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Item 7. Management’s Discussion and Analysis

2021-05-28 compared with 2020-05-28 · 287 added, 286 removed, 306 unchanged (65% of the section changed)

1 unchanged sentence

The following discussion and analysis of financial condition and results of operations is provided to enhance the understanding of, and should be read in conjunction with, Part I, Item 1, “Business” and Item 8, “Financial Statements and Supplementary Data.” For information on risks and uncertainties related to our business that may make past performance not indicative of future results, or cause actual results to differ materially from any forward-looking statements, see “General,” and Part I, Item 1A, “Risk Factors.”

We source, process, and supply agri-products.

Universal Corporation is a global business-to-business agri-products supplier to consumer product manufacturers, operating in over 30 countries on five continents, that sources and processes leaf tobacco and plant-based ingredients.

Tobacco has been our principal focus since our founding in 1918, and we are the leading global leaf tobacco supplier.

Through our plant-based ingredients platform, we provide a variety of value-added manufacturing processes to produce high-quality, specialty vegetable and fruit-based ingredients to food and beverage end markets.

We have been finding innovative solutions to serve our customers and meet their agri-product needs for more than 100 years.

We derive most of our revenues from sales of processed tobacco to manufacturers of tobacco products throughout the world and from fees and commissions for specific services.

We hold a strategic position in the world leaf markets where we work closely with both our customers and farmers to ensure that we deliver a compliant product that meets our customers' needs while promoting a strong supplier base.

We adapt to meet changes in customer requirements as well as broader changes in the leaf markets, while continuing to provide the stability of supply and high level of service that distinguishes us in the marketplace.

We believe that we have successfully met the needs of both our customers and suppliers while adapting to changes in leaf markets.

Recognizing that leaf tobacco is a mature industry, we have also been positioning our company for the future by investing in non-tobacco businesses and are focusing on building out a broader plant-based agri-product services platform.

Over the last three fiscal years, we have generated over $250 million in net cash flow from operations, invested over $185 million in our businesses, and returned over $250 million to our shareholders through a combination of dividends and share repurchases.

In fiscal year 2018, net income remained steady at about $106 million, despite modestly lower lamina volumes.

We also continued to grow our market share and expand the services we provide our customers, including gaining new multi-year processing commitments in Brazil.

In addition, we rewarded our shareholders by increasing our dividend rate and returning almost $55 million through dividends and repurchasing about $22 million, or 2%, of our outstanding common stock.

Fiscal year 2018 was not without its challenges as fewer carryover crop sales and shipment delays in North America, African burley crop sizes that were down more than 40% over the prior year, and a $10 million reduction in income from the timing of receipt of distributions of unconsolidated subsidiaries compared to fiscal year 2017, negatively impacted our results.

However, we did benefit from a return to normal crop volumes in Brazil, and the resultant gains from higher volumes and lower factory unit costs there.

Fiscal year 2019 was another strong year for Universal.

We increased our tobacco volumes handled, earned additional business with our customers by expanding the services we provide, and have continued to improve our market share.

During fiscal year 2019, we benefited from the recovery of African burley production, strong carryover volumes in the first half of the year, and robust demand for wrapper tobacco.

Our revenues were up about 10% on those higher volumes, compared to fiscal year 2018.

Our gross margin percentage remained flat, even though our product mix was less favorable as we handled a higher percentage of by-products in fiscal year 2019.

In addition, results in our North America segment were negatively impacted by weather damage to tobacco crops in the United States, which reduced yields and third party processing volumes.

Near the end of fiscal year 2020, uncertain market conditions, mainly driven by the ongoing COVID-19 pandemic, led to extreme weakening of the Indonesian rupiah, Brazilian real, and Mexican peso relative to the U.S.

dollar, all of which experienced double-digit depreciation during the month of March 2020.

These currency weaknesses were the primary drivers for unfavorable currency comparisons, mainly attributable to remeasurement, of $13 million for the year ended March 31, 2020.

Towards the end of fiscal year 2020, we also saw some shipment delays in certain regions due to the COVID-19 pandemic and slower customer orders, which increased our uncommitted inventory levels.

In addition, our results for fiscal year 2020 were negatively impacted by lower carryover volumes compared to fiscal year 2019, mainly in North America and Africa.

Our gross margins for fiscal year 2020, however, remained relatively flat compared to fiscal year 2019.

As we move into fiscal year 2021, we are forecasting that global flue-cured and burley tobacco production will decline by about 7% and 10%, respectively, which we believe will keep flue-cured tobacco in a slight oversupply position and burley will remain in a balanced supply position.

We are closely monitoring the impacts of COVID-19 in all of our operations around the world.

Business activity during the first fiscal quarter is usually lower than in other quarters, as crop purchases are continuing in Brazil and just beginning in Africa.

To date we have not seen a material impact to our supply chain or seasonal planting or harvesting requirements, however, we have experienced increased volatility in foreign currency exchange rates, which we believe is related to the uncertainties from COVID-19.

In some regions, our processing facilities temporarily experienced partial or total closures.

Nearly all operations have resumed, and we have instituted measures to protect our employees including reduced staffing and social distancing.

We have experienced slower processing due to social distancing requirements, which may delay shipments of packed orders.

We have also taken steps at this time to conserve our liquidity position, including limiting most discretionary spending and non-essential capital spending.

We are continuing to position our company for success.

As part of our capital allocation strategy, we made disciplined investments in both tobacco and non-tobacco businesses in fiscal year 2020 that we believe will be able to deliver shareholder value.

Recognizing the strong demand for natural tobacco wrappers, we have taken steps to increase production in strategic regions to meet our customers’ ongoing and future demands.

Our acquisition of FruitSmart Inc.

in January 2020 represents a foundational step in building out a broader plant-based agri-products services platform for which we maintain an active investment pipeline.

time, we are focused on prudently managing our financial position and believe that we are well positioned to fund upcoming working capital needs, including any potential requirements due to the COVID-19 pandemic, and to take advantage of investment opportunities in our tobacco business.

We are also extremely proud that we are able to deliver value to shareholders through dividend increases as illustrated by our milestone 50th annual dividend increase on May 27, 2020

We hold a strategic position in the world leaf tobacco markets where we work closely with both our customers and farmers to ensure that we deliver a compliant product that meets our customers' needs while promoting a strong supplier base.

We adapt to meet changes in customer requirements as well as broader changes in the leaf tobacco markets, while continuing to provide the stability of supply and high level of service that distinguishes us in the marketplace.

We believe that we have successfully met the needs of both our customers and suppliers while adapting to changes in leaf tobacco markets.

Recognizing that leaf tobacco is a mature industry, we have also been positioning our company for the future by investing in strengthening our plant-based agri-product services platform, while maintaining our position as the leading global leaf tobacco supplier.

In fiscal year 2021 we made considerable progress towards building and enhancing our plant-based ingredients platform.

On October 1, 2020, we acquired Silva, a natural, specialty dehydrated vegetable, fruit, and herb processing company.

We have also been working diligently on integrating and exploring opportunities for synergies between our recently acquired businesses, FruitSmart, acquired on January 1, 2020, and Silva.

Given our significant and strategic investments in our plant-based ingredients platform, we evaluated our operating segments for financial reporting purposes during the quarter ended December 31, 2020.

Based on our evaluation, we determined that we conduct our operations across two primary reportable operating segments, Tobacco Operations and Ingredients Operations.

The revised segments reflect how we manage the Company, allocate resources, and assess business performance.

Prior period segment information has been recast retrospectively to reflect these changes.

COVID-19 Pandemic Impact

On March 11, 2020, the World Health Organization declared COVID-19 a pandemic.

On March 11, 2020, the World Health Organization declared the coronavirus (“COVID-19”) a pandemic.

Foreign governmental organizations and governmental organizations in the United States have taken various actions to combat the spread of COVID-19, including imposing stay-at-home orders and closing “non-essential” businesses and their operations.

We are closely monitoring developments related to the ongoing coronavirus (COVID-19) pandemic and have taken and continue to take steps intended to mitigate the potential risks to us.

We continue to closely monitor developments related to the ongoing COVID-19 pandemic and have taken and continue to take steps intended to mitigate the potential risks to us.

It is paramount that our employees who operate our businesses are safe and informed.

We have assessed and updated our existing business continuity plans for our business in the context of this pandemic.

For example, we have taken precautions with regard to employee and facility hygiene, imposed travel limitations on our employees, directed certain employee groups to work remotely whenever possible, and we continue to assess protocols designed to protect our employees, customers and the public.

We are also working with our suppliers to understand the potential impacts to our supply chain;

however, at this time, we have not experienced a material impact to our supply chain.

During the quarter ended March 31, 2020, we experienced increased volatility in foreign currency exchange rates, which we believe is in part related to the uncertainties from COVID-19, as well as actions taken by governments and central banks in response to COVID-19.

Certain foreign currencies depreciated significantly against the U.S.

dollar in March 2020, including the Indonesian rupiah, Brazilian real, and Mexican peso.

We expect continued volatility in foreign currency exchange rates during fiscal year 2021, though we cannot reasonably estimate the duration or extent of that volatility.

We continue to monitor the impacts of COVID-19, which include slower processing of our products due to controlled staffing in our facilities that could lead to later timing of shipments to our customers.

We currently have sufficient liquidity to meet our current obligations and business operations remain fundamentally unchanged other than shipping delays, which could impact quarterly comparisons.

This is, however, a rapidly evolving situation, and we cannot predict the extent or duration of the ongoing COVID-19 pandemic, the effects of it on the global, national or local economy, including the impacts on our ability to access capital, or its effects on our business, financial position, results of operations, and cash flows.

We will continue to monitor developments affecting our employees, customers and operations and take additional steps to address the spread of COVID-19 and its impacts, as necessary.

We have assessed and regularly update our existing business continuity plans for our business in the context of this pandemic.

For example, we have taken precautions with regard to employee and facility hygiene, imposed travel limitations on our employees, implemented work-from-home procedures, and we continue to assess and reevaluate protocols designed to protect our employees, customers and the public.

We continue to work with our suppliers to mitigate the impacts to our supply chain due to the ongoing pandemic.

To date, we have not experienced a material impact to our supply chain, although the ongoing COVID-19 pandemic resulted in delays in certain operations during fiscal year 2021.

In addition, our plant-based ingredients platform has seen some shifts in product mix due to the ongoing COVID-19 pandemic related to changes in customer demand.

Since March 2020, we have at times also experienced increased volatility in foreign currency exchange rates, which we believe is in part related to the continued uncertainties from COVID-19, as well as actions taken by governments and central banks in response to COVID-19.

We continue to monitor the impacts of the ongoing COVID-19 pandemic.

We believe we currently have sufficient liquidity to meet our current obligations and our business operations remain fundamentally unchanged other than shipping delays, which could continue to impact quarterly comparisons.

This is, however, a rapidly evolving situation, and we cannot predict the extent, resurgence, or duration of the ongoing COVID-19 pandemic, the effects of it on the global, national or local economy, including the impacts on our ability to access capital, or its effects on our business, financial position, results of operations, and cash flows.

We continue to monitor developments affecting our employees, customers and operations.

RESULTS OF OPERATIONS

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Fiscal Year Ended March 31, 2021, Compared to the Fiscal Year Ended March 31, 2020

Net income for the fiscal year ended March 31, 2020, was $71.7 million, or $2.86 per diluted share, compared with $104.1 million, or $4.11 per diluted share, for the prior fiscal year.

Excluding restructuring and impairment costs and certain non-recurring items, detailed in Other Items below, net income and diluted earnings per share declined by $25.3 million and $0.96, respectively, for fiscal year 2020, compared to fiscal year 2019.

Operating income of $126.4 million for the fiscal year ended March 31, 2020, decreased by $34.8 million, compared to operating income of $161.2 million for the fiscal year ended March 31, 2019.

Segment operating income was $138.1 million for the fiscal year ended March 31, 2020, a decrease of $48.7 million, compared to the fiscal year 2019.

Results reflected earnings declines in the North America and Other Regions segments, partially offset by earnings improvements in the Other Tobacco Operations segment for fiscal year 2020, compared to fiscal year 2019.

Consolidated revenues decreased by $317.2 million to $1.9 billion for the year ended March 31, 2020, compared to the year ended March 31, 2019, on lower sales volumes and prices.

Flue-cured and Burley Leaf Tobacco Operations

Other Regions

Operating income for the Other Regions segment decreased by $40.8 million to $110.8 million for the fiscal year ended March 31, 2020, compared with fiscal year 2019, on lower sales and processing volumes.

In fiscal year 2020, volumes decreased in Africa on smaller burley tobacco crops and lower carryover crop sales, and results for Brazil were down on lower volumes and a less favorable product mix, compared to fiscal year 2019.

Results for Europe also reflected lower processing and sales volumes for fiscal year 2020, while Asia saw higher sales and trading volumes.

Selling, general, and administrative costs for the segment were lower for fiscal year 2020, largely on lower customer claim costs, gains on fixed asset sales, and lower incentive compensations costs, partially offset by unfavorable foreign currency comparisons and lower net recoveries on advances to suppliers, compared with fiscal year 2019.

Revenues for the Other Regions segment of $1.4 billion for the year ended March 31, 2020, were down $197.3 million, compared to fiscal year 2019, on lower sales prices and volumes.

North America

Operating income for the North America segment of $8.4 million for the fiscal year ended March 31, 2020, was down by $14.7 million, compared to the fiscal year ended March 31, 2019, primarily on significantly lower carryover crop sales volumes.

In the first half of fiscal year 2019, carryover crop sales volumes were higher on shipments that had been delayed in fiscal year 2018 due to reduced transportation availability in the United States.

In addition, in the fiscal year ended March 31, 2020, carryover crop sales volumes were down on reduced sales of U.S.

burley tobaccos and current crop sales volumes were down in Mexico and Guatemala, compared to fiscal year 2019.

Selling, general, and administrative costs for the North America segment were up for the fiscal year ended March 31, 2020, largely on unfavorable currency comparisons in Mexico.

Revenues for this segment decreased by $146.4 million to $236.3 million for the fiscal year ended March 31, 2020, compared to the prior fiscal year, on lower sales volumes.

Other Tobacco Operations

The Other Tobacco Operations segment operating income of $19.0 million increased by $6.8 million for fiscal year 2020, compared with the fiscal year 2019.

In fiscal year 2020, results for our dark tobacco operations reflected higher wrapper sales volumes and unfavorable foreign currency remeasurement comparisons due to the significant weakening of the Indonesian rupiah in the fourth fiscal quarter, compared to fiscal year 2019.

Results for our oriental joint venture were down for fiscal year 2020, compared to fiscal year 2019, primarily from lower sales volumes and margins partially offset by lower operating expenses as well as favorable currency remeasurement and exchange variances.

Selling, general, and administrative costs for the segment were higher in the fiscal year ended March 31, 2020, compared with fiscal year 2019, mostly from unfavorable currency variances in Indonesia.

Revenues for the segment increased by $26.5 million to $301.3 million for the fiscal year ended March 31, 2020, largely on higher wrapper sales volumes and revenues from our newly acquired fruit and vegetable business.

Cost of goods sold in the fiscal year ended March 31, 2020, decreased by 15% to $1.6 billion, compared with the prior fiscal year, consistent with a similar percentage decrease in revenues.

Selling, general, and administrative costs for fiscal year 2020 decreased by $2.2 million to $222.9 million, as lower compensation costs, value-added tax charges, and customer claims costs as well as gains on sales of fixed assets were largely offset by unfavorable currency variances of approximately $13 million, primarily in Indonesia, Brazil, and Mexico.

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

Adjusted Operating Income:

Executive Summary

We are pleased to report that our net income and diluted earnings per share, and our non-GAAP adjusted operating income for fiscal year 2021, are all up over 20% compared to fiscal year 2020.

Strong leaf tobacco shipments in the second half of fiscal year 2021, the addition of our plant-based ingredients acquisitions, and favorable foreign currency comparisons all contributed to this improvement in our results.

We are especially proud that we were able to deliver these results in the midst of the COVID-19 pandemic, and would like to thank our employees, growers, customers, and other partners for their support, adaptability, and hard work that made this a successful year.

Leaf tobacco shipments, which started slowly in fiscal year 2021, accelerated in the second half of the fiscal year.

We ended the year with leaf tobacco volumes that were just slightly below those in fiscal year 2020, in part due to some tobacco shipments that were delayed and will ship in fiscal year 2022.

Despite global challenges including increased safety protocols, work-from-home mandates, and travel restrictions that necessitated adjustment to how we conduct our leaf tobacco business, we successfully delivered the leaf tobacco desired by our customers.

We also delivered on our capital allocation strategy objective to build and enhance our plant-based ingredients platform through the acquisition of Silva in the third quarter of fiscal year 2021.

We are excited about the prospects for our plant-based ingredients platform and continue to progress on our integration process.

In the fourth quarter of fiscal year 2021, our Ingredients Operations segment performed well against its objectives in both the human and pet food categories.

In the year ended March 31, 2021, we benefited from positive net foreign currency comparisons, mostly non-cash currency remeasurement, of $26 million, compared to fiscal year 2020.

Certain currencies weakened significantly in the fourth quarter of fiscal year 2020, largely due to uncertain market conditions related to the burgeoning COVID-19 pandemic.

We ended our fiscal year 2021 with a strong balance sheet and uncommitted leaf tobacco inventory levels just over our target range, at 22%.

In addition to our investments in growth opportunities, we are also pleased to have announced our 51 st annual dividend increase, continuing our commitment to delivering shareholder value.

As we move into fiscal year 2022, we currently expect global supply for flue-cured leaf tobacco to be in line with anticipated demand and for burley leaf tobacco to be in a slight undersupply position.

We are continuing to monitor freight costs as the COVID-19 pandemic disrupted shipping patterns, which has resulted in cost increases due to limited container availability.

We published our second annual Sustainability Report in fiscal year 2021 on our website.

The report showcases our strong commitment to our sustainability programs and initiatives which stems from our belief that sustainability is a key component of our past and future success.

In fiscal year 2022, we will continue to deliver on our fundamental responsibility to our stakeholders to set high standards of social and environmental performance to support a sustainable supply chain.

FINANCIAL HIGHLIGHTS

Fiscal Year Ended March 31, Change

(in millions of dollars, except per share data) 2021 2020 $ %

Consolidated Results

Sales and other operating revenue $ 1,983.4 $ 1,910.0 $ 73.4 4 %

Cost of goods sold 1,597.4 1,553.2 44.2 3 %

Gross Profit Margin 19.5 % 18.7 % --- 80 bps

Selling, general and administrative expenses 219.8 222.9 (3.1) (1) %

Restructuring and impairment costs 22.6 7.5 15.0 199 %

Operating income (as reported) 147.8 126.4 21.4 17 %

Adjusted operating income (non-GAAP)* 172.9 141.3 31.7 22 %

Diluted earnings per share (as reported) 3.53 2.86 0.67 24 %

Adjusted diluted earnings per share (non-GAAP)* 4.25 3.49 0.76 22 %

Segment Results

Tobacco operations sales and other operating revenues $ 1,841.8 $ 1,887.1 $ (45.2) (2) %

Tobacco operations operating income 168.8 146.6 22.2 15 %

Ingredients operations sales and other operating revenues 141.5 22.9 118.6 518 %

Ingredient operations operating income 0.4 (8.5) 8.9 (104) %

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

Net income for the fiscal year ended March 31, 2021, was $87.4 million, or $3.53 per diluted share, compared with $71.7 million, or $2.86 per diluted share, for the fiscal year ended March 31, 2020.

Excluding restructuring and impairment costs and certain other non-recurring items, detailed in Other Items below, net income and diluted earnings per share increased by $17.6 million and $0.76, respectively, for fiscal year 2021, compared to fiscal year 2020.

Operating income of $147.8 million for the year ended March 31, 2021, increased by $21.4 million, compared to operating income of $126.4 million for the year ended March 31, 2020.

Adjusted operating income, detailed in Other Items below, of $172.9 million increased by $31.7 million for fiscal year 2021, compared to adjusted operating income of $141.3 million for fiscal year 2020.

Consolidated revenues increased by $73.4 million to $2.0 billion for the year ended March 31, 2021, compared to the fiscal year ended March 31, 2020, on the addition of businesses acquired in calendar year 2020 in the Ingredients Operations segment, offset in part by lower comparative leaf tobacco shipment volumes.

Tobacco Operations

Operating income for the Tobacco Operations segment increased by $22.2 million to $168.8 million for the fiscal year ended March 31, 2021, compared with the fiscal year ended March 31, 2020.

Favorable foreign currency remeasurement comparisons and strong tobacco shipment volumes benefited Tobacco Operations segment results for the year ended March 31, 2021.

Tobacco shipment volumes for fiscal year 2021, which were heavily weighted to the second half of the fiscal year, ended up just slightly below tobacco shipment volumes for fiscal year 2020.

In fiscal year 2021, compared to fiscal year 2020, sales volumes were up in Brazil and the United States on higher sales of carryover crop tobacco, while volumes decreased in Africa in part on weather reduced crop sizes as well as some delayed shipments that will occur in fiscal year 2022.

Selling, general, and administrative costs for the segment were lower for fiscal year 2021, compared to fiscal year 2020, largely on favorable net foreign currency remeasurement comparisons, mainly in Indonesia and Brazil.

A favorable product mix and continued strong wrapper demand also benefited Tobacco Operations results in fiscal year 2021.

Revenues for the Tobacco Operations segment of $1.8 billion for fiscal year 2021 were down $45.2 million, compared to fiscal year 2020, on slightly lower leaf tobacco shipment volumes and sales prices.

Ingredients Operations

As part of our capital allocation strategy to build and enhance our plant-based ingredients platform, we acquired two companies, FruitSmart on January 1, 2020, and Silva on October 1, 2020.

We also made the strategic decision to wind down our CIFI business in the quarter ended December 31, 2020.

Operating income for the Ingredients Operations segment was $0.4 million for the fiscal year ended March 31, 2021, compared to an operating loss of $8.5 million for the fiscal year ended March 31, 2020.

Results for the segment included costs from amortization of intangibles related to the acquisitions, which totaled $6.4 million in the fiscal year ended March 31, 2021, as

well as purchase accounting adjustments of $2.8 million in year ended March 31, 2021, and $2.7 million in the year ended March 31, 2020, that also reduced our results for the segment.

Our Ingredients Operations saw some changes in product mix during fiscal year 2021 due to changes in customer demand resulting from the ongoing COVID-19 pandemic.

While demand for ingredients used in products for restaurants and social venues declined, we saw demand increase for ingredients used in grocery items and pet foods.

In the fourth quarter of fiscal year 2021, we began to see demand for our products recover from certain sectors, such as food service, which were negatively impacted by COVID-19.

Selling, general, and administrative expenses increased in the fiscal year ended March 31, 2021, on the addition of the acquired businesses.

Revenues for the Ingredients Operations segment of $141.5 million for the fiscal year ended March 31, 2021, were up $118.6 million, compared to the fiscal year ended March 31, 2020, on the addition of the revenues for the acquired businesses.

Cost of goods sold in the fiscal year ended March 31, 2021, increased by 3% to $1.6 billion, compared with the fiscal year ended March 31, 2020, as a result of variances in tobacco shipment volumes and green tobacco prices as well as the acquisition of businesses in the Ingredients Operations segment.

Selling, general, and administrative costs for the fiscal year ended March 31, 2021, decreased by $3.1 million to $219.8 million, compared to the fiscal year ended March 31, 2020, as positive comparisons on foreign currency remeasurement and exchange variances more than offset additional costs from the business acquisitions in the Ingredients Operations segment.

The positive foreign currency remeasurement and exchange variances, primarily in Indonesia and Brazil, totaled approximately $26 million in the fiscal year ended March 31, 2021.

For the fiscal year ended March 31, 2021, our consolidated effective tax rate was 23%.

For the fiscal year ended March 31, 2021, income tax expense included a $4.4 million benefit for final tax regulations regarding the treatment of dividends paid by foreign subsidiaries and a $3.4 million benefit due to amending and finalizing prior year returns.

Without these benefits, the consolidated effective tax rate for the fiscal year ended March 31, 2021, would have been approximately 30%.

Our consolidated effective tax rate for the fiscal year ended March 31, 2020, was approximately 34%.

Income tax expense for the fiscal year ended March 31, 2020 included a $2.8 million net tax accrual for a tax settlement charge related to operations at a foreign subsidiary and a $1.5 million benefit due to amending and finalizing prior year returns.

Without the effect of these items, the consolidated effective tax rate for the fiscal year ended March 31, 2020, would have been approximately 30%.

Reconciliation of Certain Non-GAAP Financial Measures

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

Adjusted Operating Income Reconciliation

Fiscal Year Ended March 31,

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Consolidated operating income $ 147,810 $ 126,367

Purchase accounting adjustments (1)

Transaction costs for acquisitions (2)

Fair value adjustment to contingent consideration for FruitSmart acquisition (3)

Restructuring and impairment costs (4)

FruitSmart acquisition transaction costs (2)

FruitSmart acquisition purchase accounting adjustment (3)

Adjusted operating income $ 172,929 $ 141,278

Adjusted Net Income and Diluted Earnings Per Share

(in thousands except for per share amounts)

Fiscal Year Ended March 31,

Adjusted Net Income and Diluted Earnings Per Share Reconciliation

(in thousands except for per share amounts) Fiscal Year Ended March 31,

(all amounts reported net of income taxes) 2021 2020

Net income available Universal Corporation

Net income attributable to Universal Corporation $ 87,410 $ 71,680

Purchase accounting adjustments (1)

Transaction costs for acquisitions (2)

Fair value adjustment to contingent consideration for FruitSmart acquisition (3)

Restructuring and impairment costs (4)

FruitSmart acquisition transaction costs (2)

FruitSmart acquisition purchase accounting adjustment (3)

Income tax settlement for foreign subsidiary (4)

Interest expense related to an uncertain tax matter at a foreign subsidiary 1,849 —

Income tax benefit from dividend withholding tax liability reversal (5)

Net income available to Universal Corporation

Adjusted diluted earnings per share

Restructuring and impairment costs are included in Consolidated operating income in the consolidated statements of income and comprehensive, but excluded for purposes of Adjusted operating income, Adjusted net income available to Universal Corporation, and Adjusted diluted earnings per share.

See Note 4 to the consolidated financial statements in Item 8 of this Annual Report for more information.

The Company incurred selling, general, and administrative expenses for due diligence and other transaction costs associated with the acquisition of FruitSmart (effective January 1, 2020).

Income tax settlement for foreign subsidiary (6)

Adjusted Net income attributable to Universal Corporation $ 105,180 $ 87,530

Diluted earnings per share $ 3.53 $ 2.86

Diluted earnings per share $ 4.25 $ 3.49

(1) The Company recognized an increase in cost of goods sold in fiscal year 2021 and 2020, relating to the expensing of a fair value adjustments to inventory associated with the initial acquisition accounting for Silva (effective October 1, 2020) and FruitSmart (effective January 1, 2020).

(2) The Company incurred selling, general, and administrative expenses for due diligence and other transaction costs associated with the acquisitions of Silva and FruitSmart.

These costs are not deductible for U.S.

income tax purposes.

See Note 2 to the consolidated financial statements in Item 8 of this Annual Report for more information.

The Company recognized an increase in cost of goods sold in the 4th quarter of fiscal year 2020, relating to the expensing of a fair value adjustment to inventory associated with the initial acquisition accounting for FruitSmart, Inc.

See Note 2 to the consolidated financial statements in Item 8 of this Annual Report for more information.

During fiscal year 2020, the Company recognized an income tax settlement charge related to operations at a foreign subsidiary.

See Note 6 to the consolidated financial statements in Item 8 of this Annual Report for more information.

During fiscal year 2019, the Company reversed amounts previously recorded for dividend withholding taxes on distributed and undistributed retained earnings of a foreign subsidiary.

The reversal followed the resolution of uncertainties with the local country taxing authorities with respect to the inclusion of the tax under a tax holiday applicable to the subsidiary and was attributable to retained earnings amounts previously distributed or expected to be distributed prior to the expiration of the tax holiday.

See Note 6 to the consolidated financial statements in Item 8 of this Annual Report for more information.

The Company’s consolidated effective tax rate for the fiscal year ended March 31, 2020, was approximately 31%.

Income tax expense for the fiscal year ended March 31, 2020, included $2.8 million of additional expense ($0.11 per diluted share) for the resolution of a transfer pricing matter at a foreign subsidiary.

Without the effect of this item, the consolidated effective tax rate for fiscal year 2020, would have been 29%.

For the fiscal year ended March 31, 2019, the Company’s consolidated effective income tax rate on pretax earnings was 27%.

Income tax expense for fiscal year 2019 included a $7.8 million ($0.30 per diluted share) benefit from reversing a portion of a liability previously recorded for dividend withholding taxes on the cumulative retained earnings of a foreign subsidiary.

Without the dividend withholding tax reversal, the consolidated effective income tax rate for fiscal year 2019 would have been 33%.

The effective tax rates include the benefit of various tax planning opportunities, the effects of exchange rate changes on local earnings and taxes of foreign subsidiaries, as well as the net effect of items accounted for on a discrete basis in the respective reporting periods.

(3) The Company reversed a portion of the contingent consideration liability for the FruitSmart acquisition, as a result of certain performance metrics that did not meet the required threshold stipulated in the purchase agreement.

(4) Restructuring and impairment costs are included in Consolidated operating income in the consolidated statements of income, but excluded for purposes of Adjusted operating income, Adjusted net income attributable to Universal Corporation, and Adjusted diluted earnings per share.

See Note 4 for additional information.

(5) The Company recognized an income tax benefit for final U.S.

tax regulations on certain dividends paid by foreign subsidiaries in a prior fiscal year.

(6) The Company recognized an income tax settlement charge related to operations at a foreign subsidiary.

Fiscal Year Ended March 31, 2020, Compared to the Fiscal Year Ended March 31, 2019

Net income for the fiscal year ended March 31, 2019, was $104.1 million, or $4.11 per diluted share, compared with $105.7 million, or $4.14 per diluted share, for the fiscal year ended March 31, 2018.

Those results included certain non-recurring items, detailed in Other Items below, which decreased diluted earnings per share by $0.34 and increased diluted earnings per share by $0.18 for the fiscal years ended March 31, 2019 and March 31, 2018, respectively.

Excluding those non-recurring items, net income and earnings per share increased by $11.7 million and $0.49, respectively, for fiscal year 2019 compared to fiscal year 2018.

Operating income of $161.2 million for the fiscal year ended March 31, 2019, which included restructuring and impairment charges of $20.3 million detailed in Other Items below, decreased by $9.7 million, compared to operating income of $170.8 million for the fiscal year ended March 31, 2018.

Segment operating income was $186.8 million for the fiscal year ended March 31, 2019, an increase of $6.8 million, compared to segment operating income of $180.0 million for the fiscal year ended March 31, 2018.

Results reflected earnings improvements in the Other Regions and Other Tobacco Operations segments and flat results for the North America segment for fiscal year 2019.

Consolidated revenues increased by $193.2 million to $2.2 billion for the fiscal year 2019, compared to fiscal year 2018, primarily due to higher sales and processing volumes.

Flue-cured and Burley Leaf Tobacco Operations

Other Regions

Operating income for the Other Regions segment increased by $4.8 million to $151.5 million for the fiscal year ended March 31, 2019, compared with fiscal year 2018, on stronger sales and processing volumes partially offset by higher selling, general and administrative costs.

In fiscal year 2019, volumes increased in Africa, mainly from higher burley production volumes and carryover crop sales.

In South America, volumes also increased, but the product mix was less favorable.

Results for Asia reflected lower sales and trading volumes for fiscal year 2019, while Europe saw improvements in processing volumes.

Selling, general, and administrative costs were higher for fiscal year 2019 compared to fiscal year 2018, primarily from negative foreign currency remeasurement and exchange variances, higher compensation and incentive accruals, and higher customer claim costs, partially offset by higher net recoveries on advances to suppliers.

Revenues for the Other Regions segment of $1.6 billion for fiscal year 2019, were up $87.6 million compared to fiscal year 2018, on higher volumes and processing revenues, offset in part by lower sales prices and a less favorable product mix.

North America

Operating income for the North America segment of $23.1 million for year ended March 31, 2019, was flat, compared to fiscal year 2018.

Results for fiscal year 2019 reflected higher carryover crop sales volumes on shipments delayed from the fourth quarter of fiscal year 2018 due to reduced transportation availability in the United States, offset by lower U.S.

current crop sales and processing volumes largely due to weather-affected crops.

Results for fiscal year 2019 also included higher shipment volumes from Guatemala and Mexico, compared to fiscal year 2018.

Selling, general, and administrative costs for the North America segment for the fiscal year ended March 31, 2019, were modestly lower and declined as a percentage of sales, compared to fiscal year 2018.

Revenues for this segment increased by $73.9 million to $382.6 million for the fiscal year ended March 31, 2019, compared to the fiscal year ended March 31, 2018, on the higher sales volumes, partly offset by lower processing revenues.

Other Tobacco Operations

The Other Tobacco Operations segment operating income increased by $2.1 million to $12.2 million for the fiscal year ended March 31, 2019, compared with fiscal year 2018.

Results for the dark tobacco operations reflected higher sales of wrapper tobacco and stronger processing and other revenues for fiscal year 2019, compared to fiscal year 2018.

Those improvements were partly offset by declines in the oriental joint venture.

Lower sales volumes in the fiscal year 2019 and the absence of gain on the sale of idle assets in fiscal year 2018 for the oriental joint venture were offset in part by favorable currency remeasurement variances, compared to fiscal year 2018.

Selling, general, and administrative costs for the segment were up for the fiscal year ended March 31, 2019, compared with fiscal year 2018, as higher value-added tax charges and higher compensation and incentive accruals were only partly offset by favorable currency remeasurement comparisons.

Revenues for the segment increased by $31.7 million to $274.8 million for the fiscal year ended March 31, 2019, compared to fiscal year 2018, largely as a result of the higher wrapper tobacco sales volumes and increased processing and other revenues, partly offset by lower oriental tobacco volumes shipped into the United States.

Cost of goods sold increased by 10% to $1.8 billion for the fiscal year ended March 31, 2019, compared with fiscal year 2018, and consistent with similar percentage changes in revenues.

Selling, general, and administrative costs for fiscal year 2019, increased by $24.0 million to $225.1 million, mainly driven by higher compensation and incentive accruals, higher customer claims and allowance costs, negative foreign currency remeasurement and exchange variances, and higher value-added tax charges, partly offset by higher net recoveries on advances to suppliers, compared with fiscal year 2018.

Selling, general, and administrative costs were flat as a percentage of sales for the fiscal year ended March 31, 2019, compared to the fiscal year ended March 31, 2018.

For the fiscal year ended March 31, 2019, the Company’s consolidated effective income tax rate on pretax earnings was 27%.

Without the dividend withholding tax reversal, the consolidated effective income tax rate for fiscal year 2019 would have been 33%.

The effective tax rate included the benefit of various tax planning opportunities, as well as the effects of exchange rate changes on local earnings and taxes of foreign subsidiaries.

For the fiscal year ended March 31, 2018, the Company’s consolidated effective income tax rate was 30%.

Income tax expense for fiscal year 2018 included a one-time adjustment amounting to a reduction of $4.5 million ($0.18 per diluted share) for the fiscal year ended March 31, 2018, from the enactment of major changes to U.S.

corporate income tax law in December 2017.

Excluding those items, the effective tax rate for fiscal year 2018, would have been 33%.

Results for the fiscal year ended March 31, 2019, included restructuring and impairment charges of $20.3 million ($0.64 per diluted share), primarily recorded to reflect the cost of workforce reductions and impairment in the carrying value of property, plant, and equipment assets as a result of changes in the Company’s business in Tanzania.

For more details, see Note 4 to the consolidated financial statements in Item 8 of this Annual Report.

For a comparison of our performance and financial metrics for the fiscal years ended March 31, 2020 and March 31, 2019, see “Part II, Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the fiscal year ended March 31, 2020, filed with the SEC on May 28, 2020.

Accounting Pronouncements

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LIQUIDITY AND CAPITAL RESOURCES

Our working capital requirements in fiscal year 2020 were lower than those in fiscal year 2019 mainly due to lower green tobacco prices and volumes.

Our working capital requirements in fiscal year 2021 were lower than those in fiscal year 2020 mainly due to higher carryover crop sales of leaf tobacco, lower green leaf tobacco prices, and smaller African tobacco crops.

In fiscal year 2021, we also generated $220.4 million in cash flows from our operating activities, and our liquidity was sufficient to meet our needs.

We continued our conservative financial policies and returned funds to shareholders.

Our liquidity and capital resource requirements are predominately short-term in nature and primarily relate to working capital for crop purchases.

Working capital needs are seasonal within each geographic region.

The geographic dispersion and the timing of working capital needs permit us to predict our general level of cash requirements, although crop size, prices paid to farmers, shipment and delivery timing, and currency fluctuations affect requirements each year.

Our liquidity and capital resource requirements are predominately short-term in nature and primarily relate to working capital for tobacco crop purchases, and our primary sources of liquidity are net cash flows provided by operating activities and our committed revolving credit facility.

Working capital needs for tobacco crop purchases are seasonal within each geographic region.

The geographic dispersion and the timing of working capital needs permit us to predict our general level of cash requirements, although tobacco crop size, prices paid to farmers, shipment and delivery timing, and currency fluctuations affect requirements each year.

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

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

Despite a predominance of short-term needs, we maintain a portion of our total debt as long-term to reduce liquidity risk.

In contrast to our tobacco operations, working capital requirements for our ingredients operations tend to be lower and less seasonal.

Despite a predominance of short-term needs for working capital, we maintain a portion of our total debt as long-term to reduce liquidity risk.

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

We believe that our financial resources are adequate to support our capital needs for at least the next twelve months.

Our seasonal borrowing requirements primarily relate to purchasing crops in South America and Africa and can increase from March to September by more than $300 million.

Our seasonal borrowing requirements primarily relate to purchasing tobacco crops in South America and Africa and can increase from March to September by more than $300 million.

The funding required can vary significantly depending upon such factors as crop sizes, the price of leaf, the relative strength of the U.S.

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We have no long-term debt maturing until fiscal year 2024.

At this time, COVID‐19 has not had a material impact on our operations other than indirectly from unsettled currency markets, and we currently anticipate our current cash balances, cash flows from operations, and our available sources of liquidity will be sufficient to meet our cash requirements.

However, given the uncertainty of future impacts from the ongoing COVID-19 pandemic including slower processing and possible delays in timing of some shipments, we have taken several steps at this time to conserve our liquidity position including temporarily limiting most discretionary spending and non-essential capital spending.

To date, COVID‐19 has not had a significant impact on our operations, and we currently anticipate our current cash balances, cash flows from operations, and our available sources of liquidity will be sufficient to meet our cash requirements.

Our operations generated about $220.4 million in operating cash flows in fiscal year 2021.

That amount was about $153.6 million lower than the $164.5 million we generated in fiscal year 2019, largely due to lower current and carryover crop sales volumes in fiscal year 2020 and later timing of sales and shipments compared to the prior year’s fourth fiscal quarter.

During the fiscal year ended March 31, 2020, we spent $35.2 million on capital projects and $80.2 million on the acquisition of a new business, and we returned $108.8 million to shareholders in the form of dividends and share repurchases.

That amount was about $209.5 million higher than the $10.9 million we generated in fiscal year 2020, largely due to lower working capital requirements in fiscal year 2021.

During the fiscal year ended March 31, 2021, we spent $66.2 million on capital projects and $164.0 million on the acquisition of a new business, and we returned $75.2 million to shareholders in the form of dividends.

At March 31, 2021, cash balances totaled $197.2 million.

Working Capital

Working capital at March 31, 2020, was about $1.2 billion, down about $122.2 million from last fiscal year's level.

Cash and cash equivalents were down $190.1 million at the end of fiscal year 2020, compared to balance at the end of fiscal year 2019, in part due to our acquisition of FruitSmart and increased share repurchases.

Tobacco inventories of $707.3 million at March 31, 2020, were up $77.7 million compared to inventory levels at the end of the prior fiscal year, mostly on larger inventories of wrapper and North American tobacco.

Other inventories are also up $29.7 million at March 31, 2020, from prior year levels largely on our acquisition of the new business in January 2020.

We usually finance inventory with a mix of cash, notes payable, and customer deposits, depending on our borrowing capabilities, interest rates, and exchange rates, as well as those of our customers.

We generally do not purchase material quantities of tobacco on a speculative basis.

Working capital at March 31, 2021, was about $1.3 billion, up about $50.0 million from last fiscal year's level, largely on the addition of assets from our acquisition of Silva, offset in part by lower tobacco inventories.

Tobacco inventories of $640.7 million at March 31, 2021, were down $66.6 million compared to inventory levels at the end of the prior fiscal year, mainly due to higher carryover crop sales of leaf tobacco, lower green leaf tobacco prices, and lower purchase volumes of African tobacco crops in part due to weather-reduced crop sizes.

Other inventories were up $46.7 million at March 31, 2021, from prior year levels largely on our acquisition of Silva in October 2020.

We generally do not purchase material quantities of leaf tobacco on a speculative basis.

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

Our uncommitted tobacco inventories increased by approximately $47.0 million to $175.0 million, or about 25% of tobacco inventory, at March 31, 2020, which was above our target range.

Our uncommitted tobacco inventories decreased by approximately $35.8 million to $139.2 million, or about 22% of tobacco inventory, at March 31, 2021, which was slightly above our target range.

Uncommitted inventories at March 31, 2020, were $175.0 million, which represented 25% of tobacco inventory.

The level of these uncommitted inventories is influenced by timing of farmer deliveries of new crops, as well as the receipt of customer orders.

At the end of fiscal year 2020, market disruptions due to the COVID-19 pandemic delayed some receipts of customer orders, particularly in Brazil.

We estimate that as of April 30, 2020, our uncommitted inventories had already begun to decline as customer orders were received.

Cash and cash equivalents were up $89.8 million at the end of fiscal year 2021, compared to balance at the end of fiscal year 2020, on lower working capital requirements due to the lower tobacco inventory levels and timing of customer payments.

Capital Allocation

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Through these actions, we believe that will be able to deliver enhanced shareholder value through earnings growth and the generation of free cash flow despite operating in a mature industry.

In January 2020, we acquired FruitSmart for approximately $80 million, with potential earnout payments totaling $25 million based on Fruit Smart achieving certain financial targets in calendar years 2020 and 2021.

We financed the acquisition using borrowings under our committed revolving credit facility and cash on hand.

The investment in FruitSmart represents a foundational step in the development of a broader agri-products services platform.

In line with our capital allocation strategy, we acquired Silva for approximately $164 million on October 1, 2020.

The acquisition expanded our plant-based ingredients platform, and we expect it to enable us to offer customers a single source for vegetable and fruit ingredients.

As we look ahead, we will continually evaluate opportunities to return capital to shareholders.

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Share Activity

Our Board of Directors approved our current share repurchase program in November 2017, and in May 2019, extended its expiration to November 15, 2020.

The program authorizes the purchase of up to $100 million of our common stock.

Our Board of Directors approved our current share repurchase program in November 2020.

The program authorizes the purchase of up to $100 million of our common stock through November 15, 2022.

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

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

During fiscal year 2020, we purchased 656,820 shares of common stock at an aggregate cost of $33.5 million (average price per share of $50.94).

At March 31, 2020, our available authorization under our current share repurchase program was approximately $56 million, and approximately 24.4 million common shares were outstanding.

During fiscal year 2021, we did not purchase any shares of common stock.

At March 31, 2021, our available authorization under our current share repurchase program was $100 million, and approximately 24.5 million common shares were outstanding.

Capital Spending

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During fiscal years 2021 and 2020, we invested $66.2 million and $35.2 million, respectively, in our property, plant, and equipment.

In the fourth quarter of fiscal year 2021, we purchased the operating and administrative facilities of our FruitSmart business, which we had previously leased, for approximately $16.5 million.

Depreciation expense was approximately $38.3 million and $37.5 million, respectively, in fiscal years 2021 and 2020.

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Outstanding Debt and Other Financing Arrangements

We financed the Silva acquisition using cash-on-hand and borrowings under our committed revolving credit facility.

On December 17, 2020, we amended our bank credit agreement, originally dated as of December 20, 2018, to increase the amount of the amount of the term A-1 loans which mature in December 2023 by an additional $75 million and the amount of term A-2 loans which mature in December 2025 by an additional $75 million.

We also amended the definition of Consolidated EBITDA under the agreement to (i) exclude the effects of any non-cash purchase accounting adjustments, (ii) make pro forma adjustments for material acquisitions and material dispositions and (iii) permit adjustments for certain transaction fees and expenses related to the amendment and any material acquisition or disposition.

All other material terms and conditions of the bank credit agreement remain in full force and effect.

We used the proceeds from the term loans to repay borrowings under the committed revolving credit facility.

We consider the sum of notes payable and overdrafts, long-term debt (including any current portion), and customer advances and deposits, less cash, cash equivalents, and short-term investments on our balance sheet to be our net debt.

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

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

Net debt increased by $81.4 million to $431.0 million during the fiscal year ended March 31, 2021.

The increase primarily reflects lower cash balances.

The increase primarily reflects the Silva acquisition offset in part by higher cash balances.

Net debt as a percentage of net capitalization was approximately 25% at March 31, 2021, up from 22% at March 31, 2020.

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We have no long-term debt maturing until fiscal year 2024.

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

Currently, we have interest rate swap agreements that convert the variable benchmark LIBOR rates on our two outstanding term loans entered to fixed rates.

With the swap agreements in place, the effective interest rates on the $150 million five-year term loan and the $220 million seven-year term loan were 3.94% and 4.26%, respectively, as of March 31, 2020.

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

Currently, we have interest rate swap agreements that convert the variable benchmark LIBOR rates on $370 million of our two outstanding term loans entered to fixed rates.

With the swap agreements in place, the effective interest rates on $150 million of the five-year term loan and $220 million of the seven-year term loan were 3.94% and 4.26%, respectively, as of March 31, 2021.

These agreements were entered into to eliminate the variability of cash flows in the interest payments on our variable rate five- and seven-year term loans and are accounted for as cash flow hedges.

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

At March 31, 2020, the fair value of those open contracts was a net liability of approximately $11 million.

At March 31, 2021, the fair value of those open contracts was a net asset of approximately $0.1 million.

We also had other forward contracts outstanding that were not designated as hedges, and the fair value of those contracts was a net liability of approximately $0.4 million at March 31, 2021.

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The funds supporting our ERISA-regulated U.S.

defined benefit pension plan during fiscal year 2020 which remained at approximately $231 million .

defined benefit pension plan during fiscal year 2021 were approximately $261 million.

The accumulated benefit obligation (“ABO”) and the projected benefit obligation (“PBO”) were both approximately $244 million and $250 million, respectively as of March 31, 2021.

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Our contractual obligations as of March 31, 2021, were as follows:

(in thousands of dollars)

(in thousands of dollars) Total 2022 2023-2024 2025-2026 After 2026

Notes payable and long-term debt (1)

$ 705,905 $ 126,015 $ 263,775 $ 316,115 $ —

Operating lease obligations 34,893 11,074 12,130 6,389 5,300

Inventory purchase obligations:

564,987 441,544 123,443 — —

Agricultural materials

36,846 36,846 — — —

Other purchase obligations 65,678 50,843 8,035 6,800 —

$ 1,408,309 $ 666,322 $ 407,383 $ 329,304 $ 5,300

(1) Includes interest payments.

Interest payments on $251.0 million of variable rate debt were estimated based on rates as of March 31, 2021.

We have entered into interest rate swaps that effectively convert the interest payments on the $370.0 million outstanding balance of our two bank term loans from variable to fixed.

We have entered into interest rate swaps that effectively convert the interest payments on $370.0 million of the outstanding balance of our two bank term loans from variable to fixed.

The fixed rate has been used to determine the contractual interest payments for all periods.

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We have partially funded our tobacco purchases in some origins with short-term advances to farmers and other suppliers, which totaled approximately $122 million, net of allowances, at March 31, 2021.

In addition, we have guaranteed bank loans to farmers in Brazil that relate to a portion of our tobacco purchase obligations there.

At March 31, 2020 , we were contingently liable under those guarantees for outstanding balances of approximately $3 million (including accrued interest), and we had recorded a liability of approximately $0.1 million for the fair value of those guarantees.

As tobacco is purchased and the related bank loans are repaid, our contingent liability is reduced.

CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS

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Inventory write-downs in fiscal years 2021, 2020, and 2019 were $13.4 million, $10.3 million, and $4.0 million, respectively.

Advances to Suppliers and Guarantees of Bank Loans to Suppliers

Advances to Tobacco Suppliers

In many sourcing origins, we provide tobacco growers with agronomy services and seasonal crop advances of, or for, seed, fertilizer, and other supplies.

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In several origins, we have also made long-term advances to tobacco farmers to finance curing barns and other farm infrastructure.

In Brazil, we also guarantee bank loans made to farmers for seasonal crop financing.

In some years, due to low crop yields and other factors, individual farmers may not deliver sufficient volumes of tobacco to repay maturing advances.

In those cases, we may extend repayment of the advances into the following crop year or satisfy the guarantee by acquiring the loan from the bank.

In either situation, we will incur losses whenever we are unable to recover the full amount of the loans and advances.

At each reporting period, we must make estimates and assumptions in determining the valuation allowance for advances to farmers and the liability to accrue for our obligations under bank loan guarantees.

At March 31, 2020 , the gross balance of advances to suppliers totaled approximately $153 million , and the related valuation allowance totaled approximately $16 million .

The fair value of the loan guarantees for farmers in Brazil was a liability of less than $1.0 million at March 31, 2020 .

In those cases, we may extend repayment of the advances into the following crop year.

We will incur losses whenever we are unable to recover the full amount of the loans and advances.

At each reporting period, we must make estimates and assumptions in determining the valuation allowance for advances to farmers.

At March 31, 2021, the gross balance of advances to tobacco suppliers totaled approximately $144 million, and the related valuation allowance totaled approximately $18 million.

Recoverable Value-Added Tax Credits

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At March 31, 2021, the gross balance of recoverable tax credits (primarily VAT) totaled approximately $49 million, and the related valuation allowance totaled approximately $19 million.

Business Combinations

From time to time, we may enter into business combinations.

In accordance with ASC 805, “ Business Combinations ”, we generally recognize the identifiable assets acquired and the liabilities assumed at their fair values as of the date of acquisition.

We measure goodwill as the excess of consideration transferred, which we also measure at fair value, over the net of the acquisition date fair values of the identifiable assets acquired and liabilities assumed.

The acquisition method of accounting requires us to make significant estimates and assumptions regarding the fair values of the elements of a business combination as of the date of acquisition, including the fair values of identifiable intangible assets, deferred tax asset valuation allowances,

liabilities including those related to debt, pensions and other postretirement plans, uncertain tax positions, contingent consideration and contingencies.

This method also requires us to refine these estimates over a measurement period not to exceed one year to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date.

If we are required to adjust provisional amounts that we have recorded for the fair values of assets and liabilities in connection with acquisitions, these adjustments could have a material impact on our financial condition and results of operations.

Significant estimates and assumptions in estimating the fair value of developed technology, customer relationships, and other identifiable intangible assets include future cash flows that we expect to generate from the acquired assets.

If the subsequent actual results and updated projections of the underlying business activity change compared with the assumptions and projections used to develop these values, we could record impairment charges.

In addition, we have estimated the economic lives of certain acquired assets and these lives are used to calculate depreciation and amortization expense.

If our estimates of the economic lives change, depreciation or amortization expenses could be increased or decreased, or the acquired asset could be impaired.

We review the carrying value of goodwill for potential impairment on an annual basis and at any time that events or business conditions indicate that it may be impaired.

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Those factors did not indicate any impairment of our recorded goodwill in fiscal year 2021.

However, during fiscal year 2019 , based on business changes that have affected our operations in Tanzania, we recorded a charge of approximately $0.9 million for the full impairment of goodwill attributable to that reporting unit.

In fiscal years prior to basing our initial assessment on qualitative factors, we followed the quantitative approach in ASC 350 in assessing the fair value of our goodwill, which involved the use of discounted cash flow models (Level 3 of the fair value hierarchy under GAAP).

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Significant adverse changes in our operations or our estimates of future cash flows for a reporting unit with recorded goodwill, such as those caused by unforeseen events or changes in market conditions, could result in an impairment charge.

A majority of our consolidated goodwill balance relates to our reporting unit in Brazil and recent acquisition of FruitSmart, Inc..

A majority of our consolidated goodwill balance relates to our reporting unit in Brazil and the recent acquisitions of FruitSmart (January 1, 2020) and Silva (October 1, 2020).

Fair Value Measurements

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Interest rate swaps and forward foreign currency exchange contracts are valued based on dealer quotes using discounted cash flow models matched to the contractual terms of each instrument (Level 2 of the fair value hierarchy).

The fair value of the guarantees of bank loans to tobacco growers, which was approximately $0.1 million at March 31, 2020 , is derived using an internally-developed discounted cash flow model.

The model requires various inputs, including historical loss percentages for comparable loans and a risk-adjusted interest rate.

Because significant management judgment is required in determining and applying these inputs to the valuation model, our process for determining the fair value of these guarantees is classified as Level 3 of the fair value hierarchy.

At March 31, 2020 , a 1% increase in the expected loss percentage for all guaranteed farmer loans would not have had a material effect on the fair value of the guarantee obligation.

In addition, a 1% change in the risk-adjusted interest rate would not have had a material effect on the fair value of the guarantee obligation.

We incorporate credit risk in determining the fair values of our financial assets and financial liabilities, but that risk did not materially affect the fair values of any of those assets or liabilities at March 31, 2021.

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Significant judgment is applied to this model and therefore acquisition-related contingent consideration obligation is classified within Level 3 of the fair value hierarchy.

In fiscal year 2021, the evaluation of the contingent consideration for the FruitSmart acquisition resulted in the reduction of $4.2 million of contingent consideration of the original $6.7 million liability recorded in fiscal year 2020.

Our consolidated effective income tax rate is based on our expected taxable income, tax laws and statutory tax rates, prevailing foreign currency exchange rates, and tax planning opportunities in the various jurisdictions in which we operate.

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The effect assumes no change in benefit levels.

(in thousands of dollars)

(in thousands of dollars) Effect on

2021 Projected

Benefit Obligation

(Decrease) Effect on

2022 Annual Expense

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Discount Rate:

1% increase $ (32,905) $ (2,624)

1% decrease 40,554 2,885

Expected Long-Term Return on Plan Assets:

1% increase — (2,459)

1% decrease — 2,458

Changes in Assumptions for Other Postretirement Benefits

Discount Rate:

1% increase (2,462) (264)

1% decrease 2,923 177

Healthcare Cost Trend Rate:

1% increase 190 62

1% decrease (175) (58)

A 1% increase or decrease in the salary scale assumption would not have a material effect on the projected benefit obligation or on annual expense for the Company's pension benefits.

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Our financial performance depends on our ability to obtain an appropriate price for our products and services, to secure the product volumes and quality desired by our customers, and to maintain efficient, competitive operations.

As the leading global leaf tobacco supplier, we continually monitor issues and opportunities that may impact the supply of and demand for leaf tobacco, the volumes of leaf tobacco that we handle, and the services we provide.

As the leading global leaf tobacco supplier, we continually monitor for issues and opportunities that may impact the supply of and demand for leaf tobacco, the volumes of leaf tobacco that we handle, and the services we provide.

We have also been building a plant-based ingredients platform and monitor issues and opportunities that may impact these businesses as well.

Tobacco Operations Trends

We believe that a key factor to perform successfully in the tobacco industry is our ability to provide customers with the quality of leaf and the level of service they desire on a global basis at competitive prices, while maintaining stability of supply.

We add significant value to the leaf tobacco supply chain, providing expertise in dealing with large numbers of farmers, efficiently selling various qualities of leaf produced in each crop to a broad global customer base, and delivering products and services produced in a sustainable manner that meet stringent quality and regulatory specifications.

We also help stabilize the tobacco markets and influence crop development at the farm level.

We also make the tobacco markets more efficient and provide crop development guidance at the farm level.

As part of our commitment to our customers, we adapt our business model to meet their evolving needs and monitor new product developments in the tobacco industry to identify areas where we can provide additional value to them.

Non-Tobacco Investments

As we have stated in our capital allocation strategy, we will continue to make disciplined investments within our leaf business to take advantage of growth opportunities in tobacco as well as in non-tobacco industries and markets that utilize our assets and capabilities.

Through these actions, we believe that we will be able to deliver enhanced shareholder value through earnings growth and the generation of free cash flow despite operating in a mature industry.

In our non-tobacco investments, we are focusing on building out a broader plant-based agri-product services platform.

We made our first acquisition in this space with our purchase in January 2020 of FruitSmart, an independent specialty fruit and vegetable ingredient processor serving global markets, and we maintain an active investment pipeline.

Our acquisition of FruitSmart represents a foundational step in our development of a broader agri-products service platform as well an investment in value-added agricultural processing, the section of the agricultural value chain where we possess significant business expertise.

We consider the agricultural value chain to consist of agricultural inputs, crop production, agricultural processing, manufacture and distribution, and retail sales.

We also recently hired a senior executive to be responsible for our agri-product services platform and play a key strategic role in our efforts to build out this platform.

Our current target for our agri-product services platform is for it to eventually represent 10% to 20% of our earnings.

Current Tobacco Industry Trends

Mature Leaf Tobacco Markets

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Global leaf suppliers also usually purchase a little over a third of the tobacco, and the remainder is sourced by the smaller regional or local suppliers.

Some of the tobacco purchased directly by manufacturers is processed by the global leaf suppliers.

Although we operate in a mature industry, where demand for the end products has been declining at a compound annual rate of about 2% over the last five years, our mission is to remain the leading global leaf tobacco supplier.

In some markets the tobacco purchased directly by manufacturers is processed by the global leaf suppliers.

Although we operate in a mature industry, where demand for the end products outside of China has been declining at a compound annual rate of about 1% over the last three years, our mission is to remain the leading global leaf tobacco supplier.

In recent years, we have been and believe that we will continue to be able to grow parts of our business, and maintain performance despite declines in demand for leaf tobacco from product manufacturers.

We have done this by continuing to increase our delivery of services, driving supply chain efficiencies, enhancing the range of services we provide to certain customers, including direct buying, agronomic support, and specialized processing services, and improving our market share.

We intend to continue to work to expand our business while at the same time maintaining an appropriate return for the services we provide and believe that there are several longer term trends in the industry that could provide additional opportunities for us both to offer additional services to our customers and to increase our market share.

We intend to continue to work to expand our business while at the same time maintaining an appropriate return for the services we provide and believe that there are several longer term trends in the industry, such as a focus on sustainability, that could provide additional opportunities for us both to offer additional services to our customers and to increase our market share.

We continually explore options to capitalize on the strengths of our core competencies and seek growth opportunities related to leaf tobacco and our operations around the world.

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To understand our business, it is important to note that tobacco is not a commodity product.

Flavor and smoking characteristics of tobacco vary based on the type of tobacco, the region where the tobacco is grown, and the position of the leaf on the stalk of the plant.

Flavor and smoking characteristics as well as chemistries of tobacco vary based on the type of tobacco, the region where the tobacco is grown, and the position of the leaf on the stalk of the plant.

Many different styles and grades of tobacco may be produced in a single tobacco crop.

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In addition to bringing supply chain efficiencies to the leaf tobacco markets, we bring operational efficiencies to the industry, which in turn help reduce costs.

These efficiencies include economical utilization of processing capacity, an established and scalable global network of agronomists and technicians helping to maintain a stable, productive, and sustainable farmer base, as well as agronomic and production improvements to optimize leaf yields and qualities.

as well as agronomic and production improvements to optimize leaf yields and qualities.

In addition, we are able to offer manufacturers a complete range of services from the field to the delivery of the packed product that benefit from our efficiencies.

These services include such things as buying station optimization, processing to specific customer specifications or needs, storage of green or packed leaf tobacco, and logistical services.

These services include such things as buying station optimization, processing and blending to specific customer specifications or needs, storage of green or packed leaf tobacco, and logistical services.

In recent years, there has been an increase in the level of direct purchasing, processing, and other supply chain services that we provide our customers, notably in the United States, Mexico, Brazil, Poland, Guatemala, the Dominican Republic, and the Philippines.

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Importance of Compliant Leaf

As we have said for a number of years, the production of compliant leaf for the tobacco industry continues to grow in importance.

To be considered compliant, leaf tobacco must be grown in a traceable, sustainable manner utilizing Good Agricultural Practices (“GAP”).

We have long invested significant resources in the programs and infrastructure needed to work with growers to produce compliant leaf and continue to enhance our ability to monitor and demonstrate this compliance for customers.

Our Good Agricultural Practices focus on implementing international principles of sustainability by encouraging and training our farmers to employ sound field production and labor management practices that promote farmer profitability and minimal environmental impact.

As we have said for many years, the production of compliant leaf for the tobacco industry continues to grow in importance.

To be considered compliant, leaf tobacco must be grown in a traceable, sustainable manner utilizing GAP.

Our GAP focus on implementing international principles of sustainability by encouraging and training our farmers to employ sound field production and labor management practices that promote farmer profitability and minimal environmental impact.

To assist farmers, Universal provides comprehensive training, technical support in the field, and crop analytics through ongoing research and development.

Our commitment to compliance is reinforced through MobilLeaf™, our proprietary mobile device platform that captures and shares data in real-time, embedding sustainability throughout our supply chain and providing monitoring of GAP efforts, compliance with labor standards, and opportunities to enhance efficiencies.

Our commitment to compliance is reinforced through MobiLeaf™, our proprietary mobile device platform that captures and shares data in real-time, embedding sustainability throughout our supply chain and providing monitoring of GAP efforts, compliance with labor standards, and opportunities to enhance efficiencies.

We believe that compliant leaf will continue to grow in importance to our customers and, as a result, will favor global suppliers who are able to deliver this product.

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Specifically, we have expertise in tobacco seed development, crop production methods, crop sourcing, processing, and manufacturing of reconstituted sheet tobacco, which is beneficial to our customers as they continue to develop alternative tobacco products.

We also are able to provide high quality liquid nicotine through our subsidiary, AmeriNic.

We also are able to provide high quality, traceable and sustainable liquid nicotine through our subsidiary, AmeriNic.

We continue to monitor industry developments regarding next generation products, including consumer acceptance and regulation, and will adapt accordingly.

Leaf Tobacco Supply

Flue-cured tobacco crops grown outside of China were up slightly in fiscal year 2020 by less than 2% to 1.9 billion kilos compared to fiscal year 2019.

Global burley tobacco production decreased by about 7% to about 552 million kilos in fiscal year 2020, largely due to smaller crops in Africa.

Flue-cured tobacco crops grown outside of China are projected to decrease by about 7% to 1.8 billion kilos in fiscal year 2021.

Flue-cured tobacco crops grown outside of China declined in fiscal year 2021 by about 13% to 1.7 billion kilos compared to fiscal year 2020.

Global burley tobacco production decreased by about 16% to about 457 million kilos in fiscal year 2021, largely due to smaller crops in Africa and Brazil.

Flue-cured tobacco crops grown outside of China are projected to increase by about 5% to 1.8 billion kilos in fiscal year 2022.

Burley volumes are also forecast to decrease further to about 431 million kilos in fiscal year 2022.

We estimate that as of March 31, 2020, industry uncommitted flue-cured and burley inventories, excluding China, totaled about 122 million kilos, an increase of about 13% from March 31, 2019 levels.

At this time, we believe that flue-cured tobacco is in a slight oversupply position and burley tobacco is in line with anticipated demand.

We also forecast that oriental tobacco production will increase by about 8%, and dark air-cured production will increase by about 2% in fiscal year 2021.

We estimate that as of March 31, 2021, industry uncommitted flue-cured and burley inventories, excluding China, totaled about 94 million kilos, a decrease of about 30% from March 31, 2020 levels.

At this time, we believe that flue-cured tobacco supply is in line with anticipated demand and burley tobacco supply is in a slight undersupply position.

We also forecast that oriental and dark air-cured tobacco production will both decrease by about 5% and 6%, respectively, in fiscal year 2022.

Over the long term, we believe that global tobacco production will continue to decline slightly in line with slightly declining total demand.

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Therefore, we normally view the Chinese market independently when evaluating worldwide leaf tobacco supply and demand.

In the past few years, China’s domestic leaf production has exceeded their domestic needs for the local cigarette market, and there has been a build-up of domestic leaf inventory there.

China is continuing to demonstrate efforts to re-align their domestic leaf production and inventories to balance their needs, and these efforts could influence global supply/demand in the short term.

Factors that affect green tobacco prices include global supply and demand, market conditions, production costs, foreign exchange rates, and competition from other crops.

We work with farmers to maintain tobacco production and to secure product at price levels that are attractive to both the farmers and our customers.

Our objective is to secure compliant tobacco that is produced in a cost-effective manner under a sustainable business model with the desired quality for our customers.

In some areas, tobacco competes with agricultural commodity products for farmer production.

In the past, leaf shortages in specific markets or on a worldwide basis have also led to green tobacco price increases.

Domestic leaf tobacco inventories have built up in China over the last several years as China’s domestic leaf production has exceeded their domestic needs for the local cigarette market.

China is continuing to demonstrate efforts to re-align their domestic leaf production and inventories to balance their needs, and inventories have started to come down.

These efforts could influence global supply/demand in the short term.

Leaf Tobacco Demand

Industry data shows that over the past five years, total world consumption of cigarettes fell at a compound annual rate of about 2%.

Industry data shows that over the past three years, total world consumption of cigarettes fell at a compound annual rate of about 1%.

We believe that growth in world consumption of cigarettes peaked several years ago and is declining.

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English-blend cigarettes which use flue-cured tobacco are mainly smoked in the United Kingdom and Asia and other emerging markets.

Industry data shows that consumption of American-blend cigarettes has declined at a compound annual rate of about 2% for the five years ended in 2019.

Industry data shows that consumption of American-blend cigarettes has declined at a compound annual rate of about 1% for the three years ended in 2020.

If demand for American-blend cigarettes declines at a higher rate than reductions in demand for English-blend cigarettes, there may be less demand for burley and oriental tobaccos and more demand for flue-cured tobacco.

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On a year-to-year basis, we are also susceptible to fluctuations in leaf supply due to crop sizes and leaf demand as manufacturers adjust inventories or respond to changes in cigarette markets.

We currently believe that the supply of flue-cured tobaccos slightly exceeds anticipated demand, and the supply of burley tobaccos is in line with anticipated demand.

We currently believe that the supply of flue-cured tobaccos is in line with anticipated demand, and the supply of burley tobaccos is in a slight undersupply.

However, inventories held by our customers may affect their near-term demand for leaf tobacco.

We also sell oriental tobaccos, which are used in American-blend cigarettes, and dark tobaccos, which are used in cigars and other smokeless products.

In recent years, we have seen increased demand for natural wrapper tobacco particularly for the European and U.S.

machine-made cigar markets.

While we expect demand for oriental tobaccos and dark tobaccos used in cigar filler to be generally in line with supply, we are continuing to see strong demand for wrapper tobacco.

Regulation and Product Taxation

Decreased social acceptance of smoking and increased pressure from anti-smoking groups have had an ongoing adverse effect on the percentage of the population using tobacco products, particularly in the United States and Western Europe.

Many governments have additionally taken or proposed steps to restrict or prohibit tobacco product advertising and promotion, to increase taxes on such products, to prohibit smoking in public areas, and to discourage tobacco product consumption.

A number of such measures are included in the Framework Convention on Tobacco Control (“FCTC”), which was negotiated under the auspices of the World Health Organization (“WHO”) and offers guidelines for, among other issues, discouraging or controlling tobacco use.

Such guidelines are reviewed and developed biennially at a Conference of Parties (“COP”), with COP-9 scheduled to be held in

November 2021.

The 180 countries that are signatories to the FCTC may choose how to fulfill their obligations in implementing the articles in a manner that is most suitable with their approach to tobacco control.

For example, China imposed a ban on smoking in public places, while in the United Kingdom and Australia, laws have been passed mandating plain packaging, the removal of branding on cigarette packages.

We cannot predict the extent to which government efforts to reduce tobacco consumption might affect the business of our primary customers.

However, a significant decrease in worldwide tobacco consumption, as well as shifts to modified risk tobacco products facilitated by existing or future governmental laws and regulations, could reduce demand for leaf tobacco and services and have a material adverse effect on our business.

Recommendations by the WHO, through the FCTC, may cause shifts in customer usage of certain types and styles of tobacco.

As seen in the United States, Canada, Brazil, and the European Union, efforts have been taken to eliminate flavorings from tobacco products.

Additionally, discussions continue about the possibility of mandating the reduction of nicotine content in certain tobacco products to less than addictive levels.

Such decisions could cause a change in requirements for certain leaf tobaccos in particular countries.

Shifts in customer demand from one type of leaf tobacco to another could create sourcing issues as requirements move from one origin to another.

Furthermore, instruction at the farm level may be required to produce the changing styles of leaf tobacco needed by tobacco product manufacturers.

Given our strong global footprint, well-developed programs, and networks at the farm level worldwide, we remain particularly well positioned to meet any changes to manufacturer requirements.

Factors that affect green tobacco prices include global supply and demand, market conditions, production costs, foreign exchange rates, and competition from other crops.

We work with farmers to maintain tobacco production and to secure product at price levels that are attractive to both the farmers and our customers.

Our objective is to secure compliant tobacco that is produced in a cost-effective manner under a sustainable business model with the desired quality for our customers.

In some areas, tobacco competes with agricultural commodity products for farmer production.

In the past, leaf shortages in specific markets or on a worldwide basis have also led to green tobacco price increases.

Global Regulation of Tobacco Products

Public Acceptance of Increased Global Regulation on Tobacco Products

Diminishing social acceptance of tobacco use and increasing pressure from anti-smoking groups have cultivated a political environment that accepts greater regulations on tobacco products, particularly in the United States and the European Union.

While the impact of this cultural trend on our business is uncertain, the global acceptance of stringent regulations could reduce demand for tobacco products and have a material adverse effect on our results of operation.

Strengthened Global Cooperation in the Regulation on Tobacco Products

The World Health Organization’s (“WHO”) Framework Convention on Tobacco Control (“FCTC”) was ratified in 2005 to become the world’s first international public health treaty.

Since its inception, the FCTC has continued to strengthen international cooperation and collaboration in tobacco control by advancing the implementation of the treaty’s 38 articles and

increasing global participation.

As the ninth Conference of the Parties approaches in November 2021, the FCTC is working diligently to consider amendments to the agreement and track progress in the treaty’s implementation.

While we cannot predict the extent or speed at which the efforts of the FCTC will reduce tobacco consumption, a proliferation of national laws and regulations spurred by the recommendations of the FCTC would likely reduce demand for both tobacco products and leaf.

United States FDA’s Continued Enforcement of the Tobacco Control Act

In 2009, the U.S.

Congress passed the Family Smoking Prevention and Tobacco Control Act (the "Act”).

This legislation authorizes the Food and Drug Administration (“FDA”) to regulate the manufacturing and marketing of all tobacco products.

The FDA has banned flavored cigarettes, restricted youth access to tobacco products, banned advertising claims regarding certain tobacco products, promulgated new smokeless tobacco warnings, and issued new cigarette health warnings.

In addition, the FDA established the Center for Tobacco Products (“CTP”).

Over the past decade, the CTP has focused on establishing the scientific foundation and regulatory framework for regulating tobacco products in the United States.

On May 10, 2016, the FDA released “deeming” regulations that extend FDA oversight to all tobacco products, including electronic nicotine delivery systems, cigars, hookah tobacco, pipe tobacco, dissolvables, and “novel and future products.” The regulations require that tobacco product manufacturers register tobacco products that were on the market on February 15, 2007, and to seek FDA authorization to sell any products modified or introduced after such date.

All such submissions require manufacturers to list ingredients in their products.

This legislation authorizes the U.S.

Food and Drug Administration (“FDA”) to regulate the manufacturing and marketing of tobacco products.

The Act additionally prohibited characterizing flavors in cigarettes, restricted youth access to tobacco products, banned advertising claims regarding certain tobacco products, and established the Center for Tobacco Products.

Over the past decade, the FDA has focused on establishing the scientific foundation and regulatory framework for regulating tobacco products in the United States.

On May 10, 2016, the FDA released “deeming” regulations to extend FDA oversight over all tobacco products, including electronic nicotine delivery systems, cigars, hookah tobacco, pipe tobacco, dissolvables, and “novel and future products.” The regulations require tobacco product manufacturers to register tobacco products that were on the market on February 15, 2007, and to seek FDA authorization to sell any products modified or introduced after such date.

All submissions require manufacturers to list ingredients in their products.

Per an order issued by the U.S.

District Court for the District of Maryland in July 2019, the deadline for all pre-market tobacco application submissions moved to May 12, 2020.

However, due to the global COVID-19 pandemic, the Court will likely extend this deadline.

On July 28, 2017, then FDA Commissioner Scott Gottlieb announced a new regulatory approach for the regulation of combustible and non-combustible products focusing on nicotine reduction and the continuum of risk.

The agency issued an Advanced Notice of Proposed Rule Making (“ANPRM”) with the intention of developing a nicotine product standard for cigarettes that reduces the level of nicotine to below-addictive levels.

Additional ANPRMs were issued:

1) to explore the science behind exempting premium cigars from premarket authorization requirements and 2) to address menthol in cigarettes, flavors in vapor and other ENDS products, and the future ENDS and vapor product standards.

Furthermore, as part of the comprehensive plan, the FDA approved the first “heat-not-burn” premarket tobacco application to permit the product’s sale in the United States.

In December 2019, Dr.

Stephen Hahn was sworn in as FDA Commissioner.

Prompted by an uptick in youth use of ENDS products as reported by the National Youth Tobacco Study, FDA finalized its guidance related to its compliance policy regarding certain flavored ENDS products.

This guidance, among other things, prioritized FDA’s enforcement of the premarket review requirements against any “flavored, cartridge-based ENDS product (other than a tobacco- or menthol-flavored ENDS product)” previously marketed under the terms of FDA’s enforcement discretion policy without an otherwise-required marketing order.

The final guidance did not consider further enforcement of flavored cigars despite discussions in the draft guidance.

Regulations impacting our customer base that change the requirements for leaf tobacco or restrict their ability to sell their products will inherently impact our business.

As discussed, we have established programs that begin at the farm level to assist our customers with raw material information to support leaf traceability and customer testing requirements, including the detection of nicotine levels.

Additionally, given our global presence, we also have the ability to source different types and styles of tobacco for our customers should their needs change due to regulation.

However, due to the global COVID-19 pandemic, the Court extended this deadline to September 9, 2020.

The Agency was given one year to approve or deny the marketing applications under consideration.

Although less than 5% of cigarettes manufactured worldwide are consumed in the United States, the FDA is widely considered a global leader in the “science-based” regulation of tobacco products.

The FDA operates in stark contrast to the World Health Organization’s “emotion based” approach to nicotine use.

The WHO is reluctant to accept one nicotine product as more/less risky than another, and their suggested solution is either rigorous regulation or outright prohibition.

The continued implementation and enforcement of the Act in the United States is likely to influence the tobacco control measures considered by other countries and international bodies, including the WHO.

It is impossible to predict the ultimate impact these developing regulations will have on our business, but any reduction in the demand for our customer’s products will adversely impact the demand for leaf tobacco.

Global Acceptance of the Continuum of Risk in the Regulation of Novel Tobacco Products

As novel tobacco products, such as e-cigarettes and heat-not-burn devices, emerge in the global market, governments are tasked with developing the appropriate, science-based approach to regulation.

In 2017, then Commissioner of the FDA, Scott Gottlieb, announced a new regulatory approach for the regulation of tobacco products that embraced the placement of each product somewhere along a “continuum of risk”.

This comprehensive plan on nicotine use sought to facilitate an adult tobacco consumer’s switch from combustible cigarettes to less risky products found lower on the continuum.

As part of this regulatory scheme, the FDA approved the first “heat-not-burn” and “very-low nicotine” premarket tobacco applications to permit the sale of these products within the United States.

Furthermore, FDA approved their first modified risk tobacco products applications (“MRTPs”) to permit certain products in the heat-not-burn and smokeless categories to make modified exposure or risk claims.

Although the WHO FCTC does not include specific harm-reduction provisions in the language of the treaty, a growing number of countries have established tobacco control strategies incorporating a continuum of risk concept.

In addition, the global tobacco product market is continuously diversifying to include a wide array of novel tobacco products to serve as alternatives to combustible cigarettes.

Regardless of the type, it is generally understood that most novel products on the market contain less leaf tobacco than combustible cigarettes.

Therefore, the market-driven rise of novel products alongside a regulatory scheme designed to facilitate an adult tobacco consumer’s switch from combustible cigarettes could affect global leaf demand.

It is presently difficult to predict whether this will result in a decrease or an increase in requirements for leaf tobacco production in the long or short terms.

Since they are marketed as replacements for combustible tobacco products, the question remains whether novel products will replace traditional cigarettes in the future, add to the market, or have a balancing effect.

Increased Taxation

A number of governments, particularly federal and local governments in the United States and the European Union, impose excise or similar taxes on tobacco products.

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Illicit Trade

Illicit trade is another factor which influences demand for leaf tobacco.

Industry estimates of the illegal, unregulated illicit market for cigarettes are approximately 10% to 12% of global stick consumption, representing $40 to $50 billion in lost tax revenue globally.

The United States, European Union, and the WHO have initiated substantial steps in combating illicit trade.

Illicit trade is another factor which influences demand for legally and sustainably produced leaf tobacco.

The WHO estimates that one in every ten cigarettes consumed globally is illicit.

Individual governments like the United States, European Union, and Brazil have initiated substantial steps in combating illicit trade.

In 2012 the WHO Framework Convention on Tobacco Control adopted an illicit trade protocol which has been so far ratified by only one third of its 182 parties.

We continue to support both governmental and industry efforts to eradicate illicit trade.

Ingredients Operations Trends

Following our capital allocation strategy, we have made disciplined investments within our leaf business to take advantage of growth opportunities in tobacco as well as in plant-based ingredients businesses and markets that could utilize our assets and capabilities.

Through these actions, we believe that we will be able to deliver enhanced shareholder value despite operating in the mature leaf tobacco industry.

We made significant strategic investments in our plant-based ingredients platform in fiscal years 2020 and 2021.

We acquired FruitSmart in January 2020 and Silva in October 2020.

Our ingredients businesses provide our business-to-business customers with a broad variety of plant-based ingredients for both human and pet consumption.

A variety of value-added manufacturing processes are used in these businesses to convert raw materials into a wide spectrum of fruit and vegetable juices, concentrates, and dehydrated products.

These businesses provide value-added agricultural processing, part of the agricultural value chain where we possess significant business expertise.

We consider the agricultural value chain to consist of agricultural inputs, crop production, agricultural processing, manufacture and distribution, and retail sales.

We are pleased with the ongoing integration of our plant-based ingredients platform, and we are ahead of our capital allocation strategy objectives.

One of the markets our plant-based ingredients business serve is the growing Global Health and Wellness Foods Market.

According to industry estimates this market is projected to grow at an annual rate of 4%-6% over the next several years.

In addition, with the COVID-19 pandemic, there is strong consumer demand for healthy foods.

FruitSmart is seeing growing consumer interest in better-for-you premium ingredients, including custom blends, not-from-concentrate and dry products.

It is also seeing strong growth in targeted end markets utilizing FruitSmart products, including ciders, purees and nutraceuticals.

Silva is well positioned to take advantage of increasing demand for natural and clean-label products across the end markets it serves, including within the attractive and growing savory and pet food end markets.

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What changed 10-K

Item 7. Management’s Discussion and Analysis