Tootsie Roll Industries, Inc. — Q3 2021 Form 10-Q
Business context and period: Unaudited results for the quarter and nine months ended September 30, 2021, compared with the same 2020 periods. The company makes and sells confectionery products; the third quarter is seasonally its largest sales quarter because of pre-Halloween demand. Dollar amounts below are in millions unless noted.
Financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $184.2 | $157.8 | $402.9 | $342.2 |
| Net product sales | $183.1 | $157.0 | $399.4 | $339.6 |
| Gross margin | $65.4 | $58.4 | $141.9 | $125.5 |
| Operating earnings | $29.6 | $25.5 | $47.0 | $46.8 |
| Net earnings attributable to Tootsie Roll | $24.7 | $24.7 | $45.3 | $44.0 |
| EPS | $0.37 | $0.36 | $0.67 | $0.64 |
- Revenue grew 16.7% in Q3 and 17.7% year to date, primarily reflecting stronger sales as the economy reopened and customer orders improved. U.S. product sales rose 13.7% in Q3; foreign product sales rose 64.8% from a smaller base.
- Calculated gross margin was approximately 35.5% in Q3 versus 37.0% a year earlier, and 35.2% year to date versus 36.7%. Management cited higher ingredient, packaging, manufacturing-supply and freight costs, plus supply-chain constraints and added production costs.
- Management’s adjusted operating earnings, excluding deferred-compensation-related expenses or credits, were $29.5 million in Q3, down 2.8%, and $55.5 million year to date, up 7.5%. Adjusted operating margin on product sales fell to 16.1% from 19.4% in Q3 and to 13.9% from 15.2% year to date. These are company-presented non-GAAP adjustments.
- Reported Q3 operating earnings increased, while net earnings attributable to the company were nearly flat; reported results include investment-value-related deferred compensation effects. EPS also benefited from fewer average shares outstanding.
- Operating cash flow was $32.2 million for nine months, versus $24.1 million. Capital expenditures were $22.9 million, compared with $11.4 million. Cash, cash equivalents and restricted cash declined to $76.6 million from $167.3 million at year-end 2020, mainly reflecting investing and financing outflows.
- At September 30, cash and short-term investments totaled $115.7 million; long-term investments were $280.3 million. Total liabilities were $258.9 million. Debt was modest: $7.5 million of industrial development bonds and $1.0 million of short-term Spanish subsidiary bank loans. The current ratio was 2.9, down from 4.6 at year-end 2020; working capital was $183.3 million.
Changes, outlook and risks
- Sales exceeded Q3 2019 by 0.6% and nine-month 2019 sales by 2.7%, the company’s pre-pandemic comparison. Pandemic-related disruption to sharing and giveaway occasions had previously affected demand.
- Management expected elevated input costs, inflation and supply-chain challenges to continue through 2022. Price increases were being phased in mainly during Q4 2021 and early 2022, but management cautioned that passing all cost increases to consumers may be difficult. Higher freight and delivery costs were expected to persist and possibly rise further in 2022.
- The company committed approximately $25 million to a U.S. plant rehabilitation and expansion project; about $14 million had been spent through 2021, with roughly $1 million expected in the rest of 2021 and $1 million in 2022.
- COVID-19 and variant impacts remained uncertain. The company noted its seasonal sales pattern and said interim results may not predict full-year results. No specific earnings or revenue guidance was provided.
- A multi-employer union pension plan remained in “critical and declining” status. The company reported an estimated withdrawal liability of $99.3 million for a hypothetical 2020 withdrawal; its actuarial analysis suggested a present-value range of $34.7–$49.3 million for a capped payment scenario, with substantially higher exposure possible in a mass withdrawal. The ultimate outcome and financial effect remain uncertain. Surcharges were frozen at year-end 2020 rates after a 2021 agreement.
- Other risks include commodity and foreign-exchange exposure, investment-value fluctuations, and potential non-cash tax expense if proposed U.S. corporate tax increases became law. Management reported no material change in market-risk disclosures and said disclosure controls were effective.
Important facts for investors to verify
- Whether price increases and improved demand can offset rising ingredient, packaging, labor, energy and freight costs without materially weakening volumes or margins.
- How much of reported earnings and operating cash flow reflects recurring operations versus deferred-compensation valuation effects and working-capital timing.
- The pension plan’s funding, potential assistance under the American Rescue Plan Act, and the company’s eventual withdrawal-liability exposure.
- The composition, credit quality, maturity and liquidity of the company’s substantial investment portfolio, alongside continued share repurchases and capital spending.
- Actual completion costs and remaining cash requirements for the plant project, and the evolving effects of COVID-19 and supply-chain disruptions.