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Business Context and Reporting Period

Company: Tootsie Roll Industries, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 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

Note: All figures in millions unless otherwise noted. Q2 Operating Earnings were negative due to significant non-cash deferred compensation expenses.

Material Changes vs. Prior Period

• Revenue: Net product sales decreased 0.8% in Q2 2026 compared to Q2 2025, primarily due to the timing of seasonal sales shifting to Q3 and increased trade promotions. YTD sales increased 0.6%.
• Cost of Goods Sold (COGS): Adjusted COGS increased 2.6% in Q2 and 3.6% YTD. This was driven by higher cocoa and chocolate unit costs (though retreated from 2025 peaks) and elevated energy costs impacting packaging materials.
• Operating Expenses: Selling, marketing, and administrative expenses increased significantly in reported terms due to non-cash deferred compensation expenses ($15.2 million in Q2 2026 vs. $10.4 million in Q2 2025). Excluding these, adjusted expenses rose 14.9% in Q2 due to higher freight costs and marketing spend.
• Profitability: Net earnings declined 21.7% in Q2 and 12.8% YTD. Operating earnings turned negative in Q2 on a reported basis but remained positive on an adjusted basis ($14.3 million), though down 37.7% from the prior year.
• Liquidity: Cash and cash equivalents decreased by approximately $65 million YTD, driven by operating cash outflows related to seasonal inventory build-up and increased capital expenditures.

Guidance, Outlook, and Risks

• Outlook: Management expects lower cocoa and chocolate costs to be reflected in the supply chain in the second half of 2026 and into 2027. The Company is focused on long-term investments in manufacturing capacity.
• Capital Expenditures: The Company is undergoing a plant expansion in the USA with a total estimated cost of $75 million to $85 million over seven years. Approximately $18.2 million has been incurred to date, with most building construction expected in 2026 and early 2027.
• Tariffs and Trade: Tariffs on cocoa were rescinded in Q4 2025, providing cost relief. A February 2026 Supreme Court ruling invalidated certain tariffs imposed under IEEPA; the Company estimates it may recoup up to $1.3 million in previously paid tariffs, to be recorded upon receipt.
• Pension Risk: The Company participates in a multi-employer pension plan in "critical status." While the plan received $3.4 billion in Special Financial Assistance in 2024, the ultimate outcome remains uncertain. The estimated withdrawal liability if the Company withdrew in 2025 was approximately $102.8 million, though management believes actual liability would likely be limited to twenty annual payments with a present value range of $32.9 million to $35.4 million.
• Regulatory Risk: The FDA intends to phase out certain synthetic dyes. Transitioning to natural colors is expected to increase costs and may face supply constraints.

Investor Verification Checklist

• Deferred Compensation Impact: Verify the magnitude of non-cash deferred compensation expenses ($15.9 million in Q2 operating earnings) to accurately assess core operating performance.
• Inventory Build-up: Confirm that the negative operating cash flow ($10.9 million YTD) is consistent with seasonal inventory accumulation for the Halloween peak in Q3.
• Commodity Costs: Monitor the trajectory of cocoa and chocolate prices to validate management's expectation of cost reductions in H2 2026.
• Pension Liability: Review the specific terms of the multi-employer pension plan's rehabilitation and the potential for mass withdrawal scenarios affecting the Company.
• Tariff Refunds: Track the receipt of the estimated $1.3 million tariff refund following the Supreme Court ruling.