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| TR > SEC Filings for TR > Form 10-Q on 10-May-2012 | All Recent SEC Filings |
10-May-2012
Quarterly Report
This financial review discusses the Company's financial condition, results of operations, liquidity and capital resources, new accounting pronouncements and other matters. Dollars are presented in thousands, except per share amounts. It should be read in conjunction with the accompanying Condensed Consolidated Financial Statements and related footnotes.
Net product sales were $109,763 in first quarter 2012 compared to $108,323 in first quarter 2011, an increase of $1,440 or 1.3%. First quarter 2012 benefited from effective sales programs and price increases needed to recover higher input costs.
Product cost of goods sold were $74,905 in first quarter 2012 compared to $73,524 in first quarter 2011. Product cost of goods sold includes $739 and $335 of deferred compensation expense in first quarter 2012 and 2011, respectively, an increase of $404. Changes in deferred compensation expense principally result from the increase or decrease in the market value of investments in trading securities relating to compensation deferred in previous years and are not reflective of current operating results. Adjusting for the aforementioned changes in deferred compensation expense, product cost of goods sold increased from $73,189 in first quarter 2011 to $74,166 in first quarter 2012, an increase of $977 or 1.3%. As a percentage of net product sales, adjusted product cost of goods sold was 67.6% in both first quarter 2011 and 2012. Although first quarter 2012 reflects increased selling prices, higher input costs for ingredients and packaging materials mitigated much of the benefits.
Selling, marketing and administrative expenses were $27,239 in first quarter 2012 compared to $25,964 in first quarter 2011. Selling, marketing and administrative expenses includes $2,575 and $1,152 of deferred compensation expense in first quarter 2012 and 2011, respectively, an increase of $1,423. As discussed above, these increases principally result from changes in the market value of investments in trading securities relating to compensation deferred in previous years and are not reflective of current operating results. Adjusting for the aforementioned changes in deferred compensation expense, selling, marketing and administrative expenses decreased from $24,812 in first quarter 2011 to $24,664 in first quarter 2012, a decrease of $148 or 0.6%. As a percentage of net product sales, adjusted selling, marketing and administrative expenses favorably decreased from 22.9% in first quarter 2011 to 22.5% in first quarter 2012, a decrease of 0.4% as a percent of sales. Selling marketing and administrative expenses reflect higher freight and delivery expenses, including higher fuel surcharges, relating to customer deliveries. Freight, delivery, warehousing and distribution expenses as a percent of net product sales decreased from 9.5% in first quarter 2011 to 9.1% in first quarter 2012 which reflects the effects of product selling price increases.
Earnings from operations were $8,419 in first quarter 2012 compared to $9,637 in first quarter 2011. Earnings from operations include deferred compensation expenses relating to corresponding changes in the market value of trading securities that hedge these liabilities as discussed above. Adjusting for the aforementioned, operating earnings were $11,733 and $11,124 in first quarter 2012 and 2011, respectively, an increase of $609 or 5.5%. As a percentage of net product sales, these adjusted operating earnings were 10.7% and 10.3% in first quarter 2012 and 2011, respectively, an increase of 0.4% as a percentage of net product sales. The above discussed increases in operating earnings principally reflect the favorable impact of price increases partially offset by the adverse impact of higher ingredient and packaging costs as well as higher costs for freight and delivery expenses as discussed above. Management believes the presentation in this and the preceding paragraphs relating to amounts adjusted for deferred compensation expense better reflects controllable costs affecting operating results for first quarter 2012 as compared to the corresponding prior year quarter period and, accordingly, provides additional insight of the underlying operations of the Company.
Other income, net, was $3,335 in first quarter 2012 compared to $2,992 in first quarter 2011, a favorable increase of $343. Other income, net for first quarter 2012 and 2011 includes gains of $3,314 and $1,487, respectively, in trading securities, and a $192 loss and $1,175 gain, respectively, on foreign exchange. The favorable change relating to trading securities principally reflect increases in the fair value of trading securities investments which are used as an economic hedge for deferred compensation liabilities. The gain relating to trading securities was substantially offset by a like amount of deferred compensation (expense) or income included in product cost of goods sold and selling, marketing, and administrative expenses in the respective periods as discussed above. The gain relating to trading securities in first quarter 2012 and 2011, principally reflects market appreciation in the equity markets in the respective periods.
The consolidated effective tax rates were 25.4% and 34.0% in first quarter 2012 and 2011, respectively. The decrease in the effective tax rate in first quarter 2012 principally reflects the reduction of uncertain tax positions of approximately $927 resulting from the effective settlement of a state income tax examination.
Net earnings were $8,774 in first quarter 2012 compared to $8,330 in first quarter 2011, and earnings per share were $0.15 and $0.14 in first quarter 2012 and first quarter 2011, respectively, an increase of $0.01 per share or 7.1%. Earnings per share
for first quarter 2012 did benefit from the reduction in average shares outstanding resulting from Common Stock purchases in the open market by the Company. Average shares outstanding decreased from 59,806 in first quarter 2011 to 59,058 in first quarter 2012.
Goodwill and intangibles are assessed annually as of December 31 or whenever events or circumstances indicate that the carrying values may not be recoverable from future cash flows. The Company has not ascertained any triggering events, as defined, or other adverse information that would indicate a material impairment of its goodwill or intangibles in first quarter 2012.
Subsequent to the end of first quarter 2012, the Company received an Annual Funding Notice and a Notice of Funded Status (Notices), as defined by the Pension Protection Act (PPA), from the Bakery and Confectionery Union and Industry International (BC&T) Pension Fund (Fund), a multi-employer defined benefit pension plan (Plan) for certain Company union employees. The Notices indicate that the Fund's actuary has certified that the Plan is 65.8% funded as of January 1, 2012. This funding percentage is based on actuarial values and not market values of investments which may be lower. As of January 1, 2011 the Plan was 83.6% funded based on the actuarial value of investments, however, it was only 70.0% funded based on the then current market value of its investments. The Fund's actuary has certified to the U.S. Department of the Treasury that the Plan is in critical status, the "Red Zone", as defined by the PPA.
The Trustees of the Fund (Trustees) have advised that one of the largest contributors to the Fund filed for bankruptcy and ceased making contributions to the Fund in 2011, and that the Fund has achieved less favorable investment performance returns needed to maintain a favorable funding status. The Trustees have advised that the aforementioned are some of the reasons for the Fund's deterioration to critical status. As of January 1, 2011 plan valuation date, the BC&T multiemployer Plan had 116,708 participants, of which 32,449 were active participants, 54,470 were retired or separated from service and receiving benefits, and 29,789 were retired or separated from service and entitled to receive future benefits. The PPA requires that plans in critical status develop a plan to improve the Fund's funded status, including that contributing employers pay a surcharge to help correct the plan's financial situation. In the event that a plan does not have the financial resources to pay benefits at a level specified by law then it must apply to the Pension Benefits Guaranty Corporation for government financial assistance.
The Trustees have advised that the Company's contributions will be increased to reflect a 5% surcharge effective June 1, 2012, and that a 10% surcharge will become effective January 1, 2013. Company contributions to the Fund were $2,046 and $1,946 in calendar years 2011 and 2010, respectively. The Company is currently unable to determine the ultimate outcome to the above discussed matter and therefore, is unable to determine the effects on its consolidated financial statements, but, the ultimate outcome could be material to its consolidated results of operations of one or more periods.
LIQUIDITY AND CAPITAL RESOURCES
Net cash flows from operating activities were $21,387 and $3,724 in first quarter 2012 and 2011, respectively. The $17,663 increase in cash flows from operating activities from first quarter 2011 to first quarter 2012 principally reflects changes in inventories as well as changes in other operating assets and liabilities, principally accounts receivable, accounts payable and accrued liabilities, and income taxes payable and deferred. The change in inventories primarily reflects the later timing of customer orders and manufacturing of finished goods inventories for the back-to-school and Halloween selling season.
Net cash used in investing activities was $6,658 in first quarter 2012 compared to $23,589 in first quarter 2011. Cash flows from investing activities reflect $2,805 and $17,718 relating to the purchase of available for sale securities during first quarter 2012 and 2011, respectively. First quarter 2012 and first quarter 2011 also includes capital expenditures of $3,250 and $3,382, respectively. Capital expenditures for the 2012 year are anticipated to be generally in line with historical annualized spending, and are to be funded from the Company's cash flow from operations and internal sources.
The Company had no bank borrowings or repayments in first quarter 2012 or 2011, and had no outstanding bank borrowings as of the end of first quarter 2012 or first quarter 2011.
Financing activities include Company Common Stock purchases and retirements of $4,247 and $2,163 in first quarter 2012 and 2011, respectively. Cash dividends of $9,185 and $9,040 were paid in first quarter 2012 and 2011, respectively. The increase in cash dividends each year reflects the annual 3% stock dividend issued in each of these years less the effects of Company Common Stock purchases and retirements.
The Company's current ratio (current assets divided by current liabilities) was 3.9 to 1 as of the end of first quarter 2012 as compared to 3.6 to 1 as of the end of fourth quarter 2011 and 3.8 to 1 as of the end of first quarter 2011. Net working capital was $155,594 as of the end of first quarter 2012 as compared to $153,846 and $158,260 as of the end of fourth and first quarters 2011, respectively.
The aforementioned net working capital amounts are principally reflected in
aggregate cash and cash equivalents and short-term investments which totaled
$90,903 as of the end of first quarter 2012 compared to $89,507 and $94,463 as
of the end of fourth and first quarters 2011, respectively. In addition, long
term investments, principally debt securities comprising municipal bonds
(including $6,775 of Jefferson County auction rate securities discussed below)
and trading securities, were $101,866 as of the end of first quarter 2012, as
compared to $96,161 and $84,239 as of the end of fourth and first quarters 2011,
respectively. Aggregate cash and cash equivalents and short and long-term
investments were $192,769, $185,668, $178,702, as of the end of first quarter
2012, and as of the end of fourth and first quarters 2011, respectively. The
aforementioned includes $47,031, $41,768, and $42,536 as of the end of the first
quarter 2012, and fourth and first quarters 2011, respectively, relating to
trading securities which are used as an economic hedge for the Company's
deferred compensation liabilities. Investments in municipal bonds and other
debt securities that matured during first quarter 2012 and 2011 were generally
used to purchase the Company's Common Stock or were replaced with debt
securities of similar maturities.
During 2008, the Company contributed $16,050 to a VEBA trust to fund the estimated future costs of certain employee health, welfare and other benefits. The Company used the funds, as well as investment income in this VEBA trust, to pay the actual cost of such benefits during 2012 and 2011 and will continue to do so in future periods. As of the end of the first quarter 2012, the VEBA trust holds $5,575 of aggregate cash, cash equivalents and investments; this asset value is included in prepaid expenses in the Company's current and other assets.
As of the end of first quarter 2012 and 2011, the Company's long-term investments include $6,775 ($13,550 original cost), respectively, of Jefferson County Alabama Sewer Revenue Refunding Warrants, originally purchased with an insurance-backed AAA rating. This is an auction rate security that is classified as an available for sale security. Due to adverse events related to Jefferson County and its bond insurance carrier, Financial Guaranty Insurance Company (FGIC), as well as events in the credit markets, the auctions for this auction rate security have failed since 2008. As such, the Company continues to estimate the fair value of this auction rate security utilizing a valuation model with Level 3 inputs, as defined by guidance. This valuation model considered, among others items, a limited number of market trades, the credit risk of the collateral underlying the auction rate security, the credit risk of the bond insurer, interest rates, and the amount and timing of expected future cash flows including assumptions about the market expectation of the next successful auction or possible negotiated settlement between the County and debt holders. The Company continues to receive all contractual interest payments on this auction rate security on a timely basis, there has been no default, it is insured by FGIC and the Company has the intent and ability to hold this auction rate security until recovery of its amortized cost basis. Representatives of Jefferson County and the bond holders were in negotiations to reach a settlement agreeable to the bondholders and the insurers, and since a settlement could not be reached that was also agreeable to the state of Alabama which was asked to provide a form of future guarantee, the County has filed for bankruptcy. Jefferson County has asked the bankruptcy court judge to divert some money to municipal sewer repairs that would have otherwise gone to pay debtholders and other creditors. Rulings by the bankruptcy court on this and other matters in favor of the county, and with adverse effects to the holders of warrants and other debt, could further reduce the market value of this auction rate security resulting in an additional other-than-temporary impairments and charges to net earnings. The Company is not currently able to determine the outcome of this bankruptcy, or the amount and timing of the ultimate net proceeds that it may recover.
ACCOUNTING PRONOUNCEMENTS
In May 2011, the Financial Accounting Standards Board (FASB) issued new accounting rules related to fair value measurements. The new accounting rules clarify some existing concepts, eliminate wording differences between Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS), and in some limited cases, change some principles to achieve convergence between GAAP and IFRS. The new accounting rules result in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between GAAP and IFRS. The new accounting rules also expand the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. The adoption of the new accounting rules in the first quarter of 2012 did not have a material effect on the Company's financial condition, results of operations or cash flows.
In June 2011, the FASB issued new accounting rules that require an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income, or in two separate but consecutive statements. The new accounting rules eliminate the option to present components of other comprehensive income as part of the statement of equity. The adoption of the new accounting rules in the first quarter of 2012 did not have a material effect on the Company's financial condition, results of operations or cash flows.
In December 2011, the FASB issued new accounting rules which deferred certain provisions of the rules issued in June 2011 that required entities to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement in which net income is presented and the statement in which other comprehensive income is presented. Accordingly, this requirement is indefinitely deferred.
In September 2011, the FASB issued new accounting rules related to testing goodwill for impairment. The new accounting rules permit an entity to first assess qualitative factors to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, it is necessary to perform the two-step goodwill impairment test prescribed under current accounting rules. Otherwise, the two-step goodwill impairment test is not required. The adoption of the new accounting rules did not have a material effect on the Company's financial condition, results of operations or cash flows.
RISK FACTORS
The Company's operations and financial results are subject to a number of risks
and uncertainties that could adversely affect the Company's operating results
and financial condition. Significant risk factors, without limitations that
could impact the Company, are the following: (i) significant competitive
activity, including advertising, promotional and price competition, and changes
in consumer demand for the Company's products; (ii) fluctuations in the cost and
availability of commodities and ingredients, and packaging materials, and the
ability to recover cost increases through product sales price increases;
(iii) inherent risks in the marketplace, including uncertainties about trade and
consumer acceptance of price increases and seasonal events such as Halloween;
(iv) the effect of acquisitions on the Company's results of operations and
financial condition; (v) the effect of changes in foreign currencies on the
Company's foreign subsidiaries operating results, and the effect of the
fluctuation of the Canadian dollar on products manufactured in Canada and
marketed and sold in the United States in U.S. dollars; (vi) the Company's
reliance on third party vendors for various goods and services, including
commodities used for ingredients that are primarily grown or sourced from
foreign locations; (vii) the Company's ability to successfully implement new
production processes and lines, and new computer software systems; (viii) the
effect of changes in assumptions, including discount rates, sales growth and
profit margins and the capability to pass along higher ingredient and other
input costs through price increases, relating to the Company's impairment
testing and analysis of its goodwill and trademarks; (ix) changes in the
confectionery marketplace including actions taken by major retailers and
customers; (x) customer, consumer and competitor response to marketing programs
and price and product weight adjustments, and new products; (xi) dependence on
significant customers, including the volume and timing of their purchases, and
availability of shelf space; (xii) increases in energy costs, including freight
and delivery, that cannot be passed along to customers through increased prices
due to competitive reasons; (xiii) any significant labor stoppages, strikes or
production interruptions; (xiv) changes in governmental laws and regulations
including taxes and tariffs; (xv) the adverse effects should the Company either
voluntarily or involuntarily recall its product(s) from the marketplace;
(xvi) the risk that the market value of Company's investments could decline
including being classified as "other-than-temporary" as defined; (xvii) the
Company's dependence on its enterprise resource planning computer system to
manage its supply chain and customer deliveries, and the risk that the Company's
information technology systems fail to perform adequately or the Company is
unable to protect such information technology systems against data corruption,
cyber-based attacks or network security breaches; (xvii) the potential effects
of adverse rulings by the bankruptcy court relating to the Jefferson County
auction rate security; (xviii) the potential adverse effects on the Company of
the plan to be developed by the Bakery and Confectionary Union and Industry
Pension Fund Trustees to improve the funding status of the plan; and (xix) the
potential effects of current and future macroeconomic conditions and
geopolitical events.
FORWARD-LOOKING STATEMENTS
This discussion and certain other sections contain forward-looking statements that are based largely on the Company's current expectations and are made pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by the use of words such as "anticipated," "believe," "expect," "intend," "estimate," "project," and other words of similar meaning in connection with a discussion of future operating or financial performance and are subject to certain factors, risks, trends and uncertainties that could cause actual results and achievements to differ materially from those expressed in the forward-looking statements. Such factors, risks, trends and uncertainties, which in some instances are beyond the Company's control, include the overall competitive environment in the Company's industry, changes in assumptions and judgments discussed above under the heading "Significant Accounting Policies and Estimates," and factors identified and referred to above under the heading "Risk Factors."
The risk factors identified and referred to above are believed to be significant factors, but not necessarily all of the significant factors that could cause actual results to differ from those expressed in any forward-looking statement. Readers are cautioned not to place undue reliance on such forward-looking statements, which are made only as of the date of this report. The Company undertakes no obligation to update such forward-looking statements.
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