Tootsie Roll Industries, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; unaudited. Dollar amounts below are in millions unless stated otherwise. Results are seasonal; historically, the third quarter is the largest sales quarter due to pre-Halloween demand.
Financial performance
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Total revenue | $153.2 | $162.1 | Down 5.5% |
| Net product sales | $151.5 | $160.7 | Down 5.8% |
| Total gross margin | $50.0 | $50.3 | Down $0.3 |
| Earnings from operations | $11.1 | $12.8 | Down $1.7 |
| Net earnings attributable to Tootsie Roll | $15.8 | $13.4 | Up $2.4 |
| EPS | $0.22 | $0.19 | Up $0.03 |
| Operating cash flow | $21.4 | $(7.5) | Improved $28.9 |
Management-reported adjusted operating earnings, excluding deferred compensation expenses tied to market movements in trading securities, were $18.4 million versus $17.1 million, up 7.3%; adjusted operating margin was 12.1% versus 10.7% of net product sales. Adjusted product cost of goods sold was 67.6% of product sales versus 69.2%, a 1.6 percentage-point improvement. These are non-GAAP adjustments described by management.
Reported other income, net increased to $9.0 million from $4.8 million. It included trading-security gains and investment income that were substantially offset by deferred compensation expenses in operating costs. Net earnings also benefited from higher available-for-sale investment income and lower foreign-exchange losses. The effective tax rate was 21.4%, versus 23.8%.
Financial position and liquidity
- At March 31, 2024, cash and cash equivalents were $64.9 million; current and long-term investments were $94.5 million and $279.0 million. Cash and investments totaled $438.3 million, including $96.0 million of trading securities serving as an economic hedge for deferred compensation liabilities.
- Current assets were $328.5 million and current liabilities $87.3 million; working capital was $241.3 million and the current ratio 3.8:1.
- Bank loans were $1.1 million, all at the Spanish subsidiary; industrial development bonds were $7.5 million. The company reported no other bank borrowings. Operating lease liabilities totaled $7.2 million.
- Operating cash flow was $21.4 million, compared with cash use of $7.5 million a year earlier, reflecting earnings and more favorable working-capital movements. Capital expenditures were $4.5 million. Investing activities used $20.0 million, primarily reflecting net purchases of available-for-sale securities; financing activities used $12.5 million, including $12.5 million of cash dividends.
Material changes and management commentary
- U.S. net product sales fell 7.2%; foreign net product sales, including exports, rose 9.8%. Domestic sales represented 90.1% of product sales. Management cited customer resistance to higher prices, Easter sales timing between quarters, and customer inventory adjustments.
- Higher price realization and manufacturing efficiencies supported margin recovery, while ingredient, labor, benefits, and other manufacturing costs continued to rise. Freight and delivery costs declined 16.1% year over year.
- Reported operating earnings were affected by deferred compensation expense of $7.3 million, versus $4.3 million in Q1 2023, principally associated with trading-security market movements; related investment gains were recorded in other income.
- The company is evaluating a plant expansion, including additions and replacements of processing and packaging lines. Management estimates a potential cost of $70–$80 million over about five years, with most spending likely in the next three years; funding is expected from operating cash flow and internal resources.
Outlook, risks, and contingencies
- No specific full-year revenue or earnings guidance is provided in the filing. Management says cocoa and chocolate prices have reached unprecedented highs and volatility; longer-range supply contracts cover 2024 and much of 2025, but higher input costs may adversely affect costs and margins in 2024 and 2025.
- Other stated risks include the ability to recover input-cost increases through pricing, competition, product distribution and seasonal sell-through, and foreign-exchange and commodity-price movements. Results for this seasonal first quarter are not necessarily indicative of the full year.
- The Bakery and Confectionery Union pension plan remains in “critical and declining” status. The company’s most recent plan-provided estimate of its withdrawal liability was $96.0 million for a hypothetical 2022 withdrawal; management’s actuarial estimates put the present value of certain potential payments at $31.9–$43.7 million, with materially higher theoretical exposure in a mass withdrawal scenario. The actual future liability is uncertain and could be higher; the company warns the outcome could materially adversely affect future results or cash flows. The labor contract requires continued participation through September 2027.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether sales recover as customer inventory adjustments and seasonal timing effects unwind, and whether pricing can offset input-cost inflation.
- Developments in cocoa and chocolate supply costs and the effect on margins during 2024–2025.
- How much of reported earnings movement reflects operating performance versus offsetting trading-security gains and deferred compensation expense.
- Any update to the multiemployer pension plan’s funding, PBGC assistance application, or potential withdrawal liability.
- Whether the proposed $70–$80 million plant investment proceeds and how it affects capital spending and liquidity.