Item 2. Management’s Discussion and Analysis
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Unless the context otherwise requires, the terms “we,” “our,” “us” or “Universal” or the “Company” refer to Universal Corporation together with its subsidiaries. This Quarterly Report on Form 10-Q ("Form 10-Q") and the following “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Among other things, these statements relate to the Company’s financial condition, results of operation, and future business plans, operations, opportunities, and prospects. In addition, the Company and its representatives may from time to time make written or oral forward-looking statements, including statements contained in other filings with the Securities and Exchange Commission (the "SEC") and in reports to shareholders. These forward-looking statements are generally identified by the use of words such as we “expect,” “believe,” “anticipate,” “could,” “should,” “may,” “plan,” “will,” “predict,” “estimate,” and similar expressions or words of similar import. These forward-looking statements are based upon management’s current knowledge and assumptions about future events and involve risks and uncertainties that could cause actual results, performance, or achievements to be materially different from any anticipated results, prospects, performance, or achievements expressed or implied by such forward-looking statements. Such risks and uncertainties include, but are not limited to: product purchased not meeting quality and quantity requirements; reliance on a few large customers; anticipated levels of demand for and supply of our products and services; tobacco growing conditions and customer requirements; major shifts in customer requirements for leaf tobacco; higher inflation rates, tariffs and other pressures on costs; weather and other conditions; exposure to certain legal, regulatory and financial risks related to climate change; industry-specific risks related to our plant-based ingredients businesses; disruption of our supply chain for our plant-based ingredients; success in pursuing strategic investments or acquisitions and integration of new businesses and the impact of these new businesses on future results; our ability to maintain effective information technology systems and safeguard confidential information; our inability to attract, develop, retain, motivate, and maintain good relationships with our workforce; our dependence on a seasonal workforce; epidemics, pandemics or similar widespread public health concerns; government efforts to regulate the production and consumption of tobacco products; government actions on the sourcing of leaf tobacco; economic and political conditions in the countries in which we and our customers operate, including the ongoing impacts from international conflicts; sustainability considerations from governments and other stakeholders; changes in tax laws in the countries where we do business; material weaknesses in our internal control over financial reporting; our inability to use a Form S-3 registration statement; failure of our customers or suppliers to repay extensions of credit; changes in exchange rates; changes in interest rates; and low investment performance by our defined benefit pension plan assets and changes in pension plan valuation assumptions. For a further description of factors that may cause actual results to differ materially from such forward-looking statements, see Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended March 31, 2025. We caution investors not to place undue reliance on any forward-looking statements as these statements speak only as of the date when made, and we undertake no obligation to update any forward-looking statements made in this report, except as required by law. This Form 10-Q should be read in conjunction with our 2025 Form 10-K.
Amounts described as net income (loss) and earnings (loss) per diluted share in the following discussion are attributable to Universal Corporation and exclude earnings related to non-controlling interests in subsidiaries. Any references to adjusted operating income (loss), adjusted net income (loss) attributable to Universal Corporation, adjusted diluted earnings (loss) per share, and the total for segment operating income (loss) are references to non-GAAP financial measures. These measures are not financial measures calculated in accordance with generally accepted accounting principles ("GAAP") and should not be considered as substitutes for operating income (loss), net income (loss) attributable to Universal Corporation, diluted earnings (loss) per share, cash from operating activities or any other operating or financial performance measure calculated in accordance with GAAP, and may not be comparable to similarly-titled measures reported by other companies. Reconciliations of adjusted operating income (loss) to consolidated operating (income), adjusted net income (loss) attributable to Universal Corporation to consolidated net income (loss) attributable to Universal Corporation and adjusted diluted earnings (loss) per share to diluted earnings (loss) per share are provided in Other Items below to the extent these non-GAAP financial measures are referenced. In addition, we have provided a reconciliation of the total for segment operating income (loss) to consolidated operating income (loss) in Note 12. "Operating Segments" to the consolidated financial statements. Management evaluates the consolidated Company and segment performance excluding certain significant charges or credits. We believe these non-GAAP financial measures, which exclude items that we believe are not indicative of our core operating results, can provide investors with important information that is useful in understanding our business results and trends. References to net debt, net capitalization, and net debt to net capitalization ratio are also references to non-GAAP financial measures. These measures are not financial measures calculated in accordance with GAAP and should not be considered substitutes for total debt, total capitalization, total debt to total capitalization ratio, or any other operating or financial performance measures calculated in accordance with GAAP, and may not be comparable to similarly-titled measures reported by other companies. Reconciliations of net debt to total debt and net capitalization to total capitalization are provided in Other Items below. We believe these non-GAAP measures are meaningful indicators of liquidity and financial position.
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Results of Operations
Overview
Universal Corporation is off to a good start for fiscal year 2026. During our seasonally smaller first fiscal quarter ended June 30, 2025, consolidated revenues decreased slightly, by $3.3 million, and operating income increased by $16.6 million, compared to the same period in fiscal year 2025. Improved operating income for our Tobacco Operations segment, up 147%, or $21.2 million, was driven by a favorable product mix, despite lower carryover crop sales. The reduction in carryover crop sales in the quarter ended June 30, 2025, resulted from significant shipment volumes completed earlier in fiscal year 2025. Current flue-cured and burley tobacco crop sizes have increased significantly, and we are seeing more typical buying patterns with green tobacco purchases largely completed in Brazil and Africa. Customer demand remains firm, following several years of short tobacco supply, and our uncommitted tobacco inventory levels were low, at about 11%, as of June 30, 2025.
Revenues for our Ingredients Operations segment were up 5%, or $4.0 million, on increased sales volumes in the quarter ended June 30, 2025, compared to the quarter ended June 30, 2024. Segment results for the quarter ended June 30, 2025, were impacted by a less favorable product mix, some curtailed demand due to tariff uncertainty, and higher fixed costs as we work to fill our recently expanded production facility. We are continuing to see interest in our new value-added products and capabilities. Supported by a foundational customer for our expanded Universal Ingredients facility, we are diligently working on converting customer interest from existing and new customers into increased volumes for that facility. Our focus for a successful fiscal year 2026 is growing Universal Ingredients organically, while also maximizing and optimizing our tobacco business and strengthening our organization.
FINANCIAL HIGHLIGHTS
Three Months Ended June 30,
(in millions of dollars, except per share data) 2025 2024
Consolidated Results
Sales and other operating revenue $ 593.8 $ 597.1
Cost of goods sold $ 479.6 $ 501.1
Gross profit margin percentage 19.2 % 16.1 %
Selling, general and administrative expenses $ 79.2 $ 78.7
Restructuring and impairment costs $ 1.1 $ —
Operating income $ 33.8 $ 17.2
Adjusted operating income (non-GAAP)* $ 34.9 $ 17.2
Net income attributable to Universal Corporation $ 8.5 $ 0.1
Adjusted net income attributable to Universal Corporation (non-GAAP)* $ 9.6 $ 0.1
Diluted earnings (loss) per share $ 0.34 $ 0.01
Adjusted diluted earnings (loss) per share (non-GAAP)* $ 0.38 $ 0.01
Segment Results
Tobacco operations sales and other operating revenues $ 504.7 $ 512.0
Tobacco operations operating income $ 35.7 $ 14.5
Ingredients operations sales and other operating revenues $ 89.1 $ 85.1
Ingredients operations operating income (loss) $ 1.7 $ 2.9
*See Reconciliation of Certain non-GAAP Financial Measures in Other Items below.
Quarter Ended June 30, 2025, compared to Quarter Ended June 30, 2024
Consolidated Results
Revenues decreased by 1%, or $3.3 million, and operating income increased by 96%, or $16.6 million, in the quarter ended June 30, 2025, compared to the quarter ended June 30, 2024, primarily driven by performance in our Tobacco Operations segment.
Selling, general, and administrative expenses were up by 1%, or $0.5 million, primarily due to higher compensation costs of $5.5 million and legal and professional fees of $3.7 million, which were largely offset by favorable foreign currency
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comparisons of $7.3 million and lower tobacco sales commissions of $2.8 million in the quarter ended June 30, 2025, compared to the quarter ended June 30, 2024.
Adjusted operating income was up by $17.7 million, and adjusted net income attributable to Universal Corporation was up by $9.5 million, in the first quarter of fiscal year 2026, compared to the same period in the prior fiscal year, on a favorable product mix in the Tobacco Operations segment.
Tobacco Operations Segment
Revenues decreased by 1%, or $7.3 million, for the quarter ended June 30, 2025, compared to the quarter ended June 30, 2024, primarily on an 8% decline in tobacco sales volumes, largely due to lower sales of carryover crop tobacco. Less carryover tobacco was available for sale in the first quarter of fiscal year 2026, due to significant shipment volumes earlier in fiscal year 2025. Operating income for the Tobacco Operations segment increased by 147%, or $21.2 million, for the first quarter of fiscal year 2026, compared to first quarter of fiscal year 2025, on a favorable product mix in Asia. Selling, general, and administrative expenses were lower by approximately $1.8 million for the segment mainly due to favorable foreign currency comparisons of $7.2 million, partially offset by higher compensation costs of $2.3 million and higher legal and professional fees of $2.5 million in the quarter ended June 30, 2025, compared to the quarter ended June 30, 2024. Uncommitted tobacco inventory levels remained low at about 11% of total tobacco inventory as of June 30, 2025.
Ingredients Operations Segment
Revenues for the Ingredients Operations segment increased by 5%, or $4.0 million, for the quarter ended June 30, 2025, compared to the quarter ended June 30, 2024, on higher sales volumes. Operating income for the segment decreased by 42%, or $1.2 million, due to a less favorable product mix, some curtailed demand due to tariff uncertainty, and higher fixed costs, including depreciation, from our recently expanded Universal Ingredients production facility.
Additional Items
Cost of goods sold decreased by 4%, or $21.5 million, in the quarter ended June 30, 2025, compared to the quarter ended June 30, 2024, largely on lower sales volumes and product mix in the Tobacco Operations segment.
Interest expense was down by 14%, or $3.0 million, in the quarter ended June 30, 2025, compared to the quarter ended June 30, 2024, primarily on lower interest rates.
Restructuring and impairment costs of $1.1 million in the quarter ended June 30, 2025, were primarily related to the previously announced consolidation of the Company’s European tobacco sheet operations.
The consolidated effective tax rate for the three months ended June 30, 2025, was 27.1%. The consolidated tax rate for the three months ended June 30, 2024, was 34.7%. The consolidated effective tax rate for the three months ended June 30, 2024, was higher than the consolidated tax rate for the three months ended June 30, 2025, due to limitation of deductibility of certain compensation amounts.
Sustainability
As part of its broader renewable energy strategy, Universal recently completed its annual third-party assessment and verification of Scope 1, 2, and relevant Scope 3 emissions data. This important assessment ensures alignment with established standards and provides transparency into Universal's emission reduction efforts. A demonstration of how the Company is aligning operations with global sustainability standards is the recently commissioned biomass boiler in Zimbabwe. The new boiler, once operational, will reduce coal use over time and contribute to long-term emissions reduction.
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Other Items
Reconciliation of Certain Non-GAAP Financial Measures:
The following tables set forth certain non-recurring items included in reported results to reconcile adjusted operating income to consolidated operating income and adjusted net income to net income attributable to Universal Corporation:
Adjusted Operating Income Reconciliation
Three Months Ended June 30,
(in thousands) 2025 2024
As Reported: Consolidated operating income $ 33,813 $ 17,225
Restructuring and impairment costs (1)
1,122 —
As Adjusted operating income (non-GAAP) $ 34,935 $ 17,225
Adjusted Net Income Attributable to Universal Corporation and Adjusted Diluted Earnings Per Share Reconciliation
(in thousands except for per share amounts)
Three Months Ended June 30,
2025 2024
As Reported: Net income attributable to Universal Corporation $ 8,497 $ 130
Restructuring and impairment costs (1)
1,122 —
Total of non-GAAP adjustments to income before income taxes 1,122 —
Non-GAAP adjustments to income taxes
Income tax benefit from restructuring and impairment costs (2)
(35) —
Total of income tax impacts for non-GAAP adjustments to income before income taxes (35) —
As adjusted: Net income attributable to Universal Corporation (non-GAAP) $ 9,584 $ 130
As reported: Diluted earnings per share $ 0.34 $ 0.01
As adjusted: Diluted earnings per share (non-GAAP) $ 0.38 $ 0.01
(1) Restructuring and impairment costs are included in Consolidated operating income in the consolidated statements of income, but excluded for purposes of Adjusted operating income, Adjusted net income available to Universal Corporation, and Adjusted diluted earnings per share.
(2) The income tax effect of non-GAAP adjustments was determined based on the timing and nature of the specific non-GAAP adjustments and their relevant jurisdictional income tax rates (foreign, state, and local) and the applicable U.S. federal income tax rates. The Company considers current and deferred income tax rates to calculate the impact to income taxes for the non-GAAP adjustments.
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The following table reconciles total debt to net debt and net capitalization:
Net Debt and Net Capitalization Reconciliation
June 30, June 30, March 31,
(in thousands) 2025 2024 2025
Add: Notes payable and overdrafts $ 621,275 $ 581,087 $ 455,039
Add: Long-term obligations 618,057 617,502 617,918
Add: Current portion of long-term obligations — — —
Total Debt 1,239,332 1,198,589 1,072,957
Add: Customer advances and deposits 4,557 15,660 3,763
Less: Cash and cash equivalents 178,435 101,700 260,115
Net Debt (non-GAAP) $ 1,065,454 $ 1,112,549 $ 816,605
Add: Total Universal Corporation shareholders' equity 1,458,917 1,413,457 1,458,556
Net Capitalization (non-GAAP) $ 2,524,371 $ 2,526,006 $ 2,275,161
Net Debt/Net Capitalization (non-GAAP) 42 % 44 % 36 %
Liquidity and Capital Resources
Overview
Our liquidity and operating capital resource requirements are predominantly short term in nature and primarily relate to working capital for tobacco crop purchases. Working capital needs are seasonal within each geographic region. The geographic dispersion and the timing of working capital needs permit us to predict our general level of cash requirements, although tobacco crop sizes, prices paid to farmers, shipment and delivery timing, and currency fluctuations affect requirements each year. Peak working capital requirements are generally reached during the first and second fiscal quarters. Each geographic area follows a cycle of buying, processing, and shipping tobacco to customers, and in many regions, we also provide agricultural materials to farmers during the growing season. The timing of the elements of each cycle is influenced by such factors as local weather conditions and individual customer shipping requirements, which may change the level or the duration of crop financing. Despite a predominance of short-term needs, we maintain a portion of our total debt as long-term to reduce liquidity risk. We also periodically have large cash balances that we utilize to meet our working capital requirements.
Our first fiscal quarter is usually a period of significant working capital investment in both Africa and South America as tobacco crops are delivered by farmers. Our working capital needs followed this pattern in the quarter ended June 30, 2025, and we funded these working capital needs using a combination of cash on hand, short-term borrowings, customer advances, and operating cash flows. In contrast, in the quarter ended June 30, 2024, certain tobacco purchases that would have typically been made in that fiscal quarter had been made earlier due to market conditions, which reduced required working capital investments in quarter ended June 30, 2024.
Operating Activities
Net cash used by our operations was $205.1 million during the quarter ended June 30, 2025. That amount was $142.7 million higher than during the same period in fiscal year 2025, primarily on lower working capital requirements in the quarter ended June 30, 2024. Tobacco inventory levels increased by $413.4 million from March 31, 2025 levels to $1.2 billion at June 30, 2025, on seasonal leaf tobacco purchases. Tobacco inventory levels at June 30, 2025, were relatively flat, up $17.4 million, compared to June 30, 2024 levels. We generally do not purchase material quantities of tobacco on a speculative basis, and we target committed inventory levels of 80% or more of total tobacco inventory. Our level of committed inventory percentages is influenced by timing of farmer deliveries of new crops, as well as the receipt of customer orders. In addition, when we contract directly with tobacco farmers, we are often obligated to buy all stalk positions, which may contain less marketable leaf styles. As of June 30, 2025, our uncommitted tobacco inventories were $134.7 million, or about 11% of total tobacco inventory, compared to $164.0 million, or about 20% of our tobacco inventory as of March 31, 2025, and $154.8 million, or about 13% of our tobacco inventory as of June 30, 2024.
Our balance sheet accounts reflected seasonal patterns in the quarter ended June 30, 2025, on deliveries of tobacco crops by farmers in both Africa and South America. Accounts receivable decreased by $201.7 million from March 31, 2025 levels, on tobacco crop shipments offset in part by collections on receivables. Advances to suppliers were $79.2 million at June 30, 2025, a reduction of $90.2 million from March 31, 2025, as tobacco crops were delivered in payment on some of those balances, net of
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new balances for upcoming tobacco crops. Accounts receivable--unconsolidated affiliates were $120.6 million higher as of June 30, 2025, compared to March 31, 2025, on tobacco crop purchases. Notes payable and overdrafts were up $166.2 million from March 31, 2025 levels, on seasonal working capital needs.
Accounts receivable--unconsolidated affiliates were $66.7 million higher as of June 30, 2025, compared to the same period in the prior fiscal year, on larger tobacco crop sizes. Accounts payable were $119.8 million at June 30, 2025, up $40.1 million, compared to June 30, 2024, largely on the timing of tobacco crop purchases. Notes payable and overdrafts and cash and cash equivalents were up $40.2 million and $76.7 million, respectively, as of June 30, 2025, compared to June 30, 2024, largely due to a lower use of cash and cash equivalents to fund working capital needs.
Investing Activities
Our capital allocation strategy focuses on four strategic priorities: strengthening and investing for growth in our leaf tobacco business; increasing our strong dividend; exploring growth opportunities for our ingredients business; and returning excess capital to our shareholders. In deciding where to invest capital resources, we look for opportunities where we believe we can earn an adequate return as well as leverage our assets and expertise or enhance our farmer base. Our capital expenditures are generally limited to those that add value, replace or maintain equipment, increase efficiency, or position us for future growth. During the quarters ended June 30, 2025 and 2024, we invested about $12.1 million and $22.7 million, respectively, in our property, plant and equipment. Depreciation expense was approximately $11.0 million and $11.7 million for the quarters ended June 30, 2025 and 2024, respectively. Typically, our capital expenditures for maintenance projects are less than $30 million per fiscal year. In addition, from time to time, we undertake projects that require capital expenditures when we identify opportunities to improve efficiencies, invest in sustainability projects, add value for our customers, and position ourselves for future growth. We currently expect to spend approximately $45 to $55 million over the next twelve months on capital projects for maintenance of our facilities and other investments to grow and improve our businesses.
Our Board of Directors approved our current share repurchase program in November 2024. The program authorizes the purchase of up to $100 million of our common stock through November 15, 2026. Under the current authorization, we may purchase shares from time to time on the open market or in privately negotiated transactions at prices not exceeding prevailing market rates. Repurchases of shares under the repurchase program may vary based on management discretion, as well as changes in cash flow generation and availability. During the three months ended June 30, 2025, we did not purchase any shares of common stock. As of June 30, 2025, our available authorization under our current share repurchase program was $100 million.
Financing Activities
At June 30, 2025, we had $1.2 billion in total debt outstanding, an increase of $40.7 million compared to June 30, 2024. We consider the sum of notes payable and overdrafts, long-term debt (including any current portion), and customer advances and deposits, less cash, cash equivalents, and short-term investments on our balance sheet to be our net debt. We also consider our net debt plus shareholders' equity to be our net capitalization. Net debt decreased by $47.1 million to $1.1 billion at June 30, 2025, compared to June 30, 2024. Net debt as a percentage of net capitalization was 42% at June 30, 2025, down from 44% at June 30, 2024, and up from 36% at March 31, 2025.
As of June 30, 2025, we had $178.4 million in cash and cash equivalents, $355 million available under our committed revolving credit facility that will mature in December 2027, and we, together with our consolidated affiliates, had approximately $86 million in available, uncommitted credit lines. The financial covenants under our committed revolving credit facility require us to maintain certain levels of tangible net worth and observe restrictions on debt levels. Based on our June 30, 2025 financial statement, we were in compliance with all financial covenants of our debt agreements as of June 30, 2025. We have no long-term debt maturing until fiscal year 2028.
Our seasonal working capital requirements for our tobacco business typically increase significantly between March and September and decline after mid-fiscal year. Available capital resources from our cash balances, committed revolving credit facility, and uncommitted credit lines are expected to exceed our normal working capital needs and currently anticipated capital expenditure requirements over the next twelve months and beyond.
Derivatives
From time to time, we use interest rate swap agreements to manage our exposure to changes in interest rates. At June 30, 2025, the fair value of our outstanding interest rate swap agreements was a liability of about $0.6 million, and the notional amount swapped was $310 million. We entered into these agreements to eliminate the variability of cash flows in the interest payments on
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a portion of our variable-rate term loans. Under the swap agreements we receive variable rate interest and pay fixed rate interest. The swaps are accounted for as cash flow hedges.
We also use derivative instruments from time to time to hedge certain foreign currency exposures, primarily related to forecasted purchases of tobacco, related processing costs, and crop input sales, as well as our net monetary balance sheet exposures in local currency. We generally account for our hedges of forecasted tobacco purchases as cash flow hedges. As of June 30, 2025, the fair value of our open hedges for forecasted tobacco purchases was a net asset of approximately $0.5 million. We had forward contracts outstanding that were not designated as hedges, and the fair value of those contracts was a net liability of approximately $0.3 million as of June 30, 2025.
Critical Accounting Estimates
A summary of our critical accounting policies is included in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of our 2025 Form 10-K. Our critical accounting policies have not changed from those reported in the 2025 Form 10-K.
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