What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-05-27 compared with 2021-05-28 · 177 added, 151 removed, 442 unchanged (43% of the section changed)

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

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

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

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

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

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

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

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

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

In fiscal year 2022, we continued to make progress towards building and enhancing our plant-based ingredients platform.

On October 4, 2021, we acquired Shank’s, a specialty ingredient botanical extracts and flavorings company with bottling and packaging capabilities.

We have been integrating and exploring opportunities for synergies between our acquired businesses, FruitSmart acquired on January 1, 2020, Silva acquired on October 1, 2020, and Shank’s.

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.

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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.

On March 11, 2020, the WHO declared 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 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 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.

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.

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 pandemic.

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

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

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

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

The Conflict in Ukraine

We are closely monitoring the tragic situation in Ukraine.

Since Russia initiated its current military operations in Ukraine in 2022, business globally has been directly or indirectly impacted.

The region is an important supplier of fertilizer, oil, gas, and agricultural products for export to countries around the world, and disruptions in those exports have created or contributed to various economic and commercial challenges including increased energy costs, increased fertilizer costs, and other inflationary impacts.

In addition, business in Ukraine, Russia and the surrounding region has been impacted by the temporary suspension of business operations by companies due to safety and security concerns, the divestiture of assets and businesses in the region by their international owners, and government imposition of sanctions targeting Russia and others, including “luxury goods” sanctions that prohibit the supply of tobacco and tobacco products to Russia.

We do not have manufacturing facilities or material subsidiaries in Ukraine or Russia.

We do, however, have a number of customers that have historically conducted business there, and some of those customers have previously disclosed the temporary suspension of operations in Ukraine or the divestiture of assets in Russia.

We have worked closely with those customers to monitor and understand the impacts the conflict in Ukraine has had on their operations.

In some cases we have worked with customers to suspend tobacco orders until such time that customers believe it is safe to reopen their facilities in Ukraine, and in other cases we have coordinated with customers to cancel orders for tobacco destined to Russia and ship some or all of that tobacco to other countries in which those customers have operations that need those quantities and qualities of tobacco.

At this time, we have not experienced any material direct impact on our business from the ongoing Ukraine conflict.

We are unable, however, to estimate the duration or extent of any potential impact on our business from the continuation or potential escalation of the conflict.

Such future impacts could be direct, such as the impact of continued or increased governmental prohibitions against shipping tobacco and tobacco products to Russia, or they could be indirect, such as contributing to or increasing costs and other inflationary pressures impacting our global operations and those of our supply chain around the world.

We will continue to monitor and evaluate this complex and evolving situation.

RESULTS OF OPERATIONS

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Executive Summary

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Our fiscal year 2022 results were generally comparable to those in fiscal year 2021.

During fiscal year 2022, we continued to face a very challenging logistical environment in many of our key tobacco regions.

Strong performance from our Ingredients Operations segment offset some challenges that reduced results in our Tobacco Operations segment.

We believe our plant–based ingredients platform is coming together nicely and is exceeding our expectations.

With the acquisition of Shank’s, we are now positioned to offer our customers a broad range of products, from fruit and vegetable juices, concentrates, and dehydrated ingredients to botanical extracts and flavorings.

In fiscal year 2022, the Ingredients Operations segment saw increased demand for organic-based products and continued strong volumes for human and pet food categories as well as for vanilla extracts.

Ongoing shipping constraints reduced our Tobacco Operations segment results for the year ended March 31, 2022, as a result of continued limitations in worldwide shipping availability stemming from the COVID-19 pandemic.

Due to the logistical constraints in fiscal year 2021, we had carryover tobacco volumes which shipped in fiscal year 2022.

Similar logistical constraints impacted fiscal year 2022 which led to an even larger amount of tobacco volumes, reflecting a difference of about $70 million in revenue, which did not ship in fiscal year 2022, compared to the carryover volumes from fiscal year 2021.

Tobacco shipment volumes in fiscal year 2022 were also reduced due to smaller African burley crops.

We experienced volatile tobacco and currency markets in Brazil during the fourth quarter of fiscal year 2022.

Appreciation of the Brazilian currency coupled with strong demand for leaf tobacco led to unprecedented increases in green prices for leaf tobacco and earlier purchasing of the 2022 Brazilian crop, resulting in disruptions to market dynamics.

To fulfill our customers’ orders, leaf tobacco purchases from our contracted farmers this season have been at the prevailing inflated market price for all leaf tobacco regardless of the quality of leaf tobacco.

This resulted in larger inventory write downs in fiscal year 2022, compared to fiscal year 2021.

As we move into fiscal year 2023, we are seeing strong demand for our plant-based ingredients and tobacco products.

We believe leaf tobacco supply for flue-cured, burley, dark air-cured, and oriental tobaccos to be in an undersupply position.

At the same time, we continue to see opportunities to increase market share and expand the supply chain services we provide our customers.

We expect continued logistical constraints as well as higher costs, particularly freight, raw materials, labor, fertilizer, and energy, in both our tobacco and ingredients businesses.

We are actively working to mitigate these challenges, and we are confident that we can deliver another good year.

We remain focused on returning value to our shareholders and promoting sustainability in our operations.

We are extremely proud to deliver value to our shareholders through dividend increases such as our 52nd annual dividend increase announced on May 25, 2022.

Increasing our strong dividend remains one of the strategic priorities of our capital allocation strategy.

We have also achieved some important milestones in our sustainability efforts in fiscal year 2022, notably releasing goals and targets around agricultural labor practices and environmental performance and publishing our 2021 Sustainability Report in December.

We were also named a 2021 Supplier Engagement Leader by CDP, earning recognition for our work in engaging our suppliers on climate change.

We look forward to attaining new achievements with our sustainability programs in fiscal year 2023.

FINANCIAL HIGHLIGHTS

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Ingredients operations sales and other operating revenues 267.8 141.5 126.3 89 %

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

Ingredients operations operating income 16.6 0.4 16.2 4,418 %

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

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

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

Net income for the year ended March 31, 2022, was $86.6 million, or $3.47 per diluted share, compared with $87.4 million, or $3.53 per diluted share, for the year ended March 31, 2021.

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 $10.8 million and $0.46, respectively, for the year ended March 31, 2022, compared to the year ended March 31, 2021.

Operating income of $160.3 million for the year ended March 31, 2022, increased by $12.5 million, compared to operating income of $147.8 million for the year ended March 31, 2021.

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

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

Adjusted operating income, detailed in Other Items below, of $173.6 million increased by $0.7 million for the year ended March 31, 2022, compared to adjusted operating income of $172.9 million for the year ended March 31, 2021.

Consolidated revenues increased by $120.2 million to $2.1 billion for the year ended March 31, 2022, compared to the year ended March 31, 2021, on the addition of the businesses acquired in the Ingredients Operations segment and lower tobacco sales volumes partially offset by higher average sales prices in the Tobacco Operations segment.

Tobacco Operations

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

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

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

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

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

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

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

Segment operating income for the Tobacco Operations segment decreased by $11.1 million to $157.8 million for the year ended March 31, 2022, compared to the year ended March 31, 2021.

Tobacco Operations segment results declined largely due to tobacco shipment timing as well as some tobacco inventory write downs, partially offset by increased value-added services to customers in fiscal year 2022, compared to fiscal year 2021.

Africa sales volumes were lower in fiscal year 2022, compared to fiscal year 2021, on smaller burley crops as well as slower shipment timing.

Sales volumes for Brazil were lower for the year ended March 31, 2022, compared to the year ended March 31, 2021, in part due to lack of vessel and container availability.

In addition, inventory write downs resulting from volatile market conditions in Brazil negatively impacted results for the year ended March 31, 2022.

In Asia, although trading volumes were down on higher freight costs, our operations saw a more favorable product mix, as well as increased value-added services for customers during the year ended March 31, 2022, compared to the year ended March 31, 2021.

Our operations in Europe experienced significantly higher energy costs in fiscal year 2022, compared to fiscal year 2021.

Selling, general, and administrative expenses for the Tobacco Operations segment were higher in the year ended March 31, 2022, compared to the year ended March 31, 2021, primarily due to unfavorable foreign currency exchange comparisons, mainly remeasurement, offset in part by the effects of currency hedging activities.

Revenues for the Tobacco Operations segment of $1.8 billion for the year ended March 31, 2022, were relatively flat, compared to the year ended March 31, 2021, as higher tobacco sales prices largely offset lower sales volumes.

Our uncommitted tobacco inventory levels, about 16% of tobacco inventory at March 31, 2022, remained well within our target range.

Ingredients Operations

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Segment operating income for the Ingredients Operations segment was $16.6 million for the year ended March 31, 2022, compared to segment operating income of $0.4 million for the year ended March 31, 2021.

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

For the year ended March 31, 2022, 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 botanical extracts and flavorings.

Selling, general, and administrative expenses for the segment increased in fiscal year 2022, compared to fiscal year 2021, on the addition of the acquired businesses.

Revenues for the Ingredients Operations segment increased by $126.3 million to $267.8 million for the year ended March 31, 2022, compared to the year ended March 31, 2021, primarily on the addition of the revenues for the acquired businesses as well as increased sales prices.

Cost of goods sold in the year ended March 31, 2022, increased by 6% to $1.7 billion, compared with the year ended March 31, 2021, as a result of the acquisitions in our Ingredients Operations segment as well as variances in sales prices and volumes shipped in the Tobacco Operations segment.

Selling, general, and administrative costs for fiscal year 2022, increased by $20.9 million to $240.7 million, compared to fiscal year 2021, on additional costs from the acquisitions in the Ingredients Operations segment combined with unfavorable foreign currency comparisons.

In fiscal year 2022, foreign currency comparisons were approximately $8.1 million unfavorable, compared to fiscal year 2021, mainly due to currency remeasurement variances in Brazil, the Philippines, and Indonesia, partially offset by the effects of currency hedging programs.

Interest expense for fiscal year 2022, increased by $2.8 million to $27.7 million, compared to fiscal year 2021, largely on higher average debt balances and interest rates.

For fiscal year 2022, the Company’s effective tax rate on pre-tax income was 27.2%.

In the fiscal year ended March 31, 2022, 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 due to finalizing the prior year U.S.

Without these income tax benefits, the adjusted effective tax rate for the fiscal year ended March 31, 2022, would have been 29.2%.

For fiscal year 2021, the Company’s consolidated effective tax rate was 23.4%.

For the fiscal year ended March 31, 2021, income tax expense included benefits of $4.4 million for final tax regulations regarding the treatment of dividends paid by foreign subsidiaries and $2.9 million due to amending and finalizing prior year U.S.

Without these income tax benefits, the consolidated effective tax rate for the fiscal year ended March 31, 2021, would have been approximately 29.2%.

Reconciliation of Certain Non-GAAP Financial Measures

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

(2,532) (4,173)

Restructuring and impairment costs (4)

10,457 22,577

Adjusted operating income $ 173,607 $ 172,929

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

(2,532) (4,173)

Restructuring and impairment costs (4)

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

Income tax settlement for foreign subsidiary (6)

(1,686) (4,421)

Adjusted Net income attributable to Universal Corporation $ 94,378 $ 105,180

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Diluted earnings per share $ 3.79 $ 4.25

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

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

These costs are not deductible for U.S.

(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.

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

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

(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) 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) 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.

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

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

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

(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).

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

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LIQUIDITY AND CAPITAL RESOURCES

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

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

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

In fiscal year 2022, we generated $44.9 million in cash flows from our operating activities, and our liquidity was sufficient to meet our needs.

Our working capital requirements in fiscal year 2022 were higher than those in fiscal year 2021 mainly due to tobacco shipment timing and higher green leaf tobacco prices.

We continued our financial policies and returned funds to shareholders.

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

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In addition to our operating requirements for working capital, we expect to spend around $40 to $50 million during fiscal year 2023 for capital expenditures to maintain our facilities and invest in opportunities to grow and improve our businesses.

We also expect to provide about $7 million in funding to our pension plans.

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

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.

To date, the COVID‐19 pandemic has not had a material impact on our operations, although we are continuing to see logistical constraints around worldwide vessel and container availability and increased costs stemming from the COVID-19 pandemic.

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.

This is, however, a rapidly evolving situation, and we cannot predict the extent, resurgence, or duration of the COVID-19 pandemic, the effects of it on the global, national or local economies, 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.

Our operations generated about $44.9 million in operating cash flows in fiscal year 2022.

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

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

That amount was about $175.5 million lower than the $220.4 million we generated in fiscal year 2021, largely due to higher working capital requirements in fiscal year 2022.

During the fiscal year ended March 31, 2022, we spent $53.2 million on capital projects and $102.5 million on the acquisition of a new business, and we returned $79.5 million to shareholders in the form of dividends and share repurchases.

At March 31, 2022, cash balances totaled $81.6 million.

Working Capital

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

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

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

Working capital at March 31, 2022, was about $1.2 billion, down about $32.9 million from last fiscal year's level, largely on higher working capital usage due to tobacco shipment timing, higher green tobacco costs, and earlier purchasing of the 2022 Brazilian tobacco crop, offset in part by the acquisition of Shank’s.

Tobacco inventories of $822.5 million at March 31, 2022, were up $181.9 million compared to inventory levels at the end of the prior fiscal year, mainly due to delayed tobacco shipments and higher green leaf tobacco prices.

Other inventories were up $48.2 million at March 31, 2022, from prior year levels largely on our acquisition of Shank’s in October 2021 and higher crop input costs.

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

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

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

Our uncommitted tobacco inventories decreased by approximately $9.1 million to $130.1 million, or about 16% of tobacco inventory, at March 31, 2022, which was within our target range.

Uncommitted inventories at March 31, 2021, were $139.2 million, which represented 22% of tobacco inventory.

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

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

Cash and cash equivalents were down $115.6 million at the end of fiscal year 2022, compared to balance at the end of fiscal year 2021, on higher working capital requirements due tobacco shipment timing and higher green leaf tobacco costs as well as the Shank’s acquisition.

Capital Allocation

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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 in plant-based ingredients businesses that utilize our assets and capabilities;

• Returning excess capital through share repurchases.

Our mission is to remain the leading global leaf tobacco supplier.

We will continue to make disciplined investments within our leaf business and taking advantage of growth opportunities in tobacco as well as in non-tobacco industries and markets that utilize our assets and capabilities.

We will continue to make disciplined investments within our leaf business and taking advantage of growth opportunities in tobacco as well as in plant-based ingredients businesses and markets that utilize our assets and capabilities.

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

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

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

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

The acquisition expanded our plant-based ingredients platform adding valuable capabilities, including flavors and botanical extracts, custom packaging, bottling, and product development.

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

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

During fiscal year 2022, we purchased 58,264 shares of common stock at an aggregate cost of $3.1 million (average price per share $52.41).

At March 31, 2022, our available authorization under our current share repurchase program was $97 million, and approximately 24.6 million common shares were outstanding.

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

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

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

During fiscal years 2022 and 2021, we invested $53.2 million and $66.2 million, respectively, in our property, plant, and equipment.

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

In the third quarter of fiscal year 2022, we purchased the real property assets related to the Shank’s acquisition, for approximately $13 million.

Depreciation expense was approximately $41.3 million and $38.3 million, respectively, in fiscal years 2022 and 2021.

Generally, our capital spending on maintenance projects is at a level below depreciation expense in order to maintain strong cash flow.

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 plan to spend approximately $40 to $50 million in fiscal year 2023 on capital projects for maintenance of our facilities and other investments to grow and improve our businesses.

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

Outstanding Debt and Other Financing Arrangements

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

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

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

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

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

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

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

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

We financed the acquisition and real property assets of Shank’s using cash-on-hand and borrowings under our committed revolving credit facility.

Net debt increased by $202.3 million to $633.3 million during the fiscal year ended March 31, 2022.

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

The increase primarily reflects the Shank’s acquisition, tobacco shipment timing, and earlier purchasing of the 2022 Brazilian tobacco crop.

Net debt as a percentage of net capitalization was approximately 32% at March 31, 2022, up from 25% at March 31, 2021.

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At March 31, 2022, the fair value of our open interest rate hedge swaps was a net liability of approximately $1 million.

We also enter forward contracts from time to time to hedge certain foreign currency exposures, primarily related to forecast purchases of tobacco and related processing costs in Brazil and Africa, as well as our net monetary asset exposure in local currency there.

We also enter 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 asset exposure in local currency there.

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

At March 31, 2022, the fair value of those open contracts was a net asset of approximately $7.8 million.

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

We also had other forward contracts outstanding that were not designated as hedges, and the fair value of those contracts was a net asset of approximately $13.0 million at March 31, 2022.

For additional information, see Note 11 to the consolidated financial statements in Item 8.

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defined benefit pension plan during fiscal year 2022 were approximately $250 million.

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

The accumulated benefit obligation (“ABO”) and PBO were both approximately $231 million and $237 million, respectively as of March 31, 2022.

The ABO and PBO are calculated on the basis of certain assumptions that are outlined in Note 13 to the consolidated financial statements in Item 8.

We expect to make contributions of about $7 million to our pension plans during the next year.

We expect to make no contributions to our pension plans during the next year.

It is our policy to regularly monitor the performance of the funds and to review the adequacy of our funding and plan contributions.

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Raw materials are clearly identified at the time of purchase.

Other inventories consist primarily of unprocessed and processed food and vegetable ingredients, extracts, seed, fertilizer, packing materials, and other supplies.

We track the costs associated with raw materials in the final product lots, and maintain this identification through the time of sale.

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

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

The acquisition method of accounting requires us to make significant estimates and assumptions regarding the fair values of the elements of a business combination as of the date of acquisition, including the fair values of identifiable intangible assets, deferred tax asset valuation allowances, liabilities including those related to debt, pensions and other postretirement plans, uncertain tax positions, contingent consideration and contingencies.

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

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

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

A majority of our consolidated goodwill balance relates to our reporting unit in Brazil and the acquisitions of FruitSmart (January 1, 2020), Silva (October 1, 2020), and Shank's (October 4, 2021).

Fair Value Measurements

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

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

In fiscal year 2022, the evaluation of the contingent consideration for the FruitSmart acquisition resulted in the reduction of the remaining $2.5 million of contingent consideration of the original $6.7 million liability recorded in fiscal year 2020.

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

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Leaf tobacco is sourced directly by product manufacturers, by global leaf suppliers such as ourselves, and by other smaller, mostly regional or local, leaf suppliers.

We estimate that, of the flue-cured and burley tobacco grown outside of China in countries that are key export markets for tobacco, on average a little over a third is purchased directly by major manufacturers.

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

We estimate that, of the flue-cured and burley tobacco grown outside of China in countries that are key export markets for tobacco, on average about a third is purchased directly by major manufacturers.

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

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

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

For example, we have expanded our leaf purchasing, processing, and grower support services in multiple origins in response to customer demand.

We have increased our product offerings to meet demand for shisha (water pipe) style leaf tobacco for customers in the Middle East and North Africa (MENA) region and natural wrappers in the United States and Europe.

As we look at non-tobacco investments and explore new growth opportunities within tobacco, Universal is dedicated to remaining the leading global leaf tobacco supplier and building on our strong history.

For example, we have expanded our leaf purchasing, processing, value-added services, and grower support services in multiple origins in response to customer demand.

We have increased our product offerings to meet demand for natural wrappers in the United States and Europe and shisha (water pipe) style leaf tobacco for customers in the Middle East and North Africa (MENA) region.

As we look at ingredients investments and explore new growth opportunities within tobacco, Universal is dedicated to remaining the leading global leaf tobacco supplier and building on our strong history.

Focus on Cost Management

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

These efficiencies include economical utilization of processing capacity, an established and scalable global network of agronomists and technicians helping to maintain a stable, productive, and sustainable farmer base,

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

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

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

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

These services include such things as buying station optimization, processing and blending to specific customer specifications or

needs, storage of green or packed leaf tobacco, and logistical services.

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

We believe this increase acknowledges the efficiencies and services that we bring to the entire supply chain.

We have also seen some reductions in sourcing from lower-volume tobacco growing origins by both global leaf suppliers and major manufacturers.

Flue-cured tobacco is produced in over 70 countries around the world, and burley tobacco is grown in over 45 countries.

Flue-cured tobacco is produced in about 70 countries around the world, and burley tobacco is grown in about 45 countries.

However, over 80% of both the flue-cured tobacco grown outside of China and the worldwide burley tobacco production is sourced from the top ten growing areas for each type of tobacco.

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Most of the major tobacco product manufacturers have been developing next generation and modified risk products.

These include electronic nicotine delivery systems (“ENDS”), oral tobacco and nicotine products, and heated tobacco products.

These include ENDS, oral tobacco and nicotine products, and heated tobacco products.

ENDS use liquid nicotine, which is predominately derived from leaf tobacco, and heated tobacco products use leaf tobacco.

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Leaf Tobacco Supply

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

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

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

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

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

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

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

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

Although flue-cured tobacco crops grown outside of China increased in fiscal year 2022 by about 4% to 1.7 billion kilos compared to fiscal year 2021, production levels remain below historical averages.

In addition, these crops are projected to revert back to lower production levels, decreasing by about 4% to 1.7 billion kilos in fiscal year 2023.

Global burley tobacco production also remains below historical levels and decreased by about 10% to about 398 million kilos in fiscal year 2022.

Burley volumes are forecast to increase slightly to about 404 million kilos in fiscal year 2023.

We estimate that as of March 31, 2022, industry uncommitted flue-cured and burley inventories, excluding China were at historically low levels, totaling about 62 million kilos, a decrease of about 34% from March 31, 2021 levels.

At this time, we believe that both flue-cured tobacco and burley tobacco supply are in undersupply positions.

We also forecast that oriental and dark air-cured tobacco production will decrease by about 21% and increase by about 4%, respectively, in fiscal year 2023.

We believe both oriental tobaccos and dark air-cured tobaccos are in undersupply positions.

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

South America, Asia, Africa, and North America will remain key sourcing regions for flue-cured and burley tobaccos.

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

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

China is continuing to

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

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

Leaf Tobacco Demand

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

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

Industry data shows that over the past three years, world consumption of cigarettes outside of China fell at a compound annual rate of about 0.6%.

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

As a result, we expect that near term global demand for leaf tobacco will continue to slowly decline in line with declining global cigarette consumption.

Our sales consist primarily of flue-cured and burley tobaccos.

Those types of tobacco, along with oriental tobaccos, are used in American-blend cigarettes which are primarily smoked in Western Europe and the United States.

Our sales consist primarily of flue-cured, burley, and dark air-cured tobaccos.

Flue-cured and burley tobaccos, along with oriental tobaccos, are used in American-blend cigarettes which are primarily smoked in Western Europe and the United States.

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

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

Industry data shows that consumption of American-blend cigarettes was flat for the three years ended in 2021.

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

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

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

We currently believe that the supply of flue-cured tobaccos and burley tobaccos are in an undersupply relative to anticipated demand.

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

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machine-made cigar markets.

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

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

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

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Strengthened Global Cooperation in the Regulation on Tobacco Products

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

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

increasing global participation.

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

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

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

As the tenth Conference of the Parties approaches in November 2023, the FCTC is working diligently to consider amendments to the agreement and track progress in the treaty’s implementation.

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

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In 2009, the U.S.

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

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

This legislation authorizes the U.S.

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

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

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

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

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

On May 10, 2016, the FDA released “deeming” regulations to extend FDA oversight over all tobacco products, including electronic nicotine delivery systems, cigars, hookah tobacco, pipe tobacco, dissolvables, and “novel and future products.” Additionally, Congress extended FDA’s authority to include regulation of tobacco products using synthetically manufactured nicotine in addition to naturally derived nicotine in March 2022.

The regulations require tobacco product manufacturers to register tobacco products that were on the market on February 15, 2007, and to seek FDA authorization to sell any products modified or introduced after such date.

All submissions require manufacturers to list ingredients in their products.

Per an order issued by the U.S.

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

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

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

In April 2022, FDA released two proposed rules to advance product standards intended to ban menthol in cigarettes and characterizing flavors in cigars.

The flavored tobacco product category accounts for a significant percentage of the U.S.

market, and these product standards would likely impact future leaf demand if adopted.

It is also expected that if these bans are adopted, they will be challenged in the legal system so it is not possible at this time to predict when and if these bans become effective.

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

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

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

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

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

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

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

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

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

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

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

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We made significant strategic investments in our plant-based ingredients platform in fiscal years 2020, 2021, and 2022.

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

We acquired FruitSmart in January 2020, Silva in October 2020, and Shank's in October 2021.

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

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

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

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

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

With the acquisition of Shank’s, we are able to expand the products that we offer by adding Shank’s portfolio of high-quality botanical extracts and flavorings to our plant-based ingredients platform.

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

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

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

In addition, with the COVID-19 pandemic, there has been and continues to be strong consumer demand for healthy foods.

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

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

Industry estimates project annual growth of about 5% over the next several years for the pet food market in the U.S.

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-K

Item 7. Management’s Discussion and Analysis