PYXUS INTERNATIONAL, INC. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements Readers are cautioned that the statements contained in this report regarding expectations of our performance or other matters that may affect our business, results of operations, or financial condition are "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. These statements, which are based on current expectations of future events, may be identified by the use of words such as "strategy," "expects," "continues," "plans," "anticipates," "believes," "will," "estimates," "intends," "projects," "goals," "targets," and other words of similar meaning. These statements also may be identified by the fact that they do not relate strictly to historical or current facts. If underlying assumptions prove inaccurate, or if known or unknown risks or uncertainties materialize, actual results could vary materially from those anticipated, estimated, or projected. These risks and uncertainties include those discussed in this Quarterly Report on Form 10-Q, in our Annual Report on Form 10-K for the year ended March 31, 2023 and in our other filings with the Securities and Exchange Commission. These risks and uncertainties include: our reliance on a small number of significant customers; continued vertical integration by our customers; global shifts in sourcing customer requirements; shifts in the global supply and demand position for tobacco products; variation in our financial results due to growing conditions, customer indications and other factors; loss of confidence in us by our customers, farmers and other suppliers; migration of suppliers who have historically grown tobacco and from whom we have purchased tobacco toward growing other crops; risks related to our advancement of inputs to tobacco suppliers to be settled upon the suppliers delivering us unprocessed tobacco at the end of the growing season; risks that the tobacco we purchase directly from suppliers will not meet our customers’ quality and quantity requirements; weather and other environmental conditions that can affect the marketability of our inventory; international business risks, including unsettled political conditions, uncertainty in the enforcement of legal obligations, including the collection of accounts receivable, fraud risks, expropriation, import and export restrictions, exchange controls, inflationary economies, currency risks and risks related to the restrictions on repatriation of earnings or proceeds from liquidated assets of foreign subsidiaries; many of our operations are located in jurisdictions that pose a high risk of potential violations of the Foreign Corrupt Practices Act; impacts of international sanctions on our ability to sell or source tobacco in certain regions; exposure to foreign tax regimes in which the rules are not clear, are not consistently applied and are subject to sudden change; fluctuations in foreign currency exchange and interest rates; competition with the other primary global independent leaf tobacco merchant and independent leaf merchants; disruption, failure or security breaches of our information technology systems; continued high inflation; we have identified material weaknesses related to our internal controls in certain prior years, and there can be no assurance that material weaknesses will not be identified in the future; regulations regarding environmental matters; risks related to our capital structure, including risks related to our significant debt and our ability to continue to finance our non-U.S. local operations with uncommitted short-term operating credit lines at the local level; our ability to continue to access capital markets to obtain long-term and short-term financing; potential failure of foreign banks in which our subsidiaries maintain deposits or the failure by such banks to transfer funds or honor withdrawals; the risk that, because our ability to generate cash depends on many factors beyond our control, we may be unable to generate the significant amount of cash required to service our indebtedness; our ability to refinance our current credit facilities at the same availability or at similar interest rates; failure to achieve our stated goals, which may adversely affect our liquidity; developments with respect to our liquidity needs and sources of liquidity; the volatility and disruption of global credit markets; failure by counterparties to derivative transactions to perform their obligations; increasing scrutiny and changing expectations from governments, as well as other stakeholders such as investors and customers, with respect to our environmental, social and governance policies, including sustainability policies; inherent risk of exposure to product liability claims, regulatory action and litigation facing our e-liquids business if its products are alleged to have caused significant loss, injury, or death; certain shareholders have the ability to exercise controlling influence on various corporate matters; reductions in demand for consumer tobacco products; risks and uncertainties related to the COVID-19 pandemic and its related shipping constraints, labor shortages and supply-chain impacts; legislative and regulatory initiatives that may reduce consumption of consumer tobacco products and demand for our services and increase regulatory burdens on us or our customers; government actions that significantly affect the sourcing of tobacco, including governmental actions to identify and assess crop diversification initiatives and alternatives to leaf tobacco growing in countries whose economies depend upon tobacco production; governmental investigations into, and litigation concerning, leaf tobacco industry buying and other payment practices; and impact of potential regulations to prohibit the sale of cigarettes in the United States other than low-nicotine cigarettes. We do not undertake to update any forward-looking statements that we may make from time to time. 21 Executive Summary Higher tobacco prices, accelerated timing of shipments, and a favorable shift in customer mix contributed to a 39% increase in revenue and improved profitability compared to the prior year. In the first quarter of fiscal 2024, we believe we reached the peak of our fiscal 2024 tobacco purchases as we significantly accelerated our buying, using our geographic footprint to acquire tobacco inventory from multiple markets to meet higher current crop supply requirements and customer demand for fiscal 2024. Customer shipments in fiscal 2024 will utilize a higher percentage of tobacco purchased during the current fiscal year to fulfill orders compared to the prior year given our uncommitted inventory continues to be historically low. Our management of working capital provided sufficient liquidity through short-term borrowings under our foreign seasonal lines of credit, availability under the ABL Credit Facility, cash generated from operations, and cash collections from our securitized receivables to purchase larger volumes of more expensive tobacco compared to the prior year. In the first quarter of fiscal 2024, we increased our purchases of inventory by more than $100 million compared to the prior year using $40 million of incremental foreign seasonal lines of credit and our improved cash conversion cycle. Overview The Company is a global agricultural company with 150 years of experience delivering value-added products and services to businesses and customers. The Company is a trusted provider of responsibly sourced, independently verified, sustainable, and traceable products and ingredients. 22 Results of Operations Three Months Ended June 30, 2023 and 2022 Three Months Ended June 30, Change* (in millions, except per kilo amounts) 2023 2022 $ % Sales and other operating revenues $ 477.1 $ 343.9 133.2 38.7 Cost of goods and services sold 404.0 303.2 100.8 33.2 Gross profit 73.1 40.8 32.3 79.2 Selling, general, and administrative expenses $ 34.1 $ 34.6 (0.5) (1.4) Other expense (income), net 2.6 (1.1) 3.7 336.4 Restructuring and asset impairment charges — 0.3 (0.3) (100.0) Operating income 36.4 7.0 29.4 420.0 Loss on deconsolidation/disposition of subsidiaries — 0.6 (0.6) (100.0) Interest expense, net 30.8 25.5 5.3 20.8 Income tax expense (benefit) 2.6 (0.9) 3.5 388.9 Loss (income) from unconsolidated affiliates 2.2 (3.7) 5.9 159.5 Net income attributable to noncontrolling interests — 0.2 (0.2) (100.0) Net income (loss) attributable to Pyxus International, Inc. $ 0.8 $ (14.7) 15.5 105.4 Leaf: Sales and other operating revenues $ 450.9 $ 322.9 128.0 39.6 Tobacco costs 363.0 266.0 97.0 36.5 Transportation, storage, and other period costs 20.7 20.6 0.1 0.5 Total cost of goods sold 383.7 286.6 97.1 33.9 Product revenue gross profit 67.2 36.3 30.9 85.1 Product revenue gross profit as a percent of sales 14.9 % 11.2 % Kilos sold 85.5 72.1 13.4 18.6 Average price per kilo $ 5.27 $ 4.48 0.79 17.6 Average cost per kilo 4.49 3.98 0.51 12.8 Average gross profit per kilo 0.78 0.50 0.28 56.0 Processing and other revenues $ 25.5 $ 17.7 7.8 44.1 Processing and other revenues costs of services sold 19.9 12.5 7.4 59.2 Processing and other gross profit 5.6 5.2 0.4 7.7 Processing and other gross profit as a percent of sales 22.0 % 29.3 % All Other: Sales and other operating revenues $ 0.7 $ 3.3 (2.6) (78.8) Cost of goods and services sold 0.4 4.0 (3.6) (90.0) Gross income (loss) 0.3 (0.7) 1.0 142.9 Gross income (loss) as a percent of sales 42.9 % (21.6) % *Dollar and percentage changes may not calculate exactly due to rounding. 23 Sales and other operating revenues were $343.9 million for the three months ended June 30, 2022 and $477.1 million for the three months ended June 30, 2023, an increase of $133.2 million , or 38.7%. This increase was primarily due t o an 18.6% in leaf volume and a 17.6% increase in average price per kilo. The increase in leaf volume was primarily due to the accelerated timing of shipments from Africa and South America. The increase in average price per kilo was mainly due to higher tobacco prices. Cost of goods and services sold were $303.2 million for the three months ended June 30, 2022 and $404.0 million for the three months ended June 30, 2023, an increase of $100.8 million, or 33.2%. This increase was mainly due to the increase in sales and other operating revenues. Average cost per kilo increased primarily due to undersupply conditions and inflation. Gross profit as a percent of sales went from 11.9% for the three months ended June 30, 2022 to 15.3% for the three months ended June 30, 2023. Average gross profit per kilo for product revenue was $0.50 for the three months ended June 30, 2022 and $0.78 for the three months ended June 30, 2023, an increase of $0.28 per kilo or 56.0%. These increases were primarily due to customer mix in Africa, Asia, and Europe. Operating income was $7.0 million for the three months ended June 30, 2022 and $36.4 million for the three months ended June 30, 2023, an increase of $29.4 million, or 420.0%. This increase was mainly due to higher leaf sales and other operating revenues from increased volume and average price per kilo and was partially offset by higher other expense, net, which was primarily due to higher utilization of securitization facilities . Liquidity and Capital Resources Overview Our primary sources of liquidity are cash generated from operations, short-term borrowings under our foreign seasonal lines of credit, availability under ABL Credit Facility, and cash collections from our securitized receivables. Our liquidity requirements are affected by various factors from our core tobacco leaf business, including crop seasonality, foreign currency and interest rates, green tobacco prices, customer mix, crop size, and quality. Our leaf tobacco business is seasonal, and purchasing, processing, and selling activities have several associated peaks where cash on-hand and outstanding indebtedness may vary significantly compared to year end. The first three quarters of our fiscal year generally represent the peak of our working capital requirements. We believe our sources of liquidity will be sufficient to fund our anticipated operating needs for the next twelve months. During such time our liquidity needs for operations may approach the levels of our anticipated available cash and permitted borrowings under our credit facilities. Unanticipated developments affecting our liquidity needs, including with respect to the foregoing factors, and sources of liquidity, including impacts affecting our cash flows from operations and the availability of capital resources (including an inability to renew or refinance seasonal lines of credit), may result in a deficiency in liquidity. To address a potential liquidity deficiency, we may undertake plans to minimize cash outflows, which could include exiting operations that do not generate positive cash flow. It is possible that, depending on the occurrence of events affecting our liquidity needs and sources of liquidity, such plans may not be sufficient to adequately or timely address a liquidity deficiency. Debt Financing We continue to finance our business with a combination of short-term and long-term credit lines, the long-term debt securities, advances from customers, and cash from operations when available. See " Note 9 . Debt Arrangements " to the "Notes to Condensed Consolidated Financial Statements" for a summary of our short-term and long-term debt. We continuously monitor and, as available, adjust funding sources as needed to enhance and drive various business opportunities. From time to time we may take steps to reduce our debt or otherwise improve our financial position. Such actions could include prepayments, open market debt repurchases, negotiated repurchases, other redemptions or retirements of outstanding debt, and refinancing of debt. The amount of prepayments or the amount of debt that may be repurchased, refinanced, or otherwise retired, if any, will depend on market conditions, trading levels of our debt, our cash position, compliance with debt covenants, and other considerations. 24 The following summarizes our total borrowing capacity at June 30, 2023 and 2022 under our short-term and long-term credit lines and letter of credit facilities and the remaining available amount after the reduction for outstanding borrowings and amounts reserved for outstanding letters of credit: June 30, 2023 (in millions) Total Borrowing Capacity Remaining Amount Available ABL Credit Facility $ 100.0 $ 50.0 Foreign seasonal lines of credit 702.1 149.1 Other long-term debt 0.6 0.2 Letters of credit 10.1 4.1 Total $ 812.8 $ 203.4 June 30, 2022 (in millions) Total Borrowing Capacity Remaining Amount Available ABL Credit Facility $ 100.0 $ 10.0 Foreign seasonal lines of credit 717.2 171.9 Other long-term debt 0.6 — Letters of credit 18.3 3.9 Total $ 836.1 $ 185.8 Net Debt We refer to "Net debt," a non-GAAP measure, as total debt liabilities less cash and cash equivalents. We believe this non-GAAP financial measure is useful to monitor leverage and to evaluate changes to the Company's capital structure. A limitation associated with using net debt is that it subtracts cash and cash equivalents, and therefore, may imply that management intends to use cash and cash equivalents to reduce outstanding debt and that cash held in certain jurisdictions can be applied to repay obligations owing in other jurisdictions and without reduction for applicable taxes. In addition, net debt suggests that our debt obligations are less than the most comparable GAAP measure indicates. (in millions) June 30, 2023 June 30, 2022 March 31, 2023 Notes payable (1) $ 585.4 $ 545.2 $ 382.5 Current portion of long-term debt — 13.8 0.1 Long-term debt (2) 643.8 678.8 618.4 Total debt liabilities* $ 1,229.3 $ 1,237.8 $ 1,001.0 Less: Cash and cash equivalents 100.0 165.4 136.7 Net debt* $ 1,129.2 $ 1,072.3 $ 864.3 * Amounts may not equal column totals due to rounding (1) The increase from June 30, 2022 to June 30, 2023 is due to higher borrowings under the Company's foreign seasonal lines of credit used to finance the purchase of greater volumes of more expensive green tobacco. The increase from March 31, 2023 to June 30, 2023 is due to seasonality of the business, with higher working capital requirements in the first half of the fiscal year. (2) The fluctuations in long-term debt from June 30, 2022 and March 31, 2023 are due to repayments and borrowings on the outstanding indebtedness under the ABL Credit Facility. Weighted average borrowings outstanding under the ABL Credit Facility during the three months ended June 30, 2023 was $79.9 million. 25 Working Capital The following summarizes our working capital: (in millions except for current ratio) June 30, 2023 June 30, 2022 March 31, 2023 Cash, cash equivalents, and restricted cash $ 105.5 $ 174.9 $ 138.9 Trade and other receivables, net 204.4 182.8 202.7 Inventories and advances to tobacco suppliers 1,062.8 1,024.1 817.4 Recoverable income taxes 5.9 8.7 5.8 Prepaid expenses and other current assets 57.6 61.2 55.7 Total current assets* $ 1,436.3 $ 1,451.8 $ 1,220.6 Notes payable to banks $ 585.4 $ 545.2 $ 382.5 Accounts payable 133.9 144.9 170.3 Advances from customers 61.3 46.1 42.5 Accrued expenses and other current liabilities 94.4 91.1 92.7 Income taxes payable 20.1 6.7 18.3 Operating leases payable 9.2 8.5 8.7 Current portion of long-term debt — 13.8 0.1 Total current liabilities $ 904.3 $ 856.3 $ 715.1 Current ratio 1.6 to 1 1.7 to 1 1.7 to 1 Working capital $ 532.0 $ 595.5 $ 505.5 * Amounts may not equal column totals due to rounding Working capital declined from June 30, 2022 to June 30, 2023 by $63.5 million, or 10.7% primarily due to lower cash on hand and higher outstanding amounts on foreign seasonal lines of credit. Cash and the foreign seasonal lines of credit were utilized to finance the purchase of greater volumes of more expensive green tobacco compared to the prior year as the Company accelerated its crop buying activities in both Africa and South America compared to the prior year. The costs to procure and process green tobacco in these regions increased from the prior year due to inflationary pressures, market competition, and product mix, which also contributed to the rise in inventories. In addition, the Company utilized cash to partially repay indebtedness under the ABL Credit Facility. Inventories The following summarizes inventory committed to a customer and uncommitted inventory balances for processed tobacco: (in millions) June 30, 2023 June 30, 2022 March 31, 2023 Committed $ 630.8 $ 617.6 $ 479.4 Uncommitted 12.0 28.9 19.0 Total processed tobacco $ 642.8 $ 646.5 $ 498.4 Total processed tobacco decreased from June 30, 2022 to June 30, 2023 by $3.7 million, or 0.6%, primarily due to higher sales of inventories. Uncommitted levels of processed tobacco continue to remain low, as undersupply conditions persist in the global tobacco market. See " Note 5 . Inventories " to the "Notes to Condensed Consolidated Financial Statements" for additional information. Sources and Uses of Cash We typically finance our non-U.S. tobacco operations with short-term foreign seasonal lines of credit. These foreign lines of credit are generally seasonal in nature, normally extending for a term of 180 to 365 days, corresponding to the tobacco crop cycle in that market. These short-term foreign seasonal lines of credit are typically uncommitted and provide lenders the right to cease making loans and demand repayment of loans. These short-term foreign seasonal lines of credit are generally renewed at the outset of each tobacco season. We maintain various other financing arrangements to meet the cash requirements of our 26 businesses. See " Note 9 . Debt Arrangements " to the "Notes to Condensed Consolidated Financial Statements" for additional information. We utilize capital in excess of cash flow from operations to finance accounts receivable, inventory, and advances to tobacco suppliers in foreign countries. In addition, we may periodically elect to purchase, redeem, repay, retire, or cancel indebtedness prior to stated maturity under our various foreign credit lines. As of June 30, 2023, our cash, cash equivalents, and restricted cash was $105.5 million of which approximately $58.2 million was held in foreign jurisdictions, certain of which are subject to exchange controls and tax consequences that could limit our ability to fully repatriate these funds. Fluctuation of the U.S. dollar versus many of the currencies in which we have costs may have an impact on our working capital requirements. We will continue to monitor and hedge foreign currency costs, as needed. The following summarizes the sources and uses of our cash flows: Three Months Ended June 30, (in millions) 2023 2022 Trade and other receivables $ (33.1) $ 26.6 Inventories and advances to tobacco suppliers (245.9) (229.0) Payables and accrued expenses (32.5) (25.2) Advances from customers 18.8 (7.0) Other 7.0 (7.9) Net cash used in operating activities $ (285.7) $ (242.5) Collections from beneficial interests in securitized trade receivables 30.4 45.5 Other (3.4) 1.5 Net cash provided by investing activities $ 27.0 $ 47.0 Net proceeds from short-term borrowings 205.9 170.4 Net proceeds from revolving loan facilities 25.0 — Other (3.5) (1.6) Net cash provided by financing activities $ 227.4 $ 168.8 Effect of exchange rate changes on cash (2.2) 0.3 Decrease in cash, cash equivalents, and restricted cash* $ (33.4) $ (26.4) * Amounts may not equal column totals due to rounding The change in cash, cash equivalents, and restricted cash decreased by $7.0 million for the three months ended June 30, 2023 compared to the three months ended June 30, 2022. The decrease was primarily driven by purchases of greater volume of more expensive green tobacco, increased receivables from greater sales of processed tobacco near the end of the quarter, and reduced collections from beneficial interests in securitized trade receivables as the Company utilized securitization programs that do not result in retaining a beneficial interest. These decreases were partially offset by an increase in cash provided by financing activities primarily due to higher borrowings on our seasonal foreign lines of credit and higher draws on the ABL Credit Facility to fund the purchase of greater volumes of more expensive green tobacco. Planned Capital Expenditures Capital investments in our leaf operations were primarily for routine replacement of machinery and equipment, as well as investments in assets that will add value for our customers and increase our efficiency. We incurred approximately $3.7 million in capital expenditures for the three months ended June 30, 2023 , and are expecting to incur an additional $17.4 million for the remainder of the fiscal year ending March 31, 2024. 27 Pension and Postretirement Health and Life Insurance Benefits The following summarizes cash contributions to pension and postretirement health and life insurance benefits: Three Months Ended (in millions) June 30, 2023 Contributions made during the period 1.2 Contributions expected for the remainder of the fiscal year 3.5 Total $ 4.7 No cash dividends were paid to shareholders during the three months ended June 30, 2023. As of June 30, 2023, the payment of dividends is restricted under the terms of our debt agreements. Critical Accounting Policies and Estimates As of the date of this report, there are no material changes to the critical accounting policies and estimates previously disclosed in Part I, Item 7 "Critical Accounting Policies and Estimates" in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2023. Item 3. Quantitative and Qualitative Disclosures About Market Risk There have been no significant changes to our market risk exposures since March 31, 2023. For a discussion of our exposure to market risk, see Part II, Item 7A "Quantitative and Qualitative Disclosures About Market Risk" contained in our Annual Report on Form 10-K for the fiscal year ended March 31, 2023.