Tootsie Roll Industries, Inc. — Q2 2015 Form 10-Q
Business context and reporting period: Unaudited results for the quarter and six months ended June 30, 2015; amounts are in thousands of dollars except per-share data. The company sells confectionery products and notes that its operations are seasonal, with the third quarter historically its largest sales quarter because of pre-Halloween sales.
Financial performance
- Revenue: Q2 total revenue was $108.4 million, up 3.3% from $104.9 million; net product sales rose 3.3% to $107.5 million. First-half revenue was $214.8 million, up 1.0%.
- Profit and margins: Q2 operating earnings were $13.6 million versus $10.2 million; operating margin was 12.6% versus 9.7%. Net earnings attributable to Tootsie Roll were $11.1 million, or $0.18 per share, compared with $9.0 million, or $0.14 per share. First-half attributable earnings were $20.2 million, or $0.33 per share, versus $18.6 million, or $0.30 per share.
- Gross margin: Q2 total gross margin was $39.5 million, about 36.4% of revenue, compared with $38.5 million, about 36.7%. First-half gross margin was $78.4 million, about 36.5%, versus $79.2 million, about 37.2%.
- Cash flow: First-half operating cash flow was $22.5 million, up from $12.8 million. Investing used $12.6 million and financing used $21.9 million. Cash and cash equivalents declined $13.1 million from year-end to $87.0 million.
- Liquidity and debt: Current assets were $286.5 million and current liabilities $84.3 million; working capital was $202.2 million and the current ratio was 3.4. Cash, cash equivalents, and short- and long-term investments totaled $296.3 million, including investments that hedge deferred compensation. Debt consisted principally of $7.5 million in industrial development bonds and $0.6 million of bank loans, the latter related to Spanish subsidiaries.
- Shareholder returns: The company repurchased $12.0 million of shares and paid $9.7 million in cash dividends in the first half. It distributed a 3% stock dividend in April 2015.
Changes versus the prior comparable period
- Q2 product sales increased, supported by marketing and sales programs, product extensions, and new products. First-half sales growth was more modest.
- Management said adjusted product costs rose as a share of sales, mainly from higher plant overhead and some higher ingredient costs; plant efficiencies and cost-control efforts partly offset the increase. Lower freight and delivery costs, reflecting more favorable fuel costs, helped reduce selling, marketing, and administrative expense.
- Management’s adjusted operating earnings, excluding deferred-compensation expense, rose 10.3% in Q2 to $14.0 million, but increased only 1.4% in the first half to $28.4 million. These are company-presented adjusted figures, not reported GAAP operating earnings.
- Other income fell to $1.3 million in Q2 from $3.0 million and to $1.8 million for the first half from $4.7 million. The filing attributes much of the comparison to lower investment gains and income associated with deferred-compensation plans, and notes a prior-year Spanish step-acquisition item.
Outlook, risks, and unusual items
- Outlook and spending: No earnings or revenue guidance is provided. Capital spending is expected to exceed historical annualized levels, including approximately $10 million for a production-line replacement and renovation planned for the second half of 2015 and early 2016; management expects to fund spending from operating cash flow and internal sources.
- Tax item: A foreign court decision led to a $1.066 million release of an uncertain tax liability, benefiting Q2 and first-half 2015 earnings by approximately $0.02 per share. The effective tax rate was 25.0% in Q2 and 28.4% for the first half.
- Multiemployer pension exposure: The BC&T pension plan was reported in critical and declining status, with projected funding deficiencies for 2017–2024. The company’s estimated withdrawal liability was $56.4 million if it had withdrawn in 2014; management’s actuarial analysis indicates payments could be limited to 20 annual payments of $2.999 million, but the ultimate outcome is uncertain and could materially affect future results or cash flows. The labor contract commits participation through Q3 2017.
- Spanish subsidiaries: The majority-owned Spanish businesses had operating losses in the first half and did not meet their business plan objectives. Management said additional financing and investment may be needed in 2015 amid competitive and economic challenges.
- Other risks: The filing highlights competition and consumer demand, commodity and fuel costs, seasonality, foreign exchange, customer concentration, labor and pension costs, product recalls, investment values, and operational and cybersecurity risks. The company reported no material change in market risks from its 2014 Form 10-K and stated that disclosure controls were effective.
Important facts for investors to verify
- Whether sales momentum and margins hold through the seasonally important third quarter, and whether higher plant overhead and ingredient costs persist.
- The scale and timing of the planned production-line investment and its effect on cash, capital spending, and operating performance.
- Developments in the BC&T pension plan, including any changes to rehabilitation requirements or the potential withdrawal-liability exposure.
- Whether Spanish subsidiaries require further funding and whether restructuring improves their performance.
- The extent to which earnings comparisons depend on the one-time tax benefit, investment-related deferred-compensation effects, and share repurchases.