Tootsie Roll Industries, Inc. — 2017 Form 10-K Summary
Business context and reporting period
The filing reports the fiscal year ended December 31, 2017, with fourth-quarter results also provided. Tootsie Roll manufactures and sells confectionery products as a single business segment, principally in the United States, Canada, and Mexico. Sales are seasonal, with a substantial increase ahead of Halloween.
Financial performance and liquidity
Amounts are in millions of dollars unless stated otherwise.
| Metric | 2017 | 2016 |
|---|---|---|
| Total revenue | $519.3 | $521.1 |
| Net product sales | $515.7 | $517.4 |
| Total gross margin | $192.4 | $199.8 |
| Earnings from operations | $71.4 | $92.4 |
| Net earnings attributable to Tootsie Roll Industries, Inc. | $80.9 | $67.5 |
| Diluted earnings per share | $1.28 | $1.05 |
| Cash from operating activities | $43.0 | $98.6 |
- Product gross margin was $189.8 million, or about 36.8% of product sales, versus $197.1 million, or about 38.1%, in 2016. Higher ingredient, packaging, labor, plant-overhead, freight, and delivery costs weighed on margins.
- Reported net earnings included a favorable $20.3 million tax-reform adjustment, equal to approximately $0.32 per share. The effective tax rate was 4.6%, compared with 31.2% in 2016. The company said the tax accounting was provisional.
- Cash and cash equivalents were $96.3 million; cash, cash equivalents, and investments, including long-term investments, totaled $328.4 million, down from $351.3 million. Working capital was $207.1 million, versus $235.7 million.
- Operating cash flow fell by $55.6 million, principally reflecting higher prepaid expenses and other assets, increased income taxes receivable, lower income taxes payable, and deferred-compensation payments. Capital expenditures were $16.7 million.
- Shareholders’ equity was $733.8 million. Long-term industrial development bonds were $7.5 million; the balance sheet also reported $0.4 million of current bank loans, associated with Spanish subsidiaries. Management reported no outstanding bank borrowings at the parent-company level.
Material changes versus the prior period
- Net product sales declined 0.3%; a stronger U.S. dollar reduced 2017 sales by approximately $2.0 million. Fourth-quarter sales increased 0.7% to $125.2 million.
- Operating earnings declined $21.0 million. Excluding specified deferred-compensation expenses, management reported adjusted operating earnings of $81.4 million, down 15.8% from $96.7 million.
- Attributable net earnings rose 19.8%, and EPS rose from $1.05 to $1.28, primarily because of the tax-reform benefit and fewer average shares outstanding—not stronger operating performance.
- The company recorded a $2.4 million impairment charge for Spanish subsidiary assets. Those subsidiaries reported operating losses of $3.2 million, compared with $1.7 million in 2016.
Outlook, risks, contingencies, and unusual items
- No formal earnings or revenue guidance is provided. Management expected freight and delivery cost pressures to continue in 2018, and expected Spanish operations to incur further losses, requiring additional cash support.
- Management planned approximately $15 million for a U.S. plant upgrade and expansion, with expected outlays of about $6 million in each of 2018 and 2019 and $3 million in 2020. Approximately $13 million was committed for packaging lines in 2018. Management expected operating cash flow and internal resources to fund capital needs.
- A multi-employer union pension plan is in “critical and declining” status and is projected to become insolvent in 2030. The company disclosed an estimated $82.2 million withdrawal liability for 2017; management’s estimated present value of potential capped payments was $35.9–$46.9 million, subject to assumptions and legal provisions. The ultimate outcome could materially affect future results or cash flows.
- Wal-Mart represented approximately 24.0% of 2017 net product sales; McLane represented 16.9%, including some Wal-Mart sales. Loss or reduced purchases from major customers could materially affect the business.
- Other risks include volatile commodity and energy prices, competition and pricing acceptance, Halloween seasonality, supply-chain and production interruptions, regulatory changes, and the ongoing Chicago union contract negotiations. The company anticipated a new five-year agreement in the first or second quarter of 2018.
- The company repurchased $34.1 million of shares and paid $22.6 million in cash dividends in 2017. It also made a $20.0 million contribution to its VEBA trust for certain union employee benefits.
- The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; management reported effective controls. The filing disclosed no material pending legal proceedings.
Important facts for investors to verify
- How much of 2017 earnings and EPS growth came from the one-time, provisional tax-reform adjustment, and what are subsequent tax-accounting effects?
- Whether higher input, freight, and selling costs continue to pressure operating margins and cash generation.
- Progress and cash requirements in Spain, including further operating losses or asset impairments.
- Developments in the multi-employer pension plan, its withdrawal-liability estimates, and any changes to required contributions or benefits.
- Actual timing and cost of the announced plant and packaging investments, and their effect on cash, capacity, and efficiency.
- Sales concentration at Wal-Mart and McLane, including the overlap in reported customer sales.