Tootsie Roll Industries, Inc. — Q1 2020 Form 10-Q
Reporting period: Quarter ended March 31, 2020; unaudited. Financial statement amounts below are in millions of dollars unless stated otherwise. The company manufactures and sells confectionery products. Results are seasonal, with the third quarter typically the largest due to pre-Halloween sales.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 | Change / context |
|---|---|---|---|
| Total revenue | $103.8 | $102.0 | Up 1.8%; product sales rose 1.8% to $102.8, including 3.0% growth in domestic sales. Lower foreign sales and dollar translation weighed on results. |
| Gross margin | $37.0 | $36.9 | Reported gross margin was 35.7% of revenue versus 36.2%. Adjusted product cost of goods sold was 64.9% of product sales versus 64.0%, mainly due to higher plant overhead. |
| Operating earnings | $20.7 | $5.8 | Reported results include large deferred-compensation-related credits in 2020 and expenses in 2019. Excluding these items, operating earnings were $11.4 versus $10.8, up 5.7%; adjusted margin on product sales was 11.1% versus 10.7%. |
| Net earnings attributable to Tootsie Roll | $12.0 | $9.0 | Up 33.8%; EPS was $0.18 versus $0.13. Q1 2020 included approximately $1.9 of after-tax foreign-exchange gains, or $0.03 per share, and benefited from fewer average shares outstanding. |
| Operating cash flow | $14.6 | $10.6 | Improved by $4.0; higher earnings, collection/payment timing, and increased inventory were cited. |
| Cash and short-term investments | $216.6 | $159.7 at Mar. 31, 2019 | At Mar. 31, 2020; includes cash and cash equivalents and short-term investments. |
| Total cash and investments | $369.9 | $346.9 at Mar. 31, 2019 | Includes $153.3 of long-term investments; also includes trading securities that economically hedge deferred compensation liabilities. |
Cash, cash equivalents and restricted cash ended the quarter at $139.4, essentially unchanged from year-end. Investing cash flow was positive $8.3, primarily reflecting sales and maturities of available-for-sale securities; capital expenditures were $3.7. Financing cash outflow was $20.5, including $11.7 of cash dividends and $8.8 of share purchases.
At March 31, current assets were $334.3 and current liabilities $77.2; the current ratio was 4.3 to 1 and working capital was $257.1. Borrowings were limited: $0.8 of short-term bank loans at the Spanish subsidiary and $7.5 of industrial development bonds. The company reported no other bank borrowings.
Changes, outlook and risks
- Management said reported operating comparisons are substantially affected by deferred compensation accounting tied to trading-security values. The 2020 operating result included a $9.4 credit and 2019 a $5.0 expense; related investment results were substantially offset in other income (loss). Adjusted measures are management’s presentation of underlying operations, not GAAP results.
- COVID-19 had caused a significant decline in customer orders and sales in Q2 2020, with an expected material adverse effect on Q2 sales and earnings. Management could not quantify the impact for the balance of 2020 and expected possible adverse effects in the second half. No specific earnings or revenue guidance was provided.
- Risks include disrupted supply, manufacturing and distribution; weaker consumer demand and altered shopping habits; and uncertainty around Halloween, historically about 50% of Q3 sales. Management had built inventory in case manufacturing plants needed to shut down, while reporting no significant business disruption to date.
- The company had committed approximately $25.0 to a U.S. plant rehabilitation and expansion, with projected cash outlays of $12.6 in 2020 and $10.0 in 2021; funding was expected from operating cash flow and internal resources.
- A multi-employer union pension plan remained in “critical and declining” status. Estimated company withdrawal liability was $99.8 for a hypothetical 2019 withdrawal; management cited estimated present value of likely capped payments of $35.7–$46.7, subject to assumptions and potential legal or plan changes. The ultimate exposure is uncertain and could materially affect future results or cash flows. Q1 plan pension expense was $0.7.
- Management reported no Q1 impairment trigger for goodwill or intangibles, but noted that pandemic effects could change that assessment. Ordinary-course legal matters were not expected to have a material effect. The CARES Act had no material Q1 financial statement impact.
Key facts for investors to verify
- Whether the reported Q2 2020 order and sales decline continued, and its effect on full-year revenue, earnings and cash generation.
- How much of reported earnings and operating-margin movement reflects deferred-compensation and investment-market effects versus underlying operations.
- Whether seasonal Halloween demand, customer channels, supply and manufacturing operations recovered as restrictions changed.
- Progress, timing and final cost of the plant project, and funding needs alongside dividends and share repurchases.
- Developments in the multi-employer pension plan’s funding, withdrawal-liability rules and potential company contribution obligations.
- Changes in investment values, including available-for-sale and trading securities, and any resulting liquidity or earnings volatility.