Tootsie Roll Industries, Inc. — Q1 2016 Form 10-Q
Reporting period: Quarter ended March 31, 2016. Dollar amounts are in thousands except per-share data. Results are unaudited. The company notes that its business is seasonal, with the third quarter historically its largest sales quarter because of pre-Halloween demand.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Total revenue | $104,395 | $106,321 | Down 1.8% |
| Net product sales | $103,362 | $105,477 | Down 2.0% |
| Gross margin | $38,269 | $38,948 | Down 1.7% |
| Earnings from operations | $14,216 | $12,964 | Up 9.7% |
| Net earnings attributable to Tootsie Roll | $9,896 | $9,154 | Up 8.1% |
| EPS | $0.16 | $0.14 | Up $0.02 |
| Operating cash flow | $14,980 | $7,021 | Up $7,959 |
Gross margin was approximately 36.7% of revenue, broadly unchanged year over year; operating margin rose to approximately 13.6% from 12.2%. Management’s adjusted operating earnings, excluding deferred-compensation effects, were $14,269 versus $14,382, down 0.8%; adjusted operating margin was 13.8% versus 13.6%. The filing states these adjustments better reflect underlying operations.
Liquidity, cash flow and capital
- Cash and cash equivalents were $95,057 at March 31, 2016, down from $126,145 at year-end 2015 and up from $85,430 a year earlier. Current assets were $255,274 and current liabilities $59,770; the current ratio was 4.3 to 1.
- Cash, cash equivalents and short- and long-term investments totaled $310,290, compared with $321,230 at December 31, 2015. The total includes $62,509 of trading securities used as an economic hedge for deferred-compensation liabilities.
- Operating cash flow was $14,980. Investing activities used $28,724, including $23,348 of purchases of available-for-sale securities and $8,376 of capital expenditures. Financing activities used $17,322, including $10,943 of cash dividends and $6,576 of share repurchases. Cash declined $31,088 during the quarter.
- Bank borrowings totaled $853, principally at majority-owned Spanish subsidiaries; the company reported no other outstanding bank borrowings. Industrial development bonds were $7,500.
- Capital expenditures increased from $2,418 in Q1 2015, largely due to timing of spending on equipment and automation. Management expected 2016 capital expenditures to be funded from operating cash flow and internal sources.
Year-over-year changes and management commentary
- Lower U.S. exports and foreign-subsidiary sales affected product sales; management attributed $1,202 of the decline to lower exports and $630 to lower foreign-subsidiary sales. Currency translation contributed $829 to lower foreign sales.
- Higher price realization helped results, but lower production volumes, increased manufacturing costs, ingredient costs, wages and benefits pressured adjusted product costs. Lower production was intended to reduce finished-goods inventory amid uncertainty about potential labeling-regulation changes.
- Adjusted selling, marketing and administrative expenses fell 3.6%, with lower freight and delivery costs contributing. The effective tax rate declined to 30.5% from 32.3%, reflecting settlement of certain tax audits.
- Average shares outstanding fell to 62.499 million from 63.645 million. The company repurchased 213,806 shares for approximately $6.576 million. A 3% stock dividend was distributed after quarter-end, on April 8, 2016.
Risks, contingencies and outlook
- Multiemployer pension plan: The union plan was in “critical and declining status” and projected to become insolvent in 14 years. The company’s estimated withdrawal liability was $61 million for a hypothetical 2015 withdrawal; management said it could increase in 2016. The company described a potential payment range with present value of $34.8 million to $45.4 million under its assumptions, while noting actual liability could be higher. The labor agreement commits participation through Q3 2017. The outcome and potential financial effects remain uncertain and could be material.
- Market exposures: Risks include ingredient and fuel prices and foreign-exchange movements, particularly involving the Canadian dollar and sales in Canada, Mexico and Spain. The company uses derivatives to hedge certain commodity and currency exposures and says it does not use them speculatively.
- The company reported no material change in previously disclosed risk factors and no goodwill or intangible-asset impairment trigger in the quarter. Management provided no specific financial guidance in the filing; it cautioned that quarterly results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether labeling-rule developments and related production decisions affect inventory, manufacturing costs or future sales.
- Updates to the union pension plan’s funding status, withdrawal-liability estimates and rehabilitation measures.
- Whether operating cash flow and earnings trends persist beyond the seasonally weaker first quarter.
- Capital-spending plans, share repurchases and the composition and liquidity of the investment portfolio.
- Future effects of currency, commodity and freight costs, and the company’s stated exposure to these risks.