Business Context and Reporting Period
Company: Tootsie Roll Industries, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: October 3, 2009 (13-week quarter and 39-week year-to-date)
Business Overview: The Company manufactures and sells confectionery products. The third quarter is historically the largest sales quarter due to Halloween seasonality. The nine-month period ended October 3, 2009, benefited from three additional shipping days compared to the prior year.
Key Financial Metrics
| Metric (in thousands) | Q3 2009 | Q3 2008 | 9 Months 2009 | 9 Months 2008 |
|---|---|---|---|---|
| Net Product Sales | $183,408 | $184,687 | $385,274 | $376,619 |
| Total Revenues | $184,351 | $185,702 | $388,054 | $379,749 |
| Net Earnings | $27,247 | $19,715 | $45,905 | $33,414 |
| Earnings Per Share (EPS) | $0.49 | $0.35 | $0.82 | $0.59 |
| Gross Margin % | 35.8% | 32.1% | 35.8% | 32.4% |
| Operating Cash Flow (9 Mo) | $9,681 (vs. $(6,422) used in 2008) | |||
| Cash & Equivalents | $36,731 (as of Oct 3, 2009) | |||
| Current Ratio | 2.9 to 1 |
Material Changes vs. Prior Period
- Revenue: Q3 net product sales decreased 0.7% year-over-year due to timing of customer sales, declines in export sales, and a devalued Mexican peso. However, the nine-month period saw a 2.3% increase driven by effective marketing and selective price increases.
- Profitability: Net earnings increased 38.2% in Q3 and 37.4% for the nine months. This was driven by improved gross margins (up 3.7% in Q3) resulting from price increases, product weight declines, and favorable foreign exchange rates on Canadian manufacturing costs.
- Expenses: Selling, marketing, and administrative expenses increased nominally but decreased as a percentage of sales when adjusted for deferred compensation volatility. Lower energy and fuel costs provided favorable benefits.
- Tax Rate: The effective income tax rate decreased favorably to 29.5% in Q3 (from 33.0% in 2008) due to lower state tax expenses and the conclusion of an income tax audit.
- Cash Flow: Operating cash flow turned positive ($9.7M) for the nine months compared to a negative $6.4M in the prior year, reflecting higher net earnings and working capital management.
Guidance, Outlook, and Risks
- Capital Allocation: The Company repurchased and retired $20.1 million of common stock during the nine months. Capital expenditures are anticipated to be in line with historical annualized spending, funded by internal cash flows.
- Dividends: Cash dividends paid were $13.4 million for the nine months. A 3% stock dividend was distributed in April 2009.
- Investment Portfolio: The Company holds $8.4 million in Jefferson County Alabama Sewer Revenue Refunding Warrants (Auction Rate Securities). These are classified as non-current due to market conditions, though the fair value has not changed significantly from year-end 2008.
- Risks: Key risks include fluctuations in ingredient costs (sugar, corn syrup), foreign currency exchange rates (specifically the Canadian dollar), competitive pricing pressure, and the potential for investment impairments. The Company utilizes derivatives to hedge commodity and currency risks.
- Forward-Looking Statements: Management notes that results are subject to seasonal variations and economic conditions, including recessionary pressures.
Investor Verification Checklist
- Seasonality Impact: Verify the extent to which Q3 results are driven by Halloween sales versus underlying demand trends.
- Deferred Compensation Volatility: Review the impact of trading securities used as economic hedges for deferred compensation on reported operating expenses and other income.
- Auction Rate Securities (ARS): Assess the liquidity risk and potential impairment of the $8.4 million Jefferson County ARS holding.
- Foreign Currency Exposure: Monitor the impact of the Canadian dollar on cost of goods sold for products manufactured in Canada.
- Share Count Reduction: Confirm the impact of ongoing share repurchases on future earnings per share calculations.