Tootsie Roll Industries, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Figures below are in millions of dollars except per-share data. Comparisons are with the corresponding 2019 periods unless stated otherwise.
Business context and results
Tootsie Roll sells confectionery products, with sales typically seasonal and concentrated around Halloween. COVID-19 disrupted sales channels and reduced group gatherings, sharing occasions, and impulse purchases. The company adjusted third-quarter pre-Halloween sales for estimated sales realization based on retail sell-through through October 31.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $157.8 | $182.7 | $342.2 | $391.7 |
| Net product sales | $157.0 | $181.9 | $339.6 | $389.0 |
| Gross margin | $58.4 | $69.6 | $125.5 | $147.2 |
| Operating earnings | $25.5 | $36.0 | $46.8 | $54.3 |
| Net earnings attributable to Tootsie Roll | $24.7 | $29.9 | $44.0 | $50.4 |
| Earnings per share | $0.37 | $0.44 | $0.66 | $0.75 |
Financial condition, cash flow, and material changes
- Q3 net product sales fell 13.7%; nine-month sales fell 12.7%. U.S. product sales declined 12.5% in Q3 and 11.3% year to date; foreign sales declined at a greater rate than domestic sales.
- Q3 gross margin was 37.0% of total revenue, versus 38.1% a year earlier. Reported operating earnings declined 29.2% in Q3; management’s measure adjusted for deferred compensation expenses fell 16.2% to $30.4 million. Adjusted operating earnings were 19.4% of net product sales versus 19.9%.
- Management said lower sales and production volumes pressured product costs because much of manufacturing overhead is fixed. Cost initiatives and lower selling, marketing and administrative expenses partly offset the sales decline.
- Nine-month operating cash flow was $24.1 million, down from $36.2 million. Capital expenditures were $11.4 million. Cash, cash equivalents and restricted cash ended the period at $108.7 million.
- Current assets were $314.8 million and current liabilities $78.1 million; the current ratio was 4.0, versus 4.4 at December 31, 2019. Cash and short- and long-term investments totaled $368.2 million, including $66.1 million of trading securities used as an economic hedge for deferred compensation liabilities.
- Debt was limited: $7.5 million of industrial development bonds and $0.9 million of Spanish subsidiary bank loans; the company reported no other bank borrowings. Nine-month cash uses included $23.5 million for share repurchases and $17.9 million for cash dividends. Average shares outstanding declined year over year.
- Other income was $5.9 million in Q3, versus $1.8 million, partly reflecting gains and investment income on trading securities. Related deferred compensation costs were recorded in operating expenses and substantially offset those gains.
Outlook, risks, and unusual items
- Management expected a Q4 2020 sales decline, but one smaller than Q3; a renewed COVID-19 surge could instead sustain a significant decline into Q4 and 2021. The company said the pandemic’s duration, severity, recovery effects, and impact on consumer behavior remained uncertain. No numerical earnings or sales guidance was provided.
- Management reported no material COVID-related disruption to supply or manufacturing to date, but identified possible supply-chain, workforce, production, shipping, demand, and seasonal-sales disruptions. Halloween historically represented approximately 50% of Q3 net product sales.
- The company committed approximately $25 million to a U.S. plant rehabilitation and expansion, with projected cash outlays of about $9 million in 2020 and $13.6 million in 2021, funded from operating cash flow and internal sources.
- A multi-employer union pension plan remains in “critical and declining” status and is projected to become insolvent within 20 years. The company’s estimated withdrawal liability was $99.8 million for a hypothetical 2019 withdrawal; management’s actuarial estimate of the present value of likely annual payments was $35.7–$46.7 million. Actual exposure could be higher, and the ultimate outcome could materially affect future results or cash flows.
- After quarter-end, the company received $23.5 million from executive split-dollar life insurance policies. The amount had been carried as an asset, so the receipt produced no gain or loss.
- Management reported no impairment trigger for goodwill or indefinite-lived trademarks at September 30, 2020, but noted that prolonged pandemic-related changes could alter that assessment. Ordinary legal matters were not expected to have a material effect.
Most important facts for investors to verify
- Whether Halloween and broader consumer demand recover, and whether Q3 sales adjustments adequately reflect sell-through and returns.
- Whether operating cash flow and margins stabilize as volumes change, including the effects of largely fixed manufacturing costs.
- Investment performance and deferred compensation expense, which materially affected reported quarterly comparisons.
- The status and potential cost of the multi-employer pension plan, including future withdrawal-liability estimates and any legislative changes.
- Actual spending and progress on the plant project, and the treatment and availability of the post-quarter insurance proceeds.