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 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 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: impacts of the COVID-19 pandemic and new subvariants; success in pursuing strategic investments or acquisitions and integration of new businesses and the impact of these new businesses on future results; product purchased not meeting quality and quantity requirements; our reliance on a few large customers; our ability to maintain effective information systems and safeguard confidential information; anticipated levels of demand for and supply of our products and services; costs incurred in providing these products and services including increased transportation costs and delays attributed to global supply chain challenges; timing of shipments to customers; higher inflation rates; changes in market structure; government regulation and other stakeholder expectations; economic and political conditions in the countries in which we and our customers operate, including the ongoing impacts from international conflicts, such as the conflict in Ukraine; product taxation; industry consolidation and evolution; changes in exchange rates and interest rates; impacts of regulation and litigation on our customers; industry-specific risks related to our plant-based ingredient businesses; exposure to certain regulatory and financial risks related to climate change; changes in estimates and assumptions underlying our critical accounting policies; the promulgation and adoption of new accounting standards; new government regulations and interpretation of existing standards and regulations; and general economic, political, market, and weather conditions. 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, 2023. 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. This Form 10-Q should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended March 31, 2023.
Results of Operations
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. 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) referred to in this discussion are non-GAAP financial measures. These measures are not financial measures calculated in accordance with 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. A reconciliation 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, provide investors with important information that is useful in understanding our business results and trends.
Overview
Our fiscal year 2024 is developing very well with operating income for the six months and quarter ended September 30, 2023, up 30% and 46%, respectively, compared to the six months and quarter ended September 30, 2022. Gross profit margins also rebounded nicely in the first half of fiscal year 2024, compared with the same period in fiscal year 2023, with our ingredients companies making a positive contribution. Our Tobacco Operations segment delivered strong performance in the first half of fiscal year 2024 on robust demand for leaf tobacco from our customers. Results for the Ingredients Operations segment were also
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up in the second quarter of fiscal year 2024, compared to the same quarter in the prior fiscal year. This segment saw some supply chain normalization, which stabilized demand from certain of our customers and generated better results in the second quarter of fiscal year 2024, compared to the first quarter of fiscal year 2024 when the segment experienced soft customer demand.
Strong demand for leaf tobacco from our customers and a favorable tobacco product mix benefited our results for the first half of fiscal year 2024. Leaf tobacco margins improved in the first half of fiscal year 2024, despite lower leaf tobacco sales volumes, as we had fewer shipments of lower margin tobacco, compared to the first half of fiscal year 2023. Segment operating income for our Tobacco Operations segment was up 46% and 55% for the six months and quarter ended September 30, 2023, respectively, compared to the six months and quarter ended September 30, 2022. Our uncommitted tobacco inventory level of 12% at September 30, 2023, remained low, and global leaf tobacco supply continues to be tight for all types of tobacco. Looking ahead, we continue to expect that similar to fiscal year 2023, our tobacco shipments will be strongly weighted to the second half of the fiscal year 2024. We also believe our uncommitted tobacco inventory levels will remain low for the rest of fiscal year 2024.
We were pleased to see demand from certain customers for our ingredients products stabilizing in the quarter ended September 30, 2023. Although results for the Ingredients Operations segment were lower in the six months ended September 30, 2023, compared to the six months ended September 30, 2022, we believe that our customers have been working through their excess inventory levels, and raw material prices, such as apple prices, are coming down. While navigating evolving market dynamics, we remain focused on and encouraged by both our core and new business opportunities with existing and first-time ingredients customers. We continue to strongly believe that our commercial and research and development efforts coupled with our expanded range of capabilities that we can offer our customers due to our ongoing investments in our ingredients platform will strengthen our business for the future.
Our costs continued to be elevated in the first half of fiscal year 2024, compared to the first half of fiscal year 2023. Interest expense was up over $13 million primarily on higher interest rates, and green tobacco prices were also higher. Despite the higher costs, we have been able to reduce our debt levels in fiscal year 2024. At September 30, 2023, our net debt levels, which we define as the sum of notes payable and overdrafts, long-term debt, and customer advances and deposits, less cash and cash equivalents, declined by about $70 million, compared to our net debt levels at September 30, 2022.
Universal has a fundamental responsibility to its stakeholders to achieve high standards of environmental performance to support sustainable operations, which we demonstrate through our supplier engagement and disclosures on climate change, water stewardship, and forestry. Our record is highlighted by 15 years of participation in CDP disclosure, the establishment of science-based targets, and recognition by CDP as a Supplier Engagement Leader. To add to our commitment to environmental sustainability, we have committed to water stewardship throughout our operations. To Universal, water stewardship is water usage that is socially and culturally equitable, environmentally sustainable, economically beneficial, and achieved through a multi‐stakeholder process. Our Nominating and Corporate Governance Committee and our management team have approved a Water Stewardship policy to guide and publicly commit to water stewardship through our global operations.
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FINANCIAL HIGHLIGHTS
Six Months Ended September 30, Change
(in millions of dollars, except per share data) 2023 2022 $ %
Consolidated Results
Sales and other operating revenue $ 1,156.2 $ 1,080.8 $ 75.4 7 %
Cost of goods sold $ 938.0 $ 890.8 $ 47.1 5 %
Gross Profit Margin 18.9 % 17.6 % 130 bps
Selling, general and administrative expenses $ 149.3 $ 138.8 $ 10.5 8 %
Operating income (loss) $ 66.3 $ 51.2 $ 15.2 30 %
Diluted earnings (loss) per share (as reported) $ 1.04 $ 1.15 $ (0.11) (10) %
Adjusted diluted earnings (loss) per share (non-GAAP)* $ 1.13 $ 1.13 $ — — %
Segment Results
Tobacco operations sales and other operating revenues $ 998.6 $ 918.1 $ 80.5 9 %
Tobacco operations operating income $ 61.3 $ 41.9 $ 19.4 46 %
Ingredients operations sales and other operating revenues $ 157.6 $ 162.7 $ (5.1) (3) %
Ingredient operations operating income (loss) $ 2.8 $ 9.1 $ (6.3) (69) %
*See Reconciliation of Certain Non-GAAP Financial Measures in Other Items below.
Net income for the six months ended September 30, 2023, was $26.1 million, or $1.04 per diluted share, compared with $28.7 million, or $1.15 per diluted share, for the six months ended September 30, 2022. Excluding restructuring and impairment costs and certain other non-recurring items, detailed in Other Items below, net income increased by $0.2 million and diluted earnings per share were flat for the six months ended September 30, 2023, compared to the six months ended September 30, 2022. Operating income of $66.3 million for the six months ended September 30, 2023, increased by $15.2 million, compared to operating income of $51.2 million for the six months ended September 30, 2022. Adjusted operating income, detailed in Other Items below, of $68.9 million increased by $17.8 million for the first half of fiscal year 2024, compared to adjusted operating income of $51.2 million for the first half of fiscal year 2023.
Net income for the quarter ended September 30, 2023, was $28.1 million, or $1.12 per diluted share, compared with $21.9 million, or $0.88 per diluted share, for the quarter ended September 30, 2022. Excluding restructuring and impairment costs and certain other non-recurring items, detailed in Other Items below, net income and diluted earnings per share increased by $8.4 million and $0.33, respectively, for the quarter ended September 30, 2023, compared to the quarter ended September 30, 2022. Operating income of $55.3 million for the quarter ended September 30, 2023, increased by $17.4 million, compared to operating income of $37.9 million for the quarter ended September 30, 2022. Adjusted operating income, detailed in Other Items below, of $57.9 million increased by $20.0 million for the second quarter of fiscal year 2024, compared to adjusted operating income of $37.9 million for the second quarter of fiscal year 2023.
Consolidated revenues increased by $75.4 million to $1.2 billion and decreased slightly by $12.5 million to $638.5 million, respectively, for the six months and quarter ended September 30, 2023, compared to the same periods in fiscal year 2023. These changes were largely due to lower tobacco sales volumes but higher tobacco sales prices and a favorable product mix in the Tobacco Operations segment.
Tobacco Operations
Operating income for the Tobacco Operations segment increased by $19.4 million to $61.3 million and by $18.6 million to $52.4 million, respectively, for the six months and quarter ended September 30, 2023, compared with the six months and quarter ended September 30, 2022. Tobacco Operations segment operating income was up despite lower tobacco sales volumes largely on a more favorable product mix in the six months and quarter ended September 30, 2023, compared to the same periods in the prior fiscal year, when a large amount of lower margin carryover tobacco crops were shipped. Carryover crop shipments were significantly lower while current crop shipments were higher in both South America and Africa in the six months and quarter ended September 30, 2023, compared to the same periods in fiscal year 2023. In Europe, sales volumes and revenues were up due to shipment timing in the six months and quarter ended September 30, 2023, compared to the same periods in the prior fiscal year. In Asia, our operations also saw an improved product mix in the six months and quarter ended September 30, 2023, compared to the six months and quarter ended September 30, 2022. Equity earnings from our oriental tobacco joint venture were
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down significantly in the six months and quarter ended September 30, 2023, compared to the same periods in the prior fiscal year, on unfavorable foreign currency comparisons and higher interest expenses. Selling, general, and administrative expenses for the Tobacco Operations segment were higher in the six months ended September 30, 2023, compared to six months ended September 30, 2022, primarily on higher compensation costs partially offset by favorable foreign currency comparisons. In the quarter ended September 30, 2023, selling, general, and administrative expenses were down, compared to the quarter ended September 30, 2022, largely on favorable foreign currency comparisons. Revenues for the Tobacco Operations segment of $998.6 million for the six months ended September 30, 2023, and $554.7 million for the quarter ended September 30, 2023, were up $80.5 million and down $15.4 million, respectively, compared to the same periods in the prior fiscal year. These changes were largely due to lower tobacco sales volumes, higher tobacco sales prices, and a favorable product mix.
Ingredients Operations
Operating income for the Ingredients Operations segment was $2.8 million and $4.8 million, respectively, for the six months and quarter ended September 30, 2023, compared to $9.1 million and $4.5 million, respectively for the six months and quarter ended September 30, 2022. Operating income for the Ingredients Operations segment was up slightly for the quarter ended September 30, 2023, compared to the quarter end September 30, 2022, on the stabilization of sales volumes for certain customers. Results for our Ingredients Operations segment were down in the six months ended September 30, 2023, compared to the six months ended September 30, 2022, on lower demand due to customers continuing to carry high inventory levels. Prices for some key raw materials were down in the six months ended September 30, 2023, compared to the six months ended September 30, 2022. Inventory write-downs for the Ingredients Operations segment were higher in the six months ended September 30, 2023, compared to the same period in the prior fiscal year, on the changes in customer demand and new crop raw material prices. Selling, general, and administrative expenses for this segment increased in the six months and quarter ended September 30, 2023, compared to the same periods in the prior fiscal year, largely on higher labor costs and investments in product development capabilities. For the quarter ended September 30, 2023, revenues for the Ingredients Operations segment of $83.8 million were up $2.9 million, compared to the quarter ended September 30, 2022, largely on higher sales volumes partly from new business. Revenues for the Ingredients Operations segment of $157.6 million for six months ended September 30, 2023, compared to the six months ended September 30, 2022, were down $5.1 million, largely on lower sales volumes and sales prices.
Other Items
Cost of goods sold in the six months ended September 30, 2023, increased by 5% to $938.0 million, compared with the six months ended September 30, 2022, largely due to higher green tobacco costs. Cost of goods sold in the quarter ended September 30, 2023, decreased by 6% to $506.8 million, compared with the quarter ended September 30, 2022, primarily on changes in tobacco sales volumes and product mix. Selling, general, and administrative costs for the six months ended September 30, 2023, increased by $10.5 million to $149.3 million, compared to the six months ended September 30, 2022, on higher compensation costs partially offset by favorable foreign currency comparisons. Selling, general, and administrative costs for the quarter ended September 30, 2023, increased by $1.4 million to $73.8 million, compared to the same period in the prior fiscal year, largely on favorable foreign currency comparisons offset by higher compensation costs and provisions on advances to suppliers. Interest expense for the six months and quarter ended September 30, 2023, compared to the same periods in the prior fiscal year, increased by $13.6 million to $32.6 million and by $4.8 million to $17.1 million, respectively, on increased costs from higher interest rates.
For both the six months and quarter ended September 30, 2023, our effective tax rate on pre-tax income was 21.5%. For the six months and quarter ended September 30, 2022, our effective tax rate on pre-tax income was 31.1% and 25.5%, respectively. The consolidated effective income tax rate for the six months ended September 30, 2022, was affected by the sale of our idled Tanzania operations in the quarter ended June 30, 2022, which resulted in $1.1 million of additional income taxes. Without this item, the consolidated effective income tax rate for the six months ended September 30, 2022, would have been approximately 27.5%. Additionally, the sale of our idled Tanzania operations resulted in a $1.8 million reduction to consolidated interest expense related to an uncertain tax position.
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Reconciliation of Certain Non-GAAP Financial Measures
The following table sets 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 September 30, Six Months Ended September 30,
(in thousands) 2023 2022 2023 2022
As Reported: Consolidated operating income $ 55,312 $ 37,886 $ 66,347 $ 51,152
Restructuring and impairment costs (1)
2,599 — 2,599 —
As Adjusted operating income (Non-GAAP) $ 57,911 $ 37,886 $ 68,946 $ 51,152
Adjusted Net Income Attributable to Universal Corporation and Adjusted Diluted Earnings Per Share Reconciliation
(in thousands except for per share amounts)
Three Months Ended September 30, Six Months Ended September 30,
2023 2022 2023 2022
As Reported: Net income attributable to Universal Corporation $ 28,128 $ 21,855 $ 26,064 $ 28,685
Restructuring and impairment costs (1)
2,599 — 2,599 —
Interest expense reversal on uncertain tax position from sale of operations in Tanzania — — — (1,816)
Total of Non-GAAP adjustments to income before income taxes 2,599 — 2,599 (1,816)
Non-GAAP adjustments to income taxes
Income tax benefit from restructuring and impairment costs (465) — (465) —
Income tax expense from sale of operations in Tanzania — — — 1,132
Total of income tax impacts for Non-GAAP adjustments to income before income taxes (465) — (465) 1,132
As adjusted: Net income attributable to Universal Corporation (Non-GAAP) $ 30,262 $ 21,855 $ 28,198 $ 28,001
As reported: Diluted earnings per share $ 1.12 $ 0.88 $ 1.04 $ 1.15
As adjusted: Diluted earnings per share (Non-GAAP) $ 1.21 $ 0.88 $ 1.13 $ 1.13
(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.
Liquidity and Capital Resources
Overview
The first half of our fiscal year is usually a period of significant working capital investment in Africa, South America, and the United States as tobacco crops are delivered by farmers. We funded our working capital needs in the six months ended September 30, 2023, using a combination of cash on hand, short-term borrowings, customer advances, and operating cash flows. Tobacco shipments are expected to be strongly weighted to the second half of our fiscal year 2024.
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, 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
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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.
Operating Activities
Net cash provided by our operations was $10.5 million during the six months ended September 30, 2023. That amount was $356.8 million higher than during the same period in fiscal year 2023, primarily on sales mix and timing of shipments and customer payments in our Tobacco Operations segment. Customer advances and deposits were up $153.9 million in the six months ended September 30, 2023, compared to the same period of fiscal year 2023, due to customer arrangements providing for a higher amount of advances on tobacco purchases in fiscal year 2024. Tobacco inventory levels increased by $252.4 million from March 31, 2023 levels to $1.1 billion at September 30, 2023, on seasonal leaf purchases of larger tobacco crops. Tobacco inventory levels were $118.1 million above September 30, 2022 levels, primarily on larger tobacco crop sizes in certain origins and higher green leaf tobacco prices. We generally do not purchase material quantities of tobacco on a speculative basis. However, when we contract directly with tobacco farmers, we are often obligated to buy all stalk positions, which may contain less marketable leaf styles. At September 30, 2023, our uncommitted tobacco inventories were $130.2 million, or about 12% of total tobacco inventory, compared to $91.1 million, or about 11% of our March 31, 2023 tobacco inventory, and $109.1 million, or about 11% of our September 30, 2022 tobacco inventory. While we target committed inventory levels of 80% or more of total tobacco inventory, the level of these uncommitted inventory percentages is influenced by timing of farmer deliveries of new crops, as well as the receipt of customer orders.
Our balance sheet accounts reflected seasonal patterns in the six months ended September 30, 2023, on deliveries of tobacco crops by farmers in South America, Africa, and the United States. Accounts receivable decreased by $33.1 million from March 31, 2023 levels, on collections on receivables. Advances to suppliers were $105.6 million at September 30, 2023, a reduction of $65.2 million from March 31, 2023, as tobacco crops were delivered in payment on some of those balances, net of new advances on upcoming tobacco crops. Accounts receivable—unconsolidated affiliates were up $43.2 million in the six months ended September 30, 2023, on a larger crop size. Notes payable and overdrafts were up $105.8 million from March 31, 2023 levels, on seasonal working capital needs. Customer advances and deposits increased by $163.4 million in the six months ended September 30, 2023, due to customer arrangements providing for a higher amount of advances on tobacco crop purchases in fiscal year 2024.
Accounts receivable were down $100.5 million at September 30, 2023, compared to the same period in the prior fiscal year, largely due to customer advance arrangements in fiscal year 2024 and the timing of tobacco crop shipments. Customer advances and deposits were up $153.9 million at September 30, 2023, compared to September 30, 2022. Notes payable and overdrafts were down $281.0 million compared to September 30, 2022 levels, in part due to higher customer advances available 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 plant-based ingredients platform; 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 six months ended September 30, 2023 and 2022, we invested about $32.6 million and $26.6 million, respectively, in our property, plant and equipment. Depreciation expense was approximately $23.4 million and $21.9 million for the six months ended September 30, 2023 and 2022, 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 $60 to $70 million over the next twelve months on capital projects for maintenance of our facilities and other investments, including significant investments in our plant-based ingredients platform, to grow and improve our businesses.
Our Board of Directors approved our current share repurchase program in November 2022. The program authorizes the purchase of up to $100 million of our common stock through November 15, 2024. Under the program, we may purchase shares
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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 September 30, 2023, we purchased 100,000 shares of common stock at an aggregate cost of $4.7 million (average price per share $47.44). As of September 30, 2023, approximately 24.6 million shares of our common stock were outstanding, and our available authorization under our current share repurchase program was $95.3 million.
Financing Activities
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 as a percentage of net capitalization was approximately 42% at September 30, 2023, down from the September 30, 2022 level of approximately 44%, primarily on increased cash provided by our operations, and up from the March 31, 2023 level of approximately 35%. As of September 30, 2023, we had $99.7 million in cash and cash equivalents, our short-term debt totaled $301.4 million, and we were in compliance with all covenants of our debt agreements, which require us to maintain certain levels of tangible net worth and observe restrictions on debt levels.
As of September 30, 2023, we had $445 million available under the committed revolving credit facility that will mature in December 2027, and we had about $150 million in available, uncommitted credit lines. We also maintain an effective, undenominated universal shelf registration statement that provides for future issuance of additional debt or equity securities. This shelf registration expires on November 23, 2023, at which time, we intend to replace it with a new shelf registration statement. 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-year. Available capital resources from our cash balances, committed credit facility, and uncommitted credit lines exceed our normal working capital needs and currently anticipated capital expenditure requirements over the next twelve months.
Derivatives
From time to time, we use interest rate swap agreements to manage our exposure to changes in interest rates. At September 30, 2023, the fair value of our outstanding interest rate swap agreements was an asset of about $12.4 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 in Brazil, as well as our net monetary balance sheet exposures in local currency there. We generally account for our hedges of forecasted tobacco purchases as cash flow hedges. At September 30, 2023, we had no open hedges for forecasted tobacco purchases. We had forward contracts outstanding that were not designated as hedges, and the fair value of those contracts was a net asset of approximately $1.1 million at September 30, 2023.
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 Annual Report on Form 10-K for the period ended March 31, 2023. Our critical accounting policies have not changed from those reported in the 2023 Annual Report on Form 10-K.
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