WeUniversal Corporation is a global business-to-business agri-products supplier to consumer product manufacturers, operating in over 30 countries on five continents, that sources and processes leaf tobacco and plant-based ingredients. Tobacco has been our principal focus since our founding in 1918, and we are the leading global leaf tobacco supplier. Through our plant-based ingredients platform, we provide a variety of value-added manufacturing processes to produce high-quality, specialty vegetable and fruit-based ingredients as well as botanical extracts and flavorings to food and beverage end markets. We have been finding innovative solutions to serve our customers and meet their agri-product needs for more than 100 years. We derive most of our revenues from sales of processed tobacco to manufacturers of tobacco products throughout the world and from fees and commissions for specific services. We hold a strategic position in the world leaf tobacco markets where we work closely with both our customers and farmers to ensure that we deliver a compliant product that meets our customers' needs while promoting a strong supplier base. We adapt to meet changes in customer requirements as well as broader changes in the leaf tobacco markets, while continuing to provide the stability of supply and high level of service that distinguishes us in the marketplace. We believe that we have successfully met the needs of both our customers and suppliers while adapting to changes in leaf tobacco markets. Over the last three fiscal years,

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 opportunities existwe 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 expandreflect these changes.

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 helpemployee 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.

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 consumption declines. In fiscal year 2019, wecontinued or increased leaf purchasing, processing,governmental prohibitions against shipping tobacco and grower support services we provide in the Philippines through a new leaf supply arrangement with onetobacco 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 major customers, who had previously purchased and processed its own tobacco there. This arrangement not only increases our business footprint in that origin, but we believe strengthens and improves the efficiency of the supply chain there by providing procurement synergies and economies of scale.

Net income for the fiscal year ended March 31, 2019,2022, was $104.1$86.6 million, or $4.11$3.47 per diluted share, compared with $105.7$87.4 million, or $4.14$3.53 per diluted share, for the prior fiscal year. Those results includedyear ended March 31, 2021. Excluding restructuring and impairment costs and certain other non-recurring items, detailed in Other Items below, which decreasednet income and diluted earnings per share decreased by $0.34$10.8 million and increased diluted earnings per share by $0.18$0.46, respectively, for the fiscal years ended March 31, 2019 and March 31, 2018, respectively. Excluding those non-recurring items, net income and earnings per share increased by $11.7 million and $0.49, respectively, for fiscal year 2019 compared to fiscal year 2018. Operating income of $161.2 million for the fiscal year ended March 31, 2019, which included restructuring and impairment charges2022, compared to the year ended March 31, 2021. Operating income of $20.3$160.3 million detailed in Other Items below, decreasedfor the year ended March 31, 2022, increased by $9.7$12.5 million, compared to operating income of $170.8$147.8 million for the fiscal year ended March 31, 2018. Segment2021. Adjusted operating income, was $186.8detailed in Other Items below, of $173.6 million increased by $0.7 million for the fiscal year ended March 31, 2019, an increase2022, compared to adjusted operating income of $6.8$172.9 million for the year ended March 31, 2021.

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 $180.0$0.4 million for the fiscal year ended March 31, 2018.2021. Results reflected earnings improvements in the Other Regions and Other Tobacco Operations segments and flat results for the North America segment for fiscal year 2019. Consolidated revenues increased by $193.2 million to $2.2 billion forinclude our October 2020 acquisition of Silva and our October 2021 acquisition of Shank’s. For the fiscal year 2019, compared to the prior fiscal year, primarily due to higher sales and processing volumes.

Cost of goods sold increased by 10% to $1.8 billion forin the fiscal year ended March 31, 2019,2022, increased by 6% to $1.7 billion, compared with the prior fiscal year ended March 31, 2021, as a result of the acquisitions in our Ingredients Operations segment as well as variances in sales prices and consistent with similar percentage changesvolumes shipped in revenues.the Tobacco Operations segment. Selling, general, and administrative costs for fiscal year 2019,2022, increased by $24.0$20.9 million to $225.1$240.7 million, mainly driven by higher compensation and incentive accruals, higher customer claims and allowancecompared to fiscal year 2021, on additional costs negativefrom 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 exchange variances, and higher value-added tax charges, partlyIndonesia, partially offset by higher net recoveries on advances to suppliers, compared withthe effects of currency hedging programs. Interest expense for fiscal year 2018. Selling, general,2022, increased by $2.8 million to $27.7 million, compared to fiscal year 2021, largely on higher average debt balances and administrative costs were flat as a percentage of sales forinterest 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, 2019, compared to2022, the fiscal year ended March 31, 2018.

For fiscal year 2021, the 35% federal statutory rate at that time, due to a combination of lower netCompany’s consolidated effective tax rates onrate was 23.4%. For the fiscal year ended March 31, 2021, income from certaintax expense included benefits of $4.4 million for final tax regulations regarding the treatment of dividends paid by foreign subsidiaries and effects of changes in local currency exchange rates on deferred$2.9 million due to amending and finalizing prior year U.S. tax returns. Without these income tax balances. For more details, see Note 5 tobenefits, the consolidated financial statements in Item 8 of this Annual Report.

For a comparison of our performance and financial metrics for the fiscal years ended March 31, 2021 and March 31, 2020, see “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the fiscal year ended March 31, 2017, included restructuring and impairment costs of $4.4 million ($0.10 per diluted share).2021, filed with the SEC on May 28, 2021.

Our working capital requirements during the first three quarters of fiscal year 2019 were higher than those in fiscal year 2018 mainly due to the recovery of burley production volumes in Africa and higher dark tobacco wrapper inventories. However, in the quarter ended March 31, 2019, working capital requirements declined significantly as cash balances increased and inventory balances decreased due to strong shipments compared to the quarter ended March 31, 2018, when some shipments were delayed. We ended fiscal year 2019 with lower working capital usage for the year than in fiscal year 2018. In fiscal year 2019,2022, we also generated $164.5$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 conservative financial policies maintained our discipline on using our free cash flow, 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.purchases, and our primary sources of liquidity are net cash flows provided by operating activities and our committed revolving credit facility. Working capital needs for tobacco crop purchases are seasonal within each geographic region. The geographic dispersion and the timing of working capital needs permit us to predict our general level of cash requirements, although tobacco crop size, prices paid to farmers, shipment and delivery timing, and currency fluctuations affect requirements each year. Peak working capital requirements are generally reached during the first and second fiscal quarters. Each geographic areatobacco production region follows a cycle of buying, processing, and shipping tobacco, and in many regions we also provide agricultural materials to tobacco farmers during the growing season. The timing of the elements of each cycle is influenced by such factors as local weather conditions and individual customer shipping requirements, which may change the level or the duration of tobacco crop financing. In contrast to our tobacco operations, working capital requirements for our ingredients operations tend to be lower and less seasonal. Despite a predominance of short-term needs for working capital, we maintain a portion of our total debt as long-term to reduce liquidity risk. 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 $300$350 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. dollar, and the timing of shipments and customer payments. 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 $30$40 to $40$50 million during fiscal year 20202023 for capital expenditures to maintain our facilities and invest in opportunities to grow and improve our businesses. We also expect to provide about $2 million in funding to our pension plans. We have no long-term debt maturing until fiscal year 2024.

Our operations generated about $164.5$44.9 million in operating cash flows in fiscal year 2019.2022. That amount was about $83.3$175.5 million higherlower than the $81.2$220.4 million we generated in fiscal year 2018,2021, largely due to lowerhigher working capital requirements in fiscal year 2019.2022. During the fiscal year ended March 31, 2019,2022, we spent $38.8$53.2 million on capital projects and $102.5 million on the acquisition of a new business, and we returned $71.3$79.5 million to shareholders in the form of dividends and share repurchases. At March 31, 2019,2022, cash balances totaled $297.6$81.6 million.

Working capital at March 31, 2019,2022, was about $1.3$1.2 billion, flat withdown about $32.9 million from last fiscal year's level.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 $629.6$822.5 million at March 31, 2019,2022, were down $49.8up $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 lower North American burley tobacco purchases this fiscal yearour acquisition of Shank’s in October 2021 and delayed North American shipments in fiscal year 2018. We usually finance inventory with a mix of cash, notes payable, and customer deposits, depending on our borrowing capabilities, interest rates, and exchange rates, as well as those of our customers.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 increaseddecreased by approximately $20.9$9.1 million to $128.0$130.1 million, or about 20%16% of tobacco inventory, at March 31, 2019.2022, which was within our target range. Uncommitted inventories at March 31, 2018,2021, were $107.2$139.2 million, which represented 16%22% 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.

Our capital allocation strategy focuses on four strategic priorities:

Our mission is to remain the leading global leaf tobacco supplier. By continuingWe will continue to make disciplined investments within our leaf business and taking advantage of growth opportunities in tobacco as well as in adjacent industriesplant-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 for all shareholders 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. As we look ahead, we will continually evaluate opportunities to return capital to shareholders on an ongoing basis.shareholders. At the same time, we remain committed to maintaining our investment grade credit rating and extending our 49-year52-year history of dividend increases.

Our Board of Directors approved our current share repurchase program in November 2017.2020. The program expires in November 2019 and authorizes the purchase of up to $100 million of our common stock.stock through November 15, 2022. Under the current authorization, we may purchase shares from time to time on the open market or in privately negotiated transactions at prices not exceeding prevailing market rates. 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 2019,2022, we purchased 30,77758,264 shares of common stock at an aggregate cost of $1.4$3.1 million (average price per share of $46.87)$52.41). At March 31, 2019,2022, our available authorization under our current share repurchase program was approximately $90$97 million, and approximately 25.024.6 million common shares were outstanding.

Our capital expenditures are generally limited to those that add value, replace or maintain equipment, increase efficiency, or position us for future growth. In deciding where to invest capital resources, we look for opportunities where we believe we can earn an adequate return, leverage our assets and expertise, and enhancesupport our farmer base. During fiscal years 20192022 and 2018,2021, we invested $38.8$53.2 million and $34.0$66.2 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 $37.1$41.3 million and $34.8$38.3 million, respectively, in fiscal years 20192022 and 2018.2021. Generally, our capital spending on maintenance projects is at a level below depreciation expense in order to maintain strong cash flow. 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 $30$40 to $40$50 million in fiscal year 20202023 on capital projects for maintenance of our facilities and other investments to grow and improve our businesses. We expect that about 25% of those capital expenditures will be for non-maintenance investments in our businesses.

We consider the sum of notes payable and overdrafts, long-term debt (including any current portion), and customer advances and deposits, less cash, cash equivalents, and short-term investments on our balance sheet to be our net debt. We also consider our net debt plus shareholders' equity to be our net capitalization. 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 decreasedincreased by $40.8$202.3 million to $146.6$633.3 million during the fiscal year ended March 31, 2019.2022. The decreaseincrease primarily reflects higher cash balances.the Shank’s acquisition, tobacco shipment timing, and earlier purchasing of the 2022 Brazilian tobacco crop. Net debt as a percentage of net capitalization was approximately 10%32% at March 31, 2019, down2022, up from 12%25% at March 31, 2018.

As of March 31, 2019,2021, we had $430$330 million available under a committed revolving credit facility that will mature in December 2023, and we, together with our consolidated affiliates, had approximately $253$283 million in uncommitted lines of credit, of which approximately $198$200 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, 2019,2022, 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 20172020 that provides for future issuance of additional debt or equity securities. We have no long-term debt maturing inuntil fiscal year 2020.2024.

We also enter forward contractsderivative instruments from time to time to hedge certain foreign currency exposures, primarily related to forecast purchases of tobacco, and related processing costs, and crop input sales in Brazil, as well as our net monetary asset exposure in local currency there. We generally account for our hedges of forecast tobacco purchases as cash flow hedges. At March 31, 2019,2022, the fair value of those open contracts was an immateriala net asset.asset of approximately $7.8 million. We also had other forward contracts outstanding that were not designated as hedges, and the fair value of those contracts was an immateriala net liabilityasset of approximately $13.0 million at March 31, 2019.2022. For additional information, see Note 911 to the consolidated financial statements in Item 8.

FundsThe funds supporting our ERISA-regulated U.S. defined benefit pension plan increased by $16 million during fiscal year 2019 to $231 million, as contributions and asset returns exceeded benefit payments.2022 were approximately $250 million. The accumulated benefit obligation (“ABO”) and the projected benefit obligation (“PBO”)PBO were both approximately $233$231 million and $237 million, respectively as of March 31, 2019.2022. The ABO and PBO are calculated on the basis of certain assumptions that are outlined in Note 1113 to the consolidated financial statements in Item 8. We expect to make no contributions of about $2 million to our pension plans 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.

We do not have any off balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

In preparing the financial statements in accordance with GAAP, we are required to make estimates and assumptions that have an impact on the assets, liabilities, revenue, and expense amounts reported. These estimates can also affect our supplemental information disclosures, including information about contingencies, risks, and financial condition. We believe, given current facts and circumstances, that our estimates and assumptions are reasonable, adhere to GAAP, and are consistently applied. However, changes in the assumptions used could result in a material adjustment to the financial statements. Our critical accounting estimates and assumptions are in the following areas:

We review the carrying value of goodwill for potential impairment on an annual basis and at any time that events or business conditions indicate that it may be impaired. As permitted under Accounting Standards Codification Topic 350 (“ASC 350”), at March 31, 20192022 and 2018,2021, we elected to base our initial assessment of potential impairment on qualitative factors. Those factors did not indicate any impairment of our recorded goodwill at those dates. However, duringin fiscal year 2019, based on business changes that have affected our operations in Tanzania, we recorded a charge of approximately $0.9 million for the full impairment of goodwill attributable to that reporting unit.2022. In fiscal years prior to basing our initial assessment on qualitative factors, we followed the quantitative approach in ASC 350 in assessing the fair value of our goodwill, which involved the use of discounted cash flow models (Level 3 of the fair value hierarchy under GAAP). Under our current qualitative assessment, we would also use those discounted cash flow models to measure any expected impairment indicated by the assessment. The calculations in these models are not based on observable market data from independent sources and therefore require significant management judgment with respect to operating earnings growth rates and the selection of an appropriate discount rate. Significant adverse changes in our operations or our estimates of future cash flows for a reporting unit with recorded goodwill, such as those caused by unforeseen events or changes in market conditions, could result in an impairment charge. Over 90%A majority of our consolidated goodwill balance relates to our reporting unit in Brazil.Brazil and the acquisitions of FruitSmart (January 1, 2020), Silva (October 1, 2020), and Shank's (October 4, 2021).

Our consolidated effective income tax rate is based on our expected taxable income, tax laws and statutory tax rates, prevailing foreign currency exchange rates, and tax planning opportunities in the various jurisdictions in which we operate. Significant judgment is required in determining the effective tax rate and evaluating our tax position. We are subject to the tax laws of many jurisdictions, and could be subject to a tax audit in each of these jurisdictions, which could result in adjustments to tax expense in future periods. In the event that there is a significant, unusual, or one-time item recognized in our results, the tax attributed to that discrete item would be recorded at the same time as the item.

With the enactment of the Tax Cuts and Jobs Act in December 2017, and the corresponding move of the United States system of corporate taxation for multinational companies from the taxation of worldwide income to a system that is more territorial-based, ourOur consolidated income tax expense and effective tax rate is moreare heavily dependent on the tax rates of the individual countries in which we operate, the mix of our pretax earnings from those countries, and the prevailing rates of exchange of their local currencies with the U.S. dollar. The mix of pretax earnings and local currency exchange rates in particular can change significantly between annual and quarterly reporting periods based on crop sizes, market conditions, and economic factors. We expect these changes will make ourOur effective tax rate morecan be volatile from year-to-year and from quarter-to-quarter than it was under the prior tax law.as result of these factors.

We have no undistributed earnings of consolidated foreign subsidiaries that are classified as permanently or indefinitely reinvested. We assume that all undistributed earnings of our foreign subsidiaries will be repatriated back to their parent entities in the U.S. where the funds are best placed to meet our cash flow requirements. In addition, we strive to mitigate economic, political, and currency risk by following a disciplined annual approach to the distribution of excess capital back to the U.S. Based on these assumptions, in our income tax expense for each reporting period we fully provide for all applicable foreign country withholding taxes that are expected to be due on these distributions.

Our accounting for uncertain tax positions requires that we review all significant tax positions taken, or expected to be taken, in income tax returns for all jurisdictions in which we operate. In this review, we must assume that all tax positions will ultimately be audited, and either accepted or rejected based on the applicable tax regulations by the tax authorities for those jurisdictions. We must recognize in our financial statements only the tax benefits associated with tax positions that are “more likely than not” to be accepted upon audit, at the greatest amount that is considered “more likely than not” to be accepted. These determinations require significant management judgment, and changes in any given quarterly or annual reporting period could affect our consolidated income tax rate.

Tax regulations require items to be included in taxable income in the tax return at different times, and in some cases in different amounts, than the items are reflected in the financial statements. As a result, our effective tax rate reflected in the financial statements is different than that reported in our tax returns. Some of these differences are permanent, such as expenses that are not tax deductible, while others are related to timing issues, such as differences in depreciation methods. Timing differences create deferred tax assets and liabilities. Deferred tax liabilities generally represent tax expense recognized in our financial statements for which payment has been deferred or income taxes related to expenses that have not yet been recognized in the financial statements, but have been deducted in our tax return. Deferred tax assets generally represent items that can be used as a tax deduction or credit in future tax returns for which we have already recorded the tax benefit in our financial statements. We record valuation allowances for deferred tax assets when the amount of estimated future taxable income is not likely to support the use of the deduction or credit. Determining the amount of such valuation allowances requires significant management judgment, including estimates of future taxable income in multiple tax jurisdictions where we operate. Based on our periodic earnings forecasts, we project the upcoming year’s taxable income to help us evaluate our ability to realize deferred tax assets.

For additional disclosures on income taxes, see Notes 1 and 56 to the consolidated financial statements in Item 8.

The measurement of our pension and other postretirement benefit obligations and costs at the end of each fiscal year requires that we make various assumptions that are used by our outside actuaries in estimating the present value of projected future benefit payments to all plan participants. Those assumptions take into consideration the likelihood of potential future events such as salary increases and demographic experience. The assumptions we use may have an effect on the amount and timing of future contributions to our plans. The plan trustee conducts an independent valuation of the fair value of pension plan assets. The significant assumptions used in the calculation of our pension and other postretirement benefit obligations are:

A 1% increase or decrease in the salary scale assumption would not have a material effect on the projected benefit obligation or on annual expense for the Company's pension benefits. See Note 1113 to the consolidated financial statements in Item 8 for additional information on pension and other postretirement benefit plans.

Other management estimates and assumptions are routinely required in preparing our financial statements, including the determination of valuation allowances on accounts receivable and the fair value of long-lived assets. Changes in market and economic conditions, local tax laws, and other related factors are considered each reporting period, and adjustments to the accounts are made based on management’s best judgment.

Our financial performance depends on our ability to obtain an appropriate price for our products and services, to secure the tobaccoproduct volumes and quality desired by our customers, and to maintain efficient, competitive operations. WeAs 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.

Leaf tobacco is sourced directly by product manufacturers, by global leaf suppliers such as ourselves, and by other smaller, mostly regional or local, leaf suppliers. We estimate that, of the flue-cured and burley tobacco grown outside of China in countries that are key export markets for tobacco, a little overon average about a third is purchased directly by major manufacturers. Global leaf suppliers also usually purchase a little overabout a third of the tobacco, and the remainder is sourced by the smaller regional or local suppliers. Some ofIn 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 2%0.6% over the last fivethree years, our 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 steady performance despite declines in demand for leaf tobacco from product manufacturers. We have done this by continuing to increase our delivery of services, driving supply chain efficiencies, enhancing the range of services we provide to certain customers, including direct buying, agronomic support, and specialized processing services, and improving our market share. We intend to continue to work to expand our business while at the same time maintaining an appropriate return for the services we provide and believe that there are several longer term trends in the industry, such as a focus on sustainability, that could provide additional opportunities for us both to offer additional services to our customers and to increase our market share.

We continually explore options to capitalize on the strengths of our core competencies and seek growth opportunities related to leaf tobacco and our operations around the world. For example, we have expanded our leaf purchasing, processing, value-added services, and grower support services in the Philippines, as part of a new leaf supply arrangement with one of our major customers who had previously purchased and processed its own tobacco there, which increased the efficiency of the supply chain by providing procurement synergies and economies of scale.multiple origins in response to customer demand. We have increased our product offerings to meet demand for natural wrappers in the United States and Europe and shisha (water pipe) style leaf tobacco for customers in the Middle East and North Africa (MENA) region and natural wrappers in the United States and Europe. We also continue to explore and have developed a pipeline for growth opportunities outside of leaf tobacco in adjacent industries and markets that we believe will utilize our assets and capabilities and deliver value to our shareholders. We consider adjacencies to be industries and markets where we can leverage our strengths such as country knowledge, agricultural expertise, and complex grower management and logistic network management. A potential investment might involve high-value, non-commodity, or crop-based agricultural products requiring value-added handling or processing. By making disciplined investments within our leaf tobacco business as well as in adjacent industries and markets that utilize our assets and capabilities, we are confident that we can deliver enhanced value for all shareholders through earnings growth and the generation of free cash flow.region. As we look to adjacent industriesat ingredients investments and explore new growth opportunities within tobacco, Universal is dedicated to remaining the leading global leaf tobacco supplier and building on our strong history.

Manufacturers naturally seek to mitigate raw materials cost increases, and they are placing increased emphasis on cost containment as they address declining demand. While this is not a new trend, it continues to offer opportunities to us as we bring supply chain efficiencies to the leaf markets. We believe that global leaf suppliers add efficiencies to the markets through economies of scale, as well as through the vital role played in finding buyers for all styles and qualities of leaf tobacco, which achieves overall cost reductions. To understand our business, it is important to note that tobacco is not a commodity product. Flavor and smoking characteristics as well as chemistries of tobacco vary based on the type of tobacco, the region where the tobacco is grown, and the position of the leaf on the stalk of the plant. Many different styles and grades of tobacco may be produced in a single tobacco crop. A particular manufacturer may only want and have use for certain leaves of a plant. The leaf tobacco supplier plays a vital role in the industry by finding buyers for all of the leaf grades and styles of tobacco produced in a farmer’s crop. This role helps to improve leaf utilization.

In addition to bringing supply chain efficiencies to the leaf tobacco markets, we bring operational efficiencies to the industry, which in turn help reduce costs. 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

We have also seen some reductions in sourcing from lower-volume tobacco growing origins by both global leaf suppliers and major manufacturers. Flue-cured tobacco is produced in overabout 70 countries around the world, and burley tobacco is grown in overabout 45 countries. However, over 80% of both the flue-cured tobacco grown outside of China and the worldwide burley tobacco production is sourced from the top ten growing areas for each type of tobacco. We believe that these moves to reduce sourcing areas and concentrate on major tobacco export markets are another way for the industry to increase efficiency and to reduce costs. In recent years weWe have contributed to cost reduction and elimination of excess capacity in the supply chain through the closure or realignment of programs in Argentina, Canada, Germany, Italy, Hungary, Malawi, Nicaragua, Switzerland, Tanzania, and Zambia. We maintain a strong presence in all of the major tobacco sourcing areas and believe that any growth in these areas would favor global leaf suppliers such as ourselves. In the future, we expect that increased regulations requiring stringent monitoring and testing of leaf chemistry and compliant sourcing documentation will place greater emphasis on major sourcing areas.

Most of the major tobacco product manufacturers have been developing next generation and modified risk products. These include electronicENDS, oral tobacco and nicotine delivery systems (“ENDS”), liquid vaporizers,products, and heated tobacco products. ENDS and liquid vaporizers use liquid nicotine, which is predominately derived from leaf tobacco, and heated tobacco products use leaf tobacco. Oral tobacco and nicotine products may use liquid nicotine or leaf tobacco. At this time, it is unclear how these new products will affect demand for leaf tobacco. However, as our customers have been developing these products, we have been working with them to make sure we are able to meet their needs for both their traditional and new products. This is consistent with our commitment to efficiently and effectively adapt our business model to meet our customers’ evolving needs. 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 continue to monitor industry developments regarding next generation products, including consumer acceptance and regulation, and will adapt accordingly.

We also forecast that oriental and dark air-cured tobacco production will decrease by about 12%21% and increase by about 4%, respectively, in fiscal year 2023. We believe both oriental tobaccos and dark air-cured production will increase by about 2%tobaccos are in fiscal year 2020.undersupply positions. Over the long term, we believe that global tobacco production will continue to decline slightlymove in line with slightly declining total demand. South America, Asia, Africa, and North America will remain key sourcing regions for flue-cured and burley tobaccos.

China is a significant cigarette market. However, most of the cigarettes consumed in China and the leaf tobacco used in those cigarettes are produced domestically. Therefore, we normally view the Chinese market independently when evaluating worldwide leaf tobacco supply and demand. InDomestic leaf tobacco inventories have built up in China over the past fewlast several years as China’s domestic leaf production has exceeded their domestic needs for the local cigarette market, and there has been a build-up of domestic leaf inventory there.market. China is continuing to

Industry data shows that over the past fivethree years, total world consumption of cigarettes outside of China fell at a compound annual rate of about 2%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.

Our sales consist primarily of flue-cured, burley, and dark air-cured tobaccos. Flue-cured and burley tobaccos. Those types of tobacco,tobaccos, along with oriental tobaccos, are used in American-blend cigarettes which are primarily smoked in Western Europe and the United States. 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 has declined at a compound annual rate of about 2%was flat for the fivethree years ended in 2018.2021. 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. However, demand is affected by many factors, including regulation, product taxation, illicit trade, alternative tobacco products, and Chinese imports. To the extent that domestic leaf production and inventory durations in China do not meet requirements for Chinese cigarette blends, that tobacco could be sourced from other origins where we have major market positions. On a year-to-year basis, we are also susceptible to fluctuations in leaf supply due to crop sizes and leaf demand as manufacturers adjust inventories or respond to changes in cigarette markets. We currently expectbelieve that the supply of flue-cured tobaccos and burley tobaccos slightly exceedare in an undersupply relative to anticipated demand. However, inventories held by our customers may affect their near-term demand for leaf tobacco. We also sell oriental tobacco,tobaccos, which isare used in American-blend cigarettes, and dark tobacco,tobaccos, which isare used in cigars and other smokeless products. In recent years, we have seen increased demand for natural wrapper tobacco particularly for the European and U.S. machine-made cigar markets. While we expect demand for oriental tobacco and dark tobaccotobaccos used in cigar filler to be generally in line with supply, we are seeingcontinuing to see strong demand for wrapper tobacco.

Factors that affect green tobacco usedprices include global supply and demand, market conditions, production costs, foreign exchange rates, and competition from other crops. We work with farmers to maintain tobacco production and to secure product at price levels that are attractive to both the farmers and our customers. Our objective is to secure compliant tobacco that is produced in a cost-effective manner under a sustainable business model with the desired quality for mass-market cigars.our customers. In some areas, tobacco competes with agricultural commodity products for farmer production. In the past, leaf shortages in specific markets or on a worldwide basis have also led to green tobacco price increases.

Diminishing social acceptance of smokingtobacco use and increasedincreasing pressure from anti-smoking groups have had an ongoing adverse effectcultivated a political environment that accepts greater regulations on the percentage of the population using tobacco products, particularly in the United States and Western Europe. Many governments have additionally taken or proposed steps to restrict or prohibit tobacco product advertising and promotion, to increase taxesthe European Union. While the impact of this cultural trend on such products, to prohibit smoking in public areas, and to discourage tobacco product consumption. A numberour business is uncertain, the global acceptance of such measures are included in the Framework Convention on Tobacco Control (“FCTC”), which was negotiated under the auspices of the WHO and offers guidelines for discouraging or controlling tobacco use. The 180 countries that are signatories to the FCTC may choose how to fulfill their obligations in implementing the articles in a manner that is most suitable with their approach to tobacco control. For example, in recent years China imposed a ban on smoking in public places, while in the United Kingdom and Australia, laws have been passed mandating plain packaging, the removal of branding on cigarette packages. We cannot predict the extent to which government efforts to reduce tobacco consumption might affect the business of our primary customers. However, a significant decrease in worldwide tobacco consumption, as well as shifts to modified risk tobacco products brought about by existing or future governmental laws andstringent regulations could reduce demand for leaf tobacco and servicesproducts and have a material adverse effect on our business.results of operation.

In addition, certain recommendationsWhile we cannot predict the extent or speed at which the efforts of the FCTC will reduce tobacco consumption, a proliferation of national laws and regulations spurred by the WHO, throughrecommendations of the FCTC may cause shifts in customer usage of certain typeswould likely reduce demand for both tobacco products and styles of tobacco. As seen in the leaf.

In 2009, the U.S. Congress passed the Family Smoking Prevention and Tobacco Control Act (“the(the "Tobacco Act”). This legislation authorizes the FDAU.S. Food and Drug Administration (“FDA”) to regulate the manufacturing and marketing of all tobacco products. The FDA has banned flavoredTobacco Act additionally prohibited characterizing flavors in cigarettes, restricted youth access to tobacco products, banned advertising claims regarding certain tobacco products, established new smokeless tobacco warnings, and issued new cigarette health warnings. In addition, the FDA established the Center for Tobacco Products (“CTP”). Products.

Over the past decade, the CTPFDA has focused on establishing the scientific foundation and regulatory framework for regulating tobacco products in the United States. On May 10, 2016, the FDA released “deeming” regulations thatto extend FDA oversight toover all tobacco products, including electronic nicotine delivery systems, cigars, hookah tobacco, pipe tobacco, dissolvables, and “novel and future products.” Additionally, Congress extended FDA’s authority to include regulation of tobacco products using synthetically manufactured nicotine in addition to naturally derived nicotine in March 2022. The regulations require that tobacco product manufacturers to register tobacco products that existedwere on the market on February 15, 2007, and to seek FDA authorization to sell any products modified or introduced after such date. All such submissions require manufacturers to list ingredients in their products. On July 28,In April 2022, FDA released two proposed rules to advance product standards intended to ban menthol in cigarettes and characterizing flavors in cigars. The flavored tobacco product category accounts for a significant percentage of the U.S. market, and these product standards would likely impact future leaf demand if adopted. 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.

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. In 2017, then Commissioner of the FDA, Commissioner Scott Gottlieb, announced a new regulatory approach for the regulation of combustible and non-combustibletobacco products focusingthat embraced the placement of each product somewhere along a “continuum of risk”. This comprehensive plan on nicotine reduction anduse sought to facilitate an adult tobacco consumer’s switch from combustible cigarettes to less risky products found lower on the continuum of risk. The agency issued an Advanced Notice of Proposed Rule Making (“ANPRM”) with the intention of developing a nicotine product standard for cigarettes that reduces the level of nicotine to below-addictive levels. Additional ANPRMs were issued: 1) to explore the science behind exempting premium cigars from premarket authorization requirements and 2) to address menthol in cigarettes, flavors in vapor and other ENDS products, and the future ENDS and vapor product standards. Furthermore, ascontinuum. As part of the comprehensive plan,this regulatory scheme, the FDA approved the first “heat-not-burn” and “very-low nicotine” premarket tobacco applicationapplications to permit the product’s sale of these products within the United States. Furthermore, FDA approved their first modified risk tobacco products applications to permit certain products in the United States.

Regardless of the type, it is generally understood that most novel products on the market contain less leaf tobacco than combustible cigarettes. Therefore, the market-driven rise of novel products alongside a regulatory approachscheme designed to facilitate an adult tobacco consumer’s switch from combustible cigarettes could affect global leaf demand. It is presently difficult to predict whether this will remain consistent.

A number of governments, particularly federal and local governments in the United States and the European Union, impose excise or similar taxes on tobacco products. There has been, and will likely continue to be, newFurther legislation proposing new or increased taxes on tobacco products.products is likely to continue. In some cases, proposed legislation seeks to significantly increase existing taxes on tobacco products, or impose new taxes on products that to date have not been subject to tax.tax (e.g. ENDS products and liquid nicotine). Increases in product taxation may reduce the affordability of, and demand for, cigarettes,tobacco products, which will affect requirements for leaf tobacco by tobacco product manufacturers.

We generally use both fixed and floating interest rate debt to finance our operations. Changes in market interest rates expose us to changes in cash flows for floating rate instruments and to changes in fair value for fixed-rate instruments. We normally maintain a proportion of our debt in both variable and fixed interest rates to manage this exposure, and from time to time we may enter hedge agreements to swap the interest rates. In addition, our customers may pay market rates of interest for inventory purchased on order, which could mitigate a portion of the floating interest rate exposure. We also periodically have large cash balances and may receive deposits from customers, both of which we use to fund seasonal purchases of tobacco, reducing our financing needs. Excluding the portion of our bank term loans whichthat have been converted to fixed-rate borrowings with interest rate swaps, debt carried at variable interest rates was approximately $54$333 million at March 31, 2019.2022. Although a hypothetical 1% change in short-term interest rates would result in a change in annual interest expense of approximately $0.5$3.3 million, that amount would be at least partially mitigated by changes in charges to customers.

In certain tobacco markets that are primarily domestic, we use the local currency as the functional currency. Examples of these markets are Poland and the Philippines. In other markets, such as Western Europe, where export sales are primarily in local currencies, we also use the local currency as the functional currency. In each case, reported earnings are affected by the translation of the local currency into the U.S. dollar.

Hedging interest rate exposure using swaps and hedging foreign currency exchange rate exposure using forward contracts are specifically contemplated to manage risk in keeping with management's policies. We may use derivative instruments, such as swaps, forwards, options, or futures, which are based directly or indirectly upon interest rates and currencies to manage and reduce the risks inherent in interest rate and currency fluctuations. When we use foreign currency derivatives to mitigate our exposure to exchange rate fluctuations, we may choose not to designate them as hedges for accounting purposes, which may result in the effects of the derivatives being recognized in our earnings in periods different from the items that created the exposure.

We do not utilize derivatives for speculative purposes, and we do not enter into market risk-sensitive instruments for trading purposes. Derivatives are transaction-specific so that a specific debt instrument, forecast purchase, contract, or invoice determines the amount, maturity, and other specifics of the hedge. We routinely review counterparty risk as part of our derivative program.