contracts
(122)
Commodity futures contracts
(108)
Trading securities
71,790
Total assets measured at fair value
342,744
162,666
180,078
Estimated Fair Value December 31, 2018
183,289
3,000
180,289
(407)
Commodity futures contracts, net
(587)
62,260
355,454
175,572
179,882
Estimated Fair Value September 30, 2018
189,172
732
188,440
177
(859)
67,594
320,417
131,800
188,617
The fair value of the Company’s industrial revenue development bonds at September 30, 2019, December 31, 2018 and September 30, 2018 were valued using Level 2 inputs which approximates the carrying value of $7,500 for the respective periods. Interest rates on these bonds are reset weekly based on current market conditions.
11
Note 6 — Derivative Instruments and Hedging Activities
From time to time, the Company uses derivative instruments, including foreign currency forward contracts and commodity futures contracts to manage its exposures to foreign exchange and commodity prices. Commodity futures 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, and periodic equipment purchases from foreign suppliers denominated in a foreign currency. The Company does not engage in trading or other speculative use of derivative instruments
The Company recognizes all derivative instruments as either assets or liabilities at fair value in the Condensed Consolidated Statement of Financial Position. Derivative assets are recorded in other receivables and derivative liabilities are recorded in accrued liabilities. The Company uses hedge accounting for its foreign currency and commodity derivative instruments as discussed above. Derivatives that qualify for hedge accounting are designated as cash flow hedges by formally documenting the hedge relationships, including identification of the hedging instruments, the hedged items and other critical terms, as well as the Company’s risk management objectives and strategies for undertaking the hedge transaction.
Changes in the fair value of the Company’s cash flow hedges are recorded in accumulated other comprehensive loss, net of tax, and are reclassified to earnings in the periods in which earnings are affected by the hedged item. Substantially all amounts reported in accumulated other comprehensive loss for commodity derivatives are expected to be reclassified to cost of goods sold. Approximately $108 of this accumulated comprehensive loss is expected to be reclassified as a charge to earnings in 2020. Approximately $38 and $84 reported in accumulated other comprehensive loss for foreign currency derivatives are expected to be reclassified to other income, net in 2019 and 2020, respectively.
The following table summarizes the Company’s outstanding derivative contracts and their effects on its Condensed Consolidated Statements of Financial Position at September 30, 2019, December 31, 2018 and September 30, 2018:
Notional
Amounts
Assets
Liabilities
Derivatives designated as hedging instruments:
8,294
4,726
26
(134)
Total derivatives
11,050
9,580
92
(679)
(1,086)
8,285
(862)
180
12
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 September 30, 2019 and September 30, 2018 are as follows:
For Quarter Ended September 30, 2019
Gain (Loss)
on Amount Excluded
Reclassified from
from Effectiveness
Recognized
Accumulated OCI
Testing Recognized
in OCI
into Earnings
in Earnings
(138)
(33)
(354)
(357)
(390)
For Quarter Ended September 30, 2018
(750)
(795)
For Year to Date Ended September 30, 2019
252
(137)
(615)
(648)
For Year to Date Ended September 30, 2018
166
67
(2,588)
(1,697)
(1,630)
13
Note 7 — Pension Plans
From 2012 to 2014, the Company received periodic notices from 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, that the Plan’s actuary certified the Plan to be in “critical status” as defined by the Pension Protection Act (PPA) and the Pension Benefit Guaranty Corporation (PBGC); and that a plan of rehabilitation was adopted by the trustees of the Plan in fourth quarter 2012. Since 2015, the Company has received annual notices that the Plan is in “critical and declining status”, as defined by the PPA and PBGC, and that amendments to the rehabilitation plan were adopted. A designation of “critical and declining status” implies that the Plan is expected to become insolvent in the next 20 years. The Plan’s trustees project that the Plan will be insolvent in 2030.
The Company has been advised that its withdrawal liability would have been $81,600, $82,200 and $72,700 if it had withdrawn from the Plan during 2018, 2017 and 2016, respectively. Subsequent to September 30, 2019, the Company requested and was advised by the Plan that its withdrawal liability would be $99,800 if it withdrew from the Plan during 2019. 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.
The amended rehabilitation plan requires that employer contributions include 5% compounded annual surcharge increases each year for an unspecified period of time beginning January 2013 (in addition to the 5% interim surcharge initiated in June 2012) as well as certain plan benefit reductions. The Company’s pension expense for this Plan for nine months 2019 and 2018 was $2,307 and $2,201, respectively ($2,836 and $2,617 for twelve months 2018 and 2017, respectively). The aforementioned expense includes surcharges of $738 and $630 for nine months 2019 and 2018, respectively ($811 and $656 for twelve months 2018 and 2017, respectively), as required under the amended plan of rehabilitation.
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 amended rehabilitation plan could be material to its consolidated results of operations or cash flows in one or more future periods.
14
Note 8 — Accumulated Other Comprehensive Earnings (Loss)
Accumulated Other Comprehensive Earnings (Loss) consists of the following components:
Accumulated
Foreign
Postretirement
Other
Currency
Commodity
and Pension
Comprehensive
Translation
Derivatives
Benefits
Earnings (Loss)
(23,563)
494
(13)
(84)
3,629
(19,537)
Other comprehensive earnings (loss) before reclassifications
278
(105)
(268)
(448)
Reclassifications from accumulated other comprehensive loss
25
270
(288)
33
Other comprehensive earnings (loss) net of tax
304
(80)
(415)
(23,916)
(93)
(82)
3,341
(24,324)
(2,027)
(685)
3,535
(23,501)
158
134
(568)
888
602
(250)
352
1,240
Adoption of ASU 2018-02
(23,160)
(1,869)
(651)
3,285
(24,159)
(1,516)
(309)
(444)
4,206
2,288
191
2,618
466
(865)
(348)
2,314
216
2,270
(24,262)
(889)
20
3,289
(21,791)
(812)
125
(1,961)
(1,546)
1,286
(752)
483
74
(675)
(1,063)
(168)
748
593
15
The amounts reclassified from accumulated other comprehensive income (loss) consisted of the following:
Details about Accumulated Other
Location of (Gain) Loss
Comprehensive Income Components
Recognized in Earnings
Other income, net
Foreign currency derivatives
(67)
Commodity derivatives
357
615
1,697
Postretirement and pension benefits
Total before tax
44
464
(459)
637
Tax (expense) benefit
(11)
(112)
111
(154)
Net of tax
Note 9 — Restricted Cash
Restricted cash comprises certain cash deposits of the Company’s Spanish subsidiary with international banks that are pledged as collateral for letters of credit and bank borrowings.
Note 10 — Bank Loans
Bank loans consist of short term (less than 120 days) borrowings by the Company’s Spanish subsidiary that are held by international banks. The weighted-average interest rate as of September 30, 2019 and 2018 was 3.0% and 2.0%, respectively.
Note 11 — Leases
The Company leases certain buildings, land and equipment that are classified as operating leases. Our leases have remaining lease terms of up to approximately 3 years. In the third quarter and nine months of 2019, our operating lease cost and cash paid for operating lease liabilities totaled $411 and $746, respectively, which is classified in cash flows from operating activities. As of September 30, 2019, operating lease right-of-use assets and operating lease liabilities were both $1,770. The weighted-average remaining lease term related to our operating leases was 1.9 years as of September 30, 2019. The weighted-average discount rate related to our operating leases was 3.1% as of September 30, 2019. Maturities of our operating lease liabilities at September 30, 2019 are as follows: $236 in 2019, $934 in 2020, $540 in 2021, and $60 in 2022.
The Company, as lessor, rents certain commercial real estate to third party lessees. The cost and accumulated depreciation related to these leased properties were $36,362 and $10,071, respectively, as of September 30, 2019. Terms of such leases, including renewal options, may be extended for up to sixty years, many of which provide for periodic adjustment of rent payments based on changes in consumer or other price indices. The Company recognizes lease income on a straight-line basis over the lease term. Lease income in third quarter and nine months 2019 was $733 and $2,232, respectively, and is classified in cash flows from operating activities.
Note 12 — Contingencies
In the ordinary course of business, the Company is, from time to time, subject to a variety of active or threatened legal proceedings and claims. While it is not possible to predict the outcome of such matters with certainty, in the Company’s opinion, both individually and in the aggregate, they are not expected to have a material effect on the Company’s financial condition, results of operations or cash flows.
16
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This financial review discusses the Company’s financial condition, results of operations, liquidity and capital resources and other matters. Dollars are presented in thousands, except per share amounts. This review should be read in conjunction with the accompanying Condensed Consolidated Financial Statements and related notes included in this Form 10-Q and with the Company’s Consolidated Financial Statements and related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s Form 10-K for the year ended December 31, 2018 (the “2018 Form 10-K”).
Net product sales were $181,913 in third quarter 2019 compared to $181,505 in third quarter 2018, an increase of $408 or 0.2%. Nine months 2019 net product sales were $388,953 compared to $387,987 in nine months 2018, an increase of $966 or 0.2%. Third quarter and nine months 2019 net product sales include increases in domestic sales of 0.7% and 0.7%, respectively. Lower foreign net product sales adversely affected reported consolidated net product sales in both third quarter and nine months 2019 compared to the corresponding periods in 2018. A stronger U.S. dollar and the related translation of foreign sales also adversely affected third quarter and nine months sales in 2019 compared to the corresponding periods in the prior year. Net product sales, including foreign sales, were unfavorably impacted by the timing of certain sales in the comparative periods because certain comparative sales in third quarter 2018 were shipped and delivered in fourth quarter 2019. Third quarter and nine months 2019 net product sales benefited from higher price realization which allowed the Company to recover some product margin decline resulting from increasing input costs.
Product cost of goods sold were $112,867 in third quarter 2019 compared to $115,246 in third quarter 2018, and nine months 2019 product cost of goods sold were $243,668 compared to $248,561 in nine months 2018. Product cost of goods sold includes $8 and $83 of certain deferred compensation expenses in third quarter 2019 and 2018, respectively, and $254 and $150 of certain deferred compensation expenses in nine months 2019 and 2018, respectively. These deferred compensation expenses principally result from the changes in the market value of investments and investment income from trading securities relating to compensation deferred in previous years and are not reflective of current operating results. Adjusting for the aforementioned, product cost of goods sold declined from $115,163 in third quarter 2018 to $112,859 in third quarter 2019, a decrease of $2,304 or 2.0%; and declined from $248,411 in nine months 2018 to $243,414 in nine months 2019, a decrease of $4,997 or 2.0%. As a percentage of net product sales, adjusted product cost of goods sold was 62.0% and 63.5% in third quarter 2019 and 2018, respectively, a favorable decrease of 1.5 percentage points; and adjusted product cost of goods sold was 62.6% and 64.0% in nine months 2019 and 2018, respectively, a favorable decrease of 1.4 percentage points. Higher price realization contributed to the aforementioned favorable decrease in cost of goods sold as a percentage of net product cost in third quarter and nine months 2019.
The Company is continuing its investments in its plant manufacturing operations to meet new consumer and customer demands, achieve quality improvements, and increase operational efficiencies. Plant efficiencies driven by capital investments and ongoing cost containment programs contributed to the improved gross profit margins discussed above. The prior year 2018 product cost of goods sold was adversely affected by the implementation and start-up of new manufacturing packaging lines and resulting operational inefficiencies as well as unfavorable experience from certain employee benefit self-insurance programs.
Selling, marketing and administrative expenses were $33,578 in third quarter 2019 compared to $36,620 in third quarter 2018, and nine months 2019 selling, marketing and administrative expenses were $92,909 compared to $91,229 in nine months 2018. Selling, marketing and administrative expenses include $213 and $2,267 of certain deferred compensation expenses in third quarter 2019 and 2018, respectively, and $6,803 and $4,215 of certain deferred compensation expenses in nine months 2019 and 2018, respectively. As discussed above, these expenses principally result from changes in the market value of investments and investment income from trading securities relating to compensation deferred in previous years, and are not reflective of current operating results. Adjusting for the aforementioned deferred compensation expenses, selling, marketing and administrative expenses decreased from $34,353 in third quarter 2018 to $33,365 in third quarter 2019, a decrease of $988 or 2.9%; and selling, marketing and administrative expenses decreased from $87,014 in nine months 2018 to $86,099 in nine months 2019, a decrease of $915 or 1.1%. As a percentage of net product sales, adjusted selling, marketing and administrative expenses decreased from 18.9% in third quarter 2018 to 18.3% in third quarter 2019, a favorable decrease of 0.6
17
percentage points as a percent of net sales, and adjusted selling, marketing and administrative expenses decreased from 22.4% in nine months 2018 to 22.1% in nine months 2019, a favorable decrease of 0.3 percentage points as a percent of net sales. The decrease in adjusted selling, marketing and administrative expenses in third quarter and nine months 2019 principally reflects decreases in general and administrative expenses, primarily legal and professional fees, in 2019 when compared to the corresponding periods in 2018.
Selling, marketing and administrative expenses include $14,536 and $14,698 for customer freight, delivery and warehousing expenses in third quarter 2019 and 2018, respectively, a decrease of $162 or 1.1%, and expenses were $36,753 and $36,304 in nine months 2019 and 2018, respectively, an increase of $449 or 1.2%. These expenses were 8.0% and 8.1% of net product sales in third quarter 2019 and 2018, respectively, and were 9.4% of net product sales in both nine months 2019 and 2018.
Earnings from operations were $36,038 in third quarter 2019 compared to $30,226 in third quarter 2018, and were $54,311 in nine months 2019 compared to $50,436 in nine months 2018. Earnings from operations include $221 and $2,350 of certain deferred compensation expenses in third quarter 2019 and 2018; respectively, and include $7,057 and $4,365 of certain deferred compensation expenses in nine months 2019 and 2018, respectively, which are discussed above. Adjusting for these deferred compensation costs and expenses, earnings from operations were $36,259 and $32,576 in third quarter 2019 and 2018, respectively, an increase of $3,683 or 11.3%; and adjusted operating earnings were $61,368 and $54,801 in nine months 2019 and 2018, respectively, an increase of $6,567 or 12.0%. As a percentage of net product sales, these adjusted operating earnings were 19.9% and 17.9% in third quarter 2019 and 2018, respectively, a favorable increase of 2.0 percentage points as a percentage of net product sales; and as a percentage of net product sales, these adjusted operating earnings were 15.8% and 14.1% in nine months 2019 and 2018, respectively, a favorable increase of 1.7 percentage points as a percentage of net product sales. The improvement in adjusted earnings from operations principally reflects the benefits of higher price realization as well as the reduction and containment of certain costs and expense as discussed above.
Management believes the comparisons presented in the preceding paragraphs, after adjusting for changes in deferred compensation, are more reflective of the underlying operations of the Company.
Other income, net was $1,846 in third quarter 2019 compared to $2,987 in third quarter 2018, an unfavorable decrease of $1,141; and other income, net, was $10,916 in nine months 2019 compared to $6,871 in nine months 2018, a favorable increase of $4,045. Other income, net for third quarter 2019 and 2018 includes net gains and investment income of $221 and $2,350, respectively, on trading securities which provide an economic hedge of the Company’s deferred compensation liabilities; and other income, net for nine months 2019 and 2018 includes net gains and investment income of $7,057 and $4,365, respectively, on trading securities. These changes in trading securities were substantially offset by a like amount of deferred compensation expense included in product cost of goods sold and selling, marketing, and administrative expenses in the respective periods as discussed above. Other income, net for third quarter 2019 and 2018 includes investment income on available for sale securities of $1,160 and $799 in 2019 and 2018, respectively; and other income, net for nine months 2019 and 2018 includes investment income on available for sale securities of $3,341 and $2,520 in 2019 and 2018, respectively. Other income, net also includes gains (losses) on foreign exchange of $181 and $(506) in third quarter 2019 and 2018, respectively, and $(265) and $(783) in nine months 2019 and 2018, respectively.
The consolidated effective tax rates were 21.2% and 21.5% in third quarter 2019 and 2018, respectively, and 22.9% and 22.1% in nine months 2019 and 2018, respectively. The higher tax rates in nine months 2019 principally reflect higher state and foreign income tax expense, including the effects of certain international tax provisions relating to U.S. tax reform legislation that became effective at the beginning of 2018.
Net earnings attributable to Tootsie Roll Industries, Inc. were $29,854 (after $8 net loss attributed to non-controlling interests) in third quarter 2019 compared to $26,104 (after $25 net loss attributed to non-controlling interests) in third quarter 2018, and earnings per share were $0.46 and $0.40 in third quarter 2019 and 2018, respectively, an increase of $0.06 per share, or 15.0%. Nine months 2019 net earnings attributable to Tootsie Roll Industries, Inc. were $50,365 (after $64 net loss attributed to non-controlling interests) compared to nine months 2018 net earnings of $44,718 (after $68 net loss attributed to non-controlling interests), and net earnings per share were $0.77 and $0.68 in nine months 2019 and nine months 2018, respectively, an increase of $0.09 per share or 13.2%. Earnings per share attributable to Tootsie Roll Industries, Inc. for third quarter and nine months 2019 did benefit from the
18
reduction in average shares outstanding resulting from purchases in the open market by the Company of its common stock. Average shares outstanding decreased from 66,069 in third quarter 2018 to 65,344 in third quarter 2019, and from 66,182 in nine months 2018 to 65,598 in nine months 2019.
Goodwill and intangibles are assessed annually as of December 31 or whenever events or circumstances indicate that the carrying values may not be recoverable from future cash flows. The Company has not identified any triggering events, as defined, or other adverse information that would indicate a material impairment of its goodwill or intangibles in nine months 2019. There were also no impairments in the comparative nine months 2018 period or in calendar year 2018.
As more fully discussed in Note 1, the Company adopted the new accounting revenue recognition guidance (ASC 606) effective January 1, 2018. As a result of adoption, the cumulative impact to retained earnings at January 1, 2018 was a net after-tax increase of $3,319 ($4,378 pre-tax). The adoption principally changed the timing of recognition of certain trade promotions and related adjustments thereto which affect net product sales. Revenue for net product sales continues to be recognized at a point in time when products are delivered to or picked up by the customer, as designated by customers’ purchase orders, as discussed in Note 1.
From 2012 to 2014, the Company received periodic annual notices from 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, that the Plan’s actuary certified the Plan to be in “critical status”, as defined by the Pension Protection Act (PPA) and the Pension Benefit Guaranty Corporation (PBGC) and that plans of rehabilitation were adopted by the trustees of the Plan during these years. In 2015, the Plan’s status was changed to “critical and declining status”, as defined by the PPA and PBGC, for the plan year beginning January 1, 2015. A designation of “critical and declining status” implies that the Plan is expected to become insolvent in the next 20 years, and the Plan is projected to become insolent in 2030. During second quarter 2019, the Company received updated notices that the Plan remains in “critical and declining status for the plan year beginning January 1, 2019. These new notices also advised that the Plan trustees were considering the reduction or elimination of certain retirement benefits and may seek assistance from the PBGC. Plans in “critical and declining status” may elect to suspend (temporarily or permanently) some benefits payable to all categories of participants, including retired participants, except retirees that are disabled or over the age of 80. Suspensions must be equally distributed and cannot drop below 110% of what would otherwise be guaranteed by the PBGC.
Based on these updated notices, the Plan’s funded percentage (plan investment assets as a percentage of plan liabilities), as defined, were 51.6%, 54.7%, and 57.0% as of the most recent valuation dates available, January 1, 2018, 2017, and 2016, respectively (these valuation dates are as of the beginning of each Plan year). These funded percentages are based on actuarial values, as defined, and do not reflect the actual market value of Plan investments as of these dates. If the market value of investments had been used as of January 1, 2018, the funded percentage would be 54.2% (not 51.6%). As of the January 1, 2018 valuation date (most recent valuation available), only 18% of Plan participants were current active employees, 52% were retired or separated from service and receiving benefits, and 30% were retired or separated from service and entitled to future benefits. The Company understands that the Plan is currently exploring additional restructuring measures which include incentives to participating employers in exchange for providing additional future cash contributions as well as suspension of certain retirement benefits.
The Company has been advised by the Plan that its withdrawal liability would have been $81,600, $82,200, and $72,700 if it had withdrawn from the Plan during 2018, 2017 and 2016, respectively. The decrease from 2017 to 2018 was driven by an increase in the PBGC interest rate, resulting in a decrease in the value of vested benefits, and an increase in the Plan’s assets, as well as some decrease in the Plan’s affected benefits; however, the aforementioned was offset by effects of the Company comprising a larger share of the Plan’s contribution base. The Company’s relative share of the Plan’s contribution base has increased over the last several years, and management believes that this trend could continue indefinitely which will add upward pressure on the Company’s withdrawal liability. Subsequent to September 30, 2019, the Company requested and was advised by the Plan that its withdrawal liability would be $99,800 if it withdrew from the Plan during 2019. The Company has not yet made any analysis or evaluation as to the drivers which contributed to this increase in the Company’s withdrawal liability. Based on the above, including the Plan’s projected insolvency in the year 2030, management believes that the Company’s withdrawal liability could increase further in future years.
19
Based on the Company’s updated actuarial study and certain provisions in ERISA and the law relating to withdrawal liability payments, management believes that the Company’s liability would likely be limited to twenty annual payments of $3,059 which have a present value in the range of $35,900 to $46,900 depending on the interest rate used to discount these payments. While the Company’s actuarial consultant does not believe that the Plan will suffer a future mass withdrawal (as defined) of participating employers, in the event of a mass withdrawal, the Company’s annual withdrawal payments would theoretically be payable in perpetuity. Based on the Company’s updated actuarial study, the present value of such perpetuities is in the range of $50,100 to $105,000 and would apply in the unlikely event that substantially all employers withdraw from the Plan. The aforementioned is based on a range of valuations and interest rates which the Company’s actuary has advised is provided under the statute. 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.
The Company’s current labor contract requires the Company’s continued participation in this Plan through September 2022. The amended rehabilitation plan requires that employer contributions include 5% compounded annual surcharge increases each year for an unspecified period of time beginning in 2012 as well as certain plan benefit reductions. The Company’s pension expense for this Plan for nine months 2019 and 2018 was $2,307 and $2,201, respectively, which includes surcharges of $738 and $630, respectively.
The U.S. Congress has continued to explore and discuss various solutions, including financial assistance, for multi-employer pension plans (HR 397, the Butch Lewis Act). The Company is currently unable to determine the ultimate outcome of the above discussed multi-employer union pension matter and therefore is unable to determine the effects on its consolidated financial statements, but the ultimate outcome could be material to its consolidated results of operations or cash flows in one or more future periods. See also the Company’s Consolidated Financial Statements and related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s 2018 Form 10-K.
LIQUIDITY AND CAPITAL RESOURCES
Net cash flows provided by operating activities were $36,176 and $40,980 in nine months 2019 and 2018, respectively, an unfavorable decrease of $4,804. The decrease in nine months 2019 cash flows from operating activities principally reflects changes in inventories and related timing of sales and production in the third and fourth quarter periods, as well as the timing of sales and collections of accounts receivable trade. The timing of payments relating to income taxes payable and prepaid expenses also had some adverse impact on cash flows from operating activities.
Net cash used in investing activities was $15,043 in nine months 2019 compared to $39,521 in nine months 2018. Cash flows from investing activities reflect $49,999 and $65,098 of purchases of available for sale securities during nine months 2019 and 2018, respectively, and $51,580 and $45,379 of sales and maturities of available for sale securities during nine months 2019 and 2018, respectively. Nine months 2019 and 2018 investing activities include capital expenditures of $14,151 and $16,812, respectively. All capital expenditures in 2019 are expected to be funded from the Company’s cash flow from operations and internal sources. The higher capital expenditures in the prior year’s nine months 2018 reflects the purchase of new packaging lines at several manufacturing plants. Company management has committed approximately $17,000 to a manufacturing plant rehabilitation upgrade and expansion of one of its manufacturing facilities in the U.S. Management expects the projected cash outlays for this project to be approximately $3,000 in 2019, $6,000 in 2020 and $8,000 in 2021.
The Company’s consolidated financial statements include bank borrowings of $768 and $190 at September 30, 2019 and 2018, respectively, all of which relates to its Spanish subsidiary. The Company had no other outstanding bank borrowings at September 30, 2019.
Financing activities include Company common stock purchases and retirements of $27,232 and $16,650 in nine months 2019 and 2018, respectively. Cash dividends of $17,592 and $17,208 were paid in nine months 2019 and 2018, respectively.
The Company’s current ratio (current assets divided by current liabilities) was 4.3 to 1 at September 30, 2019 compared to 5.0 to 1 at December 31, 2018 and 4.1 to 1 at September 30, 2018. Net working capital was $254,897 at September 30, 2019 compared to $242,655 and $227,766 at December 31, 2018 and September 30, 2018, respectively. The aforementioned net working capital amounts are principally reflected in aggregate cash and cash equivalents and short-term investments of $164,166 at September 30, 2019 compared to $186,039 and $132,706 at December 31, 2018 and September 30, 2018, respectively. In addition, long term investments, principally debt securities comprising corporate and municipal bonds were $178,808 at September 30, 2019, as compared to $170,409 and $188,393 at December 31, 2018 and September 30, 2018, respectively. Aggregate cash and cash equivalents and short and long-term investments were $342,974, $356,448, and $321,099, at September 30, 2019, December 31, 2018 and September 30, 2018, respectively. The aforementioned includes $71,790, $62,260, and $67,594 at September 30, 2019, December 31, 2018 and September 30, 2018, respectively, relating to trading securities which are used as an economic hedge for the Company’s deferred compensation liabilities. Investments in corporate and municipal bonds, variable rate demand notes, and other debt securities that matured during nine months 2019 and 2018 were generally used to purchase the Company’s common stock or were replaced with debt securities of similar maturities.
The Company periodically contributes to a VEBA trust, managed and controlled by the Company, to fund the estimated future costs of certain employee health, welfare and other benefits. The Company is currently using these VEBA funds to pay the actual cost of such benefits through most of 2022. The VEBA trust held $13,594, $15,921 and $17,152 of aggregate cash and cash equivalents at September 30, 2019, December 31, 2018 and September 30, 2018, respectively. This asset value is included in prepaid expenses and long-term other assets in the Company’s Consolidated Statement of Financial Position. These assets are categorized as Level 1 within the fair value hierarchy.
ACCOUNTING PRONOUNCEMENTS
See Note 1 of the Company’s Condensed Consolidated Financial Statements.
RISK FACTORS
There were no material changes to the risk factors disclosed in the Company’s 2018 Form 10-K.
FORWARD-LOOKING STATEMENTS
This discussion and certain other sections contain forward-looking statements that are based largely on the Company’s current expectations and are made pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by the use of words such as “anticipated,” “believe,” “expect,” “intend,” “estimate,” “project,” “plan” and other words of similar meaning in connection with a discussion of future operating or financial performance and are subject to certain factors, risks, trends and uncertainties that could cause actual results and achievements to differ materially from those expressed in the forward-looking statements. Such factors, risks, trends and uncertainties, which in some instances are beyond the Company’s control, include the overall competitive environment in the Company’s industry, changes in assumptions and judgments discussed above under the heading “Significant Accounting Policies and Estimates,” and factors identified and referred to above under the heading “Risk Factors” in this report and under the heading “Risk Factors” in the Company’s 2018 Form 10-K.
The risk factors identified and referred to above are believed to be significant factors, but not necessarily all of the significant factors that could cause actual results to differ from those expressed in any forward-looking statement. Readers are cautioned not to place undue reliance on such forward-looking statements, which are made only as of the date of this report. The Company undertakes no obligation to update such forward-looking statements.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to various market risks, including fluctuations in and sufficient availability of sugar, corn syrup, edible oils, including palm oils, cocoa, dextrose, milk and whey, and gum-base input ingredients and packaging, and fuel costs principally relating to freight and delivery fuel surcharges. The Company is exposed to exchange rate fluctuations in the Canadian dollar which is the currency used for a portion of the raw material and packaging material costs and all labor, benefits and local plant operating costs at its Canadian plants. The Company is exposed to exchange rate fluctuations in Mexico, Canada, and Spain where its subsidiaries sell products in their local currencies. The Company invests in securities with maturities dates of up to approximately three years which are generally held to maturity, and variable rate demand notes where interest rates are generally reset weekly, all of which limits the Company’s exposure to interest rate fluctuations. There have been no material changes in the Company’s market risks that would significantly affect the disclosures made in the Form 10-K for the year ended December 31, 2018.
ITEM 4. CONTROLS AND PROCEDURES
Under the supervision and with the participation of management, the Chief Executive Officer and Chief Financial Officer of the Company have evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of September 30, 2019 and, based on their evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these controls and procedures are effective. Disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures are also designed to ensure that information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
There has been no change in the Company’s internal control over financial reporting that occurred during the Company’s fiscal quarter ended September 30, 2019 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Information on legal proceedings is included in Note 12 to the Condensed Consolidated Financial Statements.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table summarizes the Company’s purchases of its common stock during the quarter ended September 30, 2019:
Approximate Dollar
(a) Total
Value of Shares that
Number of
(b) Average
Purchased as Part of
May Yet Be Purchased
Price Paid per
Publicly Announced Plans
Under the Plans
Period
Purchased
Share
Or Programs
or Programs
Jul 1 to Jul 31
68,038
37.48
Not Applicable
Aug 1 to Aug 31
49,246
37.21
Sep 1 to Sep 30
98,900
36.96
216,184
37.18
While the Company does not have a formal or publicly announced stock purchase program, the Company’s board of directors periodically authorizes a dollar amount for share purchases. The treasurer executes share purchase transactions according to these guidelines.
ITEM 6. EXHIBITS
Exhibits 31.1 — Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibits 31.2 — Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32 — Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 101.INS - XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
Exhibit 101.SCH - XBRL Taxonomy Extension Schema Document.
Exhibit 101.CAL - XBRL Taxonomy Extension Calculation Linkbase Document.
Exhibit 101.LAB - XBRL Taxonomy Extension Label Linkbase Document.
Exhibit 101.PRE - XBRL Taxonomy Extension Presentation Linkbase Document.
Exhibit 101.DEF - XBRL Taxonomy Extension Definition Linkbase Document.
Exhibit 104 - Cover Page Interactive Data File – The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
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.
Date:
November 8, 2019
BY:
/S/ELLEN R. GORDON
Ellen R. Gordon
Chairman and Chief
Executive Officer
/S/G. HOWARD EMBER, JR.
G. Howard Ember, Jr.
Vice President Finance and
Chief Financial Officer