Tootsie Roll Industries, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Unaudited consolidated results; amounts below are in USD millions except per-share data. The business is seasonal, with its largest sales quarter historically in Q3 ahead of Halloween.
Financial performance
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Total revenue | $115.5 | $80.6 | $218.7 | $184.4 |
| Operating earnings | $6.9 | $0.5 | $17.3 | $21.2 |
| Net earnings attributable to Tootsie Roll | $9.8 | $7.4 | $20.6 | $19.4 |
| Earnings per share | $0.14 | $0.11 | $0.30 | $0.28 |
| Operating cash flow | Not separately provided | $10.8 | $10.9 |
Q2 net product sales rose 43.6% year over year to $114.6 million; first-half sales increased 18.5% to $216.4 million. Management reported Q2 sales 8% above Q2 2019 and first-half sales 4% above first-half 2019. Q2 reported total gross margin was approximately 34.0% of revenue, versus 37.3% a year earlier; first-half gross margin was approximately 35.0%, versus 36.4%. Reported operating margin was approximately 6.0% in Q2 and 7.9% for the first half.
Management said changes in market values of trading securities were substantially offset by deferred compensation expense. Excluding these deferred compensation items, management-reported adjusted operating earnings were $12.4 million in Q2, up 24.9%, and $26.0 million in the first half, up 22.1%. These are management-adjusted comparisons, not reported GAAP operating earnings.
Liquidity, debt and capital allocation
- At June 30, cash and cash equivalents were $96.6 million, short-term investments $42.6 million, and long-term investments $264.7 million. Management reported aggregate cash and short- and long-term investments of $403.9 million, including $83.9 million of trading securities used as an economic hedge for deferred compensation liabilities.
- Current assets were $277.5 million and current liabilities $75.6 million; working capital was $201.9 million and the current ratio was 3.7:1, down from 4.6:1 at year-end 2020.
- Cash flow from operations was $10.8 million in the first half. Capital expenditures were $12.3 million; investing cash outflow was $52.1 million, largely reflecting net purchases of available-for-sale securities. Financing cash outflow was $29.0 million, including $17.2 million for share repurchases and $12.0 million in cash dividends.
- Debt was limited: $1.0 million of short-term bank loans at the Spanish subsidiary and $7.5 million of industrial development bonds. The company reported no other bank borrowings at quarter-end.
- The company spent approximately $8 million in the first half on a U.S. plant rehabilitation and expansion project, part of a roughly $25 million commitment. Management expected about $7 million of further spending in the second half of 2021 and $1 million in 2022, funded from internal sources.
Changes, outlook and risks
- Management attributed sales improvement to effective sales and marketing and economic reopening, following pandemic-related disruption to certain sales channels and sharing/give-away occasions. Domestic sales increased 39.3% in Q2 and foreign sales 103.5% year over year.
- Ingredient, packaging and manufacturing-supply costs pressured product margins; higher-than-expected demand also led to overtime and extra production shifts. Management expected these costs to remain elevated through the rest of 2021 and into 2022. Higher freight and delivery costs, including fuel-related costs, were also expected to continue through 2021.
- The company had implemented some selling-price increases, to be phased in during the balance of 2021. The filing provides no specific sales or earnings guidance.
- COVID-19 and variants remained uncertain risks to operations and results; management said the ultimate impact could not be determined. It also noted possible future impairment implications if longer-term effects on consumer behavior change its assessment.
- A multi-employer union pension plan remained in “critical and declining” status and was projected to become insolvent within 20 years. The company estimated a hypothetical withdrawal liability of $99.3 million for a 2020 withdrawal; management’s actuarial analysis estimated a present value of roughly $34.7 million to $49.3 million for a likely capped payment scenario. Actual outcomes could differ and could materially affect future results or cash flows. Contribution surcharges were frozen at year-end 2020 levels under an agreement executed in Q1 2021.
- Ordinary-course legal matters, including potential COVID-related claims, were not expected by management to have a material effect. Subsequent to quarter-end, the company received $2.5 million from an executive officer split-dollar life insurance policy, previously carried as an asset.
Key facts for investors to verify
- Whether sales momentum persists beyond pandemic reopening comparisons, especially through the seasonally important Q3.
- How elevated input, production and freight costs—and phased-in pricing—affect margins in coming quarters.
- Operating cash conversion, inventory levels, investment portfolio composition and the planned plant-project spending.
- Developments in the multi-employer pension plan, including any effect of federal assistance legislation on potential withdrawal liability.
- Market-value movements in trading securities and the related deferred compensation expense, which can make reported operating results volatile.