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Business Context and Reporting Period

Company: Tootsie Roll Industries, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2026
Business Overview: The Company manufactures and sells confectionery products, primarily in North America. Operations are seasonal, with the third quarter historically being the largest due to pre-Halloween sales. The Company operates as a single reportable segment.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 2.1% year-over-year. Domestic net product sales rose 3.4%, while foreign sales declined 13.0%.
• Margin Compression: Product gross margin decreased to $49,766 (down from $51,021). Adjusted product cost of goods sold increased 4.5% due to significantly higher unit costs for chocolate and cocoa, though cocoa prices have retreated from 2025 peaks.
• Operating Earnings: Reported earnings from operations increased slightly to $23,213. However, adjusted operating earnings (excluding deferred compensation credits) decreased 8.6% to $17,778, driven by higher input costs and unfavorable international results.
• Deferred Compensation Impact: The Company recorded significant credits related to deferred compensation ($5.4M in operating expenses and $5.4M in other income), which masked the decline in core operating profitability.
• Capital Expenditures: Investing cash outflows increased significantly due to a $8.2M capital expenditure program, including $3.3M for a major plant expansion in the USA expected to cost $75M-$85M over seven years.

Outlook, Risks, and Management Commentary

• Cost Pressures: Management expects cocoa and chocolate costs to remain elevated but anticipates lower costs in late 2026 and 2027 as supply chain adjustments occur. Packaging costs are expected to rise due to energy costs affecting resin prices.
• Spanish Subsidiary: The Spanish subsidiary incurred an operating loss of $1.1M. Management expects losses to continue beyond 2026 and is evaluating the business, noting that future losses and capital expenditures may require additional cash financing.
• Tariff and Regulatory Risks: A February 2026 Supreme Court ruling invalidated certain tariffs imposed under IEEPA. Management estimates a potential refund of up to $1.3M but has not recorded this until received. New global tariffs announced by the U.S. government create uncertainty regarding future costs.
• Pension Liability: The Company participates in a multi-employer pension plan in "critical status." While the plan received $3.4B in Special Financial Assistance in 2024, the Company's potential withdrawal liability remains uncertain and could have a material adverse effect on future cash flows. Estimated liability ranges from $32.9M to $35.4M (present value) if withdrawal occurs.
• Dividends: The Company paid cash dividends of $13.1M and issued a 3% stock dividend.

Investor Verification Checklist

• Cocoa Price Trajectory: Verify the timeline for the expected reduction in cocoa and chocolate costs and the Company's ability to pass on remaining cost increases to consumers.
• Spanish Operations: Monitor the outcome of the in-depth evaluation of the Spanish subsidiary and the potential need for additional capital financing.
• Tariff Refunds: Track the status of the $1.3M potential tariff refund following the Supreme Court ruling and the impact of new global tariffs on input costs.
• Pension Plan Solvency: Review updates on the Bakery and Confectionery Union and Industry International Pension Fund's solvency and any changes to the Company's estimated withdrawal liability.
• Capital Expenditure Execution: Confirm the progress and funding sources for the $75M-$85M plant expansion project.