TOOTSIE ROLL INDUSTRIES INC
FORM
10-K
(Annual Report)
Filed 03/01/11 for the Period Ending 12/31/10
Address
Telephone
CIK
Symbol
SIC Code
Industry
Sector
Fiscal Year
7401 S CICERO AVE
CHICAGO, IL 60629
7738383400
0000098677
TR
2060 - Sugar And Confectionery Products
Food Processing
Consumer Non-Cyclicals
12/31
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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2010
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from
to
Commission file number 1-1361
TOOTSIE ROLL INDUSTRIES, INC.
(Exact name of Registrant as specified in its charter)
Virginia
(State or other jurisdiction of
incorporation or organization)
22-1318955
(IRS Employer Identification No.)
7401 South Cicero Avenue, Chicago, Illinois 60629
(Address of principal executive offices) (Zip Code)
Registrant’s Telephone Number: (773) 838-3400
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange
on which registered
Common Stock — Par Value $.69-4/9 Per Share
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Class B Common Stock — Par Value $.69-4/9 Per Share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes 
No Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit and post such files). Yes 
No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of
“large accelerated filer,” “accelerated filer and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer 
Accelerated Filer Non-accelerated Filer Smaller Reporting Company Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No 
As of February 22, 2011, there were outstanding 36,024,024 shares of Common Stock par value $.69-4/9 per share, and 20,439,280 shares
of Class B Common Stock par value $.69-4/9 per share.
As of June 30, 2010, the aggregate market value of the Common Stock (based upon the closing price of the stock on the New York Stock
Exchange on such date) held by non-affiliates was approximately $460,116,000. Class B Common Stock is not traded on any exchange, is
restricted as to transfer or other disposition, but is convertible into Common Stock on a share-for-share basis. Upon such conversion, the
resulting shares of Common Stock are freely transferable and publicly traded. Assuming all 20,439,280 shares of outstanding Class B
Common Stock were converted into Common Stock, the aggregate market value of Common Stock held by non-affiliates on June 30, 2010
(based upon the closing price of the stock on the New York Stock Exchange on such date) would have been approximately $546,729,000.
Determination of stock ownership by non-affiliates was made solely for the purpose of this requirement, and the Registrant is not bound by
these determinations for any other purpose.
DOCUMENTS INCORPORATED BY REFERENCE
1.
Portions of the Company’s Annual Report to Shareholders for the year ended December 31, 2010 (the “2010 Report”) are
incorporated by reference in Parts I and II of this report and filed as an exhibit to this report.
2.
Portions of the Company’s Definitive Proxy Statement for the Company’s Annual Meeting of Shareholders (the “2011
Proxy Statement”) scheduled to be held on May 2, 2011 are incorporated by reference in Part III of this report.
Table of Contents
TABLE OF CONTENTS
ITEM 1.
Business
1
ITEM 1A.
Risk Factors
3
ITEM 1B.
Unresolved Staff Comments
5
ITEM 2.
Properties
6
ITEM 3.
Legal Proceedings
6
ITEM 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
7
ITEM 6.
Selected Financial Data
7
ITEM 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
7
ITEM 7A.
Quantitative and Qualitative Disclosures About Market Risk
7
ITEM 8.
Financial Statements and Supplementary Data
8
ITEM 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
8
ITEM 9A.
Controls and Procedures
8
ITEM 9B.
Other Information
8
ITEM 10.
Directors, Executive Officers and Corporate Governance
9
ITEM 11.
Executive Compensation
9
ITEM 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
10
ITEM 13.
Certain Relationships and Related Transactions, and Director Independence
10
ITEM 14.
Principal Accounting Fees and Services
10
ITEM 15.
Exhibits, Financial Statements Schedules
10
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Forward-Looking Information
From time to time, in the Company’s statements and written reports, including this report, the Company discusses its expectations regarding
future performance by making certain “forward-looking statements.” 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. These forward-looking statements are based on
currently available competitive, financial and economic data and management’s views and assumptions regarding future events. Such forwardlooking statements are inherently uncertain, and actual results may differ materially from those expressed or implied herein. Consequently, the
Company wishes to caution readers not to place undue reliance on any forward-looking statements. In connection with the “safe harbor
provisions” of the Private Securities Litigation Reform Act of 1995, factors, among others, which could cause future results to differ materially
from the forward-looking statements, expectations and assumptions expressed or implied herein include those set forth in the subsection
entitled “Risk Factors” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” on Pages 12 and 13 of
the 2010 Report, which subsection is incorporated herein by reference. In addition, the Company’s results may be affected by general factors,
such as economic conditions, political developments, currency exchange rates, interest and inflation rates, accounting standards, taxes, and
laws and regulations affecting the Company in markets where it competes and those factors described in Item 1A “Risk Factors” and elsewhere
in this Annual Report on Form 10-K and in other Company filings with the Securities and Exchange Commission.
PART I
ITEM 1.
Business .
Tootsie Roll Industries, Inc. and its consolidated subsidiaries (the “Company”) have been engaged in the manufacture and
sale of confectionery products for over 100 years. This is the only industry segment in which the Company operates and is its only line of
business. The majority of the Company’s products are sold under the registered trademarks TOOTSIE ROLL, TOOTSIE ROLL POPS,
CHILD’S PLAY, CARAMEL APPLE POPS, CHARMS, BLOW-POP, BLUE RAZZ, ZIP-A-DEE POPS, CELLA’S, MASON DOTS,
MASON CROWS, JUNIOR MINT, CHARLESTON CHEW, SUGAR DADDY, SUGAR BABIES, ANDES, FLUFFY STUFF, DUBBLE
BUBBLE, RAZZLES, CRY BABY and NIK-L-NIP.
The Company’s products are marketed in a variety of packages designed to be suitable for display and sale in different types
of retail outlets. They are distributed through approximately 100 candy and grocery brokers and by the Company itself to approximately
15,000 customers throughout the United States. These customers include wholesale distributors of candy and groceries, supermarkets, variety
stores, dollar stores, chain grocers, drug chains, discount chains, cooperative grocery associations, warehouse and membership club stores,
vending machine operators, the U. S. military and fund-raising charitable organizations.
The Company’s principal markets are in the United States, Canada and Mexico. The majority of production from the
Company’s Canadian plants is sold in the United States. The majority of production from the Company’s Mexican plant is sold in Mexico.
The domestic confectionery business is highly competitive. The Company competes primarily with other manufacturers of
bar candy, bagged candy and bubble gum of the type sold in the above mentioned stores. Although accurate statistics are not available, the
Company believes it is among the ten largest domestic manufacturers in this field. In the markets in which the Company competes, the main
forms of competition comprise brand recognition as well as a fair price for our products at various retail price points.
The Company did not have a material backlog of firm orders at the end of the calendar years 2010 or 2009.
The Company was adversely affected by significantly higher input costs, including approximately $16,600 of ingredient unit
cost increases in 2010 compared to 2009; however, packaging material unit costs favorably decreased by approximately $800 in 2010. The
Company generally experienced significant cost increases in sugar, cocoa, edible oils and dairy inputs, however, the Company experienced
favorable declines in corn syrup. Given recent trends in the commodities markets, the Company is anticipating even higher ingredient costs in
2011.
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The Company has historically hedged certain of its future sugar, corn syrup and soybean oil needs with derivatives at such
times that it believes that the forward markets are favorable. The Company’s decision to hedge its major ingredient requirements is dependent
on our evaluation of forward commodities’ markets and comparison to vendor quotations, if available, and/or historical costs. The Company
has historically hedged with derivatives these major commodities and ingredients before the commencement of the next calendar year to better
ascertain the need for product pricing changes or product weight decline (indirect price change) adjustments to its product sales portfolio and
better manage ingredient costs. The Company will generally purchase forward derivative contracts (i.e. “long” position) in selected future
months that correspond to the Company’s estimated procurement and usage needs of the respective commodity in the respective forward
periods.
From time to time, the Company also changes the size of certain of its products, which are usually sold at standard prices, to
reflect significant changes in raw material costs.
The Company does not hold any material patents, licenses, franchises or concessions. The Company’s major trademarks are
registered in the United States and in many other countries. Continued trademark protection is of material importance to the Company’s
business as a whole.
Although the Company does develop new products, including product line extensions for existing brands, the Company does
not expend material amounts of money on research or development activities.
The Company’s compliance with federal, state and local regulations which have been enacted or adopted regulating the
discharge of materials into the environment, or otherwise relating to the protection of the environment, has not had a material effect on the
capital expenditures, earnings or competitive position of the Company nor does the Company anticipate any such material effects from
presently enacted or adopted regulations.
The Company employs approximately 2,200 persons.
The Company has found that its sales normally maintain a consistent level throughout the year except for a substantial
upsurge in the third quarter which reflects sales associated with Halloween. In anticipation of this high sales period, the Company generally
begins its Halloween inventory build-up in the second quarter of each year. The Company historically offers extended credit terms for sales
made under Halloween sales programs. Each year, after Halloween receivables have been collected, the Company invests such funds in
various marketable securities.
Revenues from Wal-Mart Stores, Inc. aggregated approximately 21.4%, 22.9%, and 23.5% of net product sales during the
years ended December 31, 2010, 2009 and 2008, respectively. Although no other customer other than Wal-Mart Stores, Inc. accounted for
more than 10% of net sales, the loss of one or more significant customers could have a material adverse effect on the Company’s business.
For a summary of sales and long-lived assets of the Company by geographic area see Note 9 of the “Notes to Consolidated
Financial Statements” on Page 23 of the 2010 Report and on Page 4 of the 2010 Report under the section entitled “International.” Note 9 and
the aforesaid section are incorporated herein by reference.
Information regarding the Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K, and any amendments to these reports, will be made available, free of charge, upon written request to Tootsie Roll Industries, Inc.,
7401 South Cicero Avenue, Chicago, Illinois 60629, Attention: Barry Bowen, Treasurer and Assistant Secretary. The Company does not
make such reports available on its website at www.tootsie.com because it believes that they are readily available from the Securities Exchange
Commission at www.sec.gov, and because the Company provides them free of charge upon request. Interested parties, including shareholders,
may communicate to the Board of Directors or any individual director in writing, by regular mail, addressed to the Board of Directors or an
individual director, in care of Tootsie Roll Industries, Inc., 7401 South Cicero Avenue, Chicago, Illinois 60629, Attention: Ellen R. Gordon,
President. If an interested party wishes to communicate directly with the Company’s non-employee directors, it should be noted on the cover
of the communication.
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ITEM 1A.
Risk Factors.
Significant factors that could impact the Company’s financial condition or results of operations include, without limitation,
the following:
3
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•
Risk of changes in the price and availability of raw materials - The packaging materials and several of the principal
ingredients used by the Company are subject to price volatility. Although the Company engages in commodity hedging
transactions and seeks to leverage the high volume of its annual purchases, the Company may experience price increases in these
raw materials that it may not be able to offset, which could have an adverse impact on the Company’s results of operations and
financial condition. In addition, although the Company has historically been able to procure sufficient supplies of raw materials,
market conditions could change such that adequate supplies might not be available.
•
Risk of changes in product performance and competition - The Company competes with other well-established manufacturers
of confectionery products. A failure of new or existing products to be favorably received, a failure to retain preferred shelf space
at retail or a failure to sufficiently counter aggressive competitive actions could have an adverse impact on the Company’s results
of operations and financial condition.
•
Risk of discounting and other competitive actions - Discounting and other competitive actions may make it more difficult for
the Company to maintain its operating margins.
•
Risk of dependence on large customers — The Company’s largest customer, Wal-Mart Stores, Inc., accounted for
approximately 21.4% of net product sales in 2010, and other large, national chains are also material to the Company’s sales. The
loss of Wal-Mart or one or more other large customers, or a material decrease in purchases by one or more large customers, could
result in decreased sales and adversely impact the Company’s results of operations and financial condition.
•
Risk of changes in consumer preferences and tastes - Failure to adequately anticipate and react to changing demographics,
consumer trends, consumer health concerns and product preferences could have an adverse impact on the Company’s results of
operations and financial condition.
•
Risk of economic conditions on consumer purchases — The Company’s sales are impacted by consumer spending levels and
impulse purchases which are affected by general macroeconomic conditions, consumer confidence, employment levels,
availability of consumer credit and interest rates on that credit, consumer debt levels, energy costs and other factors. Volatility in
food and energy costs, a sustained global recession, rising unemployment, and declines in personal spending could adversely
impact the Company’s revenues, profitability and financial condition.
•
Risk’s related to environmental matters — The Company’s operations are not particularly impactful on the environment, but
increased government regulation such as cap and trade or other such legislation could adversely impact the Company’s
profitability.
•
Risk of economic conditions on customers and suppliers - Short and long-term lenders have reportedly been cautious in
providing financing to companies. As a result, our customers and our suppliers could face difficulty in securing debt financing.
This could result in reduced liquidity for our customers and our suppliers. If current credit market conditions continue or worsen,
the Company could experience an increase in bad debt expense resulting in reduced cash flows.
•
Risk of new governmental laws and regulations - Governmental laws and regulations, including food and drug laws, laws
related to advertising and marketing practices, accounting standards, taxation requirements, competition laws, employment laws
and environmental laws, both in and outside the U.S. are subject to change over time, which could adversely impact the
Company’s results of operations and ability to compete in domestic or foreign marketplaces.
•
Risk of labor stoppages - To the extent the Company experiences any material labor stoppages, such disputes or strikes could
negatively affect shipments from suppliers or shipments of finished product.
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•
Risk of impairment of goodwill or indefinite-lived intangible assets — In accordance with authoritative guidance, goodwill
and indefinite-lived intangible assets are not amortized but are subject to an impairment evaluation annually or more frequently
upon the occurrence of a triggering event, and other long-lived assets are likewise tested for impairment upon the occurrence of a
triggering event. During 2009 the Company recorded pre-tax charges of $14,000,000 related to the impairment of certain
trademarks. Although no such impairment was recorded in 2010, a further write-down of other of the Company’s intangible or
other indefinite-lived assets could materially and adversely impact its results of operations.
•
Risk of the cost of energy increasing - Energy costs could continue to rise, which would result in higher distribution, freight
and other operating costs. The Company may not be able to offset these cost increases, which could have an adverse impact on
the Company’s results of operations and financial condition.
•
Risk of a product recall - Issues related to the quality and safety of the Company’s products could result in a voluntary or
involuntary large-scale product recall . Negative publicity associated with this type of situation, including a product recall
relating to product contamination or product tampering, whether valid or not, could negatively impact demand for our products.
Costs associated with these potential actions, including a product recall and related litigation or fines, and marketing costs relating
to the re-launch of such products or brands, could negatively affect our operating results.
•
Risk of operational interruptions relating to computer software failures, including the implementation of new enterprise
resource planning and supply chain systems - The Company is reliant on computer software programs to operate its business
and is currently in the process of implementing new business software systems to improve its operational efficiency. In addition
to the underlying risk posed by any software corruption, implementation of these new computer software systems adds further
risk, including the potential disruption of supply chain planning and activities relating to sales demand forecasts, materials
procurement, production planning, and customer shipments, all of which could negatively impact sales and profits.
•
Risk of production interruptions — The majority of the Company’s products are manufactured in a single production facility
on specialized equipment. In the event of a disaster at a specific plant location it would be difficult to transfer production to other
facilities in a timely manner, which could result in loss of market share for the affected products.
•
Risk related to international operations — To the extent there is political or social unrest, civil war, terrorism or significant
economic instability in the countries in which the Company operates, the results of the Company’s business in such countries
could be adversely impacted. Currency exchange rate fluctuations between the U.S. dollar and foreign currencies could have an
adverse impact on the Company’s results of operations and financial condition.
•
Risk related to investments in marketable securities and equity method investment — The Company invests its surplus cash
in a diversified portfolio of highly rated marketable securities, generally with maturities of generally up to three years. The
Company also holds a 50% interest in two foreign companies which are accounted for using the equity method. Changes in the
financial markets can affect the carrying value of such instruments and could materially and adversely impact its results of
operations.
•
The Company is a controlled company due to the common stock holdings of the Gordon family — The Gordon family’s
share ownership represents a majority of the combined voting power of all classes of the Company’s common stock as of
December 31, 2010. As a result, the Gordon family has the power to elect the Company’s directors and approve actions requiring
the approval of the shareholders of the Company.
The factors identified above are believed to be significant factors, but not necessarily all of the significant factors, that could impact our
business. Unpredictable or unknown factors could also have material effects on the Company.
Additional significant factors that may affect the Company’s operations, performance and business results include the risks and uncertainties
listed from time to time in filings with the Securities and Exchange Commission and the risk factors or uncertainties listed herein or listed in
any document incorporated by reference herein.
ITEM 1B.
Unresolved Staff Comments.
None.
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ITEM 2.
Properties .
The Company owns its principal plant and offices which are located in Chicago, Illinois in a building consisting of
approximately 2,225,000 square feet which is utilized for offices, manufacturing and warehousing. In addition to owning the principal plant
and warehousing facilities mentioned above, the Company leases manufacturing and warehousing facilities at a second location in Chicago
which comprises 138,000 square feet. The lease is renewable by the Company every five years through June, 2011; the Company expects to
renew this lease prior to termination. The Company also periodically leases additional warehousing space at this second location as needed on
a month-to-month basis.
The Company’s other principal manufacturing facilities, all of which are owned, are:
Location
Square Feet (a)
Covington, Tennessee
Cambridge, Massachusetts
Delavan, Wisconsin
Concord, Ontario, Canada
Hazelton, Pennsylvania
Mexico City, Mexico
685,000
142,000
162,000
280,500(b)
240,000(c)
90,000
(a)
Square footage is approximate and includes production, warehousing and office space.
Two facilities; a third owned facility, comprising 225,000 square feet of warehousing space, and which is excluded
(b)
from the reported totals above, is leased to a third party.
(c)
Warehousing only.
The Company owns substantially all of the production machinery and equipment located in its plants. The Company also
holds four commercial real estate properties for investment which were acquired with the proceeds from a sale of surplus real estate in 2005.
ITEM 3.
Legal Proceedings .
There are no material pending legal proceedings known to the Company to which the Company or any of its subsidiaries is a
party or of which any of their property is the subject, and no penalties have been imposed by the Internal Revenue Service on the Company.
ADDITIONAL ITEM.
Executive Officers of the Registrant.
See the information on Executive Officers set forth in the table in Part III, Item 10, Page 9 of this report, which is
incorporated herein by reference.
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PART II
ITEM 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities .
The Company’s Common Stock is traded on the New York Stock Exchange. The Company’s Class B Common Stock is
subject to restrictions on transferability. The Class B Common Stock is convertible at the option of the holder into shares of Common Stock on
a share-for-share basis. As of February 23, 2011, there were approximately 4,100 and 1,500 registered holders of record of Common and
Class B Common Stock, respectively. In addition, the Company estimates that as of February 23, 2011 there were 18,000 and 5,000 beneficial
holders of Common and Class B Common Stock, respectively. For information on the market price of, and dividends paid with respect to, the
Company’s Common Stock, see the section entitled “2010-2009 Quarterly Summary of Tootsie Roll Industries, Inc. Stock Price and Dividends
Per Share” which appears on Page 28 of the 2010 Report. This section is incorporated herein by reference and filed as an exhibit to this report.
The following table sets forth information about the shares of Common Stock the Company purchased on the open market
during the fiscal quarter ended December 31, 2010:
Issuer Purchases of Equity Securities
Period
Total
Number
of Shares
Purchased
Oct 3 to Oct 30
Oct 31 to Nov 27
Nov 28 to Dec 31
Total
99,900
97,500
214,000
411,400
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Average
Price
Paid per
Share
$
25.64
26.55
28.00
27.09
$
Not Applicable
Not Applicable
Not Applicable
Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet
be Purchased Under the
Plans or Programs
Not Applicable
Not Applicable
Not Applicable
While the Company does not have a formal or publicly announced Company Common Stock purchase program, the
Company’s Board of Directors periodically authorizes a dollar amount for such share purchases. The treasurer executes share purchase
transactions according to these guidelines.
ITEM 6.
Selected Financial Data .
See the section entitled “Five Year Summary of Earnings and Financial Highlights” which appears on Page 29 of the 2010
Report. This section is incorporated herein by reference and filed as an exhibit to this report.
ITEM 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations .
See the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” on
Pages 5-13 of the 2010 Report. This section is incorporated herein by reference and filed as an exhibit to this report.
ITEM 7A.
Quantitative and Qualitative Disclosures About Market Risk .
See the section entitled “Market Risks” in the “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” on Pages 11-12 of the 2010 Report. This section is incorporated herein by reference and filed as an exhibit to this report.
See also Note 1 of the “Notes to Consolidated Financial Statements” commencing on Page 18 of the 2010 Report, which is
incorporated herein by reference.
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ITEM 8.
Financial Statements and Supplementary Data .
The financial statements, together with the report thereon of PricewaterhouseCoopers LLP dated March 1, 2011, appearing
on Pages 14-26 of the 2010 Report and the “Quarterly Financial Data (Unaudited)” on Page 28 of the 2010 Report are incorporated by
reference in this report. With the exception of the aforementioned information and the information incorporated in Items 1, 5, 6, 7, 7A, and 9A,
the 2010 Report is not to be deemed filed as part of this report.
ITEM 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .
None.
ITEM 9A.
Controls And Procedures .
Disclosure Controls and Procedures
The Company’s Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation as of the end
of the period covered by this report, that the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”) ) are effective to ensure that information required to be disclosed in the reports that
the Company files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in
the Securities and Exchange Commission’s rules and forms, and (ii) is accumulated and communicated to the Company’s management,
including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Internal Control over Financial Reporting
(a) See Page 27 of the 2010 Report for “Management’s Report on Internal Control Over Financial Reporting,” which is incorporated
herein by reference.
(b) See Page 26 of the 2010 Report for the attestation report of the Company’s independent registered public accounting firm, which is
incorporated herein by reference.
(c) There were no changes in the Company’s internal control over financial reporting during the quarter ended December 31, 2010 that
have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 9B.
Other Information .
None
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PART III
ITEM 10.
Directors, Executive Officers and Corporate Governance .
See the information with respect to the Directors of the Company which is set forth in the section entitled “Election of
Directors” of the 2011 Proxy Statement, which section of the 2011 Proxy Statement is incorporated herein by reference. See the information in
the section entitled “Section 16(a) Beneficial Ownership Reporting Compliance” of the Company’s 2011 Proxy Statement, which section is
incorporated herein by reference.
The following table sets forth the information with respect to the executive officers of the Company:
Name
Position (1)
Age
Melvin J. Gordon*
Chairman of the Board and Chief Executive Officer (2)
91
Ellen R. Gordon*
President and Chief Operating Officer (2)
79
G. Howard Ember Jr.
Vice President/Finance
58
John W. Newlin Jr.
Vice President/Manufacturing
73
Thomas E. Corr
Vice President/Marketing and Sales
62
John P. Majors
Vice President/Distribution
49
Barry P. Bowen
Treasurer
55
*A member of the Board of Directors of the Company
(1)
All of the above named officers other than Mr. Majors have served in the positions set forth in the table as their principal occupations
for more than the past ten years. From January, 2000 until joining the Company in October, 2004 Mr. Majors was employed by The
Pepsi Bottling Group in various senior logistics management positions. Mr. and Mrs. Gordon also serve as President and Vice
President, respectively of HDI Investment Corp., a family investment company.
(2)
Melvin J. Gordon and Ellen R. Gordon are husband and wife.
Code of Ethics
The Company has a Code of Business Conduct and Ethics, which applies to all of the Company’s directors and employees,
and which meets the Securities Exchange Commission criteria for a “code of ethics.” The Code of Ethics is available on the Company’s
website, located at www.tootsie.com, and the information in such Code of Conduct is available in print to any shareholder who requests a
copy .
ITEM 11.
Executive Compensation .
See the information set forth in the sections entitled “Executive Compensation” and “Director Compensation” of the
Company’s 2011 Proxy Statement, which are incorporated herein by reference.
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ITEM 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters .
For information with respect to the beneficial ownership of the Company’s Common Stock and Class B Common Stock by
the beneficial owners of more than 5% of said shares and by the management of the Company, see the sections entitled “Ownership of
Common Stock and Class B Common Stock by Certain Beneficial Owners” and “Ownership of Common Stock and Class B Common Stock by
Management” of the 2011 Proxy Statement. These sections of the 2011 Proxy Statement are incorporated herein by reference. The Company
does not have any compensation plans under which equity securities of the Company are authorized for issuance.
ITEM 13.
Certain Relationships and Related Transactions, and Director Independence .
See the section entitled “Related Person Transactions” of the 2011 Proxy Statement, which is incorporated herein by
reference.
Our board of directors has determined that our non-management directors, Messrs. Seibert and Bergeman and Ms. LewisBrent, are independent under the New York Stock Exchange listing standards because they have no direct or indirect relationship with the
Company other than through their service on the Board of Directors
ITEM 14.
Principal Accounting Fees and Services .
See the section entitled “Independent Auditor Fees and Services” of the 2011 Proxy Statement, which is incorporated herein
by reference.
ITEM 15.
Exhibits, Financial Statements Schedule .
(a)
Financial Statements.
The following financial statements and schedule are filed as part of this report:
(1)
Financial Statements (filed herewith as part of Exhibit 13):
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Earnings, Comprehensive Earnings and Retained Earnings for each of the three years
ended December 31, 2010
Consolidated Statements of Financial Position at December 31, 2010 and 2009
Consolidated Statements of Cash Flows for each of the three years ended in the period December 31, 2010
Notes to Consolidated Financial Statements
(2)
Financial Statement Schedule:
Report of Independent Registered Public Accounting Firm on Financial Statement Schedule
For the three years ended December 31, 2010 — Valuation and Qualifying Accounts
(3)
Exhibits required by Item 601 of Regulation S-K:
See Index to Exhibits which appears following Financial Schedule II.
10
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, Tootsie Roll Industries, Inc., has
duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
TOOTSIE ROLL INDUSTRIES, INC.
By:
/s/ Melvin J. Gordon
Melvin J. Gordon, Chairman
of the Board of Directors and Chief Executive Officer
Date: March 1, 2011
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/ Melvin J. Gordon
Melvin J. Gordon
Chairman of the Board
of Directors and Chief Executive Officer (principal executive officer)
March 1, 2011
/s/ Ellen R. Gordon
Ellen R. Gordon
Director, President and Chief Operating Officer
March 1, 2011
/s/ Barre A. Seibert
Barre A. Seibert
Director
/s/ Lana Jane Lewis-Brent
Lana Jane Lewis-Brent
Director
March 1, 2011
/s/ Richard P. Bergeman
Richard P. Bergeman
Director
March 1, 2011
/s/ G. Howard Ember, Jr.
G. Howard Ember, Jr.
Vice President, Finance
(principal financial officer and principal accounting officer)
March 1, 2011
March 1, 2011
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of Tootsie Roll Industries, Inc.:
Our audits of the consolidated financial statements and of the effectiveness of internal control over financial reporting referred to in our report
dated March 1, 2011 appearing in the 2010 Annual Report to Shareholders of Tootsie Roll Industries, Inc. (which report and consolidated
financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the financial statement
schedule listed in Item 15(a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
Chicago, IL
March 1, 2011
11
Table of Contents
TOOTSIE ROLL INDUSTRIES, INC.
AND SUBSIDIARY COMPANIES
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS (in thousands)
DECEMBER 31, 2010, 2009 AND 2008
Balance at
beginning
of year
Description
2010:
Reserve for bad debts
Reserve for cash discounts
Deferred tax asset valuation
$
$
2009:
Reserve for bad debts
Reserve for cash discounts
Deferred tax asset valuation
$
$
2008:
Reserve for bad debts
Reserve for cash discounts
Deferred tax asset valuation
Additions
(reductions)
charged
(credited) to
expense
$
$
1,738
618
912
3,268
$
1,358
565
8,506
10,429
$
1,727
560
7,556
9,843
$
$
$
$
Balance at
End of
Year
Deductions(1)
(45) $
9,726
(226)
9,455 $
572
9,934
—
10,506
$
541 $
10,374
(7,594)
3,321 $
161
10,321
—
10,482
$
(237) $
10,233
950
10,946 $
132
10,228
—
10,360
$
$
$
$
(1)
Deductions against reserve for bad debts consist of accounts receivable written off net of recoveries and exchange rate
movements. Deductions against reserve for cash discounts consist of allowances to customers.
12
1,121
410
686
2,217
1,738
618
912
3,268
1, 358
565
8,506
10,429
Table of Contents
INDEX TO EXHIBITS
The Company hereby agrees to provide the Commission, upon request, copies of any omitted exhibits or schedules required by
Item 601(b)(2) of Regulation S-K.
3.1
Restated Articles of Incorporation. Incorporated by reference to Exhibit 3.1 of the Company’s Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1997.
3.2
Amendment to Restated Articles of Incorporation. Incorporated by reference to Exhibit 3.2 of the Company’s Annual Report on
Form 10-K for the year ended December 31, 1999.
3.3
Amended and Restated By-Laws. Incorporated by reference to Exhibit 3.2 of the Company’s Annual Report on Form 10-K for
the year ended December 31, 1996.
4.1
Specimen Class B Common Stock Certificate. Incorporated by reference to Exhibit 1.1 of the Company’s Registration Statement
on Form 8-A dated February 29, 1988.
10.1*
Excess Benefit Plan. Incorporated by reference to Exhibit 10.8.1 of the Company’s Annual Report on Form 10-K for the year
ended December 31, 1990.
10.2*
Amended and Restated Career Achievement Plan of the Company. Incorporated by reference to Exhibit 10.8.2 of the Company’s
Annual Report on Form 10-K for the year ended December 31, 1998.
10.3*
Amendment to the Amended and Restated Career Achievement Plan of the Company. Incorporated by reference to
Exhibit 10.8.3 of the Company’s Annual Report on Form 10-K for the year ended December 31, 1999.
10.4*
Restatement of Split Dollar Agreement (Special Trust) between the Company and the trustee of the Gordon Family 1993 Special
Trust dated January 31, 1997. Incorporated by reference to Exhibit 10.12 of the Company’s Annual Report on Form 10-K for the
year ended December 31, 1996.
10.5*
Executive Split Dollar Insurance and Collateral Assignment Agreement between the Company and G. Howard Ember Jr. dated
July 30, 1994. Incorporated by reference to Exhibit 10.21 of the Company’s Annual Report on Form 10-K for the year ended
December 31, 1994.
10.6*
Executive Split Dollar Insurance and Collateral Assignment Agreement between the Company and John W. Newlin dated
July 30, 1994. Incorporated by reference to Exhibit 10.22 of the Company’s Annual Report on Form 10-K for the year ended
December 31, 1994.
10.7*
Executive Split Dollar Insurance and Collateral Assignment Agreement between the Company and Thomas E. Corr dated
July 30, 1994. Incorporated by reference to Exhibit 10.23 of the Company’s Annual Report on Form 10-K for the year ended
December 31, 1994.
13
Table of Contents
10.8*
Form of Change In Control Agreement dated August, 1997 between the Company and certain executive officers. Incorporated by
reference to Exhibit 10.25 of the Company’s Annual Report on Form 10-K for the year ended December 31, 1997.
10.9*
Executive Split Dollar Insurance and Collateral Assignment Agreement between the Company and Barry Bowen dated April 1,
1997. Incorporated by reference to Exhibit 10.26 of the Company’s Annual Report on Form 10-K for the year ended
December 31, 1997.
10.10*
Amendment to Split Dollar Agreement (Special Trust) dated April 2, 1998 between the Company and the trustee of the Gordon
Family 1993 Special Trust, together with related Collateral Assignments. Incorporated by reference to Exhibit 10.27 of the
Company’s Annual Report on Form 10-K for the year ended December 31, 1998.
10.11*
Form of amendment to Change in Control Agreement between the Company and certain executive officers. Incorporated by
reference to Exhibit 10.28 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.
10.12*
Post 2004 Supplemental Savings Plan of the Company. Incorporated by reference to Exhibit 10.29 of the Company’s Annual
Report on Form 10-K for the year ended December 31, 2008.
10.13*
Post 2004 Excess Benefit Plan of the Company. Incorporated by reference to Exhibit 10.30 of the Company’s Annual Report on
Form 10-K for the year ended December 31, 2008.
10.14*
Amended and Restated Career Achievement Plan of the Company. Incorporated by reference to Exhibit 10.31 of the Company’s
Annual Report on Form 10-K for the year ended December 31, 2008.
10.15*
Exhibit 10.1- Tootsie Roll Industries, Inc. Management Incentive Plan. Incorporated by reference to Appendix A to the
Company’s definitive Proxy Statement filed with the Commission on March 24, 2006.
13
The following items incorporated by reference herein from the Company’s 2010 Annual Report to Shareholders for the year
ended December 31, 2010 (the “2010 Report”), are filed as Exhibits to this report:
(i)
Information under the section entitled “International” set forth on Page 4 of the 2010 Report;
(ii)
Information under the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” set forth on Pages 5-13 of the 2010 Report;
(iii)
Information under the subsection entitled “Risk Factors” set forth on Pages 12-13 of the 2010 Report;
(iv)
Consolidated Statements of Financial Position at December 31, 2010 and 2009 set forth on Pages 15-16 of the 2010
Report;
14
Table of Contents
(v)
Consolidated Statements of Earnings, Comprehensive Earnings and Retained Earnings for the three years ended
December 31, 2010 set forth on Page 14 of the 2010 Report;
(vi)
Consolidated Statements of Cash Flows for the three years ended December 31, 2010 set forth on Page 17 of the 2010
Report;
(vii)
Notes to Consolidated Financial Statements set forth on Pages 18-25 of the 2010 Report;
(viii)
Management’s Report on Internal Control over Financial Reporting set forth on Page 27 of the 2010 Report,
(ix)
Report of Independent Registered Public Accounting Firm set forth on Page 26 of the 2010 Report;
(x)
Quarterly Financial Data set forth on Page 28 of the 2010 Report;
(xi)
Information under the section entitled “2010-2009 Quarterly Summary of Tootsie Roll Industries, Inc. Stock Price and
Dividends per Share” set forth on Page 28 of the 2010 Report; and
(xii)
Information under the section entitled “Five Year Summary of Earnings and Financial Highlights” set forth on Page 29
of the 2010 Report.
21
List of Subsidiaries of the Company.
31.1
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101
The following financial statements and notes from Tootsie Roll Industries, Inc.’s Annual Report on Form 10-K for the year
ended December 31, 2010, filed with the Securities and Exchange Commission on March 1, 2011, formatted in XBRL
(eXtensible Business Reporting Language): (i) the Consolidated Statements of Earnings, Comprehensive Earnings and Retained
Earnings; (ii) Consolidated Statements of Financial Position; (iii) the Consolidated Statements of Cash Flows; and (iv) the
Notes to Consolidated Financial Statements.
*Management compensation plan or arrangement.
15
Exhibit 13
Melvin J. Gordon, Chairman and Chief Executive Officer and Ellen R. Gordon, President and Chief Operating Officer.
Corporate Profile
Tootsie Roll Industries, Inc. has been engaged in the manufacture and sale of confectionery products for 114 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.
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.”
1
To Our Shareholders
We are pleased to report that net product sales in 2010 reached $517 million. This was a record for the Company and an increase of $22 million
over 2009 net product sales. Sales increased in most of our brands and in key channels of distribution, and we had another strong Halloween
selling season.
Net earnings in 2010 were $54 million, approximately even with 2009. Net earnings benefited from increased sales. However, our margins and
net earnings have continued to be pressured by substantial cost increases in certain key ingredients, primarily sugar and cocoa. On a per share
basis earnings were one percent ahead of the prior year at $0.94 as compared to $0.93.
At Tootsie Roll we continually review all aspects of our operations in order to increase efficiency and eliminate waste. We have always
maintained a “bottom line” focus and take prudent steps to increase profitability whenever possible. Our time horizon has consistently been to
consider what is best for the Company and for our iconic brands over the long term. As we consider how to cope with an issue such as
increasing ingredient costs, we try to ensure that our reactions to current market conditions will not jeopardize the Company’s future prospects.
Financial Highlights
December 31,
2010
2009
(in thousands except per share data)
Net Product Sales
Net Earnings
Working Capital
Net Property, Plant and Equipment
Shareholders’ Equity
Average Shares Outstanding*
Per Share Items*
Net Earnings
Cash Dividends Paid
$
517,149
53,714
179,086
215,492
668,954
56,997
$
495,592
53,878
155,812
220,721
655,139
57,738
$
0.94
.32
$
0.93
.32
*Adjusted for stock dividends.
We extend this long-term perspective to investments we make in plant, equipment and information technology. Our brands tend toward being
value-oriented, and we believe it is essential to be the low cost producer in each of our major product lines. Over the years we have continually
invested in production technologies that we believe are state-of-the-art or better. We apply this to information technology as well, and in 2010
continued the phased-in deployment of a leading edge enterprise resource planning system. Consistent with our philosophy of continual
reinvestment in the Company, $13 million of capital expenditures were made in 2010.
Cash dividends and stock dividends were again paid in 2010. This was the sixty-eighth consecutive year the Company has paid cash dividends
and the forty-sixth consecutive year that a stock dividend was distributed.
We ended 2010 with $188 million in cash and investments. This is reflective of our conservative posture in financing future business
opportunities. We remain poised to continue investing in our business, improving manufacturing productivity and quality, supporting our
brands in the competitive marketplace, paying dividends and purchasing common stock. We also continue to look for appropriate,
complementary business acquisitions.
Sales and Marketing
As a consumer products company, we face intense competition for both retail shelf space and consumers’ dollars. Our key competitive
advantage lies in our well known brands, which offer high dollar volume for retailers and attractive values for consumers. During 2010 we
experienced solid organic growth and continued success in many important market niches.
Halloween was again our largest selling period. Focused promotional programs, particularly in the high volume grocery, mass merchandise,
drug, warehouse club and dollar store trade channels, led to Halloween sales growth. Packaged goods, which consist of straight goods as well
as mixed bag assortments of our most popular items, were once again successful in these channels.
New products generate excitement, keep our line fresh and contribute incremental sales growth. Several of these, principally in the form of line
extensions, were successfully introduced in 2010.
Three favorites, Tootsie Roll, Vanilla Tootsie Roll and Charleston Chew, were launched in a pre-priced, two-pack, giant bar configuration.
Marked for the one dollar price point, these exceptional consumer values proved to be quick-selling, high-margin items for retailers.
2
Tootsie Roll, Vanilla Tootsie Roll and Charleston Chew Two-Packs
The winning combination of chocolate and vanilla was offered in a new combo pack for Halloween 2010. This classic blend of Tootsie Roll
Midgees and Vanilla Tootsie Roll Midgees was presented in a metalized bag for maximum freshness and graphics that create a great visual onshelf image.
Chocolate and Vanilla Tootsie Roll Midgees Combo Bag
Eye-catching graphics and the freshness-preserving characteristics of metalized film were also utilized in the launch of a new “Mega Mix” of
Tootsie Fruit Rolls. This four pound assortment contains our five classic fruit flavors—lemon, cherry, orange, lime and vanilla, plus three tangy
new additions—blue raspberry, grape and green apple, and it met the category trend of higher ticket assortments.
Tootsie Fruit Rolls Mega Mix
The Tootsie Pop line was expanded with the addition of new Wild Berry Flavors. This delicious five flavor assortment of the only pop with a
Tootsie Roll center was packed in shelf-ready 100 count boxes and is another example of how we continue to bring new items and new energy
to the changemaker category.
Wild Berry Tootsie Pops
Tootsie Roll Fun Banks, our line of cylindrical, candy filled collectible banks with a coin slot in the plastic lid, got a new look and grew in
sales in 2010. With bold new graphics and an expanded line of new shipper displays, our growing assortment of Fun Banks now includes
Tootsie Roll Midgees, Vanilla Midgees, Flag Midgees, Dubble Bubble and Cry Baby.
Redesigned Tootsie Roll Fun Banks
Another category in which Tootsie Roll has been a market leader is the “theater box.” Great for home video too, or just on the go, our offerings
in this category were extended in 2010 with the new Cry Baby Extra Sour Gumball box. These supercharged gumballs are filled with sour
flavor crystals and are guaranteed to bring a tear to your eye.
Cry Baby Extra Sour Bubble Gum
The Charms Blow Pop franchise grew in 2010 with the addition of new Bursting Berry Blow Pops. Bursting with flavor and fun, this item
carries on the Blow Pop tradition of unique and award winning new flavor introductions and helped to strengthen our lollipop dominance in the
changemaker category.
Bursting Berry Blow Pops
Our popular bite-sized Blow Pop Minis, packed in an assortment of five pouches featuring different festive holiday designs, marked a new
addition to our seasonal business. Adorned with traditional images such as snowmen and wreaths, these pouches of delicious candy tablets,
each with a real bubble gum-filled center, are the perfect thing for stuffing those “stockings hung by the chimney with care.”
Blow Pop Minis Christmas Pouches
Another seasonal offering in 2010 was the Tootsie Roll Ginger Bread Cottage Kit. This unique activity kit consisted of traditional ginger bread
house panels, a packet of icing for “mortar” and eight ounces of assorted Tootsie Roll candy favorites
3
to be used as decorating elements (or as a snack for the building crew during construction). The Cottage Kit offered a whimsical fun activity
that helps to sustain the nostalgia and staying power of our iconic brands.
Tootsie Roll Gingerbread Cottage Kit
Advertising and Public Relations
A “Roll With It” campaign marked our entry into digital marketing. In the months leading up to our key Halloween selling season we reached
millions of candy buying mothers 25-44 years of age, a key Tootsie Roll demographic group. These bloggers shared stories related to the
special role of being a mother and had the opportunity to help each other by sharing their personal tips and tricks. Our campaign used a
combination of target specific web sites, specialized internet ad networks, mobile phone advertising and social media as well as search engine
and portal ads. A series of animated “roll with it moments” captured the attention of this tech savvy group of women, an emerging factor in the
marketplace.
In 2010 we again promoted our long-standing “How Many Licks?” Tootsie Pop theme with commercials on popular cable television programs.
These ads are run at various times throughout the year with a particular emphasis leading up to Halloween, which is our peak season.
As always, these campaigns were followed by many consumer letters advising us just how many licks it does take to get to the Tootsie Roll
center of a Tootsie Pop. Also as expected, the estimates we received varied widely and no consensus was reached, so the long-standing
supposition remains: “the world may never know!”
At the end of 2010, the remainder of our United States plants became kosher certified. With this step, Junior Mints, Tootsie Pops, Charms
Blow Pops, Sugar Babies and many other products joined our other kosher brands, including our flagship Tootsie Rolls, and became available
to a whole new group of consumers. Also in 2010, we were named by Forbes as one of the 100 most trustworthy companies, based on
transparency in financial reporting and a number of corporate governance related criteria. Be it in our business practices, our financial
statements or the products we sell, integrity and trustworthiness are an important part of our culture and we are honored by this type of
recognition.
Purchasing
Although packaging costs and corn-based sweeteners declined somewhat in 2010, the cost of certain other key ingredients rose to levels we
have not seen in recent years. In particular, sugar and cocoa powder costs were sharply higher in 2010 and those trends appear to be continuing
based on world-wide supply and demand.
We continue to use formalized competitive bidding programs, hedging and forward purchase contracts to help shield the Company from shortterm price fluctuations and to mitigate cost increases to the extent possible.
Operations and Supply Chain
As consumer preferences, customer buying patterns and technology continue to evolve, we find ongoing opportunities to invest in our
operations, automate processes and streamline the production and distribution of our products. We are fortunately not constrained in capital or
in other resources and are able to take on promising projects as they are identified, be they ones with economic payback, product quality
improvement or workplace safety enhancements. Although we are proactive, we focus on initiatives with the greatest return on investment,
taking into consideration both financial and non-financial factors.
Information technology is, of course, a critical aspect of any modern business and we have invested in this area as well. During 2010 we
implemented another phase of our company-wide enterprise resource planning system upgrade, and completed planning for the final
component to be implemented early in 2011.
International
Sales increased in Mexico with another strong Christmas, which is the most significant candy selling season for us in that market. The
Canadian market continued to develop with the expansion of brands and pack offerings into key selling seasons. Operating income increased in
both divisions as we were able to make pricing adjustments to cover increasing ingredient costs.
Worldwide sales increased in our export division due to successful new product introductions in selected markets. Price increases were also
implemented to help offset increased ingredient costs. These adjustments, along with other cost containment measures, led to increased profits
in this business segment.
In Appreciation
We wish to thank our many loyal employees, customers, suppliers, sales brokers and domestic and international distributors for their
contributions during 2010. We also thank our fellow shareholders for their support over the many years as we have met and continue to meet
the challenges of the candy marketplace.
Melvin J. Gordon
Chairman of the Board and
Chief Executive Officer
Ellen R. Gordon
President and
Chief Operating Officer
4
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 2010 net product sales, net earnings and related cash flows
provided by operating activities.
During 2010, the Company’s net product sales increased from $495,592 in 2009 to $517,149 in 2010, an increase of $21,557 or 4.3%. Cash
flows from operating activities totaled $82,805 in 2010 compared to $76,994 in 2009. The Company used its 2010 cash flows to pay cash
dividends of $18,130, purchase and retire $22,881 of its outstanding shares, and make capital expenditures of $12,813. In addition, the
Company’s net working capital increased from $155,812 at December 31, 2009 to $179,086 at December 31, 2010.
As of December 31, 2010, the Company’s aggregate cash, cash equivalents and investments, including all long-term investments in marketable
securities, was $188,433 compared to $157,789 at December 31, 2009, an increase of $30,644. The above increase reflects a $3,364 increase in
market value of trading securities during 2010. 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 $655,139 at December 31, 2009 to $668,954 as of December 31, 2010, principally reflecting 2010 net
earnings of $53,714, less cash dividends and share purchases of $18,130 and $22,881, respectively.
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 2011. 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
2010 vs. 2009
Net product sales were $517,149 in 2010 compared to $495,592 in 2009, an increase of $21,557 or 4.3%. This increase principally reflects
organic growth in volume, including product line extensions.
Product cost of goods sold were $348,313 in 2010 compared to $318,645 in 2009, an increase of $29,668 or 9.3%. Product cost of goods sold
reflects a $228 decrease in deferred compensation expense in 2010 compared to 2009. This decrease principally results from changes in the
market value of investments in trading securities relating to compensation deferred in previous years and is not reflective of current operating
results. Adjusting for the aforementioned, product cost of goods sold as a percentage of net product sales increased from 64.1% in 2009 to
67.2% in 2010, an increase of 3.1% as a percent of net product sales. The Company was adversely affected by significantly higher input costs,
including approximately $16,600 of ingredient unit cost increases in 2010 compared to 2009. However, packaging material unit costs favorably
decreased by approximately $800 in 2010. The Company generally experienced significant cost increases in sugar, cocoa, edible oils and dairy
inputs, however, the Company experienced favorable declines in corn syrup. Given recent trends in the commodities markets, the Company is
anticipating even higher ingredient costs in 2011.
Due to the seasonal nature of the Company’s business and corresponding variations in product mix, gross margins have historically been lower
in the second half of the year, and second half of 2010 and 2009 were consistent with this trend.
Selling, marketing and administrative expenses were $106,316 in 2010 compared to $103,755 in 2009, an increase of $2,561 or 2.5%. Selling,
marketing and administrative expenses reflect a $932 decrease in deferred compensation expense in 2010 compared to 2009. This decrease
reflects changes in the market value of investments in trading securities relating to compensation deferred in previous years and is not reflective
of current operating results. Adjusting for the aforementioned, selling, marketing and administrative expenses increased from $100,230 in 2009
to $103,722 in 2010, an increase of $3,492 or 3.5%. As a percent of net product sales, these expenses decreased slightly from 20.2% of net
product sales in 2009 to 20.1% of net product sales in 2010.
Selling, marketing and administrative expenses include $43,034 and $38,628 of freight, delivery and warehousing expenses in 2010 and
5
2009, respectively. These expenses increased from 7.8% of net product sales in 2009 to 8.3% of net product sales in 2010, primarily due to
increases in warehousing expenses and increases in freight and delivery expenses, including higher freight fuel surcharges.
The Company believes that the carrying values of its trademarks and goodwill have indefinite lives as they are expected to generate cash flows
indefinitely. In accordance with current accounting guidance, goodwill and 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 2010.
The fair values of indefinite lived intangible assets are primarily assessed using the present value of estimated future cash flows. Management
believes that all assumptions used for the impairment tests are consistent with those utilized by market participants performing similar
valuations. The Company’s fair value estimates based on these assumptions were used to prepare projected financial information which it
believes to be reasonable. Actual future results may differ from those projections and the differences could be material. 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 17% and 10%, respectively, neither change individually indicating a potential
impairment as of December 31, 2010.
Earnings from operations were $65,731 in 2010 compared to $62,079 in 2009, an increase of $3,652. Earnings from operations includes
changes in deferred compensation liabilities relating to corresponding changes in the market value of trading securities that hedge these
liabilities as discussed above. Adjusting for the changes in market value of $3,364 and $4,524 in 2010 and 2009, respectively, and excluding
the nonrecurring $14,000 non-cash impairment charge in 2009 relating to trademarks as discussed below, operating earnings were $69,095 and
$80,603 in 2010 and 2009, respectively, a decrease of $11,508 or 14.3%. Management believes this comparison is more reflective of the
underlying operations of the Company. This decrease principally reflects significantly higher ingredient costs and resulting lower gross profit
margins, as well as higher freight, delivery and warehousing expenses as discussed above.
Other income (expense), net was $8,358 in 2010 compared to $2,100 in 2009, an increase of $6,258. This increase principally reflects a pre-tax
impairment charge of $4,400 in 2009 to write down to market value the Company’s equity method investment combined with a $3,139 increase
in foreign exchange gains in 2010. The increase in foreign exchange gains consists primarily of net realized gains on foreign currency hedging.
Other income (expense), net also includes gains on trading securities of $3,364 and $4,524 in 2010 and 2009, respectively, reflecting increases
in the fair value of trading securities investments used as an economic hedge for the Company’s deferred compensation liabilities. These
trading securities gains principally reflect market appreciation in the equity markets in the respective years and were substantially 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 (expense), net also includes the operating losses of $342 and $233 for 2010 and 2009, respectively, relating to
the Company’s equity method investment in two 50% owned foreign companies.
As of December 31, 2010 and 2009, the Company’s long-term investments include $6,775 and $7,710 ($13,550 original cost), respectively, of
Jefferson County Alabama Sewer Revenue Refunding Warrants, originally purchased with an insurance-backed AAA rating. This is an auction
rate security (ARS) that is classified as an available for sale security. Due to adverse events related to Jefferson County and its bond insurance
carrier, Financial Guaranty Insurance Company (FGIC), as well as events in the credit markets, the auctions for this ARS failed throughout
2008, 2009 and 2010 (and subsequent to December 31, 2010). As such, the Company estimated the fair value of this ARS as of December 31,
2010 and 2009 utilizing a valuation model with Level 3 inputs, as defined by guidance and discussed in Note 10 to the Consolidated Financial
Statements. This valuation model considered, among others items, the credit risk of the collateral underlying the ARS, the credit risk of the
bond insurer, interest rates, and the amount and timing of expected future cash flows including assumptions about the market expectation of the
next successful auction.
During the fourth quarter of 2008, the Company determined that the market decline in fair value of its Jefferson County ARS became otherthan-temporarily impaired, as defined, and recorded a pre-tax impairment of $5,140. During 2010 and 2009, the Company further evaluated
this investment and concluded that additional declines in the market value were temporary because it was not related to further credit
impairment and recorded $935 and $700, respectively, as a charge to accumulated other comprehensive loss. The Company has classified this
ARS as non-current and has included it in long-term investments on the Consolidated Statements of Financial Position at December 31, 2010
and 2009 because the Company believes that the current financial conditions of Jefferson
6
County and FGIC, as well as the conditions in the auction rate securities market, may take more than twelve months to resolve. Future
evaluations of the fair value of this ARS could also result in additional other-than-temporary classification of declines in market value, and
therefore result in additional charges to earnings.
The consolidated effective tax rate was 27.5% and 16.1% in 2010 and 2009, respectively. The increase in the effective income tax rate from the
prior year reflects the release of Canadian income tax valuation allowances during 2009. Prior to fourth quarter 2009, Canadian income tax
valuation allowances were recorded against Canadian deferred tax assets as a result of losses generated in 2009 and prior years. Because
management determined that the Canadian net operating loss (NOL) carry-forward benefits were more-likely-than-not realizable as of
December 31, 2009, the Company reversed approximately $10,700 of valuation allowances as a credit to income tax expense as of
December 31, 2009. See 2009 vs. 2008 section below for further discussion of this matter.
Net earnings were $53,714 in 2010 compared to $53,878 in 2009, and earnings per share were $.94 and $.93 in 2010 and 2009, respectively, an
increase of $.01 or 1%. Earnings per share did benefit from the reduction in average shares outstanding resulting from Common Stock
purchases in the open market by the Company. Average shares outstanding decreased from 57,738 in 2009 to 56,997 in 2010.
2009 vs. 2008
Net product sales were $495,592 in 2009 compared to $492,051 in 2008, an increase of $3,541 or 1%. Although the increase in 2009
consolidated sales benefited from higher U.S. domestic sales, they were adversely affected by declines in export sales and sales of the
Company’s Mexican subsidiary when translated into U.S. dollar sales from a devalued foreign currency.
Product cost of goods sold were $318,645 in 2009 compared to $333,314 in 2008, a decrease of $14,669 or 4.4%. Product cost of goods sold
reflects a $2,876 increase in deferred compensation expense in 2009 compared to 2008. This increase principally results from changes in the
market value of investments in trading securities relating to compensation deferred in previous years and is not reflective of current operating
results. Adjusting for the aforementioned, product cost of goods sold as a percentage of net product sales favorably decreased from 68.1% in
2008 to 64.1% in 2009, a decrease of 4.0% as a percent of sales. This improvement principally reflects the benefits of selective price increases,
product weight declines (indirect price increases) and the favorable effects of foreign currency exchange rates on products manufactured in
Canada and principally sold in the United States. Ingredient unit costs favorably decreased by approximately $700 in 2009. However, the
Company was adversely affected by approximately $400 of packaging material unit cost increases in 2009 compared to 2008. The Company
generally experienced significant cost increases in sugar and cocoa, however, the Company experienced favorable declines in dairy products,
corn syrup and edible oils.
Due to the seasonal nature of the Company’s business and corresponding variations in product mix, gross margins have historically been lower
in the second half of the year, and second half of 2009 and 2008 were consistent with this trend.
Selling, marketing and administrative expenses were $103,755 in 2009 compared to $95,254 in 2008, an increase of $8,501 or 8.9%. Selling,
marketing and administrative expenses reflect an $8,982 increase in deferred compensation expense in 2009 compared to 2008. This increase
principally results from changes in the market value of investments in trading securities relating to compensation deferred in previous years and
is not reflective of current operating results. Adjusting for the aforementioned, selling, marketing and administrative expenses favorably
decreased from $100,711 in 2008 to $100,230 in 2009, a decrease of $481 or 0.5%. As a percent of net product sales, these expenses decreased
from 20.5% of net product sales in 2008 to 20.2% of net product sales in 2009. The favorable decrease in such expenses principally resulted
from lower freight, delivery and warehousing expenses partially offset by higher incentive compensation awards. Such higher incentive awards
are due to the substantial improvement in 2009 results compared to 2008.
Selling, marketing and administrative expenses include $38,628 and $45,570 of freight, delivery and warehousing expenses in 2009 and 2008,
respectively. These expenses decreased from 9.3% of net product sales in 2008 to 7.8% of net product sales in 2009, primarily due to lower
energy costs including lower freight fuel surcharges.
As of December 31, 2009, management ascertained that certain trademarks were impaired, and recorded a pre-tax charge of $14,000. This 2009
impairment charge was principally driven by an increase in the discount rate required by market participants. No impairments of intangibles
were recorded in 2008. 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 14% and 10%, respectively, indicating
potential additional impairment of approximately $14,000 and $10,000, respectively, as of December 31, 2009.
7
Earnings from operations were $62,079 in 2009 compared to $66,527 in 2008, a decrease of $4,448. Earnings from operations includes changes
in deferred compensation liabilities relating to corresponding changes in the market value of trading securities that hedge these liabilities as
discussed above. Adjusting for the aforementioned deferred compensation changes consisting of gains of $4,524 and losses of $7,334 in 2009
and 2008, respectively, and excluding the nonrecurring $14,000 non-cash impairment charge in 2009 relating to trademarks as discussed above,
operating earnings were $80,603 and $59,193 in 2009 and 2008, respectively, an increase of $21,410 or 36.2%. Management believes this
comparison is more reflective of the underlying operations of the Company. This increase principally reflects the favorable improvement in
product cost of goods sold and gross profit margins, and more favorable freight, delivery and warehousing expenses as discussed above.
Other income (expense), net, was $2,100 in 2009 compared to $(10,618) in 2008, an increase of $12,718. This increase principally reflects
$4,524 and ($7,334) in 2009 and 2008, respectively, of increases (decreases) in the fair value of trading securities investments used as an
economic hedge for the Company’s deferred compensation liabilities. Such income or (expense) was substantially offset by a like amount of
(expense) or income in aggregate product cost of goods sold and selling, marketing, and administrative expenses in the respective years as
discussed above. The increase in other income (expense), net principally reflects the $11,858 favorable net change in the fair value of trading
securities investments used to hedge deferred compensation liabilities, offset by a pre-tax impairment charge of $4,400 in 2009 to write down
to market value the Company’s equity method investment. The Company recorded a pre-tax impairment charge of $4,400 in the fourth quarter
2009, resulting in an adjusted carrying value of $4,961 as of December 31, 2009. The fair value was primarily assessed using the present value
of estimated future cash flows. Other income (expense), net also includes the operating results of the Company’s equity method investment
which was a loss of $233 and $477 in 2009 and 2008, respectively.
As of December 31, 2009 and 2008, the Company’s long-term investments include $7,710 and $8,410 ($13,550 original cost), respectively, of
Jefferson County Alabama Sewer Revenue Refunding Warrants. During fourth quarter of 2008, the Company determined that the market
decline in fair value of its Jefferson County ARS became other-than-temporarily impaired, as defined, and recorded a pre-tax impairment of
$5,140. During the fourth quarter of 2009, the Company further evaluated this investment and concluded that an additional decline in the
market value was temporary because it was not related to further credit impairment and recorded this $700 of additional decline in the market
value as a charge to accumulated other comprehensive loss.
Other income (expense), net also includes the results of the Company’s trading securities which provide an economic hedge to the Company’s
deferred compensation liabilities. The income (expense), on such trading securities was $4,524 and $(7,334) in 2009 and 2008, respectively.
Such income or (expense) was substantially offset by a like amount of (expense) or income in aggregate product cost of goods sold and selling,
marketing, and administrative expenses in the respective years as discussed above. The 2009 income principally reflects market appreciation in
the equity markets in 2009, and the 2008 (expense) principally reflects the market decline in the equity markets in 2008.
The consolidated effective tax rate was 16.1% and 29.7% in 2009 and 2008, respectively. This favorable decrease in the effective tax rate
principally reflects the release of Canadian income tax valuation allowances in 2009. Prior to fourth quarter 2009, Canadian income tax
valuation allowances were recorded against Canadian deferred tax assets as a result of losses generated in 2009 and prior years. These
Canadian income tax losses were principally the result of interest expense deductions for income tax purposes relating to an inter-company
financing transaction which was eliminated in the Company’s consolidated financial statements. Because the realization of such prior NOL
carry-forward benefits were not more-likely-than-not, a full valuation allowance was recorded as of December 31, 2008, and through third
quarter 2009. In response to the Fifth Protocol to the Canada-U.S. Income Tax Convention (Treaty), during fourth quarter 2009 the Company
decided to restructure its Canadian operations effective January 1, 2010. This restructuring eliminated the inter-company financing structure
and related interest deduction for Canadian income taxes effective January 1, 2010. Going forward, management expects its Canadian
operation to report taxable income rather than losses for the foreseeable future. Accordingly, management determined that the Canadian NOL
carry-forward benefits were more-likely-than-not realizable as of December 31, 2009. As such, the Company reversed approximately $10,700
of valuation allowances as a credit to income tax expense as of December 31, 2009. Management believes that its assessment is based on
reasonable assumptions and is in accordance with accounting guidance regarding the release of valuation allowances on deferred tax assets. See
also Note 4 to the Consolidated Financial Statements for further
8
discussion. The Treaty also provided for the phase-out of Canadian withholding tax rates for interest and allowed the Company to qualify for
the 0% withholding rate effective January 1, 2010, resulting in a current tax benefit of $1,500 in 2009.
Net earnings were $53,878 in 2009 compared to $39,315 in 2008, and earnings per share were $.93 and $.67 in 2009 and 2008, respectively, an
increase of $.26 or 39%. Earnings per share did benefit from the reduction in average shares outstanding resulting from Common Stock
purchases in the open market by the Company. Average shares outstanding decreased from 58,464 in 2008 to 57,738 in 2009.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operating activities were $82,805, $76,994 and $57,533 in 2010, 2009 and 2008, respectively. The $5,811 increase in cash
flows from operating activities from 2009 to 2010 primarily reflects changes in other current assets and liabilities, principally accounts
receivable, accounts payable and accrued liabilities, and income taxes payable and deferred, including the release of $10,700 of Canadian
deferred income tax asset valuation allowances in 2009, which was partially offset by the effects of $18,400 of impairment charges in 2009. As
discussed above, during 2009 the Company recorded pre-tax non-cash impairment charges of $14,000 and $4,400 relating to certain trademarks
and its equity method investment, respectively.
During 2008 the Company contributed $16,050 to a VEBA trust to fund the estimated future costs of certain employee health, welfare and
other benefits. The Company used the funds, as well as investment income in this VEBA trust, to pay the actual cost of such benefits during
2009, 2010 and will continue to do so through 2012. At December 31, 2010, the VEBA trust held $10,019 of aggregate cash, cash equivalents
and investments; this asset value is included in prepaid expenses in the Company’s current and other long-term assets.
Cash flows from investing activities reflect capital expenditures of $12,813, $20,831, and $34,355 in 2010, 2009 and 2008, respectively. The
2010, 2009 and 2008 capital additions include $1,682, $2,326 and $4,755, respectively, relating to computer systems and related
implementation. Capital expenditures in 2008 include $12,400 relating to the purchase of real estate property that the Company placed into
service as a distribution center in 2009.
The Company had no bank borrowing or repayments in 2008, 2009, or 2010, and had no outstanding bank borrowings as of December 31,
2009 or 2010.
Financing activities include Company Common Stock purchases and retirements of $22,881, $20,723, and $21,109 in 2010, 2009 and 2008,
respectively. Cash dividends of $18,130, $17,825, and $17,557 were paid in 2010, 2009 and 2008, respectively. The increase in cash dividends
each year reflects the annual 3% stock dividend issued in each of these years less the effects of Company Common Stock purchases and
retirements.
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 2010, 2009 and 2008, 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 acquired trademarks and goodwill. 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 intangibles.
9
The impairment test is performed by comparing the carrying value of the asset with its estimated fair value, which is calculated using estimates,
including discounted projected future cash flows. If the carrying value exceeds the fair value, the second step of the process is necessary. The
second step measures the difference between the carrying value and implied fair value of goodwill. These projected future cash flows are
dependent on a number of factors including the execution of business plans, achievement of projected sales, including but not limited to future
price increases, projected operating margins, and projected capital expenditures. Such operating results are also dependent upon future
ingredient and packaging material costs, exchange rates for products manufactured or sold in foreign countries, operational efficiencies, cost
savings initiatives, and competitive factors. Although the majority of the Company’s trademarks relate to well established brands with a long
history of consumer acceptance, projected cash flows are inherently uncertain. A change in the assumptions underlying the impairment
analysis, 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.
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 using a valuation model with Level 3 inputs as defined. 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, 2010, all of which are generally normal and recurring in nature, are summarized in the chart on page 13.
10
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2010-06, “Improving
Disclosures about Fair Value Measurements”. ASU 2010-06 requires additional disclosures about fair value measurements including transfers
in and out of Levels 1 and 2 and a higher level of disaggregation for the different types of financial instruments. For the reconciliation of Level
3 fair value measurements, information about purchases, sales, issuances and settlements are presented separately. This standard is effective for
interim and annual reporting periods beginning after December 15, 2009 with the exception of revised Level 3 disclosure requirements which
are effective for interim and annual reporting periods beginning after December 15, 2010. The Company adopted the provisions of the standard
as of January 1, 2010, which did not have a material impact on its Consolidated Financial Statements.
In June 2009, the FASB issued Accounting Standards Codification (ASC) 810, “Consolidation”, regarding the consolidation of variable interest
entities (formerly SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)”). ASC 810 is intended to improve financial reporting by
providing additional guidance to companies involved with variable interest entities and by requiring additional disclosures about a company’s
involvement in variable interest entities. This standard is effective for interim and annual periods beginning after November 15, 2009. The
Company adopted the provisions of the standard as of January 1, 2010, which had no impact on its 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, changes in governments’ farm policies, including mandates for ethanol and bio-fuels, and
environmental matters, including global warming, 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 increases, weight declines (indirect price increases) 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 anticipates significantly higher input costs, primarily
higher ingredient costs, in 2011 reflecting many of the above discussed factors.
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, have taken actions, including
price increases and selective product weight declines (indirect price increases) 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 price increases and weight
declines 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 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 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
11
Company at December 31, 2010, assuming a 10% change in the underlying contract price, was $1,890. 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, including ARS, 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, 2010.
Less than 1 year
1 – 2 years
2 – 3 years
Over 3 years
$
7,948
10,409
8,765
6,775
Total
$
33,897
The Company’s outstanding debt at December 31, 2010 and 2009 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, including ARS, 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.
However, given events in the municipal bond and ARS markets, including failed auctions, the Company continues to monitor these
investments and markets, as well as its investment policies. Nonetheless, the financial markets have been experiencing unprecedented events in
recent years, and future outcomes are 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, 2010, the Company has investments in mutual funds, classified as trading securities, of $38,504.
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 and Mexico, 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 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. As of December 31, 2010, the
Company held foreign exchange forward contracts with a fair value of $942.
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 limitations 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 related ingredients, and packaging materials, 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 price increases and seasonal events such as Halloween; (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 lines,
and new computer software systems; (viii) the effect of changes in assumptions, including discount rates, sales growth and profit
12
margins and the capability to pass along higher ingredient and other input costs through price increases, relating to 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, and availability of shelf space;
(xii) increases in energy costs, including freight and delivery, that cannot be passed along to customers through increased prices due to
competitive reasons; (xiii) any significant labor stoppages, strikes or production interruptions; (xiv) changes in governmental laws and
regulations including taxes and tariffs; (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-thantemporary” as defined; and (xvii) the potential effects of current and future macroeconomic conditions.
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 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 forwardlooking statements.
Open Contractual Commitments as of December 31, 2010
Payable in
Commodity hedges
Foreign currency hedges
Purchase obligations
Interest bearing debt
Operating leases
Total
Less than
1 Year
Total
$
$
15,325
3,572
15,996
7,500
2,725
45,119
$
14,638
3,572
15,996
—
916
35,122
$
1 to 3
Years
$
$
3 to 5
Years
687
—
—
—
1,015
1,702
$
$
More than
5 Years
—
—
—
—
795
795
$
$
—
—
—
7,500
—
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 $48,743, liabilities for uncertain tax positions of $9,835, postretirement health care and life
insurance benefits of $20,689 and deferred compensation and other liabilities of $46,157 because the timing of payments relating to these items
cannot be reasonably determined.
13
CONSOLIDATED STATEMENTS OF
Earnings, Comprehensive Earnings and Retained Earnings
TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES (in thousands except per share data)
2010
Net product sales
Rental and royalty revenue
Total revenue
Product cost of goods sold
Rental and royalty cost
Total costs
Product gross margin
Rental and royalty gross margin
Total gross margin
Selling, marketing and administrative expenses
Impairment charges
Earnings from operations
Other income (expense), net
Earnings before income taxes
Provision for income taxes
Net earnings
$
Net earnings
Other comprehensive earnings (loss)
Comprehensive earnings
$
Retained earnings at beginning of year
Net earnings
Cash dividends
Stock dividends
Retained earnings at end of year
$
Earnings per share
$
517,149
4,299
521,448
348,313
1,088
349,401
168,836
3,211
172,047
106,316
—
65,731
8,358
74,089
20,375
53,714
$
53,714
1,183
54,897
$
$
53,878
2,845
56,723
$
$
2008
492,051
3,965
496,016
333,314
921
334,235
158,737
3,044
161,781
95,254
—
66,527
(10,618)
55,909
16,594
39,315
$
$
148,582 $
53,714
(18,078)
(46,806)
137,412 $
145,123 $
53,878
(17,790)
(32,629)
148,582 $
158,465
39,315
(17,492)
(35,165)
145,123
$
0.94
0.93
56,997
(The accompanying notes are an integral part of these statements.)
14
$
495,592
3,739
499,331
318,645
852
319,497
176,947
2,887
179,834
103,755
14,000
62,079
2,100
64,179
10,301
53,878
39,315
(3,514)
35,801
$
Average Common and Class B Common shares outstanding
For the year ended December 31,
2009
$
$
57,738
$
0.67
58,464
CONSOLIDATED STATEMENTS OF
Financial Position
TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES (in thousands)
December 31,
Assets
2010
CURRENT ASSETS:
Cash and cash equivalents
Investments
Accounts receivable trade, less allowances of $1,531 and $2,356
Other receivables
Inventories:
Finished goods and work-in-process
Raw materials and supplies
Prepaid expenses
Deferred income taxes
Total current assets
PROPERTY, PLANT AND EQUIPMENT, at cost:
Land
Buildings
Machinery and equipment
Construction in progress
$
Less—Accumulated depreciation
Net property, plant and equipment
OTHER ASSETS:
Goodwill
Trademarks
Investments
Split dollar officer life insurance
Prepaid expenses
Equity method investment
Deferred income taxes
Total other assets
Total assets
$
(The accompanying notes are an integral part of these statements.)
15
115,976
7,996
37,394
9,961
2009
$
90,990
8,663
37,512
8,397
36,935
22,141
6,499
689
237,591
35,570
20,817
8,562
1,367
211,878
21,619
102,934
307,178
9,243
440,974
225,482
215,492
21,559
102,374
296,787
6,877
427,597
206,876
220,721
73,237
175,024
64,461
74,441
6,680
4,254
9,203
407,300
860,383
73,237
175,024
58,136
74,642
8,068
4,961
11,580
405,648
838,247
$
(in thousands except per share data)
December 31,
Liabilities and Shareholders’ Equity
2010
CURRENT LIABILITIES:
Accounts payable
Dividends payable
Accrued liabilities
Total current liabilities
NONCURRENT LIABILITES:
Deferred income taxes
Postretirement health care and life insurance benefits
Industrial development bonds
Liability for uncertain tax positions
Deferred compensation and other liabilities
Total noncurrent liabilities
SHAREHOLDERS’ EQUITY:
Common Stock, $.69-4/9 par value—120,000 shares authorized—36,057 and 35,802, respectively,
issued
Class B Common Stock, $.69-4/9 par value—40,000 shares authorized— 20,466 and 19,919,
respectively, issued
Capital in excess of par value
Retained earnings, per accompanying statement
Accumulated other comprehensive loss
Treasury stock (at cost)—69 shares and 67 shares, respectively
Total shareholders’ equity
Total liabilities and shareholders’ equity
16
$
$
9,791
4,529
44,185
58,505
2009
$
9,140
4,458
42,468
56,066
48,743
20,689
7,500
9,835
46,157
132,924
44,582
16,674
7,500
18,447
39,839
127,042
25,040
24,862
14,212
505,495
137,412
(11,213)
(1,992)
668,954
860,383 $
13,833
482,250
148,582
(12,396)
(1,992)
655,139
838,247
CONSOLIDATED STATEMENTS OF
Cash Flows
TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES (in thousands)
2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation
Impairment charges
Impairment of equity method investment
Loss from equity method investment
Other than temporary impairment
Amortization of marketable securities
Changes in operating assets and liabilities:
Accounts receivable
Other receivables
Inventories
Prepaid expenses and other assets
Accounts payable and accrued liabilities
Income taxes payable and deferred
Postretirement health care and life insurance benefits
Deferred compensation and other liabilities
Other
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures
Net purchases of trading securities
Purchase of available for sale securities
Sale and maturity of available for sale securities
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Shares purchased and retired
Dividends paid in cash
Net cash used in financing activities
Increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental cash flow information:
Income taxes paid
Interest paid
Stock dividend issued
(The accompanying notes are an integral part of these statements.)
17
$
$
$
$
$
For the year ended December 31,
2009
53,714
$
53,878
$
2008
39,315
18,279
—
—
342
—
522
17,862
14,000
4,400
233
—
320
17,036
—
—
477
5,140
396
717
(2,373)
(2,468)
4,936
2,180
2,692
6,601
(2,647)
310
82,805
(5,899)
(2,088)
(675)
5,203
(2,755)
(12,134)
1,028
3,316
305
76,994
(261)
(33)
1,352
(15,139)
967
8,104
3,394
(2,385)
(830)
57,533
(12,813)
(2,902)
(9,301)
8,208
(16,808)
(20,831)
(1,713)
(11,331)
17,511
(16,364)
(34,355)
(491)
(33,977)
61,258
(7,565)
(22,881)
(18,130)
(41,011)
24,986
90,990
115,976 $
(20,723)
(17,825)
(38,548)
22,082
68,908
90,990 $
(21,109)
(17,557)
(38,666)
11,302
57,606
68,908
20,586
49
46,683
$
$
$
22,364
182
32,538
$
$
$
12,728
252
35,042
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 subsidiaries (the Company),
which are primarily engaged in the manufacture and sales of candy products. 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.
Certain reclassifications have been made to the prior year financial statements to conform to the current year presentation.
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 $43,034, $38,628, and $45,570 in 2010, 2009
and 2008, respectively, are included in selling, marketing and administrative expenses. Accounts receivable are unsecured. Revenues from a
major customer aggregated approximately 21.4%, 22.9% and 23.5% of net product sales during the years ended December 31, 2010, 2009 and
2008, respectively.
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 (expense), 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 (expense), 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 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 ($55,287 and $53,724 at
December 31, 2010 and 2009, respectively) has been determined by the last-in, first-out (LIFO) method. The excess of current cost over LIFO
cost of inventories approximates $16,955 and $13,107 at December 31, 2010 and 2009, respectively. The cost of certain foreign inventories
($3,789 and $2,663 at December 31, 2010 and 2009, 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 $18,279, $17,862 and $17,036 in 2010, 2009 and 2008,
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 longlived asset, or asset group, to the future undiscounted cash flows of the underlying assets to determine if an 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 2010, 2009 and
2008.
Postretirement health care and life insurance benefits:
The Company provides certain postretirement health care and life insurance benefits. The cost of these postretirement benefits is accrued
during employees’ working careers. 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 2010, 2009 and 2008.
18
Goodwill and 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. The Company has completed its
annual impairment testing of its goodwill and trademarks at December 31 of each of the years presented. As of December 31, 2009,
management ascertained that certain trademarks were impaired, and recorded a pre-tax charge of $14,000. No impairments of intangibles were
recorded in 2010 and 2008.
This determination is made by comparing the carrying value of the asset with its estimated fair value, which is calculated using estimates
including discounted projected future cash flows. If the carrying value exceeds the fair value, a second step would measure the carrying value
and implied fair value of goodwill. Management believes that all assumptions used for the impairment tests are consistent with those utilized
by market participants performing similar valuations.
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 invested 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
(expense), 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 (loss).
Equity method investment:
The Company’s 50% interest in two foreign companies is accounted for using the equity method. The Company records an increase in its
investment to the extent of its share of earnings, and reduces its investment to the extent of losses and dividends received. No dividends were
paid in 2010, 2009 and 2008.
As of December 31, 2009, management determined that the fair value of the asset was less than the carrying value. As a result, the Company
recorded a pre-tax impairment charge of $4,400 in the fourth quarter 2009, resulting in an adjusted carrying value of $4,961 as of December 31,
2009. The fair value was primarily assessed using the present value of estimated future cash flows. No impairments were recorded in 2010 and
2008.
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. For instance, in determining the annual post-employment benefit costs, the
Company estimates the cost of future health care benefits. Actual results may or may not differ from those estimates.
Revision:
During 2010, the Company identified certain liabilities for uncertain tax positions that should not have been recorded based on a reevaluation
of the related facts. Management has concluded that the effects of the correcting adjustments were not material to the Company’s previously
issued quarterly and annual financial statements. The Company has revised the previously issued financial statements in this annual report and
in future filings. The revised financial statements reflect an increase in retained earnings at the beginning of the year 2008 of $1,713. The
revised financial statements also reflect changes to the provision for income tax expense which resulted in an increase (decrease) in net
earnings of $(772), $403, and $538, for the first nine months of 2010, twelve months 2009, and twelve months 2008, respectively.
Recent accounting pronouncements:
In January 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2010-06, “Improving
Disclosures about Fair Value Measurements”. ASU 2010-06 requires additional disclosures about fair value measurements including transfers
in and out of Levels 1 and 2 and a higher level of disaggregation for the different types of financial instruments. For the reconciliation of Level
3 fair value measurements, information about purchases, sales, issuances and settlements are presented separately. This standard is effective for
interim and annual reporting periods beginning after December 15, 2009 with the exception of revised Level 3 disclosure requirements which
are effective for interim and annual reporting periods beginning after December 15, 2010. The Company adopted the provisions of the standard
on January 1, 2010, which did not have a material impact on its Consolidated Financial Statements.
In June 2009, the FASB issued Accounting Standards Codification (ASC) 810, “Consolidation”, regarding the consolidation of variable interest
entities (formerly SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)”). ASC 810 is intended to improve financial reporting by
providing additional guidance to companies involved with variable interest entities and by requiring additional disclosures about a company’s
involvement in variable interest entities. This standard is effective for interim and annual periods beginning after November 15, 2009. The
Company adopted the provisions of the standard on January 1, 2010, which had no impact on its Consolidated Financial Statements.
19
NOTE 2—ACCRUED LIABILITIES:
Accrued liabilities are comprised of the following:
December 31,
2010
Compensation
Other employee benefits
Taxes, other than income
Advertising and promotions
Other
$
$
2009
9,750
2,030
1,966
20,775
9,664
44,185
$
$
9,254
2,309
1,899
19,350
9,656
42,468
NOTE 3—INDUSTRIAL DEVELOPMENT BONDS:
Industrial development bonds are due in 2027. The average floating interest rate was 0.4% and 0.5% in 2010 and 2009, 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:
2010
Domestic
Foreign
$
60,329
13,760
74,089
$
2009
$
$
2008
69,779 $
(5,600)
64,179 $
50,313
5,596
55,909
The provision for income taxes is comprised of the following:
2010
Current:
Federal
Foreign
State
$
Deferred:
Federal
Foreign
State
$
10,251
806
1,455
12,512
2009
$
5,992
2,518
(647)
7,863
20,375 $
2008
21,836
500
1,665
24,001
$
6,318
502
355
7,175
(23)
(12,987)
(690)
(13,700)
10,301 $
8,733
264
422
9,419
16,594
Significant components of the Company’s net deferred tax liability at year end were as follows:
December 31,
2010
Deferred tax assets:
Accrued customer promotions
Deferred compensation
Postretirement benefits
Other accrued expenses
Foreign subsidiary tax loss carry forward
Tax credit carry forward
Unrealized capital loss
Valuation reserve
Total deferred tax assets
$
$
2009
1,634 $
11,602
6,596
5,475
16,582
978
6,566
49,433
(686)
48,747 $
4,475
10,667
5,983
5,705
14,001
1,286
6,393
48,510
(912)
47,598
December 31,
2010
Deferred tax liabilities:
Depreciation
Deductible goodwill and trademarks
Accrued export company commissions
Employee benefit plans
Inventory reserves
$
32,376
35,790
4,532
3,506
2,749
2009
$
29,657
30,585
4,179
4,437
2,311
Prepaid insurance
Accounts receivable
Deferred gain on sale of real estate
Total deferred tax liabilities
Net deferred tax liability
377
624
7,644
87,598
38,851
$
$
363
57
7,644
79,233
31,635
$
$
At December 31, 2010, the tax benefits of foreign subsidiary tax loss carry forwards expiring by year are as follows: $1,144 in 2014, $2,732 in
2015, $375 in 2026, $654 in 2027, $6,726 in 2028, $4,808 in 2029 and $143 in 2030.
Also at December 31, 2010, the amounts of the foreign subsidiary tax credit carry forwards expiring by year are as follows: $146 in 2011, $146
in 2012, $141 in 2013, $136 in 2014, $136 in 2015, $136 in 2016 and $137 in 2017. A valuation allowance has been established for these carry
forward credits to reduce the future income tax benefits to amounts expected to be realized.
The effective income tax rate differs from the statutory rate as follows:
2010
U.S. statutory rate
State income taxes, net
Exempt municipal bond interest
Foreign tax rates
Release of prior period valuation allowances
Qualified domestic production activities deduction
Tax credits receivable
Reserve for uncertain tax benefits
Other, net
Effective income tax rate
2009
35.0%
1.0
(0.4)
(1.9)
—
(2.6)
(0.2)
(2.3)
(1.1)
27.5%
2008
35.0%
1.7
(0.6)
(4.8)
(13.1)
(2.0)
(0.4)
1.3
(1.0)
16.1%
35.0%
1.0
(1.9)
(0.7)
—
(1.4)
(1.3)
(0.4)
(0.6)
29.7%
In connection with the acquisition in 2004 of Concord Confections, a Canadian subsidiary, the Company established an inter-company
financing structure which included a loan from the U.S. parent to the Canadian subsidiary. By December of 2006, significant operating losses
had accumulated in Canada and management determined that the realization of the net operating loss carry forward benefits was not morelikely-than-not, and provided a full tax valuation allowance. Consistent with relevant accounting guidance, these benefits continued to be
reserved through 2008 and through the third quarter of 2009.
In December of 2008, a new U.S./Canada income tax treaty (Treaty) was ratified which effectively denies certain inter-company interest
benefits to the U.S. shareholder of a Canadian company. Accordingly, in December of 2009, the Company decided to recapitalize its Canadian
operations effective January 1, 2010. During the fourth quarter of 2009, the Company considered all of the evidence and relevant accounting
guidance related to this recapitalization and based on reasonable assumptions, the Company concluded that it was more-likely-than-not that it
would realize substantially all of the deferred tax assets related to the Canadian net operating loss carry forward benefits because it is expected
that sufficient levels of income will be generated in the foreseeable future. As a result, the Company released $8.4 million of prior period
valuation allowances and $2.3 million of allowances that were provided through the first nine months of 2009.
20
The Treaty also introduced a phase out of the withholding tax on payments from Canada to the U.S. allowing the Company to qualify for a zero
percent withholding rate in 2010 if certain requirements of the Treaty were met. On January 4, 2010, the Canadian subsidiary repaid accrued
interest to its U.S. parent in a manner consistent with these requirements. As a result, $1.5 million of withholding taxes accrued for 2007 and
2008 and through the third quarter of 2009 were released in the fourth quarter of 2009.
The Company has not provided for U.S. federal or foreign withholding taxes on $4,787 and $5,294 of foreign subsidiaries’ undistributed
earnings as of December 31, 2010 and December 31, 2009, respectively, because such earnings are considered to be permanently reinvested. It
is not practicable to determine the amount of income taxes that would be payable upon remittance of the undistributed earnings.
The Company adopted the provisions of the authoritative guidance relating to unrecognized tax benefits effective January 1, 2007. The
Company recognizes interest and penalties related to unrecognized tax benefits in the provision for income taxes on the Consolidated
Statements of Earnings.
At December 31, 2010 and 2009, the Company had unrecognized tax benefits of $8,138 and $14,370, respectively. Included in this balance is
$4,949 and $6,373, respectively, of unrecognized tax benefits that, if recognized, would favorably affect the annual effective income tax rate.
As of December 31, 2010 and 2009, $1,697 and $4,077, 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:
2010
Unrecognized tax benefits at January 1
Increases in tax positions for the current year
Reductions in tax positions for lapse of statute of limitations
Reductions in tax positions for withdrawal of positions previously taken
Reductions in tax positions for effective settlements
Unrecognized tax benefits at December 31
$
$
2009
14,370 $
632
(1,122)
(5,256)
(486)
8,138 $
2008
13,069 $
2,661
(514)
—
(846)
14,370 $
14,273
651
(947)
—
(908)
13,069
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 2007 through 2009. With few exceptions, the Company is no longer subject to
examinations by tax authorities for the year 2006 and prior.
The Company is not currently subject to a U.S. federal examination. The Company’s Canadian subsidiary is currently subject to examination
by the Canada Revenue Agency for tax years 2005 and 2006. The Company is unable to determine the outcome of the examination at this time.
In addition, the Company is currently subject to various state tax examinations. Two of those state examinations have been effectively settled
and the corresponding liability for unrecognized tax benefits has been reduced. Although the Company is unable to determine the ultimate
outcome of the ongoing examinations, the Company believes that its liability for uncertain tax positions relating to these jurisdictions for such
years is adequate.
Beginning in 2008, statutory income tax rates in Canada will be reduced five percentage points with the final rate reduction coming in 2014.
Accordingly in 2009, the Company’s Canadian subsidiary has revalued its deferred tax assets and liabilities based on the rate in effect for the
year the differences are expected to reverse.
NOTE 5—SHARE CAPITAL AND CAPITAL IN EXCESS OF PAR VALUE:
Common Stock
Shares
Amount
(000’s)
Balance at January 1, 2008
Issuance of 3% stock dividend
Conversion of Class B common shares to
common shares
Purchase and retirement of common
shares
Balance at December 31, 2008
Issuance of 3% stock dividend
Conversion of Class B common shares to
common shares
Purchase and retirement of common
shares
Balance at December 31, 2009
Issuance of 3% stock dividend
Conversion of Class B common shares to
common shares
Purchase and retirement of common
shares
35,404
1,043
$ 24,586
724
100
69
(889)
35,658
1,064
18
(938)
35,802
1,070
(617)
24,762
739
12
(651)
24,862
743
Class B
Common Stock
Shares
Amount
(000’s)
18,892
565
(100)
—
19,357
580
(18)
—
19,919
597
$ 13,120
391
(69)
—
13,442
403
(12)
—
13,833
414
Treasury Stock
Shares
Amount
(000’s)
(63) $
(2)
—
—
(65)
(2)
—
—
(67)
(2)
(1,992) $
—
—
—
(1,992)
—
—
—
(1,992)
—
50
35
(50)
(35)
—
—
(865)
(600)
—
—
—
—
Capital in
Excess
of Par
Value
457,491
33,927
—
(20,491)
470,927
31,396
—
(20,073)
482,250
45,526
—
(22,281)
Balance at December 31, 2010
36,057
$ 25,040
20,466
$ 14,212
(69) $
(1,992) $
505,495
Average shares outstanding and all per share amounts included in the financial statements and notes thereto have been adjusted retroactively to
reflect annual three percent stock dividends.
While the Company does not have a formal or publicly announced Company Common Stock purchase program, the Company’s board of
directors periodically authorizes a dollar amount for such share purchases.
Based upon this policy, shares were purchased and retired as follows:
Total Number of Shares
Purchased
Year
2010
2009
2008
865
938
889
Average Price Paid Per Share
$
$
$
26.41
22.05
23.71
21
NOTE 6—OTHER INCOME (EXPENSE), NET:
Other income (expense), net is comprised of the following:
2010
Interest and dividend income
Gains (losses) on trading securities relating to deferred compensation plans
Interest expense
Impairment of equity method investment
Equity method investment loss
Foreign exchange gains (losses)
Other than temporary impairment
Capital gains (losses)
Miscellaneous, net
$
$
2009
879 $
3,364
(142)
—
(342)
4,090
—
(28)
537
8,358 $
2008
1,439 $
4,524
(243)
(4,400)
(233)
951
—
(38)
100
2,100 $
3,451
(7,334)
(378)
—
(477)
(963)
(5,140)
88
135
(10,618)
As of December 31, 2009, management determined that the carrying value of an 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 $4,400 resulting
in an adjusted carrying value of $4,961 as of December 31, 2009. The fair value was primarily assessed using the present value of estimated
future cash flows.
NOTE 7—EMPLOYEE BENEFIT PLANS:
Pension plans:
The Company sponsors defined contribution pension plans covering certain non-union employees with over one year of credited service. The
Company’s policy is to fund pension costs accrued based on compensation levels. Total pension expense for 2010, 2009 and 2008
approximated $4,196, $4,178 and $3,944, respectively. The Company also maintains certain profit sharing and retirement savings-investment
plans. Company contributions in 2010, 2009 and 2008 to these plans were $1,043, $1,011 and $1,003, respectively.
The Company also contributes to multi-employer defined benefit pension plans for its union employees. Such contributions aggregated $1,923,
$1,633 and $1,392 in 2010, 2009 and 2008, respectively. Although the Company has been advised that the plan is currently in an underfunded
status, the relative position of each employer associated with the multi-employer plan with respect to the actuarial present value of benefits and
net plan assets is not determinable by the Company.
Deferred compensation:
The Company sponsors three deferred compensation plans for selected executives and other employees: (i) the Excess Benefit Plan, which
restores retirement benefits lost due to IRS limitations on contributions to tax-qualified plans, (ii) the Supplemental Plan, which allows eligible
employees to defer the receipt of eligible compensation until designated future dates and (iii) the Career Achievement Plan, which provides a
deferred annual incentive award to selected executives. Participants in these plans earn a return on amounts due them based on several
investment options, which mirror returns on underlying investments (primarily mutual funds). The Company economically hedges its
obligations under the plans by investing in the actual underlying investments. These investments are classified as trading securities and are
carried at fair value. At December 31, 2010 and 2009, these investments totaled $38,504 and $32,238, respectively. All gains and losses in
these investments, which are recorded in other income (expense), net, are equally offset by corresponding increases and decreases in the
Company’s deferred compensation liabilities.
Postretirement health care and life insurance benefit plans:
The Company provides certain postretirement health care and life insurance benefits for corporate office and management employees.
Employees become eligible for these benefits based upon their age, service and date of hire and if they agree to contribute a portion of the cost.
The Company has the right to modify or terminate these benefits. The Company does not fund postretirement health care and life insurance
benefits in advance of payments for benefit claims.
Amounts recognized in accumulated other comprehensive loss (pre-tax) at December 31, 2010 are as follows:
Prior service credit
Net actuarial loss
Net amount recognized in accumulated other comprehensive loss
$
(751)
4,983
4,232
$
The estimated actuarial loss and prior service credit to be amortized from accumulated other comprehensive income into net periodic benefit
cost during 2011 are $626 and $(125), respectively.
The changes in the accumulated postretirement benefit obligation at December 31, 2010 and 2009 consist of the following:
December 31
2010
2009
Benefit obligation, beginning of year
Service cost
Interest cost
Actuarial (gain)/loss
Benefits paid
Benefit obligation, end of year
$
$
16,674 $
696
958
2,714
(353)
20,689 $
15,468
704
853
(38)
(313)
16,674
Net periodic postretirement benefit cost included the following components:
2010
Service cost—benefits attributed to service during the period
Interest cost on the accumulated postretirement benefit obligation
Net amortization
Net periodic postretirement benefit cost
$
$
2009
696
958
128
1,782
$
$
2008
704
853
140
1,697
$
$
646
740
33
1,419
For measurement purposes, the 2011 annual rate of increase in the per capita cost of covered health care benefits was assumed to be 8.0% for
pre-age 65 retirees, post 65 retirees and for prescription drugs; these rates were assumed to decrease gradually to 5.0% for 2018 and remain at
that level thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. The weighted-average discount
rate used in determining the accumulated postretirement benefit obligation was 5.47% and 5.84% at December 31, 2010 and 2009, respectively.
22
Increasing or decreasing the health care trend rates by one percentage point in each year would have the following effect:
1% Increase
Postretirement benefit obligation
Total of service and interest cost components
$
$
3,065
272
1% Decrease
$
$
(2,513)
(221)
The Company estimates future benefit payments will be $531, $643, $785, $937 and $1,050 in 2011 through 2015, respectively, and a total of
$6,880 in 2016 through 2020. The future benefit payments are net of the annual Medicare Part D subsidy of approximately $1,230 beginning in
2011.
NOTE 8—COMMITMENTS:
Rental expense aggregated $1,152, $1,180 and $1,311 in 2010, 2009 and 2008, respectively.
Future operating lease commitments are not significant.
NOTE 9—SEGMENT AND GEOGRAPHIC INFORMATION:
The Company operates as a single reportable segment encompassing the manufacture and sale of confectionery products. Its principal
manufacturing operations are located in the United States and Canada, and its principal market is the United States. The Company also
manufactures and sells confectionery products in Mexico, and exports products to Canada and other countries worldwide.
The following geographic data includes net product sales summarized on the basis of the customer location and long-lived assets based on their
physical location:
2010
Net product sales:
United States
Foreign
$
$
Long-lived assets:
United States
Foreign
$
$
2009
471,714
45,435
517,149
$
172,087
43,405
215,492
$
$
$
2008
455,517
40,075
495,592
$
176,044
44,677
220,721
$
$
$
448,268
43,783
492,051
172,299
45,329
217,628
NOTE 10—FAIR VALUE MEASUREMENTS:
Current accounting guidance defines fair value as the price that would be received in the sale of an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date. Guidance requires disclosure of the extent to which fair value is used
to measure financial assets and liabilities, the inputs utilized in calculating valuation measurements, and the effect of the measurement of
significant unobservable inputs on earnings, or changes in net assets, as of the measurement date. Guidance establishes a three-level valuation
hierarchy based upon the transparency of inputs utilized in the measurement and valuation of financial assets or liabilities as of the
measurement date. Level 1 inputs include quoted prices for identical instruments and are the most observable. Level 2 inputs include quoted
prices for similar assets and observable inputs such as interest rates, foreign currency exchange rates, commodity rates and yield curves. Level
3 inputs are not observable in the market and include management’s own judgments about the assumptions market participants would use in
pricing the asset or liability. The use of observable and unobservable inputs is reflected in the hierarchy assessment disclosed in the table
below.
As of December 31, 2010 and 2009, the Company held certain financial assets that are required to be measured at fair value on a recurring
basis. These included derivative hedging instruments related to the foreign currency forward contracts and purchase of certain raw materials,
investments in trading securities and available for sale securities, including an ARS. The Company’s available for sale and trading securities
principally consist of municipal bonds and mutual funds that are publicly traded.
The following tables present information about the Company’s financial assets measured at fair value as of December 31, 2010 and 2009, and
indicate the fair value hierarchy and the valuation techniques utilized by the Company to determine such fair value:
Total
Fair Value
Cash and equivalents
$
Available-for-sale securities, excluding ARS
Foreign currency forward contracts
Commodity futures contracts
Commodity options contracts
Trading securities
Total assets measured at fair value
$
115,976
6,775
27,178
942
2,310
5,369
38,504
197,054
Estimated Fair Value December 31, 2010
Input Levels Used
Level 1
Level 2
$
$
115,976
—
—
942
2,310
5,369
38,504
163,101
$
$
—
—
27,178
—
—
—
—
27,178
Level 3
$
$
—
6,775
—
—
—
—
—
6,775
Estimated Fair Value December 31, 2009
Input Levels Used
Level 1
Level 2
Total
Fair Value
Cash and equivalents
$
Available-for-sale securities, excluding ARS
Foreign currency forward contracts
Commodity option contracts
Trading securities
Total assets measured at fair value
$
90,990
7,710
26,851
3,674
1,686
32,238
163,149
$
$
90,990
—
—
3,674
1,686
32,238
128,588
$
—
—
26,851
—
—
—
26,851
$
Level 3
$
—
7,710
—
—
—
—
7,710
$
Available for sale securities which utilize Level 2 inputs consist primarily of municipal bonds, which are valued based on quoted market prices
or alternative pricing sources with reasonable levels of price transparency.
A summary of the aggregate fair value, gross unrealized gains, gross unrealized losses, realized losses and amortized cost basis of the
Company’s investment portfolio by major security type is as follows:
Amortized
Cost
Available for Sale:
ARS
Municipal bonds
Mutual funds
$
$
8,410
27,073
56
35,539
23
Fair
Value
$
$
6,775
27,122
56
33,953
December 31, 2010
Unrealized
Gains
Losses
$
$
—
49
—
49
$
$
(1,635) $
—
—
(1,635) $
Realized
Losses
—
—
—
—
Amortized
Cost
Available for Sale:
$
Fair
Value
8,410
26,502
56
34,968
Municipal bonds
Mutual funds
$
$
7,710
26,793
58
34,561
$
December 31, 2009
Unrealized
Gains
Losses
$
—
291
2
293
$
$
Realized
Losses
(700) $
—
—
(700) $
$
—
—
—
—
As of December 31, 2010, the Company’s long-term investments included an ARS, Jefferson County Alabama Sewer Revenue Refunding
Warrants, reported at a fair value of $6,775, after reflecting a $5,140 other-than-temporary impairment and a $1,635 temporary, as defined,
decline in market value against its $13,550 par value. This other-than-temporary impairment was recorded in other income (expense), net in
2008. In 2008, this ARS was determined to be other-than-temporarily impaired due to the duration and severity of the decline in fair value. The
Company estimated the fair value of this ARS utilizing a valuation model with Level 3 inputs.
This valuation model considered, among other items, the credit risk of the collateral underlying the ARS, the credit risk of the bond insurer,
interest rates, and the amount and timing of expected future cash flows including the Company’s assumption about the market expectation of
the next successful auction. See also the Management’s Discussion and Analysis of Financial Condition and Results of Operations regarding
Jefferson County ARS.
The Company classified this ARS as non-current and has included it in long-term investments on the Consolidated Statements of Financial
Position at December 31, 2010 and 2009, because the Company believes that the current condition of the ARS market may take more than
twelve months to improve.
The following table presents additional information about the Company’s financial instruments (all ARS) measured at fair value on a recurring
basis using Level 3 inputs at December 31, 2010 and 2009:
2010
Balance at January 1
Unrealized loss recognized in other comprehensive loss
Balance at December 31
$
2009
7,710 $
(935)
6,775 $
$
8,410
(700)
7,710
The $7,500 carrying amount of the Company’s industrial revenue development bonds at December 31, 2010 and 2009 approximates its
estimated fair value as the bonds have a floating interest rate.
In addition to assets and liabilities that are recorded at fair value on a recurring basis, guidance requires the Company to record assets and
liabilities at fair value on a nonrecurring basis generally as a result of impairment charges. Assets measured at fair value on a nonrecurring
basis during 2009 are summarized below:
Pre-Impairment
Cost
Basis
Equity method investment
Trademarks
Total
$
$
9,361
189,024
198,385
2009
Impairment
Charge
$
$
Twelve Months Ended December 31, 2009
Level Used to Determine
New Cost Basis
New Cost
Basis
Level 1
Level 2
4,400
14,000
18,400
$
$
4,961
175,024
179,985
$
$
—
—
—
$
$
—
—
—
$
$
Level 3
4,961
175,024
179,985
As discussed in Note 6, during the fourth quarter of 2009 the Company recognized an impairment of $4,400 in an equity method investment
based on Level 3 inputs.
As discussed in Note 13, during the fourth quarter of 2009 the Company recognized a trademark impairment of $14,000 based on Level 3
inputs.
NOTE 11—DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES:
From time to time, the Company uses derivative instruments, including foreign currency forward contracts, commodity futures contracts and
commodity option contracts, to manage its exposures to foreign exchange and commodity prices. Commodity futures contracts and most
commodity option contracts are intended and effective as hedges of market price risks associated with the anticipated purchase of certain raw
materials (primarily sugar). Foreign currency forward contracts are intended and effective as hedges of the Company’s exposure to the
variability of cash flows, primarily related to the foreign exchange rate changes of products manufactured in Canada and sold in the United
States, and periodic equipment purchases from foreign suppliers denominated in a foreign currency. The Company does not engage in trading
or other speculative use of derivative instruments.
The Company recognizes all derivative instruments as either assets or liabilities at fair value in the Consolidated Statements of Financial
Position. Derivative assets are recorded in other receivables and derivative liabilities are recorded in accrued liabilities. The Company uses
either hedge accounting or mark-to-market accounting for its derivative instruments. Derivatives that qualify for hedge accounting are
designated as cash flow hedges by formally documenting the hedge relationships, including identification of the hedging instruments, the
hedged items and other critical terms, as well as the Company’s risk management objectives and strategies for undertaking the hedge
transaction.
Changes in the fair value of the Company’s cash flow hedges are recorded in accumulated other comprehensive loss, net of tax, and are
reclassified to earnings in the periods in which earnings are affected by the hedged item. Substantially all amounts reported in accumulated
other comprehensive loss for commodity derivatives are expected to be reclassified to cost of goods sold. Substantially all amounts reported in
accumulated other comprehensive loss for foreign currency derivatives are expected to be reclassified to other income (expense), net.
The following table summarizes the Company’s outstanding derivative contracts and their effects on its Consolidated Statements of Financial
Position at December 31, 2010 and 2009:
December 31, 2010
Notional
Amounts
Derivatives designated as hedging instruments:
Foreign currency forward contracts
Commodity futures contracts
Commodity option contracts
Total derivatives designated as hedges
Derivatives not designated as hedging instruments:
Commodity option contracts
Total derivatives not designated as hedges
Total derivatives
$
Assets
3,572
4,407
10,344
$
—
$
24
Liabilities
942
2,310
5,481
8,733
—
—
8,733
$
$
—
—
(112)
(112)
—
—
(112)
December 31, 2009
Notional
Amounts
Derivatives designated as hedging instruments:
Foreign currency forward contracts
Commodity futures contracts
Commodity option contracts
Total derivatives designated as hedges
Derivatives not designated as hedging instruments:
Commodity option contracts
Total derivatives not designated as hedges
Total derivatives
$
17,772
—
—
Assets
$
Liabilities
3,674
—
—
3,674
1,896
1,896
5,570
12,405
$
$
—
—
$
(210)
(210)
(210)
The effects of derivative instruments on the Company’s Consolidated Statement of Earnings, Comprehensive Earnings and Retained Earnings
for years ended December 31, 2010 and 2009 are as follows:
For Year Ended December 31, 2010
Gain (Loss)
Recognized
in OCI
Foreign currency forward contracts
Commodity futures contracts
Commodity option contracts
Total
$
467
2,120
4,726
7,313
$
Gain (Loss)
on Amount Excluded
from Effectiveness
Testing Recognized
in Earnings
Gain (Loss)
Reclassified from
Accumulated OCI
into Earnings
$
3,199 $
(191)
(357)
2,651 $
$
—
—
—
—
For Year Ended December 31, 2009
Gain (Loss)
Recognized
in OCI
Foreign currency forward contracts
Commodity futures contracts
Commodity option contracts
Total
$
4,354 $
(13)
—
4,341 $
$
Gain (Loss)
on Amount Excluded
from Effectiveness
Testing Recognized
in Earnings
Gain (Loss)
Reclassified from
Accumulated OCI
into Earnings
989
26
—
1,015
$
—
—
—
—
$
For the years ended December 31, 2010 and 2009, the Company recognized loss of $1,613 and gain of $1,581 in earnings, respectively, related
to mark-to-market accounting for certain commodity option contracts.
NOTE 12—COMPREHENSIVE EARNINGS (LOSS):
The following table sets forth information with respect to accumulated other comprehensive earnings (loss):
Foreign
Currency
Translation
Adjustment
Balance at January 1, 2008
Unrealized gains (losses)
(Gains) losses reclassified to net earnings
Tax effect
Net of tax amount
Balance at December 31, 2008
Unrealized gains (losses)
(Gains) losses reclassified to net earnings
Tax effect
Net of tax amount
Balance at December 31, 2009
Unrealized gains (losses)
(Gains) losses reclassified to net earnings
Tax effect
Net of tax amount
Balance at December 31, 2010
$
$
(11,496) $
(2,296)
—
(500)
(2,796)
(14,292)
1,183
—
(118)
1,065
(13,227)
856
—
135
991
(12,236) $
NOTE 13—GOODWILL AND INTANGIBLE ASSETS:
Investments
Unrealized Gain (Loss) on
Postretirement
and
Derivatives
Pension Benefits
108 $
(4,923)
5,055
(49)
83
191
(709)
—
263
(446)
(255)
(1,179)
—
435
(744)
(999) $
196 $
504
(467)
(13)
24
220
4,341
(1,015)
(1,232)
2,094
2,314
7,313
(2,651)
(1,724)
2,938
5,252 $
(535) $
(1,484)
—
659
(825)
(1,360)
109
—
23
132
(1,228)
(3,007)
—
1,005
(2,002)
(3,230) $
Accumulated
Other
Comprehensive
Earnings (Loss)
(11,727)
(8,199)
4,588
97
(3,514)
(15,241)
4,924
(1,015)
(1,064)
2,845
(12,396)
3,983
(2,651)
(149)
1,183
(11,213)
All of the Company’s intangible indefinite-lived assets are trademarks.
The changes in the carrying amount of trademarks for 2010 and 2009 were as follows:
2010
Original cost
Accumulated impairment losses as of January 1
Balance at January 1
Current year impairment losses
Balance at December 31
Accumulated impairment losses as of December 31
$
$
$
$
193,767
(18,743)
175,024
—
175,024
(18,743)
2009
$
$
$
$
193,767
(4,743)
189,024
(14,000)
175,024
(18,743)
As of December 31, 2009, management ascertained certain trademarks were impaired, and recorded a pre-tax charge of $14,000. The principal
driver of this impairment charge was an increase in the discount rate required by market participants. The fair value of indefinite-lived
intangible assets was primarily assessed using the present value of estimated future cash flows. No impairments of intangibles were recorded in
2008.
The Company has no accumulated impairment losses of goodwill.
25
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Tootsie Roll Industries, Inc.:
In our opinion, the accompanying consolidated statements of financial position and the related consolidated statements of earnings,
comprehensive earnings and retained earnings, and of cash flows present fairly, in all material respects, the financial position of Tootsie Roll
Industries, Inc. and its subsidiaries at December 31, 2010 and December 31, 2009, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2010 in conformity with accounting principles generally accepted in the United States
of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2010, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for
maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial
reporting, included in Management’s Report on Internal Control over Financial Reporting on page 27 of the 2010 Annual Report to
Shareholders. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial
reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all
material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall
financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate.
Chicago, IL
March 1, 2011
26
Performance Graph
The following performance graph compares the cumulative total shareholder return on the Company’s Common Stock for a five-year period
(December 31, 2005 to December 31, 2010) with the cumulative total return of Standard & Poor’s 500 Stock Index (“S&P 500”) and the Dow
Jones Industry Food Index (“Peer Group,” which includes the Company), assuming (i) $100 invested on December 31 of the first year of the
chart in each of the Company’s Common Stock, S&P 500 and the Dow Jones Industry Food Index and (ii) the reinvestment of dividends.
Management’s Report on Internal Control Over
Financial Reporting
The management of Tootsie Roll Industries, Inc. is responsible for establishing and maintaining adequate internal control over financial
reporting, as such term is defined in the Securities Exchange Act of 1934 (SEC) Rule 13a-15(f). Our management conducted an evaluation of
the effectiveness of the Company’s internal control over financial reporting as of December 31, 2010 as required by SEC Rule 13a-15(c). In
making this assessment, we used the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). Based on our evaluation under the COSO criteria, our management
concluded that our internal control over financial reporting was effective as of December 31, 2010.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2010 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears on page 26.
Tootsie Roll Industries, Inc.
Chicago, Illinois
March 1, 2011
27
Quarterly Financial Data (Unaudited)
TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES
(Thousands of dollars except per share data)
First
Second
Third
2010
Net product sales
Product gross margin
Net earnings
Net earnings per share
Fourth
Year
$
103,244
35,121
9,204
0.16
$
105,026
35,666
8,447
0.15
$
191,045
62,024
26,484
0.47
$
117,834
36,025
9,579
0.17
$
517,149
168,836
53,714
0.94
$
94,054
33,335
8,455
0.15
$
107,812
39,005
10,510
0.18
$
183,408
65,701
27,153
0.47
$
110,318
38,906
7,760
0.14
$
495,592
176,947
53,878
0.93
2009
Net product sales
Product gross margin
Net earnings
Net earnings per share
The four quarters and full year results of 2009 and the results for the first three quarters of 2010 reflect revisions of net earnings and net
earnings per share as discussed in Note 1 to the Consolidated Financial Statements. Net earnings reflect increases (decreases) of $135, $172,
$(94), $190, $119, $(24) and $(867) for the first through fourth quarters of 2009 and first through third quarters of 2010, respectively, and an
increase of $403 in the full year results of 2009 for revisions to the provision for income taxes.
The 2009 fourth quarter net earnings included the release of tax valuation allowances, charges related to the impairment of an equity method
investment and impairment charges related to certain trademarks as discussed in Notes 4, 6 and 13 to the Consolidated Financial Statements,
respectively.
Net earnings per share is based upon average outstanding shares as adjusted for 3% stock dividends issued during the second quarter of each
year and revision of net earnings as discussed above. The sum of the per share amounts may not equal annual amounts due to rounding.
2010-2009 QUARTERLY SUMMARY OF TOOTSIE ROLL INDUSTRIES, INC. STOCK PRICES AND DIVIDENDS PER SHARE
STOCK PRICES*
2010
2009
High
1st Qtr
2nd Qtr
3rd Qtr
4th Qtr
$
$
$
$
Low
28.24
28.04
25.95
29.84
$
$
$
$
High
25.88
23.65
23.34
24.64
$
$
$
$
25.77
24.42
24.64
28.06
Low
$
$
$
$
19.46
21.82
22.67
23.60
*NYSE - Closing Price
Estimated Number of shareholders at February 2011:
Common Stock
Class B Common Stock
18,000
5,000
DIVIDENDS
2010
1st Qtr
2nd Qtr
3rd Qtr
4th Qtr
$
$
$
$
2009
.08
.08
.08
.08
$
$
$
$
.08
.08
.08
.08
NOTE: In addition to the above cash dividends, a 3% stock dividend was issued on April 8, 2010 and April 9, 2009. Cash dividends are
restated to reflect 3% stock dividends.
28
Five Year Summary of Earnings and Financial Highlights
TOOTSIE ROLL INDUSTRIES, INC. AND SUBSIDIARIES
(Thousands of dollars except per share, percentage and ratio figures)
(See management’s comments starting
on page 5)
Sales and Earnings Data (2)(3)(4)(5)
Net product sales
Product gross margin
Interest expense
Provision for income taxes
Net earnings
% of net product sales
% of shareholders’ equity
Per Common Share Data (1)(3)(4)(5)
Net earnings
Cash dividends declared
Stock dividends
Additional Financial Data (1)(2)(3)(4)(5)
Working capital
Net cash provided by operating activities
Net cash provided by (used in) investing activities
Net cash used in financing activities
Property, plant & equipment additions
Net property, plant & equipment
Total assets
Long-term debt
Shareholders’ equity
Average shares outstanding
2010
2009
2008
2007
2006
$
517,149
$
168,836
142
20,375
53,714
10.4%
8.0%
495,592
$
176,947
243
10,301
53,878
10.9%
8.2%
492,051
$
158,737
378
16,594
39,315
8.0%
6.2%
492,742
$
165,047
535
25,253
51,914
10.5%
8.1%
495,990
184,723
726
28,704
66,011
13.3%
10.4%
$
0.94
$
0.32
3%
0.93
$
0.32
3%
0.67
$
0.32
3%
0.87
$
0.32
3%
1.09
0.32
3%
$
179,086
82,805
(16,808)
(41,011)
12,813
215,492
860,383
7,500
668,954
56,997
$
155,812
76,994
(16,364)
(38,548)
20,831
220,721
838,247
7,500
655,139
57,738
$
129,967
57,533
(7,565)
(38,666)
34,355
217,628
813,525
7,500
637,021
58,464
$
141,754
90,148
(43,429)
(44,842)
14,767
201,401
812,725
7,500
639,943
59,893
$
128,706
56,405
10,277
(79,959)
39,207
202,898
791,639
7,500
632,105
60,713
(1) Per Common share data and average shares outstanding adjusted for annual 3% stock dividends and revision as discussed in Note 1 to the
Consolidated Financial Statements.
(2) Certain reclassifications have been made to prior year numbers to conform to current year presentation.
(3) The 2009 data included the release of tax valuation allowances, charges related to the impairment of an equity method investment and
impairment charges related to certain trademarks as discussed in Notes 4, 6 and 13 to the Consolidated Financial Statements, respectively.
(4) The 2008 data included a charge for the other-than-temporary impairment of an ARS. Further information is included in Note 10 to the
Consolidated Financial Statements.
(5) Reflects revisions to provision for income taxes, net earnings, net earnings per share and shareholders’ equity as discussed in Note 1 to the
Consolidated Financial Statements. Net earnings reflect increases of $92, $289, $538 and $403 for 2006, 2007, 2008, and 2009, respectively,
for revisions to decrease the provision for income taxes. Shareholders’ equity reflects increases of $1,424, $1,713, $2,251 and $2,654 for 2006,
2007, 2008 and 2009, respectively, for revisions to increase retained earnings.
29
Board of Directors
Melvin J. Gordon(1)
Chairman of the Board and Chief Executive Officer
Ellen R. Gordon(1)
President and Chief Operating Officer
Barre A. Seibert(2)(3)
Retired First Vice President, Washington Mutual Bank
Lana Jane Lewis-Brent(2)(3)
President, Paul Brent Designer, Inc., an art publishing, design and licensing company
Richard P. Bergeman(2)(3)
Retired Senior Vice President, Bestfoods
(1) Executive Committee (2) Audit Committee (3) Compensation Committee
Officers
Melvin J. Gordon
Chairman of the Board and Chief Executive Officer
Ellen R. Gordon
President and Chief Operating Officer
G. Howard Ember, Jr.
Vice President, Finance & Chief Financial Officer
John W. Newlin, Jr.
Vice President, Manufacturing
Thomas E. Corr
Vice President, Marketing & Sales
John P. Majors
Vice President, Physical Distribution
Barry P. Bowen
Treasurer & Assistant Secretary
Richard F. Berezewski
Controller
Offices, Plants
Executive Offices
7401 S. Cicero Ave.
Chicago, Illinois 60629
www.tootsie.com
Plants/Warehouses
Illinois
Tennessee
Massachusetts
Pennsylvania
Wisconsin
Ontario, Canada
Mexico City, Mexico
Foreign Sales Offices
Mexico City, Mexico
Ontario, Canada
Subsidiaries
Andes Candies L.P.
Andes Manufacturing LLC
Andes Services LLC
C.C.L.P., INC.
C.G.P., INC.
Cambridge Brands Manufacturing, Inc.
Cambridge Brands Services, Inc.
Cambridge Brands, Inc.
Cella’s Confections, Inc.
Charms LLC
Concord (GP) Inc.
Concord Brands, ULC
Concord Canada Holdings ULC
Concord Confections Holdings USA, Inc.
Concord Partners LP
JT Company, Inc.
The Sweets Mix Company, Inc.
Tootsie Roll Company, Inc.
Tootsie Roll Industries, LLC
Tootsie Roll Management, Inc
Tootsie Roll Mfg., LLC
Tootsie Roll of Canada, ULC
Tootsie Roll Worldwide, Ltd.
Tootsie Rolls—Latin America
TRI de Latinoamerica S.A. de C.V.
TRI Finance, Inc.
TRI International Inc.
TRI Sales Co.
TRI Sales Finance LLC
TRI-Mass, Inc.
Tutsi S.A. de C.V.
World Trade & Marketing Ltd.
Other Information
Stock Exchange
New York Stock Exchange, Inc.
(Since 1922)
Stock Identification
Ticker Symbol: TR
CUSIP No. 890516 10-7
Stock Transfer Agent and Stock Registrar
American Stock Transfer
and Trust Company
Operations Center
6201 15th Avenue
Brooklyn, NY 11219
1-800-710-0932
www.amstock.com
Independent Registered Public Accounting Firm
PricewaterhouseCoopers LLP
One North Wacker
Chicago, IL 60606
General Counsel
Becker Ross, LLP
317 Madison Avenue
New York, NY 10017
Annual Meeting
May 2, 2011
Mutual Building, Room 1200
909 East Main Street
Richmond, VA 23219
Printed on recycled paper.
30
EXHIBIT 21
LIST OF SUBSIDIARIES OF THE COMPANY
NAME
Andes Candies, LP
Andes Manufacturing LLC
Andes Services LLC
C. C. L. P., Inc.
C. G. P., Inc.
Cambridge Brands, Inc.
Cambridge Brands Manufacturing., Inc.
Cambridge Brands Services, Inc.
Candy Realty, Inc.
Cella’s Confections, Inc.
Charms Company
Charms LLC
Concord (GP) Inc.
Concord Brands, ULC
Concord Canada Holdings ULC
Concord Confections Holdings USA, Inc.
Concord Partners LP
Concord Wax, Inc.
General Magnetics, Inc.
Henry Eisen Advertising Agency, Inc.
Impel Movie Line, Inc.
J. T. Company, Inc.
O’Tec Industries, Inc.
Sweets Company of New York, Inc.
Tootsie Roll Industries LLC
Tootsie Roll of Canada ULC
Tootsie Roll Central Europe Ltd.
The Tootsie Roll Company, Inc.
Tootsie Roll Management, Inc.
Tootsie Roll Mfg., LLC
Tootsie Rolls - Latin America, Inc.
Tootsie Roll Worldwide Ltd.
The Sweets Mix Company, Inc.
TRI de Latino America S.A. de C.V.
TRI Finance, Inc.
TRI International Co.
TRI-Mass, Inc.
TRI Sales Co.
TRI Sales Finance LLC
Tutsi S. A. de C. V.
World Trade & Marketing Ltd.
JURISDICTION OF INCORPORATION
Illinois
Illinois
Illinois
Delaware
Delaware
Delaware
Delaware
Delaware
New Jersey
Virginia
Delaware
Illinois
Ontario
Alberta
Nova Scotia
Delaware
Ontario
Delaware
New Jersey
New Jersey
Delaware
Delaware
Delaware
New York
Illinois
Alberta
Delaware
Illinois
Illinois
Illinois
Delaware
Illinois
Illinois
Mexico
Delaware
Illinois
Massachusetts
Delaware
Delaware
Mexico
British West Indies
Exhibit 31.1
CERTIFICATIONS
I, Melvin J. Gordon, Chairman and Chief Executive Officer of Tootsie Roll Industries, Inc., certify that:
1.
I have reviewed this annual report on Form 10-K of Tootsie Roll Industries, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the
period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this
report;
4.
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information;
and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
Date: March 1, 2011
By: /s/ Melvin J. Gordon
Melvin J. Gordon
Chairman and Chief Executive Officer
Exhibit 31.2
CERTIFICATIONS
I, G. Howard Ember, Jr., Vice President/Finance and Chief Financial Officer of Tootsie Roll Industries, Inc., certify that:
1.
I have reviewed this annual report on Form 10-K of Tootsie Roll Industries, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the
period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this
report;
4.
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information;
and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
Date: March 1, 2011
By: /s/ G. Howard Ember, Jr.
G. Howard Ember, Jr.
Vice President/Finance and Chief Financial Officer
Exhibit 32
Certificate Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Each of the undersigned officers of Tootsie Roll Industries, Inc. certifies that (i) the Annual Report on Form 10-K of Tootsie Roll
Industries, Inc. for the year ended December 31, 2010 (the Form 10-K) fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended and (ii) the information contained in the Form 10-K fairly presents, in all material respects, the
financial condition and results of operations of Tootsie Roll Industries, Inc.
Dated: March 1, 2011
/s/ Melvin J. Gordon
Melvin J. Gordon
Chairman and Chief Executive Officer
Dated: March 1, 2011
/s/ G. Howard Ember, Jr.
G. Howard Ember, Jr.
Vice President/Finance and Chief Financial Officer