What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-08-03 compared with 2022-02-02 · 104 added, 141 removed, 114 unchanged (68% of the section changed)

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Such risks and uncertainties include, but are not limited to:

impacts of the ongoing COVID-19 pandemic;

impacts of the COVID-19 pandemic;

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

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changes in market structure;

government regulation;

government regulation and other stakeholder expectations;

economic and political conditions in the countries in which we and our customers operate, including the ongoing impacts from the conflict in Ukraine;

product taxation;

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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.

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.

We are pleased with our start to fiscal year 2023.

In the quarter ended June 30, 2022, we continued to effectively navigate increased costs, particularly rising prices for green leaf tobacco, and shipping constraints.

We succeeded in getting a significant amount of carryover tobacco shipped out of Brazil, and our plant-based ingredients platform continued to exceed our expectations.

Results for our Tobacco Operations segment were down modestly in the quarter ended June 30, 2022, compared to the quarter ended June 30, 2021, largely on unfavorable foreign currency comparisons due to the strong U.S.

Demand for leaf tobacco remains strong, and flue-cured, burley, oriental, and wrapper tobacco remain in an undersupply position.

anticipating a reduction in African burley tobacco crop sizes due to weather conditions there.

While we were able to ship a greater amount of carryover tobacco out of Brazil in the quarter ended June 30, 2022, compared to the quarter ended June 30, 2021, we continue to face a challenging logistical environment.

We are also continuing to see increased costs for leaf tobacco across virtually all markets.

Our Ingredients Operations segment performed well in the first quarter of fiscal year 2023.

Sales for all of our businesses in this segment were up in the quarter ended June 30, 2022, compared to the quarter ended June 30, 2021, with strong volumes for both human and pet food product categories.

In our Ingredients Operations segment, we are also seeing rising costs for raw materials and the impact of higher freight costs.

Synergies captured across the plant-based ingredients platform continue to make good progress.

Our businesses are working together on new product development and strategies to serve the platform’s diverse customers which utilize our portfolio of plant-based ingredients and botanical extracts and flavorings offerings.

Results for the Ingredients Operations segment for the quarter ended June 30, 2022, include our October 2021 purchase of Shank’s Extracts, LLC (“Shank’s”).

Our elevated borrowing levels reflect our acquisition of Shank’s as well as higher tobacco inventory levels, largely due to higher green leaf tobacco prices and tobacco shipment timing.

We expect our seasonal borrowing levels to decrease in the second half of our fiscal year in line with our tobacco crop shipments, which are weighted to that period.

At Universal, we are committed to providing transparency around our sustainability efforts and goals.

We recently completed our submission to the global non-profit organization CDP regarding climate change, forestry, and water risk to provide more information on our achievements in these areas to our stakeholders.

We are also excited to announce that we have engaged a third party to aid in analyzing and communicating our climate change policy as well as to provide independent, third party verification of our results.

FINANCIAL HIGHLIGHTS

Nine Months Ended December 31, Change

Three Months Ended June 30, Change

(in millions of dollars, except per share data) 2022 2021 $ %

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

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.

Net income for the quarter ended June 30, 2022, was $6.8 million, or $0.27 per diluted share, compared with $6.4 million, or $0.26 per diluted share, for the quarter ended June 30, 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 $1.2 million and $0.05, respectively, for the quarter ended June 30, 2022, compared to the quarter ended June 30, 2021.

Operating income of $13.3 million for the quarter ended June 30, 2022, increased by $2.7 million, compared to operating income of $10.6 million for the quarter ended June 30, 2021.

Adjusted operating income, detailed in Other Items below, of $13.3 million increased by $0.6 million for the first quarter of fiscal year 2023, compared to adjusted operating income of $12.6 million for the first quarter of fiscal year 2022.

Consolidated revenues increased by $79.8 million to $429.8 million for the three months ended June 30, 2022, compared to the same period in fiscal year 2022, on higher carryover tobacco sales volumes and prices as well as the addition of Shank’s in October 2021 in the Ingredients Operations segment.

Tobacco Operations

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.

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

Operating income for the Tobacco Operations segment decreased by $0.8 million to $8.1 million for the quarter ended June 30, 2022, compared with the quarter ended June 30, 2021.

Although tobacco sales volumes were up modestly, Tobacco Operations segment results were down largely on unfavorable foreign currency comparisons due to the strong U.S.

dollar in the quarter ended June 30, 2022, compared to the same quarter in the prior fiscal year.

Carryover crop shipments were higher in Brazil in the quarter ended June 30, 2022, compared to the same quarter in the prior fiscal year, largely due to increased shipping availability.

In Africa, carryover shipments were down in the quarter ended June 30, 2022, compared to the quarter ended June 30, 2021, on smaller crops grown in fiscal year 2022.

Selling, general, and administrative expenses for the Tobacco Operations segment were higher in the quarter ended June 30, 2022, compared to June 30, 2021, primarily on unfavorable foreign currency comparisons.

Revenues for the Tobacco Operations segment of $348.1 million for the quarter ended June 30, 2022, were up $54.2 million, compared to the same period in the prior fiscal year, on higher tobacco sales volumes and prices.

Ingredients Operations

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 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 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.

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.

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

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

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

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 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.

Operating income for the Ingredients Operations segment was $4.6 million for the quarter ended June 30, 2022, compared to $4.3 million for the quarter ended June 30, 2021.

Results for the segment improved year-over-year on the inclusion of the October 2021 Shank’s acquisition.

Sales for all of our businesses in this segment were up in the quarter ended June 30, 2022, compared to the quarter ended June 30, 2021, with continued strong volumes for both human and pet food product categories.

Selling, general, and administrative expenses for this segment increased in the quarter ended June 30, 2022, compared to the same quarter in the prior fiscal year, on the addition of Shank’s as well as higher labor costs.

In the quarter ended June 30, 2022, the allocation of corporate overhead charges to the Ingredients Operations segment was also up, compared to the quarter ended June 30, 2021.

Revenues for the Ingredients Operations segment of $81.8 million for the quarter ended June 30, 2022, were up $25.6 million compared to the quarter ended June 30, 2021, largely on the addition of the revenues for Shank’s as well as higher sales volumes and prices.

Cost of goods sold in the quarter ended June 30, 2022, increased by 22% to $350.1 million, compared with the same period in the prior fiscal year, consistent with the similar percentage increase in revenues for the current period.

Selling, general, and administrative costs for the quarter ended June 30, 2022, increased by $16.6 million to $66.5 million, compared to the same period in the prior fiscal year, primarily on additional costs from the acquisition of Shank’s in the Ingredients Operations segment and unfavorable foreign currency comparisons as well as inflationary increases in compensation and travel costs.

Unfavorable foreign currency comparisons were approximately $6.6 million in the quarter ended June 30, 2022, compared to the quarter ended June 30, 2021.

Interest expense for the quarter ended June 30, 2022, increased by $0.5 million to $6.7 million on increased costs from higher debt balances and interest rates, partially offset by a $1.8 million interest expense accrual reversal related to the sale of our previously idled operations in Tanzania.

For the three months ended June 30, 2022, the Company’s consolidated effective income tax rate on pre-tax income was 54.6%.

The consolidated effective income tax rate for the three months ended June 30, 2022 was affected by the sale of our Tanzania operations which resulted in $1.1 million of additional income taxes.

Without this item, the consolidated effective income tax rate for the three months ended June 30, 2022 would have been approximately 36.2%.

Additionally, the sale of our Tanzania operations resulted in a $1.8 million reduction to consolidated interest expense related to an uncertain tax position.

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

Reconciliation of Certain Non-GAAP Financial Measures

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Adjusted Operating Income Reconciliation

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

Three Months Ended June 30,

(in thousands) 2022 2021

Consolidated operating income $ 13,266 $ 10,605

Purchase accounting adjustment (1)

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

Transaction costs for acquisitions (2)

597 2,252 2,310 3,915

Restructuring and impairment costs (1)

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

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

— — (2,532) (4,173)

Adjusted operating income $ 13,266 $ 12,629

Adjusted Net Income and Diluted Earnings Per Share

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

2021 2020 2021 2020

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

Net income available to Universal Corporation $ 6,830 $ 6,357

Purchase accounting adjustment (1)

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

Transaction costs for acquisitions (2)

482 2,252 2,195 3,915

Restructuring and impairment costs (1)

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

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

— — (2,532) (4,173)

Interest (income) expense related to tax matters at foreign subsidiaries — — (470) 1,849

Income tax benefit on a final tax ruling (fiscal year 2022) and dividends paid from foreign subsidiaries (fiscal year 2021) (5)

— — (1,686) (4,421)

Interest expense reversal on uncertain tax position and income tax from sale of operations in Tanzania (684) —

Adjusted net income available to Universal Corporation $ 6,146 $ 7,362

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Diluted earnings per share $ 0.25 $ 0.30

(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..

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

See Note 4 for additional information.

(4) The Company reversed 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.

(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).

COVID-19 Pandemic Impact

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

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 took 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 has in part related to the 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 COVID-19 pandemic.

This remains, 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.

Liquidity and Capital Resources

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

We funded our working capital needs in the quarter ended June 30, 2022, using a combination of cash on hand, short-term borrowings, customer advances, and operating cash flows.

We are expecting higher and longer duration working capital needs in fiscal year 2023 compared to historical levels due to increased costs, specifically higher leaf tobacco costs, and tobacco shipment timing.

Tobacco crop shipments are expected to be weighted to the second half of our fiscal year.

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

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

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

To date, COVID-19 has not had a significant impact on our operations, and we currently anticipate our current cash balances, cash flows from operations, and our available sources of liquidity will be sufficient to meet our cash requirements for at least the next twelve months.

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

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

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 $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 used $225.8 million in net cash flows from our operations during the quarter ended June 30, 2022.

That amount was $98.8 million higher than during the same period in fiscal year 2022.

Our working capital needs to fund our operations in the quarter ended June 30, 2022, were higher, compared to the quarter ended June 30, 2021, primarily on higher green tobacco costs as well as tobacco shipment and purchase timing.

Tobacco inventory levels increased by $258.0 million from March 31, 2022 levels to $1.1 billion at June 30, 2022, on seasonal leaf purchases.

Tobacco inventory levels were $206.1 million above June 30, 2021 levels, mainly due to higher green tobacco costs and tobacco shipment timing.

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

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

At December 31, 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.

At June 30, 2022, our uncommitted tobacco inventories were $164.3 million, or about 15% of total tobacco inventory, compared to $130.1 million, or about 16% of our March 31, 2022 tobacco inventory, and $158.6 million, or about 18% of our June 30, 2021 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 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.

Our balance sheet accounts reflected seasonal patterns in the quarter ended June 30, 2022, on deliveries of crops by farmers in both South America and Africa.

Accounts receivable decreased by $66.3 million from March 31, 2022 levels, as we used collections on receivables, to fund seasonal working capital needs.

Advances to suppliers were $99.9 million at June 30, 2022, a reduction of $30.0 million from March 31, 2022, as tobacco crops were delivered in payment on some of those balances, net of new advances on current tobacco crops.

Accounts receivable—unconsolidated affiliates were up $44.0 million in the three months ended June 30, 2022, on the timing of tobacco crop purchases and shipments.

Notes payable and overdrafts were up $272.0 million from March 31, 2022 levels, on increased notes payable usage rather than cash on hand to fund seasonal working capital needs.

Cash balances available at March 31, 2022, were reduced due to the Shank's acquisition and working capital requirements in fiscal year 2022.

Accounts receivable were up $39.2 million for the quarter ended June 30, 2022, compared to the same quarter in the prior fiscal year, on the timing of tobacco crop purchases and shipments as well as higher leaf tobacco costs.

Advances to suppliers were up $29.5 million at June 30, 2022, compared to at June 30, 2021, partly due to higher crop input costs.

Inventories—Other were also up in the quarter ended June 30 2022, compared to the quarter ended June 30, 2021, on our acquisition of Shank’s.

Notes payable and overdrafts were up $301.3 million compared to June 30, 2021 levels, on higher tobacco inventory costs and the acquisition of Shank’s in October 2021.

Accounts payable and accrued expenses were up $77.6 million for the quarter ended June 30, 2022 compared to the quarter ended June 30, 2021, primarily on tobacco purchases.

Investing Activities

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

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

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 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.

During the quarters ended June 30, 2022 and 2021, we invested about $15.1 million and $14.4 million, respectively, in our property, plant and equipment.

Depreciation expense was approximately $10.9 million and $9.7 million for the three months ended June 30, 2022 and 2021, respectively.

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

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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 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.

During the three months ended June 30, 2022, we did not purchase any shares of common stock.

As of June 30, 2022, approximately 24.6 million shares of our common stock were outstanding, and our available authorization under our current share repurchase program was about $96.9 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 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.

Net debt as a percentage of net capitalization was approximately 41% at June 30, 2022, up from the June 30, 2021 level of approximately 31%, largely on higher debt balances due in part to the Shank’s acquisition in October 2021 as well as higher working capital requirements, and up from the March 31, 2022 level of approximately 32%.

As of June 30, 2022, we had $86.6 million in cash and cash equivalents, our short-term debt totaled $454.7 million, and we were in compliance with all covenants of our debt agreements, which require us to maintain certain levels of tangible net worth and observe restrictions on debt levels.

As of June 30, 2022, we had $155 million available under a committed revolving credit facility that will mature in December 2023, and we had about $84 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 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.

At June 30, 2022, the fair value of our outstanding interest rate swap agreements was an asset of about $4.3 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 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.

At June 30, 2022, the fair value of our open hedges was a net asset of about $0.8 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 $7.5 million at June 30, 2022.

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