Tootsie Roll Industries, Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter ended July 2, 2011; year-to-date results cover the first half of 2011. Financial amounts below are in USD millions unless noted. Interim results are unaudited. The company notes that results are seasonal, with its largest sales quarter historically being Q3 due to Halloween.
Financial performance
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Total revenue | $105.8 | $106.0 | $215.2 | $210.4 |
| Gross margin | $34.1 | $36.4 | $69.2 | $72.4 |
| Operating earnings | $7.9 | $13.9 | $17.0 | $24.5 |
| Net earnings | $6.2 | $8.4 | $14.2 | $17.7 |
| Diluted earnings per share | $0.11 | $0.14 | $0.24 | $0.30 |
- Q2 revenue was nearly flat year over year; first-half revenue increased 2.3%. Net product sales rose 2.4% in the first half, which management attributed principally to organic volume growth, effective marketing and product extensions. Q2 sales were affected by the timing of certain customer purchases.
- Reported gross margin was 32.2% in Q2 and 32.1% in the first half, compared with 34.3% and 34.4%, respectively, in the prior-year periods. Reported operating margin was 7.5% in Q2 and 7.9% in the first half, versus 13.1% and 11.6%.
- Management’s adjusted operating earnings, excluding specified deferred-compensation expense changes, fell 27.3% in Q2 and 19.0% in the first half. Adjusted operating margin was 7.9% in Q2 and 8.9% in the first half, versus 10.8% and 11.2%.
- Other income was $1.0 million in Q2, compared with a $2.1 million expense in Q2 2010; first-half other income was $4.0 million versus $1.4 million. The improvement primarily reflected market-value gains on trading securities used as an economic hedge for deferred-compensation liabilities; the effect was substantially offset in operating expenses.
- First-half operating cash flow was negative $12.8 million, compared with negative $2.2 million in 2010. The company cited working-capital movements; inventory increased by $47.3 million in the cash-flow statement. Investing cash outflow was $44.7 million, including $37.1 million of purchases of available-for-sale securities and $6.1 million of capital expenditures. Financing cash outflow was $17.2 million, including $9.2 million of cash dividends and $8.1 million of share repurchases.
Financial position and liquidity
- At July 2, 2011, cash and cash equivalents were $41.3 million and short-term investments were $10.3 million. The company reported working capital of $141.3 million and a current ratio of 3.4 to 1.
- Total cash and short- and long-term investments were $155.4 million. Cash and cash equivalents had declined from $116.0 million at year-end 2010, in part alongside increased investment purchases.
- The company reported no bank borrowings. It had $7.5 million of industrial development bonds outstanding; interest paid in the first half was $29,000.
- Shareholders’ equity was $663.9 million. The company paid a regular cash dividend of $0.16 per share for the first half and issued a 3% stock dividend.
Outlook, risks and unusual items
- Management expected ingredient costs to remain significantly higher throughout 2011 than in 2010. Price increases were being implemented, but a substantial portion was not expected to take effect until Q4 2011. Higher packaging costs and freight and delivery expenses also pressured margins.
- Key disclosed risks include competitive and consumer responses to price increases or product-weight reductions, the ability to pass through higher input and freight costs, ingredient and packaging availability, customer purchase timing and shelf space, seasonality, and foreign-exchange exposure.
- The company held a Jefferson County, Alabama, auction-rate security with a $13.55 million par value and an $8.13 million estimated fair value, including a previously recognized $5.14 million other-than-temporary impairment. Auctions had failed since 2008. Contractual interest was being received, but recovery depended on negotiations or potential bankruptcy proceedings; the timing and amount of recovery were uncertain. The investment used Level 3 valuation inputs.
- Deferred-compensation expense and related trading-security gains or losses affected reported results, but management said these effects substantially offset. The company also disclosed an immaterial revision to previously issued 2010 financial statements related to uncertain tax positions.
- Management stated that disclosure controls were effective and that there had been no material change in internal control over financial reporting during the quarter. No material change in market-risk disclosures was reported.
Important facts for investors to verify
- Whether Q4 price increases offset persistently higher ingredient, packaging, freight and delivery costs, and how customers respond.
- Whether first-half inventory growth and negative operating cash flow reverse as the company moves through its seasonal sales cycle.
- The status, valuation assumptions and potential recovery of the Jefferson County auction-rate security.
- The underlying operating trend excluding deferred-compensation and related trading-security valuation effects.
- Capital allocation, including share repurchases, dividends and purchases or maturities of investment securities.