EX-13 2 tr-20141231ex13ce56785.htm EX-13 tr_Ex13

Exhibit 13

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Melvin J. Gordon

1919 - 2015

On January 20, 2015, Melvin J. Gordon, Chairman of the Board of Directors and Chief Executive Officer of Tootsie Roll Industries, passed away at the age of 95 after a brief illness. Mr. Gordon joined the board of what was then Sweets Company of America in 1952 and was elevated to the roles of Chairman and CEO in 1962. Sales at that time were $25 million, profits were $1 million and our product line primarily consisted of Tootsie Rolls and Tootsie Pops.

Mr. Gordon, a man of great vision and drive, reshaped the Company over his long tenure. Early on, he changed the Company's name to Tootsie Roll Industries in recognition of the flagship brand and relocated the Company to a large, centrally located facility in Chicago which remains the Company's headquarters and its largest plant. He expanded operations into Mexico and led the Company through a series of complementary acquisitions which added Dots, Crows, Cella's, Charms, Blow Pop, Junior Mints, Charleston Chew, Sugar Daddy, Sugar Babies, Fluffy Stuff, Andes, Dubble Bubble, Cry Baby and Nik-L-Nip to our portfolio of well-known brands.

Mr. Gordon embraced change and was quick to adopt rapidly evolving technological developments in manufacturing, material handling and information technology. He also directed the development of new products and package configurations to meet changing consumer preferences and evolving trade channels. Throughout his many years as Chairman, the Company saw great growth and success. Today Tootsie Roll is a leading confectioner with a diverse portfolio of well-known brands, seven plants across the United States, Canada and Mexico, and sales in many countries throughout the world.

Mr. Gordon's life represented the very highest values in business, wisdom, generosity, and integrity. His dedication to Tootsie Roll for over fifty years as Board Chair, his creativity, his optimism and his relentless determination to succeed were an inspiration to all who knew him.

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Corporate Principles

We believe that the differences among companies are attributable to the caliber of their people, and therefore we strive to attract and retain superior people for each job.

We believe that an open family atmosphere at work combined with professional management fosters cooperation and enables each individual to maximize his or her contribution to the Company and realize the corresponding rewards.

We do not jeopardize long-term growth for immediate, short-term results.

We maintain a conservative financial posture in the deployment and management of our assets.

We run a trim operation and continually strive to eliminate waste, minimize cost and implement performance improvements.

We invest in the latest and most productive equipment to deliver the best quality product to our customers at the lowest cost.

We seek to outsource functions where appropriate and to vertically integrate operations where it is financially advantageous to do so.

We view our well known brands as prized assets to be aggressively advertised and promoted to each new generation of consumers.

We conduct business with the highest ethical standards and integrity which are codified in the Company's "Code of Business Conduct and Ethics."

Corporate Profile

Tootsie Roll Industries, Inc. has been engaged in the manufacture and sale of confectionery products for 118 years. Our products are primarily sold under the familiar brand names: Tootsie Roll, Tootsie Roll Pops, Caramel Apple Pops, Child's Play, Charms, Blow Pop, Blue Razz, Cella's chocolate covered cherries, Tootsie Dots, Tootsie Crows, Junior Mints, Junior Caramels, Charleston Chew, Sugar Daddy, Sugar Babies, Andes, Fluffy Stuff cotton candy, Dubble Bubble, Razzles, Cry Baby, Nik-L-Nip and EI Bubble.

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Financial Highlights

 

 

 

 

 

 

 

 

 

    

December 31,

 

 

 

2014

    

2013

 

 

 

(in thousands except per share data)

 

Net Product Sales

 

$

539,895 

 

$

539,627 

 

Net Earnings Attributable to Tootsie Roll Industries, Inc.

 

 

63,298 

 

 

60,849 

 

Working Capital

 

 

200,162 

 

 

179,990 

 

Net Property, Plant and Equipment

 

 

190,081 

 

 

196,916 

 

Shareholders' Equity

 

 

690,809 

 

 

680,305 

 

Average Shares Outstanding*

 

 

60,562 

 

 

61,399 

 

Per Share Items*

 

 

 

 

 

 

 

Net Earnings Attributable to Tootsie Roll Industries, Inc.

 

$

1.05 

 

$

0.99 

 

Cash Dividends Paid

 

 

0.32 

 

 

0.24 

 

 

*Adjusted for stock dividends.

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To Our Shareholders

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Ellen R. Gordon, Chairman and Chief Executive Officer

 

Net product sales in 2014 were $539.9 million, as compared to 2013 net product sales of $539.6 million. Most of our core brands posted solid results, and Halloween was once again our largest selling season of the year.

Net earnings grew to $63.3 million in 2014 from $60.8 million in 2013. Earnings per share were $1.05 in 2014, up from $0.99 in the 2013, due to the combination of higher earnings and fewer shares outstanding in 2014.

The increase in earnings was attributable to margin improvements stemming from lower input costs in 2014. We are pleased that we are making progress on restoring our margins to their historical levels before the increases in commodity and other input costs in past years. In order to achieve our profit goals and still deliver maximum value to our consumers, we are challenged to look for every feasible way to keep our operations lean and costs in check.

As a value oriented confectioner, we deem it essential to be a low cost producer. We actively pursue investments in the latest technology to keep us so. We take a long-term view of our business and enact only those measures that improve our operating results without jeopardizing the long-term strength of the Company and its well-known brands.

In this regard, capital expenditures were $10.7 million in 2014. In addition to new state of the art material handling and packaging equipment at a number of our plants, a portion of this figure was directed toward a significant information technology project. We remain committed to enhance productivity through the deployment of leading edge business software.

During 2014, we paid cash dividends of 32 cents per share and again distributed a 3% stock dividend. This was the seventy-second consecutive year the Company has paid cash dividends and the fiftieth consecutive year that a stock dividend was distributed. We also repurchased shares of common stock on the open market.

We ended 2014 with $224.0 million in cash and investments net of interest bearing debt and investments that hedge deferred compensation liabilities. We remain poised to continue investing in our business, improving manufacturing productivity and quality, supporting our brands, paying dividends and repurchasing common stock. We also continue to seek appropriate complementary business acquisitions.

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Sales and Marketing

Our diverse and highly recognizable brand portfolio is popular across all trade channels. We have a range of offerings suitable for virtually every major consumer group and retail format. During 2014, we again used carefully executed and channel-specific promotions to drive sales. These targeted initiatives, directed both to the trade and to consumers, help to move our products into distribution and subsequently to move them off the retail shelf. We find that emphasizing high sell-through and attractive profit margins to the trade and a high quality, attractive value to the consumer is a winning strategy.

Halloween has long been our largest selling period, with third quarter sales nearly double those of any other quarter in the year. We posted strong results last Halloween in all major trade classes including grocery, mass merchandisers, warehouse clubs, dollar stores and drug chains. Especially popular are our large bags of Child's Play and other mixed candy assortments, which are offered in a variety of pack sizes and merchandising presentations including pallet packs, off-shelf displays and display ready cases.

The candy marketplace is highly competitive and we are vigilant in keeping our products contemporary even as they remain iconic. Our product line undergoes continual refinement in order to retain its appeal to ever-evolving preferences and life styles.

Building on the success of our Caramel Apple Pops, our Blow Pop line was expanded with the addition of Caramel Apple Blow Pops. With a candy shell of luscious caramel entwined with tart green apple hard candy and its emblematic bubble gum center, this unique new confection is really three treats in one!

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Caramel Apple Blow Pops

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The selling power of floor stand displays is well established, but some smaller retail venues may lack the floor space or sales volume to support a traditionally sized display. To meet this need, we introduced a new one-eighth size pallet of Tootsie Rolls and Tootsie Pops in bonus bags. This display has the dual attributes of increasing sales velocity for the retailer and attractive feature pricing for the consumer.

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1/8 Pallet Display

The addition of a new floor display also contributed added sales in our penny goods line. The half pallet Frootie shipper consists of 192 bags of the most popular flavors, Blue Razz, Fruit Punch, Green Apple and Strawberry, and was well received in the Cash and Carry class of trade. The Frootie line was further expanded with the addition of tart new Lemon-Lime Frooties.

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Lemon Lime Frooties

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For Dots lovers, the next big thing is here—the BIG BOX! Featuring 20.5 ounces of delicious fruit flavored Dots in a reclosable box, this eye-catching pack promises lots of Dots for the whole family to share!

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Dots BIG BOX

We put some fizz in gumball fun with the introduction of Dubble Bubble Fizzers. Pop one of five fizzy soda flavors in your mouth and bite down for a unique effervescent experience of bubble-blowing fun!

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Dubble Bubble Fizzers

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Consumers have become increasingly concerned with protecting the environment, and manufacturers are seeking innovative ways to minimize packaging. One such solution that we implemented in 2014 was in our gumball machine refill packs. By replacing bulky, rigid plastic jars with lightweight resealable flexible pouches, packaging weight was reduced considerably without compromising product freshness.

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Gumball refill pouch

Our Andes Crème de Menthe thins have a strong selling history during the Thanksgiving and Christmas Holiday seasons. Andes has also had great success selling outside the candy aisle with Andes Crème de Menthe Baking Chips, which have become the top selling mint baking chip. In 2014, we promoted the minty merriment of baking with Andes Recipe Contest. Visit www.tootsie.com to check out the winning entries and other delicious Andes recipes!

Advertising and Public Relations

During 2014, we continued our initiative of engaging with consumers through social media. Numerous game experiences, banner ads and prize contest entries on Facebook, Twitter, Instagram and Pinterest build and strengthen connections to our brands and also provide a venue for consumer feedback.

Mr. Owl and the long-standing "How Many Licks" Tootsie Pop message are prominently featured in our social media program and in our television advertising campaigns. This renowned theme has become part of Americana, ranging from crossword puzzles to scientific studies.

Most recently a group of NYU graduate students developed a model to analyze how fluids dissolve various materials, and applied it to the Tootsie Pop. Their algorithm concluded that it would take precisely one thousand licks to get to the chewy Tootsie Roll center. We will add this data point to the thousands of estimates we have received over the many years. Nonetheless, we can only conclude that the answer to this riddle remains "the world may never know!"

Purchasing

Cost decreases in sugar, corn syrup, cocoa powder, edible oils and packaging were partially offset by increases in coatings, dairy products and gum base components. In packaging the decrease was primarily due to lower corrugated prices.

Though the cost of many of the commodities we use is lower than recent record highs, some remain well above their historical levels and restoring margins continues to be one of our objectives. Competitive bidding, selective hedging and leveraging our high volume of purchases are some of the means we use to mitigate input costs to the greatest extent feasible.

Supply Chain

We continue to invest capital and resources in projects that keep our production and distribution facilities as efficient as possible, support evolving distribution patterns, improve quality and support growing product lines. Much of this investment is driven by continuing advancements in automation technology that we can incorporate on the shop floor.

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Considerable effort is made in designing new installations to maximize their flexibility so that we can respond to evolving package configurations or product assortments demanded by the market. Incorporating such flexibility can add significant up-front costs. We are fortunate to have sufficient financial resources and are able to make these necessary investments.

International

In Mexico we manufacture and sell products primarily under the trademark Tutsi. Most of our domestic brands are also sold in Canada, though for certain items they are offered in different package configurations and at different price points which are tailored to that market.

We also export our products to many countries in Europe, Asia, and South and Central America. During 2014, we increased our ownership percentage in Fleer Espanola, a Spanish manufacturer of sugared and sugar free gum. We are currently rebranding a number of their sugared offerings under the Dubble Bubble umbrella and hope to expand our presence in Europe and the Middle East.

In Appreciation

We wish to express our appreciation to our many loyal employees, customers, suppliers, sales brokers and distributors throughout the world for their support in 2014. We also thank our fellow shareholders as we remain committed to the pursuit of excellence in every aspect of our operations and face the increasing challenges of today's business environment.

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Ellen R. Gordon
Chairman of the Board and
Chief Executive Officer

 

 

 

 

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

(in thousands except per share, percentage and ratio figures)

 

FINANCIAL REVIEW

 

This financial review discusses the Company’s financial condition, results of operations, liquidity and capital resources, significant accounting policies and estimates, new accounting pronouncements, market risks and other matters. It should be read in conjunction with the Consolidated Financial Statements and related footnotes that follow this discussion.

 

FINANCIAL CONDITION

 

The Company’s overall financial position remains very strong as a result of its improving 2014 gross profit margins, higher net earnings and strong cash flows provided by operating activities. Cash flows from 2014 operating activities totaled $88,769 and were used to pay cash dividends of $19,241, purchase and retire $25,020 of its outstanding shares, make capital expenditures of $10,704, and add to our marketable securities investments.

 

The Company’s net working capital was $200,162 at December 31, 2014 compared to $179,990 at December 31, 2013 which generally reflects higher cash and cash equivalents and short-term investments. As of December 31, 2014, the Company’s aggregate cash, cash equivalents and investments, including all long-term investments in marketable securities, was $303,137 compared to $270,387 at December 31, 2013, an increase of $32,750. The aforementioned includes $71,682 and $63,215 in trading securities as of December 31, 2014 and 2013, respectively. The Company invests in trading securities to provide an economic hedge for its deferred compensation liabilities, as further discussed herein and in Note 7 to the Consolidated Financial Statements.

 

Shareholders’ equity increased from $680,305 at December 31, 2013 to $690,809 as of December 31, 2014, principally reflecting 2014 net earnings of $63,298, less cash dividends of $19,241, share repurchases of $25,020, and an increase in accumulated other comprehensive loss during 2014.

 

The Company has a relatively straight-forward financial structure and has historically maintained a conservative financial position. Except for an immaterial amount of operating leases, the Company has no special financing arrangements or “off-balance sheet” special purpose entities. Cash flows from operations plus maturities of short-term investments are expected to be adequate to meet the Company’s overall financing needs, including capital expenditures, in 2015. Periodically, the Company considers possible acquisitions, and if the Company were to pursue and complete such an acquisition, that could result in bank borrowings or other financing.

 

Results of Operations

 

2014 vs. 2013

 

Net product sales in fourth quarter 2014 increased by 1.8% to $137,929, and twelve months net product sales increased by $268 or 0.1% to $539,895 in 2014. Our sales results in the United States reflect the challenges of certain of our retail customers regarding consumer sales and consumer spending. Overall, 2014 sales volumes in the United States were relatively even with 2013, and there were no significant changes in selling prices and price realization, or product mix. Lower sales in Mexico and Canada, including the effects of a weaker Mexican peso and Canadian dollar, respectively, also adversely affected our reported sales during these same comparative periods.

 

Product cost of goods sold were $340,933 in 2014 compared to $350,960 in 2013, a decrease of $10,027 or 2.9%. Product cost of goods sold includes $1,140 and $2,457 in certain deferred compensation expenses in 2014 and 2013, respectively. These deferred compensation 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, product cost of goods sold decreased from $348,503 in 2013 to $339,793 in 2014, a decrease of $8,710 or 2.5%. As a percent of net product sales, these adjusted costs decreased from 64.6% in 2013 to 62.9% in 2014, a favorable decrease of 1.7% as a percent of net product sales. Although our overall comparative ingredient costs are more favorable this year, certain key ingredient costs were higher in 2014 compared to 2013. We are continuing our focus on cost reductions and savings, including capital investments to achieve

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manufacturing efficiencies, and are making progress on restoring our margins to their historical levels before the increases in commodity and other input costs in past years.

 

Selling, marketing and administrative expenses were $117,722 in 2014 compared to $119,113 in 2013, a decrease of $1,391 or 1.2%. Selling, marketing and administrative expenses include $3,761 and $8,131 in certain deferred compensation expenses in 2014 and 2013, respectively. These deferred compensation 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, selling, marketing and administrative expenses increased from $111,002 in 2013 to $113,961 in 2014, an increase of $2,959 or 2.7%. As a percent of net product sales, these adjusted expenses increased slightly from 20.6% of net product sales in 2013 to 21.1% of net product sales in 2014. Selling, marketing and administrative expenses include $46,525 and $45,367 of freight, delivery and warehousing expenses in 2014 and 2013, respectively, which increased slightly from 8.4% of net product sales in 2013 to 8.6% of net product sales in 2014.

 

The Company believes that the carrying values of its goodwill and trademarks have indefinite lives as they are expected to generate cash flows indefinitely. In accordance with current accounting guidance, these indefinite-lived intangible assets are assessed at least annually for impairment as of December 31 or whenever events or circumstances indicate that the carrying values may not be recoverable from future cash flows. No impairments were recorded in 2014 or 2013. The fair values of trademarks are assessed each year using the present value of estimated future cash flows and estimated royalties. Based on the Company’s estimate at December 31, 2014, the individual fair values of the indefinite lived intangible assets exceed the net book value by more than 10%. For certain trademarks, holding all other assumptions constant at the test date, a 100 basis point increase in the discount rate or a 100 basis point decrease in the royalty rate would reduce the fair value of certain trademarks by approximately 15% and 11%, respectively. Individually, a 100 basis point increase in the discount rate would indicate a potential impairment of approximately $2,000 as of December 31, 2014. However, if the royalty rate were decreased by 100 basis points no impairment would be indicated as of December 31, 2014.

 

Earnings from operations were $83,923 in 2014 compared to $72,353 in 2013, an increase of $11,570. Earnings from operations include $4,901 and $10,588 in certain deferred compensation expense in 2014 and 2013, respectively, which are discussed above. Adjusting for these deferred compensation expenses, earnings from operations increased from $82,941 in 2013 to $88,824 in 2014, an increase of $5,883 or 7.1%. This increase in 2014 earnings from operations principally reflects more favorable ingredient costs, plant efficiencies driven by capital investments, and on-going cost control programs.

 

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 $7,371 in 2014 compared to $12,130 in 2013, a decrease of $4,759. Other income, net principally reflects $4,901 and $10,588 of aggregate net gains and investment income on trading securities in 2014 and 2013, respectively. These trading securities provide an economic hedge of the Company’s deferred compensation liabilities; and the related net gains and investment income were offset by a like amount of expense in aggregate product cost of goods sold and selling, marketing, and administrative expenses in the respective years as discussed above. Other income, net also includes foreign exchange losses of $861 and $790 in 2014 and 2013, respectively.

 

During fourth quarter 2013, the Company sold its investment in Jefferson County Alabama Sewer Revenue Refunding Warrants for $10,840. This was an auction rate security (ARS) originally purchased for $13,550 in 2008 with an insurance-backed AAA rating. Because the Company recorded an other-than-temporary pre-tax impairment of $5,140 in 2008 on this ARS investment which resulted in a carrying value of $8,410 at that time, a net gain of $2,430 was recorded on this sale in fourth quarter 2013. Since recording this initial impairment in 2008, the Company carried this ARS investment at its estimated fair value utilizing a valuation model with Level 3 inputs, as defined by guidance, and resulting changes in the market value from the date of the original impairment charge in 2008 to its sale in fourth quarter 2013 have been recorded as changes to accumulated other comprehensive income (loss) each year.

 

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The consolidated effective tax rate was 31.1% and 28.0% in 2014 and 2013, respectively. This higher effective tax rate in 2014 reflects an additional deferred income tax expense of $2,350 relating the Company’s step acquisition of its Spanish subsidiaries which is discussed below. A reconciliation of the differences between the U.S. statutory rate and these effective tax rates is provided in Note 4 to the Consolidated Financial Statements. At December 31, 2014, the Company’s deferred tax assets include $10,880 of income tax benefits relating to its Canadian subsidiary tax loss carry-forwards which the Company expects to realize before their expiration dates (2027 through 2031). The Company utilized approximately $600 and $400 of these tax carry-forward benefits in 2014 and 2013, respectively. The Company has concluded that it is more-likely-than-not that it would realize these deferred tax assets relating to its Canadian tax operating loss carry-forwards because it is expected that sufficient levels of taxable income will be generated during the carry-forward periods. The Company has provided a full valuation allowance on its Spanish subsidiaries’ tax loss carry-forward benefits of approximately $2,092 as of December 31, 2014 because the Company has concluded that it is not more-likely-than-not that these losses will be utilized before their expiration dates. The Spanish subsidiaries have a history of net operating losses and it is not known when and if they will generate taxable income in the future. The Company has not provided for U.S. federal or foreign withholding taxes on approximately $5,400 and $11,000 of foreign subsidiaries’ undistributed earnings as of December 31, 2014 and December 31, 2013, respectively, because such earnings are considered to be permanently reinvested. The Company estimates that the federal income tax liability on such undistributed earnings would approximate 30% of these amounts.

 

Net earnings attributable to Tootsie Roll Industries, Inc. were $63,298 in 2014 compared to $60,849 in 2013, and earnings per share were $1.05 and $0.99 in 2014 and 2013, respectively, an increase of $0.06 or 6.1%. Net earnings principally benefited from improved gross profit margins which are discussed above. Net earnings for the prior year 2013 benefited from a lower effective income tax rate and a capital gain on the sale of an investment security (Jefferson County Warrants discussed above), both of which adversely affects the comparison of 2014 net earnings to those in 2013. Earnings per share in 2014 benefited from the reduction in average shares outstanding resulting from purchases of the Company’s common stock in the open market by the Company. Average shares outstanding decreased from 61,399 in 2013 to 60,562 in 2014.

 

During first quarter 2014, the Company gained operating control of its two 50% owned Spanish companies when Company employee representatives assumed all positions on their boards of directors. This was considered a step acquisition, whereby the Company remeasured the previously held investment to fair value in first quarter 2014. As a result, the Company’s first quarter 2014 net earnings include a net loss of $529, including an additional income tax provision of $2,350 relating to deferred income taxes. During 2014, the Company further increased its control and ownership to 83% by purchasing and subscribing to additional common shares of its Spanish subsidiaries for approximately $1,400 ($1,200 was paid in 2014, and the balance will be paid in 2015). These Spanish companies had operating losses for each of the years 2008 through 2014. Company management has restructured the Spanish operations and made other changes to its business plan, and management believes that they should be nearing break-even cash flows from operating activities going forward. Management believes that the business, competitive and economic challenges in Spain are likely to continue, and therefore, additional cash financing of these Spanish companies may be required in the future. Other income, net in prior year 2013 includes the results of the Company’s 50% share of two Spanish companies which were accounted for using the equity investment method in 2013. Equity method losses were $967 for 2013. In addition, a pre-tax impairment charge of $975 was recorded in 2013 to write-down the Company’s carrying value of this equity investment to estimated fair value.

 

Beginning in 2012, the Company received notices from the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union (BC&T) Pension Plan (Plan), a multi-employer defined benefit pension plan for certain Company union employees. The notices indicated that the Plan’s actuary certified the Plan to be in critical status, the “Red Zone”, 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. The 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 June 2012) as well as certain plan benefit reductions. Under the plan of rehabilitation, the Plan is projected to emerge from critical status sometime beyond a 30 year projection period. In the event that a plan does not have the financial resources to ultimately pay benefits at a level specified by law, then it must apply to the PBGC for government financial assistance. The Trustees have advised that neither the PPA nor regulatory guidance currently defines the rehabilitation standards for a plan that is

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not designed to emerge from critical status within the prescribed 10-year rehabilitation period. Recently enacted legislation (Multiemployer Pension Reform Act of 2014) may also affect the future of this Plan.

 

The Company was previously advised by the Plan that if the Company had withdrawn from the Plan during 2012 its estimated withdrawal liability would have been $37,200. The Company was recently advised by the Plan that its withdrawal liability would have been $56,400 if it had withdrawn from the Plan during 2014. The increase from 2012 to 2014 principally reflects changes in key actuarial assumptions, principally the effects of a lower interest rates proscribed by PBGC which were partially used to determine the present value of vested benefits, and a change to a more conservative mortality table. Based on the Company’s actuarial study and certain provisions in ERISA relating to withdrawal liability payments, management believes that the Company’s liability would be limited to twenty annual payments of $2,999 which have a present value of $35,193 based on the minimum funding interest rate of 6.5% used by the Plan. 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 existing labor contract with its BC&T local union commits the Company’s participation in this Plan through third quarter 2017. Pension expense, including surcharges, for the BC&T Plan for 2014 and 2013 was $2,588 and $2,231, respectively. The aforementioned expense includes surcharge increases of $342 and $242 in 2014 and 2013, respectively, related to the contribution increases required under the 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 could be material to its consolidated results of operations in one or more future periods.

 

2013 vs. 2012

 

Net product sales were $539,627 in 2013 compared to $545,985 in 2012, a decrease of $6,358 or 1.2%. The decline in 2013 sales reflects some special promotional sales in 2012 that were not repeated in 2013.

 

Product cost of goods sold were $350,960 in 2013 compared to $365,573 in 2012, a decrease of $14,613 or 4.0%. Product cost of goods sold includes $2,457 and $1,034 in certain deferred compensation expenses in 2013 and 2012, respectively. These deferred compensation 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, product cost of goods sold decreased from $364,539 in 2012 to $348,503 in 2013, a decrease of $16,036 or 4.4%. As a percent of net product sales, these adjusted costs decreased from 66.8% in 2012 to 64.6% in 2013, a favorable decrease of 2.2% as a percent of net product sales. Although certain key ingredient costs were higher in 2013, our overall comparative ingredient costs are more favorable this year; however, our packaging materials and manufacturing plant operating costs did increase in 2013 compared to 2012.

 

Selling, marketing and administrative expenses were $119,133 in 2013 compared to $113,842 in 2012, an increase of $5,291 or 4.6%. Selling, marketing and administrative expenses include $8,131 and $3,582 in certain deferred compensation expenses in 2013 and 2012, respectively. These deferred compensation 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, selling, marketing and administrative expenses increased from $110,260 in 2012 to $111,002 in 2013, an increase of $742 or 0.7%. As a percent of net product sales, these adjusted expenses increased slightly from 20.2% of net product sales in 2012 to 20.6% of net product sales in 2013. Selling, marketing and administrative expenses include $45,367 and $45,072 of freight, delivery and warehousing expenses in 2013 and 2012, respectively, which increased slightly from 8.3% of net product sales in 2012 to 8.4% of net product sales in 2013.

 

Earnings from operations were $72,353 in 2013 compared to $69,479 in 2012, an increase of $2,874. Earnings from operations include $10,588 and $4,616 in certain deferred compensation expense in 2013 and 2012, respectively, which are discussed above. Adjusting for these deferred compensation expenses, earnings from operations were $82,941 and $74,095 in 2013 and 2012, respectively, an increase of $8,846 or 11.9%. This increase in 2013 earnings from operations principally reflects more favorable ingredient costs, plant efficiencies driven by capital investments, and on-going cost control programs.

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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 $12,130 in 2013 compared to $4,685 in 2012, an increase of $7,445. Other income, net principally reflects $10,588 and $4,616 of aggregate net gains and investment income on trading securities in 2013 and 2012, respectively. These net gains and investment income were offset by a like amount of expense in aggregate product cost of goods sold and selling, marketing, and administrative expenses in the respective years as discussed above. Other income, net also includes foreign exchange gains (losses) of $(790) and $442 in 2013 and 2012, respectively, and a net gain of $2,430 on the sale of its investment in Jefferson County Alabama Warrants as discussed above.

 

Other income, net includes the results of the Company’s 50% share of two Spanish companies which were accounted for using the equity method. These equity method losses were $967 and $1,019 for 2013 and 2012, respectively. In addition, pre-tax impairment charges of $975 and $850 were recorded in 2013 and 2012, respectively, to write-down the Company’s carrying value to estimated fair value.

 

The consolidated effective tax rate was 28.0% and 29.9% in 2013 and 2012, respectively; a reconciliation of the differences between the U.S. statutory rate and these effective tax rates is provided in Note 4 to the Consolidated Financial Statements. At December 31, 2013, the Company’s deferred tax assets include $12,512 of income tax benefits relating to its Canadian subsidiary tax loss carry-forwards which the Company expects to realize before their expiration dates (2026 through 2031). The Company utilized approximately $400 and $3,000 of these carry-forward tax loss benefits in 2013 and 2012, respectively.

 

Net earnings were $60,849 in 2013 compared to $52,004 in 2012, and earnings per share were $0.99 and $0.84 in 2013 and 2012, respectively, an increase of $0.15 or 17.9%. Net earnings benefited from improved gross profit margins, as well as a gain on the sale of  its Jefferson County warrants, as discussed above, and a lower effective tax rate, all of which are discussed above. Earnings per share benefited from the reduction in average shares outstanding resulting from purchases of the Company’s common stock in the open market by the Company. Average shares outstanding decreased from 62,248 in 2012 to 61,399 in 2013.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Cash flows from operating activities were $88,769, $109,823 and $101,418 in 2014, 2013 and 2012, respectively. The $21,054 decrease in cash flows from operating activities from 2013 to 2014 primarily reflects increases in inventories and accounts receivable in 2014, and changes in prepaid expenses and other assets in the respective years. The aforementioned increases in inventories and accounts receivable principally reflect the timing of fourth quarter sales and manufacturing planning for inventories. The increase in cash flows from 2012 to 2013 primarily reflects the 2012 increase in net earnings, as well as changes in inventories and prepaid expenses and other assets in the comparative years.

 

During fourth quarter 2014 and 2013, the Company contributed $1,000 and $15,000 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 using these funds to pay the actual cost of such benefits through 2017. At December 31, 2014 and 2013, the VEBA trust held $10,845 and $13,991, respectively, of aggregate cash and cash equivalents. 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.

 

During fourth quarter 2013, the Company restructured and amended its post-retirement health benefits plan provided to corporate office and management employees. These changes resulted in a negative plan amendment, as defined by accounting guidance, resulting in a $10,425 reduction in the Company’s benefit obligation as of December 31, 2013. The plan changes generally limited future annual cost increases in health benefits to 3%, restricted this benefit to current employees with long-term service with the Company, required retirees to pay the full cost of life insurance, and eliminated all post-retirement benefits for future employees effective April 1, 2014. Post-retirement benefits liabilities (as amended) were $12,300 and 8,857 at December 31, 2014 and 2013, respectively. The aforementioned increase reflects actuarial losses relating to an 86 basis point decrease in the discount rate (3.83% discount rate used at December

13


 

31, 2014) and an update of the mortality table based on the Society of Actuaries’ research that indicates that retirees are living longer.

 

Cash flows from investing activities reflect capital expenditures of $10,704, $15,752, and $8,886 in 2014, 2013 and 2012, respectively. The changes in amounts each year principally reflects the timing of expenditures relating to plant manufacturing projects.  These capital expenditures include $1,676, $1,775 and $830 relating to computer systems and software and implementations in 2014, 2013 and 2012, respectively. Capital expenditures for 2015 are expected to be in line with historical annual spending but actual expenditures can vary due to the timing of larger projects and payments. They are to be funded from the Company’s cash flow from operations and internal sources.

 

Other than the bank loans and the related restricted cash of the Company’s Spanish subsidiaries which are discussed in Note 1 to the consolidated financial statements, the Company had no bank borrowings or repayments in 2012, 2013, or 2014, and had no outstanding bank borrowings as of December 31, 2012 or 2013. Nonetheless, the Company would consider bank borrowing or other financing in the event that a business acquisition is completed.

 

Financing activities include Company common stock purchases and retirements of $25,020, $23,143, and $23,803 in 2014, 2013 and 2012, respectively. Cash dividends of $19,241, $14,282, and $52,431 (includes a special one-time dividend of $29,138 in 2012) were paid in 2014, 2013 and 2012, respectively. The fourth quarter 2012 included a special $0.50 per share cash dividend as well as an accelerated payment of the regular quarterly dividend of $0.08 per share which has historically been paid during the first week in January. Both were in response to the uncertainty surrounding the future federal tax treatment of dividends at that time after giving consideration to the Company’s cash and investment position.

 

SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES

 

Preparation of the Company’s financial statements involves judgments and estimates due to uncertainties affecting the application of accounting policies, and the likelihood that different amounts would be reported under different conditions or using different assumptions. The Company bases its estimates on historical experience and other assumptions, as discussed herein, that it believes are reasonable. If actual amounts are ultimately different from previous estimates, the revisions are included in the Company’s results of operations for the period in which the actual amounts become known. The Company’s significant accounting policies are discussed in Note 1 to the Consolidated Financial Statements.

 

Following is a summary and discussion of the more significant accounting policies which management believes to have a significant impact on the Company’s operating results, financial position, cash flows and footnote disclosure.

 

Revenue recognition

 

Revenue, net of applicable provisions for discounts, returns, allowances and certain advertising and promotional costs, is recognized when products are delivered to customers based on a customer purchase order, and collectability is reasonably assured. The accounting for promotional costs is discussed under “Customer incentive programs, advertising and marketing” below.

 

Provisions for bad debts are recorded as selling, marketing and administrative expenses. Write-offs of bad debts did not exceed 0.1% of net product sales in each of 2014, 2013 and 2012, and accordingly, have not been significant to the Company’s financial position or results of operations.

 

Intangible assets

 

The Company’s intangible assets consist primarily of goodwill and acquired trademarks. All trademarks have been assessed by management to have indefinite lives because they are expected to generate cash flows indefinitely. In accordance with accounting guidance, goodwill and other indefinite-lived assets are not amortized, but are instead subjected to annual testing for impairment unless certain triggering events or circumstances are noted. The Company performs its annual impairment testing as of December 31. The Company may utilize third-party professional valuation firms to assist in the determination of valuation of certain trademarks.

 

With respect to impairment testing of goodwill, the first step compares the reporting unit’s estimated fair value with its carrying value. We estimate a reporting unit’s fair value using projected discounted cash flows. If the carrying value of a

14


 

reporting unit’s net assets exceeds its fair value, the second step is applied to measure the difference between the carrying value and implied fair value of goodwill. If the carrying value of goodwill exceeds its implied fair value, the goodwill is considered impaired and reduced to its implied fair value.

 

We test non-amortizable intangible assets, trademarks, for impairment by comparing the fair value of each trademark with its carrying value. We determine fair value of trademarks using discounted cash flows and estimates of royalty rates. If the carrying value exceeds fair value, the trademark is considered impaired and is reduced to fair value.

 

The cash flow projections discussed above requires us to make assumptions and estimates regarding our future plans, including sales projections and profit margins, market based discount rates, competitive factors, and economic conditions; and our actual results and conditions may differ over time. A change in the assumptions relating to the impairment analysis of goodwill and trademarks, including but not limited to a reduction in projected cash flows, the use of a different discount rate to discount future cash flows or a different royalty rate applied to the Company’s trademarks, could cause impairment in the future.

 

Customer incentive programs, advertising and marketing

 

Advertising and marketing costs are recorded in the period to which such costs relate. The Company does not defer the recognition of any amounts on its consolidated balance sheet with respect to such costs. Customer incentives and other promotional costs are recorded at the time of sale based upon incentive program terms and historical utilization statistics, which are generally consistent from year to year.

 

The liabilities associated with these programs are reviewed quarterly and adjusted if utilization rates differ from management’s original estimates. Such adjustments have not historically been material to the Company’s operating results.

 

Split dollar officer life insurance

 

The Company provides split dollar life insurance benefits to certain executive officers and records an asset principally equal to the cumulative premiums paid. The Company will fully recover these premiums in future years under the terms of the plan. The Company retains a collateral assignment of the cash surrender values and policy death benefits payable to insure recovery of these premiums.

 

Valuation of long-lived assets

 

Long-lived assets, primarily property, plant and equipment are reviewed for impairment as events or changes in business circumstances occur indicating that the carrying value of the asset may not be recoverable. The estimated cash flows produced by assets or asset groups, are compared to the asset carrying value to determine whether impairment exists. Such estimates involve considerable management judgment and are based upon assumptions about expected future operating performance. As a result, actual cash flows could differ from management’s estimates due to changes in business conditions, operating performance, and economic and competitive conditions.

 

Income taxes

 

Deferred income taxes are recognized for future tax effects of temporary differences between financial and income tax reporting using tax rates in effect for the years in which the differences are expected to reverse. The Company records valuation allowances in situations where the realization of deferred tax assets, including those relating to net operating tax losses, is not more-likely-than-not; and the Company adjusts and releases such valuation allowances when realization becomes more-likely-than-not as defined by accounting guidance. The Company periodically reviews assumptions and estimates of the Company’s probable tax obligations and effects on its liability for uncertain tax positions, using informed judgment which may include the use of third-party consultants, advisors and legal counsel, and historical experience.

 

15


 

Valuation of investments

 

Investments, primarily municipal bonds, mutual funds and equity method investments are reviewed for impairment at each reporting period by comparing the carrying value or amortized cost to the fair market value. The Company may utilize third-party professional valuation firms as necessary to assist in the determination of the value of investments that utilize Level 3 inputs as defined by guidance. In the event that an investment security’s fair value is below carrying value or amortized cost, the Company will record an other-than-temporary impairment or a temporary impairment based on accounting guidance.

 

Other matters

 

In the opinion of management, other than contracts for foreign currency forwards and raw materials, including currency and commodity hedges and outstanding purchase orders for packaging, ingredients, supplies, and operational services, all entered into in the ordinary course of business, the Company does not have any significant contractual obligations or future commitments. The Company’s outstanding contractual commitments as of December 31, 2014, all of which are generally normal and recurring in nature, are summarized in the chart on page 12, which is incorporated by reference herein.

 

RECENT ACCOUNTING PRONOUNCEMENTS

 

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

 

MARKET RISKS

 

The Company is exposed to market risks related to commodity prices, interest rates, investments in marketable securities, equity price and foreign exchange.

 

The Company’s ability to forecast the direction and scope of changes to its major input costs is impacted by significant volatility in crude oil, sugar, corn, soybean and edible oils, cocoa and dairy products markets. The prices of these commodities are influenced by changes in global demand, changes in weather and crop yields, including the effects of climate change, changes in governments’ farm policies, including mandates for ethanol and bio-fuels, environmental matters, and fluctuations in the U.S. dollar relative to dollar-denominated commodities in world markets. The Company believes that its competitors face the same or similar challenges.

 

In order to address the impact of rising input and other costs, the Company periodically reviews each item in its product portfolio to ascertain if price realization adjustments or other actions should be taken. These reviews include an evaluation of the risk factors relating to market place acceptance of such changes and their potential effect on future sales volumes. In addition, the estimated cost of packaging modifications associated with weight changes is evaluated. The Company also maintains ongoing cost reduction and productivity improvement programs under which cost savings initiatives are encouraged and progress monitored. The Company is not able to accurately predict the outcome of these cost savings initiatives and their effects on its future results.

 

Commodity future and foreign currency forward contracts

 

Commodity price risks relate to ingredients, primarily sugar, cocoa, chocolate, corn syrup, dextrose, soybean and edible oils, milk, whey and gum base ingredients. The Company believes its competitors face similar risks, and the industry has historically adjusted prices to compensate for adverse fluctuations in commodity costs. The Company, as well as competitors in the confectionery industry, has historically taken actions, including higher price realization to mitigate rising input costs for ingredients, energy, freight and delivery. Although management seeks to substantially recover cost increases over the long-term, there is risk that higher price realization cannot be fully passed on to customers and, to the extent they are passed on, they could adversely affect customer and consumer acceptance and resulting sales volume.

 

The Company utilizes commodity futures contracts and commodity options contracts, as well as annual supply agreements, to hedge and plan for anticipated purchases of certain ingredients, including sugar, in order to mitigate commodity cost fluctuation. The Company also may purchase forward foreign exchange contracts to hedge its costs of

16


 

manufacturing certain products in Canada for sale and distribution in the United States, and periodically does so for purchases of equipment or raw materials from foreign suppliers. Such commodity futures, commodity options and currency forward contracts are cash flow hedges and are effective as hedges as defined by accounting guidance. The unrealized gains and losses on such contracts are deferred as a component of accumulated other comprehensive loss (or gain) and are recognized as a component of product cost of goods sold when the related inventory is sold.

 

The potential change in fair value of commodity and foreign currency derivative instruments held by the Company at December 31, 2014, assuming a 10% change in the underlying contract price, was $3,303. The analysis only includes commodity and foreign currency derivative instruments and, therefore, does not consider the offsetting effect of changes in the price of the underlying commodity or foreign currency. This amount is not significant compared with the net earnings and shareholders’ equity of the Company.

 

Interest rates

 

Interest rate risks primarily relate to the Company’s investments in tax exempt marketable securities with maturities or auction dates of generally up to three years.

 

The majority of the Company’s investments, which are classified as available for sale, have historically been held until they mature, which limits the Company’s exposure to interest rate fluctuations. The accompanying chart summarizes the maturities of the Company’s investments in debt securities at December 31, 2014.

 

 

 

 

 

 

 

Less than 1 year

    

$

39,436 

 

1 – 2 years

 

 

42,491 

 

2 – 3 years

 

 

48,691 

 

Over 3 years

 

 

714 

 

Total

 

$

131,332 

 

 

The Company’s outstanding debt at December 31, 2014 and 2013 was $7,500 in an industrial revenue bond in which interest rates reset each week based on the current market rate. Therefore, the Company does not believe that it has significant interest rate risk with respect to its interest bearing debt.

 

Investment in marketable securities

 

As stated above, the Company invests primarily in tax exempt marketable securities with maturities or auction dates generally up to three years. The Company utilizes professional money managers and maintains investment policy guidelines which emphasize quality and liquidity in order to minimize the potential loss exposures that could result in the event of a default or other adverse event, including failed auctions. The Company continues to monitor these investments and markets, as well as its investment policies, however, the financial markets could experience unanticipated or unprecedented events as it did beginning in 2008, and future outcomes may be less predictable than in the past.

 

Equity price

 

Equity price risk relates to the Company’s investments in mutual funds which are principally used to fund and hedge the Company’s deferred compensation liabilities. At December 31, 2014, the Company has investments in mutual funds, classified as trading securities, of $71,682. Any change in the fair value of these trading securities is completely offset by a corresponding change in the respective hedged deferred compensation liability.

 

Foreign currency

 

Foreign currency risk principally relates to the Company’s foreign operations in Canada, Mexico and Spain, as well as periodic purchase commitments of machinery and equipment from foreign sources.

 

Certain of the Company’s Canadian manufacturing costs, including local payroll and plant operations, and a portion of its packaging and ingredients are sourced in Canadian dollars. The Company may purchase Canadian forward contracts

17


 

to receive Canadian dollars at a specified date in the future and uses its Canadian dollar collections on Canadian sales as a partial hedge of its overall Canadian manufacturing obligations sourced in Canadian dollars. The Company also periodically purchases and holds Canadian dollars to facilitate the risk management of these currency changes.

 

From time to time, the Company may use foreign exchange forward contracts and derivative instruments to mitigate its exposure to foreign exchange risks, as well as those related to firm commitments to purchase equipment from foreign vendors. See Note 10, Fair Value Measurements, for outstanding foreign exchange forward contracts as of December 31, 2014.

 

RISK FACTORS

 

The Company’s operations and financial results are subject to a number of risks and uncertainties that could adversely affect the Company’s operating results and financial condition. Significant risk factors, without limitation, that could impact the Company, are the following: (i) significant competitive activity, including advertising, promotional and price competition, and changes in consumer demand for the Company’s products; (ii) fluctuations in the cost and availability of commodities and ingredients, including the effects adverse weather and climate change, and disease in west Africa which could affect cocoa supplies; and the ability to recover cost increases through product sales price increases; (iii) inherent risks in the marketplace, including uncertainties about trade and consumer acceptance of product pricing changes and seasonal events such as Halloween, the Company’s largest sales season; (iv) the effect of acquisitions on the Company’s results of operations and financial condition; (v) the effect of changes in foreign currencies on the Company’s foreign subsidiaries operating results, and the effect of the fluctuation of the Canadian dollar on products manufactured in Canada and marketed and sold in the United States in U.S. dollars; (vi) the Company’s reliance on third party vendors for various goods and services, including commodities used for ingredients that are primarily grown or sourced from foreign locations; (vii) the Company’s ability to successfully implement new production processes and manufacturing automation and computer systems without disruption or quality problems; (viii) the effect of changes in assumptions, including discount rates, sales growth and profit margins, which could affect the Company’s impairment testing and analysis of its goodwill and trademarks; (ix) changes in the confectionery marketplace including actions taken by major retailers and customers; (x) customer, consumer and competitor response to marketing programs and price and product weight adjustments, and new products; (xi) dependence on significant customers, including the volume and timing of their purchases, availability of shelf space, and competitive products; (xii) increases in energy costs, including freight and delivery, that cannot be passed along to customers through increased price realization due to competitive reasons; (xiii) any significant labor stoppages, strikes or production interruptions; (xiv) changes in governmental laws or regulations that affect ingredients used in products, or taxes, tariffs or other government restrictions on products sold; (xv) the adverse effects should the Company either voluntarily or involuntarily recall its product(s) from the marketplace; (xvi) the risk that the market value of Company’s investments could decline including being classified as “other-than-temporary” as defined; (xvii) the Company’s dependence on its enterprise resource planning computer system to manage its supply chain and customer deliveries, and the risk that the Company’s information technology systems fail to perform adequately; (xviii) the adverse effects if the Company is unable to protect such information technology systems against data corruption, cyber-based attacks or network security breaches; (xix) the potential adverse effects on the Company as to changes to improve the funding status of the Bakery and Confectionery Union and Industry Pension Plan, a multi-employer plan which covers certain Company union employees; (xx) the adverse effects if restructuring efforts and changes in business plans with respect to the Company’s Spanish subsidiaries are not fully successful; and (xxi) the potential effects of current and future macroeconomic conditions and geopolitical events.

 

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,” 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

18


 

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.”

 

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.

 

Open Contractual Commitments as of December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Less than

    

1 to 3

    

3 to 5

    

More than

 

Payable in

 

Total

 

1 Year

 

Years

 

Years

 

5 Years

 

Commodity hedges

 

$

5,422 

 

$

5,422 

 

$

 

$

 

$

 

Foreign currency hedges

 

 

27,604 

 

 

16,641 

 

 

10,963 

 

 

 

 

 

Purchase obligations

 

 

8,406 

 

 

8,406 

 

 

 

 

 

 

 

Interest bearing debt

 

 

7,500 

 

 

 

 

 

 

 

 

7,500 

 

Operating leases

 

 

1,428 

 

 

978 

 

 

449 

 

 

 

 

 

Total

 

$

50,360 

 

$

31,447 

 

$

11,412 

 

$

 

$

7,500 

 

 

Note: Commodity hedges and foreign currency hedges reflect the amounts at which the Company will settle the related contracts. The above amounts exclude deferred income tax liabilities of $47,356, liabilities for uncertain tax positions of $8,584, postretirement health care benefits of $11,983 and deferred compensation and other liabilities of $78,674 because the timing of payments relating to these items cannot be reasonably determined.

 

 

 

19


 

CONSOLIDATED STATEMENTS OF

Earnings and Retained Earnings

 

 

TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES  

(in thousands except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the year ended December 31,

 

 

    

2014

    

2013

    

2012

    

Net product sales

 

$

539,895 

 

$

539,627 

 

$

545,985 

 

Rental and royalty revenue

 

 

3,630 

 

 

3,756 

 

 

3,885 

 

Total revenue

 

 

543,525 

 

 

543,383 

 

 

549,870 

 

Product cost of goods sold

 

 

340,933 

 

 

350,960 

 

 

365,573 

 

Rental and royalty cost

 

 

947 

 

 

937 

 

 

976 

 

Total costs

 

 

341,880 

 

 

351,897 

 

 

366,549 

 

Product gross margin

 

 

198,962 

 

 

188,667 

 

 

180,412 

 

Rental and royalty gross margin

 

 

2,683 

 

 

2,819 

 

 

2,909 

 

Total gross margin

 

 

201,645 

 

 

191,486 

 

 

183,321 

 

Selling, marketing and administrative expenses

 

 

117,722 

 

 

119,133 

 

 

113,842 

 

Earnings from operations

 

 

83,923 

 

 

72,353 

 

 

69,479 

 

Other income, net

 

 

7,371 

 

 

12,130 

 

 

4,685 

 

Earnings before income taxes

 

 

91,294 

 

 

84,483 

 

 

74,164 

 

Provision for income taxes

 

 

28,434 

 

 

23,634 

 

 

22,160 

 

Net earnings

 

 

62,860 

 

 

60,849 

 

 

52,004 

 

Less: Net loss attributable to noncontrolling interests

 

 

438 

 

 

 —

 

 

 —

 

Net earnings attributable to Tootsie Roll Industries, Inc.

 

$

63,298 

 

$

60,849 

 

$

52,004 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

1.05 

 

$

0.99 

 

$

0.84 

 

Average number of shares outstanding

 

 

60,562 

 

 

61,399 

 

 

62,248 

 

 

 

 

 

 

 

 

 

 

 

 

Retained earnings at beginning of period

 

$

73,109 

 

$

80,210 

 

$

114,269 

 

Net earnings attributable to Tootsie Roll Industries, Inc.

 

 

63,298 

 

 

60,849 

 

 

52,004 

 

Cash dividends

 

 

(19,199)

 

 

(18,922)

 

 

(47,729)

 

Stock dividends

 

 

(52,281)

 

 

(49,028)

 

 

(38,334)

 

Retained earnings at end of period

 

$

64,927 

 

$

73,109 

 

$

80,210 

 

 

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

20


 

CONSOLIDATED STATEMENTS OF

Comprehensive Earnings

 

 

TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES  

(in thousands except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the year ended December 31,

 

 

    

2014

    

2013

    

2012

    

Net earnings

 

$

62,860 

 

$

60,849 

 

$

52,004 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), before tax:

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(4,453)

 

 

(102)

 

 

1,303 

 

 

 

 

 

 

 

 

 

 

 

 

Pension and postretirement reclassification adjustment:

 

 

 

 

 

 

 

 

 

 

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

 

 

(2,746)

 

 

20,037 

 

 

1,066 

 

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

 

 

(1,804)

 

 

671 

 

 

1,036 

 

Unrealized gains (losses) on postretirement and pension benefits

 

 

(4,550)

 

 

20,708 

 

 

2,102 

 

 

 

 

 

 

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) for the period on investments

 

 

(606)

 

 

1,091 

 

 

1,980 

 

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

 

 

 —

 

 

(2,430)

 

 

 

Unrealized gains (losses) on investments

 

 

(606)

 

 

(1,339)

 

 

1,980 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives:

 

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) for the period on derivatives

 

 

(3,137)

 

 

(2,107)

 

 

(339)

 

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

 

 

1,295 

 

 

1,446 

 

 

(243)

 

Unrealized gains (losses) on derivatives

 

 

(1,842)

 

 

(661)

 

 

(582)

 

 

 

 

 

 

 

 

 

 

 

 

Total other comprehensive income (loss), before tax

 

 

(11,451)

 

 

18,606 

 

 

4,803 

 

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

 

 

2,991 

 

 

(6,797)

 

 

(1,297)

 

Total comprehensive earnings

 

 

54,400 

 

 

72,658 

 

 

55,510 

 

Comprehensive earnings attributable to noncontrolling interests

 

 

438 

 

 

 —

 

 

 —

 

Total comprehensive earnings attributable to Tootsie Roll Industries, Inc.

 

$

54,838 

 

$

72,658 

 

$

55,510 

 

 

 

 

 

21


 

 

 

 

 

 

 

CONSOLIDATED STATEMENTS OF

 

Financial Position

 

TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES

(in thousands)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

    

2014

    

2013

    

CURRENT ASSETS:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

100,108 

 

$

88,283 

 

Investments

 

 

39,450 

 

 

33,572 

 

Accounts receivable trade, less allowances of $1,968 and $2,042

 

 

43,253 

 

 

40,721 

 

Other receivables

 

 

3,577 

 

 

4,616 

 

Inventories:

 

 

 

 

 

 

 

Finished goods and work-in-process

 

 

44,549 

 

 

37,012 

 

Raw materials and supplies

 

 

25,830 

 

 

24,844 

 

Prepaid expenses

 

 

6,060 

 

 

5,581 

 

Deferred income taxes

 

 

1,794 

 

 

5,482 

 

Total current assets

 

 

264,621 

 

 

240,111 

 

PROPERTY, PLANT AND EQUIPMENT, at cost:

 

 

 

 

 

 

 

Land

 

 

22,360 

 

 

21,683 

 

Buildings

 

 

113,279 

 

 

111,044 

 

Machinery and equipment

 

 

350,929 

 

 

340,405 

 

Construction in progress

 

 

1,641 

 

 

3,403 

 

 

 

 

488,209 

 

 

476,535 

 

Less—Accumulated depreciation

 

 

298,128 

 

 

279,619 

 

Net property, plant and equipment

 

 

190,081 

 

 

196,916 

 

OTHER ASSETS:

 

 

 

 

 

 

 

Goodwill

 

 

73,237 

 

 

73,237 

 

Trademarks

 

 

175,024 

 

 

175,024 

 

Investments

 

 

163,579 

 

 

148,532 

 

Split dollar officer life insurance

 

 

33,632 

 

 

40,296 

 

Prepaid expenses

 

 

6,927 

 

 

10,260 

 

Restricted cash

 

 

1,589 

 

 

 

Deferred income taxes

 

 

1,696 

 

 

4,033 

 

Total other assets

 

 

455,684 

 

 

451,382 

 

Total assets

 

$

910,386 

 

$

888,409 

 

 

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

22


 

(in thousands except per share data)

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

 

2014

    

2013

    

CURRENT LIABILITIES:

 

 

 

 

 

 

 

Accounts payable

 

$

11,641 

 

$

9,153 

 

Bank loans

 

 

124 

 

 

 —

 

Dividends payable

 

 

4,814 

 

 

4,742 

 

Accrued liabilities

 

 

46,482 

 

 

45,580 

 

Postretirement health care benefits

 

 

328 

 

 

319 

 

Income taxes payable

 

 

1,070 

 

 

327 

 

Total current liabilities

 

 

64,459 

 

 

60,121 

 

NONCURRENT LIABILITIES:

 

 

 

 

 

 

 

Deferred income taxes

 

 

47,356 

 

 

54,939 

 

Bank loans

 

 

694 

 

 

 —

 

Postretirement health care benefits

 

 

11,983 

 

 

8,857 

 

Industrial development bonds

 

 

7,500 

 

 

7,500 

 

Liability for uncertain tax positions

 

 

8,584 

 

 

7,167 

 

Deferred compensation and other liabilities

 

 

78,674 

 

 

69,520 

 

Total noncurrent liabilities

 

 

154,791 

 

 

147,983 

 

TOOTSIE ROLL INDUSTRIES, INC. SHAREHOLDERS’ EQUITY:

 

 

 

 

 

 

 

Common stock, $.69-4/9 par value— 120,000 shares authorized—  37,285 and 37,011, respectively, issued

 

 

25,892 

 

 

25,702 

 

Class B common stock, $.69-4/9 par value— 40,000 shares authorized—  22,887 and 22,256, respectively, issued

 

 

15,894 

 

 

15,455 

 

Capital in excess of par value

 

 

599,186 

 

 

572,669 

 

Retained earnings

 

 

64,927 

 

 

73,109 

 

Accumulated other comprehensive loss

 

 

(13,098)

 

 

(4,638)

 

Treasury stock (at cost)— 78 shares and 76 shares, respectively

 

 

(1,992)

 

 

(1,992)

 

Total Tootsie Roll Industries, Inc. shareholders’ equity

 

 

690,809 

 

 

680,305 

 

Noncontrolling interests

 

 

327 

 

 

 —

 

Total equity

 

 

691,136 

 

 

680,305 

 

Total liabilities and shareholders’ equity

 

$

910,386 

 

$

888,409 

 

 

 

 

 

 

 

23


 

 

 

 

 

 

 

 

 

 

 

 

 

 

CONSOLIDATED STATEMENTS OF

 

Cash Flows

 

TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the year ended December 31,

 

 

    

2014

    

2013

    

2012

    

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

62,860 

 

$

60,849 

 

$

52,004 

 

Adjustments to reconcile net earnings to net cash provided by operating activities:

 

 

 

 

 

 

 

 

 

 

Depreciation

 

 

20,758 

 

 

20,050 

 

 

19,925 

 

Net loss on step acquisition

 

 

529 

 

 

 —

 

 

 —

 

Impairment of equity method investment

 

 

 —

 

 

975 

 

 

850 

 

Loss from equity method investment

 

 

 —

 

 

967 

 

 

1,019 

 

Amortization of marketable security premiums

 

 

3,261 

 

 

3,035 

 

 

1,770 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(2,007)

 

 

1,330 

 

 

272 

 

Other receivables

 

 

1,289 

 

 

253 

 

 

(2,720)

 

Inventories

 

 

(7,329)

 

 

503 

 

 

9,588 

 

Prepaid expenses and other assets

 

 

9,524 

 

 

14,922 

 

 

11,295 

 

Accounts payable and accrued liabilities

 

 

(1,268)

 

 

418 

 

 

199 

 

Income taxes payable and deferred

 

 

(1,024)

 

 

68 

 

 

1,369 

 

Postretirement health care benefits

 

 

(1,289)

 

 

2,861 

 

 

2,829 

 

Deferred compensation and other liabilities

 

 

3,465 

 

 

3,592 

 

 

3,018 

 

Net cash provided by operating activities

 

 

88,769 

 

 

109,823 

 

 

101,418 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

Net cash acquired in step acquisition

 

 

161 

 

 

 —

 

 

 —

 

Change in restricted cash

 

 

224 

 

 

 —

 

 

 —

 

Capital expenditures

 

 

(10,704)

 

 

(15,752)

 

 

(8,886)

 

Net sales (purchases) of trading securities

 

 

(3,567)

 

 

(5,500)

 

 

(2,994)

 

Purchase of available for sale securities

 

 

(54,882)

 

 

(66,324)

 

 

(39,016)

 

Sale and maturity of available for sale securities

 

 

38,309 

 

 

39,613 

 

 

10,461 

 

Net cash used in investing activities

 

 

(30,459)

 

 

(47,963)

 

 

(40,435)

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

Shares purchased and retired

 

 

(25,020)

 

 

(23,143)

 

 

(23,803)

 

Dividends paid in cash

 

 

(19,241)

 

 

(14,282)

 

 

(52,431)

 

Repayment of bank loans

 

 

(403)

 

 

 —

 

 

 —

 

Net cash used in financing activities

 

 

(44,664)

 

 

(37,425)

 

 

(76,234)

 

 

 

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

 

(1,821)

 

 

(14)

 

 

501 

 

 

 

 

 

 

 

 

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

 

11,825 

 

 

24,421 

 

 

(14,750)

 

Cash and cash equivalents at beginning of year

 

 

88,283 

 

 

63,862 

 

 

78,612 

 

Cash and cash equivalents at end of year

 

$

100,108 

 

$

88,283 

 

$

63,862 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

 

 

 

 

Income taxes paid

 

$

26,599 

 

$

24,225 

 

$

21,312 

 

Interest paid

 

$

34 

 

$

21 

 

$

31 

 

Stock dividend issued

 

$

52,165 

 

$

48,925 

 

$

38,236 

 

 

 

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

 

 

24


 

Notes to Consolidated Financial Statements ($ in thousands except per share data)

TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES

 

NOTE 1—SIGNIFICANT ACCOUNTING POLICIES:

 

Basis of consolidation:

 

The consolidated financial statements include the accounts of Tootsie Roll Industries, Inc. and its wholly-owned and majority-owned subsidiaries (the Company), which are primarily engaged in the manufacture and sales of candy products. Non-controlling interests relating to majority-owned subsidiaries are reflected in the consolidated financial statements and all significant intercompany transactions have been eliminated.

 

The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Revenue recognition:

 

Products are sold to customers based on accepted purchase orders which include quantity, sales price and other relevant terms of sale. Revenue, net of applicable provisions for discounts, returns, allowances and certain advertising and promotional costs, is recognized when products are delivered to customers and collectability is reasonably assured. Shipping and handling costs of $46,525,  $45,367, and $45,072 in 2014, 2013 and 2012, respectively, are included in selling, marketing and administrative expenses. Accounts receivable are unsecured.

 

Cash and cash equivalents:

 

The Company considers temporary cash investments with an original maturity of three months or less to be cash equivalents.

 

Investments:

 

Investments consist of various marketable securities with maturities of generally up to three years. The Company classifies debt and equity securities as either available for sale or trading. Available for sale securities are not actively traded by the Company and are carried at fair value. The Company follows current fair value measurement guidance and unrealized gains and losses on these securities are excluded from earnings and are reported as a separate component of shareholders’ equity, net of applicable taxes, until realized or other-than-temporarily impaired. Trading securities relate to deferred compensation arrangements and are carried at fair value with gains or losses included in other income, net. The Company invests in trading securities to economically hedge changes in its deferred compensation liabilities.

 

The Company regularly reviews its investments to determine whether a decline in fair value below the cost basis is other-than-temporary. If the decline in fair value is judged to be other-than-temporary, the cost basis of the security is written down to fair value and the amount of the write-down is included in other income, net. Further information regarding the fair value of the Company’s investments is included in Note 10 to the Consolidated Financial Statements.

 

Derivative instruments and hedging activities:

 

Authoritative guidance requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of derivative instruments and related gains and losses, and disclosures about credit-risk-related contingent features in derivative agreements.

 

From time to time, the Company enters into commodity futures, commodity options contracts and foreign currency forward contracts. Commodity futures and options are intended and are effective as hedges of market price risks associated with the anticipated purchase of certain raw materials (primarily sugar). Foreign currency forward contracts

25


 

are intended and are 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. Further information regarding derivative instruments and hedging activities is included in Note 11 to the Consolidated Financial Statements.

 

Inventories:

 

Inventories are stated at cost, not to exceed market. The cost of substantially all of the Company’s inventories ($65,545 and $58,038 at December 31, 2014 and 2013, respectively) has been determined by the last-in, first-out (LIFO) method. The excess of current cost over LIFO cost of inventories approximates $18,117 and $20,926 at December 31, 2014 and 2013, respectively. The cost of certain foreign inventories ($4,834 and $3,818 at December 31, 2014 and 2013, respectively) has been determined by the first-in, first-out (FIFO) method. Rebates, discounts and other cash consideration received from vendors related to inventory purchases is reflected as a reduction in the cost of the related inventory item, and is therefore reflected in cost of sales when the related inventory item is sold.

 

Property, plant and equipment:

 

Depreciation is computed for financial reporting purposes by use of the straight-line method based on useful lives of 20 to 35 years for buildings and 5 to 20 years for machinery and equipment. Depreciation expense was $20,758,  $20,050 and $19,925 in 2014, 2013 and 2012, respectively.

 

Carrying value of long-lived assets:

 

The Company reviews long-lived assets to determine if there are events or circumstances indicating that the amount of the asset reflected in the Company’s balance sheet may not be recoverable. When such indicators are present, the Company compares the carrying value of the long-lived asset, or asset group, to the future undiscounted cash flows of the underlying assets to determine if impairment exists. If applicable, an impairment charge would be recorded to write down the carrying value to its fair value. The determination of fair value involves the use of estimates of future cash flows that involve considerable management judgment and are based upon assumptions about expected future operating performance. The actual cash flows could differ from management’s estimates due to changes in business conditions, operating performance, and economic conditions. No impairment charges of long-lived assets were recorded by the Company during 2014, 2013 and 2012.

 

Postretirement health care benefits:

 

The Company provides certain postretirement health care benefits to corporate office and management employees. The cost of these postretirement benefits is accrued during employees’ working careers. See Note 7 for changes to these benefits and the resulting effects of the negative amendment, as defined by guidance. The Company also provides split dollar life benefits to certain executive officers. The Company records an asset equal to the cumulative insurance premiums paid that will be recovered upon the death of covered employees or earlier under the terms of the plan. No premiums were paid in 2014, 2013 and 2012. Certain split dollar agreements were terminated during 2014 and 2013 which resulted in the full repayment to the Company of all of the cumulative premiums previously paid on these policies. During 2014 and 2013, the Company received $6,496 and $26,477, respectively, of such repayments which were recorded as a reduction in the carrying value of Split Dollar Officer Life Insurance.

 

Goodwill and indefinite-lived intangible assets:

 

In accordance with authoritative guidance, goodwill and intangible assets with indefinite lives are not amortized, but rather tested for impairment at least annually unless certain interim triggering events or circumstances require more frequent testing. All trademarks have been assessed by management to have indefinite lives because they are expected to generate cash flows indefinitely. Management believes that all assumptions used for the impairment tests are consistent with those utilized by market participants performing similar valuations The Company has completed its annual

26


 

impairment testing of its goodwill and trademarks at December 31 of each of the years presented. No impairments of intangibles, including goodwill were recorded in 2014, 2013 and 2012.

 

With respect to impairment testing of goodwill, the first step compares the reporting unit’s estimated fair value with its carrying value. Projected discounted cash flows are used to determine the fair value of the reporting unit. If the carrying value of a reporting unit’s net assets exceeds its fair value, the second step is applied to measure the difference between the carrying value and implied fair value of goodwill. If the carrying value of goodwill exceeds its implied fair value, the goodwill is considered impaired and reduced to its implied fair value. Non-amortizable intangible assets, trademarks, are tested for impairment by comparing the fair value of each trademark with its carrying value. The fair value of trademarks is determined using discounted cash flows and estimates of royalty rates. If the carrying value exceeds fair value, the trademark is considered impaired and is reduced to fair value.

 

Income taxes:

 

Deferred income taxes are recorded and recognized for future tax effects of temporary differences between financial and income tax reporting. The Company records valuation allowances in situations where the realization of deferred tax assets is not more-likely-than-not. Federal income taxes are provided on the portion of income of foreign subsidiaries that is expected to be remitted to the U.S. and become taxable, but not on the portion that is considered to be permanently reinvested in the foreign subsidiary.

 

Foreign currency translation:

 

The U.S. dollar is used as the functional currency where a substantial portion of the subsidiary’s business is indexed to the U.S. dollar or where its manufactured products are principally sold in the U.S. All other foreign subsidiaries use the local currency as their functional currency. Where the U.S. dollar is used as the functional currency, foreign currency remeasurements are recorded as a charge or credit to other income, net in the statement of earnings. Where the foreign local currency is used as the functional currency, translation adjustments are recorded as a separate component of accumulated other comprehensive income (loss).

 

Equity method investment and majority-owned subsidiaries:

 

The 2013 and 2012 financial results include the Company’s 50% interest in two Spanish companies that was accounted for using the equity method. The Company recorded an increase in its investment to the extent of its share of earnings, and reduced its investment to the extent of losses and dividends received. No dividends were paid in 2013 and 2012.

 

As of December 31, 2013 and 2012, management determined that the carrying value of this equity method investment was impaired as a result of accumulated losses from operations and review of future expectations. The Company recorded a pre-tax impairment charge of $975 and $850 in 2013 and 2012, respectively. The fair value was assessed primarily using the discounted cash flow method and liquidation valuation. The key inputs to this method include projections of future cash flows, determinations of appropriate discount rates, and other assumptions of the equity method investee which are considered reasonable and inherent in the discounted cash flow analysis. The Company’s carrying value of this investment at December 31, 2013 was not significant.

 

During first quarter 2014, the Company gained operating control of its two 50% owned Spanish companies when Company employee representatives assumed all positions on their boards of directors. This was considered a step acquisition, whereby the Company remeasured the previously held investment to fair value in first quarter 2014. As a result, the Company’s first quarter 2014 net earnings include a net loss of $529, including an additional income tax provision of $2,350 relating to deferred income taxes. During 2014, the Company further increased its control and ownership to 83% by subscribing to additional common shares of these Spanish subsidiaries for approximately $1,400 ($1,200 was paid in 2014, and the balance will be paid in 2015). The accompanying consolidated financial statements for the year ended December 31, 2014 include these Spanish companies and related minority interests. These Spanish subsidiaries are not material to the Company’s consolidated financial statements.

 

27


 

Restricted cash:

 

Restricted cash comprises certain cash deposits of the Company’s majority-owned Spanish subsidiaries with international banks that are pledged as collateral for letters of credit and bank borrowings.

 

VEBA trust:

 

During fourth quarter 2014 and 2013, the Company contributed $1,000 and $15,000 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 using these funds to pay the actual cost of such benefits through 2017. At December 31, 2014 and 2013, the VEBA trust held $10,845 and $13,991, respectively, of aggregate cash and cash equivalents. 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.

 

Bank loans:

 

Long term bank loans comprise borrowings by the Company’s majority-owned Spanish subsidiaries which are held by international banks. The average weighted interest rate in 2014 was of 3.0% and maturity dates range from 1 to 4 years. Short term bank loans also relate to the Company’s majority-owned Spanish subsidiaries.

 

Comprehensive earnings:

 

Comprehensive earnings includes net earnings, foreign currency translation adjustments and unrealized gains/losses on commodity and/or foreign currency hedging contracts, available for sale securities and certain postretirement benefit obligations.

 

Earnings per share:

 

A dual presentation of basic and diluted earnings per share is not required due to the lack of potentially dilutive securities under the Company’s simple capital structure. Therefore, all earnings per share amounts represent basic earnings per share.

 

The Class B Common Stock has essentially the same rights as Common Stock, except that each share of Class B Common Stock has ten votes per share (compared to one vote per share of Common Stock), is not traded on any exchange, is restricted as to transfer and is convertible on a share-for-share basis, at any time and at no cost to the holders, into shares of Common Stock which are traded on the New York Stock Exchange.

 

Use of estimates:

 

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the amounts reported. Estimates are used when accounting for sales discounts, allowances and incentives, product liabilities, assets recorded at fair value, income taxes, depreciation, amortization, employee benefits, contingencies and intangible asset and liability valuations. Actual results may or may not differ from those estimates.

 

Recent accounting pronouncements:

 

In August 2014, the FASB issued ASU 2014-15 which provides guidance about management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures. This guidance will be effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. We do not expect the adoption of this guidance to have a significant impact on our condensed consolidated financial statements.

 

28


 

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09 that introduces a new five-step revenue recognition model in which an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU also requires disclosures sufficient to enable users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers, including qualitative and quantitative disclosures about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. This standard is effective for fiscal years beginning after December 15, 2016, including interim periods within that reporting period. The Company is currently evaluating the new guidance to determine the impact it may have on the condensed consolidated financial statements.

 

In April 2014, the FASB issued ASU 2014-08, which includes amendments that change the requirements for reporting discontinued operations. The new guidance requires that the disposal of a component of an entity be reported as discontinued operations only if the action represents a strategic shift that will have a major effect on an entity’s operations and financial results, and would require expanded disclosures. This guidance will be effective beginning in the first quarter 2015. We do not expect the adoption of this guidance to have a significant impact on the condensed consolidated financial statements.

 

 

NOTE 2—ACCRUED LIABILITIES:

 

Accrued liabilities are comprised of the following:

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

    

2014

    

2013

    

Compensation

 

$

9,788 

 

$

9,445 

 

Other employee benefits

 

 

7,185 

 

 

7,825 

 

Taxes, other than income

 

 

3,284 

 

 

2,776 

 

Advertising and promotions

 

 

19,805 

 

 

19,133 

 

Other

 

 

6,420 

 

 

6,401 

 

 

 

$

46,482 

 

$

45,580 

 

 

 

 

 

 

 

 

NOTE 3—INDUSTRIAL DEVELOPMENT BONDS:

 

Industrial development bonds are due in 2027. The average floating interest rate, which is reset weekly, was 0.1% and 0.2% in 2014 and 2013, respectively. See Note 10 to the Consolidated Financial Statements for fair value disclosures.

 

NOTE 4—INCOME TAXES:

 

The domestic and foreign components of pretax income are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

2014

    

2013

    

2012

    

Domestic

 

$

81,255 

 

$

73,362 

 

$

64,173 

 

Foreign

 

 

10,039 

 

 

11,121 

 

 

9,991 

 

 

 

$

91,294 

 

$

84,483 

 

$

74,164 

 

 

29


 

The provision for income taxes is comprised of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

2014

    

2013

    

2012

    

Current:

 

 

 

 

 

 

 

 

 

 

Federal

 

$

25,173 

 

$

16,192 

 

$

24,312 

 

Foreign

 

 

549 

 

 

219 

 

 

231 

 

State

 

 

1,538 

 

 

891 

 

 

1,914 

 

 

 

 

27,260 

 

 

17,302 

 

 

26,457 

 

Deferred:

 

 

 

 

 

 

 

 

 

 

Federal

 

 

(172)

 

 

4,286 

 

 

(6,857)

 

Foreign

 

 

2,032 

 

 

1,823 

 

 

1,710 

 

State

 

 

(686)

 

 

223 

 

 

850 

 

 

 

 

1,174 

 

 

6,332 

 

 

(4,297)

 

 

 

$

28,434 

 

$

23,634 

 

$

22,160 

 

 

Significant components of the Company’s net deferred tax liability at year end were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

    

2014

    

2013

    

Deferred tax assets:

 

 

 

 

 

 

 

Accrued customer promotions

 

$

3,219 

 

$

3,156 

 

Deferred compensation

 

 

28,099 

 

 

25,103 

 

Postretirement benefits

 

 

4,895 

 

 

3,847 

 

Other accrued expenses

 

 

7,660 

 

 

6,158 

 

Foreign subsidiary tax loss carry forward

 

 

12,972 

 

 

12,512 

 

Tax credit carry forward

 

 

1,530 

 

 

1,243 

 

Realized capital losses

 

 

 —

 

 

581 

 

Unrealized capital loss

 

 

 

 

 

 

 

 

58,375 

 

 

52,600 

 

Valuation allowance

 

 

(2,478)

 

 

(957)

 

Total deferred tax assets

 

$

55,897 

 

$

51,643 

 

Deferred tax liabilities:

 

 

 

 

 

 

 

Depreciation

 

$

31,520 

 

$

33,129 

 

Deductible goodwill and trademarks

 

 

43,960 

 

 

42,073 

 

Accrued export company commissions

 

 

5,555 

 

 

5,391 

 

Employee benefit plans

 

 

3,907 

 

 

5,100 

 

Inventory reserves

 

 

3,422 

 

 

1,646 

 

Prepaid insurance

 

 

867 

 

 

785 

 

Unrealized capital gain

 

 

2,364 

 

 

709 

 

Deferred gain on sale of real estate

 

 

8,168 

 

 

8,234 

 

Total deferred tax liabilities

 

$

99,763 

 

$

97,067 

 

Net deferred tax liability

 

$

43,866 

 

$

45,424 

 

 

At December 31, 2014, the Company has recognized $386 of benefits related to its Mexican subsidiary tax credit carry-forwards. The carry-forward credits expire in 2017. A valuation allowance has been established for the carry-forward losses to reduce the future income tax benefits to amounts expected to be realized. The Company has also recognized $1,144 of benefits related to state tax credit carry-forwards. The state credit carry-forward expires in 2021. The Company expects that these state credit carry-forwards will be utilized before their expiration.

 

At December 31, 2014, the tax benefits of the Company’s Canadian subsidiary tax loss carry-forwards expiring by year are as follows: $289 in 2027,  $5,767 in 2028,  $4,104 in 2029 and $720 in 2031. The Company expects that these carry-forwards will be realized before their expiration.

 

30


 

At December 31, 2014, the amounts of the Company’s Spanish subsidiary loss carry-forwards expiring by year are as follows: $304 in 2026, $64 in 2027, $223 in 2028, $110 in 2029, $341 in 2030, $445 in 2031 and $605 in 2032. A full valuation allowance has been provided for these Spanish loss carry-forwards as the Company expects that the losses will not be utilized before their expiration.

 

The effective income tax rate differs from the statutory rate as follows:

 

 

 

 

 

 

 

 

 

 

 

    

2014

    

2013

    

2012

    

U.S. statutory rate

 

35.0 

%  

35.0 

%  

35.0 

%  

State income taxes, net

 

1.0 

 

1.0 

 

1.1 

 

Exempt municipal bond interest

 

(0.5)

 

(0.4)

 

(0.5)

 

Foreign tax rates

 

(1.5)

 

(2.0)

 

(1.6)

 

Qualified domestic production activities deduction

 

(2.8)

 

(2.2)

 

(3.1)

 

Tax credits receivable

 

(0.6)

 

(0.9)

 

(0.9)

 

Adjustment of deferred tax balances

 

1.9 

 

(1.1)

 

(0.5)

 

Reserve for uncertain tax benefits

 

 —

 

(0.7)

 

(0.3)

 

Other, net

 

(1.4)

 

(0.7)

 

0.7 

 

Effective income tax rate

 

31.1 

%  

28.0 

%  

29.9 

%  

 

The Company has not provided for U.S. federal or foreign withholding taxes on $5,393 and $10,988 of foreign subsidiaries’ undistributed earnings as of December 31, 2014 and December 31, 2013, respectively, because such earnings are considered to be permanently reinvested. The Company estimates that the federal income tax liability on such remittances would approximate 30%. This foreign subsidiary holds $15,986 and $11,674 of cash and short term investments as of December 31, 2014 and 2013, respectively.

 

At December 31, 2014 and 2013, the Company had unrecognized tax benefits of $6,993 and $6,010, respectively. Included in this balance is $4,805 and $3,539, respectively, of unrecognized tax benefits that, if recognized, would favorably affect the annual effective income tax rate. As of December 31, 2014 and 2013,  $1,591 and $1,157, respectively, of interest and penalties were included in the liability for uncertain tax positions.

 

A reconciliation of the beginning and ending balances of the total amounts of unrecognized tax benefits is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

2014

    

2013

    

2012

    

Unrecognized tax benefits at January 1

 

$

6,010 

 

$

6,677 

 

$

6,804 

 

Increases in tax positions for the current year

 

 

1,827 

 

 

1,163 

 

 

727 

 

Increases in tax positions for new uncertain tax position

 

 

609 

 

 

 —

 

 

 —

 

Reductions in tax positions for lapse of statute of limitations

 

 

(1,050)

 

 

(867)

 

 

(854)

 

Reductions in tax positions relating to settlements with taxing authorities

 

 

(403)

 

 

(140)

 

 

 

Reductions in tax positions for effective settlements

 

 

 —

 

 

(823)

 

 

 

Unrecognized tax benefits at December 31

 

$

6,993 

 

$

6,010 

 

$

6,677 

 

 

The Company recognizes interest and penalties related to unrecognized tax benefits in the provision for income taxes on the Consolidated Statements of Earnings and Retained Earnings.

 

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 2011 through 2013. With few exceptions, the Company is no longer subject to examinations by tax authorities for the years 2010 and prior.

 

The Company is currently subject to a federal income tax examination of tax years 2011 and 2012. The Company’s Canadian subsidiary is currently subject to examination by the Canada Revenue Agency for tax years 2005 and 2007. The Company’s Spanish subsidiaries are currently subject to a court hearing relating to a tax examination by the Spanish tax authorities. In addition, the Company is currently subject to various state tax examinations. Although the Company is

31


 

unable to determine the ultimate outcome of the ongoing examinations and court hearing, the Company believes that its liability for uncertain tax positions relating to these jurisdictions for such years is adequate.

 

NOTE 5—SHARE CAPITAL AND CAPITAL IN EXCESS OF PAR VALUE:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital in

 

 

 

 

 

 

 

 

Class B