Tootsie Roll Industries, Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and first half ended June 28, 2014. Financial statement amounts below are in thousands of dollars, except per-share data. The filing is unaudited. Results are seasonal; historically, the third quarter is the largest sales quarter because of Halloween.
Financial results
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Total revenue | $104,930 | $102,886 | $212,712 | $214,172 |
| Net product sales | $104,061 | $101,988 | $210,873 | $212,267 |
| Total gross margin | $38,525 | $35,689 | $79,184 | $74,556 |
| Earnings from operations | $10,229 | $9,202 | $25,257 | $20,102 |
| Net earnings attributable to Tootsie Roll | $9,026 | $8,369 | $18,607 | $17,438 |
| Per-share earnings | $0.15 | $0.14 | $0.31 | $0.28 |
- Q2 product sales rose 2.0%; first-half product sales declined 0.7%. Management said U.S. Q2 sales edged ahead of the prior year, while lower sales in Mexico and Canada weighed on Q2 and first-half results.
- Gross margin was approximately 36.7% of revenue in Q2 versus 34.7% a year earlier, and 37.2% for the first half versus 34.8%. Management attributed improvement to lower ingredient costs overall, manufacturing efficiencies, capital investment and cost controls.
- Reported operating earnings increased 11.2% in Q2 and 25.6% for the first half. Excluding deferred compensation expense, management reported operating earnings growth of 23.8% in Q2 and 15.7% for the first half. These are management-adjusted figures, not GAAP results.
- Net earnings attributable to the company increased 7.9% in Q2 and 6.7% for the first half. Per-share earnings also benefited from fewer average shares outstanding following share repurchases. The prior-year comparison benefited from lower effective tax rates.
Cash flow, liquidity and debt
- First-half operating cash flow was $12,917, down from $37,093. The filing cites the prior-year benefit from changes in prepaid expenses and other assets; inventory increases used $39,770 of cash in the 2014 first half.
- Investing activities used $23,933, including $27,331 of purchases of available-for-sale securities and $5,895 of capital expenditures. Management expected full-year capital spending to be generally in line with historical annualized spending, funded from operating cash flow and internal sources.
- Financing activities used $20,176, including $10,381 for shares purchased and retired and $9,567 of cash dividends. Cash and cash equivalents declined by $31,192 from year-end to $57,091.
- At June 28, current assets were $237,808 and current liabilities $63,756; working capital was $174,052 and the current ratio was 3.7 to 1. Cash and short-term investments totaled $96,086; aggregate cash and short- and long-term investments were $258,361.
- Bank borrowings totaled $1,081, all associated with the Spanish subsidiaries; the company also had $7,500 of industrial development bonds. The filing reports no other outstanding bank borrowings.
Material changes, outlook and risks
- Spanish step acquisition: The company obtained operating control of two previously 50%-owned Spanish companies in Q1 and increased ownership to 75% by quarter-end. The step acquisition produced a reported $529 net loss, including a $2,350 deferred-tax provision, and an approximately $1,800 pretax gain included in other income. The Spanish businesses had operating losses in 2008–2013 and the first half of 2014. Management said restructuring should bring them to or near operating cash-flow break-even, but further financing may be needed and challenges in Spain may persist.
- Costs and outlook: Management said some key ingredient costs were higher despite more favorable overall comparative ingredient costs, and it was working to restore margins. Freight, delivery and warehousing costs increased as a percentage of product sales. No numerical revenue or earnings guidance was provided.
- Multiemployer pension plan: The Bakery and Confectionery Union and Industry Pension Fund is in critical status and has a rehabilitation plan with contribution surcharges. The company estimated its 2012 withdrawal liability at $37,200, with no updated estimate; a future liability could be higher. The labor contract requires participation through Q3 2017. Management said the ultimate impact is uncertain and could be material in future periods.
- Other risks: Commodity and ingredient availability and prices, customer and consumer demand, competition and pricing, foreign exchange, freight and energy costs, customer concentration, labor interruptions, investment values, product recalls, cybersecurity and the success of Spanish restructuring are among the disclosed risks. Management reported no material change in market-risk disclosures from its 2013 Form 10-K.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Key facts investors should verify
- Whether Q3/Halloween demand and sales in Mexico and Canada support full-year performance; the filing provides no numerical guidance.
- Whether gross-margin improvement continues as ingredient costs, freight and delivery expenses change.
- The Spanish subsidiaries’ progress toward break-even cash flow and whether they require additional funding.
- Updates to pension-plan funding requirements and the potential withdrawal liability.
- The composition, liquidity and valuation risks of the company’s substantial investment portfolio, including securities used to economically hedge deferred compensation liabilities.