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TR Tootsie Roll Industries

Filed: 6 Aug 21, 3:01pm

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, 2021

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 (June 30, 2021).

Class

Outstanding

Common Stock, $0.69-4/9 par value

39,699,832

Class B Common Stock, $0.69-4/9 par value

27,821,453

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.

JUNE 30, 2021

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

17-22

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

22

Item 4.

Controls and Procedures

22

Part II —

Other Information

Item 1.

Legal Proceedings

24

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

24

Item 6.

Exhibits

24

Signatures

25

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. See “Forward-Looking Statements” under Part I — Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Quarterly Report on Form 10-Q.

2

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

TOOTSIE ROLL INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

(in thousands) (Unaudited)

June 30, 2021

December 31, 2020

June 30, 2020

ASSETS

CURRENT ASSETS:

Cash and cash equivalents

   

$

96,617

    

$

166,841

    

$

106,289

Restricted cash

402

415

380

Investments

42,584

42,090

80,096

Accounts receivable trade, less allowances of $1,767, $1,694 and $1,456

36,133

41,209

30,010

Other receivables

3,652

3,894

4,739

Inventories:

Finished goods and work-in-process

57,811

35,583

64,176

Raw materials and supplies

30,473

23,996

30,678

Prepaid expenses

9,794

6,844

6,341

Total current assets

277,466

320,872

322,709

PROPERTY, PLANT AND EQUIPMENT, at cost:

Land

21,732

21,738

21,651

Buildings

123,880

123,883

122,645

Machinery and equipment

421,420

422,506

414,850

Construction in progress

28,280

14,347

10,484

Operating lease right-of-use assets

6,892

858

1,265

602,204

583,332

570,895

Less - accumulated depreciation

403,996

396,004

386,674

Net property, plant and equipment

198,208

187,328

184,221

OTHER ASSETS:

Goodwill

73,237

73,237

73,237

Trademarks

175,024

175,024

175,024

Investments

264,693

220,020

186,057

Split dollar officer life insurance

2,514

2,514

26,042

Prepaid expenses and other assets

2,771

4,525

6,650

Deferred income taxes

1,045

1,038

561

Total other assets

519,284

476,358

467,571

Total assets

$

994,958

$

984,558

$

974,501

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

3

(in thousands except per share data) (Unaudited)

June 30, 2021

December 31, 2020

June 30, 2020

LIABILITIES AND SHAREHOLDERS’ EQUITY

CURRENT LIABILITIES:

Accounts payable

   

$

20,317

    

$

13,025

    

$

12,935

Bank loans

986

832

864

Dividends payable

6,077

5,948

6,005

Accrued liabilities

46,389

45,099

40,235

Postretirement health care benefits

544

544

598

Operating lease liabilities

818

780

1,063

Deferred compensation

-

-

17,139

Income taxes payable

468

3,793

5,353

Total current liabilities

75,599

70,021

84,192

NONCURRENT LIABILITIES:

Deferred income taxes

47,664

47,900

47,174

Postretirement health care benefits

12,956

12,943

13,247

Industrial development bonds

7,500

7,500

7,500

Liability for uncertain tax positions

3,608

3,351

3,811

Operating lease liabilities

6,074

78

202

Deferred compensation and other liabilities

88,971

79,665

65,984

Total noncurrent liabilities

166,773

151,437

137,918

TOOTSIE ROLL INDUSTRIES, INC. SHAREHOLDERS’ EQUITY:

Common stock, $.69-4/9 par value - 120,000 shares authorized; 39,700, 39,073 and 39,664, respectively, issued

27,569

27,134

27,544

Class B common stock, $.69-4/9 par value - 40,000 shares authorized; 27,821, 27,012 and 27,025, respectively, issued

19,320

18,758

18,767

Capital in excess of par value

722,617

706,930

725,605

Retained earnings

6,846

32,312

4,588

Accumulated other comprehensive loss

(21,541)

(19,815)

(21,904)

Treasury stock (at cost) - 96, 93 and 93 shares, respectively

(1,992)

(1,992)

(1,992)

Total Tootsie Roll Industries, Inc. shareholders’ equity

752,819

763,327

752,608

Noncontrolling interests

(233)

(227)

(217)

Total equity

752,586

763,100

752,391

Total liabilities and shareholders’ equity

$

994,958

$

984,558

$

974,501

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

4

TOOTSIE ROLL INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF

EARNINGS AND RETAINED EARNINGS

(in thousands except per share amounts) (Unaudited)

Quarter Ended

Year to Date Ended

June 30, 2021

June 30, 2020

June 30, 2021

June 30, 2020

Net product sales

   

$

114,560

    

$

79,796

    

$

216,355

     

$

182,599

Rental and royalty revenue

898

845

2,332

1,803

Total revenue

115,458

80,641

218,687

184,402

Product cost of goods sold

75,948

50,379

141,513

116,822

Rental and royalty cost

228

210

673

512

Total costs

76,176

50,589

142,186

117,334

Product gross margin

38,612

29,417

74,842

65,777

Rental and royalty gross margin

670

635

1,659

1,291

Total gross margin

39,282

30,052

76,501

67,068

Selling, marketing and administrative expenses

32,378

29,559

59,187

45,831

Earnings from operations

6,904

493

17,314

21,237

Other income (loss), net

6,244

9,727

10,060

4,233

Earnings before income taxes

13,148

10,220

27,374

25,470

Provision for income taxes

3,356

2,838

6,819

6,112

Net earnings

9,792

7,382

20,555

19,358

Less: net earnings (loss) attributable to noncontrolling interests

(2)

(6)

(6)

(12)

Net earnings attributable to Tootsie Roll Industries, Inc.

$

9,794

$

7,388

$

20,561

$

19,370

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

$

0.14

$

0.11

$

0.30

$

0.28

Dividends per share *

$

0.09

$

0.09

$

0.18

$

0.18

Average number of shares outstanding

67,564

68,641

67,705

68,751

Retained earnings at beginning of period

$

3,121

$

3,197

$

32,312

$

40,809

Net earnings attributable to Tootsie Roll Industries, Inc.

9,794

7,388

20,561

19,370

Cash dividends

(6,069)

(5,997)

(11,994)

(11,838)

Stock dividends

-

-

(34,033)

(43,753)

Retained earnings at end of period

$

6,846

$

4,588

$

6,846

$

4,588

*Does not include 3% stock dividend to shareholders of record on 3/5/21 and 3/3/20.

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

5

TOOTSIE ROLL INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE EARNINGS

(in thousands except per share amounts) (Unaudited)

Quarter Ended

Year to Date Ended

June 30, 2021

June 30, 2020

June 30, 2021

June 30, 2020

Net earnings

   

$

9,792

    

$

7,382

    

$

20,555

    

$

19,358

Other comprehensive income (loss), before tax:

Foreign currency translation adjustments

590

610

193

(3,064)

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

(352)

(337)

(703)

(675)

Unrealized gains (losses) on postretirement and pension benefits

(352)

(337)

(703)

(675)

Investments:

Unrealized gains (losses) for the period on investments

(374)

3,419

(1,529)

2,328

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

(53)

-

(53)

-

Unrealized gains (losses) on investments

(427)

3,419

(1,582)

2,328

Derivatives:

Unrealized gains (losses) for the period on derivatives

841

739

1,317

(222)

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

(794)

169

(1,565)

422

Unrealized gains (losses) on derivatives

47

908

(248)

200

Total other comprehensive income (loss), before tax

(142)

4,600

(2,340)

(1,211)

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

178

(965)

614

(448)

Total comprehensive earnings

9,828

11,017

18,829

17,699

Comprehensive earnings (loss) attributable to noncontrolling interests

(2)

(6)

(6)

(12)

Total comprehensive earnings attributable to Tootsie Roll Industries, Inc.

$

9,830

$

11,023

$

18,835

$

17,711

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

6

TOOTSIE ROLL INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands) (Unaudited)

Year to Date Ended

June 30, 2021

June 30, 2020

CASH FLOWS FROM OPERATING ACTIVITIES:

Net earnings

   

$

20,555

    

$

19,358

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

Depreciation

8,757

9,219

Deferred income taxes

378

(568)

Amortization of marketable security premiums

1,644

557

Changes in operating assets and liabilities:

Accounts receivable

5,040

14,333

Other receivables

64

(1,208)

Inventories

(28,665)

(36,863)

Prepaid expenses and other assets

(1,260)

1,183

Accounts payable and accrued liabilities

7,388

40

Income taxes payable

(3,068)

5,033

Postretirement health care benefits

(690)

(573)

Deferred compensation and other liabilities

635

369

Net cash provided by operating activities

10,778

10,880

CASH FLOWS FROM INVESTING ACTIVITIES:

Capital expenditures

(12,327)

(6,410)

Purchases of trading securities

(1,959)

(2,438)

Sales of trading securities

582

380

Purchase of available for sale securities

(58,154)

(53,269)

Sale and maturity of available for sale securities

19,798

44,466

Net cash from (used in) investing activities

(52,060)

(17,271)

CASH FLOWS FROM FINANCING ACTIVITIES:

Shares purchased and retired

(17,181)

(12,959)

Dividends paid in cash

(12,034)

(11,853)

Proceeds from bank loans

2,032

2,133

Repayment of bank loans

(1,847)

(2,019)

Net cash used in financing activities

(29,030)

(24,698)

Effect of exchange rate changes on cash

75

(1,582)

Increase (Decrease) in cash and cash equivalents

(70,237)

(32,671)

Cash, cash equivalents and restricted cash at beginning of year

167,256

139,340

Cash, cash equivalents and restricted cash at end of quarter

$

97,019

$

106,669

Supplemental cash flow information:

Income taxes paid/(received), net

$

13,120

$

1,035

Interest paid

$

4

$

49

Stock dividend issued

$

64,667

$

63,402

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

7

TOOTSIE ROLL INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2021

(in thousands except per share amounts) (Unaudited)

Note 1 — Significant Accounting Policies

General Information

Foregoing data has been prepared from the unaudited financial records of Tootsie Roll Industries, Inc. (the “Company”) and in the opinion of Management all adjustments, which are of a normal recurring nature, necessary for a fair statement of the results for the interim period have been reflected. Certain amounts previously reported have been reclassified to conform to the current year presentation. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the related notes included in the Company’s Form 10-K for the year ended December 31, 2020 (the “2020 Form 10-K”).

Results of operations for the period ended June 30, 2021 are not necessarily indicative of results to be expected for the year to end December 31, 2021 because of the seasonal nature of the Company’s operations. Historically, the third quarter has been the Company’s largest net product sales quarter due to pre-Halloween net product sales.

On March 11, 2020, the World Health Organization designated the recent novel coronavirus ("COVID-19") as a global pandemic. The Company continues to actively monitor COVID-19 and its potential impact on our operations and financial results. The impact that COVID-19 will have on our consolidated financial statements throughout 2021 and beyond remains uncertain and ultimately will be dictated by the length and severity of the pandemic and Covid-19 variants, the pace of the “reopening” of the economy and economic recovery, and federal, state, local and foreign government actions taken in response. The effects of Covid-19 pandemic are unprecedented, and therefore the Company is unable to determine its effects on its net product sales and net earnings for the balance of 2021 and beyond.

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 net product sales revenue in the same period the related net 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 $12,437 and $8,397 in second quarter 2021 and 2020, respectively, and $22,576 and $19,069 in first half 2021 and 2020, respectively, are included in selling, marketing and administrative expenses. A minor amount of royalty income (less than 0.2% of our consolidated net product sales) is also recognized from sales-based licensing arrangements, pursuant to which revenue is recognized as the third-party licensee sales occur. Rental income (approximately 1% of our consolidated net product sales) is not considered revenue from contracts from customers.

Leases

The Company identifies leases by evaluating its 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

8

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 the Company has 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.

Recently Adopted Accounting Pronouncements

In March 2020, the FASB issued ASU 2020-04 which provides optional guidance for a limited time to ease the potential burden in accounting for reference rate reform. In January 2021, the FASB issued ASU 2021-1 which clarified the scope of ASU 2020-04. The new guidance provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts and hedging relationships that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. These amendments are effective immediately and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. The Company adopted ASU 2020-04 and ASU 2021-1in first quarter 2021. The adoption of these ASU’s did not have a material impact on the Company’s consolidated financial statements.

In December 2019, the FASB issued ASU No. 2019-12 which is designed to simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. ASU No. 2019-12 is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company adopted ASU 2019-12 in first quarter 2021. The adoption of the ASU did not have a material impact on the Company’s consolidated financial statements.

Note 2 — Average Shares Outstanding

The average number of shares outstanding for six months 2021 reflects aggregate stock purchases of 536 shares for $17,181 and a 3% stock dividend of 1,970 shares distributed on April 2, 2021. The average number of shares outstanding for six months 2020 reflects aggregate stock purchases of 378 shares for $12,959 and a 3% stock dividend of 1,942 shares distributed on April 3, 2020.

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 2017 through 2019. The Company’s consolidated effective income tax rate was 25.5% and 27.8% in second quarter 2021 and 2020, respectively, and 24.9% and 24.0% in first half 2021 and 2020, respectively.

9

NOTE 4—Share Capital and Capital In Excess of Par Value:

Capital in

 

Class B

Excess

 

Common Stock

Common Stock

Treasury Stock

of Par

 

    

Shares

    

Amount

    

Shares

    

Amount

    

Shares

    

Amount

    

Value

 

(000’s)

(000’s)

(000’s)

 

Balance at March 31, 2021

 

40,002

$

27,779

 

27,821

$

19,320

 

96

$

(1,992)

$

732,165

Issuance of 3% stock dividend

 

 

 

 

 

 

 

Conversion of Class B common shares to common shares

 

 

 

 

 

 

 

Purchase and retirement of common shares and other

 

(302)

 

(210)

 

 

 

 

 

(9,548)

Balance at June 30, 2021

 

39,700

$

27,569

 

27,821

$

19,320

 

96

$

(1,992)

$

722,617

Balance at March 31, 2020

 

39,769

$

27,617

 

27,037

$

18,776

 

93

$

(1,992)

$

729,673

Issuance of 3% stock dividend

 

 

 

 

 

 

 

Conversion of Class B common shares to common shares

 

12

 

9

 

(12)

 

(9)

 

 

 

Purchase and retirement of common shares and other

 

(117)

 

(82)

 

-

 

 

 

 

(4,068)

Balance at June 30, 2020

 

39,664

$

27,544

 

27,025

$

18,767

 

93

$

(1,992)

$

725,605

Balance at December 31, 2020

39,073

$

27,134

 

27,012

$

18,758

 

93

$

(1,992)

$

706,930

Issuance of 3% stock dividend

 

1,163

808

 

809

562

 

3

32,495

Conversion of Class B common shares to common shares

 

 

 

 

 

 

 

Purchase and retirement of common shares and other

 

(536)

 

(373)

 

 

 

 

 

(16,808)

Balance at June 30, 2021

 

39,700

$

27,569

 

27,821

$

19,320

 

96

$

(1,992)

$

722,617

Balance at December 31, 2019

38,836

$

26,969

 

26,287

$

18,254

 

90

$

(1,992)

$

696,059

Issuance of 3% stock dividend

 

1,157

803

 

786

547

 

3

42,243

Conversion of Class B common shares to common shares

 

48

 

34

 

(48)

 

(34)

 

 

 

Purchase and retirement of common shares and other

 

(377)

 

(262)

 

 

 

 

 

(12,697)

Balance at June 30, 2020

 

39,664

$

27,544

 

27,025

$

18,767

 

93

$

(1,992)

$

725,605

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 are reflected in the hierarchy assessment disclosed in the table below.

10

As of June 30, 2021, December 31, 2020 and June 30, 2020, the Company held certain financial assets that are required to be measured at fair value on a recurring basis. These included derivative hedging instruments related to the purchase of certain raw materials and foreign currencies, investments in trading securities and available for sale securities. The Company’s available for sale securities principally consist of corporate bonds.

The following table presents information about the Company’s financial assets and liabilities measured at fair value as of June 30, 2021, December 31, 2020 and June 30, 2020 and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value:

Estimated Fair Value June 30, 2021

Total

Input Levels Used

Fair Value

Level 1

Level 2

Level 3

Cash and cash equivalents

   

$

96,617

    

$

96,617

    

$

-

    

$

-

Available for sale securities

223,410

2,616

220,794

-

Foreign currency forward contracts

717

-

717

-

Commodity futures contracts

754

754

-

-

Trading securities

83,867

70,879

12,988

-

Total assets measured at fair value

$

405,365

$

170,866

$

234,499

$

-

Estimated Fair Value December 31, 2020

Total

Input Levels Used

Fair Value

Level 1

Level 2

Level 3

Cash and cash equivalents

   

$

166,841

    

$

166,841

    

$

-

    

$

-

Available for sale securities

188,282

3,149

185,133

-

Foreign currency forward contracts

778

-

778

-

Commodity futures contracts, net

941

941

-

-

Trading securities

73,828

61,431

 

12,397

-

Total assets measured at fair value

$

430,670

$

232,362

$

198,308

$

-

Estimated Fair Value June 30, 2020

Total

Input Levels Used

Fair Value

Level 1

Level 2

Level 3

Cash and cash equivalents

   

$

106,289

    

$

106,289

    

$

-

    

$

-

Available for sale securities

187,868

3,169

184,699

-

Foreign currency forward contracts

428

-

428

-

Commodity futures contracts

(94)

(94)

-

-

Trading securities

78,285

50,664

27,621

-

Total assets measured at fair value

$

372,776

$

160,028

$

212,748

$

-

The fair value of the Company’s industrial revenue development bonds at June 30, 2021, December 31, 2020 and June 30, 2020 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 $687 and $67 of this accumulated comprehensive gain is expected to be reclassified to earnings in 2021and 2022, respectively. Approximately $240 and $477 reported in accumulated other comprehensive gain for foreign currency derivatives are expected to be reclassified to other income, net in 2021and 2022, respectively.  

The following table summarizes the Company’s outstanding derivative contracts and their effects on its Condensed Consolidated Statements of Financial Position at June 30, 2021, December 31, 2020 and June 30, 2020:

June 30, 2021

Notional

    

    

    

    

Amounts

Assets

Liabilities

Derivatives designated as hedging instruments:

Foreign currency forward contracts

$

4,795

$

717

$

-

Commodity futures contracts

2,884

754

-

Total derivatives

$

1,471

$

-

December 31, 2020

Notional

    

    

    

    

Amounts

Assets

Liabilities

Derivatives designated as hedging instruments:

Foreign currency forward contracts

$

6,391

$

778

$

Commodity futures contracts

4,010

 

941

 

Total derivatives

$

1,719

$

-

June 30, 2020

Notional

    

    

    

    

Amounts

Assets

Liabilities

Derivatives designated as hedging instruments:

Foreign currency forward contracts

$

8,574

$

428

$

-

Commodity futures contracts

7,375

170

(264)

Total derivatives

$

598

$

(264)

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 June 30, 2021 and June 30, 2020 are as follows:

For Quarter Ended June 30, 2021

    

    

    

    

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

$

94

$

131

$

-

Commodity futures contracts

747

663

-

Total

$

841

$

794

$

-

For Quarter Ended June 30, 2020

    

    

    

    

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

$

352

$

(169)

$

-

Commodity futures contracts

387

-

-

Total

$

739

$

(169)

$

-

For Year to Date Ended June 30, 2021

    

    

    

    

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

$

173

$

234

$

-

Commodity futures contracts

1,144

1,331

-

Commodity option contracts

-

-

-

Total

$

1,317

$

1,565

$

-

For Year to Date Ended June 30, 2020

    

    

    

    

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

$

147

$

(267)

$

-

Commodity futures contracts

(369)

(155)

-

Total

$

(222)

$

(422)

$

-

13

Note 7 — Pension Plans

Beginning in 2012, 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 2012. Beginning in 2015, the Company received new annual notices that the Plan was reclassified 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. In 2016, the Company received new notices that the Plan’s trustees adopted an updated Rehabilitation Plan effective January 1, 2016, and all annual notices to date have continued to classify the Plan in the “critical and declining status” category.

The Company has been advised that its withdrawal liability would have been $99,300, $99,800 and $81,600 if it had withdrawn from the Plan during 2020, 2019 and 2018, respectively. 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, which continues, 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 2012) as well as certain plan benefit reductions. In fourth quarter 2020, the Plan Trustees advised the Company that the surcharges would no longer increase and therefore be “frozen” at the rates and amounts in effect as of December 31, 2020 provided that the local bargaining union and the Company executed a formal consenting agreement by March 31, 2021. During first quarter 2021, the local bargaining union and the Company executed this agreement which resulted in the “freezing” of such surcharges as of December 31, 2020. The Company’s pension expense for this Plan for first half 2021 and 2020 was $1,557 and $1,504, respectively ($2,866 and $2,961 for twelve months 2020 and 2019, respectively). The aforementioned expense includes surcharges of $549 and $530 for first half 2021 and 2020, respectively ($1,010 and $948 for twelve months 2020 and 2019, 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

Foreign

Postretirement

Other

Currency

Currency

Commodity

and Pension

Comprehensive

Translation

Investments

Derivatives

Derivatives

Benefits

Earnings (Loss)

Balance at March 31, 2021

$

(24,978)

    

$

1,116

    

$

572

    

$

508

    

$

1,205

    

$

(21,577)

Other comprehensive earnings (loss) before reclassifications

590

(283)

70

568

-

945

Reclassifications from accumulated other comprehensive loss

-

(40)

(99)

(504)

(266)

(909)

Other comprehensive earnings (loss) net of tax

590

(323)

(29)

64

(266)

36

Balance at June 30, 2021

$

(24,388)

$

793

$

543

$

572

$

939

$

(21,541)

Balance at March 31, 2020

$

(27,042)

    

$

55

    

$

(71)

    

$

(364)

    

$

1,883

    

$

(25,539)

Other comprehensive earnings (loss) before reclassifications

610

2,592

267

294

-

3,763

Reclassifications from accumulated other comprehensive loss

-

-

128

-

(256)

(128)

Other comprehensive earnings (loss) net of tax

610

2,592

395

294

(256)

3,635

Balance at June 30, 2020

$

(26,432)

$

2,647

$

324

$

(70)

$

1,627

$

(21,904)

Balance at December 31, 2020

    

$

(24,581)

$

1,992

$

589

$

713

$

1,472

$

(19,815)

Other comprehensive earnings (loss) before reclassifications

193

(1,159)

131

869

-

34

Reclassifications from accumulated other comprehensive loss

-

(40)

(177)

(1,010)

(533)

(1,760)

Other comprehensive earnings (loss) net of tax

193

(1,199)

(46)

(141)

(533)

(1,726)

Balance at June 30, 2021

$

(24,388)

$

793

$

543

$

572

$

939

$

(21,541)

Balance at December 31, 2019

$

(23,368)

$

882

$

10

$

92

$

2,139

$

(20,245)

Other comprehensive earnings (loss) before reclassifications

(3,064)

1,765

112

(280)

-

(1,467)

Reclassifications from accumulated other comprehensive loss

-

-

202

118

(512)

(192)

Other comprehensive earnings (loss) net of tax

(3,064)

1,765

314

(162)

(512)

(1,659)

Balance at June 30, 2020

$

(26,432)

$

2,647

$

324

$

(70)

$

1,627

$

(21,904)

15

The amounts reclassified from accumulated other comprehensive income (loss) consisted of the following:

Details about Accumulated Other

Quarter Ended

Year to Date Ended

Location of (Gain) Loss

Comprehensive Income Components

June 30, 2021

June 30, 2020

June 30, 2021

June 30, 2020

Recognized in Earnings

Investments

$

(53)

$

-

$

(53)

$

-

Other income, net

Foreign currency derivatives

(131)

169

(234)

267

Other income, net

Commodity derivatives

(663)

-

(1,331)

155

Product cost of goods sold

Postretirement and pension benefits

(352)

(337)

(703)

(675)

Other income, net

Total before tax

(1,199)

(168)

(2,321)

(253)

Tax (expense) benefit

290

40

561

61

Net of tax

$

(909)

$

(128)

$

(1,760)

$

(192)

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 June 30, 2021 and 2020 was 3.1% and 3.0%, respectively.

Note 11 — Leases

The Company leases certain buildings, land and equipment that are classified as operating leases. These leases have remaining lease terms of up to approximately 3 years.  In the second quarter and first half of 2021 and 2020, operating lease cost and cash paid for operating lease liabilities totaled $255 and $258, respectively, and $513 and $494, respectively, which is classified in cash flows from operating activities.  As of June 30, 2021 and 2020, operating lease right-of-use assets and operating lease liabilities were $6,892 and $1,265, respectively. The weighted-average remaining lease term related to these operating leases was 8.1 years and 1.3 years as of June 30, 2021 and 2020, respectively. The weighted-average discount rate related to the Company’s operating leases was 2.1% and 3.0% as of June 30, 2021 and 2020, respectively. Maturities of the Company’s operating lease liabilities at June 30, 2021 are as follows: $447 in 2021 (rest of year), $575 in 2022, $392 in 2023, $387 in 2024, $387 in 2025 and $4,704 thereafter.

The Company, as lessor, rents certain commercial real estate to third-party lessees. The June 30, 2021 and 2020 cost related to these leased properties was $51,402 and $36,378, respectively, and the accumulated depreciation related to these leased properties was $15,314 and $10,613, respectively. 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 second quarter and first half 2021 and 2020 was $845 and $788, respectively, and $2,075 and $1,526, 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. There are also potential claims and employer liability which could result in litigation, including defense costs, relating to the Covid-19 pandemic. 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

Note 13 — Subsequent Event

Subsequent to June 30, 2021, the Company received $2,514 from a certain split dollar life insurance policy on an executive officer. The Company has carried this amount as an asset which represents the cumulative premiums previously paid by the Company on such policy.

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, 2020 (the “2020 Form 10-K”).

Net product sales were $114,560 in second quarter 2021 compared to $79,796 in second quarter 2020, an increase of $34,764 or 43.6%. First half 2021 net product sales were $216,355 compared to $182,599 in first half 2020, an increase of $33,756 or 18.5%. Domestic (U.S.) net product sales in second quarter and first half 2021 increased 39.3% and 15.5%, respectively, compared to the corresponding period in the prior year, and, foreign net product sales, including exports to foreign markets, increased 103.5% and 59.7%, respectively, compared to the corresponding periods in the prior year. Second quarter sales reflect effective sales and marketing programs as the economy continues to recover and “re-open” from the adverse effects of the Covid-19 pandemic. The Covid-19 pandemic curtailed and limited access to certain channels of trade where the Company has historically sold its products. Response to this pandemic resulted in the disruption and changes in lifestyles and shopping habits which has adversely affected planned consumer purchases of the Company’s products for “sharing” and “give away” occasions. As the effects of the pandemic subsided throughout first half 2021, the Company had continuing improvement in customer orders and sales. Second quarter 2021 sales also exceeded second quarter 2019 sales by 8% which provides a quarterly sales comparison prior to the pandemic, and first half 2021 sales were 4% ahead of first half 2019 sales.

Product cost of goods sold were $75,948 in second quarter 2021 compared to $50,379 in second quarter 2020, and first half 2021 product cost of goods sold were $141,513 compared to $116,822 in first half 2020. Product cost of goods sold includes $263 and $339 of certain deferred compensation expenses in second quarter 2021 and 2020, respectively, and $416 and $20 of certain deferred compensation expenses in first half 2021 and 2020, 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 increased from $50,040 in second quarter 2020 to $75,685 in second quarter 2021, an increase of $25,645 or 51.2%; and increased from $116,802 in first half 2020 to $141,097 in first half 2021, an increase of $24,295 or 20.8%. As a percentage of net product sales, adjusted product cost of goods sold was 66.1% and 62.7% in second quarter 2021 and 2020, respectively, an unfavorable increase of 3.4 percentage points; and adjusted product cost of goods sold was 65.2% and 64.0% in first half 2021 and 2020, respectively, an unfavorable increase of 1.2 percentage points. Second quarter and first half 2021 adjusted product cost of goods sold as a percentage of sales were adversely affected by increasing costs for ingredients, packaging materials, and certain manufacturing supplies. These increased costs and expenses were more pronounced in second quarter 2021, and we expect these costs to remain at elevated levels for the balance of the year and into 2022. Second quarter product costs of goods sold were also adversely affected by higher than expected sales demand which resulted in additional costs related to our efforts to meet this higher demand. Such higher costs include additional overtime and the scheduling of additional production shifts to meet this higher demand.

Certain cost and expense reductions, which include Company initiatives to reduce costs, mitigated some of the cost increase in adjusted product cost of goods sold in second quarter and first half 2021 when compared to the corresponding periods in the prior year. In response to these higher costs in 2021, the confectionary industry has announced increases in selling prices in order to restore margins, and we have followed with some price increases as well. These price increases will be phased in during the balance of 2021. The Company is focused on the longer term and therefore is continuing to make investments in plant manufacturing operations to meet new consumer and

17

customer demands, achieve product quality improvements, increase operational efficiencies and provide value to consumers.

Selling, marketing and administrative expenses were $32,378 in second quarter 2021 compared to $29,559 in second quarter 2020, and first half 2021 selling, marketing and administrative expenses were $59,187 compared to $45,831 in first half 2020. Selling, marketing and administrative expenses include $5,208 and $9,079 of certain deferred compensation expenses in second quarter 2021 and 2020, respectively, and $8,244 and $23 of certain deferred compensation expenses in first half 2021 and 2020, 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 increased from $20,480 in second quarter 2020 to $27,170 in second quarter 2021, an increase of $6,690 or 32.7%; and selling, marketing and administrative expenses increased from $45,808 in first half 2020 to $50,943 in first half 2021 an increase of $5,135 or 11.2%. As a percentage of net product sales, adjusted selling, marketing and administrative expenses decreased from 25.7% in second quarter 2020 to 23.7% in second quarter 2021, a favorable decrease of 2.0 percentage points as a percent of net product sales, and adjusted selling, marketing and administrative expenses decreased from 25.1% in first half 2020 to 23.5% in first half 2021, a favorable decrease of 1.6 percentage points as a percent of net sales. The decrease in adjusted selling, marketing and administrative expenses as a percentage of net product sales in second quarter and first half 2021 reflects the benefits of certain operational changes and expense reduction initiatives, as well as reduced business travel due to the Covid-19 pandemic.

Selling, marketing and administrative expenses include $12,437 and $8,397 for customer freight, delivery and warehousing expenses in second quarter 2021 and 2020, respectively, an increase of $4,040 or 48.1%, and $22,576 and $19,069 in first half 2021 and 2020, respectively, an increase of $3,507 or 18.4%. These expenses were 10.9% and 10.5% of net product sales in second quarter 2021 and 2020, respectively, and were 10.4% and 10.4% of net product sales in first half 2021 and 2020, respectively. The aforementioned increase in second quarter 2021 reflects increasing costs for over-the-road carriers relating to customer freight and delivery, including higher diesel fuel prices. We expect these higher freight and delivery costs to also continue through the balance of 2021.

Earnings from operations were $6,904 in second quarter 2021 compared to $493 in second quarter 2020, and were $17,314 in first half 2021 compared to $21,237 in first half 2020. Earnings from operations include $5,471 and $9,418 of certain deferred compensation expenses in second quarter 2021 and 2020, respectively, and include $8,660 and $43 of certain deferred compensation expenses in first half 2021 and 2020, respectively, which are discussed above. Adjusting for these deferred compensation costs and expenses, adjusted earnings from operations were $12,375 and $9,911 in second quarter 2021 and 2020, respectively, an increase of $2,464 or 24.9%; and adjusted operating earnings were $25,974 and $21,280 in first half 2021 and 2020, respectively, an increase of $4,694 or 22.1%. The Company’s increase in second quarter and first half 2021 sales, as discussed above, were the principal drivers of these increased adjusted operating earnings in the respective periods.

As a percentage of net product sales, these adjusted operating earnings were 10.8% and 12.4% in second quarter 2021 and 2020, respectively, an unfavorable decrease of 1.6 percentage points; and as a percentage of net product sales, these adjusted operating earnings were 12.0% and 11.7% in first half 2021 and 2020, respectively, a favorable increase of 0.3 percentage points as a percentage of net product sales. The decrease in adjusted operating earnings as a percent of sales in second quarter 2021 principally reflects the increasing costs and expenses discussed above, including additional costs and expense in meeting higher sales demand.

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 $6,244 in second quarter 2021 compared to $9,727 in second quarter 2020, and $10,060 in first half 2021 compared to $4,233 in first half 2020. Other income, net for second quarter 2021 and 2020 includes net gains and investment income of $5,471 and $9,418, respectively, on trading securities which provide an economic hedge of the Company’s deferred compensation liabilities; and other income, net for first half 2021 and 2020 includes net gains and investment income of $8,660 and $43, respectively, on trading securities which provide an economic hedge of the Company’s deferred compensation liabilities. These changes in market values were substantially offset by a like amount of deferred compensation expense included in product cost of goods sold and selling, marketing, and

18

administrative expenses in the respective periods as discussed above. Other income, net for second quarter 2021 and 2020 includes investment income on available for sale securities of $670 and $920 in 2021 and 2020, respectively; and other income, net for first half 2021 and 2020 includes investment income on available for sale securities of $1,386 and $2,101 in 2021 and 2020, respectively. Other income, net also includes pre-tax gain (loss) on foreign exchange of $(268) and $(849) in second quarter 2021 and 2020, respectively, and $(235) and $1,661 in first half 2021 and 2020, respectively.

 

The consolidated effective tax rates were 25.5% and 27.8% in second quarter 2021 and 2020, respectively, and 24.9% and 24.0% in first half 2021 and 2020, respectively. The Company’s deferred income taxes at June 30, 2021 include $33,444 of U.S. federal deferred income tax liabilities. Should certain proposed U.S. legislation to increase corporate income taxes become law, the Company would record non-cash charge to earnings to reflect the tax effect of higher federal corporate income taxes on its deferred income tax liability effective as of the date that such legislation become law.  

Net earnings attributable to Tootsie Roll Industries, Inc. were $9,794 (after $2 net loss attributed to non-controlling interests) in second quarter 2021 compared to $7,388 (after $6 net loss attributed to non-controlling interests) in second quarter 2020, and earnings per share were $0.14 and $0.11 in second quarter 2021 and 2020, respectively, an increase of $0.03 per share, or 27.3%. First half 2021 net earnings attributable to Tootsie Roll Industries, Inc. were $20,561 (after $6 net loss attributed to non-controlling interests) compared to first half 2020 net earnings of $19,370 (after $12 net loss attributed to non-controlling interests), and net earnings per share were $0.30 and $0.28 in first half 2021 and first half 2020, respectively, an increase of $0.02 per share or 7.1%. First half 2021 includes after-tax foreign exchange losses of $176 compared to significant after-tax foreign exchange gains of $1,220 or $0.02 per share in first half 2020, which adversely affects the comparison of first half 2021 net earnings with 2020. Earnings per share attributable to Tootsie Roll Industries, Inc. for second quarter and first half 2021 benefited from the reduction in average shares outstanding resulting from purchases in the open market by the Company of its common stock. Average shares outstanding decreased from 68,641 at second quarter 2020 to 67,564 at second quarter 2021, and from 68,751 in first half 2020 to 67,705 in first half 2021.

Goodwill and intangibles, principally trademarks, 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 first half 2021. The Company’s trademarks have indefinite lives and Company management believes that any adverse effects of the Covid-19 pandemic on net product sales are temporary and do not significantly affect our business model and long-term strategy. Therefore, we do not consider COVID-19 to be a triggering event to accelerate our annual impairments testing. There were no impairments in the comparative first half 2020 period or in calendar year 2020. Although Company management has not identified any trigging events at this time relating to its intangibles, the ultimate effects of the Covid-19 pandemic, including possible longer term effects on consumer lifestyles and behavior, could change this assessment in the future, as discussed below and as outlined in the Company’s risk factors discussed on Form 10-K for the year ended December 31, 2020.

Beginning in 2012, 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 2012. Beginning in 2015, the Company received new annual notices that the Plan was reclassified to “critical and declining status”, as defined by the PPA and PBGC, for the plan year beginning January 1, 2015, and that the Plan was projected to have an accumulated funding deficiency for the 2017 through 2024 plan years. A designation of “critical and declining status” implies that the Plan is expected to become insolvent in the next 20 years. The Company has continued to receive annual notices each year (2016 to 2021) that this Plan remains in “critical and declining status” and is projected to become insolvent within the next 20 years. These notices have 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 (or permanently) some benefits payable to all categories of participants, including retired participants, except retirees that are disabled

19

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 48.3%, 50.4%, and 51.6% as of the most recent valuation dates available, January 1, 2020, 2019, and 2018, 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, 2020, the funded percentage would be 51.6% (not 48.3%). As of the January 1, 2020 valuation date (most recent valuation available), only 16% of Plan participants were current active employees, 53% were retired or separated from service and receiving benefits, and 31% were retired or separated from service and entitled to future benefits. The number of current active employee Plan participants as of January 1, 2020 fell 4% from the previous year and 17% over the past two years. When compared to the Plan valuation date of January 1, 2011 (nine years earlier), current active employee participants have declined 49%, whereas participants who were retired or separated from service and receiving benefits increased 4% and participants who were retired or separated from service and entitled to future benefits increased 12%.

The Company has been advised that its withdrawal liability would have been $99,300, $99,800 and $81,600 if it had withdrawn from the Plan during 2020, 2019 and 2018, respectively. The Company’s relative share of the Plan’s contribution base, driven by employer withdrawals, has increased for the last several years, and management believes that this trend could continue indefinitely which will continue to add upward pressure on the Company’s withdrawal liability. In addition, the overall reduction in interest rates in 2020, may increase the value of vested benefits and may increase the Company’s withdrawal liability for 2021.

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 $2,958 which have a present value in the range of $34,700 to $49,300 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 in the Plan) 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 $48,500 to $150,900 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 higher withdrawal liability than the above discussed amounts, could be payable to the Plan.

 

The Company and the union concluded a new labor contract in 2018 which requires the Company’s continued participation in this Plan through September 2022. The amended rehabilitation plan, which also continues, required 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. In fourth quarter 2020, the Plan Trustees advised the Company that the surcharges would no longer increase and therefore be “frozen” at the rates and amounts in effect as of December 31, 2020 provided that the local bargaining union and the Company executed a formal consent agreement by March 31, 2021. The Trustees advised that they have concluded that continuing increases in surcharges would likely have a long-term adverse effect on the solvency of the Plan. The Trustees further concluded that additional increases would result in increasing financial hardships and withdrawals of participating employers, and that this change will not have a material effect on the Plan’s insolvency date. During first quarter 2021, the local bargaining union and the Company executed this agreement which resulted in the “freezing” of such surcharge rates as of December 31, 2020.

The Company’s pension expense for this Plan for first half 2021 and 2020 was $1,557 and $1,504, respectively ($2,866 and $2,961 for twelve months 2020 and 2019, respectively). The aforementioned expense includes surcharges (reflecting the “frozen” surcharge rate) of $549 and $530 for first half 2021 and 2020, respectively ($1,010 and $948 for twelve months 2020 and 2019, respectively), as required under the amended plan of rehabilitation.

Company Management understands that the U.S. American Rescue Plan Act of 2021 legislation passed in first quarter 2021 provides financial assistance to shore up struggling multi-employer plans and forestall insolvency through 2051 for plans in “critical and declining status”. The Company continues to study this legislation with its consulting actuary

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to determine its effects on the Plan and Company withdrawal liability. This is a complex area, however, based on an initial assessment by the Company’s actuary, the Company does not believe that this legislation will result in a material reduction in its withdrawal liability. Nonetheless, 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 Note 7 in the Company’s Consolidated Financial Statements on Form 10-K for the year ended December 31, 2020.

The Company continues to actively monitor Covid-19, including developing variants, and its potential impact on our operations and financial results, prioritizing employee health and safety. Because the Company has a sizable investment in marketable securities (see Liquidity and Capital Resources section above) the Company continues to be well positioned financially to respond to any further adverse effects of this pandemic, and Covid-19 variants, in the short-term, as well as for a longer period of time if necessary.

LIQUIDITY AND CAPITAL RESOURCES

Net cash flows provided by operating activities were $10,778 and $10,880 in first half 2021 and 2020, respectively, an unfavorable decrease of $102. First half 2021 cash flows from operating activities principally benefited from higher net earnings, lower finished goods inventories at June 30, 2021 reflecting higher than planned demand, the timing of production of finished goods, and changes in accounts payable and accrued liabilities in the comparative periods. The aforementioned increases were partially offset by changes in accounts receivable reflecting the timing of net product sales and collections of accounts receivable trade, and changes in income taxes payable, including estimated tax payments in the comparative periods.

Net cash used in investing activities was $52,060 in first half 2021 compared to $17,271 in first half 2020. Cash flows used in investing activities reflect $58,154 and $53,269 of purchases of available for sale securities during first half 2021 and 2020, respectively, and $19,798 and $44,466 of sales and maturities of available for sale securities during first half 2021 and 2020, respectively. First half 2021 and 2020 investing activities include capital expenditures of $12,327 and $6,410, respectively. The Company has committed approximately $25,000 to a rehabilitation upgrade and expansion of one of its manufacturing plants in the U.S. The Company spent approximately $8,000 and $6,000 in 2021 and 2020, respectively, on the aforementioned project. Company management expects future cash outlays for this project to approximate $7,000 during the second half of 2021 and $1,000 in 2022. All capital expenditures are to be funded from the Company’s cash flow from operations and internal sources including available for sale securities.

The Company’s consolidated financial statements include bank borrowings of $986 and $864 at June 30, 2021 and 2020, respectively, all of which relates to its Spanish subsidiary. The Company had no other outstanding bank borrowings at June 30, 2021.

Financing activities include Company common stock purchases and retirements of $17,181 and $12,959 in first half 2021 and 2020, respectively. Cash dividends of $12,034 and $11,853 were paid in first half 2021 and 2020, respectively.

The Company’s current ratio (current assets divided by current liabilities) was 3.7 to 1 at June 30, 2021 compared to 4.6 to 1 at December 31, 2020 and 3.8 to 1 at June 30, 2020. Net working capital was $201,867 at June 30, 2021 compared to $250,851 and $238,517 at December 31, 2020 and June 30, 2020, respectively. The aforementioned net working capital amounts are principally reflected in aggregate cash and cash equivalents and short-term investments of $139,201 at June 30, 2021 compared to $208,931 and $186,385 at December 31, 2020 and June 30, 2020, respectively. In addition, long term investments, principally debt securities comprising corporate bonds, were $264,693 at June 30, 2021, as compared to $220,020 and $186,057 at December 31, 2020 and June 30, 2020, respectively. Aggregate cash and cash equivalents and short and long-term investments were $403,894, $428,951, and $372,442, at June 30, 2021, December 31, 2020 and June 30, 2020, respectively. The aforementioned includes $83,867, $73,828, and $78,285 at June 30, 2021, December 31, 2020 and June 30, 2020, respectively, relating to trading securities which are used as an economic hedge for the Company’s deferred compensation liabilities. Investments in available for sale securities, primarily high quality corporate bonds, that matured during first half 2021 and 2020 were generally used to purchase the Company’s common stock or were replaced with debt securities of similar maturities.

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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 $7,549, $8,272 and $10,639 of aggregate cash and cash equivalents at June 30, 2021, December 31, 2020 and June 30, 2020, 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 2 within the fair value hierarchy.

ACCOUNTING PRONOUNCEMENTS

See Note 1 of the Company’s Condensed Consolidated Financial Statements.

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 2020 Form 10-K.

The risk factors identified and referred to above, including the effects of the Covid-19 pandemic and variants, 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.

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, 2020.

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 June 30, 2021 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.

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There has been no change in the Company’s internal control over financial reporting that occurred during the Company’s fiscal quarter ended June 30, 2021 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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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 June 30, 2021:

    

    

    

    

    

    

Approximate Dollar

(a) Total

Shares

Value of Shares that

Number of

(b) Average

Purchased as Part of

May Yet Be Purchased

Shares

Price Paid per

Publicly Announced Plans

Under the Plans

Period

Purchased

Share

Or Programs

or Programs

Apr 1 to Apr 30

104,985

$

32.76

Not Applicable

Not Applicable

May 1 to May 31

142,446

31.81

Not Applicable

Not Applicable

Jun 1 to Jun 30

54,783

32.42

Not Applicable

Not Applicable

Total

302,214

$

32.25

Not Applicable

Not Applicable

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.

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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:

August 6, 2021

BY:

/S/ELLEN R. GORDON

Ellen R. Gordon

Chairman and Chief

Executive Officer

Date:

August 6, 2021

BY:

/S/G. HOWARD EMBER, JR.

G. Howard Ember, Jr.

Vice President Finance and

Chief Financial Officer

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