UNIVERSAL CORP /VA/ 10-Q

ITEM 1. FINANCIAL STATEMENTS UNIVERSAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (in thousands, except share and per share data) Three Months Ended December 31, Nine Months Ended December 31, 2023 2022 2023 2022 (Unaudited) (Unaudited) Sales and other operating revenues $ 821,507 $ 795,039 $ 1,977,713 $ 1,875,845 Costs and expenses Cost of goods sold 654,556 649,539 1,592,533 1,540,368 Selling, general and administrative expenses 78,563 67,974 227,846 206,799 Restructuring and impairment costs 924 — 3,523 — Operating income 87,464 77,526 153,811 128,678 Equity in pretax earnings (loss) of unconsolidated affiliates 1,384 345 ( 3,495 ) 208 Other non-operating income (expense) 726 ( 69 ) 2,179 ( 208 ) Interest income 1,720 77 4,038 407 Interest expense 15,525 14,265 48,121 33,259 Income before income taxes and other items 75,769 63,614 108,412 95,826 Income taxes 14,482 12,253 21,498 22,258 Net income 61,287 51,361 86,914 73,568 Less: net loss (income) attributable to noncontrolling interests in subsidiaries ( 8,071 ) ( 9,701 ) ( 7,634 ) ( 3,223 ) Net income attributable to Universal Corporation $ 53,216 $ 41,660 $ 79,280 $ 70,345 Earnings per share: Basic $ 2.14 $ 1.68 $ 3.19 $ 2.84 Diluted $ 2.12 $ 1.67 $ 3.17 $ 2.82 Weighted average common shares outstanding: Basic 24,849,498 24,770,294 24,853,774 24,772,827 Diluted 25,055,829 24,928,426 25,017,167 24,934,447 Total comprehensive income (loss), net of income taxes $ 55,884 $ 64,082 $ 83,638 $ 80,377 Less: comprehensive (income) loss attributable to noncontrolling interests ( 8,255 ) ( 10,071 ) ( 7,555 ) ( 2,976 ) Comprehensive income (loss) attributable to Universal Corporation $ 47,629 $ 54,011 $ 76,083 $ 77,401 Dividends declared per common share $ 0.80 $ 0.79 $ 2.40 $ 2.37 See accompanying notes. 3 UNIVERSAL CORPORATION CONSOLIDATED BALANCE SHEETS (in thousands of dollars) December 31, December 31, March 31, 2023 2022 2023 (Unaudited) (Unaudited) ASSETS Current assets Cash and cash equivalents $ 74,102 $ 71,283 $ 64,690 Accounts receivable, net 435,306 536,650 402,073 Advances to suppliers, net 159,481 163,237 170,801 Accounts receivable—unconsolidated affiliates 33,109 5,920 12,210 Inventories—at lower of cost or net realizable value: Tobacco 1,009,030 866,380 833,876 Other 196,246 211,561 202,907 Prepaid income taxes 18,304 17,363 16,493 Other current assets 88,051 79,495 99,840 Total current assets 2,013,629 1,951,889 1,802,890 Property, plant and equipment Land 26,516 24,142 24,926 Buildings 319,740 305,215 311,138 Machinery and equipment 720,816 679,970 689,220 1,067,072 1,009,327 1,025,284 Less accumulated depreciation ( 706,642 ) ( 663,333 ) ( 674,122 ) 360,430 345,994 351,162 Other assets Operating lease right-of-use assets 34,913 42,337 40,505 Goodwill, net 213,891 213,881 213,922 Other intangibles, net 71,697 82,917 80,101 Investments in unconsolidated affiliates 75,335 72,565 76,184 Deferred income taxes 14,855 10,005 13,091 Pension asset 11,586 12,740 9,984 Other noncurrent assets 37,538 32,575 51,343 459,815 467,020 485,130 Total assets $ 2,833,874 $ 2,764,903 $ 2,639,182 See accompanying notes. 4 UNIVERSAL CORPORATION CONSOLIDATED BALANCE SHEETS (in thousands of dollars) December 31, December 31, March 31, 2023 2022 2023 (Unaudited) (Unaudited) LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities Notes payable and overdrafts $ 365,327 $ 348,073 $ 195,564 Accounts payable 89,301 92,305 83,213 Accounts payable—unconsolidated affiliates 122 57 5,830 Customer advances and deposits 19,620 5,365 3,061 Accrued compensation 27,967 21,670 33,108 Income taxes payable 5,499 3,715 3,274 Current portion of operating lease liabilities 10,403 11,160 11,404 Accrued expenses and other current liabilities 106,635 115,882 106,533 Current portion of long-term debt — — — Total current liabilities 624,874 598,227 441,987 Long-term debt 617,225 616,750 616,809 Pensions and other postretirement benefits 43,301 50,773 42,769 Long-term operating lease liabilities 22,050 27,030 25,540 Other long-term liabilities 26,609 22,797 32,512 Deferred income taxes 41,165 48,584 42,613 Total liabilities 1,375,224 1,364,161 1,202,230 Shareholders’ equity Universal Corporation: Preferred stock: Series A Junior Participating Preferred Stock, no par value, 500,000 shares authorized, none issued or outstanding — — — Common stock, no par value, 100,000,000 shares authorized 24,559,181 shares issued and outstanding at December 31, 2023 ( 24,555,361 at December 31, 2022 and 24,555,361 at March 31, 2023) 344,467 335,160 337,247 Retained earnings 1,152,863 1,102,887 1,136,898 Accumulated other comprehensive loss ( 80,254 ) ( 77,255 ) ( 77,057 ) Total Universal Corporation shareholders' equity 1,417,076 1,360,792 1,397,088 Noncontrolling interests in subsidiaries 41,574 39,950 39,864 Total shareholders' equity 1,458,650 1,400,742 1,436,952 Total liabilities and shareholders' equity $ 2,833,874 $ 2,764,903 $ 2,639,182 See accompanying notes. 5 UNIVERSAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands of dollars) Nine Months Ended December 31, 2023 2022 (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 86,914 $ 73,568 Adjustments to reconcile net income (loss) to net cash used by operating activities: Depreciation and amortization 43,843 42,844 Net provision for losses (recoveries) on advances to suppliers 9,950 6,127 Inventory writedowns 4,813 10,782 Stock-based compensation expense 10,625 6,630 Foreign currency remeasurement (gain) loss, net 3,227 ( 1,335 ) Foreign currency exchange contracts 2,655 14,600 Deferred income taxes ( 2,078 ) 470 Equity in net loss (income) of unconsolidated affiliates, net of dividends 2,055 5,717 Restructuring and impairment costs 3,523 — Restructuring payments ( 999 ) — Other, net 734 ( 4,967 ) Changes in operating assets and liabilities, net: Accounts and notes receivable ( 61,434 ) ( 186,039 ) Inventories ( 169,129 ) ( 84,250 ) Other assets 16,539 10,170 Accounts payable ( 1,422 ) ( 80,355 ) Accrued expenses and other current liabilities ( 13,356 ) 17,801 Income taxes 19 ( 10,191 ) Customer advances and deposits 16,784 ( 5,422 ) Net cash provided (used) by operating activities ( 46,737 ) ( 183,850 ) CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property, plant and equipment ( 47,732 ) ( 39,430 ) Proceeds from sale of business, net of cash held by the business 3,757 3,245 Proceeds from sale of property, plant and equipment 1,932 1,634 Net cash used by investing activities ( 42,043 ) ( 34,551 ) CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of short-term debt, net 170,433 166,109 Issuance of long-term debt — 123,481 Repayment of long-term debt — ( 23,481 ) Dividends paid to noncontrolling interests ( 5,845 ) ( 6,825 ) Repurchase of common stock ( 4,744 ) ( 3,448 ) Dividends paid on common stock ( 58,755 ) ( 57,993 ) Proceeds from termination of interest rate swap agreements — 11,786 Other ( 2,973 ) ( 6,337 ) Net cash provided (used) by financing activities 98,116 203,292 Effect of exchange rate changes on cash, restricted cash and cash equivalents 76 ( 1,256 ) Net increase (decrease) in cash, restricted cash and cash equivalents 9,412 ( 16,365 ) Cash, restricted cash and cash equivalents at beginning of year 64,690 87,648 Cash, restricted cash and cash equivalents at end of period $ 74,102 $ 71,283 See accompanying notes. 6 UNIVERSAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. BASIS OF PRESENTATION Universal Corporation, which together with its subsidiaries is referred to herein as “Universal” or the “Company,” is a global business-to-business agri-products supplier to consumer product manufacturers. The Company is the leading global leaf tobacco supplier and provides high-quality plant-based ingredients to food and beverage end markets. Because of the seasonal nature of the Company’s business, the results of operations for any fiscal quarter will not necessarily be indicative of results to be expected for other quarters or a full fiscal year. All adjustments necessary to state fairly the results for the period have been included and were of a normal recurring nature. This Form 10-Q should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2023 (the “2023 Annual Report on Form 10-K”). Accounting Pronouncements to be Adopted in Future Years In November 2023, the FASB issued Accounting Standards Update No. 2023-07, "Segment Reporting (Topic 280) - Improvements to Reportable Segment Disclosures" ("ASU 2023-07"). ASU 2023-07 requires additional disclosures about profitability measures utilized by the chief operating decision maker and significant segment expenses. ASU 2023-07 also requires all annual disclosures regarding profit or loss and assets to be included in interim disclosures. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023 and for interim periods in fiscal years beginning after December 15, 2024, although early adoption is permitted. The Company is currently evaluating the impact of adopting this standard on its operating segments disclosures. NOTE 2. RESTRUCTURING AND IMPAIRMENT COSTS Universal continually reviews its business for opportunities to realize efficiencies, reduce costs, and realign its operations in response to business changes. Restructuring and impairment costs are periodically incurred in connection with those activities. There were no restructuring and impairment costs incurred for the three and nine months ended December 31, 2022. Tobacco Operations During the nine months ended December 31, 2023, the Company began restructuring operations at its Global Labs Services ("GLS") facility in Wilson, NC. GLS provides testing for crop protection agents and tobacco constituents in seed, leaf, and finished products, including e-cigarette liquids and vapors, and has capabilities for testing non-tobacco products. As a result of the restructuring of the GLS operations, the Company incurred $ 1.8 million of restructuring and impairment costs for the nine months ended December 31, 2023. During the nine months ended December 31, 2023, the Company also incurred $ 1.7 million of termination and impairment costs in other areas of the Tobacco Operations segment. NOTE 3. REVENUE FROM CONTRACTS WITH CUSTOMERS The majority of the Company’s consolidated revenue consists of sales of processed leaf tobacco to customers. The Company also earns revenue from processing leaf tobacco owned by customers and from various other services provided to customers. Additionally, the Company has fruit and vegetable processing operations, as well as flavor and extract services that provide customers with a range of ingredient products. Payment terms with customers vary depending on customer creditworthiness, product types, services provided, and other factors. Contract durations and payment terms for all revenue categories generally do not exceed one year. Therefore, the Company has applied a practical expedient to not adjust the transaction price for the effects of financing components, as the Company expects that the period from the time the revenue for a transaction is recognized to the time the customer pays for the related good or service transferred will be one year or less. Shipping and handling costs under sales contracts with customers are treated as fulfillment costs and included in the transaction price. Below is a description of the major revenue-generating categories from contracts with customers. Tobacco Sales The majority of the Company’s business involves purchasing leaf tobacco from farmers in the origins where it is grown, processing and packing the tobacco in its factories, and then transferring ownership and control of the tobacco to customers. On a much smaller basis, the Company also sources processed tobacco from third-party suppliers for resale to customers. The contracts 7 for tobacco sales with customers create a performance obligation to transfer tobacco to the customer. Transaction prices for the sale of tobaccos are primarily based on negotiated fixed prices, but the Company does have a small number of cost-plus contracts with certain customers. Cost-plus arrangements provide the Company reimbursement of the cost to purchase and process the tobacco, plus a contractually agreed-upon profit margin. The Company utilizes the most likely amount methodology under the accounting guidance to recognize revenue for cost-plus arrangements with customers. Taxes assessed by government authorities on the sale of leaf tobacco products are excluded from the transaction price. At the point in time that the customer obtains control over the tobacco, which is typically aligned with physical shipment under the contractual terms with the customer, the Company completes its performance obligation and recognizes the revenue for the sale. Ingredients Sales The Company has diversified operations through the acquisition of established companies that offer customers a wide range of both liquid and dehydrated fruit and vegetable ingredient products, flavors, and extracts. These operations procure raw materials from domestic and international growers and suppliers and through a variety of processing steps including sorting, cleaning, pressing, mixing, extracting, and blending to manufacture finished goods utilized in both pet food and human food and beverages. The contracts for ingredients with customers create a performance obligation to transfer the manufactured finished goods to the customer. Transaction prices for the sale of ingredients are primarily based on negotiated fixed prices. At the point in time that the customer obtains control over the finished product, which is typically aligned with physical shipment under the contractual terms with the customer, the Company completes its performance obligation and recognizes the revenue for the sale. Processing Revenue Processing and packing of customer-owned tobacco and ingredients is a short-duration process. Processing charges are primarily based on negotiated fixed prices per unit of weight processed. Under normal operating conditions, customer-owned raw materials that are placed into the production line exits as processed and packed product and is then later transported to customer-designated transfer locations. The revenue for these services is recognized when the performance obligation is satisfied, which is generally when processing is completed. The Company’s operating history and contract analyses indicate that customer requirements for processed tobacco and ingredients products are consistently met upon completion of processing. Other Sales and Revenue from Contracts with Customers From time to time, the Company enters into various arrangements with customers to provide other value-added services that may include blending, chemical and physical testing of products, storage, and tobacco cutting services for select manufacturers. These other arrangements and operations are a much smaller portion of the Company’s business, and are separate and distinct contractual agreements from the Company’s tobacco and ingredients sales or third-party processing arrangements with customers. The transaction prices and timing of revenue recognition of these items are determined by the specifics of each contract. Disaggregation of Revenue from Contracts with Customers The following table disaggregates the Company’s revenue by significant revenue-generating category: Three Months Ended December 31, Nine Months Ended December 31, (in thousands of dollars) 2023 2022 2023 2022 Tobacco sales $ 694,215 $ 672,002 $ 1,635,105 $ 1,536,898 Ingredients sales 72,254 65,824 221,309 219,429 Processing revenue 20,448 21,266 58,342 54,796 Other sales and revenue from contracts with customers 26,216 31,051 50,554 58,146 Total revenue from contracts with customers 813,133 790,143 1,965,310 1,869,269 Other operating sales and revenues 8,374 4,896 12,403 6,576 Consolidated sales and other operating revenues $ 821,507 $ 795,039 $ 1,977,713 $ 1,875,845 Other operating sales and revenues consists principally of interest on advances to suppliers and dividend payments from deconsolidated affiliates. 8 NOTE 4. OTHER CONTINGENT LIABILITIES AND OTHER MATTERS Other Contingent Liabilities Other Contingent Liabilities (Letters of credit) The Company had other contingent liabilities totaling approximately $ 1 million at December 31, 2023, primarily related to outstanding letters of credit. Value-Added Tax Assessments in Brazil As further discussed below, the Company’s local operating subsidiaries pay significant amounts of value-added tax (“VAT”) in connection with their operations, which generate tax credits that they normally are entitled to recover through offset, refund, or sale to third parties. In Brazil, VAT is assessed at the state level when green tobacco is transferred between states. The Company’s operating subsidiary there pays VAT when tobaccos grown in the states of Santa Catarina and Parana are transferred to its factory in the state of Rio Grande do Sul for processing. The subsidiary has received assessments for additional VAT plus interest and penalties from tax authorities for the states of Santa Catarina and Parana based on audits of the subsidiary’s VAT filings for specified periods. In June 2011, tax authorities for the state of Santa Catarina issued assessments for tax, interest, and penalties for periods from 2006 through 2009 totaling approximately $ 10 million. In September 2014, tax authorities for the state of Parana issued an assessment for tax, interest, and penalties for periods from 2009 through 2014 totaling approximately $ 11 million. Those amounts are based on the exchange rate for the Brazilian currency at December 31, 2023. Management of the operating subsidiary and outside counsel believe that errors were made by the tax authorities for both states in determining all or significant portions of these assessments and that various defenses support the subsidiary’s positions. With respect to the Santa Catarina assessments, the subsidiary took appropriate steps to contest the full amount of the claims. As of December 31, 2023, a portion of the subsidiary’s arguments had been accepted, but there has not been any further resolution for the matter. The assessment, together with the related accumulated interest through the end of the current reporting period, totaled approximately $ 11 million (at the December 31, 2023 exchange rate). The subsidiary is continuing to contest the full remaining amount of the assessment. While the range of reasonably possible loss is zero up to the full $ 11 million remaining assessment with interest, based on the strength of the subsidiary’s defenses, no loss within that range is considered probable at this time and no liability has been recorded at December 31, 2023. With respect to the Parana assessment, management of the subsidiary and outside counsel challenged the full amount of the claim. A significant portion of the Parana assessment was based on positions taken by the tax authorities that management and outside counsel believe deviate significantly from the underlying statutes and relevant case law. In addition, under the law, the subsidiary’s tax filings for certain periods covered in the assessment were no longer open to any challenge by the tax authorities. In December 2015, the Parana tax authorities withdrew the initial claim and subsequently issued a new assessment covering the same tax periods, reflecting a substantial reduction from the original assessment. In fiscal year 2020, the Parana tax authorities acknowledged the statute of limitations related to claims prior to December 2010 had expired and reduced the assessment to $ 3 million (at the December 31, 2023 exchange rate). Notwithstanding the reduced assessment, management and outside counsel continue to believe that the new assessment is not supported by the underlying statutes and relevant case law and have challenged the full amount of the claim. The range of reasonably possible loss is considered to be zero up to the full $ 3 million assessment. However, based on the strength of the subsidiary's defenses, no loss within that range is considered probable at this time and no liability has been recorded at December 31, 2023. In both states, the process for reaching a final resolution to the assessments is expected to be lengthy, and management is not currently able to predict when either case will be concluded. Should the subsidiary ultimately be required to pay any tax, interest, or penalties in either case, the portion paid for tax would generate VAT credits that the subsidiary may be able to recover. Other Legal and Tax Matters Various subsidiaries of the Company are involved in litigation and tax examinations incidental to their business activities. While the outcome of these matters cannot be predicted with certainty, management is vigorously defending the matters and does not currently expect that any of them will have a material adverse effect on the Company’s business or financial position. However, should one or more of these matters be resolved in a manner adverse to management’s current expectation, the effect on the Company’s results of operations for a particular fiscal reporting period could be material. 9 Advances to Suppliers In many sourcing origins where the Company operates, it provides agronomy services and seasonal advances of seed, seedlings, fertilizer, and other supplies to tobacco farmers for crop production, or makes seasonal cash advances to farmers for the procurement of those inputs. These advances are short term, are repaid upon delivery of tobacco to the Company, and are reported in advances to suppliers in the consolidated balance sheets. In several origins, the Company has made long-term advances to tobacco farmers to finance curing barns and other farm infrastructure. In some years, due to low crop yields and other factors, individual farmers may not deliver sufficient volumes of tobacco to fully repay their seasonal advances, and the Company may extend repayment of those advances into future crop years. The long-term portion of advances is included in other noncurrent assets in the consolidated balance sheets. Both the current and the long-term portions of advances to suppliers are reported net of allowances recorded when the Company determines that amounts outstanding are not likely to be collected. Short-term and long-term advances to suppliers totaled $ 186 million at December 31, 2023 and 2022, and $ 199 million at March 31, 2023. The related valuation allowances totaled $ 25 million at December 31, 2023, $ 21 million at December 31, 2022, and $ 24 million at March 31, 2023, and were estimated based on the Company’s historical loss information and crop projections. The allowances were increased by net provisions of approximately $ 10.0 million and $ 6.1 million in the nine-month periods ended December 31, 2023 and 2022, respectively. These net provisions and recoveries are included in selling, general, and administrative expenses in the consolidated statements of income. Interest on advances is recognized in earnings upon the farmers’ delivery of tobacco in payment of principal and interest. Recoverable Value-Added Tax Credits In many foreign countries, the Company’s local operating subsidiaries pay significant amounts of VAT on purchases of unprocessed and processed tobacco, crop inputs, packing materials, and various other goods and services. In some countries, VAT is a national tax, and in other countries it is assessed at the state level. Items subject to VAT vary from jurisdiction to jurisdiction, as do the rates at which the tax is assessed. When tobacco is sold to customers in the country of origin, the operating subsidiaries generally collect VAT on those sales. The subsidiaries are normally permitted to offset their VAT payments against the collections and remit only the incremental VAT collections to the tax authorities. When tobacco is sold for export, VAT is normally not assessed. In countries where tobacco sales are predominately for export markets, VAT collections generated on downstream sales are often not sufficient to fully offset the subsidiaries’ VAT payments. In those situations, unused VAT credits can accumulate. Some jurisdictions have procedures that allow companies to apply for refunds of unused VAT credits from the tax authorities, but the refund process often takes an extended period of time and it is not uncommon for refund applications to be challenged or rejected in part on technical grounds. Other jurisdictions may permit companies to sell or transfer unused VAT credits to third parties in private transactions, although approval for such transactions must normally be obtained from the tax authorities, limits on the amounts that can be transferred may be imposed, and the proceeds realized may be heavily discounted from the face value of the credits. Due to these factors, local operating subsidiaries in some countries can accumulate significant balances of VAT credits over time. The Company reviews these balances on a regular basis and records valuation allowances on the credits to reflect amounts that are not expected to be recovered, as well as discounts anticipated on credits that are expected to be sold or transferred. At December 31, 2023, the aggregate balance of recoverable tax credits held by the Company’s subsidiaries totaled approximately $ 63 million ($ 66 million at December 31, 2022, and $ 64 million at March 31, 2023), and the related valuation allowances totaled approximately $ 21 million ($ 24 million at December 31, 2022, and $ 22 million at March 31, 2023). The net balances are reported in other current assets and other noncurrent assets in the consolidated balance sheets. Shelf Registration and Stock Repurchase Plan In November 2023 the Company filed an undenominated automatic universal shelf registration statement with the U.S. Securities and Exchange Commission to provide for the future issuance of an undefined amount of securities as determined by the Company and offered in one or more prospectus supplements prior to issuance. A stock repurchase plan, which was authorized by the Company's Board of Directors, became effective and was publicly announced on November 2, 2022. This stock repurchase plan authorized the purchase of up to $ 100 million in common and/or preferred stock in open market or privately negotiated transactions through November 15, 2024 or when funds for the program have been exhausted, subject to market conditions and other factors. The program had $ 95 million of remaining capacity for repurchases of common stock at December 31, 2023. 10 Sale of Idled Tanzania Operations During the nine months ended December 31, 2022, the Company entered into a sales agreement to sell all outstanding shares of common stock, which included all properties, of the idled companies in Tanzania for $ 8.5 million. Restricted Cash Release of Deferred Proceeds from Acquisition of Silva International, Inc. During the three months ended December 31, 2022, the Company released $ 6.0 million, held in a third-party escrow account, to one of Silva's selling shareholders. The amounts were held in escrow since the date of acquisition, as the employee had a post-combination service requirement with forfeitable payment provisions. Therefore, under ASC Topic 805, "Business Combinations," the amounts held in escrow were treated as a contingent consideration arrangement and expensed as compensation expense in selling, general, and administrative expense on the consolidated statements of income. As of December 31, 2022, all amounts had been released to the selling shareholder, who remains employed by the Company, and expensed in the Company's consolidated statements of income. NOTE 5. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share: Three Months Ended December 31, Nine Months Ended December 31, (in thousands, except share and per share data) 2023 2022 2023 2022 Basic Earnings Per Share Numerator for basic earnings per share Net income attributable to Universal Corporation $ 53,216 $ 41,660 $ 79,280 $ 70,345 Denominator for basic earnings per share Weighted average shares outstanding 24,849,498 24,770,294 24,853,774 24,772,827 Basic earnings per share $ 2.14 $ 1.68 $ 3.19 $ 2.84 Diluted Earnings Per Share Numerator for diluted earnings per share Net income attributable to Universal Corporation $ 53,216 $ 41,660 $ 79,280 $ 70,345 Denominator for diluted earnings per share: Weighted average shares outstanding 24,849,498 24,770,294 24,853,774 24,772,827 Effect of dilutive securities Employee and outside director share-based awards 206,331 158,132 163,393 161,620 Denominator for diluted earnings per share 25,055,829 24,928,426 25,017,167 24,934,447 Diluted earnings per share $ 2.12 $ 1.67 $ 3.17 $ 2.82 NOTE 6. INCOME TAXES The Company operates in the United States and many foreign countries and is subject to the tax laws of many jurisdictions. Changes in tax laws or the interpretation of tax laws can affect the Company’s earnings, as can the resolution of pending and contested tax issues. The Company's consolidated effective income tax rate is affected by various factors, including the mix and timing of domestic and foreign earnings, discrete items, and the effect of exchange rate changes on taxes. Three and nine months ended December 31, 2023 The Company's consolidated effective income tax rate for the three and nine months ended December 31, 2023 was 19.1 % and 19.8 %, respectively. 11 Three and nine months ended December 31, 2022 The Company's consolidated effective income tax rate for the three and nine months ended December 31, 2022 was 19.3 % and 23.2 %, respectively. In the nine months ended December 31, 2022, the Company sold its idled Tanzania operations and recognized $ 1.1 million of 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 Company's idled Tanzania operations resulted in a $ 1.8 million reduction to consolidated interest expense related to the removal of an uncertain tax position for the nine months ended December 31, 2022. NOTE 7. GOODWILL AND OTHER INTANGIBLES The Company's changes in goodwill at December 31, 2023 and 2022 consisted of the following: (in thousands of dollars) Nine Months Ended December 31, 2023 2022 Balance at beginning of fiscal year $ 213,922 $ 213,998 Foreign currency translation adjustment ( 31 ) ( 117 ) Balance at end of period $ 213,891 $ 213,881 The Company's intangible assets primarily consist of capitalized customer-related intangibles, trade names, proprietary developed technology and noncompetition agreements. The Company's intangible assets subject to amortization consisted of the following at December 31, 2023 and 2022 and at March 31, 2023: (in thousands, except useful life) December 31, 2023 Useful Life (years) Gross Carrying Value Accumulated Amortization Net Carrying Value Customer relationships 11 — 13 $ 86,500 $ ( 23,491 ) $ 63,009 Trade names 5 11,100 ( 7,710 ) 3,390 Developed technology 13 9,300 ( 5,579 ) 3,721 Noncompetition agreements 4 — 5 4,000 ( 2,488 ) 1,512 Other 5 792 ( 727 ) 65 Total intangible assets $ 111,692 $ ( 39,995 ) $ 71,697 December 31, 2022 Useful Life (years) Gross Carrying Value Accumulated Amortization Net Carrying Value Customer relationships 11 — 13 $ 86,500 $ ( 15,760 ) $ 70,740 Trade names 5 11,100 ( 5,490 ) 5,610 Developed technology 3 — 13 9,300 ( 5,233 ) 4,067 Noncompetition agreements 4 — 5 4,000 ( 1,537 ) 2,463 Other 5 707 ( 670 ) 37 Total intangible assets $ 111,607 $ ( 28,690 ) $ 82,917 12 March 31, 2023 Useful Life (years) Gross Carrying Value Accumulated Amortization Net Carrying Value Customer relationships 11 — 13 $ 86,500 $ ( 17,693 ) $ 68,807 Trade names 5 11,100 ( 6,045 ) 5,055 Developed technology 13 9,300 ( 5,319 ) 3,981 Noncompetition agreements 4 — 5 4,000 ( 1,775 ) 2,225 Other 5 721 ( 688 ) 33 Total intangible assets $ 111,621 $ ( 31,520 ) $ 80,101 Intangible assets are amortized on a straight-line basis over the asset's estimated useful economic life, as noted above. The Company's amortization expense for intangible assets for the three and nine months ended December 31, 2023 and 2022 was: (in thousands of dollars) Three Months Ended December 31, Nine Months Ended December 31, 2023 2022 2023 2022 Amortization Expense $ 2,862 $ 3,280 $ 8,475 $ 9,625 Amortization expense for the developed technology intangible asset is recorded in cost of goods sold in the consolidated statements of income. The amortization expense for other intangible assets is recorded in selling, general, and administrative expenses in the consolidated statements of income. As of December 31, 2023, the expected future amortization expense for intangible assets is as follows: Fiscal Year (in thousands of dollars) 2024 (excluding the nine months ended December 31, 2023) $ 2,825 2025 11,083 2026 9,232 2027 8,077 2028 and thereafter 40,480 Total expected future amortization expense $ 71,697 NOTE 8. DERIVATIVES AND HEDGING ACTIVITIES Universal is exposed to various risks in its worldwide operations and uses derivative financial instruments to manage two specific types of risks – interest rate risk and foreign currency exchange rate risk. Interest rate risk has been managed by entering into interest rate swap agreements, and foreign currency exchange rate risk has been managed by entering into forward and option foreign currency exchange contracts. However, the Company’s policy also permits other types of derivative instruments. In addition, foreign currency exchange rate risk is also managed through strategies that do not involve derivative instruments, such as using local borrowings and other approaches to minimize net monetary positions in non-functional currencies. The disclosures below provide additional information about the Company’s hedging strategies, the derivative instruments used, and the effects of these activities on the consolidated statements of income and comprehensive income and the consolidated balance sheets. In the consolidated statements of cash flows, the cash flows associated with all of these activities are reported in net cash provided by operating activities. Cash Flow Hedging Strategy for Interest Rate Risk In December 2022, the Company entered into receive-floating/pay-fixed interest rate swap agreements that were designated and qualify as hedges of the exposure to changes in interest payment cash flows created by fluctuations in variable interest rates on two outstanding non-amortizing bank term loans that were funded as part of a new bank credit facility in December 2022. Although no significant ineffectiveness is expected with this hedging strategy, the effectiveness of the interest rate swaps is evaluated on a quarterly basis. At December 31, 2023, the total notional amount of the interest rate swaps was $ 310 million, which corresponded to a portion of the aggregate outstanding balance of the term loans. 13 Previously, the Company had receive-floating/pay-fixed interest rate swap agreements that were designated and qualified as cash flow hedges for two non-amortizing bank loans that were repaid concurrent with closing on the new bank credit facility in December 2022. Those swap agreements, which had an aggregate notional amount of $ 370 million corresponding to a portion of the principal balance on the repaid loans, were terminated concurrent with the inception of the new swap agreements. The fair value of the previous swap agreements, approximately $ 11.8 million, was received from the counterparties in December 2022 upon termination and is being amortized from accumulated other comprehensive loss into earnings as a reduction of interest expense through the original maturity dates of those agreements. Cash Flow Hedging Strategy for Foreign Currency Exchange Rate Risk Related to Sales of Crop Inputs, Forecast Purchases of Tobacco, and Related Processing Costs The majority of the tobacco production in most countries outside the United States where Universal operates is sold in export markets at prices denominated in U.S. dollars. However, sales of crop inputs (such as seeds and fertilizers) to farmers, purchases of tobacco from farmers, and most processing costs (such as labor and energy) in those countries are usually denominated in the local currency. Changes in exchange rates between the U.S. dollar and the local currencies where tobacco is grown and processed affect the ultimate U.S. dollar sales of crop inputs and cost of processed tobacco. From time to time, the Company enters into forward and option contracts to buy U.S. dollars and sell the local currency at future dates that coincide with the sale of crop inputs to farmers. In the case of forecast purchases of tobacco and the related processing costs, the Company enters into forward and option contracts to sell U.S. dollars and buy the local currency at future dates that coincide with the expected timing of a portion of the tobacco purchases and processing costs. These strategies offset the variability of future U.S. dollar cash flows for sales of crop inputs, tobacco purchases, and processing costs for the foreign currency notional amount hedged. These hedging strategies have been used mainly for tobacco purchases, processing costs, and sales of crop inputs in Brazil, although the Company periodically enters into hedges for a portion of tobacco purchases in Africa. The aggregate U.S. dollar notional amount of forward and option contracts entered into for these purposes during the nine-month periods in fiscal years 2024 and 2023 was as follows: Nine Months Ended December 31, (in millions of dollars) 2023 2022 Tobacco purchases $ 30.3 $ 47.1 Processing costs 4.9 7.9 Total $ 35.2 $ 55.0 Fluctuations in exchange rates and in the amount and timing of fixed-price orders from customers for their purchases from individual crop years routinely cause variations in the U.S. dollar notional amount of forward contracts entered into from one year to the next. All contracts related to tobacco purchases and crop input sales were initially designated and qualified as hedges of the future cash flows associated with the forecast purchases of tobacco. As a result, changes in fair values of the forward contracts have been recognized in comprehensive income as they occurred, but only recognized in earnings as a component of cost of goods sold upon sale of the related tobacco to third-party customers. The Company de-designates ineffective tobacco purchases and crop input sales hedges to selling, general, and administrative expense when the forecasted tobacco purchases or crop input sales are no longer expected to occur. The table below presents the expected timing of when the remaining accumulated other comprehensive gains and losses as of December 31, 2023 for cash flows hedges of tobacco purchases and crop input sales are expected to be recognized in earnings. Hedging Program Crop Year Geographic Location(s) Fiscal Year Earnings Tobacco purchases 2022 Brazil 2024 Tobacco purchases 2023 Brazil 2024 Crop input sales 2023 Brazil 2024 Crop input sales 2024 Brazil 2025 Forward contracts related to processing costs have not been designated as hedges, and gains and losses on those contracts have been recognized in earnings on a mark-to-market basis. 14 Hedging Strategy for Foreign Currency Exchange Rate Risk Related to Net Local Currency Monetary Assets and Liabilities of Foreign Subsidiaries Most of the Company’s foreign subsidiaries transact the majority of their sales in U.S. dollars and finance the majority of their operating requirements with U.S. dollar borrowings, and therefore use the U.S. dollar as their functional currency. These subsidiaries normally have certain monetary assets and liabilities on their balance sheets that are denominated in the local currency. Those assets and liabilities can include cash and cash equivalents, accounts receivable and accounts payable, advances to farmers and suppliers, deferred income tax assets and liabilities, recoverable value-added taxes, operating lease liabilities, and other items. Net monetary assets and liabilities denominated in the local currency are remeasured into U.S. dollars each reporting period, generating gains and losses that the Company records in earnings as a component of selling, general, and administrative expenses. The level of net monetary assets or liabilities denominated in the local currency normally fluctuates throughout the year based on the operating cycle, but it is most common for monetary assets to exceed monetary liabilities, sometimes by a significant amount. When this situation exists and the local currency weakens against the U.S. dollar, remeasurement losses are generated. Conversely, remeasurement gains are generated on a net monetary asset position when the local currency strengthens against the U.S. dollar. To manage a portion of its exposure to currency remeasurement gains and losses, the Company enters into forward contracts to buy or sell the local currency at future dates coinciding with expected changes in the overall net local currency monetary asset position of the subsidiary. Gains and losses on the forward contracts are recorded in earnings as a component of selling, general, and administrative expenses for each reporting period as they occur, and thus directly offset the related remeasurement losses or gains in the consolidated statements of income for the notional amount hedged. The Company does not designate these contracts as hedges for accounting purposes. The contracts are generally arranged to hedge the subsidiary's projected exposure to currency remeasurement risk for specified periods of time, and new contracts are entered as necessary throughout the year to replace previous contracts as they mature. The Company is currently using forward currency contracts to manage its exposure to currency remeasurement risk in Brazil. The total notional amounts of contracts outstanding at December 31, 2023 and 2022, and March 31, 2023, were approximately $ 97.2 million, $ 91.8 million, and $ 42.8 million, respectively. To further mitigate currency remeasurement exposure, the Company’s foreign subsidiaries may utilize short-term local currency financing during certain periods. This strategy, while not involving the use of derivative instruments, is intended to minimize the subsidiary’s net monetary position by financing a portion of the local currency monetary assets with local currency monetary liabilities, thus hedging a portion of the overall position. Several of the Company’s foreign subsidiaries transact the majority of their sales and finance the majority of their operating requirements in their local currency, and therefore use their respective local currencies as the functional currency for reporting purposes. From time to time, these subsidiaries sell tobacco to customers in transactions that are not denominated in the functional currency. In those situations, the subsidiaries routinely enter into forward exchange contracts to offset currency risk for the period of time that a fixed-price order and the related trade account receivable are outstanding with the customer. The contracts are not designated as hedges for accounting purposes. 15 Effect of Derivative Financial Instruments on the Consolidated Statements of Income The table below outlines the effects of the Company’s use of derivative financial instruments on the consolidated statements of income: Three Months Ended December 31, Nine Months Ended December 31, (in thousands of dollars) 2023 2022 2023 2022 Cash Flow Hedges - Interest Rate Swap Agreements Derivative Effective Portion of Hedge Gain (loss) recorded in accumulated other comprehensive loss $ ( 10,249 ) $ 1,006 $ 7,815 $ 14,255 Gain (loss) reclassified from accumulated other comprehensive loss into earnings $ 1,479 $ ( 1,031 ) $ 4,105 $ ( 2,902 ) Gain on terminated interest rate swaps amortized from accumulated other comprehensive loss into earnings $ 1,570 $ — $ 4,709 $ — Location of gain (loss) reclassified from accumulated other comprehensive loss into earnings Interest expense Ineffective Portion of Hedge Gain (loss) recognized in earnings $ — $ — $ — $ — Location of gain (loss) recognized in earnings Selling, general and administrative expenses Hedged Item Description of hedged item Floating rate interest payments on term loans Cash Flow Hedges - Foreign Currency Exchange Contracts Derivative Effective Portion of Hedge Gain (loss) recorded in accumulated other comprehensive loss $ — $ 2,454 $ 2,019 $ 2,450 Gain (loss) reclassified from accumulated other comprehensive loss into earnings $ 2,190 $ 1,790 $ 6,330 $ 4,831 Location of gain (loss) reclassified from accumulated other comprehensive loss into earnings Cost of goods sold Ineffective Portion and Early De-designation of Hedges Gain (loss) recognized in earnings $ — $ — $ 1,138 $ ( 520 ) Location of gain (loss) recognized in earnings Selling, general and administrative expenses Hedged Item Description of hedged item Forecast purchases of tobacco in Brazil and Africa Derivatives Not Designated as Hedges - Foreign Currency Exchange Contracts Gain (loss) recognized in earnings $ ( 3,241 ) $ ( 1,949 ) $ ( 4,010 ) $ ( 4,266 ) Location of gain (loss) recognized in earnings Selling, general and administrative expenses For the interest rate swap agreements, the effective portion of the gain or loss on the derivative is recorded in accumulated other comprehensive loss and any ineffective portion is recorded in selling, general and administrative expenses. For the forward foreign currency exchange contracts designated as cash flow hedges of tobacco purchases and the crop input sales in Brazil, a net hedge gain of approximately $ 1.5 million remained in accumulated other comprehensive loss at December 31, 2023. That balance reflects gains and losses on contracts related to the 2023 and 2022 Brazil crops, and the 2024 and 2023 Brazil crop input sales, less the amounts reclassified to earnings related to tobacco sold through December 31, 2023. Based on the hedging strategy, as the gain or loss is recognized in earnings, it is expected to be offset by a change in the direct 16 cost for the tobacco or by a change in sales prices if the strategy has been mandated by the customer. Generally, margins on the sale of the tobacco will not be significantly affected. Effect of Derivative Financial Instruments on the Consolidated Balance Sheets The table below outlines the effects of the Company’s derivative financial instruments on the consolidated balance sheets at December 31, 2023 and 2022, and March 31, 2023: Derivatives in a Fair Value Asset Position Derivatives in a Fair Value Liability Position Balance Sheet Location Fair Value as of Balance Sheet Location Fair Value as of (in thousands of dollars) December 31, 2023 December 31, 2022 March 31, 2023 December 31, 2023 December 31, 2022 March 31, 2023 Derivatives Designated as Hedging Instruments Interest rate swap agreements Other non-current assets $ 633 $ 3,179 $ — Other long-term liabilities $ — $ — $ 3,077 Foreign currency exchange contracts Other current assets — 3,389 7,102 Accounts payable and accrued expenses — — 890 Total $ 633 $ 6,568 $ 7,102 $ — $ — $ 3,967 Derivatives Not Designated as Hedging Instruments Foreign currency exchange contracts Other current assets $ 183 $ 1,152 $ 1,320 Accounts payable and accrued expenses $ 1,377 $ 1,194 $ 435 Total $ 183 $ 1,152 $ 1,320 $ 1,377 $ 1,194 $ 435 Substantially all of the Company's foreign exchange derivative instruments are subject to master netting arrangements whereby the right to offset occurs in the event of default by a participating party. The Company has elected to present these contracts on a gross basis in the consolidated balance sheets. NOTE 9. FAIR VALUE MEASUREMENTS Universal measures certain financial and nonfinancial assets and liabilities at fair value based on applicable accounting guidance. The financial assets and liabilities measured at fair value include money market funds, trading securities associated with deferred compensation plans, interest rate swap agreements and forward foreign currency exchange contracts. The application of the fair value guidance to nonfinancial assets and liabilities primarily includes the determination of fair values for goodwill and long-lived assets when indicators of potential impairment are present. Under the accounting guidance, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The framework for measuring fair value is based on a fair value hierarchy that distinguishes between observable inputs and unobservable inputs. Observable inputs are based on market data obtained from independent sources. Unobservable inputs require the Company to make its own assumptions about the value placed on an asset or liability by market participants because little or no market data exists. There are three levels within the fair value hierarchy: Level Description 1 quoted prices in active markets for identical assets or liabilities that the Company has the ability to access as of the reporting date; 2 quoted prices in active markets for similar assets or liabilities, or quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability; and 3 unobservable inputs for the asset or liability. 17 As permitted under the accounting guidance, the Company uses net asset value per share ("NAV") as a practical expedient to measure the fair value of its money market funds. The fair values for those funds are presented under the heading "NAV" in the tables that follow in this disclosure. In measuring the fair value of liabilities, the Company considers the risk of non-performance in determining fair value. Universal has not elected to report at fair value any financial instruments or any other assets or liabilities that are not required to be reported at fair value under current accounting guidance. Recurring Fair Value Measurements At December 31, 2023 and 2022, and at March 31, 2023, the Company had certain financial assets and financial liabilities that were required to be measured and reported at fair value on a recurring basis. These assets and liabilities are listed in the tables below and are classified based on how their values were determined under the fair value hierarchy or the NAV practical expedient: December 31, 2023 Fair Value Hierarchy (in thousands of dollars) NAV Level 1 Level 2 Level 3 Total Assets Money market funds $ 145 $ — $ — $ — $ 145 Trading securities associated with deferred compensation plans — 11,880 — — 11,880 Interest rate swap agreements — — 633 — 633 Foreign currency exchange contracts — — 183 — 183 Total financial assets measured and reported at fair value $ 145 $ 11,880 $ 816 $ — $ 12,841 Liabilities Foreign currency exchange contracts $ — $ — $ 1,377 $ — $ 1,377 Total financial liabilities measured and reported at fair value $ — $ — $ 1,377 $ — $ 1,377 December 31, 2022 Fair Value Hierarchy (in thousands of dollars) NAV Level 1 Level 2 Level 3 Total Assets Money market funds $ 334 $ — $ — $ — $ 334 Trading securities associated with deferred compensation plans — 11,257 — — 11,257 Interest rate swap agreements — — 3,179 — 3,179 Foreign currency exchange contracts — — 4,541 — 4,541 Total financial assets measured and reported at fair value $ 334 $ 11,257 $ 7,720 $ — $ 19,311 Liabilities Foreign currency exchange contracts $ — $ — $ 1,195 $ — $ 1,195 Total financial liabilities measured and reported at fair value $ — $ — $ 1,195 $ — $ 1,195 18 March 31, 2023 Fair Value Hierarchy (in thousands of dollars) NAV Level 1 Level 2 Level 3 Total Assets Money market funds $ 400 $ — $ — $ — $ 400 Trading securities associated with deferred compensation plans — 11,698 — — 11,698 Foreign currency exchange contracts — — 8,422 — 8,422 Total financial assets measured and reported at fair value $ 400 $ 11,698 $ 8,422 $ — $ 20,520 Liabilities Interest rate swap agreements $ — $ — $ 3,077 $ — $ 3,077 Foreign currency exchange contracts — — 1,325 — 1,325 Total financial liabilities measured and reported at fair value $ — $ — $ 4,402 $ — $ 4,402 Money market funds The fair value of money market funds, which are reported in cash and cash equivalents in the consolidated balance sheets, is based on NAV, which is the amount at which the funds are redeemable and is used as a practical expedient for fair value. These funds are not classified in the fair value hierarchy, but are disclosed as part of the fair value table above. Trading securities associated with deferred compensation plans Trading securities represent mutual fund investments that are matched to employee deferred compensation obligations. These investments are bought and sold as employees defer compensation, receive distributions, or make changes in the funds underlying their accounts. Quoted market prices (Level 1) are used to determine the fair values of the mutual funds. Interest rate swap agreements The fair values of interest rate swap agreements are determined based on dealer quotes using a discounted cash flow model matched to the contractual terms of each instrument. Since inputs to the model are observable and significant judgment is not required in determining the fair values, interest rate swaps are classified within Level 2 of the fair value hierarchy. Foreign currency exchange contracts The fair values of forward and option foreign currency exchange contracts are also determined based on dealer quotes using a discounted cash flow model matched to the contractual terms of each instrument. Since inputs to the model are observable and significant judgment is not required in determining the fair values, forward and option foreign currency exchange contracts are classified within Level 2 of the fair value hierarchy. Long-term Debt The following table summarizes the fair and carrying value of the Company’s long-term debt, and if applicable any current portion, at each of the balance sheet dates December 31, 2023, and 2022 and March 31, 2023: (in millions of dollars) December 31, 2023 December 31, 2022 March 31, 2023 Fair market value of long term obligations $ 617 $ 615 $ 621 Carrying value of long term obligations $ 620 $ 620 $ 620 The Company estimates the fair value of its long-term debt using Level 2 inputs which are based upon quoted market prices for the same or similar obligations or on calculations that are based on the current interest rates available to the Company for debt of similar terms and maturities. 19 Nonrecurring Fair Value Measurements Assets and liabilities that are measured at fair value on a nonrecurring basis primarily relate to long-lived assets, right-of-use operating lease assets and liabilities, goodwill and intangibles, and other current and noncurrent assets. These assets and liabilities fair values are also evaluated for impairment when potential indicators of impairment exist. Accordingly, the nonrecurring measurement of the fair value of these assets and liabilities are classified within Level 3 of the fair value hierarchy. Acquisition Accounting for Business Combinations The Company accounts for acquisitions qualifying under ASC 805, "Business Combinations," which requires, among other things, that the assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. The fair values of consideration transferred and net assets acquired are determined using a combination of Level 2 and Level 3 inputs as specified in the fair value hierarchy in ASC 820, “Fair Value Measurements and Disclosures.” The Company believes that the fair values assigned to the assets acquired and liabilities assumed are based on reasonable assumptions. Long-Lived Assets The Company reviews long-lived assets for impairment whenever events, changes in business conditions, or other circumstances provide an indication that such assets may be impaired. NOTE 10. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS The Company sponsors several defined benefit pension plans covering eligible U.S. salaried employees and certain foreign and other employee groups. These plans provide retirement benefits based primarily on employee compensation and years of service. The Company also sponsors defined benefit plans that provide postretirement health and life insurance benefits for eligible U.S. employees attaining specific age and service levels, although postretirement life insurance is no longer provided for active employees. The components of the Company’s net periodic benefit cost were as follows: Pension Benefits Other Postretirement Benefits Three Months Ended December 31, Three Months Ended December 31, (in thousands of dollars) 2023 2022 2023 2022 Service cost $ 1,280 $ 1,549 $ 24 $ 33 Interest cost 2,897 2,341 263 236 Expected return on plan assets ( 3,887 ) ( 3,323 ) ( 15 ) ( 18 ) Net amortization and deferral 205 1,001 ( 189 ) ( 168 ) Net periodic benefit cost $ 495 $ 1,568 $ 83 $ 83 Pension Benefits Other Postretirement Benefits Nine Months Ended December 31, Nine Months Ended December 31, (in thousands of dollars) 2023 2022 2023 2022 Service cost $ 3,848 $ 4,597 $ 73 $ 97 Interest cost 8,696 7,027 793 712 Expected return on plan assets ( 11,663 ) ( 9,971 ) ( 47 ) ( 56 ) Net amortization and deferral 611 3,003 ( 569 ) ( 507 ) Net periodic benefit cost $ 1,492 $ 4,656 $ 250 $ 246 During the nine months ended December 31, 2023, the Company made contributions of approximately $ 0.9 million to its pension plans. Additional contributions of $ 3.0 million are expected during the remaining three months of fiscal year 2024. 20 NOTE 11. STOCK-BASED COMPENSATION The Company's shareholders approved the Universal Corporation 2023 Stock Incentive Plan (“Plan”) under which officers, directors, and employees of the Company may receive grants and awards of common stock, restricted stock, restricted stock units (“RSUs”), performance share units (“PSUs”), stock appreciation rights, incentive stock options, and non-qualified stock options. The Company’s practice is to award grants of stock-based compensation to officers on an annual basis at the first regularly-scheduled meeting of the Compensation Committee of the Board of Directors (the “Compensation Committee”) in the fiscal year following the public release of the Company’s financial results for the prior year. The Compensation Committee administers the Company’s Plan consistently, following previously defined guidelines. In recent years, the Compensation Committee has awarded only grants of RSUs and PSUs. Awards of restricted stock, RSUs, and PSUs are currently outstanding under the Plan. RSUs awarded prior to fiscal year 2022 vest 5 years after the grant date and those awarded beginning in fiscal year 2022 vest 3 years after the grant date. After vesting RSUs are paid out in shares of common stock. Under the terms of the RSU awards, grantees receive dividend equivalents in the form of additional RSUs that vest and are paid out on the same date as the original RSU grant. The PSUs vest at the end of a performance period of three years that begins with the year of the grant, are paid out in shares of common stock shortly after the vesting date, and do not carry rights to dividends or dividend equivalents prior to vesting. Shares ultimately paid out under PSU grants are dependent on the achievement of predetermined performance measures established by the Compensation Committee and can range from zero to 150 % of the stated award. The Company’s outside directors receive RSUs following the annual meeting of shareholders. RSUs awarded to outside directors vest 1 year after the grant date. Restricted shares vest upon the individual’s retirement from service as a director. During the nine-month periods ended December 31, 2023 and 2022, the Company issued the following stock-based awards, representing the regular annual grants to officers and outside directors of the Company: Nine Months Ended December 31, 2023 2022 RSUs: Number granted 93,300 79,405 Grant date fair value $ 51.34 $ 62.17 PSUs: Number granted 54,700 48,315 Grant date fair value $ 43.01 $ 54.46 Fair value expense for RSUs and PSUs is recognized ratably over the period from grant date to the earlier of: (1) the vesting date of the award, or (2) the date the grantee is eligible to retire without forfeiting the award. For employees who are already eligible to retire at the date an award is granted, the total fair value of all non-forfeitable awards is recognized as expense at the date of grant. For PSUs, the Company recognizes expense based on management’s judgment of the ultimate award that is likely to be paid out based on the achievement of the predetermined performance measures. Universal typically incurs higher stock compensation expense in the first quarter of each fiscal year when grants are awarded to officers who are retirement eligible. The Company accounts for forfeitures of stock-based awards as they occur. For the nine-month periods ended December 31, 2023 and 2022, the Company recorded total stock-based compensation expense of approximately $ 10.6 million and $ 6.6 million, respectively. The Company expects to recognize stock-based compensation expense of approximately $ 1.0 million during the remaining three months of fiscal year 2024. NOTE 12. OPERATING SEGMENTS The Company conducts operations across two reportable operating segments, Tobacco Operations and Ingredients Operations. The Tobacco Operations segment activities involve selecting, procuring, processing, packing, storing, shipping, and financing leaf tobacco for sale to, or for the account of, manufacturers of consumer tobacco products throughout the world. Through various operating subsidiaries located in tobacco-growing countries around the world and significant ownership interests in unconsolidated affiliates, the Company processes and/or sells flue-cured and burley tobaccos, dark air-cured tobaccos, and oriental tobaccos. Flue-cured, burley, and oriental tobaccos are used principally in the manufacture of cigarettes, and dark air- 21 cured tobaccos are used mainly in the manufacture of cigars, pipe tobacco, and smokeless tobacco products. Some of these tobacco types are also increasingly used in the manufacture of non-combustible tobacco products that are intended to provide consumers with an alternative to traditional combustible products. The Tobacco Operations segment also provides physical and chemical product testing and smoke testing for tobacco customers. A substantial portion of the Company’s Tobacco Operations' revenues are derived from sales to a limited number of large, multinational cigarette and cigar manufacturers. The Ingredients Operations segment provides its customers with a broad variety of plant-based ingredients for both human and pet consumption. The Ingredients Operations segment utilizes a variety of value-added manufacturing processes converting raw materials into a wide spectrum of fruit and vegetable juices, concentrates, dehydrated products, flavors, and botanical extracts. Customers for the Ingredients Operations segment include large multinational food and beverage companies, smaller independent manufacturers, and retail organizations. FruitSmart, Silva, and Shank's are the primary operations for the Ingredients Operations segment. FruitSmart manufactures fruit and vegetable juices, purees, concentrates, essences, fibers, seeds, seed oils, and seed powders. Silva is primarily a dehydrated product manufacturer of fruit and vegetable based flakes, dices, granules, powders, and blends. Shank's manufactures flavors and botanical extracts and also offers bottling and custom packaging for customers. The Company currently evaluates the performance of its segments based on operating income after allocated overhead expenses, plus equity in the pretax earnings (loss) of unconsolidated affiliates. Operating results for the Company’s reportable segments for each period presented in the consolidated statements of income and comprehensive income were as follows. Three Months Ended December 31, Nine Months Ended December 31, (in thousands of dollars) 2023 2022 2023 2022 SALES AND OTHER OPERATING REVENUES Tobacco Operations $ 743,933 $ 724,589 $ 1,742,494 $ 1,642,682 Ingredients Operations 77,574 70,450 235,219 233,163 Consolidated sales and other operating revenues $ 821,507 $ 795,039 $ 1,977,713 $ 1,875,845 OPERATING INCOME Tobacco Operations $ 87,605 $ 77,104 $ 148,875 $ 119,010 Ingredients Operations 2,167 767 4,964 9,876 Segment operating income 89,772 77,871 153,839 128,886 Deduct: Equity in pretax (earnings) loss of unconsolidated affiliates (1) ( 1,384 ) ( 345 ) 3,495 ( 208 ) Restructuring and impairment costs (2) ( 924 ) — ( 3,523 ) — Consolidated operating income $ 87,464 $ 77,526 $ 153,811 $ 128,678 (1) Equity in pretax earnings (loss) of unconsolidated affiliates is included in segment operating income (Tobacco Operations), but is reported below consolidated operating income and excluded from that total in the consolidated statements of income and comprehensive income. (2) Restructuring and impairment costs are excluded from segment operating income, but are included in consolidated operating income in the consolidated statements of income and comprehensive income. See Note 2 for additional information . 22 NOTE 13. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) The following table summarizes the changes in the accumulated balances for each component of accumulated other comprehensive income (loss) attributable to the Company for the nine months ended December 31, 2023 and 2022: Nine Months Ended December 31, (in thousands of dollars) 2023 2022 Foreign currency translation: Balance at beginning of year $ ( 44,233 ) $ ( 40,965 ) Other comprehensive income (loss) attributable to Universal Corporation: Net gain (loss) on foreign currency translation 1,090 ( 5,425 ) Less: Net (gain) loss on foreign currency translation attributable to noncontrolling interests 79 247 Other comprehensive income (loss) attributable to Universal Corporation, net of income taxes 1,169 ( 5,178 ) Balance at end of period $ ( 43,064 ) $ ( 46,143 ) Foreign currency hedge: Balance at beginning of year $ 4,899 $ 3,579 Other comprehensive income (loss) attributable to Universal Corporation: Net gain (loss) on derivative instruments (net of tax (expense) benefit of $( 153 ) and $( 530 )) 703 253 Reclassification of (gain) loss to earnings (net of tax expense (benefit) of $ 1,422 and $ 519 ) (1) ( 4,530 ) ( 2,191 ) Other comprehensive income (loss) attributable to Universal Corporation, net of income taxes ( 3,827 ) ( 1,938 ) Balance at end of period $ 1,072 $ 1,641 Interest rate hedge: Balance at beginning of year $ 5,253 $ ( 860 ) Other comprehensive income (loss) attributable to Universal Corporation: Net gain (loss) on derivative instruments (net of tax (expense) benefit of $( 2,063 ) and $( 3,224 )) 5,751 11,870 Reclassification of (gain) loss to earnings (net of tax expense (benefit) of $ 2,327 and $( 220 )) (2) ( 6,486 ) 811 Other comprehensive income (loss) attributable to Universal Corporation, net of income taxes ( 735 ) 12,681 Balance at end of period $ 4,518 $ 11,821 Pension and other postretirement benefit plans: Balance at beginning of year $ ( 42,976 ) $ ( 46,065 ) Other comprehensive income (loss) attributable to Universal Corporation: Amortization included in earnings (net of tax expense (benefit) of $( 38 ) and $( 409 )) (3) 196 1,491 Other comprehensive income (loss) attributable to Universal Corporation, net of income taxes 196 1,491 Balance at end of period $ ( 42,780 ) $ ( 44,574 ) Total accumulated other comprehensive loss at end of period $ ( 80,254 ) $ ( 77,255 ) (1) Gain (loss) on foreign currency cash flow hedges related to forecast purchases of tobacco and crop input sales is reclassified from accumulated other comprehensive income (loss) to cost of goods sold when the tobacco is sold to customers. See Note 8 for additional information. (2) Gain (loss) on interest rate cash flow hedges is reclassified from accumulated other comprehensive income (loss) to interest expense when the related interest payments are made on the underlying debt, or as amortized to interest expense over the period to original maturity for terminated swap agreements. See Note 8 for additional information. (3) This accumulated other comprehensive income (loss) component is included in the computation of net periodic benefit cost. See Note 10 for additional information. 23 NOTE 14. CHANGES IN SHAREHOLDERS' EQUITY AND NONCONTROLLING INTERESTS IN SUBSIDIARIES A reconciliation of the changes in Universal Corporation shareholders’ equity and noncontrolling interests in subsidiaries for the three and nine months ended December 31, 2023 and 2022 is as follows: Three Months Ended December 31, 2023 Three Months Ended December 31, 2022 (in thousands of dollars) Universal Corporation Non-controlling Interests Total Universal Corporation Non-controlling Interests Total Balance at beginning of three-month period $ 1,384,189 $ 33,319 $ 1,417,508 $ 1,324,854 $ 29,879 $ 1,354,733 Changes in common stock Accrual of stock-based compensation 4,914 — 4,914 1,326 — 1,326 Withholding of shares from stock-based compensation for grantee income taxes ( 9 ) — ( 9 ) — — — Dividend equivalents on RSUs 321 — 321 294 — 294 Changes in retained earnings Net income (loss) 53,216 8,071 61,287 41,660 9,701 51,361 Cash dividends declared Common stock ( 19,647 ) — ( 19,647 ) ( 19,399 ) — ( 19,399 ) Dividend equivalents on RSUs ( 321 ) — ( 321 ) ( 294 ) — ( 294 ) Other comprehensive income (loss) ( 5,587 ) 184 ( 5,403 ) 12,351 370 12,721 Balance at end of period $ 1,417,076 $ 41,574 $ 1,458,650 $ 1,360,792 $ 39,950 $ 1,400,742 24 Nine Months Ended December 31, 2023 Nine Months Ended December 31, 2022 (in thousands of dollars) Universal Corporation Non-controlling Interests Total Universal Corporation Non-controlling Interests Total Balance at beginning of year $ 1,397,088 $ 39,864 $ 1,436,952 $ 1,340,543 $ 44,226 $ 1,384,769 Changes in common stock Repurchase of common stock ( 1,373 ) — ( 1,373 ) ( 893 ) — ( 893 ) Accrual of stock-based compensation 10,625 — 10,625 6,630 — 6,630 Withholding of shares from stock-based compensation for grantee income taxes ( 2,972 ) — ( 2,972 ) ( 2,090 ) — ( 2,090 ) Dividend equivalents on RSUs 940 — 940 851 — 851 Changes in retained earnings Net income 79,280 7,634 86,914 70,345 3,223 73,568 Cash dividends declared Common stock ( 59,004 ) — ( 59,004 ) ( 58,244 ) — ( 58,244 ) Repurchase of common stock ( 3,371 ) — ( 3,371 ) ( 2,555 ) — ( 2,555 ) Dividend equivalents on RSUs ( 940 ) — ( 940 ) ( 851 ) — ( 851 ) Other comprehensive income (loss) ( 3,197 ) ( 79 ) ( 3,276 ) 7,056 ( 247 ) 6,809 Other changes in noncontrolling interests Dividends paid to noncontrolling shareholders — ( 5,845 ) ( 5,845 ) — ( 6,825 ) ( 6,825 ) Other — — — — ( 427 ) ( 427 ) Balance at end of period $ 1,417,076 $ 41,574 $ 1,458,650 $ 1,360,792 $ 39,950 $ 1,400,742 25