Business context and reporting period
Tootsie Roll Industries, Inc. reported unaudited results for the 13 and 26 weeks ended July 3, 2010. The company noted that results are seasonal, with the third quarter historically its largest sales quarter because of Halloween.
Key financial results
Amounts below are in millions of dollars, except per-share data.
| Metric | Q2 2010 | Q2 2009 | First half 2010 | First half 2009 |
|---|---|---|---|---|
| Total revenue | $106.0 | $108.7 | $210.4 | $203.7 |
| Gross margin | $36.4 | $39.7 | $72.4 | $73.8 |
| Operating earnings | $13.9 | $13.9 | $24.5 | $25.9 |
| Net earnings | $8.5 | $10.3 | $17.6 | $18.7 |
| Net earnings per share | $0.15 | $0.18 | $0.31 | $0.32 |
- Q2 net product sales fell 2.6% to $105.0 million; management attributed the decline partly to timing of certain customer sales between the second and third quarters. First-half net product sales rose 3.2% to $208.3 million.
- Q2 total gross margin declined to $36.4 million from $39.7 million; first-half gross margin was $72.4 million versus $73.8 million. Reported operating earnings were nearly unchanged in Q2 and down 5.4% for the first half.
- Management’s results adjusted for deferred compensation expense showed operating earnings down 24.7% in Q2 and 12.9% for the first half. Adjusted operating earnings as a percentage of product sales were 10.8% versus 14.0% in Q2 and 11.2% versus 13.3% for the first half.
- First-half operating cash flow was negative $2.2 million, compared with negative $2.7 million a year earlier. Inventories used $49.2 million of cash, partly offset by cash inflows from accounts receivable.
- First-half investing cash outflow was $9.7 million, including $6.8 million of capital expenditures. Financing cash outflow was $19.1 million, including $9.0 million in cash dividends and $10.0 million for share repurchases. Cash declined $31.0 million from year-end 2009 to $60.0 million.
- At July 3, current assets were $213.2 million and current liabilities $62.5 million; the current ratio was 3.4 to 1 and working capital was $150.6 million. The company reported no bank borrowings; industrial development bonds were $7.5 million.
Changes, outlook, risks and unusual items
- Management said higher ingredient costs, primarily sugar, were a principal pressure on underlying operating results. It expected sugar and most other ingredient costs to be significantly higher in 2010 than in 2009. Higher freight, delivery, warehousing and distribution costs also weighed on results.
- Q2 other expense was $2.1 million, compared with $1.8 million of other income a year earlier. The unfavorable change principally reflected a $3.7 million decline in the fair value of trading securities and unfavorable foreign-exchange movements. Trading-security results were substantially offset by corresponding compensation expense changes in operating costs.
- The company reported a $1.8 million first-half mark-to-market loss in earnings on certain commodity option contracts. Derivatives are used to manage commodity and foreign-exchange exposures, not for speculative trading.
- Liquidity included $67.1 million of cash and short-term investments and $61.7 million of long-term investments. The latter included an $8.3 million Jefferson County, Alabama auction-rate security, valued using Level 3 inputs. Auctions had continued to fail; the security had a $13.6 million par value and a previously recorded $5.1 million other-than-temporary impairment. The company reported receiving contractual interest and intended and was able to hold it until recovery of amortized cost.
- Capital expenditures for 2010 were expected to be generally in line with historical annualized spending and funded from operating cash flow and internal sources. No specific earnings or revenue guidance was provided. Management cautioned that interim results are not necessarily indicative of full-year results.
- Other stated risks included competition and consumer demand, ingredient and packaging availability and costs, Halloween seasonality, customer purchase timing and shelf space, foreign exchange, energy and freight costs, and market declines in investments. Tax authorities could examine U.S. federal, state and foreign returns for 2006–2009.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It reported no triggering events indicating material impairment of goodwill or intangibles.
Important facts for investors to verify
- Whether customer-order timing shifts and Halloween seasonality affect second-half sales and full-year comparisons.
- Whether higher sugar and other input costs, freight and distribution expenses can be contained or passed through to customers.
- How inventory levels and working-capital needs affect operating cash flow after the substantial first-half inventory build.
- Developments in the Jefferson County auction-rate security, including valuation assumptions, liquidity and any recovery in fair value.
- The effect of trading-security and deferred-compensation valuation changes on reported quarterly earnings versus underlying operating trends.