Tootsie Roll Industries, Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter ended September 29, 2012, with year-to-date comparisons for the nine months ended September 29, 2012. Amounts below are in millions of dollars except per-share data. The company notes that results are seasonal, with the third quarter historically its largest sales quarter due to Halloween.
Financial performance
- Q3 revenue: $201.2 million, up 7.1% from $187.9 million; product sales were $200.3 million, up 7.2%.
- Q3 earnings: Gross margin was $65.1 million (32.4% of revenue), versus $55.4 million (29.5%). Operating earnings were $32.4 million, versus $29.9 million. Net earnings were $22.9 million, or $0.39 per share, versus $18.9 million, or $0.32 per share.
- Nine-month revenue and earnings: Revenue was $421.1 million, up 4.5%; net earnings were $39.2 million, up 16.4%. Earnings per share were $0.67, compared with $0.56.
- Margins and costs: Management’s adjusted product cost of goods sold, excluding deferred compensation effects, was 67.6% of product sales for Q3 versus 71.3% a year earlier, and 67.6% year to date versus 69.3%. Adjusted operating earnings were $34.2 million for Q3 and $56.0 million year to date; management attributed improvement principally to higher sales and pricing, partly offset by plant overhead and freight costs.
- Cash flow: Year-to-date operating cash flow was $24.1 million, versus cash used of $16.4 million in 2011. Investing activities used $37.3 million, including $33.5 million in purchases of available-for-sale securities and $7.0 million in capital expenditures. Financing activities used $28.3 million, including $14.0 million in cash dividends and $14.4 million for shares purchased and retired.
- Liquidity and debt: Cash and cash equivalents were $37.1 million; current assets were $240.0 million and current liabilities $80.8 million, for a 3.0-to-1 current ratio. The company reported $7.5 million of industrial development bonds, no bank borrowings, and aggregate cash and short- and long-term investments of $178.1 million.
Changes and management commentary
- Sales benefited from marketing and sales programs, including back-to-school and pre-Halloween promotions, price increases, and timing of certain customer sales. Management cautioned that sales timing affected both the quarter and year-to-date comparisons.
- Management-adjusted operating earnings rose 33.5% in Q3 and 22.8% year to date. Reported results also reflect fluctuating deferred compensation costs and gains or losses on investments held as an economic hedge; these effects substantially offset one another but can make reported line items volatile.
- Average shares outstanding declined year over year, partly due to open-market share purchases, supporting per-share earnings growth. The company paid $0.08 per share in Q3 dividends and issued its annual 3% stock dividend in April 2012.
- Management expected full-year 2012 capital expenditures to be generally in line with historical annualized spending, funded from operating cash flow and internal sources. No earnings or sales guidance was provided.
Risks, contingencies, and unusual items
- Pension plan: The BC&T multiemployer pension plan was reported 65.8% funded and in critical “Red Zone” status. Company contributions incurred a 5% surcharge from June 2012, with another 5% surcharge scheduled for January 2013. Estimated withdrawal liability was $37.2 million for the current calendar year; the company was exploring alternatives, including withdrawal, and said the eventual effect could be material.
- Auction-rate security: The company held $8.1 million of Jefferson County, Alabama warrants, with original cost of $13.6 million. Auctions have failed since 2008; Jefferson County and its insurer are in bankruptcy. Adverse court rulings could further reduce value and lead to an impairment charge. The company continued to receive interest and intended to hold the security until recovery, but could not determine ultimate proceeds or timing.
- Spanish equity investment: The carrying value of the company’s 50% investments in two Spanish companies was $3.0 million. Management expected Spain’s economic situation could cause further equity-method losses and said impairment was possible.
- Other disclosed risks include competition and consumer response to pricing, commodity and packaging costs, freight and fuel costs, seasonality, customer concentration and purchase timing, foreign exchange, labor interruptions, product recalls, and investment-market declines. Management reported no material change in market-risk disclosures from the 2011 Form 10-K.
Key facts for investors to verify
- Whether sales growth and improved adjusted product costs persist after seasonal Halloween demand and the effect of customer-sales timing.
- How commodity, plant overhead, freight, and marketing costs affect reported and adjusted margins.
- Developments in the BC&T pension plan, contribution surcharges, and any decision that could trigger withdrawal liability.
- Recovery prospects and any impairment of the Jefferson County security, and the performance of the Spanish equity investments.
- Cash conversion, investment balances, share repurchases, and capital spending relative to management’s stated expectation.