Tootsie Roll Industries, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Unaudited consolidated results; amounts below are in millions of dollars except per-share data. Comparisons are with the corresponding 2019 periods unless noted.
Financial performance
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Total revenue | $80.6 | $107.0 | $184.4 | $208.9 |
| Net product sales | $79.8 | $106.0 | $182.6 | $207.0 |
| Gross margin | $30.1 | $40.7 | $67.1 | $77.6 |
| Operating earnings | $0.5 | $12.5 | $21.2 | $18.3 |
| Net earnings attributable to Tootsie Roll | $7.4 | $11.6 | $19.4 | $20.5 |
| Earnings per share | $0.11 | $0.17 | $0.29 | $0.30 |
- Q2 product sales fell 24.7%; first-half sales fell 11.8%. Management attributed the declines primarily to COVID-19-related closures, curtailed sales channels, and reduced sharing, gifting, and impulse-purchase occasions.
- Q2 operating margin was approximately 0.6% of revenue, versus 11.7% a year earlier. Management’s adjustment for deferred-compensation items showed Q2 operating earnings of $9.9 million, down 30.9%, and first-half adjusted operating earnings of $21.3 million, down 15.2%. These are management-presented, non-GAAP comparisons.
- Lower production volumes increased fixed manufacturing overhead as a percentage of sales. Adjusted product cost of goods sold was 62.7% of product sales in Q2 versus 62.1% in 2019, and 64.0% for the first half versus 63.1%.
- Q2 other income was $9.7 million, including $9.4 million of gains and investment income on trading securities. These gains were substantially offset by deferred-compensation expenses in operating costs. First-half other income was $4.2 million versus $9.1 million.
Cash flow, liquidity and debt
- First-half cash from operations was $10.9 million, compared with $11.0 million. Capital expenditures were $6.4 million, down from $9.9 million.
- Cash and cash equivalents were $106.3 million at June 30, 2020; short-term investments were $80.1 million and long-term investments were $186.1 million. Cash plus short- and long-term investments totaled $372.4 million, including trading securities used to economically hedge deferred-compensation liabilities.
- Current assets were $322.7 million and current liabilities $84.2 million; the current ratio was 3.8, down from 4.7 at June 30, 2019. Net working capital was $238.5 million.
- Bank loans were $0.9 million, all at the Spanish subsidiary; industrial development bonds were $7.5 million. The filing reports no other bank borrowings at quarter-end.
- First-half financing included $13.0 million of share purchases and $11.9 million of cash dividends. A 3% stock dividend was distributed in April 2020.
Outlook, risks and unusual items
- Management expected COVID-19 to adversely affect third-quarter earnings and possibly fourth-quarter results, but said the full-year impact could not be reliably estimated. The third quarter is historically the largest sales quarter, and Halloween accounts for approximately 50% of third-quarter sales. Reduced or altered Halloween activity could affect sales, returns, and retail markdowns.
- The company reported no material COVID-related supply-chain or manufacturing disruption to date, but identified potential risks from supply, labor, transport, customer-channel, consumer-demand, and economic disruptions, as well as possible impairment of trademarks if sales effects persist.
- Management committed approximately $25 million to upgrade and expand a U.S. manufacturing plant; projected cash outlays were approximately $12.6 million in 2020 and $10 million in 2021.
- A multi-employer union pension plan remains in “critical and declining” status. The company disclosed an estimated withdrawal liability of $99.8 million based on a hypothetical 2019 withdrawal; its actuarial estimate of the present value of likely limited payments was $35.7–$46.7 million. Actual future liability could be higher, and the ultimate outcome could materially affect future results or cash flows.
- Management stated that COVID-19’s effects remained uncertain. No impairment trigger for goodwill or indefinite-lived trademarks had been identified at June 30, 2020. The company also noted potential COVID-related legal claims, which it did not expect to have a material effect based on information then available.
Most important facts to verify
- Whether sales and orders recovered after Q2, particularly in the Halloween season and other affected channels.
- How much Q2 earnings volatility reflects deferred-compensation investment movements versus underlying operating performance; reconcile management’s adjusted figures to reported GAAP results.
- Performance and cash requirements of the plant project, and whether the company’s investment portfolio remains available to fund operations and planned spending.
- Developments in the multi-employer pension plan, including funded status, proposed legislation, and the company’s potential withdrawal liability.
- Whether lower volumes, changing consumer behavior, or prolonged pandemic effects create impairment indicators for trademarks or other assets.