Tootsie Roll Industries, Inc. — Q2 2023 Form 10-Q
Business context and reporting period. The filing covers the quarter and six months ended June 30, 2023. Tootsie Roll sells confectionery products, with the third quarter typically its largest sales quarter because of pre-Halloween demand. Figures below are in U.S. dollars; financial amounts are shown in millions unless stated otherwise.
Financial performance
| Metric | Q2 2023 | Q2 2022 | H1 2023 | H1 2022 |
|---|---|---|---|---|
| Total revenue | $160.1 | $143.4 | $322.2 | $284.1 |
| Net product sales | $158.8 | $142.1 | $319.5 | $281.4 |
| GAAP operating earnings | $14.8 | $27.0 | $27.5 | $47.8 |
| Net earnings attributable to Tootsie Roll | $14.7 | $12.0 | $28.1 | $24.0 |
| Earnings per share | $0.21 | $0.17 | $0.40 | $0.34 |
| Operating cash flow | Not separately reported | Not separately reported | $(5.1) | $0.6 |
- Net product sales increased 11.8% in Q2 and 13.6% in H1. Management attributed growth primarily to improved sales price realization, with higher volumes also contributing. Domestic sales rose 10.3% and 12.3%, respectively; foreign sales rose 28.6% and 28.7%.
- GAAP gross margin on product sales was approximately 32.6% in Q2 versus 32.9% a year earlier, and 31.6% in H1 versus 33.3%. Management cited higher ingredient, packaging, labor, benefit, repair, and manufacturing costs.
- Management’s adjusted operating earnings, excluding deferred-compensation-related market-value effects, were $19.7 million in Q2 (up 36.5%) and $36.8 million in H1 (up 24.2%). Adjusted operating margins on product sales were 12.4% and 11.5%, respectively. These are company-presented non-GAAP comparisons.
- GAAP net earnings increased despite lower reported operating earnings, largely reflecting swings in investment gains and losses on trading securities, which management says were substantially offset by deferred compensation expense or credits recorded in operating costs. Trading-securities gains were $4.9 million in Q2 and $9.3 million in H1 2023, versus losses of $12.6 million and $18.2 million in the prior-year periods.
Liquidity, cash flow, and debt
- At June 30, 2023, cash and cash equivalents were $26.0 million; current and long-term investments were $335.6 million. Cash plus short- and long-term investments totaled $361.7 million, including $81.3 million of trading securities associated with deferred compensation liabilities.
- Current assets were $314.6 million and current liabilities $91.0 million; the current ratio was 3.5:1 and working capital was $223.6 million.
- H1 operating cash flow was negative $5.1 million, primarily reflecting a $54.3 million cash use from increased inventories as the company built production and inventory ahead of seasonal demand. Capital expenditures were $10.7 million.
- H1 financing used $29.1 million, including $16.5 million for share purchases and $12.5 million of cash dividends. Cash and cash equivalents declined $27.2 million from year-end to $26.0 million.
- Debt was limited: $1.1 million of short-term bank loans at the Spanish subsidiary and $7.5 million of industrial development bonds. The company reported no other bank borrowings.
Changes, outlook, and risks
- Input costs remained a significant margin pressure. The company implemented price increases beginning in 2021 and continuing into 2023, but said margins had not returned to historical levels and ingredient costs were expected to be higher in 2024. It cautioned that pricing may not fully offset cost inflation.
- Management reported improved supply-chain conditions versus 2022, but continued to monitor disruption risk and labor challenges at some plants. Additional shifts and overtime were used to raise production for 2023 demand.
- Results are seasonal; management identifies Q3 as typically the largest product-sales quarter due to Halloween. The filing provides no quantified full-year revenue or earnings guidance.
- The multi-employer union pension plan remains in “critical and declining” status. The company says the ultimate exposure is uncertain and could materially adversely affect future results or cash flows. Its new five-year union contract runs through September 2027 and requires continued participation in the plan. The plan withdrew its PBGC financial-assistance application in June 2023 and intended to resubmit it.
- Management cited estimated withdrawal-liability scenarios, not a recorded settlement amount: a hypothetical 2022 withdrawal was estimated at 20 annual payments of $2.714 million, with present value of $31.9–$43.7 million under stated assumptions; a mass-withdrawal scenario had an estimated present value of $44.5–$115.8 million. Actual liability could be higher.
- Other risks include commodity and packaging availability and prices, foreign-exchange movements, Halloween sell-through, and competition. The company reported no material change in market-risk disclosures and no identified goodwill or trademark impairment trigger during H1.
Important facts for investors to verify
- Whether sales-price increases and volume growth can offset expected further input-cost inflation without weakening demand.
- Whether the company’s inventory build converts to seasonal sales and operating cash flow in the second half.
- The recurring operating trend excluding deferred-compensation and trading-security market-value effects; compare reported GAAP results with the company’s adjusted measures.
- Developments in the pension plan’s funding, PBGC assistance application, and potential withdrawal liability.
- Investment portfolio values and liquidity, including the distinction between trading securities and available-for-sale securities and the unrealized losses on the latter.