Tootsie Roll Industries, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022, compared with the three months ended March 31, 2021. Dollar amounts below are in millions, except per-share data. Results are unaudited. The company notes that sales are seasonal, with the third quarter typically largest due to Halloween-related demand.
Financial performance and liquidity
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Total revenue | $140.6 | $103.2 |
| Net product sales | $139.3 | $101.8 |
| Gross margin | $47.9 | $37.2 |
| Earnings from operations | $20.8 | $10.4 |
| Net earnings attributable to Tootsie Roll | $12.0 | $10.8 |
| Diluted earnings per share as reported | $0.17 | $0.15 |
| Cash provided by operating activities | $16.8 | $15.3 |
- Net product sales increased 36.8%; U.S. sales rose 38.7% and foreign sales 17.6%. Domestic sales were 92.4% of net product sales.
- Reported gross margin was 34.1% of revenue versus 36.1% a year earlier. Management’s adjusted product cost of goods sold rose 41.6%; as a share of product sales it increased to 66.5% from 64.3%.
- Management-adjusted operating earnings, excluding deferred-compensation-related items, were $15.2 million versus $13.6 million, up 12.0%; adjusted operating margin on product sales declined to 10.9% from 13.4%. Reported results were significantly affected by market-value changes in trading securities and offsetting deferred compensation costs or credits.
- Other income (loss) was a loss of $5.0 million versus income of $3.8 million, primarily reflecting trading-security losses of $5.6 million compared with gains of $3.2 million. The company says these were substantially offset by deferred compensation entries in operating expenses.
- Cash and cash equivalents were $86.8 million at March 31, 2022; cash, cash equivalents and restricted cash totaled $87.2 million. Cash and short- and long-term investments totaled $422.3 million. Current assets were $275.7 million and current liabilities $80.3 million; the current ratio was 3.4 to 1.
- Operating cash flow was $16.8 million; capital expenditures were $5.9 million. Cash used in investing was $23.1 million and cash used in financing was $13.1 million. Cash and cash equivalents declined $19.0 million during the quarter.
- Bank borrowings were $1.1 million, relating to the Spanish subsidiary, and industrial development bonds were $7.5 million. The company reported no other outstanding bank borrowings. Cash dividends paid were $12.1 million; share purchases and retirements were $1.2 million.
Changes, outlook and risks
- Sales growth reflected stronger demand as consumers resumed group activities and gatherings, effective sales and marketing, and some shipments shifted from Q4 2021 because of supply and manufacturing delays. Q1 sales were 38% above Q1 2019.
- Management said higher costs for ingredients, packaging, freight, fuel, and manufacturing supplies substantially offset the benefit of sales growth. It expected elevated input and freight costs to continue through the rest of 2022. Price increases were phased in mainly in Q4 2021 and Q1 2022, with further increases planned for some products in Q2 2022; management cautioned these would not restore historical margins and that passing on all cost increases is limited.
- Supply disruptions, longer supplier lead times, transportation constraints and tight labor markets could restrict product volumes or temporarily shut manufacturing lines, causing lost sales and profits. Management said disruptions remained less predictable than in the past.
- The company had committed approximately $30 million to a U.S. plant rehabilitation and expansion; it expected about $7 million of additional spending in 2022. No formal full-year revenue or earnings guidance is provided in the filing text.
- COVID-19’s future effects on sales and earnings remained uncertain. Management also identified commodity-price and availability, fuel, foreign-exchange, interest-rate, and competitive risks.
- A multi-employer union pension plan remains in “critical and declining” status and is projected to become insolvent within 20 years. The company’s estimated withdrawal liability was $104.3 million for a hypothetical withdrawal in 2021; management’s actuarial estimates of potential payment obligations vary substantially by assumptions. The company says the ultimate outcome could materially affect future results or cash flows, and it could not determine the ultimate effect. The union contract requires participation through September 2022. First-quarter pension expense was $0.8 million.
- Ordinary-course legal proceedings and potential COVID-related claims were not expected by management to have a material effect. The filing states disclosure controls were effective and no material change in internal control over financial reporting occurred during the quarter.
Important facts for investors to verify
- Whether pricing and cost-saving actions can offset continued input, freight and fuel inflation, and how margins develop in subsequent quarters.
- Whether supply-chain constraints, transportation availability and labor conditions limit production or sales.
- How the multi-employer pension plan’s financial condition, potential PBGC assistance and applicable withdrawal-liability assumptions affect the company’s eventual exposure.
- The performance and valuation of the company’s substantial investment portfolio: Q1 investment-related losses contributed to lower other income and a $5.9 million pre-tax unrealized investment loss in other comprehensive income.
- Progress and remaining spending on the plant project, and whether Q1 cash-flow and inventory trends persist. Inventory-related operating cash use was $12.1 million.
- Implications of the company’s seasonal sales pattern when interpreting Q1 results or assessing full-year performance.