Tootsie Roll Industries, Inc. — Q1 2012 Form 10-Q
Business context and period: Unaudited results for the quarter ended March 31, 2012, compared with the quarter ended April 2, 2011. The company notes that operations are seasonal, with its largest sales quarter historically occurring in Q3 due to Halloween.
Key financial results
Amounts are in millions of dollars, except per-share data and percentages.
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Net product sales | $109.763 | $108.323 | Up 1.3% |
| Total revenue | $110.820 | $109.395 | Up $1.425 |
| Total gross margin | $35.658 | $35.601 | Nearly flat |
| Earnings from operations | $8.419 | $9.637 | Down $1.218 |
| Net earnings | $8.774 | $8.330 | Up 5.3% |
| Diluted earnings per share | $0.15 | $0.14 | Up $0.01 |
| Operating cash flow | $21.387 | $3.724 | Up $17.663 |
| Capital expenditures | $3.250 | $3.382 | Down $0.132 |
Financial position and liquidity
- Cash and cash equivalents were $79.909 million at March 31, 2012. Cash plus short- and long-term investments totaled $192.769 million.
- Current assets were $209.355 million and current liabilities were $53.761 million; working capital was $155.594 million and the current ratio was 3.9:1.
- Industrial development bonds totaled $7.5 million. The company reported no bank borrowings at quarter-end.
- Operating cash flow was $21.387 million; investing activities used $6.658 million and financing activities used $13.432 million. Cash increased $1.297 million during the quarter.
Material changes and management commentary
- Higher selling prices and effective sales programs supported product sales. Management said higher ingredient and packaging costs offset much of the benefit of price increases.
- Reported operating earnings declined, but management’s adjustment for deferred compensation expense showed operating earnings of $11.733 million versus $11.124 million, up 5.5%. Adjusted operating earnings were 10.7% of product sales versus 10.3% a year earlier. These are management-presented adjusted figures, not GAAP measures.
- Deferred compensation expense rose by $1.827 million across product costs and selling, marketing and administrative expenses. Management said the changes principally reflect market-value movements in investments associated with deferred compensation and do not reflect current operating performance.
- The effective tax rate was 25.4%, versus 34.0%. A $0.927 million reduction in tax provision following settlement of a state tax examination increased Q1 2012 net earnings by the same amount.
- Operating cash flow improved substantially, principally because of changes in inventories and other operating assets and liabilities. Management attributed inventory movements in part to the timing of production and customer orders ahead of back-to-school and Halloween seasons.
- The company repurchased 178,662 shares for approximately $4.247 million. Cash dividends paid were $9.185 million; the company also issued a 3% stock dividend.
Outlook, risks and unusual items
- No specific full-year earnings or sales guidance is provided. Management anticipated 2012 capital expenditures generally in line with historical annualized spending, funded from operating cash flow and internal sources.
- The multiemployer Bakery and Confectionery Union and Industry Pension Fund was reported 65.8% funded on an actuarial basis as of January 1, 2012 and in “critical status.” Company contributions were to include a 5% surcharge beginning June 1, 2012, rising to 10% beginning January 1, 2013. The company said the ultimate financial effect could be material to one or more periods but could not be determined.
- A Jefferson County, Alabama, auction rate security was carried at $6.775 million against $13.550 million par value and original cost. The security is illiquid, valued using significant unobservable inputs, and exposed to potential further loss from the county’s bankruptcy proceedings. The company said it could not determine ultimate recovery or timing.
- Key risks include commodity and packaging costs, ability to pass costs through pricing, competition and consumer response, seasonal sales, foreign exchange, freight and fuel costs, customer concentration, labor interruptions, investment-value changes, pension-fund developments, and the Jefferson County bankruptcy. Management reported no material change in market-risk disclosures from the 2011 Form 10-K.
- Management stated that disclosure controls were effective as of March 31, 2012 and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether sales-price increases continue to offset higher ingredient, packaging, freight and fuel costs.
- How much reported earnings benefited from the $0.927 million tax settlement and how deferred-compensation-related market movements affect comparisons.
- The pension fund’s funding status, surcharge levels and eventual impact on company contributions.
- Developments in Jefferson County’s bankruptcy, valuation assumptions for the auction rate security and any further impairment.
- Seasonal order, production and inventory trends, especially ahead of the historically larger Q3 Halloween period.