Tootsie Roll Industries, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; fourth-quarter figures are noted separately. Unless stated otherwise, dollar amounts below are in millions.
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 largest selling period. Walmart, Dollar Tree and McLane together represented approximately 37.5% of 2020 net product sales.
Financial performance and position
- Revenue: Net product sales were $467.4, down 10.7% from $523.6 in 2019. Total revenue, including rental and royalty revenue, was $471.1.
- Profit and margins: Product gross margin was $167.7, down 13.8%; as a share of product sales it was approximately 35.9%, compared with 37.1% in 2019. Operating earnings were $58.2, down from $69.2. Net earnings attributable to Tootsie Roll were $59.0, or $0.89 per share, versus $64.9, or $0.96 per share. Net earnings were 12.6% of product sales, compared with 12.4% in 2019.
- Fourth quarter: Net product sales were $127.9, down 5.0% year over year. Net earnings were $15.0 and earnings per share were $0.23, compared with $14.6 and $0.22 in fourth-quarter 2019.
- Cash flow and investment: Operating cash flow was $74.7, down from $100.2. Capital expenditures were $18.0. Cash, cash equivalents and investments totaled $429.0 at year-end, including $73.8 of trading securities held to economically hedge deferred compensation liabilities.
- Liquidity and debt: Working capital was $250.9, versus $273.8 a year earlier; management attributed much of the decline to more investments being classified as long-term. The company reported $7.5 of industrial development bonds and no outstanding bank borrowings at year-end; short-term bank loans of $0.8 were reported for its Spanish subsidiary. Management said operating cash flow and investment maturities should meet 2021 financing needs.
- Capital returns: The company paid $23.8 in cash dividends and purchased and retired $32.1 of shares in 2020. It continued its annual 3% stock dividend.
Changes versus 2019
- COVID-19-related changes in shopping, work routines, gatherings and impulse purchases curtailed access to some sales channels and reduced demand, particularly for products bought for sharing or group occasions. Sales declined 25% in the second quarter and 14% in the third quarter; the fourth-quarter decline narrowed to 5%.
- Lower sales and production volumes increased the burden of fixed manufacturing overhead. Adjusted product costs, excluding specified deferred-compensation effects, rose to 64.0% of product sales from 62.8%.
- Selling, marketing and administrative expenses fell 12.3%, reflecting lower travel and trade-show costs, favorable freight rates and cost-reduction measures.
- Other income included $12.5 of gains and investment income on trading securities, matched by deferred-compensation expense in operating costs. These items affect reported results but are not representative of current operating performance, according to management.
- Cash and investments increased by $36.5 to $429.0. Operating cash flow fell $25.5, primarily reflecting lower earnings and deferred-compensation payments.
Outlook, risks and unusual items
- Management expected Spanish subsidiary operating losses to continue beyond 2021, while anticipating lower losses in 2021 than in 2020. The subsidiary recorded a $0.7 operating loss in 2020.
- A U.S. plant rehabilitation and expansion project is expected to cost approximately $25.0 in total. About $6.0 was spent in 2020; management expected approximately $17.0 of cash outlays in 2021.
- The multi-employer union pension plan is in “critical and declining” status and is projected to become insolvent within 20 years. The company’s estimated withdrawal liability was $99.3 for a hypothetical 2020 withdrawal; management also discussed a possible payment limitation and a substantially higher theoretical exposure in an unlikely mass withdrawal. The ultimate impact is uncertain and could be material. A subsequent agreement froze contribution surcharges at their December 2020 levels.
- Principal risks include pandemic-related demand and operating disruptions, dependence on large customers, Halloween seasonality, volatile ingredient and energy costs, customer pricing pressure, supply-chain interruption, specialized production facilities, foreign exchange, and possible impairment of goodwill or trademarks.
- No goodwill or trademark impairment was recorded in 2020. The auditor identified trademark impairment testing as a critical audit matter because projected revenue, operating margins and discount rates require significant judgment. Routine legal proceedings were not expected by management to materially affect the company.
- The filing provides no formal financial guidance. Management stated that it expected available operating cash flow and investment maturities to cover 2021 needs and did not expect significant 2021 benefits from pandemic stimulus programs.
Investor facts to verify
- Whether sales and margins recovered after the year-end as pandemic-related channel and consumer-behavior disruptions changed.
- Current sales concentration and exposure to Walmart, Dollar Tree and McLane, including the effect of any changes in customer purchasing.
- Progress, spending and expected returns on the plant project, including the anticipated 2021 outlays.
- Developments in the multi-employer pension plan, including plan solvency, surcharges and the company’s potential withdrawal liability.
- Performance of the Spanish subsidiary and any further cash support or impairment charges.
- Investment portfolio liquidity and credit quality, and whether commodity and foreign-exchange hedges continue to offset input-cost volatility.