Tootsie Roll Industries, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Unaudited. Amounts are in thousands of dollars except per-share data. The company notes that results are seasonal: Q3 is historically its largest sales quarter due to pre-Halloween demand.
Key financial results
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $182,724 | $182,303 | $391,653 | $390,912 |
| Net product sales | $181,913 | $181,505 | $388,953 | $387,987 |
| Gross margin | $69,616 | $66,846 | $147,213 | $141,665 |
| Operating earnings | $36,038 | $30,226 | $54,311 | $50,436 |
| Net earnings attributable to Tootsie Roll | $29,854 | $26,104 | $50,365 | $44,718 |
| EPS | $0.46 | $0.40 | $0.77 | $0.68 |
- Revenue increased 0.2% in both the quarter and year-to-date period. Domestic product sales rose 0.7%; lower foreign sales, U.S. dollar strength, and timing of shipments weighed on consolidated sales.
- Gross margin was approximately 38.1% of revenue in Q3 and 37.6% year to date, compared with approximately 36.7% and 36.2%, respectively, in 2018. Management attributed improvement to higher price realization, manufacturing efficiencies, and cost containment. Prior-year costs included packaging-line start-up inefficiencies and unfavorable self-insurance experience.
- Management’s adjusted operating earnings, excluding deferred-compensation-related expense, were $36,259 in Q3, up 11.3%, and $61,368 year to date, up 12.0%. Adjusted figures are non-GAAP measures described by management as more reflective of underlying operations.
- Reported other income was $1,846 in Q3 versus $2,987; year-to-date other income was $10,916 versus $6,871. Trading-security gains and investment income contributed to these results; trading-security movements were substantially offset by deferred-compensation expense.
- Operating cash flow was $36,176 year to date, down from $40,980. The filing cites inventory and sales/production timing, receivable collection timing, tax payments, and prepaid expenses as factors. Capital expenditures were $14,151, compared with $16,812.
Financial position and liquidity
- At September 30, cash and cash equivalents were $87,400; current investments were $76,766; and total assets were $982,092. Cash, cash equivalents, and short- and long-term investments totaled approximately $342,974, including $71,790 of trading securities used as an economic hedge for deferred-compensation liabilities.
- Current assets were $332,306 and current liabilities $77,409, yielding a 4.3:1 current ratio and $254,897 of working capital. The current ratio was 5.0:1 at December 31, 2018.
- Borrowings were limited: $768 of short-term bank loans at the Spanish subsidiary and $7,500 of industrial development bonds. The filing reports no other outstanding bank borrowings. Operating lease liabilities were $1,770.
- Year-to-date financing included $27,232 of share repurchases and $17,592 of cash dividends. Average shares outstanding declined year over year, supporting EPS growth. The company has no formal publicly announced repurchase program.
Outlook, risks, and notable items
- The filing provides no specific earnings or revenue guidance. Management expects approximately $17,000 of spending for a U.S. manufacturing-facility rehabilitation and expansion: about $3,000 in 2019, $6,000 in 2020, and $8,000 in 2021. 2019 capital expenditures are expected to be funded from operating cash flow and internal sources.
- Significant pension-plan exposure: a multi-employer union plan remains in “critical and declining” status and is projected by its trustees to become insolvent in 2030. The company was advised that hypothetical 2019 withdrawal liability would be $99,800; management says the ultimate amount and financial effects are uncertain and could be material. Its labor contract requires participation through September 2022. Nine-month pension expense was $2,307.
- Input-cost availability and prices—including sugar, corn syrup, oils, cocoa, and packaging—foreign exchange, and competition remain risks. The company reported no material change to its 2018 Form 10-K risk factors or market-risk disclosures.
- Ordinary-course legal proceedings are not expected by management to have a material effect. Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported.
- Q3 and year-to-date figures are affected by deferred compensation linked to market movements in investments. The filing also reports adoption of lease accounting in 2019, recognizing $1,482 of right-of-use assets and lease liabilities at adoption, with no material overall impact.
Important facts for investors to verify
- Track whether pricing, cost containment, and manufacturing efficiencies continue to offset weak foreign sales and input-cost pressures.
- Assess cash conversion and working-capital trends, particularly receivables and inventory, alongside planned facility spending and continued repurchases and dividends.
- Monitor developments in the multi-employer pension plan, including funding status, potential benefit changes, and any changes to estimated withdrawal exposure.
- Reconcile the filing’s selling, marketing and administrative expense figures: the financial statements report $92,902 year to date, while MD&A cites $92,909 in one passage and $92,909 elsewhere as $92,909; the difference is not explained in the provided filing text.