Tootsie Roll Industries, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Financial amounts below are in millions of dollars, except per-share data. The company notes that results are seasonal, with its largest sales quarter historically in Q3, ahead of Halloween.
Financial performance
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Total revenue | $105.8 | $105.2 | $210.3 | $209.6 |
| Operating earnings | $13.9 | $14.3 | $26.0 | $28.5 |
| Net earnings attributable to Tootsie Roll | $11.9 | $11.1 | $21.9 | $21.0 |
| Earnings per share | $0.19 | $0.17 | $0.35 | $0.33 |
- Q2 total revenue increased 0.6%; first-half revenue increased 0.3%. Management cited sales timing and foreign-currency translation as modest headwinds.
- Reported operating margin was 13.1% in Q2 versus 13.6% a year earlier, and 12.4% for the first half versus 13.6%. Total gross margin was 38.1% in Q2 versus 38.0%, and 37.6% for the first half versus 37.3%.
- Management’s adjusted operating earnings, excluding deferred-compensation expenses, rose 2.0% in Q2 to $15.7 million and 3.7% in the first half to $30.7 million. Adjusted operating margin on product sales was 14.9% in Q2 and 14.8% year to date, up 0.2 and 0.5 percentage points, respectively. These are management-presented non-GAAP adjustments.
- Lower effective tax rates helped lift attributable earnings: 27.4% in Q2 and 28.3% for the first half, compared with 33.0% and 31.9% in 2016. The company attributed the decrease principally to benefits from amended federal and state tax returns, including a state tax carryforward.
- Other income was $2.5 million in Q2 and $4.4 million for the first half. Investment gains on securities tied to deferred compensation were substantially offset by deferred-compensation expenses in operating costs. First-half foreign-exchange losses were $1.6 million, versus a $0.01 million gain in 2016.
Cash flow, liquidity and debt
- First-half operating cash flow was $8.4 million, down from $21.6 million. Management cited receivable collection timing, higher finished-goods inventories and changed production plans, tax-payment timing, and increased broker margin deposits on commodity hedges.
- Investing cash outflow was $39.7 million, including $7.4 million of capital expenditures and net purchases of available-for-sale securities. Financing cash outflow was $31.7 million, including $20.1 million of share repurchases and $11.3 million of cash dividends.
- Cash and equivalents were $57.8 million at June 30, down from $119.1 million at year-end 2016. Cash, cash equivalents, and short- and long-term investments totaled $326.1 million, including $75.3 million in trading securities used as an economic hedge for deferred-compensation liabilities.
- Current assets were $267.8 million and current liabilities $64.6 million; the current ratio was 4.1 to 1 and working capital was $203.2 million. Total assets were $917.3 million.
- Debt was limited to $7.5 million of industrial development bonds and $0.3 million of bank loans at June 30. The company reported no other outstanding bank borrowings.
Changes, outlook and risks
- Despite slightly higher sales, reported operating earnings declined year over year in both periods, while attributable net earnings and EPS increased, helped by lower taxes and fewer average shares. The company repurchased 536,000 shares for $20.1 million in the first half; average shares outstanding fell to 63.4 million from 64.3 million.
- Management cited manufacturing-efficiency gains and cost-containment efforts as support for adjusted operating performance. Higher labeling-related expenses affected selling, marketing and administrative costs. Foreign operations’ operating losses and unfavorable currency movements were offsets.
- No specific earnings or revenue guidance was provided. Management expects approximately $15 million of spending on a U.S. manufacturing-plant rehabilitation and expansion: about $2 million in 2017, $9 million in 2018, and $2 million annually in 2019 and 2020. It also planned a $10–15 million VEBA contribution in Q4 2017.
- Multiemployer pension exposure: The union plan remains in “critical and declining” status and is projected to become insolvent in 13 years. The company’s estimated withdrawal liability was $72.7 million for a hypothetical 2016 withdrawal. Management believes payments may be limited to 20 annual installments of $2.914 million, with an estimated present value of $34.2–44.7 million; the outcome remains uncertain and could materially affect future results or cash flows. The labor contract commits participation through Q3 2017.
- Key market exposures include ingredient and fuel prices, foreign exchange, and investment-rate movements. The company said there were no material changes in its disclosed risk factors or market risks. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported.
Important facts for investors to verify
- Whether sales and operating performance strengthen in the seasonally important third quarter, and the effects of customer-order timing and currency translation.
- How much of the gap between reported and management-adjusted operating earnings reflects deferred-compensation market movements, and whether those adjustments persist.
- Cash conversion and inventory levels, given the sharp first-half decline in operating cash flow.
- Developments in the underfunded multiemployer pension plan, including any changes to withdrawal exposure, rehabilitation measures, or the company’s participation after Q3 2017.
- Timing and funding of the plant project and planned VEBA contribution, alongside continued share repurchases and dividends.