Tootsie Roll Industries, Inc. — FY 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing is an annual report, not a standalone Q4 filing; quarterly figures are noted below. Unless otherwise stated, amounts are in U.S. dollars and millions.
Business context
The Company manufactures and sells confectionery products as its sole business segment, primarily in the United States, Canada and Mexico. Sales are seasonal, with a substantial increase in the third quarter ahead of Halloween and back-to-school. The Company employs approximately 2,000 people.
Financial results and liquidity
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Net product sales | $536.7 | $539.9 |
| Total revenue, including rental and royalty revenue | $540.1 | $543.5 |
| Product gross margin | $196.6 (36.6% of product sales) | $199.0 (36.9%) |
| Earnings from operations | $91.1 | $83.9 |
| Net earnings attributable to Tootsie Roll Industries, Inc. | $66.1 | $63.3 |
| EPS | $1.08 | $1.02 |
| Cash provided by operating activities | $91.1 | $88.8 |
- Net product sales declined 0.6%. U.S. product sales increased approximately 0.7%, while the stronger U.S. dollar reduced reported 2015 sales by $8.2 million, principally in Canada and Mexico. U.S. sales volume was 1% higher; management reported no significant changes in selling prices or product mix.
- Operating margin was approximately 16.9% of total revenue, compared with 15.4% in 2014. Product gross margin as a share of product sales eased, while lower selling, marketing and administrative expenses supported higher operating earnings. Management’s adjusted operating earnings, excluding deferred-compensation effects, increased 4.2%.
- The effective tax rate was 28.6%, versus 31.1%. Management attributed the lower rate principally to a $1.1 million release of an uncertain tax liability; the 2014 rate included a tax expense related to the Spanish step acquisition.
- At year-end, working capital was $221.7 million and cash, cash equivalents and investments totaled $321.2 million, including $60.6 million of trading securities held as an economic hedge for deferred-compensation liabilities. Net cash used in investing activities was $8.5 million; capital expenditures were $15.5 million. Net cash used in financing activities was $53.9 million, including $33.0 million of share repurchases and $20.8 million of cash dividends.
- Debt included $7.5 million of industrial development bonds due 2027 and approximately $0.6 million of bank loans at Spanish subsidiaries. The Company reported no other outstanding bank borrowings. Management expects operating cash flow and investment maturities to cover 2016 financing needs, including capital spending.
Q4 and changes versus prior year
Fourth-quarter 2015 net product sales were $139.9 million, up 1.4% from $137.9 million; quarterly net earnings attributable to the Company were $19.7 million versus $18.0 million, and EPS was $0.32 versus $0.29. For the full year, net earnings rose 4.4% and EPS rose 5.9%; the lower average share count following repurchases also supported EPS.
Despite modestly higher domestic sales, annual revenue was lower because of currency translation. Product gross margin declined to $196.6 million from $199.0 million. Adjusted selling, marketing and administrative expenses fell 6.0%, including lower freight, delivery and warehousing costs. Ingredient costs were mixed in 2015, and management warned of higher overall ingredient costs in 2016.
Outlook, risks and contingencies
- Outlook: Management provided no quantified earnings or sales guidance. It expects higher overall ingredient costs in 2016 and capital expenditures broadly in line with historical annual spending. Cost reductions and manufacturing-efficiency investments remain priorities.
- Multi-employer pension plan: The plan covering certain union employees was classified as “critical and declining,” with projected funding deficiencies for 2017–2024. The Company’s contract commits participation through the third quarter of 2017; required contributions include compounded surcharges. A hypothetical 2015 withdrawal liability was estimated at $61.0 million. Management’s estimated statutory payment limitation has a present value of $34.8–$45.4 million, but the ultimate outcome is uncertain and could materially affect future results or cash flows.
- Spain: The Spanish subsidiaries had operating losses each year from 2008 through 2015. Management said further cash financing would likely be required in 2016; the outcome of restructuring and profitability efforts remains uncertain.
- Concentration and operations: Walmart represented 23.7% of net product sales; McLane represented 16.7%, including some Walmart sales. The Company also cites the risk of disruption because many products rely on specialized equipment and a principal production facility, as well as seasonal dependence on Halloween sales.
- Other exposures: Key risks include volatile or unavailable ingredients, inability to pass cost increases through pricing, foreign currency movements, competition and retail pricing pressure, changing consumer preferences, regulatory changes, product recalls, supply-chain or technology interruptions, and possible impairment of goodwill or trademarks. No goodwill or intangible impairment was recorded in 2015.
- The Company reported no material pending legal proceedings. Management and the auditor concluded that internal control over financial reporting was effective at December 31, 2015.
Important facts for investors to verify
- Whether higher 2016 ingredient costs can be offset by pricing, product changes, productivity savings or other cost reductions without weakening volume or margins.
- How foreign-exchange movements affect reported sales and earnings, particularly in Canada and Mexico.
- Developments in the pension plan’s funding status, surcharges, the Company’s potential withdrawal liability and its participation after the current labor contract.
- Whether the Spanish subsidiaries require additional funding and whether restructuring improves their operating performance.
- The sustainability of cash generation and shareholder distributions, including repurchases and dividends, alongside capital investment needs.
- The extent of customer concentration and the resilience of supply and production given dependence on major retailers and specialized manufacturing facilities.