What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-08-04 compared with 2021-02-08 · 107 added, 144 removed, 104 unchanged (71% of the section changed)

8 unchanged sentences

impacts of the ongoing COVID-19 pandemic;

integration of FruitSmart Inc.

("FruitSmart") and Silva International, Inc.

("Silva") and the impact of the FruitSmart and Silva acquisitions on future results;

success in pursuing strategic investments or acquisitions and integration of new businesses and the impact of these new businesses on future results;

product purchased not meeting quality and quantity requirements;

28 unchanged sentences

We believe these non-GAAP financial measures, which exclude items that we believe are not indicative of our core operating results, provide investors with important information that is useful in understanding our business results and trends.

Tobacco shipments in the third quarter of fiscal year 2021 exceeded our previous expectations as customer mandated timing for some shipments forecast for the fourth fiscal quarter were accelerated into the third fiscal quarter.

As a result, total tobacco shipment volumes for the nine months ended December 31, 2020, are similar to those of the prior year’s comparable fiscal period.

The majority of our remaining committed tobacco orders for the 2020 crop are packed and ready to ship, and we expect sustained strong tobacco shipment volumes in our fourth fiscal quarter of 2021 barring any unforeseen events including changes in shipment timing.

In addition, our uncommitted tobacco inventory levels remain within our target range.

We continue to believe our adjusted operating income for fiscal year 2021, which excludes restructurings and certain costs for acquisitions,

will materially exceed that for fiscal year 2020, barring any unforeseen events including shipment delays due to lack of vessel or container availability, port congestion, or COVID-19 related uncertainties.

Net income for the quarter ended December 31, 2020, was $33.3 million, or $1.34 per diluted share, compared with net income of $26.0 million, or $1.04 per diluted share, for the prior year’s third fiscal quarter.

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 $27.5 million and $1.11, respectively, for the quarter ended December 31, 2020, compared to the quarter ended December 31, 2019.

Operating income for the third quarter of fiscal year 2021 increased to $60.2 million compared to $44.1 million for the three months ended December 31, 2019.

Net income for the nine months ended on December 31, 2020, was $48.0 million, or $1.94 per diluted share, compared with $56.1 million, or $2.23 per diluted share, for the same period of the prior fiscal year.

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 $3.4 million and $0.18, respectively, for the nine months ended December 31, 2020, compared to the nine months ended December 31, 2019.

Operating income of $85.1 million for the nine months ended December 31, 2020, decreased by $9.8 million, compared to operating income of $94.8 million for the nine months ended December 31, 2019.

Adjusted operating income, detailed in Other Items below, of $107.6 million increased by $10.9 million for the nine months ended December 31, 2020, compared to adjusted operating income of $96.7 million for the same period in the prior fiscal year.

Segment operating income was $103.0 million for the nine months ended December 31, 2020, an increase of $5.9 million, and for the quarter ended December 31, 2020, was $81.7 million, an increase of $37.6 million, both compared to the same periods last fiscal year.

Results for the nine months and quarter ended December 31, 2020, reflected earnings improvements in the Tobacco Operations segment, primarily on strong tobacco shipment volumes in the third fiscal quarter, compared to the same periods in the prior fiscal year.

Consolidated revenues increased by $87.9 million to $1.4 billion for the nine months ended December 31, 2021, and by $167.9 million to $672.9 million for the three months ended December 31, 2020, compared to the same periods in fiscal year 2020, on the strong tobacco shipment volumes in the third fiscal quarter and the addition of businesses acquired in calendar year 2020 to the Ingredients Operations segment.

We have also made considerable progress towards delivering on our capital allocation strategy in the third fiscal quarter of 2021.

One pillar of this strategy is to deliver shareholder value through building and enhancing our plant-based ingredients platform.

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

We have been working diligently throughout the quarter on integrating and exploring opportunities for synergies between our recently acquired businesses, FruitSmart and Silva.

During this process, we concluded that CIFI, our sweet potato processing operation which we built from the ground up, was not a strategic fit for the platform’s long-term objectives due in part to its single-product focused, high capacity processing line and ongoing international competitor pricing pressures.

We made the difficult but prudent decision to wind down the operation.

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.

We are pleased with the ongoing integration of our plant-based ingredients platform, and with these acquisitions, we continue to expect the new platform will generate between 10% and 20% of our EBITDA in our fiscal year 2022, ahead of our capital allocation strategy objectives.

We are excited about our plant-based ingredients platform and its potential for future success.

We also remain committed to our role as the leading global leaf tobacco supplier.

Supported by our compliance and sustainability programs, we continue to see opportunities to increase market share and enhance our leaf tobacco businesses.

Results for our Tobacco Operations segment improved on higher African carryover tobacco shipments and a favorable tobacco product mix in the three months ended June 30, 2021, compared to the three months ended June 30, 2020.

Our Ingredients Operations segment, which includes our October 2020 acquisition of Silva International, Inc.

(“Silva”), delivered very strong performance in the three months ended June 30, 2021.

We are beginning to see the positive outcome from our capital allocation strategy, which we put in place in May 2018 with the goal of ensuring that we are well positioned for the future.

Investments in our tobacco business have enabled us to expand the supply chain services we provide our customers and to create footprint rationalization efficiencies, and we are seeing the returns from those investments in our results.

Our plant-based ingredients platform is coming together nicely;

we continue to

believe we are on track for our ingredients businesses to meet our previously announced goal of representing 10% to 20% of our results in fiscal year 2022.

We are excited about the performance of our investments thus far and will continue to seek prudent, strategic opportunities to enhance our businesses and return value to our shareholders.

Our tobacco and plant-based ingredients businesses are both currently performing according to our plans.

Like other industries, we are seeing some logistical constraints around the world with regard to vessel and container availability stemming from the ongoing COVID-19 pandemic;

however at this time, we do not know what significance such constraints may have on shipment timing or our results.

We are continuing to monitor these and other pandemic-related conditions which affect our operations.

As part of our ongoing efforts to set high standards of social and environmental performance to support a sustainable supply chain, we have developed targets to reduce greenhouse gas emissions which are consistent with the levels required to meet the goals of the Paris Agreement – limiting global warming to well-below 2°C above pre-industrial levels.

Our targets were recently approved by the Science Based Targets initiative (SBTi), and reflect our commitment to reduce our global greenhouse gas emissions by 30% by 2030.

FINANCIAL HIGHLIGHTS

Three Months Ended June 30, Change

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

Consolidated Results

Sales and other operating revenue $ 350.0 $ 315.8 $ 34.2 11 %

Cost of goods sold $ 287.6 $ 262.0 $ 25.5 10 %

Gross Profit Margin 17.8 % 17.0 % 80 bps

Selling, general and administrative expenses $ 49.8 $ 49.4 $ 0.4 1 %

Restructuring and impairment costs $ 2.0 $ — $ 2.0 (100) %

Operating income (as reported) $ 10.6 $ 8.5 $ 2.1 24 %

Adjusted operating income (non-GAAP)* $ 12.6 $ 4.4 $ 8.3 190 %

Diluted earnings per share (as reported) $ 0.26 $ 0.29 $ (0.03) (10) %

Adjusted diluted earnings per share (non-GAAP)* $ 0.30 $ 0.02 $ 0.28 1400 %

Segment Results

Tobacco operations sales and other operating revenues $ 293.8 $ 298.4 $ (4.5) (2) %

Tobacco operations operating income $ 8.9 $ 5.0 $ 3.8 76 %

Ingredients operations sales and other operating revenues $ 56.2 $ 17.4 $ 38.7 222 %

Ingredient operations operating income $ 4.3 $ (0.7) $ 5.1 720 %

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

Net income for the quarter ended June 30, 2021, was $6.4 million, or $0.26 per diluted share, compared with $7.3 million, or $0.29 per diluted share, for the quarter ended June 30, 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 $6.8 million and $0.28, respectively, for the quarter ended June 30, 2021, compared to the quarter ended June 30, 2020.

Operating income of $10.6 million for the quarter ended June 30, 2021, increased by $2.1 million, compared to operating income of $8.5 million for the quarter ended June 30, 2020.

Adjusted operating income, detailed in Other Items below, of $12.6 million increased by $8.3 million for the first quarter of fiscal year 2022, compared to adjusted operating income of $4.4 million for the first quarter of fiscal year 2021.

Consolidated revenues increased by $34.2 million to $350.0 million for the three months ended June 30, 2021, compared to the same period in fiscal year 2021, on the addition of the business acquired in October 2020 in the Ingredients Operations segment, offset in part by modestly lower comparative leaf tobacco sales volumes.

Tobacco Operations

Operating income for the Tobacco Operations segment increased by $6.1 million to $107.7 million for the nine months and by $38.4 million to $84.1 million for the quarter ended December 31, 2020, compared with the same periods for fiscal year 2020.

Strong tobacco shipment volumes in the third fiscal quarter benefited Tobacco Operations segment results for both the three and nine months ended December 31, 2020, and year-to-date tobacco shipment volumes as of December 31, 2020, were similar to those in the same period of fiscal year 2020.

In the nine months ended December 31, 2020, increases in shipments of carryover crop tobaccos largely offset decreases in shipments of current crop tobacco caused in part by customer mandated shipment timing that has pushed some current crop shipments into our fourth fiscal quarter, compared to the same period in the prior fiscal year.

In the nine months ended December 31, 2020, sales volumes were up in Brazil and the United States on higher sales of carryover crop tobacco, while volumes decreased in Africa on weather reduced crop sizes, compared to the nine months ended December 31, 2019.

In the quarter ended December 31, 2020, increased shipments of carryover tobacco from Africa, the United States, and Brazil, higher current crop shipments from Africa, and timing of receipt of distributions from unconsolidated affiliates benefited Tobacco Operations segment results, compared to the third quarter of fiscal year 2020.

Segment results were also up in the nine months and quarter ended December 31, 2020, compared to the same periods in the prior fiscal year, on a favorable product mix and continued strong demand for wrapper tobaccos.

Selling, general, and administrative costs for the segment were lower for the nine months and flat for the quarter ended December 31, 2020, compared to the same periods in the prior fiscal year.

In the nine months ended December 31, 2020, selling, general, and administrative costs for the segment declined largely on favorable net foreign currency remeasurement comparisons, mainly in Indonesia, Brazil, and the Philippines, and lower travel costs.

Revenues for the Tobacco Operations segment of $1.3 billion for the nine months and $623.9 million for the quarter ended December 31, 2020, were flat and up $120.0 million, respectively, compared to the same periods in the prior fiscal year, on tobacco shipment volumes and a more favorable sales mix in the third fiscal quarter.

The first fiscal quarter is historically a slow quarter for our tobacco businesses.

Operating income for the Tobacco Operations segment increased by $3.8 million to $8.9 million for the quarter ended June 30, 2021, compared with the quarter

ended June 30, 2020.

Although tobacco sales volumes were down modestly, Tobacco Operations segment results improved on carryover shipments, product mix, and increased supply chain services to customers in the quarter ended June 30, 2021, compared to the same quarter in the prior fiscal year.

Carryover crop shipments were higher in Africa in the quarter ended June 30, 2021, compared to the same quarter in the prior fiscal year, in part due to some shipments that were delayed from fiscal year 2021.

Brazil experienced an improved product mix on lower volumes in the quarter ended June 30, 2021, compared to the quarter ended June 30, 2020, when high volumes of lower margin carryover crops shipped.

Carryover tobacco crop shipments were lower and product mix was less favorable in Asia in the first quarter of fiscal year 2022, compared to the same quarter in fiscal year 2021.

In the first quarter of fiscal year 2022, we also provided increased supply chain services to customers for wrapper tobacco, compared to the same quarter in the prior fiscal year.

Selling, general, and administrative expenses for the Tobacco Operations segment were lower in the quarter ended June 30, 2021, compared to June 30, 2020, primarily on higher recoveries of value-added taxes and advances to suppliers.

Revenues for the Tobacco Operations segment of $293.8 million for the quarter ended June 30, 2021, were down $4.5 million, compared to the same period in the prior fiscal year, on modestly lower tobacco sales volumes.

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, and results for these operations are not included in the segment results for the comparable prior periods ended December 31, 2019.

The operating loss for the Ingredients Operations segment was $4.7 million and $2.5 million, respectively, for the nine months and quarter ended December 31, 2020, compared to an operating loss of $4.5 million and $1.4 million, respectively, for the nine months and quarter ended December 31, 2019.

In addition, results for the segment included costs from amortization of intangibles related to the acquisitions, which totaled $4.0 million and $2.4 million, respectively, in the nine months and quarter ended December 31, 2020, as well as a purchase accounting adjustment of $2.8 million that also reduced our results for the segment in the nine months and quarter ended December 31, 2020.

Although results improved for our CIFI business in the nine months ended December 31, 2020, compared to the same period in the prior fiscal year, we made the strategic decision to wind down that operation in the quarter ended December 31, 2020.

Our FruitSmart operations results for the first nine months of fiscal year 2021 were dampened by a less favorable product mix due to changes in customer demand as the ongoing COVID-19 pandemic reduced capacity at social venues that use FruitSmart products.

Selling, general, and administrative expenses increased in the nine months and quarter ended December 31, 2020, on the addition of the acquired businesses.

Revenues for the Ingredients Operations segment of $86.9 million for the nine months and $49.1 million for the quarter ended December 31, 2020, were up $83.9 million and $47.9 million, respectively, compared to the same periods in the prior fiscal year, on the addition of the revenues for the acquired businesses.

Operating income for the Ingredients Operations segment was $4.3 million for the quarter ended June 30, 2021, compared to an operating loss of $0.7 million for the quarter ended June 30, 2020.

Results for the segment improved year-over-year on the inclusion of the October 2020 Silva acquisition.

For the quarter ended June 30, 2021, our Ingredients Operations saw strong volumes in both human and pet food categories as well as some rebound in demand from sectors that have been suffering during the ongoing COVID-19 pandemic.

Selling, general, and administrative expenses increased in the quarter ended June 30, 2021, compared to the same quarter in the prior fiscal year, on the addition of the acquired business.

Revenues for the Ingredients Operations segment of $56.2 million for the quarter ended June 30, 2021, were up $38.7 million compared to the quarter ended June 30, 2020, primarily on the addition of the revenues for the acquired business.

COVID-19 Pandemic Impact

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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, directed certain employee groups to work remotely whenever possible, and we continue to assess protocols designed to protect our employees, customers and the public.

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 has resulted in delays in certain operations.

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 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 the ongoing COVID-19 pandemic, which include slower processing of our products due to controlled staffing in our facilities that could lead to further delays of shipments to our customers.

We are currently seeing and monitoring some logistical constraints around worldwide vessel and container availability stemming from 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.

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.

We will take additional steps to address the spread of COVID-19 and its impacts, as necessary, and remain thankful for the hard work of our employees and the continued support of our customers, growers, and other partners during these challenging times.

Cost of goods sold in the nine months and quarter ended December 31, 2020, increased by 29% and 7% to $1.1 billion and $533.4 million, respectively, both compared with the same periods in the prior fiscal year, as a result of tobacco shipment volumes and the acquisition of businesses in the Ingredients Operations segment.

Selling, general, and administrative costs for the nine months and quarter ended December 31, 2020, increased by $8.3 million to $161.2 million and by $10.5 million to $59.3 million, respectively, compared to the same periods in the prior fiscal year, on the business acquisitions in the Ingredients Operations segment.

Increases in selling, general, and administrative costs in the nine months ended December 31, 2020, were partially offset by positive foreign currency remeasurement and exchange variances, primarily in Indonesia, Brazil, and the Philippines, and lower travel costs, compared with the same period in the prior year.

For the nine months and quarter ended December 31, 2020, our consolidated effective tax rate was 19% and 26%, respectively.

For the nine months ended December 31, 2020, income tax expense included a $4.4 million benefit for final tax regulations regarding the treatment of dividends paid by foreign subsidiaries and a $2.9 million benefit in the third fiscal quarter of 2021 due to amending and finalizing prior year returns.

Without these benefits, the consolidated effective tax rate for the nine months and quarter ended December 31, 2020, would have been approximately 29% and 32%, respectively.

Our consolidated effective tax rates for the nine months and quarter ended December 31, 2019, were approximately 30% and 26%, respectively.

Income tax expense for the nine months ended December 31, 2019 included a $2.8 million net tax accrual for an unresolved tax matter at a foreign subsidiary and a $1.5 million benefit in the third fiscal quarter of 2020 due to amending and finalizing prior year returns.

Without the effect of these items, the consolidated effective tax rate for the nine months and quarter ended December 31, 2019, would have been 29% and 30%, respectively.

We will take additional steps and reevaluate current protocols to address the spread of COVID-19 and its impacts, as necessary, and remain thankful for the hard work of our employees and the continued support of our customers, growers, and other partners during these challenging times.

Cost of goods sold in the quarter ended June 30, 2021, increased by 10% to $287.6 million, compared with the same period in the prior fiscal year, as a result of the acquisition of the business in the Ingredients Operations segment, offset in part by variances in tobacco sales volumes and product mix.

Selling, general, and administrative costs for the quarter ended June 30, 2021, increased by $0.4 million to $49.8 million, compared to the same period in the prior fiscal year, as additional costs from the business acquisition in the Ingredients Operations segment were largely offset by lower costs in the Tobacco Operations segment primarily on higher recoveries of value-added taxes and advances to suppliers.

Interest expense for the quarter ended June 30, 2021, decreased by $0.6 million to $6.2 million as increased costs from higher debt balances were more than offset in comparison to the quarter ended June 30, 2020, which included a non-recurring interest expense item of $1.8 million associated with the settlement of an uncertain tax matter at a foreign subsidiary.

For the three months ended June 30, 2021, the Company’s effective tax rate on pre-tax income was 23.7%.

For the three months ended June 30, 2020, the Company reported a net tax benefit on pretax earnings of $5.0 million, mainly due to a $4.4 million benefit for final tax regulations issued in the quarter regarding the treatment of dividends paid by foreign subsidiaries.

Without this benefit, income taxes for the quarter ended June 30, 2020, would have been a benefit of approximately $0.6 million.

Reconciliation of Certain Non-GAAP Financial Measures

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

Adjusted Operating Income Reconciliation

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

Three Months Ended June 30,

(in thousands) 2021 2020

Consolidated operating income $ 10,605 $ 8,528

Silva acquisition purchase accounting adjustment (1)

2,800 — 2,800 —

Transaction costs for acquisitions (2)

2,252 939 3,915 1,864

Restructuring and impairment costs (1)

19,979 — 19,979 —

Fair value adjustment to contingent consideration for FruitSmart acquisition (2)

— — (4,173) —

Adjusted operating income $ 12,629 $ 4,355

Adjusted Net Income and Diluted Earnings Per Share

(in thousands and reported net of income taxes) Three Months Ended December 31, Nine Months Ended December 31,

(all amounts are reported net of income taxes) 2020 2019 2020 2019

(in thousands and reported net of income taxes) Three Months Ended June 30,

Net income available to Universal Corporation $ 6,357 $ 7,274

Silva acquisition purchase accounting adjustment (1)

2,800 — 2,800 —

Transaction costs for acquisitions (2)

2,252 939 3,915 1,864

Restructuring and impairment costs (1)

16,100 — 16,100 —

Fair value adjustment to contingent consideration for FruitSmart acquisition (2)

— — (4,173) —

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

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

— — (4,421) —

Income tax settlement for a foreign subsidiary (6)

Income tax benefit on dividends paid from foreign subsidiaries (3)

Adjusted net income available to Universal Corporation $ 7,362 $ 529

1 unchanged sentence

Diluted earnings per share $ 0.30 $ 0.02

(1) The Company recognized an increase in cost of goods sold in the third quarter of fiscal year 2021, relating to the expensing of a fair value adjustment to inventory associated with the initial acquisition accounting for Silva.

This cost is not deductible for U.S.

income tax purposes.

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

These costs are not deductible for U.S.

income tax purposes.

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

See Note 4 for additional information.

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

(2) 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.

(3) 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) During the first quarter of fiscal year 2020, the Company recognized an income tax settlement charge related to operations at a foreign subsidiary.

Liquidity and Capital Resources

After significant seasonal working capital investment in the first half of the fiscal year, we generally see tobacco inventory levels and other working capital items decrease in the second half of our fiscal year as tobacco crops in Africa, South America, and North America are being shipped.

We saw the beginning of the seasonal contraction in our working capital requirements by the end of the third quarter of fiscal year 2021.

Our operations generated operating cash flows, and cash balances increased in the three months ended December 31, 2020.

Our working capital needs in the nine months ended December 31, 2020, were lower than normal in part due to lower green leaf tobacco prices, mainly resulting from a strong U.S.

dollar, and smaller African crop sizes.

We funded our working capital needs in the nine months ended December 31, 2020, using a combination of cash on hand, short-term borrowings, customer advances, and operating cash flows.

We saw strong tobacco crop shipments in the third quarter of fiscal year 2021 and expect this shipping pattern will continue in the fourth fiscal quarter.

Our first fiscal quarter is usually a period of significant working capital investment in both Africa and South America as tobacco crops are delivered by farmers.

We funded our working capital needs in the quarter ended June 30, 2021, using a combination of cash on hand, short-term borrowings, customer advances, and operating cash flows.

We expect tobacco crop shipments to be weighted to the second half of the fiscal year.

Our liquidity and operating capital resource requirements are predominantly short term in nature and primarily relate to working capital for tobacco crop purchases.

6 unchanged sentences

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

At this time, COVID-19 has not had a material impact on our supply chain, other than indirect currency market disruptions caused by the pandemic in the quarter ended March 31, 2020.

COVID-19 has, however, resulted in shipment delays in certain operations, and our plant-based ingredients platform has seen some shifts in product mix due to COVID-19 related changes in customer demand.

Despite these impacts, we anticipate our current cash balances, cash flows from operations, and our available sources of liquidity will be sufficient to meet our cash requirements for at least the next twelve months.

However, given the uncertainty of future impacts from COVID-19, including delays in timing of some shipments, the duration of our working capital needs could be extended.

Our balance sheet at December 31, 2020, also reflects our acquisitions of FruitSmart and Silva in our Ingredients Operations segment during calendar year 2020.

These acquisitions significantly increased our goodwill and other intangibles balance and were financed using a combination of cash on hand and borrowings under our committed revolving credit facility, a portion of which was subsequently converted to long-term debt.

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 for at least the next twelve months.

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

Operating Activities

We generated about $38.6 million in net cash flows to fund our operations during the nine months ended December 31, 2020.

That amount was $211.5 million higher than during the same period last fiscal year.

We did not require as much working capital to fund our operations during the nine months ended December 31, 2020, due to lower green leaf tobacco prices.

Tobacco inventory levels increased by $107.0 million from March 31, 2020 levels to $814.3 million at December 31, 2020, on seasonal leaf purchases.

Tobacco inventory levels at December 31, 2020, were $123.4 million below December 31, 2019 levels, on carryover crop sales, lower green leaf tobacco prices, and lower purchases of African crops in part due to weather-reduced crop sizes.

We used $120.9 million in net cash flows from our operations during the quarter ended June 30, 2021, compared to generating $0.1 million from our operations in the quarter ended June 30, 2020.

Our working capital needs to fund our operations in the quarter ended June 30, 2021, were higher, compared to the quarter ended June 30, 2020, on the tobacco shipment and purchase timing as well as our acquisition of Silva in October 2020.

Crop purchase timing was slower in the quarter ended June 30, 2020, in part due to COVID-19 working restrictions.

Tobacco inventory levels increased by $233.7 million from March 31, 2021 levels to $874.4 million at June 30, 2021, on seasonal leaf purchases.

Tobacco inventory levels were $15.4 million above June 30, 2020 levels, mainly due to tobacco shipment timing.

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

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

At December 31, 2020, our uncommitted tobacco inventories were $155.7 million, or about 19% of total tobacco inventory, compared to $175.0 million, or about 25% of our March 31, 2020 tobacco inventory, and $197.7 million, or about 21% of our December 31, 2019 tobacco inventory.

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

Our balance sheet accounts reflected seasonal patterns in the nine months ended December 31, 2020, on deliveries of tobacco crops by farmers in South America, Africa, and North America.

Cash and cash equivalent balances and accounts receivable decreased by $12.0 million from March 31, 2020 levels, as we used cash, including collections on receivables, to fund seasonal working capital needs.

Advances to suppliers were $102.8 million at December 31, 2020, a reduction of $31.0 million from March 31, 2020, as tobacco crops were delivered in payment of those balances, net of new advances on current tobacco crops.

Other inventories and goodwill and other intangibles were up by $45.1 million and $110.7 million, respectively, from March 31, 2020 levels, mainly due to an acquisition in our Ingredients Operations segment.

Notes payable and overdrafts was up $51.6 million from March 31, 2020 levels, on seasonal tobacco increases.

Cash and cash equivalent balances of $95.4 million at December 31, 2020, were up $30.7 million, compared to balances at December 31, 2019, on lower working capital requirements largely offset by the funding of the FruitSmart acquisition in January 2020 with cash on hand.

Accounts receivable were up $82.7 million at December 31, 2020, compared to December 31, 2019, on tobacco shipment timing and the inclusion of the Silva acquisition.

Other inventories and accounts payable and accrued expenses were also up $59.7 million and $26.3 million, respectively, in the third quarter of fiscal year 2021 compared to the third fiscal quarter of fiscal year 2020, mainly on the acquisitions in the Ingredients Operations segment.

Notes payable and overdrafts of $129.6 million at December 31, 2020, were up $37.0 million compared to December 31, 2019, largely on lower fiscal year opening cash balances to fund working capital requirements this fiscal year.

At June 30, 2021, our uncommitted tobacco inventories were $158.6 million, or about 18% of total tobacco inventory, compared to $139.2 million, or about 22% of our March 31, 2021 tobacco inventory, and $176.3 million, or about 21% of our June 30, 2020 tobacco inventory.

While we target committed inventory levels of 80% or more of total tobacco inventory, the level of these uncommitted inventory percentages is influenced by timing of farmer deliveries of new crops, as well as the receipt of customer orders.

Our balance sheet accounts reflected seasonal patterns in the quarter ended June 30, 2021, on deliveries of crops by farmers in both South America and Africa.

Cash and cash equivalent balances and accounts receivable decreased by $112.5 million and $87.6 million, respectively, from March 31, 2021 levels, as we used cash, including collections on receivables, to fund seasonal working capital needs.

Advances to suppliers were $70.4 million at June 30, 2021, a reduction of $51.2 million from March 31, 2021 as tobacco crops were delivered in payment on some of those balances, net of new advances on current tobacco crops.

Notes payable and overdrafts was up $52.0 million from March 31, 2021 levels, on seasonal increases.

Accounts receivable and accounts receivable—unconsolidated affiliates were both up $57.7 million and $19.2 million, respectively for the quarter ended June 30, 2021, compared to the same quarter in the prior fiscal year, on the timing of crop purchases and shipments.

Inventories—Other were also up in the quarter ended June 30 2021, compared to the quarter ended June 30, 2020, on our acquisition of Silva.

Investing Activities

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increasing our strong dividend;

exploring growth opportunities in non-tobacco industries and markets that utilize our assets and capabilities;

exploring growth opportunities for our plant-based ingredients platform that

utilize our assets and capabilities;

and returning excess capital to our shareholders.

In deciding where to invest capital resources, we look for opportunities where we believe we can earn an adequate return as well as leverage our assets and expertise or enhance our farmer base.

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

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

Our capital expenditures are generally limited to those that add value, replace or maintain equipment, increase efficiency, or position us for future growth.

During the nine months ended December 31, 2020 and 2019, we invested about $33.8 million and $21.7 million, respectively, in our property, plant and equipment.

Depreciation expense was approximately $28.6 million and $27.5 million for the nine months ended December 30, 2020 and 2019, respectively.

During the quarters ended June 30, 2021 and 2020, we invested about $14.4 million and $8.4 million, respectively, in our property, plant and equipment.

Depreciation expense was approximately $9.7 million and $9.3 million for the three months ended June 30, 2021 and 2020, respectively.

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

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We currently expect to spend approximately $35 to $45 million over the next twelve months on capital projects for maintenance of our facilities and other investments to grow and improve our businesses.

On November 5, 2020, we announced that our Board of Directors had approved a new share repurchase program, which replaced the expiring November 2017 share repurchase program, for the purchase of up to $100 million of our common stock through November 15, 2022.

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

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 the three months ended December 31, 2020, we did not purchase any shares of common stock, and as of December 31, 2020, approximately 24.5 million shares of our common stock were outstanding.

During the three months ended June 30, 2021, we did not purchase any shares of common stock.

As of June 30, 2021, approximately 24.6 million shares of our common stock were outstanding and our available authorization under our current share repurchase program was $100 million.

Financing Activities

On October 1, 2020, we acquired Silva for approximately $164 million.

We financed the 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 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 material 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.

Net debt as a percentage of net capitalization was approximately 31% at December 31, 2020, up from the December 31, 2019 level of approximately 24%, largely on increased borrowings due in part to the funding of the FruitSmart acquisition in January 2020 and the Silva acquisition in October 2020, and up from the March 31, 2020 level of approximately 22%.

As of December 31, 2020, we had $95.4 million in cash and cash equivalents, our short-term debt totaled $129.6 million, and we were in compliance with all covenants of our debt agreements, which require us to maintain certain levels of tangible net worth and observe restrictions on debt levels.

As of December 31, 2020, we had $410 million available under a committed revolving credit facility that will mature in December 2023, and we had about $180 million in unused, uncommitted credit lines.

We also maintain an effective, undenominated universal shelf registration statement that provides for future issuance of additional securities.

Net debt as a percentage of net capitalization was approximately 31% at June 30, 2021, up from the June 30, 2020 level of approximately 23%, largely on higher debt balances due in part to the Silva acquisition in October 2020 as well as higher working capital requirements, and up from the March 31, 2021 level of approximately 25%.

As of June 30, 2021, we had $84.7 million in cash and cash equivalents, our short-term debt totaled $153.3 million, and we were in compliance with all covenants of our debt agreements, which require us to maintain certain levels of tangible net worth and observe restrictions on debt levels.

As of June 30, 2021, we had $405 million available under a committed revolving credit facility that will mature in December 2023, and we had about $138 million in unused, uncommitted credit lines.

We also maintain an effective, undenominated universal shelf registration statement that provides for future issuance of additional debt or equity securities.

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

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

At December 31, 2020, the fair value of our outstanding interest rate swap agreements was a liability of about $33.9 million, and the notional amount swapped was $370 million.

We entered into these agreements to eliminate the variability of cash flows in the interest payments on our variable-rate term loans.

At June 30, 2021, the fair value of our outstanding interest rate swap agreements was a liability of about $24.9 million, and the notional amount swapped was $370 million.

We entered into these agreements to eliminate the variability of cash flows in the interest payments on a portion of our variable-rate term loans.

Under the swap agreements we receive variable rate interest and pay fixed rate interest.

The swaps are accounted for as cash flow hedges.

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

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

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

At December 31, 2020, the fair value of our open hedges was a net asset of about $4.8 million.

We had forward contracts outstanding that were not designated as hedges, and the fair value of those contracts was a net asset of about $1.3 million at December 31, 2020.

At June 30, 2021, the fair value of our open hedges was a net asset of about $3.4 million.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis