Tootsie Roll Industries, Inc. — FY2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. The filing is an annual report, not a standalone fourth-quarter filing; selected Q4 results are included. Amounts are in thousands of dollars unless stated otherwise.
Business context
The company manufactures and sells confectionery products, primarily in the United States, Canada, and Mexico, and reports one operating segment. Sales are seasonal, with Halloween the most significant season. Wal-Mart represented 23.0% of 2022 net product sales and Dollar Tree 12.4%; McLane accounted for 20.4%, including sales and deliveries to other customers.
Financial performance and position
| Metric | FY2022 | FY2021 | Change |
|---|---|---|---|
| Net product sales | $681.4 million | $566.0 million | +20.4% |
| Total revenue | $687.0 million | $570.8 million | +20.4% |
| Operating earnings | $110.8 million | $67.1 million | +$43.6 million |
| Net earnings attributable to Tootsie Roll | $75.9 million | $65.3 million | +16.2% |
| Earnings per share | $1.10 | $0.94 | +17.0% |
| Operating cash flow | $72.1 million | $85.3 million | −$13.2 million |
| Capital expenditures | $23.4 million | $31.4 million | −$8.1 million |
- Margins: Reported total gross margin was $232.7 million, approximately 33.9% of total revenue, versus $199.2 million, or approximately 34.9%, in 2021. Operating margin was approximately 16.1%, versus 11.8%. Management’s adjustments for deferred-compensation market-value changes show adjusted operating earnings of $93.5 million, up 14.9% from $81.3 million. Adjusted product cost of goods sold rose to 66.5% of net product sales from 65.3%.
- Fourth quarter: Net product sales were $188.2 million, up 13.0%; net earnings attributable to the company were $25.3 million versus $20.0 million; EPS was $0.37 versus $0.29.
- Liquidity: Cash, cash equivalents, and investments totaled $396.9 million at year-end, down from $437.0 million. Working capital was $218.9 million, up from $188.3 million. Current assets were $309.0 million and current liabilities $90.1 million.
- Debt: The balance sheet reported $7.5 million of industrial development bonds and $1.1 million of current bank loans, the latter relating to the Spanish subsidiary. The company reported no outstanding bank borrowings at year-end apart from Spanish subsidiary borrowing; it has historically operated without significant borrowing.
- Capital returns: The company paid $24.6 million in cash dividends and repurchased and retired $31.9 million of shares in 2022. It also continued its annual 3% stock dividend.
Changes, outlook, and material matters
- Sales growth reflected stronger demand, higher price realization, and the return of group events and seasonal activities as pandemic-related restrictions eased. FY2022 sales were 30% above FY2019.
- Higher ingredient, packaging, freight, energy, and manufacturing costs, along with supply-chain inefficiencies and labor shortages, pressured gross margins and constrained fulfillment of some orders. Management said 2023 supply contracts imply still higher unit costs for most ingredients and materials.
- Price increases phased in from the second half of 2021 through 2022 and into 2023 improved Q4 margins. Management expects further margin recovery as increases take full effect, but cautioned that inflation and input-cost increases may prevent a return to pre-pandemic margins.
- Operating cash flow declined mainly because inventory increased, reflecting higher production, accelerated 2023 production, and higher material costs. Management expects operating cash flow and investment maturities to cover 2023 financing needs. It planned approximately $15 million of 2023 capital spending for plant projects, including the next phase of expansion.
- The Spanish subsidiary’s operating loss widened to $1.4 million from $0.6 million. Management expects continued challenges and losses, while targeting progress in reducing the loss in 2023; further losses and capital spending may require additional cash financing.
- A multi-employer pension plan covering certain union employees is classified as “critical and declining” and is projected to become insolvent within 20 years. The company’s estimated withdrawal liability was $104.3 million for a hypothetical 2021 withdrawal; management said a withdrawal liability could rise and the ultimate financial effect is uncertain and potentially material.
- The Chicago union contract expired in September 2022 and was extended month to month while negotiations continued. Management was cautiously optimistic about reaching a new contract in the first half of 2023; a stoppage or strike could materially affect sales and profits.
- Other notable risks include dependence on major customers, seasonal sales concentration, commodity and supply-chain volatility, reliance on specialized production facilities, and potential impairment of goodwill or trademarks. No goodwill or trademark impairment was recorded in 2022. The auditor identified trademark impairment valuation as a critical audit matter. Routine legal proceedings were not expected by management to have a material effect.
- The company reported effective internal control over financial reporting, and the auditor issued unqualified opinions on the financial statements and internal controls.
Key investor verification points
- Track whether 2023 pricing offsets higher input, freight, energy, and labor costs, and whether margins recover as management expects.
- Monitor inventory levels, supply-chain reliability, labor availability, and order fulfillment, especially ahead of Halloween.
- Review updated multi-employer pension plan funding and withdrawal-liability estimates, including any effect of federal financial assistance to the plan.
- Follow Chicago labor negotiations and assess exposure to a work stoppage.
- Assess customer concentration and the Spanish subsidiary’s losses and funding needs.
- Reconcile the impact of deferred-compensation investment gains and losses: 2022 trading-security losses substantially offset related compensation credits in operating expenses, producing significant volatility in reported operating and other income.