Tootsie Roll Industries, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Unaudited consolidated results; dollar amounts below are in millions unless stated otherwise. The business is seasonal, with the third quarter typically its largest sales quarter due to pre-Halloween demand.
Financial performance
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Total revenue | $143.4 | $115.5 | $284.1 | $218.7 |
| Net product sales | $142.1 | $114.6 | $281.4 | $216.4 |
| Gross margin | $47.7 | $39.3 | $95.6 | $76.5 |
| Operating earnings | $27.0 | $6.9 | $47.8 | $17.3 |
| Net earnings attributable to Tootsie Roll | $12.0 | $9.8 | $24.0 | $20.6 |
| Earnings per share | $0.17 | $0.14 | $0.35 | $0.29 |
- Net product sales rose 24.0% in Q2 and 30.1% in the first half. Domestic product sales increased 26.1% and 32.1%, respectively; foreign sales increased 3.8% and 10.1%.
- Reported gross margin was approximately 33.2% in Q2 versus 34.0% a year earlier, and 33.6% for the first half versus 35.0%. Management said higher ingredient, packaging, freight, energy and manufacturing costs offset much of the benefit from sales growth.
- Management’s adjusted operating earnings, excluding deferred-compensation-related expenses or credits, were $14.4 million in Q2 versus $12.4 million, and $29.7 million for the first half versus $26.0 million. Adjusted operating margin on product sales declined to 10.1% from 10.8% in Q2 and to 10.5% from 12.0% for the first half.
- Other income (loss), net was a loss of $11.1 million in Q2 and $16.2 million for the first half, versus income of $6.2 million and $10.1 million in the comparable periods. Market losses on trading securities tied to deferred compensation were substantially offset by corresponding compensation credits in operating expenses; these items materially affect reported comparisons.
Cash flow, liquidity and debt
- First-half operating cash flow was $0.6 million, down from $10.8 million. Inventory growth used $45.5 million of cash, compared with $28.7 million in the prior-year period; the company said it was building inventory for expected demand through Halloween.
- First-half capital expenditures were $10.2 million. Investing cash outflow was $42.8 million, including purchases and maturities/sales of available-for-sale securities. Financing cash outflow was $17.1 million, including $12.2 million of cash dividends and $5.0 million of share purchases and retirements.
- At June 30, cash and cash equivalents were $46.6 million; current investments were $76.5 million and long-term investments were $258.1 million. Management reported aggregate cash and cash equivalents plus short- and long-term investments of $381.2 million, including trading securities used as an economic hedge for deferred compensation.
- Current assets were $280.8 million and current liabilities $82.5 million; the current ratio was 3.4 to 1 and working capital was $198.3 million. Debt consisted of $7.5 million of industrial development bonds and $1.0 million of short-term bank loans at the Spanish subsidiary; the company reported no other outstanding bank borrowings.
Material changes, outlook and risks
- Management attributed sales growth to stronger demand as consumers resumed group events and other activities, effective sales and marketing, and some orders shifted from earlier periods because of supply and manufacturing delays. First-half sales exceeded the comparable 2019 period by 36%.
- Supply constraints, longer supplier lead times, transportation limitations and a tight labor market could limit product availability or temporarily shut manufacturing lines, resulting in lost sales and profits. Management expected elevated input costs to persist through 2022 and said it was seeing still higher overall ingredient and material costs for 2023.
- Price increases phased in mainly during Q4 2021 and Q1 2022 had not restored historical margins. Management planned further pricing actions but noted limits to passing all cost increases on to consumers. No specific earnings or sales guidance was provided.
- The company committed approximately $30 million to a U.S. manufacturing-plant rehabilitation and expansion; it expected about $7 million of additional project cash outlays in 2022.
- A multiemployer pension plan covering certain union employees remains in “critical and declining” status and is projected to become insolvent in the future. The company disclosed estimated withdrawal liability of $104.3 million if it had withdrawn in 2021; management’s actuarial analysis estimated a present value of $32.8–$46.6 million for likely limited payment scenarios, with substantially higher theoretical values in a mass-withdrawal scenario. The ultimate outcome and financial effect remain uncertain and could be material. The union contract required continued participation through September 2022.
- COVID-19 effects remained uncertain. Management also identified commodity, fuel, foreign-exchange, investment-market and supply-chain risks. Ordinary-course legal matters were not expected by management to materially affect results or financial condition.
Important facts for investors to verify
- Whether sales momentum, particularly the seasonal Halloween business, continues without reliance on orders shifted from earlier periods.
- Whether price increases and cost controls offset persistent or rising input, freight, utility and labor costs, and how margins develop.
- Whether inventory converts to sales and cash; first-half operating cash flow was substantially reduced by inventory investment.
- The sensitivity of reported earnings to market movements in trading securities and the related deferred-compensation expense or credits.
- Developments in the multiemployer pension plan, including PBGC assistance, withdrawal-liability estimates and the union contract after September 2022.
- Execution, cost and funding of the manufacturing-plant project and any supply-chain or labor disruption affecting production.