Tootsie Roll Industries, Inc. — Q2 2012 Form 10-Q
Business context and period: Unaudited results for the quarter and six months ended June 30, 2012, compared with the quarter and six months ended July 2, 2011. Dollar amounts below are in millions unless stated otherwise. The company notes that results are seasonal, with the third quarter historically its largest sales quarter due to Halloween.
Financial performance
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Total revenue | $109.1 | $105.8 | $220.0 | $215.2 |
| Operating earnings | $11.0 | $8.4 | $19.4 | $18.1 |
| Net earnings | $7.5 | $6.5 | $16.3 | $14.8 |
| Diluted earnings per share as reported | $0.13 | $0.11 | $0.28 | $0.25 |
| Gross margin | 33.0% | 32.7% | 32.6% | 32.6% |
| Operating margin | 10.1% | 8.0% | 8.8% | 8.4% |
Product sales rose 3.1% in Q2 and 2.2% in the first half. Management attributed growth to sales programs and price increases. Higher ingredient and packaging costs offset some pricing benefits. Management’s adjusted operating earnings, excluding deferred compensation expense or income, increased 13.8% in Q2 and 9.2% year to date; adjusted operating margins were 9.2% and 10.0%, respectively, versus 8.4% and 9.3% in the comparable periods.
Other income was a $0.4 million expense in Q2 2012, versus $1.0 million income a year earlier; first-half other income fell to $2.9 million from $4.0 million. Trading-security gains and losses substantially offset changes in deferred compensation expense or income. The first-half effective tax rate was 27.0%, down from 32.8%; a prior-year foreign tax recovery and settlement of tax examinations reduced the tax provision and increased first-half earnings by $1.3 million.
Cash flow, liquidity and debt
- First-half operating cash flow was $28.9 million, compared with cash used of $12.8 million in 2011. Management cited inventory timing and improved inventory management, along with changes in other working-capital accounts.
- First-half investing cash outflow was $24.5 million, including $20.1 million of purchases of available-for-sale securities and $5.4 million of capital expenditures. Financing cash outflow was $16.4 million, including $7.1 million for share purchases and $9.3 million of cash dividends.
- Cash and cash equivalents were $66.6 million at June 30, 2012, down from $78.6 million at December 31, 2011. Cash, cash equivalents and short-term investments totaled $79.4 million; total cash and short- and long-term investments were $194.3 million.
- Current assets were $211.4 million and current liabilities $62.0 million, for a 3.4:1 current ratio and $149.5 million of working capital. The company reported no bank borrowings at quarter-end. Industrial development bonds were $7.5 million; the filing does not identify other conventional borrowings.
Material changes, outlook and risks
- Operating earnings and net earnings increased year over year in both the quarter and first half. Lower selling, marketing and administrative expenses as a share of sales and pricing gains helped, while input costs remained a headwind. Share repurchases also reduced average shares outstanding.
- No specific earnings or sales guidance was provided. Management expects 2012 capital expenditures to be generally in line with historical annualized spending and funded from operating cash flow and internal sources.
- The Bakery and Confectionery Union and Industry Pension Fund is in critical status and was 65.8% funded on an actuarial basis at January 1, 2012. Company contributions face a 5% surcharge effective June 1, 2012 and another 5% effective January 1, 2013. The Fund’s estimated withdrawal liability attributable to the company was revised after quarter-end from $21.1 million (as of January 1, 2011) to $37.2 million (as of January 1, 2012). The company does not currently plan to withdraw, but is evaluating options; the ultimate effects could be material and are not yet determinable.
- The company held a Jefferson County, Alabama auction-rate security valued at $7.5 million, against original cost of $13.6 million. Jefferson County and its bond insurer are in bankruptcy; adverse court rulings could reduce value and lead to further impairment. The company said it continued to receive contractual interest and could not determine ultimate recovery.
- The company reported $3.3 million invested in two Spanish equity-method companies and expects further operating losses may occur; a future impairment is possible. Other cited risks include commodity and packaging costs, price acceptance, competition, seasonality, foreign exchange, customer concentration, freight costs, labor disruptions, and operational and technology risks.
Important facts for investors to verify
- Whether price increases continue to offset commodity, packaging and delivery costs, and whether Halloween-season sales meet expectations.
- Developments in the multiemployer pension fund’s rehabilitation plan, surcharges and potential withdrawal liability.
- Recovery prospects and impairment risk for the Jefferson County security and the Spanish equity-method investment.
- How much of reported earnings and cash flow reflects recurring operations versus market-related deferred compensation effects, tax settlements and working-capital timing.
- Capital allocation, including ongoing share repurchases, dividends and investment purchases; the company said it had no formal publicly announced stock-purchase program.