Business context and reporting period
Tootsie Roll Industries, Inc. filed this unaudited Form 10-Q for the quarter ended March 31, 2017. The company makes and sells confectionery products. Results are seasonal: the third quarter is historically its largest sales quarter because of pre-Halloween demand. Unless noted, financial amounts below are in thousands of dollars.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Total revenue | $104,455 | $104,395 |
| Gross margin | $38,773; 37.1% of revenue | $38,269; 36.7% |
| Operating earnings | $12,175; 11.7% | $14,216; 13.6% |
| Net earnings attributable to Tootsie Roll | $10,051 | $9,896 |
| EPS | $0.16 | $0.15 |
| Operating cash flow | $11,862 | $14,980 |
| Capital expenditures | $4,845 | $8,376 |
At March 31, 2017, cash and cash equivalents were $78,555, current assets $260,010, and current liabilities $57,261. The current ratio was 4.5:1 and working capital was $202,749. Cash and short- and long-term investments totaled $340,869, including $73,025 of trading securities used as an economic hedge for deferred compensation liabilities. Total debt was approximately $7,830, comprising $330 of bank loans and $7,500 of industrial development bonds; the company reported no other outstanding bank borrowings. Total assets were $910,731 and shareholders’ equity was $706,799.
Changes versus the prior comparable period
- Revenue was nearly flat, up $60 (0.1%); management cited customer sales timing and foreign-currency translation as adverse factors.
- Reported operating earnings fell $2,041, while net earnings attributable to the company rose $155 and EPS increased by $0.01. Reported operating expenses included $2,882 of deferred-compensation expense in 2017 versus $53 in 2016, principally reflecting market movements in investments tied to deferred compensation. Management’s adjusted operating earnings, excluding these expenses, increased 5.5% to $15,057; adjusted operating margin rose to 14.6% from 13.8%.
- Adjusted product cost of goods sold declined 1.8%, and as a share of product sales improved to 62.5% from 63.7%. Management attributed this to manufacturing efficiencies and cost containment; the prior-year comparison was affected by product-labeling changes, lower production volumes, and inventory reductions.
- Other income was $1,979 versus a $35 loss, substantially reflecting gains on trading securities that were largely offset by deferred-compensation expenses. Foreign-exchange losses increased to $1,545 from $634.
- Operating cash flow decreased $3,118, which management attributed principally to timing of sales and receivable collections and higher inventory associated with production plans. Cash declined $40,590 during the quarter, including investment purchases, share repurchases, and dividends.
Outlook, commentary, risks and unusual items
- No specific revenue or earnings guidance was provided. Management stated that all 2017 capital expenditures are expected to be funded from operating cash flow and internal sources.
- Management committed approximately $15,000 to a U.S. manufacturing-facility rehabilitation and expansion, with anticipated outlays of $5,000 in 2017, $9,000 in 2018, and $1,000 in 2019. It also plans a $10,000–$15,000 VEBA trust contribution in the fourth quarter of 2017 to prepay employee benefits.
- A multiemployer union pension plan remains in “critical and declining status” and is projected to become insolvent in 13 years. The company’s estimated withdrawal liability would have been $72,700 for a 2016 withdrawal; management believes statutory limits may constrain payments, but actual liability could be higher. The ultimate effect is uncertain and could be material to future results or cash flows. The company’s current labor contract commits participation through the third quarter of 2017.
- The company cited exposure to ingredient, packaging, fuel, and foreign-exchange fluctuations. It reported no material changes to previously disclosed risk factors or market risks. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
- Shares repurchased during the quarter totaled 259,916 for approximately $9,985. The company also issued a 3% stock dividend on April 17, 2017; this was not included in reported dividends per share.
- The company was evaluating several new accounting standards, including revenue recognition and financial-instrument guidance effective for periods beginning after December 15, 2017, and lease guidance effective January 1, 2019; impacts had not yet been determined.
Important facts for investors to verify
- Whether the improved adjusted operating performance persists after separating deferred-compensation market-value effects from reported expenses and income.
- How seasonal demand, customer order timing, and foreign-currency movements affect sales and cash generation through the year.
- Developments in the underfunded multiemployer pension plan, including potential benefit changes, required contributions, and the company’s possible withdrawal liability.
- Funding and timing for the manufacturing project and planned VEBA contribution, alongside ongoing buybacks and dividends.
- The future effect of pending accounting standards and any changes in commodity, freight, or currency costs.