Business Context and Reporting Period
Company: Tootsie Roll Industries, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: July 4, 2009 (Second Quarter and First Half)
Business Overview: The Company manufactures and sells confectionery products. Operations are seasonal, with the third quarter historically being the largest sales period due to Halloween. The 2009 first half benefited from three additional shipping days compared to the prior year.
Key Financial Metrics
| Metric (in thousands) | Q2 2009 | Q2 2008 | YTD 2009 | YTD 2008 |
|---|---|---|---|---|
| Total Revenue | $108,672 | $102,614 | $203,703 | $194,047 |
| Net Earnings | $10,338 | $7,246 | $18,658 | $13,699 |
| Earnings Per Share (Diluted) | $0.18 | $0.13 | $0.33 | $0.24 |
| Gross Margin % | 36.5% | 32.8% | 36.2% | 33.1% |
| Operating Earnings | $13,926 | $10,451 | $25,889 | $20,923 |
| Cash & Equivalents (End of Period) | $33,149 | $31,251 | $33,149 | $31,251 |
| Current Ratio | 3.3:1 | 2.7:1 | 3.3:1 | 2.7:1 |
| Net Working Capital | $124,851 | $114,331 | $124,851 | $114,331 |
Debt & Liquidity: The Company reported no long-term debt with a difference between fair value and carrying value. Total liabilities were $175,678 (Q2 2009). The Company maintains a strong liquidity position with a current ratio of 3.3 to 1.
Material Changes vs. Prior Period
- Revenue Growth: Net product sales increased 6.1% in Q2 2009 and 5.2% YTD compared to 2008. Growth was driven by effective marketing, selective price increases, and timing of customer orders. Foreign sales declined when translated to a stronger U.S. dollar.
- Margin Expansion: Product gross margin improved significantly, rising from 32.3% to 36.2% in Q2 2009. This was due to lower product costs in Canada (favorable exchange rates), improved plant efficiencies, and lower aggregate ingredient/packaging unit costs compared to the prior year.
- Expense Increases: Selling, marketing, and administrative expenses increased 11.0% in Q2 2009. A significant portion ($895k in Q2) was attributed to deferred compensation expense related to changes in the market value of trading securities used as an economic hedge.
- Profitability: Net earnings increased 42.7% in Q2 2009 and 36.2% YTD. Earnings per share increased 38.5% in Q2, aided by share repurchases reducing the share count.
- Cash Flow: Net cash used in operating activities was $3,863 for the first half of 2009, compared to $1,700 used in the prior year, primarily due to timing of payments and inventory build-up.
Guidance, Outlook, and Risks
Management Commentary: Management noted that results for the period are not necessarily indicative of full-year results due to seasonality. Capital expenditures for 2009 are anticipated to be in line with historical annualized spending, funded by cash flow and internal sources.
Forward-Looking Risks:
- Commodity Costs: Fluctuations in the cost and availability of ingredients (sugar, corn syrup, cocoa) and packaging materials.
- Currency: Exposure to Canadian dollar exchange rate fluctuations affecting costs of goods manufactured in Canada.
- Market Conditions: Risks related to consumer demand, competitive pricing, and the potential effects of recessionary economic conditions.
- Investments: Risk that the market value of investments could decline, including the classification of Auction Rate Securities (ARS) as "other than temporary." The Company holds $8.4 million in Jefferson County ARS, valued using Level 3 inputs due to market illiquidity.
Investor Verification Checklist
- Seasonality Impact: Verify the extent to which Q2 results were influenced by the three additional shipping days compared to the prior year.
- Deferred Compensation Volatility: Review the impact of trading securities market value changes on operating expenses and net earnings, as this created significant volatility in reported expenses.
- Auction Rate Securities (ARS): Assess the liquidity risk and fair value assumptions for the $8.4 million Jefferson County ARS holding, which is classified as non-current due to market conditions.
- Share Repurchases: Confirm the impact of the $13.7 million in share repurchases on earnings per share dilution/accretion.
- Inventory Levels: Monitor inventory build-up, which contributed to negative operating cash flow in the first half of 2009.