Business context and reporting period
Tootsie Roll Industries, Inc. filed this unaudited Form 10-Q for the 13 and 39 weeks ended October 2, 2010. The company manufactures and sells confectionery products; the third quarter is historically its largest sales quarter because of Halloween. Unless stated otherwise, dollar amounts below are in millions.
Financial performance and position
| Metric | 13 weeks ended Oct. 2, 2010 | 13 weeks ended Oct. 3, 2009 | 39 weeks ended Oct. 2, 2010 | 39 weeks ended Oct. 3, 2009 |
|---|---|---|---|---|
| Total revenue | $192.1 | $184.4 | $402.5 | $388.1 |
| Operating earnings | $31.6 | $35.5 | $56.1 | $61.4 |
| Net earnings | $27.4 | $27.2 | $44.9 | $45.9 |
| EPS | $0.48 | $0.47 | $0.79 | $0.79 |
| Operating cash flow | Not separately reported for the quarter | $6.0 | $11.1 |
Third-quarter net product sales rose 4.2%; nine-month sales rose 3.6%. Total gross margin was $62.8 million for the quarter and $135.2 million for the nine months, versus $66.4 million and $140.2 million in the comparable periods. Approximate gross margin as a share of total revenue fell to 32.7% from 36.0% for the quarter and to 33.6% from 36.1% year to date. Reported operating margin was approximately 16.4% versus 19.3% for the quarter, and 13.9% versus 15.8% year to date.
The effective tax rate declined to 24.5% from 29.5% for the quarter and to 27.6% from 30.4% for the nine months, principally due to releases of federal and state tax reserves and statutory expirations. Nine-month comprehensive earnings were $43.1 million, compared with $48.1 million.
At October 2, 2010, cash and cash equivalents were $58.9 million; cash and short-term investments totaled $67.7 million. Cash, short- and long-term investments together were $128.2 million. Current assets were $254.2 million and current liabilities $76.7 million, yielding a 3.3-to-1 current ratio and $177.5 million of working capital. The company had no bank borrowings; industrial development bonds were $7.5 million. Nine-month capital expenditures were $9.4 million. Cash dividends paid were $13.6 million and share purchases and retirements were $11.7 million.
Material changes versus comparable periods
- Despite higher sales, operating earnings declined $4.0 million in the quarter and $5.4 million year to date; nine-month net earnings fell $1.0 million, while quarterly net earnings were roughly flat.
- Management’s operating earnings adjusted for deferred compensation effects were $34.0 million for the quarter, down 9.7%, and $57.3 million for the nine months, down 11.1%. Management said declines reflected higher ingredient costs, especially sugar and cocoa, and higher freight, distribution and warehousing costs.
- Nine-month operating cash flow fell $5.1 million to $6.0 million. Management attributed the decrease principally to changes in inventories, prepaid expenses and other assets, and income taxes payable.
- Cash and equivalents declined $32.1 million from year-end 2009. Capital spending was lower than in the prior-year period, while cash used for financing included dividends and stock repurchases.
Outlook, risks and unusual items
- Management expected sugar, cocoa and other ingredient costs to remain significantly higher through the balance of 2010, with aggregate ingredient unit costs expected to rise further in 2011. The filing gives no specific sales or earnings guidance.
- Sales benefited from marketing and pre-Halloween programs. Results are seasonal and the nine-month performance is not necessarily indicative of full-year results.
- The company recorded a $1.75 million decline in the estimated value of its Jefferson County, Alabama, auction-rate security in accumulated other comprehensive loss. The security had $13.55 million par value and a reported fair value of $5.96 million. Auctions had continued to fail; the county had offered a restructuring that could mean a 50% loss to existing holders. The company said it continued to receive contractual interest and intended and was able to hold the security until recovery of its adjusted cost basis.
- Other stated risks include competition, consumer and retailer response, ingredient and energy costs, supply availability, foreign exchange, customer concentration, operational and systems implementation, impairment assumptions, and macroeconomic conditions. Management reported no material change in market-risk disclosures and no material change in internal controls during the quarter.
- Deferred-compensation-related investment value movements affected reported costs and other income. The filing also reported a $1.6 million year-to-date loss in earnings from mark-to-market accounting for certain commodity options.
Important facts for investors to verify
- Whether pricing, product mix or other actions can offset the forecast increases in sugar, cocoa and other input costs, and the related pressure on margins.
- The status, valuation assumptions, potential recovery and downside exposure of the Jefferson County auction-rate security.
- Whether operating cash flow recovers from its year-to-date decline and supports capital spending, dividends and share repurchases.
- How much reported earnings volatility reflects underlying operations versus deferred-compensation investment movements, foreign exchange and derivative accounting.
- The effect of Halloween-season sales and other seasonal patterns on full-year results; the filing cautions that interim results are not necessarily indicative of the year.