What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-02-08 compared with 2022-11-03 · 111 added, 103 removed, 134 unchanged (61% of the section changed)

41 unchanged sentences

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

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.

We are extremely pleased with our results driven by strong tobacco shipments in the nine months and quarter ended December 31, 2022, compared to the same periods in fiscal year 2022.

Tobacco shipments are generally moving smoothly, and we are not seeing the logistical constraints that we saw in the prior fiscal year.

Our Ingredients Operations segment also continued to positively contribute to and diversify our results in the nine months and quarter ended December 31, 2022.

There continues to be significant demand for leaf tobacco with all types of leaf tobacco currently in an undersupply position.

Short burley tobacco crops in Africa, largely due to weather conditions, have contributed to the lower leaf tobacco supply.

As of December 31, 2022, our uncommitted inventory levels stood at less than 7% of our tobacco inventory, an exceptionally low level.

Although it is still early, we are forecasting larger crops in several key tobacco origins in fiscal year 2024.

In our Ingredients Operations segment, we recently have been experiencing some softening of demand for some of our ingredients products which we believe is temporary and largely due to customers adjusting their inventory levels.

Some of our ingredients customers have been carrying higher inventory levels because of supply chain uncertainties.

Increased costs, particularly selling, general, and administrative expenses, including costs related to the expansion of sales and product development resources and deferred compensation costs from acquisitions, reduced our results for our Ingredients Operations segment in the quarter and nine months ended December 31, 2022.

We remain excited about the long-term outlook for our ingredients businesses and continue to make significant capital investments to enhance and increase the capabilities of our plant-based ingredients platform.

We are ahead of achieving some of the earlier identified operational synergies across the platform and making considerable progress on our vision for the segment.

As announced on February 1, 2023, we have appointed a new director with extensive experience in the ingredients and value-added supplier space to our corporate Board of Directors to assist us as we continue to promote and expand this business.

We successfully refinanced and expanded our bank credit facility in the quarter ended December 31, 2022, positioning us to meet our future financial needs.

In line with our previous expectations, we also reduced our outstanding borrowings considerably in the three months ended December 31, 2022, as we moved beyond our peak working capital requirements for fiscal year 2023.

Our fiscal year 2022 Sustainability Report was published in December 2022 and is available on our website, www.universalcorp.com.

Sustainability is an essential pillar of our business at Universal.

We are committed to disclosing our operational activities as well as our sustainability performance in a consistent and transparent manner.

We are excited about our sustainability achievements and the new and updated information and disclosures contained in our 2022 Sustainability Report.

FINANCIAL HIGHLIGHTS

Six Months Ended September 30, Change

Nine Months Ended December 31, 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 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.

Net income for the nine months ended December 31, 2022, was $70.3 million, or $2.82 per diluted share, compared with $60.8 million, or $2.44 per diluted share, for the nine months ended December 31, 2021.

Excluding certain non-recurring items detailed in Other Items below, net income and diluted earnings per share increased by $1.1 million and $0.04, respectively, for the

nine months ended December 31, 2022, compared to the nine months ended December 31, 2021.

Operating income of $128.7 million for the nine months ended December 31, 2022, increased by $25.5 million, compared to operating income of $103.2 million for the nine months ended December 31, 2021.

Adjusted operating income, detailed in Other Items below, of $128.7 million increased by $12.2 million for the nine months ended December 31, 2022, compared to adjusted operating income of $116.5 million for the nine months ended December 31, 2021.

Net income for the quarter ended December 31, 2022, was $41.7 million, or $1.67 per diluted share, compared with $34.9 million, or $1.40 per diluted share, for the quarter ended December 31, 2021.

Excluding certain non-recurring items detailed in Other Items below, net income and diluted earnings per share decreased by $3.1 million and $0.13, respectively, for the quarter ended December 31, 2022, compared to the quarter ended December 31, 2021.

Operating income of $77.5 million for the quarter ended December 31, 2022, increased by $14.8 million, compared to operating income of $62.8 million for the quarter ended December 31, 2021.

Adjusted operating income, detailed in Other Items below, of $77.5 million increased by $2.7 million for the third quarter of fiscal year 2023, compared to adjusted operating income of $74.9 million for the third quarter of fiscal year 2022.

Consolidated revenues increased by $419.2 million to $1.9 billion for the nine months ended December 31, 2022, compared to the same period 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.

For the quarter ended December 31, 2022, consolidated revenues were $795.0 million, an increase of $142.4 million compared to $652.6 million for the quarter ended December 31, 2021, on higher tobacco sales volumes and prices.

Tobacco Operations

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.

Operating income for the Tobacco Operations segment increased by $13.4 million to $119.0 million and by $7.3 million to $77.1 million, respectively, for the nine months and quarter ended December 31, 2022, compared to the same periods in fiscal year 2022.

Tobacco Operations segment results improved primarily due to large shipments of both carryover and current crop tobacco, in the nine months and quarter ended December 31, 2022, compared to the nine months and quarter ended December 31, 2021.

While sales volumes were higher for the Tobacco Operations segment in the nine months and quarter ended December 31, 2022, compared to the same periods in the prior fiscal year, gross profit and operating margins were lower due to sales mix and sales of tobaccos that were written down in prior quarters.

Tobacco shipments from Brazil of both carryover and current crops were up significantly in the nine months and quarter ended December 31, 2022, compared to the nine months and quarter ended December 31, 2021.

In Africa, despite some lower burley tobacco crop sizes, tobacco sales volumes were up due to earlier shipment timing in the nine months and quarter ended December 31, 2022, compared to the same periods in fiscal year 2022.

Results for our oriental tobacco joint venture were down in the nine months and quarter ended December 31, 2022, compared to the same periods in the prior fiscal year, on lower sales volumes and unfavorable foreign currency comparisons.

Selling, general, and administrative expenses for the Tobacco Operations segment were higher in the nine months ended December 31, 2022, compared to the nine months ended December 31, 2021, primarily due to unfavorable foreign currency comparisons, higher provisions to suppliers, and higher compensation costs.

For the quarter ended December 31, 2022, selling, general, and administrative expenses for the Tobacco Operations segment were higher compared to the quarter ended December 31, 2021, largely due to higher compensation costs and larger provisions to suppliers, in part due to lower crop yields, partially offset by favorable foreign exchange comparisons.

Revenues for the Tobacco Operations segment of $1.6 billion for the nine months and $724.6 million for the quarter ended December 31, 2022, were up $374.1 million and $146.6 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 $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.

Operating income for the Ingredients Operations segment was $9.9 million for the nine months ended December 31, 2022, compared to $10.6 million for the nine months ended December 31, 2021.

Results for the Ingredients Operations segment were down in the nine months ended December 31, 2022, compared to the same period in the prior fiscal year, as increased sales and better margins as well as the inclusion of the October 2021 purchase of Shank’s Extracts, LLC (“Shank’s”) were offset by increased costs, mainly higher selling, general, and administrative expenses.

Operating income for the Ingredients Operations segment was $0.8 million for the quarter ended December 31, 2022, compared to $3.5 million for the quarter ended December 31, 2021, on lower sales, particularly lower sales of extracts, and higher costs.

Selling, general, and administrative expenses for the segment increased in the nine months and quarter ended December 31, 2022, compared to the same periods in the prior fiscal year, largely on higher compensation costs, including final deferred compensation costs from acquisitions, as well as costs related to the expansion of sales and product development capabilities of our plant-based ingredients platform.

Selling, general, and administrative expenses for the segment also increased in the nine months ended December 31, 2022, compared to the same period in the prior fiscal year, on the addition of Shank’s.

Revenues for the Ingredients Operations segment increased by $45.1 million to $233.2 million for the nine months ended December 31, 2022, compared to the nine months ended December 31, 2021,

largely on the addition of the revenues for the acquired business as well as higher sales volumes and prices for the existing businesses.

For the quarter ended December 31, 2022, revenues for the Ingredients Operations segment decreased by $4.2 million to $70.5 million, compared to the quarter ended December 31, 2021, on lower sales volumes.

Cost of goods sold in the nine months and quarter ended December 31, 2022, increased by 32% and 25% to $1.5 billion and $649.5 million, respectively, compared to the same periods in the prior fiscal year, as a result of higher raw material costs.

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%.

Selling, general, and administrative costs for the nine months ended December 31, 2022, increased by $31.3 million to $206.8 million compared to the same period in the prior fiscal year, on higher compensation costs, additional costs from the acquisition of Shank’s in the Ingredients Operations segment as well as unfavorable foreign currency comparisons.

Selling, general, and administrative costs for the quarter ended December 31, 2022, increased by $7.7 million to $68.0 million compared to the same period in the prior fiscal year, on higher compensation costs, including final deferred compensation costs from acquisitions, and higher provisions to suppliers partially offset by favorable foreign currency comparisons.

Unfavorable foreign currency comparisons were approximately $3.8 million in the nine months ended December 31, 2022, and favorable foreign currency comparisons were approximately $4.5 million in the quarter ended December 31, 2022, compared to the same periods in the prior year.

Interest expense for the nine months and quarter ended December 31, 2022, increased by $12.5 million to $33.3 million and by $6.8 million to $14.3 million, respectively, largely on higher debt balances and interest rates.

For the nine months and quarter ended December 31, 2022, our effective tax rate on pre-tax income was 23.2% and 19.3%, respectively.

In the nine months ended December 31, 2022, we sold our idled Tanzania operations and recognized $1.1 million of income taxes.

Without this item, the consolidated effective income tax rate for the nine months ended December 31, 2022, would have been approximately 22.0%.

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.

For the nine months and quarter ended December 31, 2021, our 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 24.3% and 25.5%, respectively.

Reconciliation of Certain Non-GAAP Financial Measures

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Adjusted Operating Income Reconciliation

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

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

(in thousands) 2022 2021 2022 2021

Consolidated operating income $ 77,526 $ 62,773 $ 128,678 $ 103,191

Purchase accounting adjustment (1)

— 3,057 — 3,057

Transaction costs for acquisitions (2)

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Restructuring and impairment costs (3)

— 8,433 — 10,457

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

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Adjusted Net Income and Diluted Earnings Per Share

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

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

2022 2021 2022 2021

Net income available to Universal Corporation $ 41,660 $ 34,940 $ 70,345 $ 60,807

Purchase accounting adjustment (1)

— 2,415 — 2,415

Transaction costs for acquisitions (2)

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Restructuring and impairment costs (3)

— 6,874 — 7,879

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

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Diluted earnings per share $ 1.67 $ 1.80 $ 2.80 $ 2.76

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

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

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

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.

COVID-19 Pandemic Impact

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 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 continue to monitor global 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.

Mitigating risks from COVID to our employees and our business is critically important.

We have assessed and regularly update our existing health and safety protocols, business continuity plans, and related policies and practices, and 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 we previously experienced delays resulting from COVID in certain operations, we experienced increased volatility in foreign currency exchange rates which we believe in part related to COVID uncertainties and actions taken by governments and central banks, and we experienced and continue to monitor for logistical constraints around worldwide vessel and container

availability and increased costs stemming from the COVID pandemic.

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

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.

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

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.

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 2023.

We are, however, experiencing higher working capital needs in fiscal year 2023 compared to historical levels due to increased costs, specifically higher leaf tobacco costs.

We funded our working capital needs in the nine months ended December 31, 2022, using a combination of cash on hand, short-term borrowings, customer advances, and operating cash flows.

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

Working capital needs are seasonal within each geographic region.

The geographic dispersion and the timing of working capital needs permit us to predict our general level of cash requirements, although tobacco crop size, prices paid to farmers, shipment and delivery timing, and currency fluctuations affect requirements each year.

The geographic dispersion and the timing of working capital needs permit us to predict our general level of cash requirements, although tobacco crop sizes, prices paid to farmers, shipment and delivery timing, and currency fluctuations affect requirements each year.

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

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

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.

Operating Activities

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

We used $183.9 million in net cash flows from our operations during the nine months ended December 31, 2022.

That amount was $132.3 million higher than during the same period in fiscal year 2022.

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.

Our working capital needs to fund our operations in the nine months ended December 31, 2022, were higher, compared to the nine months ended December 31, 2021, primarily on higher green tobacco costs.

Tobacco inventory levels increased by $43.9 million from March 31, 2022 levels to $866.4 million at December 31, 2022, on seasonal leaf purchases.

Tobacco inventory levels were $10.8 million above December 31, 2021 levels, mainly due to higher green tobacco prices, partially offset by lower crop sizes in certain tobacco origins.

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

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

At September 30, 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.

At December 31, 2022, our uncommitted tobacco inventories were $56.0 million, or less than 7% of total tobacco inventory, compared to $130.1 million, or about 16% of our March 31, 2022 tobacco inventory, and $132.0 million, or about 15% of our December 31, 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.

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.

Our balance sheet accounts reflected seasonal patterns in the nine months ended December 31, 2022, on deliveries of tobacco crops by farmers in South America, Africa, and North America.

Accounts receivable were up $151.2 million for the nine months ended December 31, 2022, from March 31, 2022 levels.

This increase in accounts receivable was higher than historic levels mainly on shipment timing as well as higher leaf tobacco costs.

Notes payable and overdrafts were up $165.4 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.

Accounts payable and accrued expenses at December 31, 2022, were down $63.9 million from March 31, 2022 levels, primarily due to payments on acquired tobacco inventory.

Accounts receivable of $536.7 million at December 31, 2022, were $136.5 million higher, compared to the same period in the prior fiscal year, primarily on the timing of tobacco sales and shipments and higher leaf tobacco costs.

Advances to suppliers were up $36.4 million at December 31, 2022, compared to at December 31, 2021, partly due to higher crop input costs.

Inventories—Other were also up in the nine months ended December 31, 2022, compared to the nine months ended December 31, 2021, on higher raw material and crop input costs.

Notes payable and overdrafts were up $95.5 million compared to December 31, 2021 levels, on higher tobacco inventory costs and higher accounts receivable balances.

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 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.

During the nine months ended December 31, 2022 and 2021, we invested about $39.4 million and $39.8 million, respectively, in our property, plant and equipment.

Depreciation expense was approximately $33.2 million and $30.4 million for the nine months ended December 31, 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, 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.

We currently expect to spend approximately $70 to $80 million over the next twelve months on capital projects for maintenance of our facilities and other investments, including significant investments in our plant-based ingredients platform, to grow and improve our businesses.

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.

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Repurchases of shares under the repurchase program may vary based on management discretion, as well as changes in cash flow generation and availability.

During the three months ended September 30, 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.

During the three months ended December 31, 2022, we did not purchase any shares of common stock.

As of December 31, 2022, approximately 24.6 million shares of our common stock were outstanding, and our available authorization under our current share repurchase program was $100 million.

Financing Activities

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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 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.

Net debt as a percentage of net capitalization was approximately 40% at December 31, 2022, up from the December 31, 2021 level of approximately 35%, largely on higher debt balances due in part to higher working capital requirements, and up from the March 31, 2022 level of approximately 32%.

As of December 31, 2022, we had $71.3 million in cash and cash equivalents, our short-term debt totaled $348.1 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.

On December 15, 2022, we entered into a new bank credit agreement that replaced our existing bank credit agreement dated December 20, 2018.

The terms of the new agreement are substantially similar to the terms of the prior agreement.

The new agreement established a five-year committed revolving credit facility of $530 million, a funded $275 million five-year term loan, and a funded $345 million seven-year term loan.

The new revolving credit facility replaced a $430 million revolving credit facility that would have matured in December 2023 and a $225 million five-year term loan and a $295 million seven-year term loan that would have matured in December 2023 and December 2025, respectively.

The financial covenants under the new revolving credit facility are substantially similar to those of the previous facility and require us to maintain certain levels of tangible net worth and leverage.

Under applicable accounting guidance, a significant portion of the replacement of the term loans was accounted for as a debt modification rather than a debt extinguishment.

As of December 31, 2022, we had $330 million available under the committed revolving credit facility that will mature in December 2027, and we had about $196 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.

We have no long-term debt maturing until fiscal year 2028.

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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 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.

At December 31, 2022, the fair value of our outstanding interest rate swap agreements was an asset of about $3.2 million, and the notional amount swapped was $310 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.

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

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.

At December 31, 2022, the fair value of our open hedges was a net asset of about $3.4 million.

We had forward contracts outstanding that were not designated as hedges, and the fair value of those contracts was a net liability of approximately $42 thousand at December 31, 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