Tootsie Roll Industries, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. The company manufactures and sells confectionery products. Its third quarter is historically its largest sales quarter because of pre-Halloween demand; interim results are not necessarily indicative of full-year results. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Total revenue | $186.4 | $184.6 | $395.9 | $399.4 |
| Operating earnings | $39.3 | $41.0 | $67.8 | $67.6 |
| Net earnings attributable to Tootsie Roll | $28.6 | $26.2 | $49.7 | $46.4 |
| EPS | $0.46 | $0.41 | $0.80 | $0.73 |
| Gross margin | $71.4 | $67.4 | $149.6 | $145.8 |
Q3 revenue rose 0.9%, while nine-month revenue declined 0.9%. Reported operating earnings fell 4.3% in Q3 and were nearly flat year to date. Net earnings attributable to the company increased 9.4% in Q3 and 7.1% for nine months. Revenue and margin percentages are based on total revenue; gross margin was approximately 38.3% in Q3 2016 versus 36.5% in Q3 2015, and approximately 37.8% versus 36.5% for nine months.
Management separately presented results adjusted for deferred-compensation investment-market effects. Adjusted operating earnings increased 8.9% in Q3 to $41.2 million and 7.0% for nine months to $70.9 million. Adjusted operating margin on product sales was 22.2% versus 20.6% in Q3 and 18.0% versus 16.7% year to date. These are company-presented non-GAAP-style adjustments; the filing does not label them as a formal non-GAAP measure.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $47.0 million, up from $30.3 million, mainly reflecting the timing of sales and collections and related receivables movements. Capital expenditures were $13.1 million; operating cash flow less capital expenditures was approximately $34.0 million.
- Cash and cash equivalents were $94.2 million at September 30, down from $126.1 million at year-end 2015. Cash and short- and long-term investments totaled $312.1 million, compared with $321.2 million at year-end.
- Current assets were $278.8 million and current liabilities $76.5 million; the current ratio was 3.6:1, versus 4.1:1 at December 2015. Net working capital was $202.3 million.
- Bank borrowings totaled $0.4 million, all at majority-owned Spanish subsidiaries; industrial development bonds were $7.5 million. The company reported no other outstanding bank borrowings.
- Nine-month financing included $26.3 million of share purchases and retirements and $16.7 million of cash dividends. Cash and cash equivalents decreased $31.9 million over the period.
Material changes and management commentary
- Q3 product sales increased 0.9%; nine-month product sales decreased 0.9%. A stronger U.S. dollar reduced foreign sales by $0.7 million in Q3 and $2.3 million year to date. Management also cited timing shifts in customer sales between Q3 and Q4.
- Management attributed improved adjusted product costs to higher price realization, manufacturing improvements and cost containment. Higher ingredient, wage and benefit costs, labeling-compliance expenses, lower production volumes and inventory reductions were headwinds.
- Adjusted selling, marketing and administrative expenses rose 6.4% in Q3, principally due to sales-related costs, compensation and benefits, and labeling requirements; the nine-month increase was 0.3%.
- Reported results were affected by deferred-compensation costs or credits linked to market movements in related trading securities. The gains or losses on those securities were substantially offset by corresponding compensation expense or credits.
- The company repurchased 456,175 shares in Q3 at an average price of $37.50. It has no formal publicly announced repurchase program; purchases are made under periodic board-authorized dollar limits.
Outlook, risks and contingencies
- No specific revenue, earnings or other forward guidance was provided. Management cautioned that results are seasonal and that Q3 is typically the largest sales quarter.
- A multi-employer union pension plan covering certain employees was in “critical and declining status” and projected to become insolvent in 14 years. The company’s estimated withdrawal liability was $61.0 million if it had withdrawn in 2015; management said its statutory payment estimate implied 20 annual payments of $2.966 million, with a present value of $34.8 million to $45.4 million. Actual liability could be higher, and the ultimate effects are uncertain and could materially affect future results or cash flows. The current labor contract requires participation through Q3 2017.
- Key market exposures include sugar and other ingredient and packaging costs, fuel and foreign exchange. The filing reported no material change in market risks or risk factors from the 2015 Form 10-K.
- Management reported disclosure controls as effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether sales timing, foreign exchange and labeling-related inventory adjustments affect Q4 or full-year demand and production costs.
- The sustainability of improved gross margins and adjusted operating performance, particularly given higher ingredient and labor costs.
- Developments in the multi-employer pension plan, including its funding status, potential withdrawal liability and required contributions.
- The composition, valuation and liquidity of the $312.1 million investment portfolio, including trading securities associated with deferred-compensation liabilities.
- How share repurchases, dividends and capital spending affect cash balances and per-share results.