Tootsie Roll Industries, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Unaudited; financial amounts below are in millions except per-share data. The business is seasonal, with the third quarter historically its largest sales quarter because of pre-Halloween demand.
Financial performance
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Total revenue | $107.0 | $106.8 | $208.9 | $208.6 |
| Net product sales | $106.0 | $105.6 | $207.0 | $206.5 |
| Total gross margin | $40.7 | $39.1 | $77.6 | $74.8 |
| Earnings from operations | $12.5 | $10.4 | $18.3 | $20.2 |
| Net earnings attributable to Tootsie Roll | $11.6 | $10.5 | $20.5 | $18.6 |
| EPS | $0.18 | $0.16 | $0.31 | $0.28 |
| Cash from operating activities | Not reported by quarter | $11.0 | $6.4 |
- Q2 revenue increased 0.1% and first-half revenue increased 0.2% year over year. Domestic product sales rose approximately 1.6% in Q2 and 0.8% in the first half; lower foreign sales, sales timing and U.S. dollar strength offset some growth.
- Gross margin improved to approximately 38.1% of revenue in Q2 from 36.6%; first-half gross margin was approximately 37.1%, versus 35.9%.
- Reported first-half operating earnings declined despite stronger underlying operating performance, due largely to higher deferred-compensation expense tied to investment market movements. Excluding those expenses, management reported operating earnings of $14.3 million in Q2, up 19.8%, and $25.1 million in the first half, up 13.0%.
- Reported net earnings and EPS grew in both periods. First-half other income increased $5.2 million, principally reflecting higher gains and investment income on trading securities; substantially offsetting deferred-compensation expense is included in operating costs.
Financial position and liquidity
- At June 30, 2019, cash and cash equivalents were $57.9 million, current investments $82.7 million, and long-term investments $195.4 million. The company reported aggregate cash and short- and long-term investments of $335.9 million, including trading securities used as an economic hedge for deferred-compensation liabilities.
- Current assets were $281.1 million and current liabilities $60.3 million; the current ratio was 4.7:1. Net working capital was $220.8 million, down from $242.7 million at December 31, 2018.
- Debt was limited: $7.5 million of industrial development bonds and $0.7 million of short-term bank loans at June 30. The bank loans related to the Spanish subsidiary; the company reported no other outstanding bank borrowings. Operating-lease liabilities totaled $1.3 million.
- First-half cash from operations was $11.0 million. Investing activities used $33.7 million, including $9.9 million of capital expenditures and net securities purchases; financing activities used $30.6 million, including $19.2 million for share repurchases and $11.7 million in cash dividends. Cash, cash equivalents and restricted cash decreased $53.0 million to $58.2 million.
- Inventories were $92.3 million, up from $54.5 million at year-end 2018. Management cited timing and seasonal operating factors in its discussion of cash flows.
Management commentary, outlook and risks
- Management attributed improved underlying margins to higher price realization, manufacturing efficiencies from capital investment, and cost containment. Prior-year product costs were affected by new packaging-line start-up inefficiencies and unfavorable self-insurance experience.
- Management committed approximately $16 million to a U.S. plant rehabilitation and expansion, with projected cash outlays of $4 million in 2019, $9 million in 2020 and $3 million in 2021. It expected 2019 capital expenditures to be funded from operating cash flow and internal sources.
- No specific earnings or sales guidance was provided. Management cautioned that interim results are not necessarily indicative of full-year results because of seasonality.
- Key operating exposures include availability and prices of sugar, corn syrup, oils, cocoa, dairy ingredients, gum base, packaging and fuel, as well as foreign-exchange movements, especially the Canadian dollar. The company uses commodity and foreign-currency derivatives for hedging and reported no material change in market-risk disclosures.
- The multi-employer union pension plan remains in “critical and declining” status and is projected by plan trustees to become insolvent in 2030. The company cited a potential withdrawal liability of $81.6 million based on a 2018 withdrawal estimate; its actuarial analysis also describes possible payment scenarios with material uncertainty. The company said the ultimate outcome could materially affect future results or cash flows. Its labor contract requires participation through September 2022.
- Ordinary-course legal proceedings were not expected by management to have a material effect. Management reported no material change to the risk factors in the 2018 Form 10-K and concluded disclosure controls were effective.
Important facts for investors to verify
- How much of reported earnings growth reflects core operations versus investment gains and the corresponding deferred-compensation expense, particularly in the first half.
- Whether improved pricing and plant efficiencies can offset input, freight and foreign-exchange pressures as the business enters its seasonally important third quarter.
- Developments in the multi-employer pension plan, including its funding, potential benefit changes, contribution surcharges and any change in estimated withdrawal exposure.
- Execution, costs and funding of the planned plant rehabilitation and expansion, alongside continued repurchases and dividends.
- Cash-flow and liquidity trends as inventories build seasonally and investment holdings change in value or mature.