Tootsie Roll Industries, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. The company makes confectionery products; its third quarter is typically its largest sales quarter because of pre-Halloween demand. Financial figures below are in millions of dollars unless noted otherwise.
Financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $213.2 | $184.2 | $497.3 | $402.9 |
| Net product sales | $211.9 | $183.1 | $493.3 | $399.4 |
| Gross margin | $71.5 | $65.4 | $167.1 | $141.9 |
| Operating earnings | $35.6 | $29.6 | $83.4 | $47.0 |
| Net earnings attributable to Tootsie Roll | $26.6 | $24.7 | $50.6 | $45.3 |
| Earnings per share | $0.39 | $0.36 | $0.73 | $0.65 |
Q3 sales grew 15.7%; nine-month sales grew 23.5%. Management attributed growth to higher demand, improved sales price realization, and marketing programs, alongside consumers returning to group events and activities. Sales also exceeded the comparable 2019 periods by 16% for Q3 and 27% for nine months.
Cost pressures weighed on profitability. Management-reported adjusted product cost of goods sold rose to 66.6% of net product sales in Q3 from 64.7%, and to 66.9% for nine months from 65.0%. Adjusted operating earnings were $32.9 million in Q3, up 11.5%, and $62.6 million for nine months, up 12.8%; adjusted operating margins declined year over year in both periods. These are management-adjusted figures that exclude deferred compensation-related market-value effects.
Other income (loss), net was a loss of $1.2 million in Q3 and $17.4 million for nine months, versus income of $1.8 million and $11.8 million, respectively, in 2021. The nine-month comparison chiefly reflects investment losses on trading securities, substantially offset by deferred compensation expense effects in operating expenses. Q3 and nine-month effective tax rates were 22.7% and 23.4%, respectively.
Cash flow, liquidity and debt
- Operating cash flow was $30.6 million for nine months, down from $32.2 million. Higher production and inventory levels—also reflecting increased material costs—used more cash.
- Capital expenditures were $17.6 million. Investing cash outflow was $53.0 million, including purchases and maturities or sales of available-for-sale securities. Financing cash outflow was $26.3 million, including $18.4 million in cash dividends and $8.0 million for share purchases and retirements.
- Cash, cash equivalents and restricted cash were $57.5 million at quarter-end, down from $106.2 million at year-end 2021. Cash and short-term investments totaled $145.7 million; including long-term investments, aggregate cash and investments were $387.0 million.
- Current assets were $324.1 million and current liabilities $101.5 million; the current ratio was 3.2 to 1. Bank loans were $0.9 million, associated with the Spanish subsidiary, and industrial development bonds were $7.5 million.
Changes, outlook and risks
- Higher selling prices and sales volumes supported revenue and earnings, but higher ingredient, packaging, freight, energy, manufacturing-supply and labor costs continued to pressure margins. Management said input costs were expected to remain high through 2022, with further increases for many inputs anticipated in 2023.
- Price increases were continuing through 2022 and into 2023. Management expected meaningful margin-recovery progress in 2023 as increases took full effect, while cautioning that further input-cost inflation and limits on passing costs to consumers could impede recovery. The filing provides no formal earnings or sales guidance.
- Supply-chain delays and tight ingredient and packaging availability, together with labor shortages, constrained some production and customer order volumes. Management warned disruptions could temporarily shut manufacturing lines and reduce sales and profits in 2022 or 2023.
- A multi-employer union pension plan remains in “critical and declining” status, with projected insolvency in 2031. Estimated company withdrawal liability was $104.3 million for a hypothetical 2021 withdrawal; management noted actual future liability could be higher and said the ultimate outcome and financial effects are uncertain and potentially material. Nine-month pension expense was $2.8 million.
- The labor contract at the principal manufacturing plant and distribution center expired September 30, 2022. Negotiations continued under an automatic-extension provision. The company also committed about $30 million to a U.S. plant rehabilitation and expansion, with further cash outlays expected.
- COVID-19 effects remained uncertain. The filing also reported investment-related losses in other comprehensive income and a larger accumulated other comprehensive loss, principally reflecting unrealized investment losses.
Investor verification points
- Track whether price increases offset continued input-cost inflation and deliver the margin improvement management expected in 2023.
- Monitor inventory growth, operating cash conversion, and the timing and funding of the plant project.
- Review investment valuation and deferred-compensation effects when comparing reported earnings with management’s adjusted operating results.
- Follow the pension plan’s solvency, potential PBGC assistance, and any change in the company’s estimated withdrawal exposure.
- Check for supply-chain or labor disruption, and for developments in the extended labor negotiations.