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; 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, 2026 (the "2026 Form 10-K"). 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 2026 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. 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. 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
We are starting fiscal year 2027 with confidence in the long-term strategic direction of our company. We are focused on creating sustainable value through disciplined execution across our businesses. In tobacco, we believe that our long-standing market expertise and measured approach position us well to navigate current oversupply conditions, make prudent buying decisions, and be a trusted, full-service partner to our customers. In ingredients, we are leveraging our platform growth investments and focusing on improving commercial execution, facility utilization, and financial and operational efficiencies. We expect certain of our improvement efforts to continue through fiscal year 2028.
Our results for the quarter ended June 30, 2026, reflected the expected timing and market dynamics in our tobacco business, in comparison to our first quarter fiscal year 2026 results, which we believe were exceptional. Purchasing activity was slower as we and our customers evaluated green tobacco price trends amid oversupply conditions in flue-cured and burley markets and monitored potential weather impacts on next season’s crops. We are pleased with our current customer indications and commitments, and we expect customer demand to remain consistent with our fiscal year 2027 sales plan. In our ingredients business, in the quarter ended June 30, 2026, revenue was down slightly, in comparison to the quarter ended June 30, 2025, and results continued to be negatively affected by persistent consumer market headwinds, high fixed costs at our expanded Lancaster facility, and longer-than-anticipated product development cycles. We continued to implement our initiatives to strengthen the ingredients platform for long-term success, which include enhancements to leadership, systems, operational capabilities, and commercial execution. During the fiscal quarter ended June 30, 2026, our liquidity position remained strong, and our debt levels were down, compared to the quarter ended June 30, 2025, due to reduced working capital usage, driven by tobacco crop purchase timing and lower green tobacco prices.
FINANCIAL HIGHLIGHTS
Three Months Ended June 30, Change
(in millions of dollars, except per share data) 2026 2025 %
Consolidated Results
Sales and other operating revenue $ 523.8 $ 593.8 (12) %
Cost of goods sold $ 440.7 $ 479.6 (8) %
Gross profit margin percentage 15.9 % 19.2 % -330 bps
Selling, general and administrative expenses $ 80.8 $ 79.2 2 %
Restructuring and impairment costs $ — $ 1.1 (100) %
Operating income $ 2.3 $ 33.8 (93) %
Adjusted operating income (non-GAAP)* $ 2.3 $ 34.9 (93) %
Net income (loss) attributable to Universal Corporation $ (5.0) $ 8.5 (159) %
Adjusted net income (loss) attributable to Universal Corporation (non-GAAP)* $ (5.0) $ 9.6 (152) %
Diluted earnings (loss) per share $ (0.20) $ 0.34 (159) %
Adjusted diluted earnings (loss) per share (non-GAAP)* $ (0.20) $ 0.38 (153) %
Segment Results
Tobacco operations sales and other operating revenues $ 437.1 $ 504.7 (13) %
Tobacco operations operating income $ 3.5 $ 35.7 (90) %
Ingredients operations sales and other operating revenues $ 86.7 $ 89.1 (3) %
Ingredients operations operating income (loss) $ (0.7) $ 1.7 (139) %
*See Reconciliation of Certain Non-GAAP Financial Measures in Other Items below.
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Quarter Ended June 30, 2026, compared to Quarter Ended June 30, 2025
Consolidated Results
Revenue decreased by 12%, or $70.0 million, in the quarter ended June 30, 2026, compared to the quarter ended June 30, 2025, primarily driven by lower tobacco sales volumes, down 9%, and tobacco sales prices, down 6%.
Operating income decreased by 93%, or $31.5 million, in the quarter ended June 30, 2026, compared to the quarter ended June 30, 2025, on a less favorable product mix and lower sales volumes in the Tobacco Operations segment and continued market headwinds and high fixed costs in the Ingredients Operations segment.
Selling, general, and administrative expenses were up by 2%, or $1.6 million, primarily due to unfavorable foreign currency comparisons of $4.8 million and lower recoveries on advances to suppliers of $1.7 million, partially offset by lower compensation costs of $3.0 million and lower legal and professional fees of $1.2 million in the quarter ended June 30, 2026, compared to the quarter ended June 30, 2025.
Adjusted operating income was down by $32.6 million and adjusted net income attributable to Universal Corporation was down by $14.6 million in the quarter ended June 30, 2026, compared to the quarter ended June 30, 2025, largely on on a less favorable product mix and lower sales volumes in the Tobacco Operations segment and continued market headwinds and high fixed costs in the Ingredients Operations segment.
Tobacco Operations Segment
Our first fiscal quarter is historically a slow quarter for our tobacco business. Revenue decreased by 13%, or $67.6 million, for the quarter ended June 30, 2026, compared to the quarter ended June 30, 2025, primarily on a 9% decrease in tobacco sales volumes due to lower sales of carryover crop tobacco and a 6% decrease in tobacco sales prices due to product mix and lower green tobacco prices. Operating income for the Tobacco Operations segment decreased by 90%, or $32.2 million, for the first quarter of fiscal year 2027, compared to the first quarter of fiscal year 2026, on a less favorable product mix in Asia and lower sales of carryover crop tobacco. Selling, general, and administrative expenses were higher by $1.3 million for the segment mainly due to unfavorable foreign currency comparisons of $4.4 million and lower recoveries on advances to suppliers of $1.7 million, partially offset by lower legal and professional fees of $2.3 million in the quarter ended June 30, 2026, compared to the quarter ended June 30, 2025. Corporate overhead costs allocated to the segment were $2.2 million higher in the quarter ended June 30, 2026, compared to the quarter ended June 30, 2025, due to a higher percentage allocation of the actual corporate overhead costs to the segment. The allocation of corporate overhead costs is based on projected annual financial and operational performance.
Ingredients Operations Segment
Revenue for the Ingredients Operations segment decreased by 3%, or $2.4 million, for the quarter ended June 30, 2026, compared to the quarter ended June 30, 2025, as sales of certain products were negatively impacted by market headwinds. Operating income for the segment decreased by 139%, or $2.4 million, on product mix and high fixed costs as well as inventory write-downs of $1.4 million. Market headwinds included persistent weakness in the consumer-packaged-goods industry, supply restraints, particularly tight apple markets in the Pacific Northwest, inflationary pressures, and tariff volatility. Selling, general, and administrative expenses were lower by $1.5 million for the segment mainly due to lower compensation costs of $0.8 million and lower intangibles amortization expense of $0.6 million in the quarter ended June 30, 2026, compared to the quarter ended June 30, 2025. Corporate overhead costs allocated to the segment were $0.4 million lower in the quarter ended June 30, 2026, compared to the quarter ended June 30, 2025, due to a lower percentage allocation of the actual corporate overhead costs to the segment. The allocation of corporate overhead costs is based on projected annual financial and operational performance.
Additional Items
Cost of goods sold decreased by 8%, or $38.9 million, in the quarter ended June 30, 2026, compared to the quarter ended June 30, 2025, largely on lower tobacco sales volumes and green tobacco prices.
Interest expense was down by 7%, or $1.3 million, in the quarter ended June 30, 2026, compared to the quarter ended June 30, 2025, on lower debt balances.
Restructuring and impairment costs of $1.1 million in the quarter ended June 30, 2025.
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The consolidated effective tax rate for the three months ended June 30, 2026, was 35%. The consolidated tax rate for the three months ended June 30, 2025, was 27%. The consolidated effective tax rate for the three months ended June 30, 2026, was higher than the consolidated tax rate for the three months ended June 30, 2025, due to various factors, including the mix and timing of domestic and foreign earnings, discrete items including increased withholding taxes on undistributed earnings in Brazil, and the tax deductibility of certain items.
Sustainability
Universal continues to strengthen the foundation of its business through investments in environmental, health, and safety capabilities that support long-term sustainability and operational resilience. Recent initiatives include the implementation of an enhanced global safety management software platform and a comprehensive Global EHS Management System. The new systems improve visibility across operations, support greater consistency and accountability, and strengthen the Company's approach to risk management across its global footprint. By reinforcing a culture of safety, transparency, and continuous improvement, these investments help position Universal for long-term success.
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 (loss) attributable to Universal Corporation to net income (loss) attributable to Universal Corporation:
Adjusted Operating Income Reconciliation
Three Months Ended June 30,
(in thousands) 2026 2025
As Reported: Consolidated operating income $ 2,296 $ 33,813
Restructuring and impairment costs (1)
— 1,122
As Adjusted operating income (non-GAAP) $ 2,296 $ 34,935
Adjusted Net Income (Loss) Attributable to Universal Corporation and Adjusted Diluted Earnings (Loss) Per Share Reconciliation
(in thousands except for per share amounts)
Three Months Ended June 30,
2026 2025
As Reported: Net income (loss) attributable to Universal Corporation $ (5,016) $ 8,497
Restructuring and impairment costs (1)
— 1,122
Total of non-GAAP adjustments to income (loss) before income taxes — 1,122
Non-GAAP adjustments to income taxes
Income tax benefit from restructuring and impairment costs (1)(2)
— (35)
Total of income tax impacts for non-GAAP adjustments to income (loss) before income taxes — (35)
As adjusted: Net income (loss) attributable to Universal Corporation (non-GAAP) $ (5,016) $ 9,584
As reported: Diluted earnings (loss) per share $ (0.20) $ 0.34
As adjusted: Diluted earnings (loss) per share (non-GAAP) $ (0.20) $ 0.38
(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 (loss) available to Universal Corporation, and Adjusted diluted earnings (loss) 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) 2026 2025 2026
Add: Notes payable and overdrafts $ 567,011 $ 621,275 $ 287,564
Add: Long-term obligations 616,869 618,057 616,727
Add: Current portion of long-term obligations — — —
Total Debt 1,183,880 1,239,332 904,291
Add: Customer advances and deposits 3,531 4,557 3,376
Less: Cash and cash equivalents 173,593 178,435 62,178
Net Debt (non-GAAP) $ 1,013,818 $ 1,065,454 $ 845,489
Add: Total Universal Corporation shareholders' equity 1,388,829 1,458,917 1,415,400
Net Capitalization (non-GAAP) $ 2,402,647 $ 2,524,371 $ 2,260,889
Net Debt/Net Capitalization (non-GAAP) 42 % 42 % 37 %
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 typically a period of significant working capital investment in Africa and South America as farmers deliver tobacco crops. For the quarter ended June 30, 2026, working capital investment remained significant, but was lower than in the quarter ended June 30, 2025, primarily due to an oversupply of tobacco, particularly flue-cured and burley tobacco, in the global market. As a result of these market conditions, green tobacco purchases were slower and green tobacco prices were lower than in the prior-year quarter, reducing our working capital requirements. We funded these requirements through a combination of cash on hand, short-term borrowings, customer advances, accounts receivable factoring, and operating cash flows.
Operating Activities
Net cash used by our operations was $117.1 million during the quarter ended June 30, 2026. That amount was $88.0 million lower than during the same period in fiscal year 2026, primarily on lower working capital requirements. Tobacco inventory levels at June 30, 2026, were down $54.2 million, compared to June 30, 2025 levels, on slower green tobacco purchases and lower green tobacco prices. 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, 2026, our uncommitted tobacco inventories were $275.1 million, or about 24% of total tobacco inventory, compared to $222.3 million, or about 27% of our tobacco inventory as of March 31, 2026, and $134.7 million, or about 11% of our tobacco inventory as of June 30, 2025. Uncommitted tobacco levels as a percentage of total tobacco inventory came down from March 31, 2026 levels in the quarter ended June 30, 2026, but remained elevated due to delayed customer purchase commitments. We expect our uncommitted tobacco inventory levels to be within our range of 20% or less of total tobacco inventory during fiscal year 2027.
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Our balance sheet accounts reflected seasonal patterns in the quarter ended June 30, 2026, on deliveries of tobacco crops by farmers in Africa and South America. Accounts receivable decreased by $215.8 million from March 31, 2026 levels on collections on receivables, partially offset by tobacco crop shipments. Advances to suppliers were $102.9 million at June 30, 2026, a reduction of $74.3 million from March 31, 2026, as tobacco crops were delivered in payment on some of those balances, net of new balances for upcoming tobacco crops. Accounts receivable--unconsolidated affiliates increased by $92.2 million from March 31, 2026 levels, on tobacco crop purchases. Notes payable and overdrafts were up $279.4 million from March 31, 2026 levels on seasonal working capital needs.
Accounts receivable were $76.1 million lower in the quarter ended June 30, 2026, compared to the quarter ended June 30, 2025, on lower sales of carryover crop tobacco. Advances to suppliers were $23.7 million higher and accounts payable were $28.8 million lower at June 30, 2026, compared to June 30, 2025, largely on slower purchases of green tobacco. Accounts receivable--unconsolidated affiliates were $23.2 million lower as of June 30, 2026, compared to the same period in the prior fiscal year, on the timing of tobacco shipments. Notes payable and overdrafts were down $54.3 million as of June 30, 2026, compared to June 30, 2025, due to lower working capital requirements.
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, 2026 and 2025, we invested approximately $15.9 million and $12.1 million, respectively, in our property, plant and equipment. Depreciation expense was approximately $11.0 million for each of the quarters ended June 30, 2026 and 2025. 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 $55 to $65 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, 2026, we purchased 51,741 shares of common stock at an aggregate cost of $2.7 million (average price per share $53.06). As of June 30, 2026, our available authorization under our current share repurchase program was $97.3 million.
Financing Activities
At June 30, 2026, we had $1.2 billion in total debt outstanding, a decrease of $55.5 million compared to June 30, 2025. 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 $51.6 million to $1.0 billion at June 30, 2026, compared to June 30, 2025. Net debt as a percentage of net capitalization was 42% at June 30, 2026, flat with 42% at June 30, 2025, and up from 37% at March 31, 2026.
As of June 30, 2026, we had $174 million in cash and cash equivalents, $635 million available under our committed revolving credit facility that will mature in December 2030, and we, together with our consolidated affiliates, had approximately $279 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, 2026 financial statements, we were in compliance with all financial covenants of our debt agreements as of June 30, 2026. We have no long-term debt maturing until fiscal year 2031.
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.
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Derivatives
From time to time, we use interest rate swap agreements to manage our exposure to changes in interest rates. At June 30, 2026, the fair value of our outstanding interest rate swap agreements was an asset of about $5.0 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 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, 2026, the fair value of our open hedges for forecasted tobacco purchases and crop inputs was a net liability of approximately $3.0 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 $1.1 million as of June 30, 2026.
Critical Accounting Estimates
A summary of our critical accounting policies is included in Part II, 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 2026 Form 10-K.
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