Tootsie Roll Industries, Inc. — Q1 2014 Form 10-Q
Reporting period: Quarter ended March 29, 2014. Dollar amounts below are in thousands, except per-share data. Results are unaudited. The company notes that results are seasonal, with its largest sales quarter historically in Q3 because of Halloween.
Financial performance
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Total revenue | $107,782 | $111,286 | Down 3.1% |
| Net product sales | $106,812 | $110,279 | Down 3.1% |
| Total gross margin | $40,659 (37.7% of revenue) | $38,867 (34.9%) | Up $1,792 |
| Operating earnings | $15,028 (13.9% of revenue) | $10,900 (9.8%) | Up $4,128 |
| Net earnings attributable to Tootsie Roll | $9,581 | $9,069 | Up 5.6% |
| Earnings per share | $0.16 | $0.15 | Up $0.01 |
| Net cash from operating activities | $2,633 | $33,431 | Down $30,798 |
Management attributed lower sales primarily to shipment and trade-promotion timing, including the later Easter in 2014. It said improved ingredient costs, plant efficiencies and cost-containment efforts lifted margins. Excluding specified deferred-compensation expense, adjusted operating earnings rose 9.7% to $15,306, and adjusted operating margin increased to 14.3% from 12.7%.
Financial position and liquidity
- Cash and cash equivalents were $51,179 at quarter-end, versus $88,283 at year-end 2013 and $50,887 a year earlier. Cash plus short-term investments totaled $88,951; cash plus short- and long-term investments totaled $252,816.
- Current assets were $227,352 and current liabilities $64,047; the current ratio was 3.5:1. Net working capital was $163,305.
- Total bank borrowings were $1,237, all associated with the Spanish companies; industrial development bonds were $7,500. The company reported no bank borrowings at Q1 2013 year-end comparison.
- Operating cash flow was $2,633. Investing activities used $22,342, including $25,034 of available-for-sale security purchases and $2,138 of capital expenditures. Financing activities used $17,395, including $7,864 for share purchases and $9,458 of cash dividends paid.
Material developments, outlook and risks
- Spanish step acquisition: The company gained operating control of its two 50%-owned Spanish companies and consolidated them. The quarter included their sales of $2,615 and operating loss of $449. The step acquisition generated a reported net loss of $529, including a $2,350 deferred-tax provision. Management planned to invest about $750 in Q2, potentially increasing ownership significantly above 50%, and expected the restructured operations to be at or near break-even cash flow for the balance of 2014. It cautioned that further losses remain possible.
- Tax: The effective tax rate rose to 43.9% from 32.8%, primarily because of the Spanish acquisition-related reversal of deferred tax assets.
- Pension contingency: A multiemployer pension plan covering certain union employees is in critical status. Required contribution surcharges apply for an unspecified period; the company’s labor contract commits it to participation through Q3 2017. Estimated withdrawal liability was $37,200 based on 2012 information and could be higher. Management said the ultimate outcome and financial effects cannot be determined and could be material.
- Outlook and risks: No specific company-wide earnings or sales guidance was provided. Management anticipated 2014 capital expenditures generally in line with historical annualized spending. Principal risks include competition and consumer demand, commodity and freight costs, foreign exchange, customer and seasonal purchasing patterns, investment values, pension funding, and execution of the Spanish restructuring.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It reported no material change in market-risk exposure from its 2013 Form 10-K.
Important facts for investors to verify
- Whether the sales decline reflects timing alone and how sales develop through the seasonally stronger Q3.
- Whether improved gross margins persist as ingredient, freight and other input costs change.
- The cash-flow drivers, particularly inventory growth and the timing of receivables and taxes.
- Spanish subsidiary performance, planned investment, resulting ownership level and any additional losses or tax effects.
- Updated exposure and contribution requirements for the multiemployer pension plan.
- The composition, maturity and market-value risks of the company’s substantial investment portfolio.