What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2024-02-07 compared with 2023-11-02 · 85 added, 101 removed, 126 unchanged (60% of the section changed)

7 unchanged sentences

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;

13 unchanged sentences

impacts of regulation and litigation on our customers;

industry-specific risks related to our plant-based ingredient businesses;

industry-specific risks related to our plant-based ingredients businesses;

exposure to certain regulatory and financial risks related to climate change;

15 unchanged sentences

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.

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

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.

Universal Corporation again delivered strong financial and operational performance in the third quarter of fiscal year 2024.

Operating income and net income for the quarter were up 13% and 28%, respectively, relative to the third quarter of fiscal year 2023, which helped increase operating income and net income for the nine months of fiscal year 2024 by 20% and 13%, respectively, compared to the same period last fiscal year.

Our tobacco business continued to perform very well, driven by a favorable product mix and strong demand from our customers.

Improved margins, larger crops in Africa, and strong tobacco shipments in line with our expectations benefited our results in the nine months and quarter ended December 31, 2023, compared to the same periods in fiscal year 2023.

Global leaf supply for all types of leaf tobacco continues to be tight, and as of December 31, 2023, our uncommitted tobacco inventory was at a low level of 8%.

While we expect global leaf tobacco supply to remain tight in fiscal year 2025, in part due to El Nino weather conditions, we believe the strength of our diverse global footprint will help us satisfy our customers’ leaf tobacco needs.

We continue to be encouraged by the solid progress the team is making to expand our ingredients business.

The investments we have made to build out the research and development and corporate sales teams are starting to gain momentum and have positioned us for future growth.

We are also pleased with the progress we are making on the expansion of our processing capabilities at our ingredients facility in Lancaster, Pennsylvania.

We expect those resources to be fully operational in the third quarter of fiscal year 2025 and positively contributing to our earnings as soon as fiscal year 2026.

Another important achievement in fiscal year 2024 has been the progress we made to advance Universal's global sustainability agenda.

These include the December 2023 publication of our 2023 Sustainability Report, and our recently announced participation in a solar project that we believe will help us meet our target to reduce operational greenhouse gas emissions by 30 percent by 2030.

We are proud of our sustainability advances, and we continue to seek opportunities to further promote sustainability in our business.

FINANCIAL HIGHLIGHTS

Six Months Ended September 30, Change

Nine Months Ended December 31, Change

(in millions of dollars, except per share data) 2023 2022 $ %

11 unchanged sentences

Ingredients operations sales and other operating revenues $ 235.2 $ 233.2 $ 2.1 1 %

Ingredient operations operating income (loss) $ 2.8 $ 9.1 $ (6.3) (69) %

Ingredients operations operating income (loss) $ 5.0 $ 9.9 $ (4.9) (50) %

*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.

Net income for the nine months ended December 31, 2023, was $79.3 million, or $3.17 per diluted share, compared with $70.3 million, or $2.82 per diluted share, for the nine months ended December 31, 2022.

Excluding restructuring and impairment costs and certain other non-recurring items, as detailed in Other Items below, net income increased by $12.6 million and diluted earnings per share increased by $0.49 for the nine months ended December 31, 2023, compared to the same period in the prior fiscal year.

Operating income for the nine months ended December 31, 2023, was $153.8 million, an increase of $25.1 million, compared to operating income of $128.7 million for the nine months ended December 31, 2022.

Adjusted operating income, detailed in Other Items below, was $157.3 million, an increase of $28.7 million, as compared to the same period in fiscal year 2023.

Net income for the quarter ended December 31, 2023, was $53.2 million, or $2.12 per diluted share, compared with $41.7 million, or $1.67 per diluted share, for the quarter ended December 31, 2022.

Excluding restructuring and impairment costs and certain other non-recurring items, as detailed in Other Items below, net income and diluted earnings per share increased by $12.4 million and $0.49, respectively, for the quarter ended December 31, 2023, compared to the quarter ended December 31, 2022.

Operating income for the quarter ended December 31, 2023, was $87.5 million, an increase of $9.9 million, compared to operating income of $77.5 million for the quarter ended December 31, 2022.

Adjusted operating income, detailed in Other Items

below, was $88.4 million for the third quarter of fiscal year 2024, an increase of $10.9 million, as compared to adjusted operating income of $77.5 million for the third quarter of fiscal year 2023.

Consolidated revenues increased by $101.9 million to $2.0 billion and by $26.5 million to $821.5 million, respectively, for the nine months and quarter ended December 31, 2023, compared to the same periods in fiscal year 2023.

These changes were largely due to higher tobacco sales prices, which more than offset lower tobacco sales volumes, as well as an improved 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

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.

Revenues for the Tobacco Operations segment were $1.7 billion for the nine months ended December 31, 2023, and $743.9 million for the quarter ended December 31, 2023, up $99.8 million and $19.3 million, respectively, compared to the same periods in the prior fiscal year.

These increases were due to higher tobacco sales prices and a favorable product mix, partially offset by lower tobacco sales volumes.

Operating income for the Tobacco Operations segment increased by $29.9 million to $148.9 million and by $10.5 million to $87.6 million, respectively, for the nine months and quarter ended December 31, 2023, compared with the nine months and quarter ended December 31, 2022.

Tobacco Operations segment operating income was up largely on higher prices and a more favorable product mix, partially offset by lower tobacco sales volumes.

In the nine months and quarter ended December 31, 2022, a large amount of lower margin carryover tobacco crops was shipped.

Larger African crops positively impacted the results for the Tobacco Operations segment in both the nine months and quarter ended December 31, 2023.

Carryover crop shipments from South America were significantly lower in the nine months and quarter ended December 31, 2023, compared to the same periods in fiscal year 2023.

In the nine months ended December 31, 2023, our operations in Europe and in Asia had improved product mixes, compared to the nine months ended December 31, 2022.

Equity earnings from our oriental tobacco joint venture were down in the nine months ended December 31, 2023, on unfavorable foreign currency comparisons and higher interest expenses, but increased in the quarter ended December 31, 2023, on an improved product mix, compared to the same periods in the prior fiscal year.

Selling, general, and administrative expenses for the Tobacco Operations segment were higher in the nine months and quarter ended December 31, 2023, compared to the nine months and quarter ended December 31, 2022, primarily on higher compensation and benefit costs, as well as unfavorable foreign currency comparisons.

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.

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.

Revenues for the Ingredients Operations segment of $235.2 million for the nine months ended December 31, 2023, and $77.6 million for the quarter ended December 31, 2023, were up $2.1 million and $7.1 million, respectively, compared to the same periods in the prior fiscal year, as the sale of new products more than offset the impact of lower sales prices on core products.

Operating income for the Ingredients Operations segment was $5.0 million and $2.2 million, respectively, for the nine months and quarter ended December 31, 2023, compared to $9.9 million and $0.8 million, respectively for the nine months and quarter ended December 31, 2022.

In the quarter ended December 31, 2023, operating income for our Ingredients Operations segment was in line with results for the same quarter in the prior fiscal year, as incremental revenue and margin from sale of new products offset the effects of market challenges for our core products and higher expenses resulting from the investments that we are making to position the segment for future growth.

Operating income for the nine months ended December 31, 2023, was lower as compared to the same period in the prior year, mainly as the result of lower operating income in the first quarter of the current fiscal year, as compared to the same period in the prior fiscal year.

Results for the first quarter of fiscal 2024 were negatively impacted by customer inventory recalibrations.

Other factors that contributed to lower segment operating income for the nine months ended December 31, 2023, as compared to the same period in the prior fiscal year, include lower new crop raw material prices, inventory write-downs, and higher selling, general, and administrative expenses, partially offset by margins from the sale of new products.

In the nine months and quarter ended December 31, 2023, selling, general, and administrative expenses were higher, compared to the same periods in the prior fiscal year, due to higher compensation and other costs related to investment in expanding sales and product development capabilities as well as higher corporate overhead allocations, partially offset by deferred compensation expense incurred during the third quarter of fiscal year 2023.

Cost of goods sold in the nine months and quarter ended December 31, 2023, increased by 3% to $1.6 billion and by 1% to $654.6 million, respectively, compared with the nine months and quarter ended December 31, 2022, largely due to higher green tobacco costs.

Selling, general, and administrative costs for the nine months ended December 31, 2023, increased by $21.0 million to $227.8 million, compared to the nine months ended December 31, 2022, on higher compensation costs.

Selling, general, and administrative costs for the quarter ended December 31, 2023, increased by $10.6 million to $78.6 million, compared to the same period in the prior fiscal year, largely on higher compensation costs and unfavorable foreign currency comparisons.

Interest expense for the nine months and quarter ended December 31, 2023, increased by $14.9 million to $48.1 million and by $1.3 million to $15.5 million, respectively, compared to the same periods in the prior fiscal year, on increased costs from higher interest rates.

Interest income for the nine months and quarter ended December 31, 2023, increased by $3.6 million to $4.0 million and by $1.6 million to $1.7 million, respectively, compared to the same periods in the prior fiscal year, primarily on interest income associated with favorably resolved tax judgements at a subsidiary as well as higher interest rates on cash deposits.

For the nine months and quarter ended December 31, 2023, our effective tax rate on pre-tax income was 19.8% and 19.1%, respectively.

For the nine months and quarter ended December 31, 2022, our effective tax rate on pre-tax income was 19.3% and 23.2%, respectively.

The consolidated effective income tax rate for the nine months ended December 31, 2022, was affected by the sale of the 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 nine months ended December 31, 2022, would have been approximately 22.0%.

Additionally, the sale of the idled Tanzania operations resulted in a $1.8 million reduction to consolidated interest expense related to an uncertain tax position.

Reconciliation of Certain Non-GAAP Financial Measures

1 unchanged sentence

Adjusted Operating Income Reconciliation

Three Months Ended September 30, Six Months Ended September 30,

Three Months Ended December 31, Nine Months Ended December 31,

(in thousands) 2023 2022 2023 2022

5 unchanged sentences

(in thousands except for per share amounts)

Three Months Ended September 30, Six Months Ended September 30,

Three Months Ended December 31, Nine Months Ended December 31,

2023 2022 2023 2022

12 unchanged sentences

(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.

Sustainability

Universal is taking important steps to advance its sustainability agenda as Universal continues to monitor and address the environmental and social impacts of its businesses.

In December 2023, we published our 2023 Sustainability Report which details efforts we have taken to promote the sustainability of our operations and contribute to global sustainability goals.

The report focuses on our primary sustainability topics as well as our environmental, social, and supply chain goals.

We also announced in January 2024 an investment in a solar project that is intended to address emissions from 100 percent of Universal’s annual purchased electricity demand in the United States.

We believe that this is a meaningful step towards meeting our science-based environmental target to reduce operational greenhouse gases emissions by 30 percent by 2030.

Liquidity and Capital Resources

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.

After significant seasonal working capital investment in our tobacco operations in the first half of the fiscal year, we generally see tobacco inventory levels and other working capital items decrease in the second half of our fiscal year as tobacco crops in Africa, South America, and North America are being shipped.

We saw the beginning of the seasonal contraction in our working capital requirements by the end of the third quarter of fiscal year 2024.

We funded our working capital needs in the nine

months ended December 31, 2023, using a combination of cash on hand, short-term borrowings, customer advances, and operating cash flows.

Our liquidity and operating capital resource requirements are predominantly short term in nature and primarily relate to working capital for tobacco crop purchases.

4 unchanged sentences

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.

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.

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.

Net cash used by our operations was $46.7 million during the nine months ended December 31, 2023.

That amount was $137.1 million lower 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.

Tobacco inventory levels increased by $175.2 million from March 31, 2023 levels to $1.0 billion at December 31, 2023, on seasonal leaf purchases of larger tobacco crops.

Tobacco inventory levels were $142.7 million above December 31, 2022 levels, primarily on 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.

As of December 31, 2023, our uncommitted tobacco inventories were $75.8 million, or less than 8% of total tobacco inventory, compared to $91.1 million, or about 11% of our tobacco inventory as of March 31, 2023, and $56.0 million, or less than 7% of our tobacco inventory as of December 31, 2022.

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.

Our balance sheet accounts reflected seasonal patterns in the nine months ended December 31, 2023, on deliveries of tobacco crops by farmers in South America, Africa, and North America.

Compared to March 31, 2023 levels, as of December 31, 2023, accounts receivable were up $33.2 million, accounts receivable—unconsolidated affiliates were up $20.9 million from March 31, 2023 levels, on a larger crop size, and notes payable and overdrafts were up $169.8 million, on increased short-term borrowings to fund seasonal working capital needs.

Compared to December 31, 2022 levels, as of December 31, 2023, accounts receivable were down $101.3 million, largely due to the timing of tobacco crop shipments and customer payments, accounts receivable—unconsolidated affiliates were up $27.2 million, on a larger crop size.

Investing Activities

6 unchanged sentences

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.

During the nine months ended December 31, 2023 and 2022, we invested about $47.7 million and $39.4 million, respectively, in our property, plant and equipment.

Depreciation expense was approximately $35.4 million and $33.2 million for the nine months ended December 31, 2023 and 2022, respectively.

Typically, our capital expenditures for maintenance projects are less than $30 million per fiscal year.

6 unchanged sentences

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.

During the three months ended December 31, 2023, we did not purchase any shares of common stock.

As of December 31, 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

1 unchanged sentence

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.

Net debt as a percentage of net capitalization was approximately 40% at December 31, 2023, flat with the December 31, 2022 level of approximately 40%, and up from the March 31, 2023 level of approximately 35%.

As of December 31, 2023, we had $74.1 million in cash and cash equivalents, our short-term debt totaled $365.3 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 December 31, 2023, we had $335 million available under the committed revolving credit facility that will mature in December 2027, and we had about $175 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.

2 unchanged sentences

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.

At December 31, 2023, the fair value of our outstanding interest rate swap agreements was an asset 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 a portion of our variable-rate term loans.

3 unchanged sentences

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.

At December 31, 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 liability of approximately $1.2 million at December 31, 2023.

Critical Accounting Estimates

3 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis