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Item 2. Management’s Discussion and Analysis

2025-04-21 compared with 2024-08-07 · 158 added, 111 removed, 83 unchanged (76% of the section changed)

1 unchanged sentence

Unless the context otherwise requires, the terms “we,” “our,” “us” or “Universal” or the “Company” refer to Universal Corporation together with its subsidiaries.

This Quarterly Report on Form 10-Q and the following “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.

This Quarterly Report on Form 10-Q ("Form 10-Q") and the following “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.

Among other things, these statements relate to the Company’s financial condition, results of operation, and future business plans, operations, opportunities, and prospects.

In addition, the Company and its representatives may from time to time make written or oral forward-looking statements, including statements contained in other filings with the Securities and Exchange Commission and in reports to shareholders.

These forward-looking statements are generally identified by the use of words such as we “expect,” “believe,” “anticipate,” “could,” “should,” “may,” “plan,” “will,” “predict,” “estimate,” and similar expressions or words of similar import.

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new government regulations and interpretation of existing standards and regulations;

and general economic, political, market, and weather conditions.

general economic, political, market, and weather conditions;and our failure to maintain effective internal control over financial reporting.

For a further description of factors that may cause actual results to differ materially from such forward-looking statements, see Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended March 31, 2024, as amended by Amendment No.1 thereto ("2024 Form 10-K"), and Item 1A, "Risk Factors" of this Form 10-Q.

We caution investors not to place undue reliance on any forward-looking statements as these statements speak only as of the date when made, and we undertake no obligation to update any forward-looking statements made in this report.

This Form 10-Q should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended March 31, 2024.

Results of Operations

This Form 10-Q should be read in conjunction with our 2024 Form 10-K .

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

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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.

Any references to net debt, net capitalization, and net debt to net capitalization ratio are also references to non-GAAP financial measures.

These measures are not financial measures calculated in accordance with GAAP and should not be considered substitutes for total debt, total capitalization, total debt to total capitalization ratio, or any other operating or financial performance measures calculated in accordance with GAAP, and may not be comparable to similarly-titled measures reported by other companies.

A reconciliation of net debt to total debt and net capitalization to total capitalization are provided

in Other Items below to the extent these non-GAAP financial measures are referenced.

We believe these non-GAAP measures are meaningful indicators of liquidity and financial position.

Results of Operations

Universal Corporation had a strong quarter and nine months ended December 31, 2024.

Revenues and operating income increased by 14% and 19%, respectively, for the quarter, and by 14% and 24%, respectively, for the nine months ended December 31, 2024, compared to the same periods in fiscal year 2024.

These increases were primarily driven by strong tobacco sales volumes and prices.

Improved results for our Tobacco Operations segment in both the quarter and nine months ended December 31, 2024, compared to the same periods in fiscal year 2024, were largely driven by strong customer demand, successful tobacco procurement and marketing efforts, and larger, higher quality, and better yielding crops in Africa.

Strong trading volumes combined with higher shipment volumes and better-quality crops in Asia and accelerated shipment timing in the United States requested by certain customers also contributed to the improved results.

The Ingredients Operations segment also continued to perform in line with strategic plans, with sales of newly produced and developed value-added products largely offsetting market-driven pricing pressures experienced by certain of the Company’s traditional product lines.

The progress Universal is making in its ingredients business is a direct result of the investments made in fiscal years 2024 and 2025, including in its enhanced ingredients facility.

FINANCIAL HIGHLIGHTS

Three Months Ended June 30, Change

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

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

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Cost of goods sold $ 743.6 $ 654.6 14 % $ 1,812.4 $ 1,592.5 14 %

Gross profit margin percentage 16.1 % 16.7 % -60 bps

Gross profit margin percentage 20.7 % 20.3 % 40 bps 19.3 % 19.5 % -20 bps

Selling, general and administrative expenses $ 89.5 $ 78.6 14 % $ 232.0 $ 227.8 2 %

Restructuring and impairment costs $ — $ 0.9 (100) % $ 10.6 $ 3.5 200 %

Operating income $ 104.1 $ 87.5 19 % $ 190.0 $ 153.8 24 %

Adjusted operating income (Non-GAAP)* $ 104.1 $ 88.4 18 % $ 200.6 $ 157.3 28 %

Net income attributable to Universal Corporation $ 59.6 $ 53.2 12 % $ 85.7 $ 79.3 8 %

Adjusted net income attributable to Universal Corporation (Non-GAAP)* $ 59.6 $ 54.1 10 % $ 96.2 $ 82.3 17 %

Diluted earnings (loss) per share $ 2.37 $ 2.12 12 % $ 3.41 $ 3.17 8 %

Adjusted diluted earnings (loss) per share (Non-GAAP)* $ 2.37 $ 2.16 10 % $ 3.83 $ 3.29 16 %

Segment Results

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Ingredients operations operating income (loss) $ 3.7 $ 2.2 69 % $ 7.9 $ 5.0 59 %

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

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

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.

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

Quarter Ended December 31, 2024, compared to Quarter Ended December 31, 2023

Consolidated Results

Revenues and operating income increased by 14%, or $115.7 million, and by 19%, or $16.6 million, respectively, in the quarter ended December 31, 2024, compared to the quarter ended December 31, 2023, primarily driven by improved performance in the Tobacco Operations segment.

Selling, general, and administrative expenses were up by 14%, or $10.9 million, primarily on an unfavorable foreign currency comparison of approximately $11 million in the quarter ended December 31, 2024, compared to the quarter ended December 31, 2023.

Adjusted operating income was up by 18%, or $15.7 million, and adjusted net income attributable to Universal Corporation was up by 10%, or $5.6 million, in the third quarter of fiscal year 2025, compared to the same period in the prior fiscal year, on strong performance in the Tobacco Operations segment.

Tobacco Operations Segment

Revenues and operating income for the Tobacco Operations segment increased by 15%, or $110.0 million, and by 17%, or $15.0 million, respectively, for the quarter ended December 31, 2024, compared to the quarter ended December 31, 2023.

Tobacco Operations segment results reflected continued strong customer demand and successful tobacco procurement and marketing efforts.

Tobacco average sales price and tobacco sales volumes increased 5% and 11%, respectively, in the quarter ended December 31, 2024, compared to the quarter ended December 31, 2023.

In addition, results for the quarter ended December 31, 2024, benefited from higher sales volumes in Asia, in part on better-quality crops, and in North America on accelerated shipment timing in the United States per certain customers’ requests, compared to the same quarter in fiscal year 2024.

Selling, general, and administrative expenses were higher by approximately $14.9 million for the segment mainly due to unfavorable foreign currency comparisons of $10.4 million in the quarter ended December 31, 2024, compared to the quarter ended December 31, 2023.

Uncommitted tobacco inventory levels remained low at about 10% at December 30, 2024.

Ingredients Operations Segment

Revenues and operating income for the Ingredients Operations segment increased by 7%, or $5.7 million, and by 69%, or $1.5 million, respectively, for the quarter ended December 31, 2024, compared to the quarter ended December 31, 2023.

Revenues for value-added products in the Ingredients Operations segment were higher in the quarter ended December 31, 2024, compared to the quarter ended December 31, 2023.

However, the segment did experience some margin pressure in the quarter ended December 31, 2024, due to high raw material costs and inflation-driven increases in consumer food prices.

Also, in the quarter, we continued to see a high level of interest in our value-added products, reflecting the effectiveness of the investments made in Universal Ingredients in fiscal year 2024 and 2025.

Additional Items

Cost of goods sold increased by 14%, or $89.0 million, in the quarter ended December 31, 2024, compared to the quarter ended December 31, 2023, largely on higher tobacco sales volumes and tobacco prices.

Interest expense was up by 24%, or $4 million, in the quarter ended December 31, 2024, compared to the quarter ended December 31, 2023, primarily on on higher notes payable and overdrafts of approximately $173 million.

The consolidated effective tax rate for the three months ended December 31, 2024, was 23%.

The consolidated tax for the three months ended December 31, 2023, was 19%.

The consolidated effective tax rate for the three months ended December 31, 2024, was higher than the consolidated tax rate for the three months ended December 31, 2023, due to various factors, including the mix and timing of domestic and foreign earnings, discrete items, and the effect of exchange rate changes on taxes.

Nine Months Ended December 31, 2024, compared to Nine Months Ended December 31, 2023

Consolidated Results

Revenues and operating income for the nine months ended December 31, 2024, increased by 14%, or $267.3 million, and by 24%, or $36.2 million, respectively, compared to the nine months ended December 31, 2023, primarily driven by improved performance in the Tobacco Operations segment.

Selling, general, and administrative expenses were up by 2%, or $4.2 million, on $5.6 million of unfavorable foreign currency comparisons, $5.0 million of higher sales commissions, and $3.0 million of higher legal and professional fees largely offset by $10.4 million of higher recoveries of farmer advances in the nine months ended December 31, 2024, compared to the nine months ended December 31, 2023.

Adjusted operating income was up by 28%, or $43.3 million, and adjusted net income attributable to Universal Corporation was up by 17%, or $13.9 million, for the nine months ended December 31, 2024, compared to the nine months ended December 31, 2023, largely on strong performance in the Tobacco Operations segment.

Tobacco Operations Segment

Revenues for the Tobacco Operations segment increased by 15%, or $253.6 million, and operating income for the segment increased by 31%, or $45.5 million, in the nine months ended December 31, 2024, compared to the nine months ended December 31, 2023.

Tobacco Operations segment results reflected continued strong customer demand as well as successful tobacco procurement and marketing.

In addition, an approximately 7% increase in the tobacco average sales price;

an 8% increase in total sales volumes;

larger, higher quality, better yielding crops from Africa;

better-quality crops from Asia;

and accelerated shipment timing in the United States per certain customers’ requests, contributed to higher results for the segment in the nine months ended December 31, 2024, compared to the same period in fiscal year 2024.

Ingredients Operations Segment

Revenues and operating income for the Ingredients Operations segment increased by 6%, or $13.7 million, and 59%, or $2.9 million, respectively, in the nine months ended December 31, 2024, compared to the nine months ended December 31, 2023.

Results for the Ingredients Operations segment reflected some increased sales of new products, as well as lower inventory write-downs of $2.1 million compared to the nine months ended December 31, 2023.

However, the segment did experience some margin pressure in the nine months ended December 31, 2024, due to high raw material costs and inflation-driven increases in consumer food prices.

We also continued to see a high level of interest in our value-added products in the nine months ended December 31, 2024, reflecting the effectiveness of the investments made in Universal Ingredients in fiscal year 2024 and 2025.

Additional Items

Cost of goods sold increased by 14%, or $219.8 million, in the nine months ended December 31, 2024, compared to the nine months ended December 31, 2023, largely on higher tobacco sales volumes and tobacco prices that reflected continued strong customer demand as well as successful tobacco procurement and marketing.

Restructuring and impairment costs of $10.6 million in the nine months ended December 31, 2024, were related to the previously announced consolidation of the Company’s European tobacco sheet operations.

The consolidated effective tax rate for the nine months ended December 31, 2024, was 26%.

The consolidated effective tax rate for the nine months ended December 31, 2023, was 20%.

The consolidated effective tax rate for the nine months ended December 31, 2024, was higher than the consolidated tax rate for the nine months ended December 31, 2023, due to various factors, including the mix and timing of domestic and foreign earnings, discrete items, and the effect of exchange rate changes on taxes coupled with a minimal income tax benefit associated with the restructuring and impairment costs recognized for the consolidation of the sheet operations in fiscal year 2025.

Sustainability

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.

On December 19, 2024, Universal released its 2024 Sustainability Report (the “Report”), highlighting its efforts in advancing energy efficiency, strengthening supply chain resiliency and continuing to be a strong partner for its farming communities.

Responsible business practices are integrated into Universal’s business strategy, allowing the Company to cultivate sustainable growth as good stewards of the environment.

As a result of the Company’s transition to cleaner fuels for its operations, 93.5% of the tobacco Universal processes is coal-free as of fiscal year 2024.

This positive change supports the Company’s goal of reducing its greenhouse gas (GHG) emissions by 30% by 2030 from its 2020 baseline year.

In 2024, the Company also trained over 175,000 farmers on Good Agricultural Practices and Agricultural Labor Practices to advance human rights standards throughout its supply chain.

Universal also adopted a Behavior-Based Safety program to cultivate a proactive safety culture in its operations.

Reconciliation of Certain Non-GAAP Financial Measures:

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

Adjusted Operating Income Reconciliation

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

(in thousands) 2024 2023 2024 2023

Consolidated operating income $ 104,076 $ 87,464 $ 190,037 $ 153,811

Restructuring and impairment costs (1)

— 924 10,573 3,523

As Adjusted operating income (Non-GAAP) $ 104,076 $ 88,388 $ 200,610 $ 157,334

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,

2024 2023 2024 2023

Net income attributable to Universal Corporation $ 59,639 $ 53,216 $ 85,709 $ 79,280

Restructuring and impairment costs (1)

— 924 10,573 3,523

Total of Non-GAAP adjustments to income before income taxes — 924 10,573 3,523

Non-GAAP adjustments to income taxes

Income tax benefit from restructuring and impairment costs (2)

— (47) (132) (512)

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

Net income attributable to Universal Corporation (Non-GAAP) $ 59,639 $ 54,093 $ 96,150 $ 82,291

Diluted earnings per share $ 2.37 $ 2.12 $ 3.41 $ 3.17

Diluted earnings per share (Non-GAAP) $ 2.37 $ 2.16 $ 3.83 $ 3.29

(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.

(2) The income tax effect of Non-GAAP adjustments was determined based on the timing and nature of the specific Non-GAAP adjustments and their relevant jurisdictional income tax rates (foreign, state, and local) and the applicable U.S.

federal income tax rates.

The Company considers current and deferred income tax rates to calculate the impact to income taxes for the Non-GAAP adjustments.

The following table reconciles total debt to net debt and net capitalization:

Net Debt and Net Capitalization Reconciliation

December 31, December 31, March 31,

(in thousands) 2024 2023 2024

Notes payable and overdrafts $ 538,526 $ 365,327 $ 417,217

Long-term obligations 617,780 617,225 617,364

Current portion of long-term obligations — — —

Total Debt 1,156,306 982,552 1,034,581

Customer advances and deposits 3,362 19,620 17,179

Cash and cash equivalents 215,108 74,102 55,593

Net Debt (Non-GAAP) $ 944,560 $ 928,070 $ 996,167

Total Universal Corporation shareholders' equity 1,450,610 1,417,076 1,437,207

Net Capitalization (Non-GAAP) $ 2,395,170 $ 2,345,146 $ 2,433,374

Net Debt/Net Capitalization (Non-GAAP) 39 % 40 % 41 %

Liquidity and Capital Resources

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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We also periodically have large cash balances that we utilize to meet our working capital requirements.

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 the United States are being shipped.

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 our fiscal year 2025, were made in our fiscal year 2024, reducing required working capital investments in the nine months ended December 31, 2024.

We funded our working capital needs in the nine months ended December 31, 2024, using a combination of cash on hand, short-term borrowings, customer advances, and operating cash flows.

Operating Activities

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 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 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.

Net cash provided by our operations was $168.2 million during the nine months ended December 31, 2024.

That amount was $215.0 million higher than during the same period in fiscal year 2024, primarily on lower working capital requirements in the nine months ended December 31, 2024, due to accelerated tobacco purchases in Brazil in our fiscal year 2024.

Tobacco inventory levels were $924.7 million as of December 31, 2024, which was $84.3 million below the levels on December 31, 2023, largely due to the timing of tobacco shipments.

We generally do not purchase material quantities of tobacco on a speculative basis, and we target committed inventory levels of 80% or more of total tobacco inventory.

Our level of committed inventory percentages is influenced by timing of farmer deliveries of new crops, as well as the receipt of customer orders.

In addition, when we contract directly with tobacco farmers, we are often obligated to buy all stalk positions, which may contain less marketable leaf styles.

As of December 31, 2024, our uncommitted tobacco inventories were $94.3 million, or about 10% of total tobacco inventory, compared to $181.1 million, or about 17% of our tobacco inventory as of March 31, 2024, and $75.8 million, or about 8% of our tobacco inventory as of December 31, 2023.

Our balance sheet accounts reflected seasonal patterns in the nine months ended December 31, 2024, on deliveries of tobacco crops by farmers in Africa, South America, and the United States.

Accounts receivable increased by $125.7 million from March 31, 2024 levels, on tobacco crop shipments offset in part by collections on receivables.

Notes payable and overdrafts were up $121.3 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.

Accounts receivable were up $214.7 million at December 31, 2024, compared to the same period in the prior fiscal year, on higher tobacco sales volumes as well as the timing of tobacco crop shipments.

Accounts receivable--unconsolidated affiliates were $32.5 million lower as of December 31, 2024, compared to the same period in the prior fiscal year, on the timing of crop shipments.

Notes payable and overdrafts and cash and cash equivalents were up $173.2 million and $141.0 million, respectively, compared to December 31, 2023 levels, largely due to a lower use of cash and cash equivalents to fund working capital needs.

Investing Activities

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increasing our strong dividend;

exploring growth opportunities for our plant-based ingredients platform;

exploring growth opportunities for our ingredients business;

and returning excess capital to our shareholders.

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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 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.

During the nine months ended December 31, 2024 and 2023, we invested about $54.9 million and $47.7 million, respectively, in our property, plant and equipment.

Depreciation expense was approximately $36.1 million and $35.4 million for the nine months ended December 31, 2024 and 2023, respectively.

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

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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.

On November 7, 2024, we announced that our Board of Directors had approved a new share repurchase program, which replaced the share repurchase program expiring November 15, 2024, for the purchase of up to $100 million of our common stock through November 15, 2026.

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

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

During the three months ended June 30, 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.

During the three months ended December 31, 2024, we did not purchase any shares of common stock.

As of December 31, 2024, approximately 24.7 million shares of our common stock were outstanding.

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 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.

Net debt as a percentage of net capitalization was approximately 39% at December 31, 2024, down from the December 31, 2023 level of approximately 40%, and down from the March 31, 2024 level of approximately 41%.

As of December 31, 2024, we had $215.1 million in cash and cash equivalents, and our short-term debt totaled $538.5 million.

As discussed in Note 15.

"Subsequent Event" to the consolidated financial statements, we obtained lender consents for our committed revolving credit facility (the "Consents").

The Consents provided for, among other things, an extension until June 16, 2025, to file the second and third quarter financial statements with the SEC.

Based on our September 30, 2024 financial statements and December 31, 2024 financial statements, we were in compliance with the financial covenants in the committed revolving credit facility as of the end of each of the second and third fiscal quarters.

As of December 31, 2024, we had $270 million available under the committed revolving credit facility that will mature in December 2027, and we had approximately $152 million in available, uncommitted credit lines.

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

Our seasonal working capital requirements for our tobacco business typically increase significantly between March and September and decline after mid-year.

Available capital resources from our cash balances, committed credit facility, and uncommitted credit lines exceed our normal working capital needs and currently anticipated capital expenditure requirements over the next twelve months.

Our seasonal working capital requirements for our tobacco business typically increase significantly between March and September and decline after mid-fiscal year.

Available capital resources from our cash balances, committed revolving credit facility, and uncommitted credit lines are expected to exceed our normal working capital needs and currently anticipated capital expenditure requirements over the next twelve months.

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

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.

At December 31, 2024, the fair value of our outstanding interest rate swap agreements was an asset of about $6.3 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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The swaps are accounted for as cash flow hedges.

We also use derivative instruments from time to time to hedge certain foreign currency exposures, primarily related to forecasted purchases of tobacco, related processing costs, and crop input sales in Brazil, as well as our net monetary balance sheet exposures in local currency there.

We also use derivative instruments from time to time to hedge certain foreign currency exposures, primarily related to forecasted purchases of tobacco, related processing costs, and crop input sales, as well as our net monetary balance sheet exposures in local currency.

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

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.

As of December 31, 2024, the fair value of our open hedges for forecasted tobacco purchases was a net liability of approximately $13.8 million.

We had forward contracts outstanding that were not designated as hedges, and the fair value of those contracts was a net liability of approximately $2.8 million as of December 31, 2024.

Critical Accounting Estimates

A summary of our critical accounting policies is included in Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the period ended March 31, 2024.

Management's Discussion and Analysis of Financial Condition and Results of Operations of our 2024 Form 10-K.

Our critical accounting policies have not changed from those reported in the 2024 Annual Report on Form 10-K.

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