Tootsie Roll Industries, Inc. — Q1 2015 Form 10-Q
Unaudited quarter ended March 31, 2015; comparisons are with the quarter ended March 29, 2014 unless otherwise noted. Financial amounts below are in millions of dollars, except per-share data.
Business context and financial results
Tootsie Roll makes and sells confectionery products. Results are seasonal: the company says its largest sales quarter is typically Q3, ahead of Halloween, so Q1 results are not necessarily indicative of full-year performance.
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Total revenue | $106.3 | $107.8 |
| Operating earnings | $13.0 | $15.0 |
| Net earnings attributable to Tootsie Roll | $9.2 | $9.6 |
| EPS attributable to Tootsie Roll | $0.15 | $0.15 |
| Cash from operating activities | $7.0 | $2.6 |
| Capital expenditures | $2.4 | $2.1 |
Gross margin was $38.9 million, or approximately 36.6% of revenue, versus $40.7 million, or 37.7%, a year earlier. Operating margin was approximately 12.2%, compared with 13.9%. The effective tax rate was 32.3%, down from 43.9%; the prior-year rate included a $2.35 million deferred-tax provision associated with the Spanish subsidiaries’ step acquisition.
Material changes and financial position
- Net product sales fell 1.2% to $105.5 million. Management attributed the decline to unfavorable foreign-currency translation; it said sales would have edged above the prior-year quarter at comparable exchange rates.
- Operating earnings declined to $13.0 million. Management identified lower sales and slightly higher product costs as factors. Excluding deferred-compensation expenses, management’s adjusted operating earnings were $14.4 million versus $15.3 million, down 6.0%; this is a company-presented adjustment, not a GAAP measure.
- Net earnings attributable to the company decreased to $9.2 million from $9.6 million, while EPS remained $0.15. The lower average share count, partly reflecting repurchases, supported per-share results.
- Operating cash flow improved to $7.0 million from $2.6 million, with management citing the timing of sales and receivables and a smaller inventory increase. Cash and cash equivalents were $85.4 million at quarter-end, versus $51.2 million a year earlier.
- Cash, cash equivalents, and short- and long-term investments totaled $294.0 million, compared with $252.8 million a year earlier. Current assets were $277.6 million and current liabilities $75.7 million; the current ratio was 3.7:1.
- Bank loans totaled $0.7 million, all attributable to the majority-owned Spanish subsidiaries. The company also had $7.5 million of industrial development bonds. Management reported no other outstanding bank borrowings.
- Cash used in financing was $14.2 million, including $4.5 million of share repurchases and $9.6 million of cash dividends. The company also distributed a 3% stock dividend after quarter-end.
Outlook, risks, and unusual items
- Management expects 2015 capital expenditures to exceed historical annualized spending, including about $10 million for a production-line replacement and renovation planned for the second half of 2015 and early 2016. It expects to fund spending from operating cash flow and internal sources.
- The two Spanish subsidiaries have reported operating losses for 2008–2014 and Q1 2015, and did not meet their business plan and financial objectives in Q1. Management said additional financing and investment would likely be required in 2015 amid competitive and economic challenges in Spain.
- A multi-employer union pension plan was reported after quarter-end as being in “critical and declining status,” with projected funding deficiencies for 2017–2024. The company disclosed an estimated $56.4 million withdrawal liability based on a hypothetical 2014 withdrawal, but said its own analysis indicated a potential limit of 20 annual payments of $2.999 million, with a stated present value of $35.193 million. Actual future liability and financial effects remain uncertain and could be material. The labor contract commits company participation through Q3 2017.
- Deferred-compensation expenses were $1.418 million in Q1 2015, substantially offset by gains and investment income on trading securities included in other income. Management said these market-value-related items are not reflective of current operating results. Other income also included foreign-exchange losses of $1.354 million.
- Key risks include competition and consumer demand, commodity and freight costs, foreign exchange, seasonality and Halloween sales, major-customer exposure, production and IT disruptions, and the pension-plan and Spanish-subsidiary issues. The filing reports no material change in market risks from the 2014 Form 10-K and says disclosure controls were effective.
Important facts for investors to verify
- Whether currency movements, product costs, and sales trends continue to affect revenue and margins.
- Developments in the union pension plan, including funding changes, rehabilitation measures, and the company’s potential contribution or withdrawal liability.
- Whether the Spanish subsidiaries require additional capital and whether restructuring improves their results.
- Timing, cost, and funding of the planned approximately $10 million production-line project.
- Composition and liquidity of the investment portfolio, including trading securities associated with deferred-compensation liabilities.