Tootsie Roll Industries, Inc. — Q1 2011 Form 10-Q
Reporting period: Quarter ended April 2, 2011; unaudited consolidated results. Financial amounts below are in millions of dollars unless noted. The company notes that results are seasonal, with the third quarter historically its largest due to Halloween sales.
Financial performance
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Total revenue | $109.4 | $104.4 | +4.8% |
| Net product sales | $108.3 | $103.2 | +4.9% |
| Gross margin | $35.1; 32.1% of revenue | $36.0; 34.4% | Down $0.9 |
| Operating earnings | $9.1; 8.3% of revenue | $10.6; 10.2% | Down 14.2% |
| Net earnings | $8.0 | $9.2 | Down 13.1% |
| Diluted earnings per share | $0.14 | $0.16 | Down $0.02 |
| Operating cash flow | $3.7 | $0.9 | Up $2.8 |
Higher ingredient costs drove product cost of goods sold up 8.7%, faster than product sales. Management’s adjusted figures, excluding deferred compensation expense, show product costs rose 8.6%, and operating earnings declined 11.0% to $10.6 million. Adjusted operating margin on product sales fell to 9.8% from 11.5%. Selling, marketing and administrative expense was $26.0 million, up 2.5% as reported; management said adjusted expense rose 2.0%, while its share of product sales improved to 22.9% from 23.6%.
Financial position and liquidity
- Cash and cash equivalents were $84.9 million at quarter-end, versus $116.0 million at year-end 2010 and $76.4 million a year earlier. Cash declined $31.1 million during the quarter.
- Current assets were $216.2 million and current liabilities $56.0 million; the current ratio was 3.9 to 1. Working capital was $160.2 million.
- Cash, cash equivalents and short-term investments totaled $94.5 million. Long-term investments were $84.2 million.
- The company reported $7.5 million of industrial development bonds, no bank borrowings, and no bank borrowing activity during the quarter. Interest paid was $25,000.
- Investing cash outflow was $23.6 million, including $17.7 million of available-for-sale securities purchases and $3.4 million of capital expenditures. Financing cash outflow was $11.2 million, including $9.0 million of cash dividends and $2.2 million of shares purchased and retired.
Changes, outlook and risks
- Sales growth reflected marketing and sales programs and organic volume growth, including product line extensions. Management cited higher ingredient unit costs and freight and delivery expense as key pressures on operating results.
- Management expected ingredient costs to remain significantly higher throughout the balance of 2011 than in 2010. 2011 capital spending was expected to be generally in line with historical annualized spending and funded from operating cash flow and internal sources.
- Other income declined to $3.0 million from $3.4 million, principally reflecting lower foreign-exchange gains, partly offset by changes in trading-security income and an equity-method investment. Trading-security income is substantially offset by deferred-compensation expense.
- Other comprehensive loss was $2.5 million, mainly reflecting unrealized derivative losses. The company uses commodity and foreign-currency derivatives as hedges, not for speculation.
- The Jefferson County, Alabama, auction-rate security was carried at $6.8 million against $13.6 million par value, reflecting a prior $5.1 million other-than-temporary impairment and a $1.6 million temporary decline. Auctions had failed since 2008; the company reported timely contractual interest payments and no further fair-value change in Q1 2011. It classified the security as noncurrent and used Level 3 valuation inputs.
- The company revised prior-period financial statements for improperly recorded uncertain-tax-position liabilities. It said the corrections were not material; the revision increased beginning 2010 retained earnings by $2.7 million and Q1 2010 net earnings by $119,000.
- Key stated risks include commodity and packaging costs, ability to pass through price increases, competition and consumer acceptance, customer concentration and shelf space, freight and fuel costs, foreign-exchange exposure, production interruptions, investment-value declines, and macroeconomic conditions. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Key facts for investors to verify
- Whether higher ingredient and freight costs can be offset through pricing, product mix or operating efficiencies, and the resulting effect on margins.
- Whether sales growth continues beyond this seasonally weaker quarter and how Halloween-season demand affects full-year performance.
- Developments in the Jefferson County auction-rate security, including valuation assumptions, liquidity and credit exposure.
- Cash deployment, including investment purchases, dividends and share repurchases, alongside operating cash generation.
- The status and potential resolution of uncertain tax positions and ongoing tax examinations.