Tootsie Roll Industries, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless noted. Financial statement amounts below are in millions of dollars except per-share data. Results are unaudited. The company notes that results are seasonal, with its largest sales quarter historically being Q3 due to pre-Halloween sales.
Key financial results
| Metric | Q1 2019 | Q1 2018 | Change / context |
|---|---|---|---|
| Total revenue | $102.0 | $101.8 | Up 0.2%; net product sales were $101.0 million, up 0.2%. |
| Total gross margin | $36.9 | $35.7 | Reported gross margin was approximately 36.2% of revenue versus 35.1%. |
| Operating earnings | $5.8 | $9.8 | Reported operating margin was approximately 5.6% versus 9.7%. |
| Net earnings attributable to Tootsie Roll | $9.0 | $8.1 | EPS was $0.14 versus $0.12. |
| Net cash from operating activities | $10.6 | $9.7 | Up $0.9 million. |
| Capital expenditures | $4.7 | $7.7 | Lower than prior-year period. |
Management’s adjusted operating earnings, excluding specified deferred-compensation expenses related to investment-market changes, were $10.8 million versus $10.3 million, up 5.0%; adjusted operating margin was 10.7% versus 10.2%. These adjustments should be considered alongside reported GAAP results. Deferred-compensation investment gains of $5.0 million were included in other income, with substantially offsetting expenses included in operating costs. Reported other income was $6.0 million, compared with $0.5 million.
Management attributed improved underlying operating performance principally to higher price realization and lower manufacturing overhead costs, partly offset by higher freight, delivery and warehousing expense. Adjusted product cost of sales was 64.0% of product sales versus 65.3%. Freight, delivery and warehousing costs rose 7.9% to $11.0 million.
Financial position and liquidity
- At March 31, 2019, cash and cash equivalents were $77.7 million and current investments were $82.0 million. The company reported $346.9 million of aggregate cash, cash equivalents and short- and long-term investments, including $69.3 million of trading securities used as an economic hedge for deferred-compensation liabilities.
- Current assets were $280.0 million and current liabilities were $53.0 million; the current ratio was 5.3 to 1. Net working capital was $226.9 million.
- Cash and cash equivalents, including restricted cash, fell by $33.2 million during the quarter to $78.1 million. Investing cash use was $22.2 million, including $20.9 million of available-for-sale security purchases; financing cash use was $21.7 million, including $10.5 million of share purchases and $11.5 million of cash dividends.
- Debt was limited: $0.8 million of bank loans at the Spanish subsidiary and $7.5 million of industrial development bonds. The company reported no other outstanding bank borrowings. Operating lease liabilities were $1.4 million following adoption of the lease accounting standard.
- Share repurchases totaled approximately 285,000 shares for $10.5 million. A 3% stock dividend was distributed April 5, 2019; the reported $0.09 per-share cash dividend excludes the stock dividend.
Changes, outlook and risks
Reported operating earnings declined despite higher gross margin, primarily because selling, marketing and administrative expenses included $4.8 million of deferred-compensation expense versus $0.4 million in Q1 2018. Management stated that its adjusted comparisons better reflect underlying operations. The effective tax rate increased to 24.3% from 21.8%, principally because foreign income tax expense was more favorable in the prior-year quarter.
No specific full-year earnings or sales guidance is provided. Management expects the approximately $17 million U.S. manufacturing-facility rehabilitation and expansion project to require cash outlays of about $10.0 million in 2019, $3.1 million in 2020 and $3.1 million in 2021; it expects 2019 capital expenditures to be funded from operating cash flow and internal sources. The company continues investing in manufacturing capacity, quality and efficiency.
A significant uncertainty is the multi-employer union pension plan, which is in “critical and declining” status and is projected by its trustees to become insolvent in 2030. The company’s estimated withdrawal liability was $81.6 million for a hypothetical 2018 withdrawal; management’s actuarial analysis estimates present-value ranges for potential payments, but actual liability could be higher. The labor contract requires continued participation through September 2022. The company says the matter’s ultimate effect cannot be determined and could be material to future results or cash flows. Subsequent to quarter-end, it received notice that the plan remained in critical and declining status and that trustees were considering benefit reductions and may seek PBGC assistance.
Management reported no material changes to the risk factors in the 2018 Form 10-K and said disclosure controls were effective. Market exposures include ingredient and packaging prices, freight fuel costs, and foreign currency movements. The company uses derivatives to hedge certain commodity and currency exposures. Ordinary-course legal matters were not expected to have a material effect.
Key facts for investors to verify
- How much of reported earnings and other income reflects deferred-compensation investment gains and offsetting expenses, versus underlying operating performance.
- Whether price realization and manufacturing efficiencies continue to offset freight and delivery cost inflation.
- Developments in the multi-employer pension plan, including benefit changes, contribution surcharges and potential withdrawal-liability exposure.
- Cash and investment balances, security valuation and liquidity needs as the planned facility project proceeds.
- The effects of seasonality, foreign exchange and commodity prices on results for the remainder of 2019.