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Business Context and Reporting Period

Company: Tootsie Roll Industries, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 29, 2002 (Second Quarter)
Industry: Confectionery Manufacturing

The Company reported results for the 13-week and 26-week periods ended June 29, 2002. Management notes that results are seasonal, with the third quarter historically being the largest sales period due to Halloween demand.

Key Financial Metrics

Cash Flow (YTD 26 Weeks): Net cash used in operating activities was $(1,539) compared to $9,395 provided in the prior year. Net cash used in investing activities was $(14,668), and net cash used in financing activities was $(19,214), primarily due to share repurchases of $11,822 and dividends paid of $7,392.

Material Changes vs. Prior Period

• Sales Decline: Q2 2002 net sales decreased 3.6% year-over-year to $77.1 million. However, YTD sales increased 0.2% to $156.1 million.
• Earnings Decline: Q2 net earnings fell 11.4% to $12.3 million. YTD net earnings decreased 4.6% to $25.1 million.
• Margin Pressure: Cost of sales as a percentage of net sales increased to 54.2% for the first half (from 53.3% in 2001) due to higher ingredient costs and product mix changes. Q2 cost of sales percentage improved to 53.6% (from 54.2% in 2001) aided by the closure of a small manufacturing plant in late 2001.
• Accounting Changes:
  • Revenue Recognition: Adoption of EITF 00-14 and 00-25 reclassified cooperative advertising and sales incentives from operating expenses to a reduction of net sales. This reduced reported sales and expenses by $7.1 million in Q2 and $13.3 million YTD but did not affect net earnings.
  • Goodwill/Intangibles: Adoption of SFAS 142 eliminated amortization of goodwill and indefinite-lived trademarks. This increased reported net income by approximately $0.7 million in Q2 and $1.4 million YTD.
• Share Repurchases: The Company repurchased and retired 300,000 shares for $11.8 million during the period.

Outlook, Risks, and Management Commentary

• Seasonality: Management cautions that Q2 results are not indicative of full-year results due to the seasonal nature of operations, with Q3 typically being the strongest quarter.
• Capital Expenditures: Expected to be in line with historical spending, funded by internal cash flows.
• Market Risks: The Company is exposed to fluctuations in raw material prices (sugar, corn, edible oils, cocoa, packaging). No material change in market risk exposure was reported.
• Impairment Testing: Management completed impairment tests for goodwill and trademarks under SFAS 142 and concluded neither was impaired.
• Forward-Looking Statements: Risks include changes in consumer preferences, competition, reliance on third-party vendors, and actions by major retailers.

Investor Verification Checklist

• Adjusted Earnings: Verify the impact of the $962,000 capital gain in Q2 2001 which inflated prior-year comparables. Adjusted EPS for Q2 2002 vs. 2001 was $0.24 vs. $0.26.
• Inventory Levels: Confirm the impact of the $35.4 million increase in inventory on cash flow, which was a primary driver of negative operating cash flow YTD.
• Raw Material Costs: Monitor future quarters for the impact of rising ingredient costs on gross margins.
• Share Count: Note the reduction in shares outstanding due to the 3% stock dividend and subsequent repurchases, which impacts EPS calculations.
• Unshipped Orders: Unshipped orders decreased to $47.6 million from $62.6 million in the prior year, potentially indicating softer near-term demand.