UNIVERSAL CORP /VA/ - Quarter Report: 2023 December (Form 10-Q)

Other, net ()Changes in operating assets and liabilities, net:Accounts and notes receivable()()Inventories()()Other assets Accounts payable()()Accrued expenses and other current liabilities() Income taxes ()Customer advances and deposits ()Net cash provided (used) by operating activities()()CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of property, plant and equipment()()Proceeds from sale of business, net of cash held by the business Proceeds from sale of property, plant and equipment Net cash used by investing activities()()CASH FLOWS FROM FINANCING ACTIVITIES:Issuance of short-term debt, net Issuance of long-term debt Repayment of long-term debt ()Dividends paid to noncontrolling interests()()Repurchase of common stock()()Dividends paid on common stock()()Proceeds from termination of interest rate swap agreements Other()()Net cash provided (used) by financing activities Effect of exchange rate changes on cash, restricted cash and cash equivalents ()Net increase (decrease) in cash, restricted cash and cash equivalents ()Cash, restricted cash and cash equivalents at beginning of year Cash, restricted cash and cash equivalents at end of period$ $

See accompanying notes.

UNIVERSAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.

NOTE 2.

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 $ 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 $ million of termination and impairment costs in other areas of the Tobacco Operations segment.

NOTE 3.

$ $ $ Ingredients sales Processing revenue Other sales and revenue from contracts with customers Total revenue from contracts with customers Other operating sales and revenues Consolidated sales and other operating revenues$ $ $ $

Other operating sales and revenues consists principally of interest on advances to suppliers and dividend payments from deconsolidated affiliates.

NOTE 4.

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 $ 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 $ 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 $ 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 up to the full $ 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 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 $ 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 up to the full $ million assessment. However, based on the strength of the subsidiary's defenses, no loss within that range is considered probable at this time and 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.

million at December 31, 2023 and 2022, and $ million at March 31, 2023. The related valuation allowances totaled $ million at December 31, 2023, $ million at December 31, 2022, and $ 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 $ million and $ 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 $ million ($ million at December 31, 2022, and $ million at March 31, 2023), and the related valuation allowances totaled approximately $ million ($ million at December 31, 2022, and $ 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 $ 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 $ million of remaining capacity for repurchases of common stock at December 31, 2023.

million.

Restricted Cash Release of Deferred Proceeds from Acquisition of Silva International, Inc.

During the three months ended December 31, 2022, the Company released $ 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.

$ $ $ Denominator for basic earnings per shareWeighted average shares outstanding Basic earnings per share$ $ $ $ Diluted Earnings Per ShareNumerator for diluted earnings per shareNet income attributable to Universal Corporation$ $ $ $ Denominator for diluted earnings per share:Weighted average shares outstanding Effect of dilutive securitiesBalance at end of period$ $

The Company's intangible assets primarily consist of capitalized customer-related intangibles, trade names, proprietary developed technology and noncompetition agreements.

—$ $()$ Trade names () Developed technology () Noncompetition agreements— () Other () Total intangible assets$ $()$

December 31, 2022

Useful Life (years)

Gross Carrying Value

Accumulated Amortization

Net Carrying Value

Customer relationships

—

()

Trade names

()

Developed technology

—

()

Noncompetition agreements

—

()

Other

()

Total intangible assets

()

—$ $()$ Trade names () Developed technology () Noncompetition agreements— () Other () Total intangible assets$ $()$

Intangible assets are amortized on a straight-line basis over the asset's estimated useful economic life, as noted above.

$ $ $

2025 2026 2027 2028 and thereafter Total expected future amortization expense$

NOTE 8.

million, which corresponded to a portion of the aggregate outstanding balance of the term loans.

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 $ 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.

$ Processing costs

Total

$ $

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.

million, $ million, and $ 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.

)$ $ $

Gain (loss) reclassified from accumulated other comprehensive loss into earnings

$ $()$ $()

Gain on terminated interest rate swaps amortized from accumulated other comprehensive loss into earnings

$ $ $ $

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 earningsSelling, general and administrative expenses

Hedged Item

Description of hedged itemFloating rate interest payments on term loansCash Flow Hedges - Foreign Currency Exchange Contracts

Derivative

Effective Portion of Hedge

Gain (loss) recorded in accumulated other comprehensive loss$ $ $ $

Gain (loss) reclassified from accumulated other comprehensive loss into earnings

$ $ $ $

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$ $ $ $()Location of gain (loss) recognized in earningsSelling, general and administrative expenses

Hedged Item

Description of hedged item

Forecast purchases of tobacco in Brazil and AfricaDerivatives Not Designated as Hedges - Foreign Currency Exchange ContractsGain (loss) recognized in earnings$()$()$()$()Location of gain (loss) recognized in earningsSelling, 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 $ 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

$ $ Other
long-term
liabilities$ $ $ Foreign currency exchange contractsOther
current
assets Accounts
payable and
accrued
expenses Total$ $ $ $ $ $ Derivatives Not Designated as Hedging InstrumentsForeign currency exchange contractsOther
current
assets$ $ $ Accounts
payable and
accrued
expenses$ $ $ Total$ $ $ $ $ $

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.

$ $ $ $

Trading securities associated with deferred compensation plans

Interest rate swap agreements

Foreign currency exchange contracts

Total financial assets measured and reported at fair value

$ $ $ $ $ Liabilities

Foreign currency exchange contracts

$ $ $ $ $

Total financial liabilities measured and reported at fair value

$ $ $ $ $

December 31, 2022

Fair Value Hierarchy

(in thousands of dollars)

NAV

Level 1

Level 2

Level 3

Total

Assets

Money market funds

Trading securities associated with deferred compensation plans

Interest rate swap agreements

Foreign currency exchange contracts

Total financial assets measured and reported at fair value

Liabilities

Foreign currency exchange contracts

Total financial liabilities measured and reported at fair value

$ $ $ $

Trading securities associated with deferred compensation plans

Foreign currency exchange contracts

Total financial assets measured and reported at fair value

$ $ $ $ $ Liabilities

Interest rate swap agreements

$ $ $ $ $

Foreign currency exchange contracts

Total financial liabilities measured and reported at fair value

$ $ $ $ $

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

$ $ Carrying value of long term obligations$ $ $

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.

NOTE 10.

$ $ $ Interest cost Expected return on plan assets()()()()Net amortization and deferral ()()

Net periodic benefit cost

$ $ $ $


	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	$	$	$	$
Interest cost
Expected return on plan assets	()	()	()	()
Net amortization and deferral			()	()
Net periodic benefit cost	$	$	$	$

During the nine months ended December 31, 2023, the Company made contributions of approximately $ million to its pension plans. Additional contributions of $ million are expected during the remaining three months of fiscal year 2024.

NOTE 11.

years after the grant date and those awarded beginning in fiscal year 2022 vest 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 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 to % of the stated award. The Company’s outside directors receive RSUs following the annual meeting of shareholders. RSUs awarded to outside directors vest year after the grant date. Restricted shares vest upon the individual’s retirement from service as a director.

Grant date fair value$ $ PSUs:Number granted Grant date fair value$ $

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 $ million and $ million, respectively. The Company expects to recognize stock-based compensation expense of approximately $ million during the remaining three months of fiscal year 2024.

NOTE 12.

$ $ $ Ingredients Operations Consolidated sales and other operating revenues$ $ $ $ OPERATING INCOME Tobacco Operations$ $ $ $ Ingredients Operations Segment operating income

Deduct: Equity in pretax (earnings) loss of unconsolidated affiliates (1)

()() ()

Restructuring and impairment costs (2)

() () Consolidated operating income$ $ $ $

(1)

(2).

NOTE 13.

)$()Other comprehensive income (loss) attributable to Universal Corporation:Net gain (loss) on foreign currency translation ()Less: Net (gain) loss on foreign currency translation attributable to noncontrolling interests Other comprehensive income (loss) attributable to Universal Corporation, net of income taxes ()Balance at end of period$()$()Foreign currency hedge:Balance at beginning of year$ $ Other comprehensive income (loss) attributable to Universal Corporation:

Net gain (loss) on derivative instruments (net of tax (expense) benefit of $() and $())

Reclassification of (gain) loss to earnings (net of tax expense (benefit) of $ and $) (1)

()()Other comprehensive income (loss) attributable to Universal Corporation, net of income taxes()()Balance at end of period$ $ Interest rate hedge:Balance at beginning of year$ $()Other comprehensive income (loss) attributable to Universal Corporation:

Net gain (loss) on derivative instruments (net of tax (expense) benefit of $() and $())

Reclassification of (gain) loss to earnings (net of tax expense (benefit) of $ and $()) (2)

() Other comprehensive income (loss) attributable to Universal Corporation, net of income taxes() Balance at end of period$ $ Pension and other postretirement benefit plans:Balance at beginning of year$()$()Other comprehensive income (loss) attributable to Universal Corporation:

Amortization included in earnings (net of tax expense (benefit) of $() and $())(3)

Other comprehensive income (loss) attributable to Universal Corporation, net of income taxes Balance at end of period$()$()Total accumulated other comprehensive loss at end of period$()$()

(1)

(2)

(3)

NOTE 14.

$ $ $ $ $ Changes in common stock Accrual of stock-based compensation

Withholding of shares from stock-based compensation for grantee income taxes

() () Dividend equivalents on RSUs Changes in retained earnings Net income (loss) Cash dividends declared Common stock() ()() ()Dividend equivalents on RSUs() ()() ()Other comprehensive income (loss)() () Balance at end of period$ $ $ $ $ $

$ $ $ $ $ Changes in common stock Repurchase of common stock() ()() ()Accrual of stock-based compensation

Withholding of shares from stock-based compensation for grantee income taxes

() ()() ()Dividend equivalents on RSUs Changes in retained earnings Net income Cash dividends declared

Common stock

() ()() ()Repurchase of common stock() ()() ()Dividend equivalents on RSUs() ()() ()Other comprehensive income (loss)()()() () Other changes in noncontrolling interests

Dividends paid to noncontrolling shareholders

()() ()()Other ()()Balance at end of period$ $ $ $ $ $

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Unless the context otherwise requires, the terms “we,” “our,” “us” or “Universal” or the “Company” refer to Universal Corporation together with its subsidiaries. This Quarterly Report on Form 10-Q and the following “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Among other things, these statements relate to the Company’s financial condition, results of operation, and future business plans, operations, opportunities, and prospects. In addition, the Company and its representatives may from time to time make written or oral forward-looking statements, including statements contained in other filings with the Securities and Exchange Commission and in reports to shareholders. These forward-looking statements are generally identified by the use of words such as we “expect,” “believe,” “anticipate,” “could,” “should,” “may,” “plan,” “will,” “predict,” “estimate,” and similar expressions or words of similar import. These forward-looking statements are based upon management’s current knowledge and assumptions about future events and involve risks and uncertainties that could cause actual results, performance, or achievements to be materially different from any anticipated results, prospects, performance, or achievements expressed or implied by such forward-looking statements. Such risks and uncertainties include, but are not limited to: success in pursuing strategic investments or acquisitions and integration of new businesses and the impact of these new businesses on future results; product purchased not meeting quality and quantity requirements; our reliance on a few large customers; our ability to maintain effective information systems and safeguard confidential information; anticipated levels of demand for and supply of our products and services; costs incurred in providing these products and services including increased transportation costs and delays attributed to global supply chain challenges; timing of shipments to customers; higher inflation rates; changes in market structure; government regulation and other stakeholder expectations; economic and political conditions in the countries in which we and our customers operate, including the ongoing impacts from international conflicts, such as the conflict in Ukraine; product taxation; industry consolidation and evolution; changes in exchange rates and interest rates; impacts of regulation and litigation on our customers; industry-specific risks related to our plant-based ingredients businesses; exposure to certain regulatory and financial risks related to climate change; changes in estimates and assumptions underlying our critical accounting policies; the promulgation and adoption of new accounting standards; new government regulations and interpretation of existing standards and regulations; and general economic, political, market, and weather conditions. For a further description of factors that may cause actual results to differ materially from such forward-looking statements, see Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended March 31, 2023. We caution investors not to place undue reliance on any forward-looking statements as these statements speak only as of the date when made, and we undertake no obligation to update any forward-looking statements made in this report. This Form 10-Q should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended March 31, 2023.

Results of Operations

Amounts described as net income (loss) and earnings (loss) per diluted share in the following discussion are attributable to Universal Corporation and exclude earnings related to non-controlling interests in subsidiaries. Adjusted operating income (loss), adjusted net income (loss) attributable to Universal Corporation, adjusted diluted earnings (loss) per share, and the total for segment operating income (loss) referred to in this discussion are non-GAAP financial measures. These measures are not financial measures calculated in accordance with GAAP and should not be considered as substitutes for operating income (loss), net income (loss) attributable to Universal Corporation, diluted earnings (loss) per share, cash from operating activities or any other operating or financial performance measure calculated in accordance with GAAP, and may not be comparable to similarly-titled measures reported by other companies. A reconciliation of adjusted operating income (loss) to consolidated operating (income), adjusted net income (loss) attributable to Universal Corporation to consolidated net income (loss) attributable to Universal Corporation and adjusted diluted earnings (loss) per share to diluted earnings (loss) per share are provided in Other Items below. In addition, we have provided a reconciliation of the total for segment operating income (loss) to consolidated operating income (loss) in Note 12. "Operating Segments" to the consolidated financial statements. Management evaluates the consolidated Company and segment performance excluding certain significant charges or credits. We believe these non-GAAP financial measures, which exclude items that we believe are not indicative of our core operating results, provide investors with important information that is useful in understanding our business results and trends.

Overview

Universal Corporation again delivered strong financial and operational performance in the third quarter of fiscal year 2024. Operating income and net income for the quarter were up 13% and 28%, respectively, relative to the third quarter of fiscal year 2023, which helped increase operating income and net income for the nine months of fiscal year 2024 by 20% and 13%, respectively, compared to the same period last fiscal year.

Our tobacco business continued to perform very well, driven by a favorable product mix and strong demand from our customers. Improved margins, larger crops in Africa, and strong tobacco shipments in line with our expectations benefited our results in the nine months and quarter ended December 31, 2023, compared to the same periods in fiscal year 2023. Global leaf supply for all types of leaf tobacco continues to be tight, and as of December 31, 2023, our uncommitted tobacco inventory was at a low level of 8%. While we expect global leaf tobacco supply to remain tight in fiscal year 2025, in part due to El Nino weather conditions, we believe the strength of our diverse global footprint will help us satisfy our customers’ leaf tobacco needs.

We continue to be encouraged by the solid progress the team is making to expand our ingredients business. The investments we have made to build out the research and development and corporate sales teams are starting to gain momentum and have positioned us for future growth. We are also pleased with the progress we are making on the expansion of our processing capabilities at our ingredients facility in Lancaster, Pennsylvania. We expect those resources to be fully operational in the third quarter of fiscal year 2025 and positively contributing to our earnings as soon as fiscal year 2026.

Another important achievement in fiscal year 2024 has been the progress we made to advance Universal's global sustainability agenda. These include the December 2023 publication of our 2023 Sustainability Report, and our recently announced participation in a solar project that we believe will help us meet our target to reduce operational greenhouse gas emissions by 30 percent by 2030. We are proud of our sustainability advances, and we continue to seek opportunities to further promote sustainability in our business.


FINANCIAL HIGHLIGHTS
	Nine Months Ended December 31,						Change
(in millions of dollars, except per share data)	2023			2022			$		%

Consolidated Results
Sales and other operating revenue	$	1,977.7		$	1,875.8		$	101.9	5	%
Cost of goods sold	$	1,592.5		$	1,540.4		$	52.2	3	%
Gross Profit Margin	19.5		%	17.9		%			160 bps
Selling, general and administrative expenses	$	227.8		$	206.8		$	21.0	10	%

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	%
Segment Results
Tobacco operations sales and other operating revenues	$	1,742.5		$	1,642.7		$	99.8	6	%
Tobacco operations operating income	$	148.9		$	119.0		$	29.9	25	%
Ingredients operations sales and other operating revenues	$	235.2		$	233.2		$	2.1	1	%
Ingredients operations operating income (loss)	$	5.0		$	9.9		$	(4.9)	(50)	%

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

Net income for the nine months ended December 31, 2023, was $79.3 million, or $3.17 per diluted share, compared with $70.3 million, or $2.82 per diluted share, for the nine months ended December 31, 2022. Excluding restructuring and impairment costs and certain other non-recurring items, as detailed in Other Items below, net income increased by $12.6 million and diluted earnings per share increased by $0.49 for the nine months ended December 31, 2023, compared to the same period in the prior fiscal year. Operating income for the nine months ended December 31, 2023, was $153.8 million, an increase of $25.1 million, compared to operating income of $128.7 million for the nine months ended December 31, 2022. Adjusted operating income, detailed in Other Items below, was $157.3 million, an increase of $28.7 million, as compared to the same period in fiscal year 2023.

Net income for the quarter ended December 31, 2023, was $53.2 million, or $2.12 per diluted share, compared with $41.7 million, or $1.67 per diluted share, for the quarter ended December 31, 2022. Excluding restructuring and impairment costs and certain other non-recurring items, as detailed in Other Items below, net income and diluted earnings per share increased by $12.4 million and $0.49, respectively, for the quarter ended December 31, 2023, compared to the quarter ended December 31, 2022. Operating income for the quarter ended December 31, 2023, was $87.5 million, an increase of $9.9 million, compared to operating income of $77.5 million for the quarter ended December 31, 2022. Adjusted operating income, detailed in Other Items

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

Consolidated revenues increased by $101.9 million to $2.0 billion and by $26.5 million to $821.5 million, respectively, for the nine months and quarter ended December 31, 2023, compared to the same periods in fiscal year 2023. These changes were largely due to higher tobacco sales prices, which more than offset lower tobacco sales volumes, as well as an improved product mix in the Tobacco Operations segment.

Tobacco Operations

Revenues for the Tobacco Operations segment were $1.7 billion for the nine months ended December 31, 2023, and $743.9 million for the quarter ended December 31, 2023, up $99.8 million and $19.3 million, respectively, compared to the same periods in the prior fiscal year. These increases were due to higher tobacco sales prices and a favorable product mix, partially offset by lower tobacco sales volumes.

Operating income for the Tobacco Operations segment increased by $29.9 million to $148.9 million and by $10.5 million to $87.6 million, respectively, for the nine months and quarter ended December 31, 2023, compared with the nine months and quarter ended December 31, 2022. Tobacco Operations segment operating income was up largely on higher prices and a more favorable product mix, partially offset by lower tobacco sales volumes. In the nine months and quarter ended December 31, 2022, a large amount of lower margin carryover tobacco crops was shipped. Larger African crops positively impacted the results for the Tobacco Operations segment in both the nine months and quarter ended December 31, 2023. Carryover crop shipments from South America were significantly lower in the nine months and quarter ended December 31, 2023, compared to the same periods in fiscal year 2023. In the nine months ended December 31, 2023, our operations in Europe and in Asia had improved product mixes, compared to the nine months ended December 31, 2022. Equity earnings from our oriental tobacco joint venture were down in the nine months ended December 31, 2023, on unfavorable foreign currency comparisons and higher interest expenses, but increased in the quarter ended December 31, 2023, on an improved product mix, compared to the same periods in the prior fiscal year. Selling, general, and administrative expenses for the Tobacco Operations segment were higher in the nine months and quarter ended December 31, 2023, compared to the nine months and quarter ended December 31, 2022, primarily on higher compensation and benefit costs, as well as unfavorable foreign currency comparisons.

Ingredients Operations

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.

Other Items

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
As Reported: 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
As Reported: 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


95,255,674

(1)Repurchases are based on the date the shares were traded. This presentation differs from the consolidated statement of cash flows, where the cost of share repurchases is based on the date the transactions were settled.

(2)Amounts listed for average price paid per share include broker commissions paid in the transactions.

(3)A stock repurchase plan, which was authorized by the Company's Board of Directors, became effective and was publicly announced on November 3, 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.

Our current dividend policy anticipates the payment of quarterly dividends in the future. However, the declaration and payment of dividends to holders of common stock is at the discretion of the Board of Directors and will be dependent upon our future earnings, financial condition, and capital requirements. Under certain of our credit facilities, we must meet financial covenants relating to minimum tangible net worth and maximum levels of debt. If we were not in compliance with them, these financial covenants could restrict our ability to pay dividends. We were in compliance with all such covenants at December 31, 2023.

ITEM 5. OTHER INFORMATION

During the three months ended December 31, 2023, none of our directors or officers (as defined in Rule 16a-1(f) of the Securities Exchange Act of 1934, as amended) adopted or terminated a Rule 10b5-1 trading arrangement (as such terms are defined in Item 408 of Regulation S-K of the Securities Act of 1933).

ITEM 6. EXHIBITS



31.1						Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

31.2						Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

32.1						Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350.*

32.2						Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350.*

101						Interactive Data File (submitted electronically herewith).*

						101.INS XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. 101.SCH XBRL Taxonomy Extension Schema Document 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF XBRL Taxonomy Extension Definition Linkbase Document 101.LAB XBRL Taxonomy Extension Label Linkbase Document 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section and shall not be part of any registration or other document filed under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.

104						Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

__________

*Filed herewith

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		UNIVERSAL CORPORATION
		(Registrant)

Date:	February 7, 2024	/s/ Johan C. Kroner
		Johan C. Kroner, Senior Vice President and Chief Financial Officer
		(Principal Financial Officer)

Date:	February 7, 2024	/s/ Scott J. Bleicher
		Scott J. Bleicher, Vice President and Controller
		(Principal Accounting Officer)

UNIVERSAL CORP /VA/ - Quarter Report: 2023 December (Form 10-Q)

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