Tootsie Roll Industries, Inc. — Q3 2011 Form 10-Q
Business context and reporting period. The unaudited quarter ended October 1, 2011; year-to-date figures cover the nine months then ended. The company makes confectionery products. Historically, Q3 is its largest sales quarter because of Halloween, and management cautions that interim results are not necessarily indicative of full-year results. Unless stated otherwise, dollar amounts below are in thousands.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenue | $187,856 | $192,125 | $403,071 | $402,521 |
| Operating earnings | $29,126 | $31,588 | $46,167 | $56,082 |
| Net earnings | $18,338 | $26,484 | $32,503 | $44,135 |
| Diluted earnings per share as reported | $0.32 | $0.45 | $0.56 | $0.75 |
| Net cash from (used in) operations | Not stated by quarter | $(16,420) | $6,044 |
- Q3 net product sales declined 2.2%; nine-month sales increased 0.2%. Management attributed the quarterly decline partly to timing of customer sales between Q3 and Q4.
- Q3 total gross margin was $54,551 versus $62,830; nine-month gross margin was $123,727 versus $135,194. Product cost of goods sold rose to $133,041 in Q3 and $278,572 year to date, from $129,021 and $266,504, respectively.
- Management’s adjusted figures exclude deferred-compensation expense changes. On that basis, operating earnings fell 26.9% in Q3 and 23.7% year to date; adjusted operating margins were 13.3% versus 17.8% and 10.9% versus 14.4%, respectively.
- Other income (expense), net was a $3,777 expense in Q3 versus $4,618 income a year earlier; nine-month other income was $216 versus $5,976. Trading-security gains or losses were substantially offset by related deferred-compensation expense or income in operating costs.
- Year-to-date operating cash flow was negative, principally reflecting working-capital movements, including accounts receivable and inventory. Investing cash outflow was $49,807, including $38,722 of purchases of available-for-sale securities and $12,677 of capital expenditures. Financing cash outflow was $24,059, including $13,788 of cash dividends and $10,271 of share purchases and retirements.
Financial position and liquidity
- At October 1, 2011, cash and cash equivalents were $25,690; current assets were $224,405 and current liabilities $73,482. The reported current ratio was 3.1:1, and net working capital was $150,923.
- Total assets were $875,621 and shareholders’ equity $671,153. The company reported $7,500 of industrial development bonds, no bank borrowings, and no bank borrowing or repayments during the quarter.
- Cash and short- and long-term investments totaled $133,653, including $39,031 of trading securities used as an economic hedge for deferred-compensation liabilities.
Outlook, risks, and unusual items
- Management expected ingredient costs to remain significantly higher than in 2010 through the balance of 2011 and into 2012. Packaging, manufacturing, and freight costs also contributed to margin pressure. Price increases were being implemented, but a substantial portion did not take effect until Q4 2011; the filing does not provide quantified earnings guidance.
- Key risks include competitive and consumer response to price increases or product-weight changes, input-cost and freight inflation, availability of materials, seasonal demand, customer purchase timing and shelf space, foreign-exchange exposure, and operational or information-technology disruptions.
- The company held an $8,130 Jefferson County, Alabama auction-rate security (ARS), down from its $13,550 par value and recorded after a $5,140 other-than-temporary impairment and a $280 temporary decline. Auctions had failed since 2008. The company continued to receive contractual interest and intended to hold the security, but said it could not predict the outcome of settlement negotiations or possible bankruptcy, or the amount and timing of recovery.
- The filing revised prior-period 2010 financial statements for an identified uncertain-tax-position liability; management said the correction was not material to previously issued statements. Tax authorities could examine U.S. federal and state and foreign returns for specified years.
Important facts for investors to verify
- Whether Q4 pricing actions offset elevated ingredient, packaging, manufacturing, and distribution costs without materially harming sales or demand.
- Whether customer-sales timing and Halloween seasonality affect Q4 revenue and full-year results.
- How working-capital needs and investment purchases affect cash generation and the company’s liquidity.
- Developments in Jefferson County ARS negotiations, valuation assumptions, and potential recovery.
- Reported versus management-adjusted operating results, including the deferred-compensation and trading-security offsets.