Tootsie Roll Industries, Inc. — Q1 2023 Form 10-Q
Reporting period: Quarter ended March 31, 2023. Unaudited consolidated results; dollar amounts below are in millions unless otherwise noted. The company notes that results are seasonal, with its largest sales quarter historically occurring in Q3 ahead of Halloween.
Financial results and liquidity
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total revenue | $162.1 | $140.6 | +15.3% |
| Net product sales | $160.7 | $139.3 | +15.4% |
| Gross margin | $50.3; 31.0% of revenue | $47.9; 34.1% | Margin down 3.1 percentage points |
| Operating earnings | $12.8 | $20.8 | Down 38.6% |
| Net earnings attributable to Tootsie Roll | $13.4 | $12.0 | +11.4% |
| EPS | $0.19 | $0.17 | +11.8% |
| Operating cash flow | $(7.5) | $16.8 | Down $24.3 |
| Capital expenditures | $5.0 | $5.9 |
Domestic product sales increased 14.3%; foreign sales, including exports, increased 28.9%. Domestic sales were 91.5% of product sales. Management attributed growth mainly to higher realized prices, with increased volumes also contributing. Reported gross profit rose, but higher costs outpaced sales: product cost of goods sold increased 20.6% against product sales growth of 15.4%.
Reported operating earnings were affected by deferred-compensation valuation changes. Excluding these items, management reported adjusted operating earnings of $17.1 million versus $15.2 million, up 12.6%; adjusted operating margin was 10.7% versus 10.9%. These are management-adjusted measures, not GAAP results. Net income also benefited from $4.3 million of trading-security gains in other income, substantially offset by deferred-compensation expense in operating costs; the comparable 2022 amounts were a $5.6 million investment loss and a substantially offsetting credit.
Cash, cash equivalents and short-term investments totaled $123.9 million at quarter-end; long-term investments were $252.9 million. The company reported aggregate cash and investments of $376.8 million, including trading securities used as an economic hedge. Current assets were $304.5 million and current liabilities $77.3 million; the current ratio was 3.9 to 1 and working capital was $227.2 million. Bank loans were $1.1 million, and industrial development bonds were $7.5 million. The company reported no other bank borrowings. Cash dividends paid were $12.3 million; share purchases and retirements were $1.6 million.
Changes, outlook and key risks
- Costs and margins: New supply contracts at higher prices took effect in early 2023 after prior contracts expired. Management cited elevated ingredient, packaging, manufacturing, utility and labor costs, as well as some spot-market ingredient purchases at higher prices. Price increases have not fully restored pre-2021 margins, and further input-cost inflation may limit recovery.
- Cash flow and inventory: Operating cash flow turned negative, primarily because of higher production and inventory levels, including higher material costs, and the timing of supplier and accrued-liability payments. Management said it accelerated production to support 2023 demand, including pre-Halloween orders.
- Supply and labor: Supply-chain conditions improved from 2022, but delays could disrupt production and cause lost sales. Labor shortages continued to constrain some production; overtime and extended shifts were used. Management believed it could meet substantially all 2023 labor and shift needs, while noting a tighter labor market.
- Pension contingency: The multi-employer union pension plan remains in “critical and declining” status and is projected to become insolvent within 20 years. Historical estimated company withdrawal liabilities were $99.3–$104.3 million for hypothetical withdrawals in 2019–2021; these are not recorded amounts for a current withdrawal. The plan applied for PBGC financial assistance, but its effect on solvency and the company’s potential liability is uncertain. Management warned that the ultimate outcome could materially adversely affect future results or cash flows. Labor contract negotiations were ongoing after the agreement expired in September 2022; operations continued under extensions.
- Other outlook and items: No specific financial guidance was provided. The company continues capital investment in manufacturing capacity, quality and efficiency. It reported no Q1 triggering event indicating material impairment of goodwill or trademarks. A 3% stock dividend was distributed after quarter-end, on April 7, 2023. Management said COVID-19’s future effects on sales and earnings remain uncertain.
Most important facts for investors to verify
- Whether price increases and cost-reduction actions can offset continued materials, labor and other input-cost inflation without materially affecting demand.
- Inventory levels, production plans and operating cash flow as the company builds supply for seasonal sales.
- Developments in the union contract negotiations, pension-plan funding and any updated withdrawal-liability estimates or PBGC assistance.
- The reconciliation and persistence of deferred-compensation and investment valuation effects when assessing underlying operating performance.
- Seasonal sales performance, supply-chain reliability and labor availability, particularly ahead of the Q3 Halloween selling period.