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 "guidance", "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, 2024 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; risks and uncertainties related to geopolitical conflicts, including the armed conflict between Israel and Hamas and disruptions affecting Red Sea shipping; 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 and other cybersecurity risks; continued high inflation; 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 or reduced 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 pandemics or other widespread health crises and any 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 the Company's business activities, including but not limited to, 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 except to the extent required by law. Overview Pyxus is a global agricultural company with businesses having more than 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. 23 Executive Summary The positive momentum from fiscal year 2024 carried into the Company's first quarter of fiscal year 2025 as sales growth remained strong year-over-year. Customer demand remains steady as undersupply conditions persist due to short crops in South America and in certain geographies in Africa. We were successful in adapting to market conditions by leveraging our global geographic footprint to meet the needs of our customers and grow our business. We also continued to take advantage of opportunities to reduce long-term debt by purchasing $10.3 million of aggregate principal amount of the Pyxus Term Loans for $9.4 million in May 2024 and on August 2, 2024, the Company purchased $34.2 million of the 8.5% Senior Secured Notes for $26.7 million. Our disciplined focus on reducing long-term debt, optimizing working capital, and improving access to liquidity remain paramount to our strategy to enhance stakeholder value. Our employees kept their focus on operational effectiveness and demonstrated resiliency in the face of external challenges, especially in Southern Brazil where El Niño weather effects dealt this region unprecedented amounts of rainfall in April and May, leading to widespread catastrophic flooding. While the Company was spared from significant damage, our teams provided relief to affected colleagues, contracted farmers, and the local communities, while at the same time working to ensure the safety of our operations and the continuity of our business during the busy crop buying season. 24 Results of Operations Three Months Ended June 30, 2024 and 2023 Three Months Ended June 30, Change (in millions, except per kilo amounts) 2024 2023 $ % Consolidated: Sales and other operating revenues $ 634.9 $ 477.1 157.8 33.1 Cost of goods and services sold 551.0 404.0 147.0 36.4 Gross profit 83.9 73.1 10.8 14.8 Gross profit as a percent of sales 13.2 % 15.3 % Selling, general, and administrative expenses $ 40.7 $ 34.1 6.6 19.4 Other expense, net 2.6 2.6 — — Restructuring and asset impairment charges 0.1 — 0.1 ** Operating income 40.5 36.4 4.1 11.3 Gain on debt retirement 1.3 — 1.3 ** Interest expense, net 33.3 30.8 2.5 8.1 Income tax expense 6.1 2.6 3.5 134.6 (Income) loss from unconsolidated affiliates, net (2.6) 2.2 (4.8) (218.2) Net income (loss) attributable to noncontrolling interests 0.3 — 0.3 ** Net income attributable to Pyxus International, Inc.* $ 4.6 $ 0.8 3.8 475.0 Leaf: Product revenues $ 589.2 $ 450.9 138.3 30.7 Tobacco costs 484.0 363.0 121.0 33.3 Transportation, storage, and other period costs 24.8 20.7 4.1 19.8 Total product cost of goods sold 508.8 383.7 125.1 32.6 Product revenue gross profit 80.4 67.2 13.2 19.6 Product revenue gross profit as a percent of sales 13.6 % 14.9 % Kilos sold 95.7 85.5 10.2 11.9 Average price per kilo $ 6.16 $ 5.27 0.89 16.9 Average cost per kilo 5.32 4.49 0.83 18.5 Average gross profit per kilo 0.84 0.78 0.06 7.7 Processing and other revenues $ 41.8 $ 25.5 16.3 63.9 Processing and other revenues costs of services sold 37.4 19.9 17.5 87.9 Processing and other gross profit 4.4 5.6 (1.2) (21.4) Processing and other gross profit as a percent of sales 10.5 % 22.0 % All Other: Sales and other operating revenues $ 3.9 $ 0.7 3.2 457.1 Cost of goods and services sold 4.8 0.4 4.4 1,100.0 Gross income (loss) (0.9) 0.3 (1.2) (400.0) Gross income (loss) as a percent of sales (23.1) % 42.9 % * Amounts may not equal column totals due to rounding. ** Not meaningful for comparison purposes. 25 Sales and other operating revenues were $477.1 million for the three months ended June 30, 2023 and $634.9 million for the three months ended June 30, 2024, an increase of $157.8 million, or 33.1%. This increase was due to a 16.9% increase in average price per kilo driven by higher tobacco prices and a 11.9% increase in volume primarily due to accelerated timing of shipments in North America compared to the prior year. Cost of goods and services sold were $404.0 million for the three months ended June 30, 2023 and $551.0 million for the three months ended June 30, 2024, an increase of $147.0 million, or 36.4%. This increase was mainly due to the 18.5% increase in average cost per kilo primarily due to undersupply conditions and inflation. Gross profit as a percent of sales decreased from 15.3% for the three months ended June 30, 2023 to 13.2% for the three months ended June 30, 2024 mainly due to a shift in product mix in Africa and regional mix. Average gross profit per kilo increased 7.7% primarily due to more favorable customer and regional mix. Selling, general, and administrative expenses were $34.1 million for the three months ended June 30, 2023 and $40.7 million for the three months ended June 30, 2024, an increase of $6.6 million, or 19.4%. This increase was primarily due to the recognition of $3.0 million of equity-based compensation in the current quarter for modified awards, pursuant to the Amended and Restated 2020 Incentive Plan, and earlier recognition of accrued bonus compensation. Income tax expense was $2.6 million for the three months ended June 30, 2023 and $6.1 million for the three months ended June 30, 2024, an increase of $3.5 million, or 134.6%. This increase was primarily due to higher income during the period, net foreign currency impact, and additional uncertain tax benefits reserves, partially offset by changes in the valuation allowance. 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 our 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. Although we believe that our sources of liquidity will be sufficient to fund our anticipated operating needs for the next twelve months, we anticipate periods during which our liquidity needs for operations will 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. 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 11. 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. 26 The following summarizes our total borrowing capacity at June 30, 2024 and 2023 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, 2024 June 30, 2023 (in millions) Total Borrowing Capacity Remaining Amount Available Total Borrowing Capacity Remaining Amount Available Senior Secured Credit Facilities: ABL Credit Facility $ 120.0 $ 76.0 $ 100.0 $ 50.0 Foreign seasonal lines of credit 815.6 169.7 702.1 149.1 Other long-term debt 0.4 0.3 0.6 0.2 Letters of credit 10.6 2.9 10.1 4.1 Total $ 946.6 $ 248.9 $ 812.8 $ 203.4 The total borrowing capacity under the ABL Credit Facility increased $20.0 million when compared to the prior period as a result of the Company entering into the Third Amendment to the ABL Credit Agreement on October 24, 2023, which among other things, increased the aggregate amount of revolving loan commitments from $100.0 million to $120.0 million. The amount available under the ABL Credit Facility is limited by a borrowing base consisting of certain eligible accounts receivable and inventory, reduced by specified reserves. Foreign seasonal lines of credit increased $113.5 million when compared to the prior year and were utilized to purchase green tobacco at higher prices. Many of the foreign seasonal lines of credit are secured by trade receivables and inventories as collateral and are subject to restrictive covenants. 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. The following summarizes the computation of net debt: (in millions) June 30, 2024 June 30, 2023 March 31, 2024 Notes payable $ 679.4 $ 585.4 $ 499.3 Current portion of long-term debt 20.4 — 20.3 Long-term debt (1) 531.5 643.8 497.7 Total debt liabilities* $ 1,231.3 $ 1,229.3 $ 1,017.3 Less: Cash and cash equivalents 82.0 100.0 92.6 Net debt* $ 1,149.3 $ 1,129.2 $ 924.7 * Amounts may not equal column totals due to rounding (1) Fluctuations in long-term debt are due to borrowings and repayments on the outstanding indebtedness under the ABL Credit Facility, along with repurchases of certain long-term debt. Weighted average borrowings outstanding under the ABL Credit Facility during the three months ended June 30, 2024 was $64.0 million. Net debt increased as of June 30, 2024 when compared to June 30, 2023 as a result of lower cash and cash equivalents on hand, which is driven by higher cash spend on purchases of more expensive green tobacco. 27 Working Capital The following summarizes our working capital: (in millions except for current ratio) June 30, 2024 June 30, 2023 March 31, 2024 Cash, cash equivalents, and restricted cash $ 89.1 $ 105.5 $ 99.8 Trade and other receivables, net 226.1 204.4 187.5 Inventories and advances to tobacco suppliers 1,058.4 1,062.8 952.1 Recoverable income taxes 4.1 5.9 4.5 Prepaid expenses and other current assets 64.5 57.6 66.4 Total current assets* $ 1,442.1 $ 1,436.3 $ 1,310.2 Notes payable $ 679.4 $ 585.4 $ 499.3 Accounts payable 115.3 133.9 181.2 Advances from customers 71.0 61.3 90.7 Accrued expenses and other current liabilities 99.1 94.4 97.0 Income taxes payable 8.7 20.1 8.5 Operating leases payable 7.8 9.2 8.1 Current portion of long-term debt 20.4 — 20.3 Total current liabilities* $ 1,001.7 $ 904.3 $ 905.2 Current ratio 1.4 to 1 1.6 to 1 1.4 to 1 Working capital $ 440.4 $ 532.0 $ 405.0 * Amounts may not equal column totals due to rounding Working capital declined from June 30, 2023 to June 30, 2024 by $91.6 million, or 17.2%, primarily due to the increase in outstanding short-term lines of credit used to purchase green tobacco at higher prices, as well as the impact of the 10% Notes due August 24, 2024 being classified as current. Inventories The following summarizes inventory committed to a customer and uncommitted inventory balances for processed tobacco: (in millions) June 30, 2024 June 30, 2023 March 31, 2024 Committed $ 590.8 $ 630.8 $ 570.4 Uncommitted 14.7 12.0 14.9 Total processed tobacco $ 605.5 $ 642.8 $ 585.3 Total processed tobacco decreased from June 30, 2023 to June 30, 2024 by $37.3 million, or 5.8%, primarily due to accelerated timing of shipments from North America and smaller crop sizes from certain markets in Africa. Uncommitted levels of processed tobacco continue to remain low as undersupply conditions persist in the global tobacco market. See " Note 7. Inventories, Net " 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 uncommitted short-term foreign seasonal lines of credit, 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 28 various other financing arrangements to meet the cash requirements of our businesses. See " Note 11. 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, 2024, our cash, cash equivalents, and restricted cash was $89.1 million of which approximately $63.4 million was held in non-U.S. jurisdictions, which $44.6 million was 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) 2024 2023 Net income $ 5.0 $ 0.8 Trade and other receivables (72.4) (33.1) Inventories and advances to tobacco suppliers (108.0) (245.9) Payables and accrued expenses (64.8) (32.5) Advances from customers (18.6) 18.8 Other 6.6 6.2 Net cash used in operating activities $ (252.2) $ (285.7) Collections from beneficial interests in securitized trade receivables 31.7 30.4 Other (3.8) (3.4) Net cash provided by investing activities $ 27.9 $ 27.0 Net proceeds from short-term borrowings 182.0 205.9 Repayment of long-term borrowings (9.1) — Net proceeds of revolving loan facilities 44.0 25.0 Other (2.6) (3.5) Net cash provided by financing activities $ 214.3 $ 227.4 Effect of exchange rate changes on cash (0.8) (2.2) Decrease in cash, cash equivalents, and restricted cash* $ (10.7) $ (33.4) * Amounts may not equal column totals due to rounding The change in cash, cash equivalents, and restricted cash for the three months ended June 30, 2024 compared to the three months ended June 30, 2023 increased by $22.7 million. This increase was mainly driven by the change in inventory, primarily the timing of purchases in Africa and South America compared to the prior year, partially offset by accelerated timing of shipments in North America. 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 $5.1 million in capital expenditures for the three months ended June 30, 2024 , and are expecting to incur an additional $25.2 million for the remainder of the fiscal year ending March 31, 2025, which includes expenditures expected to be funded through government assistance. 29 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 June 30, (in millions) 2024 Contributions made during the period $ 1.3 Contributions expected for the remainder of the fiscal year 3.6 Total $ 4.9 No cash dividends on shares of common stock of Pyxus International, Inc. were paid to shareholders during the three months ended June 30, 2024. As of June 30, 2024, the payment of such 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 II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2024. Item 3. Quantitative and Qualitative Disclosures About Market Risk There have been no significant changes to our market risk exposures since March 31, 2024. 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, 2024.