TOOTSIE ROLL INDUSTRIES INC (TR)

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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This financial review discusses the Company’s financial condition, results of operations, liquidity and capital resources and other matters. Dollars are presented in thousands, except per share amounts. This review should be read in conjunction with the accompanying Condensed Consolidated Financial Statements and related notes included in this Form 10-Q and with the Company’s Consolidated Financial Statements and related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s Form 10-K for the year ended December 31, 2025 (the “2025 Form 10-K”).

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Net product sales were $151,943 in second quarter 2026 compared to $153,190 in second quarter 2025, a decrease of $1,247 or 0.8%. First half 2026 net product sales were $301,431 compared to $299,711 in first half 2025, an increase of $1,720 or 0.6%. Domestic (U.S.) net product sales in second quarter decreased by 2.5% but increased by 0.3% in first half 2026 compared to the corresponding period in the prior year; and foreign net product sales, including exports to foreign markets and the effects of foreign translations, increased 25.1% and 3.4%, respectively, compared to the corresponding periods in the prior year. For the second quarter and first half 2026, domestic sales represented 92.2% and 92.4%, respectively, of total consolidated net product sales. Second quarter and first half 2026 sales were adversely impacted by the timing of sales, including seasonal sales, between second and third quarter 2026 when compared to the prior years’ corresponding quarterly periods. We are focused on the long term and have continued to support our brands with increased trade promotions, as well as advertising in the second quarter and first half 2026. Because trade promotions are accounted for as a reduction in reported net sales, these higher levels of trade promotions had some adverse effects on our reported net sales for second quarter and first half 2026.

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Product cost of goods sold was $100,965 in second quarter 2026 compared to $98,127 in second quarter 2025, and $200,687 in first half 2026 compared to $193,627 in first half 2025. Product cost of goods sold includes $718 and $467 of certain deferred compensation expenses in second quarter 2026 and 2025, respectively, and $473 and $312 of certain deferred compensation expenses in first half 2026 and 2025, respectively. These deferred compensation expenses principally resulted from the changes in the market value of investments and investment income from trading securities relating to compensation deferred in previous years and are not reflective of current operating results. Excluding the adjustment for deferred compensation expenses, product cost of goods sold increased from $97,660 in second quarter 2025 to $100,247 in second quarter 2026, an increase of $2,587 or 2.6%; and from $193,315 in first half 2025 to $200,214 in first half 2026, an increase of $6,899 or 3.6%. As a percentage of net product sales, adjusted product cost of goods sold was 66.0% and 63.8% in second quarter 2026 and 2025, respectively, an increase of 2.2 percentage points; and 66.4% and 64.5% in first half 2026 and 2025, respectively, an increase of 1.9 percentage points. In addition to the sales impact of timing between second and third quarter as discussed above, second quarter and first half 2026 cost of goods sold and gross profit margins were adversely affected by significantly higher cocoa and chocolate unit costs, when compared to the corresponding periods in 2025. Cocoa commodities markets have retreated from their extraordinarily high price levels in 2025 but still remain above historical levels. As these lower costs begin to be reflected in our supply chain costs, we should realize lower cocoa and chocolate costs in second half 2026 and into 2027. During second quarter and first half 2026, elevated energy costs also contributed to higher costs for resin-based packaging materials, as well as certain other materials and supplies.

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The Company uses the Last-In-First-Out (LIFO) method of accounting for inventory and costs of goods sold which generally results in lower current net earnings during such periods of increasing costs and higher inflation. Under the LIFO method, the most current costs are charged to cost of goods sold thereby accelerating the realization of higher costs during such periods of rising costs. Although the Company continues to monitor its input costs, we are mindful of the effects and limits when passing on the above-discussed higher input costs to our customers as well as to the final consumers of our products.

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Selling, marketing and administrative expenses were $54,247 in second quarter 2026 compared to $44,362 in second quarter 2025; and $82,328 in first half 2026 compared to $73,752 in first half 2025. Selling, marketing and administrative expenses include $15,233 and $10,403 of certain deferred compensation expenses in second quarter 2026 and 2025, respectively, and $10,043 and 6,944 of certain deferred compensation expenses in first half 2026 and 2025, respectively. As discussed above, these expenses principally result from changes in the market value of investments and investment income from trading securities relating to compensation deferred in previous years and are not reflective of current operating results. Excluding the adjustment for deferred compensation expenses, selling,

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marketing and administrative expenses increased from $33,959 in second quarter 2025 to $39,014 in second quarter 2026, an increase of $5,055 or 14.9%; and from $66,808 in first half 2025 to $72,285 in first half 2026, an increase of $5,477 or 8.2%. As a percentage of net product sales, adjusted selling, marketing and administrative expenses increased from 22.2% in second quarter 2025 to 25.7% in second quarter 2026, an unfavorable change of 3.5 percentage points; and from 22.3% in first half 2025 to 24.0% in first half 2026, an unfavorable change of 1.7 percentage points.

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Selling, marketing and administrative expenses include $15,424 and $13,047 for customer freight, delivery and warehousing expenses in second quarter 2026 and 2025, respectively, an increase of $2,377 or 18.2%; and $28,960 and $26,963 in first half 2026 and 2025, respectively, an increase of $1,997 or 7.4%. These expenses were 10.2% and 8.5% of net product sales in second quarter 2026 and 2025, respectively; and 9.6% and 9.0% of net product sales in first half 2026 and 2025, respectively. Customer freight and delivery unit costs, which reflect the cost per pound shipped, increased in second quarter 2026, and first half 2026, compared to the corresponding periods in 2025. Increases in fuel costs, principally freight fuel surcharges, were driven by elevated energy markets. In addition, higher marketing and advertising expenses, as well as increased professional fees, in second quarter and first half 2026, contributed to these higher selling, marketing and administrative expenses.

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Earnings (losses) from operations were $(1,617) in second quarter 2026 compared to $12,121 in second quarter 2025; and were $21,596 in first half 2026 compared to $35,181 in first half 2025. Earnings from operations include $15,951 and $10,870 of certain deferred compensation expenses in second quarter 2026 and 2025, respectively; and include $10,516 and $7,256 of certain deferred compensation expenses in first half 2026 and 2025, respectively, which is discussed above. Adjusting for these deferred compensation expenses, adjusted earnings from operations were $14,334 and $22,991 in second quarter 2026 and 2025, respectively, a decrease of $8,657 or 37.7%; and $32,112 and $42,437 in first half 2026 and 2025, respectively, a decrease of $10,325 or 24.3%. As a percentage of net product sales, these adjusted operating earnings were 9.4% and 15.0% in second quarter 2026 and 2025, respectively, an unfavorable 5.6 percentage point change; and 10.7% and 14.2% in first half 2026 and 2025, respectively, an unfavorable 3.5 percentage point change. As discussed above, higher trade promotions and the timing of sales between second and third quarter 2026, as well as the higher costs and expenses noted above, contributed to the decrease in adjusted operating earnings in second quarter and first half 2026 when compared to the corresponding periods in the prior year. Declines in international operating income, including exports to foreign countries also contributed to the decline in adjusted operating earnings in second quarter and first half 2026.

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Other income, net was $19,854 in second quarter 2026 compared to $14,072 in second quarter 2025; and $20,170 in first half 2026 compared to $14,021 in first half 2025. Other income, net includes net gains and investment income of $15,952 and $10,870 for second quarter 2026 and 2025, respectively, and $10,516 and $7,256 in first half 2026 and 2025, respectively, on trading securities which provide an economic hedge of the Company’s deferred compensation liabilities on trading securities. The changes in net investment activity on trading securities in second quarter and first half 2026 and 2025 primarily reflect the overall changes in the equity markets during these periods. These changes were substantially offset by a like amount of deferred compensation expense included in product cost of goods sold and selling, marketing, and administrative expenses in the respective periods as discussed above.

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Management believes the comparisons presented in the preceding paragraphs, after adjusting for changes in deferred compensation, are useful to our investors and other users of our financial information in assessing the operations of the Company.

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Other income, net includes investment income from available for sale securities and cash equivalents of $4,468 and $3,485 for second quarter 2026 and 2025, respectively; and $10,495 and $6,946 in first half 2026 and 2025, respectively. The increases in 2026 investment income reflects the higher average balances held in second quarter and first half 2026 compared to the corresponding period in the prior year. In addition, other income, net also includes pre-tax (loss) on foreign exchange of $(619) and $(843) in second quarter 2026 and 2025, respectively; and $(658) and $(1,387) in first half 2026 and 2025, respectively.

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The Company’s effective income tax rates were 26.9% and 33.1% in second quarter 2026 and 2025, respectively, and 25.9% and 27.7% in first half 2026 and 2025, respectively. The changes in the effective tax rates in the comparative periods principally reflect the effects of changes in certain deferred compensation that will not be deductible for income taxes when paid in future periods. The Company is currently under audit for its federal income

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tax returns for 2022 to 2024 calendar years. The audit is in the early stages and the Company in not able to predict the outcome of this audit.

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Net earnings attributable to Tootsie Roll Industries, Inc. were $13,347 (after $21 net loss attributed to non-controlling interests) in second quarter 2026 compared to $17,544 (after $14 net loss attributed to non-controlling interests) in second quarter 2025, and earnings per share were $0.18 and $0.23 in second quarter 2026 and 2025, respectively, a decrease of $0.05 per share, or 21.7%. First half 2026 net earnings attributable to Tootsie Roll Industries, Inc. were $31,008 (after $56 net loss attributed to non-controlling interests) compared to first half 2025 net earnings of $35,602 (after $31 net loss attributed to non-controlling interests), and net earnings per share were $0.41 and $0.47 in first half 2026 and first half 2025, respectively, a decrease of $0.06 per share or 12.8%. Average shares outstanding decreased from 75,060 at second quarter 202

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ITEM 7.               Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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(Thousands of dollars except per share, percentage and ratio figures)

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The following discussion should be read in conjunction with the other sections of this report, including the consolidated financial statements and related notes contained in Item 8 of this Form 10-K. This section of this Form 10-K generally discusses the twelve months ended December 31, 2025 as compared to the same period of 2024.  Discussions comparing the results of the twelve months ended December 31, 2024 as compared to same period of 2023 can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Form 10-K for the year ended December 31, 2024.

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FINANCIAL REVIEW

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This financial review discusses the Company’s financial condition, results of operations, liquidity and capital resources, significant accounting policies and estimates, new accounting pronouncements, market risks and other matters. It should be read in conjunction with the Consolidated Financial Statements and related Notes that follow this discussion.

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FINANCIAL CONDITION

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The Company’s overall financial position remains strong given that aggregate cash, cash equivalents and investments is $613,747 at December 31, 2025, including $121,541 in trading securities discussed below. Cash flows from 2025 operating activities totaled $130,614 compared to $138,889 in 2024, and are discussed in the section entitled Liquidity and Capital Resources. During 2025, the Company paid cash dividends of $26,066, purchased and retired $6,482 of its outstanding shares, and made capital expenditures of $34,263, all of which was financed from internal sources.

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The Company’s net working capital was $223,016 at December 31, 2025 compared to $246,319 at December 31, 2024. As of December 31, 2025, the Company’s total cash, cash equivalents and investments, including all long-term investments, was $613,747 compared to $526,968 at December 31, 2024, an increase of $86,779. See Liquidity And Capital Resources section below for discussion. The aforementioned includes $121,541 and $105,067 of investments in trading securities as of December 31, 2025 and 2024, respectively. The Company invests in trading securities to provide an economic hedge for its deferred compensation liabilities, as further discussed herein and in Note 7 of the Company’s Notes to Consolidated Financial Statements.

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Shareholders’ equity increased from $870,743 at December 31, 2024 to $940,972 as of December 31, 2025, which principally reflects 2025 net earnings of $100,052, less cash dividends of $26,066 and share repurchases of $6,482.

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The Company has a relatively straight-forward financial structure and has historically maintained a conservative financial position. The Company has no special financing arrangements or “off-balance sheet” special purpose entities. Cash flows from operations plus maturities of investments are expected to be adequate to meet the Company’s overall financing needs, including capital expenditures, in 2026. The Company is continuously alert to possible acquisitions, and if the Company were to pursue and complete such an acquisition, that could result in the sale of marketable securities held for investment, bank borrowings or other financing.

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RESULTS OF OPERATIONS

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2025 vs. 2024

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The consolidated net product sales for the twelve months of 2025 were $724,675 compared to the twelve months 2024 of $715,530, an increase of $9,145 or 1.3%. Fourth quarter 2025 net product sales were $194,350 compared to $191,356 in fourth quarter 2024, an increase of $2,994, or 1.6%. The sales increase in fourth quarter and twelve months 2025 was driven primarily by price increases taken during the year, as well as successful marketing and sales programs. The Company continued to face some challenges in 2025 as customers and consumers became more resistant to higher prices, and these headwinds had some adverse effects on sales throughout 2025.

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Product cost of goods sold were $472,127 in 2025 compared to $468,056 in 2024, an increase of $4,071 or 0.9%. Product cost of goods sold includes $698 and $803 in certain deferred compensation expenses in 2025 and 2024, respectively. These deferred compensation expenses principally result from changes in the market value of investments and investment income from trading securities relating to compensation deferred in previous years and are not reflective of current operating results. Adjusting for the aforementioned, product cost of goods sold increased from $467,253 in 2024 to $471,429 in 2025, an increase of $4,176 or 0.9%. As a percent of net product sales, these adjusted costs decreased from 65.3% in 2024 to 65.1% in 2025, a 0.2 favorable percentage point change. Higher price realizations, as well as certain cost and expense reductions, benefited cost of goods sold and gross profit margins in both 2025 and 2024.

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Many companies in the consumer products industry have increased selling prices in order to improve price realization in response to increasing input costs in recent years. We have implemented price increases as well during this period in order to mitigate certain input cost increases and recover our margin declines. Although we made progress in restoring our

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margins in 2025, certain ingredients and packaging materials unit costs, particularly cocoa and chocolate, continued to increase in 2025. Cocoa commodities markets have now retreated from their recent high price levels, but still remain above historical levels. As these lower costs begin to be reflected in our supply chain costs, we expect to realize lower cocoa and chocolate costs in late 2026 and into 2027. Although the Company continues to monitor its input costs, we are mindful of the effects and limits when passing on the above-discussed higher input costs to our customers as well as the final consumers of our products.

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The Company uses the Last-In-First-Out (LIFO) method of accounting for inventory and costs of goods sold which generally results in lower current net earnings and income taxes during such periods of increasing costs and higher inflation. As a result, the above discussed higher input costs have had some adverse effects on our gross profit margins in 2025 and 2024. During the prior year fourth quarter 2024, the Company reduced inventories which resulted in a LIFO liquidation. The liquidated inventory was carried at lower costs prevailing in prior years as compared with current costs in 2024, and therefore provided a benefit to the prior year fourth quarter and twelve months 2024 results.

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Selling, marketing and administrative expenses were $157,503 in 2025 compared to $152,675 in 2024, an increase of $4,828 or 3.2%. Selling, marketing and administrative expenses include $15,653 and $15,521 in certain deferred compensation expenses in 2025 and 2024, respectively. These deferred compensation expenses principally result from changes in the market value of investments and investment income from trading securities relating to compensation deferred in previous years and are not reflective of current operating results. Adjusting for the aforementioned, selling, marketing and administrative expenses increased from $137,154 in 2024 to $141,850 in 2025, an increase of $4,696 or 3.4%. As a percent of net product sales, these adjusted expenses increased from 19.2% of net product sales in 2024 to 19.6% of net product sales in 2025, a 0.4 unfavorable percentage point change. The increase in these expenses in 2025, as a percentage of net product sales, was principally driven by increases in advertising and marketing expenses, and higher expenses relating to international operations.

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As outlined in Note 1 to the consolidated financial statements, the Company records revenue from net product sales based on accounting guidance. Adjustments for estimated customer cash discounts upon payment, discounts for price adjustments, product returns, allowances, and certain advertising and promotional costs, including consumer coupons, are variable considerations and are recorded as a reduction of net product sales revenue in the same period the related net product sales are recorded. These estimates are calculated using historical averages adjusted for any expected changes due to current business conditions and experience. The Company identified changes in business conditions in each of the periods presented that changed Management’s estimated current and future liabilities for prior period obligations resulting in a reduction in accrued liabilities and an increase in net product sales of $2,700 and $5,665 in 2025 and 2024, respectively.

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Selling, marketing and administrative expenses include freight, delivery and warehousing expenses. These expenses decreased from $57,581 in 2024 to $56,780 in 2025, a decrease of $801 or 1.4%. As a percent of net product sales, these adjusted expenses decreased from 8.0% in 2024 to 7.8% in 2025, a 0.2 favorable percentage point change, which generally reflects the benefits of sales price increases.

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The Company has foreign operating businesses in Mexico, Canada and Spain, and exports products to many foreign markets. The Company’s Spanish subsidiary (97% owned by the Company) incurred an operating loss of $2,244 in 2025 compared to its $611 loss in 2024. Company management expects the competitive and business challenges in Spain to continue, but is undertaking an in-depth evaluation of the business to ascertain the best course of action for this business. Nonetheless, Management believes that operating losses at its Spanish subsidiary will continue in 2026 and that these future losses, as well as some capital expenditures, will likely require additional cash financing.

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The Company believes that the carrying values of its goodwill and trademarks have indefinite lives as they are expected to generate cash flows indefinitely. In accordance with current accounting guidance, these indefinite-lived intangible assets are assessed at least annually for impairment as of December 31 or whenever events or circumstances indicate that the carrying values may not be recoverable from future cash flows. No impairments were recorded in 2025, 2024 or 2023. Current accounting guidance provides entities an option of performing a qualitative assessment (a "step-zero" test) before performing a quantitative analysis. If the entity determines, on the basis of certain qualitative factors, that it is more-likely-than-not that the intangibles (goodwill and certain trademarks) are not impaired, the entity would not need to proceed to the two step impairment testing process (quantitative analysis) as prescribed in the guidance. During fourth quarter 2025

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(and fourth quarters 2024 and 2023), the Company performed a “step zero” test of its goodwill and certain trademarks, and concluded that there was no impairment based on this guidance. Although the “step-zero” analysis performed for the fair value assessment of certain trademarks concluded that there was no impairment, the Company proceeded to “step-one” and performed additional analysis in fourth quarter 2025 and 2024 for significant indefinite-lived intangible assets that have been impaired in the past. Using discounted cash flows and estimated royalty rates, the Company concluded that the trademarks were not impaired. For these trademarks, holding all other assumptions constant, as of December 31, 2025, a 100 basis point increase in the discount rate would reduce the fair value of these trademarks by approximately 11% and a 100 basis point decrease in the royalty rate would reduce the fair value of these trademarks by approximately 9%. Individually, a 100 basis point increase in the discount rate or a 100 basis point decre

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