Tootsie Roll Industries, Inc. — Q1 2021 10-Q Summary
Reporting period: Quarter ended March 31, 2021. Dollar amounts below are in thousands, except per-share data. The company notes that results are seasonal, with its largest sales quarter historically occurring before Halloween.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Total revenue | $103,229 | $103,761 | Down 0.5% |
| Net product sales | $101,795 | $102,803 | Down 1.0% |
| Gross margin | $37,219 | $37,016 | Up $203 |
| Operating earnings | $10,410 | $20,744 | Down $10,334 |
| Net earnings attributable to Tootsie Roll | $10,767 | $11,982 | Down 10.1% |
| EPS | $0.16 | $0.17 | Down $0.01 |
| Operating cash flow | $15,337 | $14,581 | Up $756 |
Management said deferred-compensation expense or credits, substantially offset by market gains or losses on related trading securities, materially distorted reported comparisons. Excluding these items, operating earnings were $13,599 versus $11,369, up 19.6%; adjusted operating earnings were 13.4% of net product sales versus 11.1%. Adjusted product cost of goods sold was 64.3% of sales versus 64.9%, while adjusted selling, marketing and administrative expense was 23.4% versus 24.6%. These are management-adjusted measures, not GAAP results.
Other income was $3,816 versus a $5,494 loss, principally reflecting trading-security gains of $3,189 compared with losses of $9,375 in Q1 2020. The prior-year quarter also included $2,510 of foreign-exchange gains, compared with $33 in Q1 2021. The effective tax rate was 24.3%, up from 21.5%.
Liquidity, debt and capital allocation
- At March 31, 2021, cash and cash equivalents were $136,291; short-term investments were $42,396; and long-term investments were $243,749. Cash plus short- and long-term investments totaled $422,436, including $78,271 of trading securities used as an economic hedge for deferred-compensation liabilities.
- Current assets were $292,332 and current liabilities $65,941; the current ratio was 4.4 to 1. Net working capital was $226,391.
- Bank loans were $965, relating to the Spanish subsidiary; the company reported no other bank borrowings. Industrial development bonds totaled $7,500.
- Operating cash flow was $15,337. Investing activities used $26,528, including $3,787 in capital expenditures and net purchases of securities. Financing activities used $19,123, including $11,874 in cash dividends and $7,423 in share repurchases. Cash, cash equivalents and restricted cash declined $30,566 to $136,690.
- The company committed approximately $25,000 to a U.S. plant rehabilitation and expansion project and expected approximately $17,000 of project cash outlays in 2021, funded from operations and internal resources.
Material changes and management commentary
- U.S. net product sales declined 3.1%; foreign net product sales, including exports, increased. Management attributed continuing sales pressure to pandemic-related limitations on certain trade channels and fewer group gatherings and impulse purchases. It reported improving sales and orders as the economy reopened, and favorable Q2 2021 customer-order trends versus the pandemic-affected Q2 2020.
- Management cited cost-reduction initiatives, operational changes and lower business travel as factors supporting adjusted margins. Customer freight, delivery and warehousing expense declined 5.0% to $10,139.
- Cash and short-term investments declined from $208,931 at December 31, 2020, while long-term investments increased from $220,020. Total cash and short- and long-term investments were $422,436, compared with $428,951 at year-end 2020 and $369,864 at March 31, 2020.
- The company repurchased 234,031 common shares for approximately $7,423 during the quarter. A 3% stock dividend was distributed April 2, 2021; Q1 dividends were $0.09 per share, excluding the stock dividend.
Outlook, risks and contingencies
- No quantified full-year financial guidance is provided. Management said the pandemic’s effects on 2021 and beyond remain uncertain and depend on its duration and severity, variants, reopening and economic recovery. The company said it was monitoring the situation and was financially positioned to respond to further disruption.
- A multi-employer union pension plan remains in “critical and declining status” and is projected to become insolvent within 20 years. The company’s estimated withdrawal liability was $99,300 if it had withdrawn in 2020; management said the liability could rise. Its actuarial estimate of the present value of likely limited payments was $34,700–$49,300, while a mass-withdrawal scenario could produce a materially higher estimate. The company cannot determine the ultimate outcome or the effect of the American Rescue Plan Act; future effects could be material.
- The union and company executed an agreement in Q1 freezing pension-plan surcharges at December 31, 2020 levels. Q1 pension expense for the plan was $604, including $213 of surcharges.
- Key market exposures include prices and availability of ingredients, packaging and fuel, foreign-exchange movements, and interest rates. The company reported no material change in market-risk disclosures from its 2020 Form 10-K.
- Ordinary-course legal proceedings and potential COVID-19-related claims were not expected by management to have a material effect. Management reported no Q1 goodwill or intangible-asset impairment trigger.
Important facts for investors to verify
- Reconcile reported earnings with management’s deferred-compensation adjustments and the offsetting trading-security results; these materially affect period comparisons.
- Track sales recovery by geography and channel as reopening progresses, and assess whether the favorable Q2 order trend translated into recognized sales.
- Review the union pension plan’s funding, withdrawal-liability assumptions and any effects of American Rescue Plan assistance; the potential exposure is uncertain.
- Monitor planned plant-project spending against the approximately $17,000 expected 2021 outlay and its effect on cash and investments.
- Assess the composition, maturity and valuation exposure of the $422,436 investment and cash portfolio, including trading securities tied to deferred compensation.