What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-11-03 compared with 2022-08-03 · 121 added, 102 removed, 116 unchanged (66% of the section changed)

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

impacts of the COVID-19 pandemic;

impacts of the ongoing COVID-19 pandemic and new subvariants;

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

product purchased not meeting quality and quantity requirements;

reliance on a few large customers;

our reliance on a few large customers;

our ability to maintain effective information systems and safeguard confidential information;

anticipated levels of demand for and supply of our products and services;

costs incurred in providing these products and services;

costs incurred in providing these products and services including increased transportation costs and delays attributed to global supply chain challenges;

timing of shipments to customers;

higher inflation rates;

changes in market structure;

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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.

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.

Demand for both our tobacco and plant-based ingredients products remains very strong, and we are excited about how our fiscal year 2023 is developing.

We are seeing improvement in shipping availability, particularly in Brazil, where we were able to ship large amounts of carryover tobacco in both the six months and quarter ended September 30, 2022.

We also remain very pleased with our strategic investment in our plant-based ingredients platform.

Our Ingredients Operations segment diversifies our earnings and delivered higher results driven by higher sales in both the six months and quarter ended September 30, 2022, compared to the same periods in the prior fiscal year.

We believe we are through our peak seasonal working capital requirements for fiscal year 2023, and we expect a considerable reduction in debt levels over the next two fiscal quarters.

We have already seen significant working capital receipts in October 2022.

Our tobacco shipments, which are weighted to the second half of our fiscal year, should enable us to reduce our debt levels from the elevated September 30, 2022 levels, as payments are received from our customers.

Operating income for our Tobacco Operations segment for the six months and quarter ended September 30, 2022, was up significantly, compared to the six months and quarter ended September 30, 2021, driven by increased tobacco shipments.

Improved container and vessel availability in Brazil enabled us to ship a greater amount of tobacco, particularly in the three months ended September 30, 2022.

A large portion of the tobacco we shipped during the six months and quarter ended September 30, 2022, was carryover tobacco, and some tobacco we shipped was lower margin tobacco.

While we are still having some shipping challenges in certain areas around the world, we are encouraged by the global easing of shipping constraints.

All types of leaf tobacco are currently in an undersupply position.

We have worked diligently to secure the leaf tobacco desired by our customers, and our tobacco inventories were nearly 90% committed for sale to our customers at September 30, 2022.

Burley tobacco crops have been particularly short in Africa, largely due to weather conditions, which has limited our sales opportunities.

Our Ingredients Operations segment again delivered healthy results in the six months and quarter ended September 30, 2022.

Demand for our ingredients products remains strong, and we continue to capitalize on synergies across the plant-based ingredients platform.

We have seen inflationary cost increases, particularly for raw materials and labor, but margins have held up nicely.

As these businesses continue to find success with their established products, we are working to grow the platform offerings by investing in key sales and product development personnel to promote and expand the full range of our ingredients capabilities across the platform.

Universal remains focused on integrating sustainability into all aspect of our business.

A key part of our sustainability efforts is reducing global emissions.

To support us in developing our long-term strategy for reducing our global emissions footprint, we have engaged a third party to develop a low carbon transition plan and to prepare for updated guidance on meeting future net zero targets.

FINANCIAL HIGHLIGHTS

Three Months Ended June 30, Change

Six Months Ended September 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 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.

Net income for the six months ended September 30, 2022, was $28.7 million, or $1.15 per diluted share, compared with $25.9 million, or $1.04 per diluted share, for the six months ended September 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 increased by

$4.1 million and $0.17, respectively, for the six months ended September 30, 2022, compared to the six months ended September 30, 2021.

Operating income of $51.2 million for the six months ended September 30, 2022, increased by $10.7 million, compared to operating income of $40.4 million for the six months ended September 30, 2021.

Adjusted operating income, detailed in Other Items below, of $51.2 million increased by $9.5 million for the first half of fiscal year 2023, compared to adjusted operating income of $41.6 million for the first half of fiscal year 2022.

Net income for the quarter ended September 30, 2022, was $21.9 million, or $0.88 per diluted share, compared with $19.5 million, or $0.78 per diluted share, for the quarter ended September 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 increased by $5.3 million and $0.22, respectively, for the quarter ended September 30, 2022, compared to the quarter ended September 30, 2021.

Operating income of $37.9 million for the quarter ended September 30, 2022, increased by $8.1 million, compared to operating income of $29.8 million for the quarter ended September 30, 2021.

Adjusted operating income, detailed in Other Items below, of $37.9 million increased by $8.9 million for the second quarter of fiscal year 2023, compared to adjusted operating income of $29.0 million for the second quarter of fiscal year 2022.

Consolidated revenues increased by $276.8 million to $1.1 billion and by $197.0 million to $651.0 million, respectively, for the six months and quarter ended September 30, 2022, compared to the same periods in fiscal year 2022, on higher tobacco sales volumes and prices as well as the addition of the business acquired in October 2021 in the Ingredients Operations segment.

Tobacco Operations

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.

Operating income for the Tobacco Operations segment increased by $6.1 million to $41.9 million and by $6.9 million to $33.8 million, respectively, for the six months and quarter ended September 30, 2022, compared to the same periods in fiscal year 2022.

Tobacco Operations segment results improved largely due to substantial shipments of both carryover and current crop tobacco, in the six months and quarter ended September 30, 2022, compared to the six months and quarter ended September 30, 2021.

While sales volumes were higher for the Tobacco Operations segment in the six months and quarter ended September 30, 2022, compared to the same periods in the prior fiscal year, the sales included some lower margin tobacco.

Unfavorable foreign currency comparisons due to the strong U.S.

dollar also negatively impacted Tobacco Operations segment results in the six months and quarter ended September 30, 2022.

Carrryover and current crop tobacco shipments from Brazil were up significantly in the six months and quarter ended September 30, 2022, compared to the six months and quarter ended September 30, 2021.

In Africa, carryover and current crop shipments from Mozambique and Malawi were lower in the six months and quarter ended September 30, 2022, compared to the same periods in fiscal year 2022, due to smaller crop sizes as well as some logistical delays.

In North America, sales volumes were down, in part due to shipment timing, and the sales mix included some lower margin tobacco in the six months and quarter ended September 30, 2022, compared to the same periods in fiscal year 2022.

Trading business was up in Asia in the first half of fiscal year 2023, compared to the first half of fiscal year 2022.

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

Revenues for the Tobacco Operations segment of $918.1 million for the six months and $570.0 million for the quarter ended September 30, 2022, were up $227.5 million and $173.3 million, respectively, compared to the same periods in the prior fiscal year, on higher sales volumes and prices.

Ingredients Operations

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%.

Operating income for the Ingredients Operations segment was $9.1 million and $4.5 million, respectively, for the six months and quarter ended September 30, 2022, compared to $7.1 million and $2.7 million, respectively, for the six months and quarter ended September 30, 2021.

Results for the Ingredients Operations segment improved in the six months and quarter ended September 30, 2021, compared to the same periods in the prior fiscal year, on the inclusion of the October 2021 purchase of Shank’s Extracts, LLC (“Shank’s”).

For both the six months and quarter ended September 30, 2021, the Ingredients Operations segment continued to see strong demand and volumes in both human and pet food categories.

Despite seeing higher costs for raw materials, labor, travel and marketing, margins for the Ingredients Operations segment in the first half of fiscal year 2023 continued to hold up well compared to those in the first half of fiscal year 2022.

Selling, general, and administrative expenses for the segment increased in the six months and quarter ended September 30, 2022, compared to the same periods in the prior fiscal year, primarily on the addition of Shank’s.

Revenues for the Ingredients Operations segment increased by $49.3 million to $162.7 million and by $23.8 million to $81.0 million, respectively, for the six months and quarter ended September 30, 2022, compared to the six months and quarter ended September 30, 2021, largely on the addition of the revenues for the acquired business as well as higher sales volumes and prices.

Cost of goods sold in the six months and quarter ended September 30, 2022, increased by 37% and 50% to $890.8 million and $540.7 million, respectively, compared to the same periods in the prior fiscal year, as a result of higher sales.

The percentage increases in cost of goods sold were higher than comparable percentage increases in revenues in the same periods primarily due to some lower margin sales in the Tobacco Operations segment.

Selling, general, and administrative costs for the six months and quarter ended September 30, 2022, increased by $23.6 million to $138.8 million and by $7.0 million to $72.4 million, respectively, compared to the same periods in the prior fiscal year, on additional costs from the acquisition of Shank’s in the Ingredients Operations segment, unfavorable foreign currency comparisons as well as higher compensation and travel costs.

Unfavorable foreign currency comparisons were approximately $8.3 million and $1.7 million, respectively, in the six months and quarter ended September 30, 2022, compared to the same periods in the prior year.

Interest expense for the six months and quarter ended September 30, 2022, increased by $5.6 million to $19.0 million and by $5.1 million to $12.3 million, respectively, largely on higher debt balances and interest rates.

For the six months and quarter ended September 30, 2022, our effective tax rate on pre-tax income was 31.1% and 25.5%, respectively.

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

Without this item, the consolidated effective income tax rate for the six months ended September 30, 2022, would have been approximately 27.6%.

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

For the six months and quarter ended September 30, 2021, our effective tax rate on pre-tax income was 16.5% and 15.1% respectively.

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

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

Reconciliation of Certain Non-GAAP Financial Measures

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Adjusted Operating Income Reconciliation

Three Months Ended June 30,

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

(in thousands) 2022 2021 2022 2021

Consolidated operating income $ 37,886 $ 29,813 $ 51,152 $ 40,418

Transaction costs for acquisitions (1)

— 1,713 — 1,713

Restructuring and impairment costs (2)

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

— (2,532) — (2,532)

Adjusted operating income $ 37,886 $ 28,994 $ 51,152 $ 41,623

Adjusted Net Income and Diluted Earnings Per Share

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

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

2022 2021 2022 2021

Net income available to Universal Corporation $ 21,855 $ 19,510 $ 28,685 $ 25,867

Transaction costs for acquisitions (1)

— 1,713 — 1,713

Restructuring and impairment costs (2)

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

— (2,532) — (2,532)

Interest income and income tax benefit on a final tax ruling at a foreign subsidiary — (2,156) — (2,156)

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

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Diluted earnings per share $ 0.88 $ 0.66 $ 1.13 $ 0.96

(1) The Company incurred selling, general, and administrative expenses for due diligence and other transaction costs associated with the acquisition of Shank's.

(2) 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.

(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.

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 COVID-19 pandemic and have taken and continue to take steps intended to mitigate the potential risks and impacts to us.

We continue to closely monitor developments related to the coronavirus (“COVID-19” or “COVID”) 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.

We have assessed and regularly update our existing health and safety protocols, business continuity plans for our business, and related policies and practices in the context of this pandemic, and we will take additional steps and reevaluate them to address the spread of COVID and its impacts, as necessary.

We also 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 we experienced delays resulting from COVID in certain operations during fiscal year 2021, and since March 2020 we have at times experienced increased volatility in foreign currency exchange rates, which we believe in part related to the uncertainties from COVID as well as actions taken by governments and central banks in response to COVID.

We continue to see and monitor some logistical constraints around worldwide vessel and container availability and increased costs stemming from the COVID 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 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.

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 extent to which COVID impacts our business, financial position, results of operations, and cash flows will depend on future developments which are highly uncertain and cannot be predicted including, without limitation, the extent, resurgence, variation or duration of COVID, governmental and other third party actions that may be taken in response to the same, and their effects on the global, national or local economy, including the impacts on our ability to access capital.

We remain thankful for the hard work of our employees and the continued support of our customers, growers, and other partners during these challenging times.

Liquidity and Capital Resources

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.

The first half of our fiscal year is usually a period of significant working capital investment in Africa, South America, and the United States as tobacco crops are delivered by farmers.

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

We are experiencing 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 delayed tobacco shipment timing.

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

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To date, COVID 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.

Operating Activities

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

We used $346.2 million in net cash flows from our operations during the six months ended September 30, 2022.

That amount was $225.5 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.

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

Tobacco inventory levels increased by $145.7 million from March 31, 2022 levels to $968.2 million at September 30, 2022, on seasonal leaf purchases.

Tobacco inventory levels were $113.8 million above September 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 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.

At September 30, 2022, our uncommitted tobacco inventories were $109.1 million, or about 11% of total tobacco inventory, compared to $130.1 million, or about 16% of our March 31, 2022 tobacco inventory, and $94.5 million, or about 11% of our September 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 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.

Historically, our accounts receivable usually decrease in the first six months of our fiscal year as we use collections on receivables to fund seasonal working capital needs.

However, in the first six months of fiscal year 2023, our accounts receivable increased by $84.0 million from March 31, 2022 levels, largely due to tobacco shipment timing in Brazil and increased tobacco

trading business in Asia.

Notes payable and overdrafts were up $400.0 million from March 31, 2022 levels, partly on increased short-term borrowings to fund seasonal working capital needs.

Accounts payable and accrued expenses at September 30, 2022, were down $104.9 million from March 31, 2022 levels, primarily due to payments on acquired tobacco inventory.

Accounts receivable of $469.4 million at September 30, 2022, were $172.0 million higher, compared to the same period in the prior fiscal year, primarily on the timing of tobacco crop purchases and shipments, increased tobacco trading business, and higher leaf tobacco costs.

Advances to suppliers were up $24.3 million at September 30, 2022, compared to at September 30, 2021, partly due to higher crop input costs.

Inventories—Other were also up in the six months ended September 30 2022, compared to the six months ended September 30, 2021, on our acquisition of Shank’s as well as higher crop input costs.

Notes payable and overdrafts were up $397.4 million compared to September 30, 2021 levels, on higher tobacco inventory costs, higher accounts receivable balances, and the acquisition of Shank’s in October 2021.

Investing Activities

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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.

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.

During the six months ended September 30, 2022 and 2021, we invested about $26.6 million and $18.6 million, respectively, in our property, plant and equipment.

Depreciation expense was approximately $21.9 million and $19.8 million for the six months ended September 30, 2022 and 2021, respectively.

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

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

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

We currently expect to spend approximately $40 to $50 million over the next twelve months on capital projects for maintenance of our facilities and other investments to grow and improve our businesses.

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

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

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

On November 3, 2022, we announced that our Board of Directors had approved a new share repurchase program, which replaced the share repurchase program expiring in November 2022, for the purchase of up to $100 million of our common stock through November 15, 2024.

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

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 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.

During the three months ended September 30, 2022, we purchased 66,124 shares of common stock at an aggregate cost of $3.4 million (average price per share $52.15).

As of September 30, 2022, approximately 24.6 million shares of our common stock were outstanding.

Financing Activities

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

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.

Net debt as a percentage of net capitalization was approximately 44% at September 30, 2022, up from the September 30, 2021 level of approximately 33%, 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 September 30, 2022, we had $58.9 million in cash and cash equivalents, our short-term debt totaled $582.4 million, and we were in compliance with all covenants of our debt agreements, which require us to maintain certain levels of tangible net worth and observe restrictions on debt levels.

As of September 30, 2022, we had $100 million available under a committed revolving credit facility that will mature in December 2023, and we had about $56 million in available, 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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Our seasonal working capital requirements for our tobacco business typically increase significantly between March and September and decline after mid-year.

We believe that we have gotten through our peak seasonal working capital requirements for fiscal year 2023.

Our tobacco shipments are forecasted to be weighted to the second half of fiscal year 2023, and as payments

are received from our customers, we expect our debt levels to decline.

Available capital resources from our cash balances, committed credit facility, and uncommitted credit lines exceed our normal working capital needs and currently anticipated capital expenditure requirements over the next twelve months.

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

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.

At September 30, 2022, the fair value of our outstanding interest rate swap agreements was an asset of about $14 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 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.

At September 30, 2022, the fair value of our open hedges was a net asset of about $0.9 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 $2.4 million at September 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