Tootsie Roll Industries, Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Unaudited consolidated results; dollar amounts below are in millions unless noted. The business is seasonal, with the third quarter historically the largest sales quarter because of pre-Halloween demand.
Financial performance
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Total revenue | $105.2 | $108.4 | $209.6 | $214.8 |
| Operating earnings | $14.3 | $13.6 | $28.5 | $26.6 |
| Net earnings attributable to Tootsie Roll | $11.1 | $11.1 | $21.0 | $20.2 |
| EPS | $0.18 | $0.17 | $0.34 | $0.32 |
| Operating cash flow | Not presented quarterly | $21.6 | $22.5 |
Q2 net product sales fell 3.0%; first-half sales fell 2.5%. Management attributed the declines to stronger U.S. dollar effects and the timing of sales to certain customers. Currency translation reduced foreign sales by $0.7 million in Q2 and $1.6 million in the first half.
Reported operating earnings increased 4.9% in Q2 and 7.2% in the first half. Excluding deferred-compensation-related expenses, management reported operating earnings of $15.4 million in Q2, up 9.7%, and $29.6 million in the first half, up 4.4%. Reported operating margin was approximately 13.6% of revenue in both periods in 2016, versus 12.6% in Q2 2015 and 12.4% in first-half 2015. Higher price realization and lower selling, marketing and administrative expenses helped results; ingredient and manufacturing costs were headwinds.
Effective tax rates were 33.0% for Q2 and 31.9% for the first half, versus 25.0% and 28.4% in 2015. The prior-year rates benefited from a $1.1 million tax benefit related to a foreign court decision. EPS also benefited from fewer average shares outstanding, following share repurchases.
Financial position and liquidity
- At June 30, 2016, cash and cash equivalents were $92.0 million; current assets were $261.4 million and current liabilities $66.3 million. The current ratio was 3.9 to 1 and working capital was $195.0 million.
- Cash, cash equivalents, and short- and long-term investments totaled $311.9 million, compared with $321.2 million at December 31, 2015. This total includes $63.9 million of trading securities that economically hedge deferred-compensation liabilities.
- Operating cash flow was $21.6 million. Investing activities used $34.6 million, including $10.4 million of capital expenditures and net purchases of securities. Financing activities used $20.2 million, including $9.2 million of share purchases and $11.1 million of cash dividends. Cash declined $34.2 million from year-end to $92.0 million.
- Total bank loans and industrial development bonds were approximately $8.1 million. The $0.6 million of bank loans related to majority-owned Spanish subsidiaries; the company reported no other bank borrowings. Interest paid was $9,000.
Material changes, outlook, and risks
- Management said higher price realization benefited adjusted product costs as a percentage of sales, while lower production volumes, ingredient costs, wages and benefits increased manufacturing costs. Production was reduced to lower finished-goods inventory and prepare for possible labeling-regulation changes. Cost-containment efforts and capital investments partly offset cost pressures.
- Capital expenditures increased to $10.4 million from $6.8 million, principally reflecting timing of equipment and automation spending. Management expected 2016 capital expenditures to be funded from operating cash flow and internal sources.
- The filing gives no quantitative earnings or sales guidance. Management cautioned that interim results are not necessarily indicative of full-year results because of seasonality; the third quarter is historically the largest sales quarter.
- A multiemployer pension plan covering certain union employees is in “critical and declining” status and projected to become insolvent in 14 years. The company’s estimated withdrawal liability was $61.0 million for a hypothetical 2015 withdrawal; management estimated potential liability payments could be limited to 20 annual payments of $2.966 million, with present value of $34.8–$45.4 million under its assumptions. Actual liability and any effects remain uncertain and could materially affect future results or cash flows. The labor contract commits participation through Q3 2017.
- Key exposures include commodity and packaging costs, fuel, and foreign exchange. The company reported no material change in its previously disclosed risk factors or market risks. Management stated disclosure controls were effective and there was no material change in internal control over financial reporting.
Investor facts to verify
- Whether sales timing and currency effects persist, and how labeling-related inventory and production decisions affect the second half.
- The pension plan’s funding, rehabilitation measures, potential withdrawal liability, and the company’s ongoing contribution obligations.
- Underlying operating trends after separating deferred-compensation-related expenses and their offsetting investment income.
- Liquidity composition and investment risk, including the portion of securities tied to deferred-compensation obligations.
- Capital spending, share repurchases, and cash dividends relative to operating cash generation.