What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-02 compared with 2023-02-08 · 105 added, 151 removed, 94 unchanged (73% of the section changed)

7 unchanged sentences

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

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

impacts of the COVID-19 pandemic and new subvariants;

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

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

We are 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.

Our tobacco operations performed well and are off to a good start for our fiscal year 2024.

Segment operating income was higher for our Tobacco Operations segment in the quarter ended June 30, 2023, compared to the quarter ended June 30, 2022, even though we did not have the benefit of large shipments of carryover tobacco from certain origins that we had in first quarter of fiscal year 2023.

Demand for leaf tobacco from our customers remains strong, and our level of uncommitted tobacco inventory was 16% of tobacco inventory at June 30, 2023.

We are forecasting increased leaf tobacco production in fiscal year 2024,

compared to fiscal year 2023, and believe that even with that increased production, leaf tobacco will remain in an undersupply position.

We are pleased with the ongoing progress we are making to integrate our plant-based ingredients platform, and we continue to execute on our strategy to invest in and expand the platform’s capabilities for future growth in existing and new products.

For the quarter ended June 30, 2023, the platform faced soft demand, due to high customer inventory levels, and our earnings for the platform were below our expectations.

We believe that many of our customers are continuing to draw down on their raw materials inventories after building inventories to protect against prior supply chain uncertainties.

These inventory challenges have been more extensive and persistent in duration than we had forecasted.

In addition, the expansion of the platform’s capabilities has added to our costs, while a sharp drop in certain new crop raw material prices resulted in inventory write-downs in the quarter ended June 30, 2023.

We continue to believe the inventory challenges are temporary and expect excess inventory levels held by our customers to eventually work down.

One of the main objectives of our current investments in our plant-based ingredients platform is to expand our portfolio to include more value-added products for our customers.

We believe that we are well-positioned to capitalize on demand from our customers, and that with the investments we are making, we are a stronger partner for current and future customers due to the expanded range of capabilities and products that we can offer them.

We are encouraged by ongoing customer engagements regarding existing business and new business opportunities.

Our costs, notably interest costs and prices for green leaf tobacco, remained high in the quarter ended June 30, 2023, compared to the quarter ended June 30, 2022.

Interest costs were more than double on higher interest rates in the first quarter of fiscal year 2024, compared to the same quarter in fiscal year 2023.

Our debt balances, the sum of notes payable and overdrafts and long-term obligations, were relatively flat in the quarter ended June 30, 2023, compared to the same quarter in the prior fiscal year, as working capital requirements to fund larger tobacco crops and higher green tobacco prices were partially offset by increased customer deposits.

We continue to make transparency around our sustainability efforts and goals a priority.

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

We continue to work with third parties to verify our emissions and establish our pathway to net zero through the identification and prioritization of high-impact projects throughout our footprint.

FINANCIAL HIGHLIGHTS

Nine Months Ended December 31, Change

Three Months Ended June 30, Change

(in millions of dollars, except per share data) 2023 2022 $ %

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Selling, general and administrative expenses $ 75.5 $ 66.5 $ 9.0 14 %

Restructuring and impairment costs $ — $ 10.5 $ (10.5) (100) %

Operating income (as reported) $ 128.7 $ 103.2 $ 25.5 25 %

Adjusted operating income (non-GAAP)* $ 128.7 $ 116.5 $ 12.2 10 %

Diluted earnings per share (as reported) $ 2.82 $ 2.44 $ 0.38 16 %

Adjusted diluted earnings per share (non-GAAP)* $ 2.80 $ 2.76 $ 0.04 1 %

Operating income (loss) $ 11.0 $ 13.3 $ (2.2) (17) %

Diluted earnings (loss) per share (as reported) $ (0.08) $ 0.27 $ (0.35) (130) %

Adjusted diluted earnings (loss) per share (non-GAAP)* $ (0.08) $ 0.25 $ (0.33) (132) %

Segment Results

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Ingredients operations sales and other operating revenues $ 73.8 $ 81.8 $ (7.9) (10) %

Ingredient operations operating income $ 9.9 $ 10.6 $ (0.7) (7) %

Ingredient operations operating income (loss) $ (2.0) $ 4.6 $ (6.6) (144) %

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

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.

Net loss for the quarter ended June 30, 2023, was $(2.1) million, or $(0.08) per diluted share, compared with net income of $6.8 million, or $0.27 per diluted share, for the quarter ended June 30, 2022.

Excluding certain other non-recurring items, detailed in Other Items below, net income and diluted earnings per share decreased by $8.2 million and $0.33, respectively, for the quarter ended June 30, 2023, compared to the quarter ended June 30, 2022.

Operating income of $11.0 million for the quarter

ended June 30, 2023, decreased by $2.2 million, compared to operating income of $13.3 million for the quarter ended June 30, 2022.

Consolidated revenues increased by $87.9 million to $517.7 million for the three months ended June 30, 2023, compared to the same period in fiscal year 2023, on higher tobacco sales prices and a favorable product and geographic mix in our Tobacco Operations segment.

Tobacco Operations

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.

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

Operating income for the Tobacco Operations segment increased by $0.8 million to $8.9 million for the quarter ended June 30, 2023, compared with the quarter ended June 30, 2022.

Although tobacco sales volumes were down, Tobacco Operations segment operating income was up largely on a more favorable product and geographic mix in the quarter ended June 30, 2023, compared to the same quarter in the prior fiscal year, when a large amount of carryover tobacco crops were shipped.

Prices for green leaf tobacco in the quarter ended June 30, 2023, were also higher than in the quarter ended June 30, 2022.

Carryover crop shipments were significantly lower in Brazil in the quarter ended June 30, 2023, compared to the quarter ended June 30, 2022.

In Europe, sales volumes and revenues were up due to shipment timing and a favorable product mix in the quarter ended June 30, 2023, compared to the same quarter in the prior fiscal year.

Carryover crop shipments were up in North America due to shipment timing in the quarter ended June 30, 2023, compared to the quarter ended June 30, 2022.

Results for our oriental tobacco joint venture were down significantly in the quarter ended June 30, 2023, compared to the quarter ended June 30, 2022, on unfavorable foreign currency comparisons and higher interest expenses.

Selling, general, and administrative expenses for the Tobacco Operations segment were higher in the quarter ended June 30, 2023, compared to June 30, 2022, primarily on higher compensation costs and higher provisions on advances to suppliers following adverse weather conditions in Africa.

Revenues for the Tobacco Operations segment of $443.9 million for the quarter ended June 30, 2023, were up $95.8 million, compared to the same period in the prior fiscal year, on higher tobacco sales prices and a favorable product and geographic mix.

Ingredients Operations

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 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%.

Operating loss for the Ingredients Operations segment was $(2.0) million for the quarter ended June 30, 2023, compared to operating income of $4.6 million for the quarter ended June 30, 2022.

Sales for all of our businesses in this segment were down in the quarter ended June 30, 2023, compared to the quarter ended June 30, 2022, on lower demand due to our customers continuing to carry high inventory levels.

Prices for some key raw materials were down in the quarter ended June 30, 2023, compared to the quarter ended June 30, 2022.

Inventory write-downs for the Ingredients Operations segment were higher in the quarter ended June 30, 2023, compared to the same quarter in the prior fiscal year, on the changes in customer demand and new crop raw material prices.

Selling, general, and administrative expenses for this segment increased in the quarter ended June 30, 2023, compared to the same quarter in the prior fiscal year, largely on higher labor costs and investments in product development capabilities.

Revenues for the Ingredients Operations segment of $73.8 million for the quarter ended June 30, 2023, were down $7.9 million compared to the quarter ended June 30, 2022, largely on lower sales volumes.

Cost of goods sold in the quarter ended June 30, 2023, increased by 23% to $431.2 million, compared with the same period in the prior fiscal year, largely due to higher green tobacco costs.

Selling, general, and administrative costs for the quarter ended June 30, 2023, increased by $9.0 million to $75.5 million, compared to the same period in the prior fiscal year, primarily on weakening of the U.S.

dollar, increased compensation costs, and higher provisions on advances to suppliers.

Interest expense for the quarter ended June 30, 2023, increased by $8.8 million to $15.5 million on increased costs from higher interest rates.

For the three months ended June 30, 2023, our consolidated effective income tax rate on pre-tax loss was a benefit of 21.6%.

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

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

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

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

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

The following tables set forth certain non-recurring items included in reported results to reconcile adjusted operating income to consolidated operating income and adjusted net income to net income attributable to Universal Corporation:

Adjusted Operating Income Reconciliation

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)

— 597 — 2,310

Restructuring and impairment costs (3)

— 8,433 — 10,457

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

— — — (2,532)

Adjusted operating income $ 77,526 $ 74,860 $ 128,678 $ 116,483

Adjusted Net Income and Diluted Earnings Per Share

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

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)

— 482 — 2,195

Restructuring and impairment costs (3)

— 6,874 — 7,879

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

— — — (2,532)

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

The following table sets forth certain non-recurring items included in reported results to reconcile adjusted operating income to consolidated operating income and adjusted net income to net income attributable to Universal Corporation:

Adjusted Net Income (Loss) and Adjusted Diluted Earnings (Loss) Per Share Reconciliation

(in thousands) Three Months Ended June 30,

Net income (loss) available to Universal Corporation $ (2,064) $ 6,830

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

Adjusted net income available to Universal Corporation $ 41,660 $ 44,711 $ 69,661 $ 68,608

Diluted earnings per share $ 1.67 $ 1.40 $ 2.82 $ 2.44

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.

(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 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.

Total of Non-GAAP adjustments to income (loss) before income taxes $ — $ (1,816)

Non-GAAP adjustments to income taxes

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

Total of income tax impacts for Non-GAAP adjustments to income (loss) before income taxes and Non-GAAP adjustment to income taxes — 1,132

Net income (loss) attributable to Universal Corporation (Non-GAAP) $ (2,064) $ 6,146

Diluted earnings (loss) per share $ (0.08) $ 0.27

Diluted earnings (loss) per share $ (0.08) $ 0.25

Liquidity and Capital Resources

After significant seasonal working capital investment in our tobacco operations in the first half of the fiscal year, we generally see tobacco inventory levels and other working capital items decrease in the second half of our fiscal year as tobacco crops in Africa, South America, and North America are being shipped.

We saw the beginning of the seasonal contraction in our working capital requirements by the end of the third quarter of fiscal year 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 first fiscal quarter is usually a period of significant working capital investment in both Africa and South America as tobacco crops are delivered by farmers.

We funded our working capital needs in the quarter ended June 30, 2023, using a combination of cash on hand, short-term borrowings, customer advances, and operating cash flows.

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

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

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Operating Activities

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 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.

Net cash used by our operations was $103.9 million during the quarter ended June 30, 2023.

That amount was $121.9 million lower than during the same period in fiscal year 2023.

Our working capital needs to fund our operations in the quarter ended June 30, 2023, were lower, compared to the quarter ended June 30, 2022, primarily on higher customer advances and deposits partially offset by increased tobacco purchase volumes and higher green tobacco prices.

Customer advances and deposits were up $84.0 million in the first quarter of fiscal year 2024, compared to the same period of fiscal year 2023, due to a customer arrangement providing for a higher amount of advances on tobacco purchases in fiscal year 2024.

Tobacco inventory levels increased by $266.8 million from March 31, 2023 levels to $1.1 billion at June 30, 2023, on seasonal leaf purchases of larger tobacco crops.

Tobacco inventory levels were $20.4 million above June 30, 2022 levels.

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

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

At December 31, 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.

At June 30, 2023, our uncommitted tobacco inventories

were $175.2 million, or about 16% of total tobacco inventory, compared to $91.1 million, or about 11% of our March 31, 2023 tobacco inventory, and $164.3 million, or about 15% of our June 30, 2022 tobacco inventory.

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

Our balance sheet accounts reflected seasonal patterns in the nine months ended December 31, 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 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.

Our balance sheet accounts reflected seasonal patterns in the quarter ended June 30, 2023, on deliveries of tobacco crops by farmers in both South America and Africa.

Accounts receivable decreased by $26.5 million from March 31, 2023 levels, as we used collections on receivables to fund seasonal working capital needs.

Advances to suppliers were $111.2 million at June 30, 2023, a reduction of $59.6 million from March 31, 2023, as tobacco crops were delivered in payment on some of those balances, net of new advances on upcoming tobacco crops.

Accounts receivable—unconsolidated affiliates were up $61.1 million in the three months ended June 30, 2023, on the timing of tobacco crop purchases and shipments.

Notes payable and overdrafts were up $164.3 million from March 31, 2023 levels, on seasonal working capital needs.

Customer advances and deposits increased by $100.4 million in the three months ended June 30, 2023, due to a customer arrangement providing for a higher amount of advances on tobacco crop purchases in fiscal year 2024.

Accounts receivable were up $56.5 million for the quarter ended June 30, 2023, compared to the same quarter in the prior fiscal year, on larger tobacco crops and the timing of tobacco crop shipments.

Accounts receivable—unconsolidated affiliates were up $24.8 million in the three months ended June 30, 2023, on larger tobacco crop sizes.

Notes payable and overdrafts were down $94.8 million compared to June 30, 2022 levels, in part due to higher customer advances available to fund working capital needs.

Accounts payable were down $33.3 million for the quarter ended June 30, 2023 compared to the quarter ended June 30, 2022, primarily on the timing tobacco purchases in fiscal year 2023.

Investing Activities

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increasing our strong dividend;

exploring growth opportunities for our plant-based ingredients platform that utilize our assets and capabilities;

exploring growth opportunities for our plant-based ingredients platform;

and returning excess capital to our shareholders.

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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 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.

During the quarter ended June 30, 2023 and 2022, we invested about $18.0 million and $15.1 million, respectively, in our property, plant and equipment.

Depreciation expense was approximately $11.9 million and $10.9 million for the quarter ended June 30, 2023 and 2022, respectively.

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

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We currently expect to spend approximately $65 to $75 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.

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

Our Board of Directors approved our current share repurchase program in November 2022.

The program authorizes the purchase of up to $100 million of our common stock through November 15, 2024.

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

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

During the three months ended 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.

During the three months ended June 30, 2023, we did not purchase any shares of common stock.

As of June 30, 2023, 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 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.

Net debt as a percentage of net capitalization was approximately 42% at June 30, 2023, up slightly from the June 30, 2022 level of approximately 41%, primarily on higher working capital requirements, and up from the March 31, 2023 level of approximately 35%.

As of June 30, 2023, we had $80.5 million in cash and cash equivalents, our short-term debt totaled $359.8 million, and we were in compliance with all covenants of our debt agreements, which require us to maintain certain levels of tangible net worth and observe restrictions on debt levels.

As of June 30, 2023, we had $480 million available under the committed revolving credit facility that will mature in December 2027, and we had about $59 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.

Our seasonal working capital requirements for our tobacco business typically increase significantly between March and September and decline after mid-year.

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

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 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.

At June 30, 2023, the fair value of our outstanding interest rate swap agreements was an asset of about $5.8 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 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.

At June 30, 2023, the fair value of our open hedges was a net asset of about $0.6 million.

Critical Accounting Estimates

A summary of our critical accounting policies is included in Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the period ended March 31, 2023.

Our critical accounting policies have not changed from those reported in the 2023 Annual Report on Form 10-K.

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