What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-02-02 compared with 2021-11-03 · 111 added, 104 removed, 144 unchanged (60% of the section changed)

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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.

In the six months ended September 30, 2021, tobacco operations results improved on a favorable product mix consisting of a higher percentage of lamina tobacco and fewer carryover sales of lower margin tobaccos, compared to the same period in the prior fiscal year.

In addition, our uncommitted inventory level of 11% of tobacco inventories at September 30, 2021, was significantly below our uncommitted inventory level of 16% of tobacco inventories at September 30, 2020.

At the same time, we continue to have logistical challenges related to worldwide shipping availability stemming from the ongoing COVID-19 pandemic.

To address these challenges, we are working closely with our customers to accelerate tobacco shipments in some origins where vessels and containers have been available while diligently managing slower tobacco shipments in origins with reduced container and vessel availability.

Our lamina tobacco sales volumes for the first half of fiscal year 2022 were just slightly

below those in the first half of fiscal year 2021, and we expect our tobacco crop shipments to be heavily weighted to the second half of fiscal year 2022.

We are continuing to monitor global supply chain constraints.

However, at this time, we do not know if we will encounter significant shipment timing delays which may push shipments into fiscal year 2023.

We are also seeing rising rates of inflation, increases in freight costs, and labor constraints in some locations which are driving up costs.

Although we currently do not know the significance of the impact at this time, we are anticipating these increased costs will especially affect our ingredient operations later in the fiscal year.

On October 4, 2021, we announced the closing of our purchase of Shank’s, which will enhance our plant-based ingredients platform through growing the value-added services available to our customers by adding flavors, custom packaging and bottling, and product development capabilities.

As we move into the second half of fiscal year 2022, we look to maintain our strong level of performance despite ongoing global supply chain challenges.

At the same time, we remain committed to setting high standards of social and environmental performance essential to supporting a sustainable supply chain, and recently released goals and targets around agricultural labor practices and environmental impacts, which are available on our website.

Our operations produced solid results in the nine months ended December 31, 2021.

We are especially pleased by the strong results from our Ingredients Operations segment.

That segment is developing nicely and was bolstered by our acquisition of Shank’s on October 4, 2021.

Shank’s adds valuable capabilities to the segment, including flavors and extracts, custom packaging, bottling, and product development.

We continued to experience the impact of tobacco shipment timing on our results in the nine months and quarter ended December 31, 2021.

Tobacco shipments through the nine months ended December 31, 2021, were lower, compared to the same period in fiscal year 2021, in part due to elevated tobacco shipments in the third quarter of fiscal year 2021 related to earlier customer mandated shipment timing.

Logistical challenges due to continued limitations in worldwide shipping availability

stemming from the ongoing COVID-19 pandemic also slowed tobacco shipments in the nine months ended December 31, 2021.

However, despite the shipment timing variations and logistical challenges, we believe that our tobacco business remains robust with strong customer demand, and our uncommitted tobacco inventory levels remain well within our target range.

Our businesses have performed well managing global supply chain constraints, particularly shipping availability.

However, due to continued lack of containers, trucks, and vessels in certain geographies, we expect that some tobacco shipments from certain origins will be pushed into fiscal year 2023.

Inflationary pressures including higher freight and labor expenses have driven up our costs in both our tobacco and ingredients operations.

We are also seeing higher raw materials costs for both tobacco and ingredients products, and we have been working diligently to build these increased costs into our product costs and customer contracts.

Despite rising prices, we believe demand remains strong for both our tobacco and ingredients products.

While it is still very early, we are also forecasting smaller crops in several key origins for fiscal year 2023.

Sustainability has long been a core tenant of how we conduct our business, and we work to clearly communicate our sustainability goals and efforts.

We published our fiscal year 2021 Sustainability Report in December 2021, and it is available on our website, www.universalcorp.com.

We are excited about our measurable sustainability goals and targets outlined in the report and are committed to continue to build on our global sustainability programs to reinforce the sustainability of our supply chains.

FINANCIAL HIGHLIGHTS

Six Months Ended September 30, Change

Nine Months Ended December 31, Change

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

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

Net income for the six months ended September 30, 2021, was $25.9 million, or $1.04 per diluted share, compared with $14.8 million, or $0.60 per diluted share, for the six months ended September 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 $14.2 million and $0.56, respectively, for the six months ended September 30, 2021, compared to the six months ended September 30, 2020.

Operating income of $40.4 million for the six months ended September 30, 2021, increased by $15.5 million, compared to operating income of $24.9 million for the six months ended September 30, 2020.

Adjusted operating income, detailed in Other Items below, of $41.6 million increased by $19.3 million for the first half of fiscal year 2022, compared to adjusted operating income of $22.4 million for the first half of fiscal year 2021.

Net income for the quarter ended September 30, 2021, was $19.5 million, or $0.78 per diluted share, compared with $7.5 million, or $0.30 per diluted share, for the quarter ended September 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 $7.4 million and $0.29, respectively, for the quarter ended September 30, 2021, compared to the quarter ended September 30, 2020.

Operating income of $29.8 million for the quarter ended September 30, 2021, increased by $13.4 million, compared to operating

income of $16.4 million for the quarter ended September 30, 2020.

Adjusted operating income, detailed in Other Items below, of $29.0 million increased by $11.0 million for the second quarter of fiscal year 2022, compared to adjusted operating income of $18.0 million for the second quarter of fiscal year 2021.

Consolidated revenues increased by $111.1 million to $804.0 million and by $76.9 million to $454.0 million, respectively, for the six months and quarter ended September 30, 2021, compared to the same periods in fiscal year 2021, on the addition of the business acquired in October 2020 in the Ingredients Operations segment and a better product mix and higher sales prices in the Tobacco Operations segment.

Net income for the nine months ended December 31, 2021, was $60.8 million, or $2.44 per diluted share, compared with $48.0 million, or $1.94 per diluted share, for the nine months ended December 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 $4.5 million and $0.17, respectively, for the nine months ended December 31, 2021, compared to the nine months ended December 31, 2020.

Operating income of $103.2 million for the nine months ended December 31, 2021, increased by $18.1 million, compared to operating income of $85.1 million for the nine months ended December 31, 2020.

Adjusted operating income, detailed in Other Items below, of $116.5 million increased by $8.9 million for the nine months ended December 31, 2021, compared to adjusted operating income of $107.6 million for the nine months ended December 31, 2020.

Net income for the quarter ended December 31, 2021, was $34.9 million, or $1.40 per diluted share, compared with $33.3 million, or $1.34 per diluted share, for the quarter ended December 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 decreased by $9.7

million and $0.39, respectively, for the quarter ended December 31, 2021, compared to the quarter ended December 31, 2020.

Operating income of $62.8 million for the quarter ended December 31, 2021, increased by $2.6 million, compared to operating income of $60.2 million for the quarter ended December 31, 2020.

Adjusted operating income, detailed in Other Items below, of $74.9 million decreased by $10.4 million for the third quarter of fiscal year 2022, compared to adjusted operating income of $85.2 million for the third quarter of fiscal year 2021.

Consolidated revenues increased by $90.9 million to $1.5 billion for the nine months ended December 31, 2021, compared to the same period in fiscal year 2021, on the addition of the businesses acquired in the Ingredients Operations segment and a better product mix and higher sales prices in the Tobacco Operations segment.

In the quarter ended December 31, 2021, consolidated revenues decreased by $20.3 million to $652.6 million, compared to the quarter ended December 31, 2020, on lower tobacco sales volumes offset in part by a better tobacco product mix and higher tobacco sales prices as well as the inclusion of the Shank’s acquisition in the Ingredients Operations segment.

Tobacco Operations

Operating income for the Tobacco Operations segment increased by $12.3 million to $35.8 million and by $8.4 million to $26.9 million, respectively, for the six months and quarter ended September 30, 2021, compared to the same periods in fiscal year 2021.

Tobacco Operations segment results improved largely due to a favorable product mix consisting of a higher percentage of lamina tobacco and a reduced amount of carryover sales of lower margin tobaccos, as well as increased value-added services to customers, in the six months and quarter ended September 30, 2021, compared to the six months and quarter ended September 30, 2020.

Africa sales volumes were higher in the six months and quarter ended September 30, 2021, compared to the same periods in fiscal year 2021, on accelerated shipments as well as some shipments of carryover tobacco.

In contrast, sales volumes for Brazil were lower in the six months and quarter ended September 30, 2021, compared to the same periods in the prior year, when high volumes of lower margin carryover tobaccos shipped.

In addition, reduced vessel availability slowed shipments out of Brazil.

Our operations in Asia saw a more favorable product mix, as well as increased value-added services for customers during the quarter ended September 30, 2021, compared to the quarter ended September 30, 2020.

Selling, general, and administrative expenses for the Tobacco Operations segment were higher in the six months and quarter ended September 30, 2021, compared to the six months and quarter ended September 30, 2020, primarily due to unfavorable foreign currency comparisons, mainly remeasurement.

Revenues for the Tobacco Operations segment of $690.6 million for the six months and $396.8 million for the quarter ended September 30, 2021, were up $35.6 million and $40.1 million, respectively, compared to the same periods in the prior fiscal year, on a more favorable product mix as well as higher sales prices.

Operating income for the Tobacco Operations segment decreased by $2.1 million to $105.6 million and by $14.3 million to $69.8 million, respectively, for the nine months and quarter ended December 31, 2021, compared to the same periods in fiscal year 2021.

Tobacco Operations segment results declined largely due to tobacco shipment timing, partially offset by a favorable product mix consisting of a higher percentage of lamina tobacco as well as increased value-added services to customers in the nine months and quarter ended December 31, 2021, compared to the nine months and quarter ended December 31, 2020.

Africa sales volumes were lower in the nine months and quarter ended December 31, 2021, compared to the same periods in fiscal year 2021, on smaller burley crops as well as slower shipment timing.

Sales volumes for Brazil were lower in the nine months ended December 31, 2021, compared to the same period in the prior year, when high volumes of lower margin carryover tobaccos shipped.

Vessel and container availability has also been limited in Brazil in fiscal year 2022, which has slowed shipments.

In Asia, although trading volumes were down on high freight costs, our operations saw a more favorable product mix, as well as increased value-added services for customers during the nine months and quarter ended December 31, 2021, compared to the same periods in the prior fiscal year.

Our operations in Europe experienced higher energy costs in the quarter and nine months ended December 31, 2021, compared to the same periods in the prior fiscal year.

Selling, general, and administrative expenses for the Tobacco Operations segment were higher in the nine months and quarter ended December 31, 2021, compared to the nine months and quarter ended December 31, 2020, primarily due to unfavorable foreign currency exchange comparisons, mainly remeasurement.

Revenues for the Tobacco Operations segment of $1.3 billion for the nine months and $578.0 million for the quarter ended December 31, 2021, were down $10.2 million and $45.8 million, respectively, compared to the same periods in the prior fiscal year, on lower sales volumes partially offset by a more favorable product mix as well as higher sales prices.

Ingredients Operations

Operating income for the Ingredients Operations segment was $7.1 million and $2.7 million, respectively, for the six months and quarter ended September 30, 2021, compared to operating losses of $2.2 million and $1.5 million, respectively, for the six months and quarter ended September 30, 2020.

Results for the segment improved in the six months and quarter ended September 30, 2021, compared to the same periods in the prior fiscal year, on the inclusion of the October 2020 Silva acquisition.

For both the six months and quarter ended September 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 for the segment increased in the six months and quarter ended September 30, 2021, compared to the same periods in the prior fiscal year, on the addition of the acquired business.

Revenues for the Ingredients Operations segment increased by $75.5 million to $113.4 million and by $36.8 million to $57.2 million, respectively, for the six months and quarter ended September 30, 2021, compared to the six months and quarter ended September 30, 2020, primarily on the addition of the revenues for the acquired business.

Operating income for the Ingredients Operations segment was $10.6 million and $3.5 million, respectively, for the nine months and quarter ended December 31, 2021, compared to operating losses of $4.7 million and $2.5 million, respectively, for the nine months and quarter ended December 31, 2020.

Results for the segment include our October 2020 acquisition of Silva and our October 2021 acquisition of Shank’s.

For both the nine months and quarter ended December 31, 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 impacted by the ongoing COVID-19 pandemic.

In addition, the segment saw strong sales of organic-based products, certain dehydrated products, and flavors and extracts.

Selling, general, and administrative expenses for the segment increased in the nine months and quarter ended December 31, 2021, compared to the same periods in the prior fiscal year, on the addition of the acquired businesses.

Revenues for the Ingredients Operations segment increased by $101.1 million to $188.0 million and by $25.6 million to $74.6 million, respectively, for the nine months and quarter ended December 31, 2021, compared to the nine months and quarter ended December 31, 2020, primarily on the addition of the revenues for the acquired businesses.

COVID-19 Pandemic Impact

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 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.

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

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 and impacts to us.

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

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.

For example, we have taken precautions during the pandemic 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.

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 are currently seeing and monitoring some logistical constraints around worldwide vessel and container availability and increased costs stemming from the ongoing COVID-19 pandemic.

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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 six months and quarter ended September 30, 2021, increased by 14% and 17% to $648.8 million and $361.3 million, respectively, compared with the same periods in the prior fiscal year, as a result of the acquisition of Silva in the Ingredients Operations segment as well as variances in product mix in the Tobacco Operations segment.

Selling, general, and administrative costs for the six months and quarter ended September 30, 2021, increased by $13.4 million to $115.2 million and by $13.0 million to $65.4 million, respectively, compared to the same periods in the prior fiscal year, on unfavorable foreign currency comparisons, mainly remeasurement, as well as additional costs from the acquisition of Silva in the Ingredients Operations segment.

Unfavorable foreign currency comparisons were approximately $6.4 million and $1.4 million, respectively, in the six months and quarter ended September 30, 2021, compared to the same periods in the prior year.

Interest expense for the six months and quarter ended September 30, 2021, increased by $0.9 million to $13.3 million and by $1.5 million to $7.1 million, respectively, largely on increased costs from higher debt balances.

Interest expense for the six months ended September 30, 2020, 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 six months and quarter ended September 30, 2021, the Company’s effective tax rate on pre-tax income was 15.1% and 16.5% respectively.

In the three months ended September 30, 2021, the Company recognized a $1.7 million income tax benefit related to a foreign subsidiary.

Without this income tax benefit, the adjusted effective tax rates were 22.0% and 21.7% for the six months and quarter ended September 30, 2021, respectively.

For the six months and quarter ended September 30, 2020, the Company’s effective tax rate on pre-tax income was (14%) and 28%, respectively.

For the six months ended September 30, 2020, income taxes included a $4.4 million benefit for final tax regulations regarding the treatment of dividends paid by foreign subsidiaries.

Without this benefit, income taxes for the six months ended September 30, 2020, would have been an expense of approximately $2.5 million, or a consolidated effective tax rate of approximately 19%.

Cost of goods sold in the nine months ended December 31, 2021, increased by 6% to $1.2 billion and decreased by 2% to $521.2 million in the quarter ended December 31, 2021, compared with the same periods in the prior fiscal year, as a result of the acquisitions in our Ingredients Operations segment as well as variances in volumes and product mix in the Tobacco Operations segment.

Selling, general, and administrative costs for the nine months and quarter ended December 31, 2021, increased by $14.4 million to $175.5 million and by $0.9 million to $60.3 million, respectively, compared to the same periods in the prior fiscal year, on additional costs from the acquisitions in the Ingredients Operations segment as well as unfavorable foreign currency comparisons, mainly remeasurement, partially offset by lower compensation costs in the Tobacco Operations segment.

Unfavorable foreign currency comparisons were approximately $11.5 million and $5.0 million, respectively, in the nine months and quarter ended December 31, 2021, compared to the same periods in the prior year.

Interest expense for the nine months and quarter ended December 31, 2021, increased by $1.7 million to $20.8 million and by $0.7 million to $7.5 million, respectively, largely on higher average debt balances and interest rates.

For the nine months and quarter ended December 31, 2021, the Company’s effective tax rate on pre-tax income was 21.0% and 23.4% respectively.

In the nine months ended December 31, 2021, the Company recognized a $1.7 million income tax benefit related to a final tax ruling at a foreign subsidiary and a $1.2 million benefit in the third fiscal quarter of 2022 due to finalizing the prior year U.S.

Without these income tax benefits, the adjusted effective tax rate for the nine months and quarter ended December 31, 2021, would have been 24.2% and 25.5%, respectively.

For the nine months and quarter ended December 31, 2020, our consolidated effective tax rate was 18.6% and 26.5%, 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 U.S.

Without these income tax benefits, the consolidated effective tax rate for the nine months and quarter ended December 31, 2020, would have been approximately 29.3% and 31.7%, respectively.

Reconciliation of Certain Non-GAAP Financial Measures

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Adjusted Operating Income Reconciliation

Three Months Ended September 30, Six Months Ended September 30,

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

(in thousands) 2021 2020 2021 2020

Consolidated operating income $ 62,773 $ 60,186 $ 103,191 $ 85,065

Purchase accounting adjustment (1)

3,057 2,800 3,057 2,800

Transaction costs for acquisitions (2)

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Restructuring and impairment costs (3)

8,433 19,979 10,457 19,979

Fair value adjustment to contingent consideration for FruitSmart acquisition (4)

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Adjusted Net Income and Diluted Earnings Per Share

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

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

2021 2020 2021 2020

Net income available to Universal Corporation $ 34,940 $ 33,273 $ 60,807 $ 48,049

Purchase accounting adjustment (1)

2,415 2,800 2,415 2,800

Transaction costs for acquisitions (2)

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Restructuring and impairment costs (3)

6,874 16,100 7,879 16,100

Fair value adjustment to contingent consideration for FruitSmart acquisition (4)

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Diluted earnings per share $ 1.80 $ 2.19 $ 2.76 $ 2.59

(1) The Company incurred selling, general, and administrative expenses for due diligence and other transaction costs associated with the acquisitions of Shank's (effective October 4, 2021) and Silva (effective October 1, 2020).

These costs are not deductible for U.S.

(1) The Company recognized an increase in cost of goods sold in the third quarters of fiscal year 2022 and 2021, relating to the expensing of fair value adjustments to inventory associated with the acquisition accounting for Shank's (effective October 4, 2021) and Silva (effective October 1, 2020).

The adjustment related to the Silva acquisition 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 Shank's and Silva.

A portion of these costs is not deductible for U.S.

income tax purposes..

(3) 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.

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(4) The Company reversed 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) The Company recognized an income tax benefit in both fiscal years presented related to a favorable final income tax ruling at a foreign subsidiary (fiscal year 2022) and final U.S.

(5) The Company recognized income tax benefits related to a favorable final income tax ruling at a foreign subsidiary (fiscal year 2022) and final U.S.

tax regulations on certain dividends paid by foreign subsidiaries (fiscal year 2021).

Liquidity and Capital Resources

Our first six months of the fiscal year 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 six months ended September 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.

After significant seasonal working capital investment in our tobacco operations 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 2022, however, that contraction has been smaller than in fiscal year 2021 largely due to tobacco shipment timing.

We funded our working capital needs in the nine months ended

December 31, 2021, using a combination of cash on hand, short-term borrowings, customer advances, and operating cash flows.

We expect tobacco crop shipments to continue to be weighted to the second half of the fiscal year with significant shipments expected in our fourth fiscal quarter.

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

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

Each geographic area follows a

cycle of buying, processing, and shipping tobacco, and in many regions, we also provide agricultural materials to farmers during the growing season.

Each geographic area follows a cycle of buying, processing, and shipping tobacco, and in many regions, we also provide agricultural materials to farmers during the growing season.

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 crop financing.

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

Our balance sheet at December 31, 2021, also reflects our acquisition of Shank’s on October 4, 2021.

The acquisition was financed using a combination of cash on hand and borrowings under our committed revolving credit facility.

Operating Activities

We used $121.3 million in net cash flows from our operations during the six months ended September 30, 2021.

That amount was $28.6 million lower than during the same period last fiscal year.

Tobacco inventory levels increased by $213.7 million from March 31, 2021 levels to $854.3 million at September 30, 2021, on seasonal leaf purchases.

Tobacco inventory levels were $33.9 million below September 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 September 30, 2021, our uncommitted tobacco inventories were $94.5 million, or about 11% of total tobacco inventory, compared to $139.2 million, or about 22% of our March 31, 2021 tobacco inventory, and $141.5 million, or about 16% of our September 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 six months ended September 30, 2021, on deliveries of crops by farmers in both South America, Africa, and North America.

Cash and cash equivalent balances and accounts receivable decreased by $96.5 million and $70.0 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 $82.2 million at September 30, 2021, a reduction of $39.4 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.

Accounts receivable—unconsolidated affiliates and notes payable and overdrafts were up $62.5 million and $83.7 million, respectively, from March 31, 2021 levels, on seasonal increases and shipment timing.

Accounts receivable were down $31.9 million for the six months ended September 30, 2021, compared to the same period in the prior fiscal year, on the timing of crop purchases and shipments.

Inventories—Other were up $44.7 million in the six months ended September 30 2021, compared to the six months ended September 30, 2020, primarily on our acquisition of Silva.

We used $121.3 million in net cash flows from our operations during the six months ended September 30, 2021.

That amount was $28.6 million lower than during the same period last fiscal year.

Tobacco inventory levels increased by $213.7 million from March 31, 2021 levels to $854.3 million at September 30, 2021, on seasonal leaf purchases.

Tobacco inventory levels were $33.9 million below September 30, 2020 levels, mainly due to tobacco shipment timing.

We used $51.6 million in net cash flows from our operations during the nine months ended December 31, 2021.

That amount was higher than during the same period last fiscal year when we generated $38.6 million in net cash flows largely due to tobacco shipment timing.

Tobacco inventory levels increased by $214.9 million from March 31, 2021 levels to $855.6 million at December 31, 2021, on seasonal leaf purchases.

Tobacco inventory levels were $41.3 million above December 31, 2020 levels, mainly due to 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, 2021, our uncommitted tobacco inventories were $132.0 million, or about 15% of total tobacco inventory, compared to $139.2 million, or about 22% of our March 31, 2021 tobacco inventory, and $155.7 million, or about 19% of our December 31, 2020 tobacco inventory.

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

Accounts receivable were down $31.9 million for the six months ended September 30, 2021, compared to the same period in the prior fiscal year, on the timing of crop purchases and shipments.

Inventories—Other were up $44.7 million in the six months ended September 30 2021, compared to the six months ended September 30, 2020, primarily on our acquisition of Silva.

Our balance sheet accounts reflected seasonal patterns in the nine months ended December 31, 2021, on deliveries of tobacco crops by farmers in both South America, Africa, and North America.

Cash and cash equivalent balances decreased by $97.9 million from March 31, 2021 levels, as we used cash, including collections on receivables, to fund seasonal working capital needs.

Accounts receivable were $400.1 million at December 31, 2021, an increase of $32.6 million from March 31, 2021, mainly on seasonal increases.

Goodwill and other intangibles and notes payable and overdrafts were up by $64.5 million and $151.3 million, respectively, compared from March 31, 2021 levels, mainly due the Shank’s acquisition in our Ingredients Operations segment.

Accounts payable and accrued expenses increased by $81.9 million from March 31, 2021 levels, primarily on tobacco purchases.

Accounts receivable were up $45.5 million for the nine months ended December 31, 2021, compared to the same period in the prior fiscal year, on the timing of tobacco shipments.

Notes payable and overdrafts increased by $123.0 million in the nine months ended December 31, 2021, compared to the same period in the prior fiscal year, largely on the Shank’s acquisition.

Accounts payable and accrued expenses were up $65.0 million in the nine months ended December 31, 2021, compared to the same period in the prior fiscal year, primarily on tobacco purchases.

Investing Activities

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In line with our capital allocation strategy, we acquired Shank’s for approximately $100 million on October 4, 2021.

The acquisition expands our plant-based ingredients platform, adding to our product offerings and growing the value-added services available to our customers by adding flavors, custom packaging and bottling, and product development capabilities.

In the quarter ended December 31, 2021, we also spent approximately $13 million to purchase the real property assets related to the Shank’s acquisition.

The acquisition expands our plant-based ingredients platform, adding to our product offerings and growing the value-added services available to our customers by adding flavors and extracts, custom packaging, bottling, and product development capabilities.

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 six months ended September 30, 2021 and 2020, we invested about $18.6 million and $22.8 million, respectively, in our property, plant and equipment.

Depreciation expense was approximately $19.8 million and $18.8 million for the six months ended September 30, 2021 and 2020, respectively.

During the nine months ended December 31, 2021 and 2020, we invested about $39.8 million and $33.8 million, respectively, in our property, plant and equipment.

Depreciation expense was approximately $30.4 million and $28.6 million for the nine months ended December 31, 2021 and 2020, respectively.

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

In addition, from time to time, we undertake projects that require capital expenditures when we identify opportunities to improve efficiencies, add value for our customers, and position ourselves for future growth.

We currently expect to spend approximately $50 to $60 million over the next twelve months on capital projects for maintenance of our facilities and other investments to grow and improve our businesses, including approximately $13 million in the third quarter of fiscal year 2022 to purchase the real property assets related to the Shank’s acquisition.

We currently expect to spend approximately $45 to $55 million over the next twelve months on capital projects for maintenance of our facilities and other investments to grow and improve our businesses.

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

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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 September 30, 2021, we did not purchase any shares of common stock.

As of September 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.

During the three months ended December 31, 2021, we did not purchase any shares of common stock.

As of December 31, 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 4, 2021, we acquired Shank’s for approximately $100 million.

In the quarter ended December 31, 2021, we also spent approximately $13 million to purchase the real property assets related to the Shank’s acquisition.

We financed the acquisition and real property assets using cash-on-hand and borrowings under our 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 33% at September 30, 2021, up from the September 30, 2020 level of approximately 31%, largely on higher debt balances due in part to the Silva acquisition in October 2020, and up from the March 31, 2021 level of approximately 25% on seasonal working capital borrowings.

As of September 30, 2021, we had $100.7 million in cash and cash equivalents, our short-term debt totaled 185.0 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 September 30, 2021, we had $350 million available under a committed revolving credit facility that will mature in December 2023, and we had about $169 million in unused, uncommitted credit lines.

On October 4, 2021, we closed and funded the approximately $100 million acquisition of Shank’s using cash-on-hand and borrowings under our committed revolving credit facility.

Net debt as a percentage of net capitalization was approximately 35% at December 31, 2021, up from the December 31, 2020 level of approximately 31%, largely on higher debt balances due in part to the Shank’s acquisition in October 2021, and up from the March 31, 2021 level of approximately 25% on the acquisition and seasonal working capital borrowings.

As of December 31, 2021, we had $99.3 million in cash and cash equivalents, our short-term debt totaled $252.6 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, 2021, we had $260 million available under a committed revolving credit facility that will mature in December 2023, and we had about $188 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.

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

At September 30, 2021, the fair value of our outstanding interest rate swap agreements was a liability of about $23 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.

At December 31, 2021, the fair value of our outstanding interest rate swap agreements was a liability of about $17 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.

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

At September 30, 2021, the fair value of our open hedges was a net liability of about $2.3 million.

We had forward contracts outstanding that were not designated as hedges, and the fair value of those contracts was a net asset of approximately $0.4 million at September 30, 2021.

At December 31, 2021, the fair value of our open hedges was a net liability of about $1.8 million.

We had forward contracts outstanding that were not designated as hedges, and the fair value of those contracts was a net asset of approximately $0.1 million at December 31, 2021.

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