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Business Context and Reporting Period

Company: Tootsie Roll Industries, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 28, 2008 (Second Quarter and First Half of Fiscal Year 2008)
Business Overview: The Company manufactures and sells confectionery products. Operations are seasonal, with the third quarter historically being the largest sales period due to Halloween demand.

Key Financial Metrics

(All figures in thousands, except per share data)

Cash Flow (YTD): Net cash used in operating activities was $(1,700) for the first half of 2008, compared to $9,760 provided in the prior year. Capital expenditures were $9,742. The Company repurchased $19,935 of common stock and paid $8,738 in cash dividends.

Material Changes vs. Prior Period

• Revenue Decline: Net product sales decreased 0.3% in Q2 and 1.5% YTD compared to 2007, attributed to challenging economic conditions and competitive factors.
• Margin Compression: Product cost of goods sold as a percentage of sales increased from 66.2% to 67.7% in Q2. This was driven by higher input costs for ingredients (corn, sugar, soybean), packaging, and unfavorable foreign exchange rates for Canadian operations.
• Earnings Drop: Net earnings fell 29.1% in Q2 and 31.6% YTD. Operating earnings declined 7.1% in Q2 and 14.3% YTD due to lower sales volumes and higher costs.
• Other Income Volatility: Other income, net dropped significantly due to investment losses on trading securities related to deferred compensation plans in 2008, contrasting with gains in 2007.
• Liquidity: Cash and short-term investments decreased from $98,913 at year-end 2007 to $47,029 at June 28, 2008, reflecting share repurchases, dividends, and operating cash outflows.

Guidance, Outlook, and Risks

Management Commentary: Management notes that results for the interim period are not necessarily indicative of full-year results due to seasonality. The Company is actively reviewing its product portfolio for potential price increases or weight reductions to offset rising input costs. Capital expenditures for 2008 are expected to align with historical annualized spending.

Key Risks and Contingencies:

• Commodity Volatility: Significant exposure to fluctuations in crude oil, corn, soybean, and sugar markets, influenced by global demand and bio-fuel mandates.
• Auction Rate Securities (ARS): The Company holds $11,043 in Jefferson County Alabama Sewer Revenue Refunding Warrants (ARS). Due to market failures, these were reclassified to Level 3 fair value measurements. An unrealized loss of $2,507 was recorded in other comprehensive income. Management deems the decline temporary but notes the securities may remain illiquid for more than 12 months.
• Foreign Exchange: Adverse impact from the Canadian dollar on products manufactured in Canada and sold in the U.S.
• Competitive Landscape: Risks related to consumer acceptance of price/weight changes and competitive pricing actions.

Investor Verification Checklist

• Input Cost Pass-Through: Verify the Company's ability to implement price increases or weight reductions without significant volume loss in a competitive market.
• ARS Liquidity: Monitor the status of the $11.0 million Jefferson County ARS holding and the potential for future impairment charges if the market decline is deemed other than temporary.
• Seasonality Impact: Assess the performance of the upcoming third quarter (Halloween season) to determine if it can offset the first-half decline.
• Cash Flow Sustainability: Review the shift from positive to negative operating cash flow and its impact on future capital allocation (dividends and buybacks).
• Foreign Exchange Exposure: Evaluate the sensitivity of margins to continued fluctuations in the Canadian dollar.