Tootsie Roll Industries, Inc. — Q1 2013 Form 10-Q
Reporting period: Quarter ended March 30, 2013; comparisons are to the quarter ended March 31, 2012. Amounts below are USD millions unless otherwise noted. The company notes that results are seasonal, with its largest sales quarter historically in Q3 due to Halloween.
Key financial results
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Total revenue | $111.3 | $110.8 | +$0.5; +0.4% |
| Net product sales | $110.3 | $109.8 | +$0.5; +0.5% |
| Total gross margin | $38.9 | $35.7 | +$3.2 |
| Operating earnings | $10.9 | $8.4 | +$2.5 |
| Net earnings | $9.1 | $8.8 | +$0.3; +3.4% |
| Diluted earnings per share | $0.15 | $0.14 | +$0.01 |
| Operating cash flow | $33.4 | $21.4 | +$12.0 |
Reported total gross margin was 34.9% of revenue, versus 32.2% a year earlier; operating margin was 9.8%, versus 7.6%. The effective tax rate increased to 32.8% from 25.4%, principally reflecting a prior-year state tax examination settlement. Comprehensive earnings were $9.4 million, down from $10.4 million.
Material changes and management commentary
- Management attributed improved product margins mainly to more favorable ingredient costs and plant efficiencies from capital investment. Excluding deferred-compensation expenses tied to investment-market movements, product cost of goods sold fell 3.6%, and adjusted operating earnings rose 18.9% to $14.0 million.
- Adjusted selling, marketing and administrative expenses increased 3.8%; freight, delivery and warehousing costs were $10.1 million, or 9.2% of product sales, compared with 9.1% a year earlier.
- Other income declined to $2.6 million from $3.3 million. It included foreign-exchange losses of $0.6 million versus $0.2 million, as well as gains and investment income on trading securities that were substantially offset by deferred-compensation expenses.
Cash, liquidity and debt
- Cash and cash equivalents were $50.9 million at quarter-end, down from $63.9 million at December 31, 2012. Current assets were $201.6 million and current liabilities $61.2 million; the current ratio was 3.3:1.
- Cash from operations was $33.4 million. Investing activities used $37.1 million, including $47.3 million of purchases of available-for-sale securities; financing activities used $9.3 million, including $4.6 million for share purchases and $4.7 million of cash dividends.
- Cash, cash equivalents and short- and long-term investments totaled $230.8 million. The company reported no bank borrowings at quarter-end; industrial development bonds were $7.5 million.
- Capital expenditures were $2.2 million. Management expected full-year 2013 capital spending to be generally in line with historical annualized spending and funded from operating cash flow and internal sources.
Risks, contingencies and unusual items
- Multiemployer pension plan: The BC&T plan is in critical status. The company committed to continue participation through Q3 2017 under a new labor contract. Required employer surcharges include a 5% compounded annual surcharge beginning in 2013, in addition to an interim surcharge. A 2012 estimated withdrawal liability was $37.2 million; a future amount could be higher. The company said the ultimate financial effect is uncertain and could be material.
- Auction-rate security: A Jefferson County, Alabama security had a reported fair value of $8.8 million versus $13.6 million original cost. Auctions have failed since 2008, and both Jefferson County and its bond insurer are in bankruptcy. Further impairment is possible; recovery amount and timing are uncertain.
- Spain investment: The carrying value of the company’s equity investment in two Spanish affiliates was $1.8 million. Management cited continuing economic and business challenges and the possibility of further losses or impairment.
- Legal matter: A shareholder derivative complaint filed in Illinois on April 16, 2013 alleged director fiduciary-duty breaches and sought unspecified damages. A board special committee concluded the claims had no merit.
- Other disclosed risks include commodity and packaging costs, foreign exchange, competition and consumer demand, seasonal sales, customer concentration, labor disruptions, product recalls, and information-technology and cybersecurity risks. Management reported no material change in market-risk disclosures and stated disclosure controls were effective.
- No specific earnings or sales guidance was provided. Management cautioned that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether improved ingredient costs and manufacturing efficiencies persist, and how commodity inflation or pricing affects margins.
- The funding progress, surcharge trajectory and potential future liability of the BC&T pension plan.
- Valuation assumptions and potential recoveries for the Jefferson County security, and the outlook for the Spanish equity investment.
- How investment purchases, seasonal working-capital needs, dividends and share repurchases affect cash and liquidity through the year.
- The outcome and any subsequent developments in the shareholder complaint.