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Item 7. Management’s Discussion and Analysis

2023-05-25 compared with 2022-05-27 · 175 added, 169 removed, 450 unchanged (43% of the section changed)

9 unchanged sentences

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

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

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

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

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

Given our significant and strategic investments in our plant-based ingredients platform, we evaluated our operating segments for financial reporting purposes during the quarter ended December 31, 2020.

Based on our evaluation, we determined that we conduct our operations across two primary reportable operating segments, Tobacco Operations and Ingredients Operations.

The revised segments reflect how we manage the Company, allocate resources, and assess business performance.

Prior period segment information has been recast retrospectively to reflect these changes.

COVID-19 Pandemic Impact

On March 11, 2020, the WHO declared COVID-19 a pandemic.

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

We continue to closely monitor developments related to the COVID-19 pandemic and have taken and continue to take steps intended to mitigate the potential risks and impacts to us.

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

We have assessed and regularly update our existing business continuity plans for our business in the context of this pandemic.

For example, we have taken precautions during the pandemic with regard to employee and facility hygiene, imposed travel limitations on our employees, implemented work-from-home procedures, and we continue to assess and reevaluate protocols designed to protect our employees, customers and the public.

We continue to work with our suppliers to mitigate the impacts to our supply chain due to the pandemic.

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

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

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

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

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

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

We will take additional steps and reevaluate current protocols to address the spread of COVID-19 and its impacts, as necessary, and remain thankful for the hard work of our employees and the continued support of our customers, growers, and other partners during these challenging times.

The Conflict in Ukraine

We are closely monitoring the tragic situation in Ukraine.

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

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

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

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

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

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

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

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

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

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

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

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

In fiscal year 2023, we continued to enhance and increase the capabilities of our plant-based ingredients platform.

We have been achieving operational synergies across the platform among our acquired businesses, FruitSmart, acquired on January 1, 2020, Silva, acquired on October 1, 2020, and Shank’s, acquired on October 4, 2021.

We have also made considerable progress on our vision for the segment, providing a total solution-based approach for our customers that utilizes our broad spectrum of capabilities in fruits, vegetables and botanical extracts and flavorings.

RESULTS OF OPERATIONS

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Executive Summary

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Fiscal year 2023 was a good year for Universal.

Tobacco shipments were strong, as logistical constraints eased in fiscal year 2023, and despite tight tobacco supply conditions, we were able to secure the leaf tobacco needed by our customers.

Our plant-based ingredients platform continued to perform well, and we are excited about our progress in integrating our ingredients companies and executing on our strategies.

During fiscal year 2023, we enhanced and increased the scope of our platform by adding sales and research and development resources, and we recently announced plans to expand our plant-based ingredients platform’s manufacturing capabilities.

Our operating income and net income for fiscal year 2023 were up 13% and 43%, respectively, compared to fiscal year 2022, in part due to higher tobacco shipments and sales volumes.

Our results for fiscal year 2023 included a favorable final ruling on a legal case involving one of our subsidiaries in Brazil regarding the exclusion of certain tax credits on exported goods in the calculation of taxable income.

As a result of the favorable ruling, we recognized $5.0 million of interest income and a $24.5 million net income tax benefit in fiscal year 2023.

We were pleased to see a return to more normal shipping conditions, particularly for our tobacco operations, in fiscal year 2023.

Due to this improved logistical environment, we were able to ship a large amount of carryover tobacco from prior crops, notably from Brazil.

Some of the tobacco shipped in fiscal year 2023 was lower margin tobacco due to sales mix and sales of tobacco written down in prior quarters, however, operating income for our Tobacco Operations segment was up about 10% in fiscal year 2023, compared to fiscal year 2022, largely on the higher tobacco shipments.

Tobacco supply was tight for virtually all types of tobacco in fiscal year 2023, and African burley crops sizes were particularly small, largely due to weather conditions.

Our uncommitted tobacco inventory levels remained low at 11% of tobacco inventory as of March 31, 2023.

Both worldwide flue-cured and burley tobacco crops to be grown in our fiscal year 2024 are forecast to be larger than those produced in our fiscal year 2023, but we still expect flue-cured and burley tobaccos to remain in undersupply positions.

The tobacco marketing season is underway in Brazil, and the Brazilian flue-cured crop is larger than the crop produced in our fiscal year 2023.

We are carefully monitoring the burley crops in Africa where above average rainfall was received in some of our key growing areas even before Cyclone Freddy arrived.

Although weather has reduced burley crop sizes, especially in Mozambique, we are still forecasting that the fiscal year 2024 African burley crops will be larger compared to those grown in our fiscal year 2023.

While gross margins for the Ingredients Operations segment were flat for fiscal year 2023, compared to fiscal year 2022, operating income for our Ingredients Operations segment was lower in fiscal year 2023, compared to fiscal year 2022, on higher costs related to an increase in corporate overhead allocation and the expansion of sales and product development capabilities, as well as some softening of demand and margin pressures from our customers during the second half of fiscal year 2023.

We believe that the softening in demand and margin pressures are temporary and related to our customers adjusting their inventories to reflect both current supply chain conditions and inflationary pricing pressures on the end consumer.

We are continuing to enhance and increase the capabilities of our plant-based ingredients platform and have made considerable progress on our vision for the segment, providing a total solution-based approach for our customers that utilizes our broad spectrum of capabilities in fruits, vegetables and botanical extracts and flavorings.

Returning value to our shareholders in our operations remains an important priority for Universal.

We were very pleased to announce our 53rd annual common dividend increase on May 24, 2023, continuing our commitment to deliver shareholder value.

We also achieved important milestones in our sustainability efforts during fiscal year 2023.

Notably, we are proud to have substantially met 2022 supply chain goals outlined in our Sustainability Report.

For example, we provide access to personal protective equipment to our contracted farmers and their workers.

In addition, we were named a Supplier Engagement Leader by CDP for the second consecutive year, earning recognition for our work in engaging our suppliers on climate change.

We are excited about the opportunities within our operations to improve our environmental performance and look forward to continuing to achieve our sustainability goals in fiscal year 2024.

FINANCIAL HIGHLIGHTS

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Net income for the year ended March 31, 2023, was $124.1 million, or $4.97 per diluted share, compared with $86.6 million, or $3.47 per diluted share, for the year ended March 31, 2022.

Excluding restructuring and impairment costs and certain other non-recurring items, detailed in Other Items below, net income and diluted earnings per share decreased by $10.8 million and $0.46, respectively, for the year ended March 31, 2022, compared to the year ended March 31, 2021.

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

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

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

Excluding certain non-recurring items detailed in Other Items below, net income and diluted earnings per share decreased by $0.2 million and $0.02, respectively, for the fiscal year ended March 31, 2023, compared to the fiscal year ended March 31, 2022.

Operating income of $181.1 million for the fiscal year ended March 31, 2023, increased by $20.8 million, compared to operating income of $160.3 million for the fiscal ended March 31, 2022.

Adjusted operating income, detailed in Other Items below, of $181.1 million increased by $7.5 million for the fiscal year ended March 31, 2023, compared to adjusted operating income of $173.6 million for the fiscal year ended March 31, 2022.

Consolidated revenues increased by $466.2 million to $2.6 billion for the fiscal year ended March 31, 2023, compared to the 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

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

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

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

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

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

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

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

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

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

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

Operating income for the Tobacco Operations segment increased by $15.1 million to $172.9 million for the fiscal year ended March 31, 2023, compared to the fiscal year ended March 31, 2022.

Tobacco Operations segment results improved in fiscal year 2023, compared to fiscal year 2022, primarily due to increased tobacco shipments, which included a large amount of carryover crop tobacco.

While sales volumes were higher for the Tobacco Operations segment in fiscal year 2023, compared to fiscal year 2022, 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 fiscal year 2023, compared to fiscal year 2022.

The increased Brazilian shipments were partially offset by lower African burley tobacco volumes in fiscal year 2023.

African burley tobacco crop sizes were smaller largely due to weather conditions in fiscal year 2023, compared to fiscal year 2022.

Results for our oriental tobacco joint venture were down, compared to fiscal year 2022, on lower sales volumes, higher interest expense, and unfavorable foreign currency comparisons.

Selling, general, and administrative expenses for the Tobacco Operations segment were higher in fiscal year 2023, compared to fiscal year 2022, primarily due to higher compensation costs;

higher provisions on advances to suppliers, in part due to weather-related lower crop yields;

and unfavorable foreign currency comparisons.

Revenues for the Tobacco Operations segment of $2.3 billion for fiscal year 2023, were up $422.5 million, compared to fiscal year 2022, on higher tobacco sales volumes and prices.

Ingredients Operations

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

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

For the year ended March 31, 2022, our Ingredients Operations saw strong volumes in both human and pet food categories as well as some rebound in demand from sectors that have been impacted by the ongoing COVID-19 pandemic.

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

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

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

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

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

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

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

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

In the fiscal year ended March 31, 2022, the Company recognized a $1.7 million income tax benefit related to a final tax ruling at a foreign subsidiary and a $1.2 million benefit due to finalizing the prior year U.S.

Segment operating income for the Ingredients Operations segment decreased by $6.0 million to $10.6 million for the fiscal year ended March 31, 2023, compared to fiscal year 2022.

Ingredients Operations segment results declined despite relatively flat gross margins for fiscal year 2023, compared to fiscal year 2022, largely due to higher costs related to an increase in corporate overhead allocation and the expansion of sales and product development capabilities, as well as market and margin pressures from some of our customers during the second half of fiscal year 2023.

Results for the Ingredients Operations segment

for fiscal year 2023 included the October 2021 purchase of Shank’s.

Selling, general, and administrative expenses for the segment increased in the fiscal year ended March 31, 2023, compared to the fiscal year ended March 31, 2022, largely on costs related to the expansion of sales and product development capabilities of our plant-based ingredients platform as well as higher compensation costs.

Selling, general, and administrative expenses for the segment also increased in the fiscal year 2023, compared to the fiscal year 2022, on the addition of Shank’s.

Revenues for the Ingredients Operations segment increased by $43.8 million to $311.6 million for fiscal year 2023, compared to fiscal year 2022, largely on the addition of the revenues for the acquired business as well as higher sales volumes and prices for the existing businesses.

Cost of goods sold in the fiscal year ended March 31, 2023, increased by 25% to $2.1 billion, compared to the same periods in fiscal year 2022, as a result of higher raw material costs.

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

Selling, general, and administrative costs for fiscal year 2023 increased by $36.5 million to $277.2 million compared to fiscal year 2022, on higher compensation costs, additional costs from the acquisition of Shank’s in the Ingredients Operations segment as well as higher provisions on advances to suppliers.

Interest expense for the fiscal year ended March 31, 2023, compared to the fiscal year ended March 31, 2022, increased by $21.6 million to $49.3 million largely on higher debt balances and interest rates.

For the fiscal year ended March 31, 2023, our effective tax rate on pre-tax income was 8.3%.

In fiscal year 2023, one of our subsidiaries in Brazil received a favorable final judgement from the Brazilian Superior Court of Justice.

The lawsuit asserted certain tax credits on exported goods should be excluded from taxable income.

The Brazilian revenue authority asserted certain tax credits generated on purchased goods and services that were ultimately exported from Brazil should be included in the calculation of taxable income.

The Brazilian Superior Court of Justice affirmed the tax credits are non-taxable in accordance with the historical and existing tax legislation in Brazil.

The ruling resulted in recognition of $26.6 million of Brazilian tax credits due to the recalculation of federal income taxes in Brazil for years 2015 through 2022.

The affirmative ruling also resulted in recognition of $5.0 million of interest income for the fiscal year ended March 31, 2023.

The ruling resulted in a net income tax benefit of $24.2 million for the fiscal year March 31, 2023.

The net income tax benefit included a $2.4 million income tax provision for U.S.

federal income taxes.

In the fiscal year ended March 31, 2023, we sold our idled Tanzania operations and recognized $1.1 million of income taxes.

Without this item and the favorable judgement in Brazil discussed above, the consolidated effective income tax rate for the fiscal year ended March 31, 2023, would have been approximately 25.5%.

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 fiscal year ended March 31, 2022, our effective tax rate on pre-tax income was 27.2%.

In the fiscal year ended March 31, 2022, we recognized a $1.7 million income tax benefit related to a final tax ruling at a foreign subsidiary and a $1.2 million benefit due to finalizing the prior year U.S.

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

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

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

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

Reconciliation of Certain Non-GAAP Financial Measures

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Purchase accounting adjustments (1)

— 3,057 2,800

Transaction costs for acquisitions (2)

— 2,310 3,915

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

2 unchanged sentences

— 10,457 22,577

Adjusted operating income $ 173,607 $ 172,929

Adjusted Net Income and Diluted Earnings Per Share Reconciliation

(in thousands except for per share amounts) Fiscal Year Ended March 31,

(all amounts reported net of income taxes) 2022 2021

Adjusted operating income (Non-GAAP) $ 181,072 $ 173,607 $ 172,929

Adjusted Net Income and Adjusted Diluted Earnings Per Share Reconciliation

Fiscal Year Ended March 31,

(in thousands except for per share amounts) 2023 2022 2021

Net income attributable to Universal Corporation $ 124,052 $ 86,577 $ 87,410

Purchase accounting adjustments (1)

— 3,057 2,800

Transaction costs for acquisitions (2)

— 2,310 3,915

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

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Restructuring and impairment costs (4)

Interest expense related to an uncertain tax matter at a foreign subsidiary (470) 1,849

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

— 10,457 22,577

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

Interest (income) expense related to final income tax rulings (fiscal years 2023 and 2022) and settlement (fiscal years 2021) at foreign subsidiaries (5)

(4,980) (470) 1,849

Interest expense reversal on uncertain tax position from sale of operations in Tanzania (1,816) — —

Total of Non-GAAP adjustments to income before income taxes (6,796) 12,822 26,968

Income tax benefit on final tax rulings (fiscal years 2023 and 2022) and dividends paid from foreign subsidiaries (fiscal year 2021) (5)

(24,256) (1,686) (4,421)

Income tax expense from sale of operations in Tanzania 1,132 — —

Income tax benefit from Non-GAAP adjustments to income before income taxes (6)

— (2,181) (4,290)

Total of income tax impacts for Non-GAAP adjustments to income before income taxes and Non-GAAP adjustment to income taxes (23,124) (3,867) (8,711)

Impact to net income attributable to noncontrolling interests in subsidiaries from Non-GAAP adjustments — (1,154) (487)

Net income attributable to Universal Corporation (Non-GAAP) $ 94,132 $ 94,378 $ 105,180

Diluted earnings per share $ 4.97 $ 3.47 $ 3.53

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See Note 4 for additional information.

(5) The Company recognized an income tax benefit ($24.2 million) and associated interest income ($5.0 million) in the fourth quarter of fiscal year 2023 related to a favorable final judgement for one of the Company's operating subsidiaries in Brazil.

The lawsuit related to the treatment of certain tax credits on exported goods in the calculation of taxable income.

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).

(6) The income tax effect of Non-GAAP adjustments was determined based on the timing and nature of the specific Non-GAAP adjustments and their relevant jurisdictional income tax rates (foreign, state, and local) and the applicable U.S.

federal income tax rates.

The Company considers current and deferred income tax rates to calculate the impact to income taxes for the Non-GAAP adjustments.

Fiscal Year Ended March 31, 2022, Compared to the Fiscal Year Ended March 31, 2021

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LIQUIDITY AND CAPITAL RESOURCES

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

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

We continued our financial policies and returned funds to shareholders.

In fiscal year 2023, our liquidity was sufficient to meet our needs.

Our working capital requirements in fiscal year 2023 were significantly higher than those in fiscal year 2022 mainly due to increased costs, including higher leaf tobacco costs.

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

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

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

We believe that our financial resources are adequate to support our capital needs for at least the next twelve months.

Our seasonal borrowing requirements primarily relate to purchasing tobacco crops in South America and Africa and can increase from March to September by more than $350 million.

We believe that our financial resources are adequate to support our capital and liquidity needs for at least the next twelve months.

Our seasonal borrowing requirements primarily relate to purchasing tobacco crops in South America and Africa and can increase from March to September by close to $400 million.

The funding required can vary significantly depending upon such factors as crop sizes, the price of leaf, the relative strength of the U.S.

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We deal with this uncertainty by maintaining substantial credit lines and cash balances.

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

In addition to our operating requirements for working capital, we expect to spend around $65 to $75 million during fiscal year 2024 for capital expenditures to maintain our facilities and invest in opportunities to grow and improve our businesses, including expanding our plant-based ingredients platform’s manufacturing capabilities.

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

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

We currently anticipate our current cash balances, cash flows from operations, and our available sources of liquidity will be sufficient to meet our cash requirements for at least the next twelve months.

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

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

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

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

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

Our operations used about $10.6 million in operating cash flows in fiscal year 2023.

That amount was about $55.4 million higher than the $44.9 million we generated in fiscal year 2022, largely due to higher working capital requirements in fiscal year 2023.

During the fiscal year ended March 31, 2023, we spent $54.7 million on capital projects, and we returned $80.8 million to shareholders in the form of dividends and share repurchases.

At March 31, 2023, cash balances totaled $64.7 million.

Working Capital

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

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

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

Working capital at March 31, 2023, was about $1.4 billion, up about $131.6 million from last fiscal year's level, largely on higher working capital requirements due to higher costs, including higher green tobacco costs.

Tobacco inventories of $833.9 million at March 31, 2023, were up $11.4 million compared to inventory levels at the end of the prior fiscal year, in part due to higher green leaf tobacco prices.

Advances to suppliers were up $41.0 million at March 31, 2023, from prior year levels largely on higher crop input costs.

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

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

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

Our uncommitted tobacco inventories decreased by approximately $39.1 million to $91.1 million, or about 11% of tobacco inventory, at March 31, 2023, which was on the low end of our target range.

Uncommitted inventories at March 31, 2022, were $130.1 million, which represented 16% of tobacco inventory.

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

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

While we target committed tobacco inventory levels of 80% or more of total tobacco inventory, the level of these uncommitted inventories is influenced by timing of farmer deliveries of new crops, as well as the receipt of customer orders.

Capital Allocation

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• Increasing our strong dividend;

• Exploring growth opportunities in plant-based ingredients businesses that utilize our assets and capabilities;

• Exploring growth opportunities for our plant-based ingredients platform;

• Returning excess capital through share repurchases.

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

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

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

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

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

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

We will continue to make disciplined investments within our leaf business and taking advantage of growth opportunities in tobacco as well as in our plant-based ingredients platform.

Through these actions, we believe that will be able to deliver enhanced shareholder value through earnings

growth and the generation of free cash flow despite operating in a mature industry.

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

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

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

During fiscal year 2023, we purchased 66,124 shares of common stock at an aggregate cost of $3.4 million (average price per share $52.15) under our previous share repurchase program.

At March 31, 2023, our available authorization under our current share repurchase program was $100 million, and approximately 24.6 million common shares were outstanding.

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During fiscal years 2023 and 2022, we invested $54.7 million and $53.2 million, respectively, in our property, plant, and equipment.

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

Depreciation expense was approximately $44.8 million and $41.3 million, respectively, in fiscal years 2023 and 2022.

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

Generally, our capital spending on maintenance projects is at a level below depreciation expense.

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

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

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

We currently plan to spend approximately $65 to $75 million in fiscal year 2024 on capital projects for maintenance of our facilities and other investments to grow and improve our businesses, including significant investments in our plant-based ingredients platform.

Outstanding Debt and Other Financing Arrangements

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

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

Net debt increased by $117.5 million to $750.7 million during the fiscal year ended March 31, 2023.

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

The increase primarily reflects higher working capital requirements.

Net debt as a percentage of net capitalization was approximately 35% at March 31, 2023, up from 32% at March 31, 2022.

As of March 31, 2021, we had $330 million available under a committed revolving credit facility that will mature in December 2023, and we, together with our consolidated affiliates, had approximately $283 million in uncommitted lines of credit, of which approximately $200 million were unused and available to support seasonal working capital needs.

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 March 31, 2023, we had $500 million available under the committed revolving credit facility that will mature in December 2027, and we, together with our consolidated affiliates, had approximately $350 million in uncommitted lines of credit, of which approximately $183 million were unused and available to support seasonal working capital needs.

The financial covenants under our committed revolving credit facility require us to maintain certain levels of tangible net worth and observe restrictions on debt levels.

As of March 31, 2023, we were in compliance with all covenants of our debt agreements.

We also have an active, undenominated universal shelf registration filed with the SEC in November 2020 that provides for future issuance of additional debt or equity securities.

We also have an effective, undenominated universal shelf registration filed with the SEC in November 2020 that provides for future issuance of additional debt or equity securities.

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

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

Currently, we have interest rate swap agreements that convert the variable benchmark LIBOR rates on $370 million of our two outstanding term loans entered to fixed rates.

Currently, we have interest rate swap agreements that convert the variable benchmark SOFR rates on $310 million of our two outstanding term loans entered to fixed rates.

With the swap agreements in place, the effective interest rates on $275 million of the five-year term loan and $345 million of the seven-year term loan were 6.11% and 6.31%, respectively, as of March 31, 2023.

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

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

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

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

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This method of cost accounting is referred to as the specific cost or specific identification method.

We write down inventory for changes in net realizable value based upon assumptions related to future demand and market conditions if the indicated value is below cost.

We write down inventory for changes in net realizable value based upon assumptions related to

future demand and market conditions if the indicated value is below cost.

Future demand assumptions can be impacted by changes in customer sales, changes in customers’ inventory positions and policies, competitors’ pricing policies and inventory positions, and varying crop sizes and qualities.

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As the leading global leaf tobacco supplier, we continually monitor for issues and opportunities that may impact the supply of and demand for leaf tobacco, the volumes of leaf tobacco that we handle, and the services we provide.

We have also been building a plant-based ingredients platform and monitor issues and opportunities that may impact these businesses as well.

Our plant-based ingredients platform similarly requires us to monitor issues and opportunities that may impact supply and demand for the materials we source, the products we sell, and the services we provide.

Tobacco Operations Trends

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

Although we operate in a mature industry, where demand for the end products outside of China has been declining at a compound annual rate of about 0.6% over the last three years, our mission is to remain the leading global leaf tobacco supplier.

Although we operate in a mature industry, where global consumption of cigarettes outside of China has been relatively flat and consumption of American-blend cigarettes have been declining at a compound annual growth rate of about 1.8% over the last five years, our primary mission is to remain the leading global leaf tobacco supplier.

In recent years, we have been and believe that we will continue to be able to grow parts of our business and maintain performance despite declines in demand for leaf tobacco from product manufacturers.

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These efficiencies include economical utilization of processing capacity, an established and scalable global network of agronomists and technicians helping to maintain a stable, productive, and sustainable farmer base, as well as agronomic and production improvements to optimize leaf yields and qualities.

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

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

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

In addition, we are able to offer

manufacturers a complete range of services from the field to the delivery of the packed product that benefit from our efficiencies.

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

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

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Specifically, we have expertise in tobacco seed development, crop production methods, crop sourcing, processing, and manufacturing of reconstituted sheet tobacco, which is beneficial to our customers as they continue to develop alternative tobacco products.

We also are able to provide high quality, traceable and sustainable liquid nicotine through our subsidiary, AmeriNic.

We also are able to provide high quality liquid nicotine through our subsidiary, AmeriNic.

We continue to monitor industry developments regarding next generation products, including consumer acceptance and regulation, and will adapt accordingly.

Leaf Tobacco Supply

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

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

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

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

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

Flue-cured tobacco crops grown outside of China decreased in fiscal year 2023 by about 5% to 1.6 billion kilos compared to fiscal year 2022, with production levels below historical averages.

Global burley tobacco production was also below historical levels in fiscal year 2023, and at about 353 million kilos, decreased by 12% compared to the burley crops grown in our fiscal year 2022.

Both the flue-cured tobacco production grown outside of China and the global burley tobacco crop are projected to increase by about 12% to 1.8 billion kilos and by about 27% to about 450 million kilos, respectively, in fiscal year 2024.

We estimate that as of March 31, 2023, industry uncommitted flue-cured and burley inventories, excluding China were at historically low levels.

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

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

We also forecast that oriental tobacco production will decrease by about 6% and dark air-cured tobacco production will remain flat in fiscal year 2024.

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

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Therefore, we normally view the Chinese market independently when evaluating worldwide leaf tobacco supply and demand.

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

China is continuing to

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

Domestic leaf tobacco inventories have built up in China over the last several years

as China’s domestic leaf production has exceeded their domestic needs for the local cigarette market.

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

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

Leaf Tobacco Demand

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

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

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

Industry data from the TMA shows that over the past five years, world consumption of cigarettes outside of China was relatively flat, growing at a compound annual growth rate of just under 1%, and consumption of American-blend cigarettes has been declining at a compound annual growth rate of 1.8%.

We expect that near term global demand for leaf tobacco will slowly decline in line with global cigarette consumption.

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

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

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

Industry data shows that consumption of American-blend cigarettes was declining for the five years ended in 2022.

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

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All submissions require manufacturers to list ingredients in their products.

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

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

In January 2023, the FDA announced they expect to make a decision to finalize the rules in calendar year 2023.

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

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

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

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

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

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

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

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

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

Global Acceptance of the Continuum of Risk in the Regulation of Novel Tobacco Products

As novel tobacco products, such as e-cigarettes and heat-not-burn devices, emerge in the global market, governments are tasked with developing the appropriate, science-based approach to regulation.

As novel tobacco products, such as e-cigarettes and heat-not-burn devices, emerge in the global market, governments are tasked with developing the appropriate, science-driven approach to regulation.

In 2017, then Commissioner of the FDA, Scott Gottlieb, announced a new regulatory approach for the regulation of tobacco products that embraced the placement of each product somewhere along a “continuum of risk”.

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

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

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

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

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Individual governments like the United States, European Union, and Brazil have initiated substantial steps in combating illicit trade.

In 2012 the WHO Framework Convention on Tobacco Control adopted an illicit trade protocol which has been so far ratified by only one third of its 182 parties.

In 2012, the WHO FCTC adopted an illicit trade protocol which has been so far ratified by only one third of its 182 parties.

We continue to support both governmental and industry efforts to eradicate illicit trade.

Ingredients Operations Trends

Following our capital allocation strategy, we have made disciplined investments within our leaf business to take advantage of growth opportunities in tobacco as well as in plant-based ingredients businesses and markets that could utilize our assets and capabilities.

Following our capital allocation strategy, we have made disciplined investments within our leaf business to take advantage of growth opportunities in tobacco as well as in our plant-based ingredients platform that utilize our assets and capabilities.

Through these actions, we believe that we will be able to deliver enhanced shareholder value despite operating in the mature leaf tobacco industry.

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

In fiscal year 2023, we made additional investments to enhance operational synergies among the businesses and grow the platform offerings, including by investing in key sales and product development personnel to promote and expand the full range of our capabilities across the plant-based ingredients platform.

As we move into fiscal year 2024, we are working on further enhancements and expansion of our production capabilities.

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

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We consider the agricultural value chain to consist of agricultural inputs, crop production, agricultural processing, manufacture and distribution, and retail sales.

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

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

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

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

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

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

It is also seeing strong growth in targeted end markets utilizing FruitSmart products, including ciders, purees and nutraceuticals.

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

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

We have been achieving operational synergies across the platform among our businesses and have also made considerable progress on our vision for the segment, providing a total solution-based approach for our customers that utilizes our broad spectrum of capabilities in fruits, vegetables and botanical extracts and flavorings.

Our consolidated sales efforts allow us to introduce additional products from across our platform to our existing customers, while also pursuing opportunities with new customers.

We also see potential in providing our customers with product offerings that combine ingredients from across our platform;

for example, combining fruit juice, dehydrated vegetables, and botanical extracts into a new beverage concept or into a smoothie.

One of the markets our plant-based ingredients platform serves is the growing global health and wellness market.

According to industry estimates this market is projected to grow at an annual rate of over 10% from 2022 to 2031.

In addition, the COVID-19 pandemic had a positive impact on the global health and wellness market as many consumers focused on mental and physical health.

This focus is driving strong consumer demand for healthy foods.

Many of our ingredients can be used as additive components of healthy food products.

We continue to believe that there will be strong demand for healthy foods going forward and that our ingredients portfolio can provide food manufacturers with innovative ingredients solutions to support these types of products.

Another of the growing end markets for ingredients products is the global pet food market.

This market could climb to over $135 billion globally by 2030, according to industry projections.

Our platform is well positioned to take advantage of increasing demand in the pet food end market as well as for other natural and clean-label products across the end markets it serves.

As we continue to grow our plant-based ingredients platform, we will explore and develop targeted opportunities to vertically integrate certain plant-based ingredients from our tobacco growing areas to capitalize on our strengths and capabilities there.

We have established grower networks and agricultural support infrastructure in origins where we source tobacco, and we also have strong, mature sustainability programs in those origins.

We believe that ingredients produced in a sustainable manner will grow in importance to our customers and, as a result, will favor suppliers who are able to deliver these products.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis