What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-08-07 compared with 2024-02-07 · 102 added, 119 removed, 92 unchanged (71% of the section changed)

17 unchanged sentences

government regulation and other stakeholder expectations;

economic and political conditions in the countries in which we and our customers operate, including the ongoing impacts from international conflicts, such as the conflict in Ukraine;

economic and political conditions in the countries in which we and our customers operate, including the ongoing impacts from international conflicts;

product taxation;

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Amounts described as net income (loss) and earnings (loss) per diluted share in the following discussion are attributable to Universal Corporation and exclude earnings related to non-controlling interests in subsidiaries.

Adjusted operating income (loss), adjusted net income (loss) attributable to Universal Corporation, adjusted diluted earnings (loss) per share, and the total for segment operating income (loss) referred to in this discussion are non-GAAP financial measures.

Any references to adjusted operating income (loss), adjusted net income (loss) attributable to Universal Corporation, adjusted diluted earnings (loss) per share, and the total for segment operating income (loss) are references to non-GAAP financial measures.

These measures are not financial measures calculated in accordance with GAAP and should not be considered as substitutes for operating income (loss), net income (loss) attributable to Universal Corporation, diluted earnings (loss) per share, cash from operating activities or any other operating or financial performance measure calculated in accordance with GAAP, and may not be comparable to similarly-titled measures reported by other companies.

A reconciliation of adjusted operating income (loss) to consolidated operating (income), adjusted net income (loss) attributable to Universal Corporation to consolidated net income (loss) attributable to Universal Corporation and adjusted diluted earnings (loss) per share to diluted earnings (loss) per share are provided in Other Items below.

In addition, we have provided a reconciliation of the total for segment operating income (loss) to consolidated operating income (loss) in Note 11.

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Management evaluates the consolidated Company and segment performance excluding certain significant charges or credits.

We believe these non-GAAP financial measures, which exclude items that we believe are not indicative of our core operating results, provide investors with important information that is useful in understanding our business results and trends.

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.

We believe these non-GAAP financial measures, which exclude items that we believe are not indicative of our core operating results, can provide investors with important information that is useful in understanding our business results and trends.

Universal Corporation is off to a strong start for our fiscal year 2025.

For the quarter ended June 30, 2024, revenue was $597.1 million, up by approximately 15% for both our Tobacco and Ingredients Operations segments, while operating income was $17.2 million, up $6.2 million, or 56%, compared to the same quarter last fiscal year.

Our revenue increase in the Tobacco Operations segment was driven by higher sales volumes and prices.

Coming out of an exceptional fiscal year 2024, we benefited from continued strong demand from our tobacco customers.

We believe this demand will continue to support solid results for the segment for fiscal year 2025.

Our strategic decisions to accelerate tobacco crop purchasing allowed us to secure our contracted tobacco in certain dynamic markets, which has positioned us well to meet customer demand.

As in previous fiscal years, we expect that tobacco shipment timing and related revenue recognition will be more heavily weighted towards the second half of our fiscal year 2025.

Our uncommitted tobacco inventory levels at June 30, 2024, remained low at about 13%, and we believe that global leaf tobacco remains in an undersupply position.

Looking ahead, we expect that recent elevated green tobacco prices will incentivize farmers to increase planting for the next season, potentially leading to more balanced markets in the coming years.

We work closely with our contract farmers to provide guidance and support to promote increased production.

During the quarter ended June 30, 2024, our Ingredients Operations segment also delivered improved performance primarily based on increased sales volumes.

New product sales have increased across our ingredients platform, contributing to positive results.

These increased sales, combined with general improvement in certain markets and recovery of demand for our core products, drove the 15% increase in sales revenue for the segment as compared to the same quarter last fiscal year.

Test runs and certifications of the processing lines for our Lancaster, Pennsylvania expansion project are progressing well, and the facility is on track to become fully operational in the second half of this fiscal year.

Along with the expansion project, we continue to focus on our commercial and research and development teams to enhance the capabilities and specialized products we are able to offer Universal Ingredients’ customers.

We continue to expect the project to meaningfully contribute to our Ingredients Operations segment results in fiscal year 2026.

As expected, our debt level remained elevated at June 30, 2024.

As our committed tobacco inventories, which represented 87% of total tobacco inventories at June 30, 2024, are processed and delivered to customers, we anticipate working capital to unwind during fiscal year 2025.

Reducing our environmental impacts remains a key business goal for Universal.

Setting scope 1, 2 and 3 greenhouse gas emissions targets with the Science Based Target initiative (SBTi) in 2021 and committing to publicly disclosing our progress towards meeting those targets by 2030 are some of the ways we demonstrate our commitment to sustainability.

The credibility of our disclosures is contingent on the accuracy of our emissions data and the methods we use to calculate them.

We are pleased to announce that we received independent third-party verification of our scope 1 and 2 emissions data, as well as our scope 3 emissions data associated with tobacco purchased through our supply chain, and the methods we use to calculate our emissions.

These important milestones reinforce our dedication to the public and transparent disclosure of our progress towards our goals, and the importance of sustainability to Universal.

For over 100 years, Universal has successfully managed our business and generated strong cash flows over time under a wide range of market conditions.

We continue to leverage our global footprint to alleviate the impact of localized disruptions, such as adverse weather.

Our proactive approach to understanding and responding to the changing world in which we operate and our deep understanding of our customers’ needs will serve us well as we continue our endeavor to deliver consistent results year-over-year.

FINANCIAL HIGHLIGHTS

Nine Months Ended December 31, Change

Three Months Ended June 30, Change

(in millions of dollars, except per share data) 2024 2023 $ %

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Cost of goods sold $ 501.1 $ 431.2 $ 69.9 16 %

Gross Profit Margin 19.5 % 17.9 % 160 bps

Gross profit margin percentage 16.1 % 16.7 % -60 bps

Selling, general and administrative expenses $ 78.7 $ 75.5 $ 3.2 4 %

Operating income (loss) $ 153.8 $ 128.7 $ 25.1 20 %

Diluted earnings (loss) per share (as reported) $ 3.17 $ 2.82 $ 0.35 12 %

Adjusted diluted earnings (loss) per share (non-GAAP)* $ 3.29 $ 2.80 $ 0.49 18 %

Operating income $ 17.2 $ 11.0 $ 6.2 56 %

Diluted earnings (loss) per share $ 0.01 $ (0.08) $ 0.09 113 %

Segment Results

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Ingredients operations operating income (loss) $ 2.9 $ (2.0) $ 4.9 245 %

*See Reconciliation of Certain Non-GAAP Financial Measures in Other Items below.

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.

Net income for the quarter ended June 30, 2024, was $0.1 million, or $0.01 per diluted share, compared with a net loss of $(2.1) million, or $(0.08) per diluted share, for the quarter ended June 30, 2023.

Net income and diluted earnings per share increased by $2.2 million and $0.09, respectively, for the quarter ended June 30, 2024, compared to the quarter ended June 30, 2023.

Operating income for the quarter ended June 30, 2024, was $17.2 million, an increase of $6.2 million, compared to operating income of $11.0 million for the quarter ended June 30, 2023.

Consolidated revenues increased by $79.3 million to $597.1 million for the first quarter of fiscal year 2025, compared to first quarter of fiscal year 2024.

The increase was largely due to higher tobacco sales prices and volumes as well as increased sales of new ingredients products.

Tobacco Operations

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.

The first fiscal quarter is historically a slow quarter for our tobacco businesses.

Revenues for the Tobacco Operations segment were $512.0 million for the first quarter of fiscal year 2025, up $68.0 million or 15%, compared to the first quarter of fiscal year 2024, on higher tobacco sales prices and volumes.

Operating income for the Tobacco Operations segment increased by $5.6 million to $14.5 million for the quarter ended June 30, 2024, compared to the quarter ended June 30, 2023.

Tobacco Operations segment operating income was up largely on higher carryover crop shipments as well as higher earnings from our oriental tobacco joint venture.

Our operations in several origins saw increased shipments of carryover tobacco in the quarter ended June 30, 2024, compared to the quarter ended June 30, 2023.

Results for our oriental joint venture were up in the quarter ended June 30, 2024, on a better product mix as well as favorable foreign currency comparisons, compared to the quarter ended June 30, 2023.

Selling, general, and administrative expenses for the Tobacco Operations segment were modestly higher in the first quarter of fiscal year 2025, compared to first quarter of fiscal year 2024, primarily due to unfavorable foreign currency comparisons.

Ingredients Operations

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

The following table sets forth certain non-recurring items included in reported results to reconcile adjusted operating income to consolidated operating income and adjusted net income to net income attributable to Universal Corporation:

Adjusted Operating Income Reconciliation

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

(in thousands) 2023 2022 2023 2022

Consolidated operating income $ 87,464 $ 77,526 $ 153,811 $ 128,678

Restructuring and impairment costs (1)

924 — 3,523 —

As Adjusted operating income (Non-GAAP) $ 88,388 $ 77,526 $ 157,334 $ 128,678

Adjusted Net Income Attributable to Universal Corporation and Adjusted Diluted Earnings Per Share Reconciliation

(in thousands except for per share amounts)

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

2023 2022 2023 2022

Net income attributable to Universal Corporation $ 53,216 $ 41,660 $ 79,280 $ 70,345

Restructuring and impairment costs (1)

924 — 3,523 —

Interest expense reversal on uncertain tax position from sale of operations in Tanzania — — — (1,816)

Total of Non-GAAP adjustments to income before income taxes 924 — 3,523 (1,816)

Non-GAAP adjustments to income taxes

Income tax benefit from restructuring and impairment costs (47) — (512) —

Income tax expense from sale of operations in Tanzania — — — 1,132

Total of income tax impacts for Non-GAAP adjustments to income before income taxes (47) — (512) 1,132

Net income attributable to Universal Corporation (Non-GAAP) $ 54,093 $ 41,660 $ 82,291 $ 69,661

Diluted earnings per share $ 2.12 $ 1.67 $ 3.17 $ 2.82

Diluted earnings per share (Non-GAAP) $ 2.16 $ 1.67 $ 3.29 $ 2.80

(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.

For the Ingredients Operations segment, revenues of $85.1 million and operating income of $2.9 million for the quarter ended June 30, 2024, were up $11.3 million and $4.9 million, respectively, compared to the quarter ended June 30, 2023.

These increases were primarily due to increased sales volumes which included higher sales of new products as well as some increases in sales of core products, notably fruit juices.

Accelerated purchasing by certain customers and lower inventory write-downs also increased results for the segment in the first quarter of fiscal year 2025, compared to the same period last fiscal year.

Selling, general, and administrative expenses were flat in the quarter ended June 30, 2024, compared to the same period in fiscal year 2024.

Cost of goods sold in the quarter ended June 30, 2024, increased by 16% to $501.1 million, compared with the quarter ended June 30, 2023, largely due to higher green tobacco costs.

Selling, general, and administrative costs for the quarter ended June 30, 2024, increased by $3.2 million to $78.7 million, compared to the quarter ended June 30, 2023, primarily due to

unfavorable foreign currency comparisons.

Interest expense for the quarter ended June 30, 2024, increased by $5.2 million, compared to the quarter ended June 30, 2023, largely on higher interest rates and higher debt balances resulting from higher green tobacco prices and accelerated tobacco purchases.

For the three months ended June 30, 2024, our consolidated effective income tax rate was 34.7%.

For the three months ended June 30, 2023, our consolidated effective income tax rate was 21.6%.

As part of our ongoing efforts to promote efficiency in our operations, we initiated a plan in the second quarter of fiscal year 2025 to consolidate our European sheet tobacco operations into our facility in the Netherlands.

As part of this plan, we will wind down our sheet operations in Germany in fiscal year 2025.

We believe that this consolidation, which will bring together two operations that are in close proximity to one another, will optimize our sheet operations and generate efficiencies.

We expect to recognize between a total of $10 million to $15 million of restructuring and impairment costs during fiscal years 2025 and 2026 as a result of the consolidation of operations.

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.

In 2019, Universal committed to setting science-based goals for reducing our global greenhouse gas (GHG) emissions.

Our target of reducing scope 1, 2, and 3 emissions by 30% by 2030 was approved by the Science Based Target initiative (SBTi) in 2021.

GHG emissions are inherently difficult to calculate, particularly scope 3 emissions because they are indirect emissions by our supply chain partners that require collection and analysis of data from third parties.

We previously received independent third-party verification of our scope 1 and 2 emissions data and how we calculate such data.

We are proud to have recently received independent third-party verification related to our scope 3 emissions as well.

These important milestones reinforce the credibility of our commitment to reducing our scope 1, 2 and 3 emissions, as well as ensuring the methods and data we use to calculate emissions are accurate and comply with established standards.

The need for companies to accurately calculate and disclose their environmental impacts has never been greater, which is why we continue to publicly and transparently share our progress towards meeting our GHG emissions goals each year in our annual Sustainability Report, which is available on our website.

Liquidity and Capital Resources

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 first fiscal quarter is usually a period of significant working capital investment in both Africa and South America as tobacco crops are delivered by farmers.

Due to market conditions in Brazil, we made the strategic decision in the quarter ended March 31, 2024, to accelerate tobacco purchases there.

Therefore, some of our working capital investments for the Brazil crop that typically would have been made in the quarter ended June 30, 2024, were made in the quarter ended March 31, 2024.

We also accelerated some African tobacco crop purchases in the quarter ended June 30, 2024.

We funded our working capital needs in the quarter ended June 30, 2024, using a combination of cash on hand, short-term borrowings, customer advances, and operating cash flows.

Tobacco sales are expected to be more heavily weighted to the second half of fiscal year 2025.

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

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Peak working capital requirements are generally reached during the first and second fiscal quarters.

Each geographic area follows a cycle of buying, processing, and shipping tobacco, and in many regions, we also provide agricultural materials to farmers during the growing season.

Each geographic area follows a cycle of buying, processing, and shipping tobacco to customers, and in many regions, we also provide agricultural materials to farmers during the growing season.

The timing of the elements of each cycle is influenced by such factors as local weather conditions and individual customer shipping requirements, which may change the level or the duration of crop financing.

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Operating Activities

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.

Net cash used by our operations was $62.4 million during the quarter ended June 30, 2024.

The net use of cash was $41.4 million less than during the same period in fiscal year 2024, primarily on accelerated tobacco purchases in Brazil in our Tobacco Operations segment in the fourth quarter of fiscal year 2024.

Tobacco inventory levels increased by $131.8 million from March 31, 2024 levels to $1.2 billion at June 30, 2024, on seasonal leaf purchases.

Tobacco inventory levels were $101.6 million above June 30, 2023 levels, primarily on higher green leaf tobacco prices and some accelerated tobacco purchases in Africa.

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.

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.

As of June 30, 2024, our

uncommitted tobacco inventories were $154.8 million, or about 13% of total tobacco inventory, compared to $181.1 million, or about 17% of our tobacco inventory as of March 31, 2024, and $175.2 million, or about 16% of our tobacco inventory as of June 30, 2023.

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 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.

Our balance sheet accounts reflected seasonal patterns in the quarter ended June 30, 2024, on deliveries of tobacco crops by farmers in both South America and Africa.

Accounts receivable decreased by $89.3 million from March 31, 2024 levels, as we used collections on receivables to fund seasonal working capital needs.

Advances to suppliers were $100.5 million at June 30, 2024, a reduction of $38.6 million from March 31, 2024, 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 $55.6 million at June 30, 2024, on the timing of tobacco crop purchases and shipments.

Notes payable and overdrafts were up $163.9 million from March 31, 2024 levels, on seasonal working capital needs.

Accounts receivable were up $60.4 million for the quarter ended June 30, 2024, compared to the same quarter in the prior fiscal year, on higher sales of carryover crop tobacco as well as the timing of tobacco crop shipments.

Notes payable and overdrafts were up $221.3 million compared to June 30, 2023 levels, in part due to lower customer advances available to fund working capital needs and timing of tobacco crop purchases.

Customer advances and deposits were $87.8 million lower at June 30, 2024, compared to June 30, 2023, primarily due to a customer arrangement providing for a higher amount of advances on tobacco crop purchases in fiscal year 2024 that was not repeated in the first quarter of fiscal year 2025.

Investing Activities

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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 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.

During the quarters ended June 30, 2024 and 2023, we invested about $22.7 million and $18.0 million, respectively, in our property, plant and equipment.

Depreciation expense was approximately $11.7 million and $11.9 million for the quarters ended June 30, 2024 and 2023, respectively.

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

In addition, from time to time, we undertake projects that require capital expenditures when we identify opportunities to improve efficiencies, invest in sustainability projects, add value for our customers, and position ourselves for future growth.

We currently expect to spend approximately $55 to $65 million over the next twelve months on capital projects for maintenance of our facilities and other investments, including significant investments in our plant-based ingredients platform, to grow and improve our businesses.

We currently expect to spend approximately $50 to $60 million over the next twelve months on capital projects for maintenance of our facilities and other investments to grow and improve our businesses.

Our Board of Directors approved our current share repurchase program in November 2022.

The program authorizes the purchase of up to $100 million of our common stock through November 15, 2024.

Under the program, we may purchase shares

from time to time on the open market or in privately negotiated transactions at prices not exceeding prevailing market rates.

Under the program, we may purchase shares from time to time on the open market or in privately negotiated transactions at prices not exceeding prevailing market rates.

Repurchases of shares under the repurchase program may vary based on management discretion, as well as changes in cash flow generation and availability.

During the three months ended 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.

During the three months ended June 30, 2024, we did not purchase any shares of common stock.

As of June 30, 2024, approximately 24.7 million shares of our common stock were outstanding, and our available authorization under our current share repurchase program was $95.3 million.

Financing Activities

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We also consider our net debt plus shareholders' equity to be our net capitalization.

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.

Net debt as a percentage of net capitalization was approximately 44% at June 30, 2024, up from the June 30, 2023 level of approximately 42%, and up from the March 31, 2024 level of approximately 41%.

As of June 30, 2024, we had $101.7 million in cash and cash equivalents, our short-term debt totaled $581.1 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 June 30, 2024, we had $330 million available under the committed revolving credit facility that will mature in December 2027, and we had about $41 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.

We have no long-term debt maturing until fiscal year 2028.

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From time to time, we use interest rate swap agreements to manage our exposure to changes in interest rates.

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.

At June 30, 2024, the fair value of our outstanding interest rate swap agreements was an asset of about $7.9 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.

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We generally account for our hedges of forecasted tobacco purchases as cash flow hedges.

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.

At June 30, 2024, the fair value of our open hedges for forecasted tobacco purchases was a net liability of approximately $5.5 million.

We had forward contracts outstanding that were not designated as hedges, and the fair value of those contracts was a net asset of approximately $1.2 million at June 30, 2024.

Critical Accounting Estimates

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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