Tootsie Roll Industries, Inc. — FY2023 Form 10-K
Business context and period. The company manufactures and sells confectionery products as a single reportable business segment, principally in the United States, Canada and Mexico. This annual report covers the fiscal year ended December 31, 2023; fourth-quarter comparisons are also disclosed. Amounts below are in U.S. dollars, generally millions unless noted.
Key financial results
| Metric | FY2023 | FY2022 | Change |
|---|---|---|---|
| Net product sales | $763.3 | $681.4 | +12.0% |
| Total revenue, including rental and royalty revenue | $769.4 | $687.0 | +12.0% |
| Gross margin | $256.8 | $232.7 | +10.4% |
| Operating earnings | $101.8 | $110.8 | -8.1% |
| Earnings attributable to Tootsie Roll | $91.9 | $75.9 | +21.0% |
| Earnings per share | $1.32 | $1.07 | +$0.25 |
| Cash from operating activities | $94.6 | $72.1 | +$22.6 |
- Fourth-quarter net product sales were $195.4 million, up 3.8%; earnings attributable to the company were $29.4 million, or $0.42 per share, versus $25.3 million, or $0.36 per share, a year earlier.
- Product gross margin was approximately 33.1% of product sales, versus 33.6% in 2022. Management cited higher ingredient, packaging, labor, utilities and manufacturing costs, partly offset by price increases and cost reductions.
- Management’s adjusted figures exclude deferred-compensation-related market gains and losses. On that basis, operating earnings rose 25.5% to $117.3 million and selling, marketing and administrative expenses increased 1.4% to $140.3 million. These adjustments are non-GAAP measures described by management as more reflective of underlying operations.
- Year-end cash, cash equivalents and investments totaled $427.0 million, including $87.8 million of trading securities held to economically hedge deferred-compensation liabilities. Net working capital was $245.8 million, versus $218.9 million.
- Capital expenditures were $26.8 million. Cash dividends paid were $25.1 million and shares purchased and retired totaled $33.1 million. Shareholders’ equity was $823.4 million.
- Debt and borrowing items were limited but included $7.5 million of industrial development bonds due 2027 and $1.1 million of short-term bank loans at the Spanish subsidiary. The filing also reports operating lease liabilities of $7.3 million.
Material changes and management outlook
- Sales growth was primarily driven by higher price realization and seasonal marketing programs. Earlier pre-Halloween and other sales in Q3 shifted some demand out of Q4.
- Input costs rose further in 2023, following substantial increases in 2022. Management said it made progress restoring margins but had not returned them to historical levels; it reported consumer resistance to higher confectionery prices in 2024 and expected this could weigh on sales.
- Management said supply-chain conditions improved in 2023 and expected continued improvement in 2024, while noting labor challenges at some plants.
- The company is studying a plant expansion involving processing and packaging capacity. Management estimates total spending of approximately $70–$80 million over the next five years, with most expenditures expected in the next three years, funded from internal resources.
- The Spanish subsidiary’s operating loss narrowed to $0.8 million from $1.4 million. Management expects continued challenges and possible future losses and capital needs, while aiming to reduce losses in 2024. No formal earnings or revenue guidance is provided.
- The company’s multi-employer union pension plan is classified as critical and declining. The latest reported funded percentage was 49.4% as of January 1, 2022; estimated withdrawal liability is uncertain and could be material in future periods. The plan has applied for federal financial assistance.
Risks, contingencies and unusual items
- Customer concentration is significant: Wal-Mart, Dollar Tree and McLane together represented approximately 37% of 2023 net product sales. The loss or reduced purchasing of a major customer could adversely affect results.
- Sales are seasonal, with Halloween particularly important; the company reports that Halloween has historically represented about half of Q3 domestic product sales. Supply interruptions, production concentration at specialized facilities, labor disputes and input-cost volatility could affect fulfillment and margins.
- Deferred-compensation investment gains of $15.5 million in 2023, compared with losses of $17.3 million in 2022, were offset by related expense or credits in operating expenses. These movements materially affect reported operating earnings and other income but are not representative of current operating performance, according to management.
- Ordinary-course legal matters were not expected by management to have a material effect. The filing identifies potential product-labeling and slack-fill litigation risks. No material cybersecurity incident was reported for 2023.
- The company reported no goodwill or trademark impairment in 2023. Spain’s tax-loss benefits remain subject to a valuation allowance.
Most important facts for investors to verify
- Whether price increases can offset continuing cost pressure without materially reducing volumes or consumer demand.
- The reconciliation of GAAP operating earnings to management’s adjusted results, including deferred-compensation gains and matching expenses.
- Current status and potential exposure of the critical-and-declining multi-employer pension plan, including any outcome of its federal assistance application.
- Customer concentration, planned capacity expansion costs and timing, and the Spanish subsidiary’s future losses or financing needs.
- Full debt, investment and liquidity disclosures in the audited statements and notes; the figures summarized here include securities held to hedge deferred compensation.