Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of financial condition and results of operations is provided to enhance the understanding of, and should be read in conjunction with, Part I, Item 1, “Business” and Item 8, “Financial Statements and Supplementary Data.” For information on risks and uncertainties related to our business that may make past performance not indicative of future results, or cause actual results to differ materially from any forward-looking statements, see “General,” and Part I, Item 1A, “Risk Factors.”
OVERVIEW
Universal 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.
Recognizing that leaf tobacco is a mature industry, we have also been positioning our company for the future by investing in and strengthening our plant-based ingredients platform, while maintaining our position as the leading global leaf tobacco supplier. In fiscal year 2022, we continued to make progress towards building and enhancing our plant-based ingredients platform. On October 4, 2021, we acquired Shank’s, a specialty ingredient botanical extracts and flavorings company with bottling and packaging capabilities. We have been integrating and exploring opportunities for synergies between our acquired businesses, FruitSmart acquired on January 1, 2020, Silva acquired on October 1, 2020, and Shank’s.
Given our significant and strategic investments in our plant-based ingredients platform, we evaluated our operating segments for financial reporting purposes during the quarter ended December 31, 2020. Based on our evaluation, we determined that we conduct our operations across two primary reportable operating segments, Tobacco Operations and Ingredients Operations. The revised segments reflect how we manage the Company, allocate resources, and assess business performance. Prior period segment information has been recast retrospectively to reflect these changes.
COVID-19 Pandemic Impact
On March 11, 2020, the WHO declared COVID-19 a pandemic. Foreign governmental organizations and governmental organizations in the United States have taken various actions to combat the spread of COVID-19 and its subsequent variants, including imposing stay-at-home orders, closing “non-essential” businesses and their operations, and restricting international travel. We continue to closely monitor developments related to the COVID-19 pandemic and have taken and continue to take steps intended to mitigate the potential risks and impacts to us. It is paramount that our employees who operate our businesses are safe and informed. We have assessed and regularly update our existing business continuity plans for our business in the context of this pandemic. For example, we have taken precautions during the pandemic with regard to employee and facility hygiene, imposed travel limitations on our employees, implemented work-from-home procedures, and we continue to assess and reevaluate protocols designed to protect our employees, customers and the public.
We continue to work with our suppliers to mitigate the impacts to our supply chain due to the pandemic. To date, we have not experienced a material impact to our supply chain, although the COVID-19 pandemic resulted in delays in certain operations during fiscal year 2021. Since March 2020, we have at times also experienced increased volatility in foreign currency exchange rates, which we believe is in part related to the continued uncertainties from COVID-19, as well as actions taken by governments and central banks in response to COVID-19. We are currently seeing and monitoring some logistical constraints around worldwide vessel and container availability and increased costs stemming from the COVID-19 pandemic.
We believe we currently have sufficient liquidity to meet our current obligations and our business operations remain fundamentally unchanged other than shipping delays, which could continue to impact quarterly comparisons. This is, however, a rapidly evolving situation, and we cannot predict the extent, resurgence, or duration of the COVID-19 pandemic, the effects of it on the global, national or local economy, including the impacts on our ability to access capital, or its effects on our business, financial position, results of operations, and cash flows. We continue to monitor developments affecting our employees, customers and operations. We will take additional steps and reevaluate current protocols to address the spread of COVID-19 and its impacts, as necessary, and remain thankful for the hard work of our employees and the continued support of our customers, growers, and other partners during these challenging times.
The Conflict in Ukraine
We are closely monitoring the tragic situation in Ukraine. Since Russia initiated its current military operations in Ukraine in 2022, business globally has been directly or indirectly impacted. The region is an important supplier of fertilizer, oil, gas, and agricultural products for export to countries around the world, and disruptions in those exports have created or contributed to various economic and commercial challenges including increased energy costs, increased fertilizer costs, and other inflationary impacts. In addition, business in Ukraine, Russia and the surrounding region has been impacted by the temporary suspension of business operations by companies due to safety and security concerns, the divestiture of assets and businesses in the region by their international owners, and government imposition of sanctions targeting Russia and others, including “luxury goods” sanctions that prohibit the supply of tobacco and tobacco products to Russia.
We do not have manufacturing facilities or material subsidiaries in Ukraine or Russia. We do, however, have a number of customers that have historically conducted business there, and some of those customers have previously disclosed the temporary suspension of operations in Ukraine or the divestiture of assets in Russia. We have worked closely with those customers to monitor and understand the impacts the conflict in Ukraine has had on their operations. In some cases we have worked with customers to suspend tobacco orders until such time that customers believe it is safe to reopen their facilities in Ukraine, and in other cases we have coordinated with customers to cancel orders for tobacco destined to Russia and ship some or all of that tobacco to other countries in which those customers have operations that need those quantities and qualities of tobacco.
At this time, we have not experienced any material direct impact on our business from the ongoing Ukraine conflict. We are unable, however, to estimate the duration or extent of any potential impact on our business from the continuation or potential escalation of the conflict. Such future impacts could be direct, such as the impact of continued or increased governmental prohibitions against shipping tobacco and tobacco products to Russia, or they could be indirect, such as contributing to or increasing costs and other inflationary pressures impacting our global operations and those of our supply chain around the world. We will continue to monitor and evaluate this complex and evolving situation.
RESULTS OF OPERATIONS
Amounts described as net income (loss) and earnings (loss) per diluted share in the following discussion are attributable to Universal Corporation and exclude earnings related to non-controlling interests in subsidiaries. Adjusted operating income (loss), adjusted net income (loss) attributable to Universal Corporation, adjusted diluted earnings (loss) per share, and the total for segment operating income (loss) referred to in this discussion are non-GAAP financial measures. These measures are not financial measures calculated in accordance with GAAP and should not be considered as substitutes for operating income (loss), net income (loss) attributable to Universal Corporation, diluted earnings (loss) per share, cash from operating activities or any other operating or financial performance measure calculated in accordance with GAAP, and may not be comparable to similarly-titled measures reported by other companies. A reconciliation of adjusted operating income (loss) to consolidated operating (income), adjusted net income (loss) attributable to Universal Corporation to consolidated net income (loss) attributable to Universal Corporation and adjusted diluted earnings (loss) per share to diluted earnings (loss) per share are provided in Other Items below. In addition, we have provided a reconciliation of the total for segment operating income (loss) to consolidated operating income (loss) in Note 17. "Operating Segments" to the consolidated financial statements in Item 8. Management evaluates the consolidated Company and segment performance excluding certain significant charges or credits. 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.
Fiscal Year Ended March 31, 2022, Compared to the Fiscal Year Ended March 31, 2021
Executive Summary
Our fiscal year 2022 results were generally comparable to those in fiscal year 2021. During fiscal year 2022, we continued to face a very challenging logistical environment in many of our key tobacco regions. Strong performance from our Ingredients Operations segment offset some challenges that reduced results in our Tobacco Operations segment.
We believe our plant–based ingredients platform is coming together nicely and is exceeding our expectations. With the acquisition of Shank’s, we are now positioned to offer our customers a broad range of products, from fruit and vegetable juices, concentrates, and dehydrated ingredients to botanical extracts and flavorings. In fiscal year 2022, the Ingredients Operations segment saw increased demand for organic-based products and continued strong volumes for human and pet food categories as well as for vanilla extracts.
Ongoing shipping constraints reduced our Tobacco Operations segment results for the year ended March 31, 2022, as a result of continued limitations in worldwide shipping availability stemming from the COVID-19 pandemic. Due to the logistical constraints in fiscal year 2021, we had carryover tobacco volumes which shipped in fiscal year 2022. Similar logistical constraints impacted fiscal year 2022 which led to an even larger amount of tobacco volumes, reflecting a difference of about $70 million in revenue, which did not ship in fiscal year 2022, compared to the carryover volumes from fiscal year 2021. Tobacco shipment volumes in fiscal year 2022 were also reduced due to smaller African burley crops.
We experienced volatile tobacco and currency markets in Brazil during the fourth quarter of fiscal year 2022. Appreciation of the Brazilian currency coupled with strong demand for leaf tobacco led to unprecedented increases in green prices for leaf tobacco and earlier purchasing of the 2022 Brazilian crop, resulting in disruptions to market dynamics. To fulfill our customers’ orders, leaf tobacco purchases from our contracted farmers this season have been at the prevailing inflated market price for all leaf tobacco regardless of the quality of leaf tobacco. This resulted in larger inventory write downs in fiscal year 2022, compared to fiscal year 2021.
As we move into fiscal year 2023, we are seeing strong demand for our plant-based ingredients and tobacco products. We believe leaf tobacco supply for flue-cured, burley, dark air-cured, and oriental tobaccos to be in an undersupply position. At the same time, we continue to see opportunities to increase market share and expand the supply chain services we provide our customers. We expect continued logistical constraints as well as higher costs, particularly freight, raw materials, labor, fertilizer, and energy, in both our tobacco and ingredients businesses. We are actively working to mitigate these challenges, and we are confident that we can deliver another good year.
We remain focused on returning value to our shareholders and promoting sustainability in our operations. We are extremely proud to deliver value to our shareholders through dividend increases such as our 52nd annual dividend increase announced on May 25, 2022. Increasing our strong dividend remains one of the strategic priorities of our capital allocation strategy. We have also achieved some important milestones in our sustainability efforts in fiscal year 2022, notably releasing goals and targets around agricultural labor practices and environmental performance and publishing our 2021 Sustainability Report in December. We were also named a 2021 Supplier Engagement Leader by CDP, earning recognition for our work in engaging our suppliers on climate change. We look forward to attaining new achievements with our sustainability programs in fiscal year 2023.
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FINANCIAL HIGHLIGHTS | | | | | | | |
| Fiscal Year Ended March 31, | | Change |
(in millions of dollars, except per share data) | 2022 | | 2021 | | $ | | % |
| | | | | | | |
Consolidated Results | | | | | | | |
Sales and other operating revenue | $ | 2,103.6 | | | $ | 1,983.4 | | | $ | 120.2 | | | 6 | % |
Cost of goods sold | 1,694.7 | | | 1,597.4 | | | 97.3 | | | 6 | % |
Gross Profit Margin | 19.44 | % | | 19.46 | % | | --- | | -2 bps |
Selling, general and administrative expenses | 240.7 | | | 219.8 | | | 20.9 | | | 10 | % |
Restructuring and impairment costs | 10.5 | | | 22.6 | | | (12.1) | | | (54) | % |
Operating income (as reported) | 160.3 | | | 147.8 | | | 12.5 | | | 8 | % |
Adjusted operating income (non-GAAP)* | 173.6 | | | 172.9 | | | 0.7 | | | 0 | % |
Diluted earnings per share (as reported) | 3.47 | | | 3.53 | | | (0.06) | | | (2) | % |
Adjusted diluted earnings per share (non-GAAP)* | 3.79 | | | 4.25 | | | (0.46) | | | (11) | % |
Segment Results | | | | | | | |
Tobacco operations sales and other operating revenues | $ | 1,835.8 | | | $ | 1,841.8 | | | $ | (6.0) | | | 0 | % |
Tobacco operations operating income | 157.8 | | | 168.8 | | | (11.1) | | | (7) | % |
Ingredients operations sales and other operating revenues | 267.8 | | | 141.5 | | | 126.3 | | | 89 | % |
Ingredients operations operating income | 16.6 | | | 0.4 | | | 16.2 | | | 4,418 | % |
*See Reconciliation of Certain Non-GAAP Financial Measures in Other Items below
Net income for the year ended March 31, 2022, was $86.6 million, or $3.47 per diluted share, compared with $87.4 million, or $3.53 per diluted share, for the year ended March 31, 2021. Excluding restructuring and impairment costs and certain other non-recurring items, detailed in Other Items below, net income and diluted earnings per share decreased by $10.8 million and $0.46, respectively, for the year ended March 31, 2022, compared to the year ended March 31, 2021. Operating income of $160.3 million for the year ended March 31, 2022, increased by $12.5 million, compared to operating income of $147.8 million for the year ended March 31, 2021. Adjusted operating income, detailed in Other Items below, of $173.6 million increased by $0.7 million for the year ended March 31, 2022, compared to adjusted operating income of $172.9 million for the year ended March 31, 2021.
Consolidated revenues increased by $120.2 million to $2.1 billion for the year ended March 31, 2022, compared to the year ended March 31, 2021, on the addition of the businesses acquired in the Ingredients Operations segment and lower tobacco sales volumes partially offset by higher average sales prices in the Tobacco Operations segment.
Tobacco Operations
Segment operating income for the Tobacco Operations segment decreased by $11.1 million to $157.8 million for the year ended March 31, 2022, compared to the year ended March 31, 2021. Tobacco Operations segment results declined largely due to tobacco shipment timing as well as some tobacco inventory write downs, partially offset by increased value-added services to customers in fiscal year 2022, compared to fiscal year 2021. Africa sales volumes were lower in fiscal year 2022, compared to fiscal year 2021, on smaller burley crops as well as slower shipment timing. Sales volumes for Brazil were lower for the year ended March 31, 2022, compared to the year ended March 31, 2021, in part due to lack of vessel and container availability. In addition, inventory write downs resulting from volatile market conditions in Brazil negatively impacted results for the year ended March 31, 2022. In Asia, although trading volumes were down on higher freight costs, our operations saw a more favorable product mix, as well as increased value-added services for customers during the year ended March 31, 2022, compared to the year ended March 31, 2021. Our operations in Europe experienced significantly higher energy costs in fiscal year 2022, compared to fiscal year 2021. Selling, general, and administrative expenses for the Tobacco Operations segment were higher in the year ended March 31, 2022, compared to the year ended March 31, 2021, primarily due to unfavorable foreign currency exchange comparisons, mainly remeasurement, offset in part by the effects of currency hedging activities. Revenues for the Tobacco Operations segment of $1.8 billion for the year ended March 31, 2022, were relatively flat, compared to the year ended March 31, 2021, as higher tobacco sales prices largely offset lower sales volumes. Our uncommitted tobacco inventory levels, about 16% of tobacco inventory at March 31, 2022, remained well within our target range.
Ingredients Operations
Segment operating income for the Ingredients Operations segment was $16.6 million for the year ended March 31, 2022, compared to segment operating income of $0.4 million for the year ended March 31, 2021. Results for the segment include our October 2020 acquisition of Silva and our October 2021 acquisition of Shank’s. For the year ended March 31, 2022, our Ingredients Operations saw strong volumes in both human and pet food categories as well as some rebound in demand from sectors that have been impacted by the ongoing COVID-19 pandemic. In addition, the segment saw strong sales of organic-based products, certain dehydrated products, and botanical extracts and flavorings. Selling, general, and administrative expenses for the segment increased in fiscal year 2022, compared to fiscal year 2021, on the addition of the acquired businesses. Revenues for the Ingredients Operations segment increased by $126.3 million to $267.8 million for the year ended March 31, 2022, compared to the year ended March 31, 2021, primarily on the addition of the revenues for the acquired businesses as well as increased sales prices.
Other Items
Cost of goods sold in the year ended March 31, 2022, increased by 6% to $1.7 billion, compared with the year ended March 31, 2021, as a result of the acquisitions in our Ingredients Operations segment as well as variances in sales prices and volumes shipped in the Tobacco Operations segment. Selling, general, and administrative costs for fiscal year 2022, increased by $20.9 million to $240.7 million, compared to fiscal year 2021, on additional costs from the acquisitions in the Ingredients Operations segment combined with unfavorable foreign currency comparisons. In fiscal year 2022, foreign currency comparisons were approximately $8.1 million unfavorable, compared to fiscal year 2021, mainly due to currency remeasurement variances in Brazil, the Philippines, and Indonesia, partially offset by the effects of currency hedging programs. Interest expense for fiscal year 2022, increased by $2.8 million to $27.7 million, compared to fiscal year 2021, largely on higher average debt balances and interest rates.
For fiscal year 2022, the Company’s effective tax rate on pre-tax income was 27.2%. In the fiscal year ended March 31, 2022, the Company recognized a $1.7 million income tax benefit related to a final tax ruling at a foreign subsidiary and a $1.2 million benefit due to finalizing the prior year U.S. tax return. Without these income tax benefits, the adjusted effective tax rate for the fiscal year ended March 31, 2022, would have been 29.2%.
For fiscal year 2021, the Company’s consolidated effective tax rate was 23.4%. For the fiscal year ended March 31, 2021, income tax expense included benefits of $4.4 million for final tax regulations regarding the treatment of dividends paid by foreign subsidiaries and $2.9 million due to amending and finalizing prior year U.S. tax returns. Without these income tax benefits, the consolidated effective tax rate for the fiscal year ended March 31, 2021, would have been approximately 29.2%.
Reconciliation of Certain Non-GAAP Financial Measures
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:
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Adjusted Operating Income Reconciliation | | | | | | | | |
| | | | Fiscal Year Ended March 31, |
(in thousands) | | | | | | 2022 | | 2021 |
As Reported: Consolidated operating income | | | | | | $ | 160,315 | | | $ | 147,810 | |
Purchase accounting adjustments(1) | | | | | | 3,057 | | | 2,800 | |
Transaction costs for acquisitions(2) | | | | | | 2,310 | | | 3,915 | |
Fair value adjustment to contingent consideration for FruitSmart acquisition(3) | | | | | | (2,532) | | | (4,173) | |
Restructuring and impairment costs(4) | | | | | | 10,457 | | | 22,577 | |
Adjusted operating income | | | | | | $ | 173,607 | | | $ | 172,929 | |
| | | | | | | | |
Adjusted Net Income and Diluted Earnings Per Share Reconciliation | | | | | | | | |
(in thousands except for per share amounts) | | | | Fiscal Year Ended March 31, |
(all amounts reported net of income taxes) | | | | | | 2022 | | 2021 |
As Reported: Net income attributable to Universal Corporation | | | | | | $ | 86,577 | | | $ | 87,410 | |
Purchase accounting adjustments(1) | | | | | | 2,415 | | | 2,800 | |
Transaction costs for acquisitions(2) | | | | | | 2,195 | | | 3,915 | |
Fair value adjustment to contingent consideration for FruitSmart acquisition(3) | | | | | | (2,532) | | | (4,173) | |
Restructuring and impairment costs(4) | | | | | | 7,879 | | | 17,800 | |
Interest expense related to an uncertain tax matter at a foreign subsidiary | | | | | | (470) | | | 1,849 | |
Income tax benefit from dividend withholding tax liability reversal(5) | | | | | | (1,686) | | | (4,421) | |
| | | | | | | | |
Adjusted Net income attributable to Universal Corporation | | | | | | $ | 94,378 | | | $ | 105,180 | |
| | | | | | | | |
As reported: Diluted earnings per share | | | | | | $ | 3.47 | | | $ | 3.53 | |
Adjusted: Diluted earnings per share | | | | | | $ | 3.79 | | | $ | 4.25 | |
(1) The Company recognized an increase in cost of goods sold in the third quarters of fiscal year 2022 and 2021, relating to the expensing of fair value adjustments to inventory associated with the acquisition accounting for Shank's (effective October 4, 2021) and Silva (effective October 1, 2020). The adjustment related to the Silva acquisition is not deductible for U.S. income tax purposes.
(2) The Company incurred selling, general, and administrative expenses for due diligence and other transaction costs associated with the acquisitions of Shank's and Silva. A portion of these costs is not deductible for U.S. income tax purposes.
(3) The Company reversed the contingent consideration liability for the FruitSmart acquisition, as a result of certain performance metrics that did not meet the required threshold stipulated in the purchase agreement.
(4) Restructuring and impairment costs are included in Consolidated operating income in the consolidated statements of income, but excluded for purposes of Adjusted operating income, Adjusted net income available to Universal Corporation, and Adjusted diluted earnings per share. See Note 4 for additional information.
(5) The Company recognized income tax benefits related to a favorable final income tax ruling at a foreign subsidiary (fiscal year 2022) and final U.S. tax regulations on certain dividends paid by foreign subsidiaries (fiscal year 2021).
Fiscal Year Ended March 31, 2021, Compared to the Fiscal Year Ended March 31, 2020
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, 2021, filed with the SEC on May 28, 2021.
Accounting Pronouncements
See "Accounting Pronouncements" in Note 1 to the consolidated financial statements in Item 8 of this Annual Report for a discussion of recent accounting pronouncements issued by the Financial Accounting Standards Board ("FASB") that will become effective and be adopted by the Company in future reporting periods.
LIQUIDITY AND CAPITAL RESOURCES
Overview
In fiscal year 2022, we generated $44.9 million in cash flows from our operating activities, and our liquidity was sufficient to meet our needs. Our working capital requirements in fiscal year 2022 were higher than those in fiscal year 2021 mainly due to tobacco shipment timing and higher green leaf tobacco prices. We continued our financial policies and returned funds to shareholders.
Our liquidity and capital resource requirements are predominately short-term in nature and primarily relate to working capital for tobacco crop purchases, and our primary sources of liquidity are net cash flows provided by operating activities and our committed revolving credit facility. 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 tobacco 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 $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 $40 to $50 million during fiscal year 2023 for capital expenditures to maintain our facilities and invest in opportunities to grow and improve our businesses. We have no long-term debt maturing until fiscal year 2024.
To date, the COVID‐19 pandemic has not had a material impact on our operations, although we are continuing to see logistical constraints around worldwide vessel and container availability and increased costs stemming from the COVID-19 pandemic. We currently anticipate our current cash balances, cash flows from operations, and our available sources of liquidity will be sufficient to meet our cash requirements for at least the next twelve months. This is, however, a rapidly evolving situation, and we cannot predict the extent, resurgence, or duration of the COVID-19 pandemic, the effects of it on the global, national or local economies, including the impacts on our ability to access capital, or its effects on our business, financial position, results of operations, and cash flows. We continue to monitor developments affecting our employees, customers and operations.
Cash Flow
Our operations generated about $44.9 million in operating cash flows in fiscal year 2022. That amount was about $175.5 million lower than the $220.4 million we generated in fiscal year 2021, largely due to higher working capital requirements in fiscal year 2022. During the fiscal year ended March 31, 2022, we spent $53.2 million on capital projects and $102.5 million on the acquisition of a new business, and we returned $79.5 million to shareholders in the form of dividends and share repurchases. At March 31, 2022, cash balances totaled $81.6 million.
Working Capital
Working capital at March 31, 2022, was about $1.2 billion, down about $32.9 million from last fiscal year's level, largely on higher working capital usage due to tobacco shipment timing, higher green tobacco costs, and earlier purchasing of the 2022 Brazilian tobacco crop, offset in part by the acquisition of Shank’s. Tobacco inventories of $822.5 million at March 31, 2022, were up $181.9 million compared to inventory levels at the end of the prior fiscal year, mainly due to delayed tobacco shipments and higher green leaf tobacco prices. Other inventories were up $48.2 million at March 31, 2022, from prior year levels largely on our acquisition of Shank’s in October 2021 and higher crop input costs. We generally do not purchase material quantities of leaf tobacco on a speculative basis. However, when we contract directly with tobacco farmers, we are obligated to buy all stalk positions, which may contain less marketable leaf styles. Our uncommitted tobacco inventories decreased by approximately $9.1 million to $130.1 million, or about 16% of tobacco inventory, at March 31, 2022, which was within our target range. Uncommitted inventories at March 31, 2021, were $139.2 million, which represented 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.
Capital Allocation
Our capital allocation strategy focuses on four strategic priorities:
•Strengthening and investing for growth in our leaf tobacco business;
•Increasing our strong dividend;
•Exploring growth opportunities in plant-based ingredients businesses that utilize our assets and capabilities; and
•Returning excess capital through share repurchases.
Our mission is to remain the leading global leaf tobacco supplier. We will continue to make disciplined investments within our leaf business and taking advantage of growth opportunities in tobacco as well as in plant-based ingredients businesses and markets that utilize our assets and capabilities. Through these actions, we believe that will be able to deliver enhanced shareholder value through earnings growth and the generation of free cash flow despite operating in a mature industry.
In line with our capital allocation strategy, we acquired Shank’s for approximately $100 million on October 4, 2021. The acquisition expanded our plant-based ingredients platform adding valuable capabilities, including flavors and botanical extracts, custom packaging, bottling, and product development. As we look ahead, we will continually evaluate opportunities to return capital to shareholders. At the same time, we remain committed to maintaining our investment grade credit rating and extending our 52-year history of dividend increases.
Share Activity
Our Board of Directors approved our current share repurchase program in November 2020. The program authorizes the purchase of up to $100 million of our common stock through November 15, 2022. Under the current authorization, we may purchase shares from time to time on the open market or in privately negotiated transactions at prices not exceeding prevailing market rates. Repurchases of shares under the repurchase program may vary based on management discretion, as well as changes in cash flow generation and availability. During fiscal year 2022, we purchased 58,264 shares of common stock at an aggregate cost of $3.1 million (average price per share $52.41). At March 31, 2022, our available authorization under our current share repurchase program was $97 million, and approximately 24.6 million common shares were outstanding.
Capital Spending
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 support our farmer base. During fiscal years 2022 and 2021, we invested $53.2 million and $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 $41.3 million and $38.3 million, respectively, in fiscal years 2022 and 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 $40 to $50 million in fiscal year 2023 on capital projects for maintenance of our facilities and other investments to grow and improve our businesses.
Outstanding Debt and Other Financing Arrangements
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 increased by $202.3 million to $633.3 million during the fiscal year ended March 31, 2022. The increase primarily reflects 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 32% at March 31, 2022, up from 25% at March 31, 2021.
As of March 31, 2021, we had $330 million available under a committed revolving credit facility that will mature in December 2023, and we, together with our consolidated affiliates, had approximately $283 million in uncommitted lines of credit, of which approximately $200 million were unused and available to support seasonal working capital needs. 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, 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 2020 that provides for future issuance of additional debt or equity securities. We have no long-term debt maturing until fiscal year 2024.
Derivatives
From time to time, we use interest rate swap agreements to manage our exposure to changes in interest rates. Currently, we have interest rate swap agreements that convert the variable benchmark LIBOR rates on $370 million of our two outstanding term loans entered to fixed rates. With the swap agreements in place, the effective interest rates on $220 million of the five-year term loan and $295 million of the seven-year term loan were 3.36% and 3.84%, respectively, as of March 31, 2022. These agreements were entered into to eliminate the variability of cash flows in the interest payments on our variable rate five- and seven-year term loans and are accounted for as cash flow hedges. Under the swap agreements, we receive variable rate interest and pay fixed rate interest. At March 31, 2022, the fair value of our open interest rate hedge swaps was a net liability of approximately $1 million.
We also enter derivative instruments from time to time to hedge certain foreign currency exposures, primarily related to forecast purchases of tobacco, 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, 2022, the fair value of those open contracts was a net 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 a net asset of approximately $13.0 million at March 31, 2022. For additional information, see Note 11 to the consolidated financial statements in Item 8.
Pension Funding
The funds supporting our ERISA-regulated U.S. defined benefit pension plan during fiscal year 2022 were approximately $250 million. The accumulated benefit obligation (“ABO”) and PBO were both approximately $231 million and $237 million, respectively as of March 31, 2022. The ABO and PBO are calculated on the basis of certain assumptions that are outlined in Note 13 to the consolidated financial statements in Item 8. We expect to make no contributions to our pension plans during the next year. It is our policy to regularly monitor the performance of the funds and to review the adequacy of our funding and plan contributions.
Off-Balance Sheet Arrangements
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.
Contractual Obligations
Our contractual obligations as of March 31, 2022, were as follows:
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(in thousands of dollars) | | Total | | 2023 | | 2024-2025 | | 2026-2027 | | After 2027 |
Notes payable and long-term debt (1) | | $ | 761,645 | | | $ | 204,803 | | | $ | 253,338 | | | $ | 303,504 | | | $ | — | |
Operating lease obligations | | 57,370 | | | 16,069 | | | 22,528 | | | 10,053 | | | 8,720 | |
Inventory purchase obligations: | | | | | | | | | | |
Tobacco | | 722,822 | | | 598,506 | | | 113,316 | | | 11,000 | | | — | |
Agricultural materials | | 64,692 | | | 64,692 | | | — | | | — | | | — | |
Other purchase obligations | | 67,437 | | | 56,682 | | | 7,355 | | | 3,400 | | | — | |
Total | | $ | 1,673,966 | | | $ | 940,752 | | | $ | 396,537 | | | $ | 327,957 | | | $ | 8,720 | |
(1)Includes interest payments. Interest payments on $333.0 million of variable rate debt were estimated based on rates as of March 31, 2022. We have entered into interest rate swaps that effectively convert the interest payments on $370.0 million of the outstanding balance of our two bank term loans from variable to fixed. The fixed rate has been used to determine the contractual interest payments for all periods.
In addition to principal and interest payments on notes payable and long-term debt, our contractual obligations include operating lease payments, inventory purchase commitments, and capital expenditure commitments. Operating lease obligations represent minimum payments due under leases for various production, storage, distribution, and other facilities, as well as vehicles and equipment. Tobacco inventory purchase obligations primarily represent contracts to purchase tobacco from farmers. The amounts shown above are estimates since actual quantities purchased will depend on crop yield, and prices will depend on the quality of the tobacco delivered. We have partially funded our tobacco purchases in some origins with short-term advances to farmers and other suppliers, which totaled approximately $130 million, net of allowances, at March 31, 2022.
CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS
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:
Inventories
Inventories of tobacco are valued at the lower of cost or net realizable value with cost determined under the specific cost method. Raw materials are clearly identified at the time of purchase. Other inventories consist primarily of unprocessed and processed food and vegetable ingredients, extracts, seed, fertilizer, packing materials, and other supplies. We track the costs associated with raw materials in the final product lots, and maintain this identification through the time of sale. We also capitalize direct and indirect costs related to processing raw materials. This method of cost accounting is referred to as the specific cost or specific identification method. We write down inventory for changes in net realizable value based upon assumptions related to future demand and market conditions if the indicated value is below cost. Future demand assumptions can be impacted by changes in customer sales, changes in customers’ inventory positions and policies, competitors’ pricing policies and inventory positions, and varying crop sizes and qualities. Market conditions that differ significantly from those assumed by management could result in additional write-downs. We experience inventory write-downs routinely. Inventory write-downs in fiscal years 2022, 2021, and 2020 were $19.9 million, $13.5 million, and $10.3 million, respectively.
Advances to Tobacco Suppliers
In many sourcing origins, we provide tobacco growers with agronomy services and seasonal crop advances of, or for, seed, fertilizer, and other supplies. These advances are short term in nature and are customarily repaid upon delivery of tobacco to us. In several origins, we have also made long-term advances to tobacco farmers to finance curing barns and other farm infrastructure. In some years, due to low crop yields and other factors, individual farmers may not deliver sufficient volumes of tobacco to repay maturing advances. In those cases, we may extend repayment of the advances into the following crop year. We will incur losses whenever we are unable to recover the full amount of the loans and advances. At each reporting period, we must make estimates and assumptions in determining the valuation allowance for advances to farmers. At March 31, 2022, the gross balance of advances to tobacco suppliers totaled approximately $153 million, and the related valuation allowance totaled approximately $19 million.
Recoverable Value-Added Tax Credits
In many foreign countries, we pay significant amounts of value-added tax (“VAT”) on purchases of unprocessed and processed tobacco, crop inputs, packing materials, and various other goods and services. In some countries, VAT is a national tax, and in other countries it is assessed at the state level. Items subject to VAT vary from jurisdiction to jurisdiction, as do the rates at which the tax is assessed. When we sell tobacco to customers in the country of origin, we generally collect VAT on those sales. We are normally permitted to offset our VAT payments against those collections and remit only the incremental VAT collections to the tax authorities. When tobacco is sold for export, VAT is normally not assessed. In countries where our tobacco sales are predominately for export markets, we often do not generate enough VAT collections on downstream sales to fully offset our VAT payments. In those situations, we can accumulate unused VAT credits. Some jurisdictions have procedures that allow companies to apply for refunds of unused VAT credits from the tax authorities, but the refund process often takes an extended period of time and it is not uncommon for refund applications to be challenged or rejected in part on technical grounds. Other jurisdictions may permit companies to sell or transfer unused VAT credits to third parties in private transactions, although approval for such transactions must normally be obtained from the tax authorities, limits on the amounts that can be transferred may be imposed, and the proceeds realized may be heavily discounted from the face value of the credits. Due to these factors, in some countries we can accumulate significant balances of VAT credits over time. We review these balances on a regular basis, and we record valuation allowances on the credits to reflect amounts that we do not expect to recover, as well as discounts anticipated on credits we expect to sell or transfer. In determining the appropriate valuation allowance to record in a given jurisdiction, we must make various estimates and assumptions about factors affecting the ultimate recovery of the VAT credits. At March 31, 2022, the gross balance of recoverable tax credits (primarily VAT) totaled approximately $67 million, and the related valuation allowance totaled approximately $21 million.
Business Combinations
From time to time, we may enter into business combinations. In accordance with ASC 805, “Business Combinations”, we generally recognize the identifiable assets acquired and the liabilities assumed at their fair values as of the date of acquisition. We measure goodwill as the excess of consideration transferred, which we also measure at fair value, over the net of the acquisition date fair values of the identifiable assets acquired and liabilities assumed. The acquisition method of accounting requires us to make significant estimates and assumptions regarding the fair values of the elements of a business combination as of the date of acquisition, including the fair values of identifiable intangible assets, deferred tax asset valuation allowances, liabilities including those related to debt, pensions and other postretirement plans, uncertain tax positions, contingent consideration and contingencies. This method also requires us to refine these estimates over a measurement period not to exceed one year to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. If we are required to adjust provisional amounts that we have recorded for the fair values of assets and liabilities in connection with acquisitions, these adjustments could have a material impact on our financial condition and results of operations.
Significant estimates and assumptions in estimating the fair value of developed technology, customer relationships, and other identifiable intangible assets include future cash flows that we expect to generate from the acquired assets. If the subsequent actual results and updated projections of the underlying business activity change compared with the assumptions and projections used to develop these values, we could record impairment charges. In addition, we have estimated the economic lives of certain acquired assets and these lives are used to calculate depreciation and amortization expense. If our estimates of the economic lives change, depreciation or amortization expenses could be increased or decreased, or the acquired asset could be impaired.
Goodwill
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, 2022 and 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 in fiscal year 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. A majority of our consolidated goodwill balance relates to our reporting unit in Brazil and the acquisitions of FruitSmart (January 1, 2020), Silva (October 1, 2020), and Shank's (October 4, 2021).
Fair Value Measurements
We hold various financial assets and financial liabilities that are required to be measured and reported at fair value in our financial statements, including money market funds, trading securities associated with deferred compensation plans, interest rate swaps, forward foreign currency exchange contracts, and guarantees of bank loans to tobacco growers. We follow the relevant accounting guidance in determining the fair values of these financial assets and liabilities. Money market funds are valued based on net asset value (“NAV”), which is used as a practical expedient to measure the fair value of those funds (not classified within the fair value hierarchy). Quoted market prices (Level 1 of the fair value hierarchy) are used in most cases to determine the fair values of trading securities. Interest rate swaps and forward foreign currency exchange contracts are valued based on dealer quotes using discounted cash flow models matched to the contractual terms of each instrument (Level 2 of the fair value hierarchy). We incorporate credit risk in determining the fair values of our financial assets and financial liabilities, but that risk did not materially affect the fair values of any of those assets or liabilities at March 31, 2022. We estimate the fair value of acquisition-related contingent consideration obligations by applying an income approach model that utilizes probability-weighted discounted cash flows. Each period we evaluate the fair value of the acquisition-related contingent consideration obligations. Significant judgment is applied to this model and therefore acquisition-related contingent consideration obligation is classified within Level 3 of the fair value hierarchy. In fiscal year 2022, the evaluation of the contingent consideration for the FruitSmart acquisition resulted in the reduction of the remaining $2.5 million of contingent consideration of the original $6.7 million liability recorded in fiscal year 2020.
Income Taxes
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.
Our consolidated income tax expense and effective tax rate are 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. Our effective tax rate can be volatile from year-to-year and from quarter-to-quarter 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 6 to the consolidated financial statements in Item 8.
Pension and Other Postretirement Benefit Plans
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:
•Discount rate – The discount rate is based on investment yields on a hypothetical portfolio of actual long-term corporate bonds rated AA that align with the cash flows for our benefit obligations.
•Salary scale – The salary scale assumption is based on our long-term actual experience for salary increases, the near-term outlook, and expected inflation.
•Expected long-term return on plan assets – The expected long-term return on plan assets reflects asset allocations and investment strategy adopted by the Finance and Pension Investment Committee of the Board of Directors.
•Retirement and mortality rates – Retirement rates are based on actual plan experience along with our near-term outlook. Early retirement assumptions are based on our actual experience. Mortality rates are based on standard industry group annuity mortality tables which are updated to reflect projected improvements in life expectancy.
•Healthcare cost trend rates – For postretirement medical plan obligations and costs, we make assumptions on future inflationary increases in medical costs. These assumptions are based on our actual experience, along with third-party forecasts of long-term medical cost trends.
From one fiscal year to the next, the rates we use for each of the above assumptions may change based on market developments and other factors. The discount rate reflects prevailing market interest rates at the end of the fiscal year when the benefit obligations are actuarially measured and will increase or decrease based on market patterns. The expected long-term return on plan assets may change based on changes in investment strategy for plan assets or changes in indicated longer-term yields on specific classes of plan assets. In addition to the changes in actuarial assumptions from year to year, actual plan experience affecting our net benefit obligations, such as actual returns on plan assets and actual mortality experience, will differ from the assumptions used to measure the obligations. The effects of these changes and differences increase or decrease the obligation we record for our pension and other postretirement benefit plans, and they also create gains and losses that are accumulated and amortized over future periods, thus affecting the expense we recognize for these plans over those periods. Changes in the discount rate from year to year generally have the largest impact on our projected benefit obligation and annual expense, and the effects may be significant, particularly over successive years where the discount rate moves in the same direction.
As of March 31, 2022, the effect of the indicated increase or decrease in the selected pension and other postretirement benefit valuation assumptions is shown below. The effect assumes no change in benefit levels.
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(in thousands of dollars) | | Effect on 2022 Projected Benefit Obligation Increase (Decrease) | | Effect on 2023 Annual Expense Increase (Decrease) |
Changes in Assumptions for Pension Benefits | | | | |
Discount Rate: | | | | |
1% increase | | $ | (29,959) | | | $ | (2,582) | |
1% decrease | | 36,753 | | | 2,921 | |
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| | | | |
| | | | |
Expected Long-Term Return on Plan Assets: | | | | |
1% increase | | — | | | (2,461) | |
1% decrease | | — | | | 2,461 | |
| | | | |
| | | | |
Changes in Assumptions for Other Postretirement Benefits | | | | |
Discount Rate: | | | | |
1% increase | | (2,006) | | | (159) | |
1% decrease | | 2,365 | | | 181 | |
Healthcare Cost Trend Rate: | | | | |
1% increase | | 153 | | | 43 | |
1% decrease | | (141) | | | (41) | |
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 13 to the consolidated financial statements in Item 8 for additional information on pension and other postretirement benefit plans.
Other Estimates and Assumptions
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.
OTHER INFORMATION REGARDING TRENDS
AND MANAGEMENT’S ACTIONS
Our financial performance depends on our ability to obtain an appropriate price for our products and services, to secure the product volumes and quality desired by our customers, and to maintain efficient, competitive operations. As the leading global leaf tobacco supplier, we continually monitor for issues and opportunities that may impact the supply of and demand for leaf tobacco, the volumes of leaf tobacco that we handle, and the services we provide. We have also been building a plant-based ingredients platform and monitor issues and opportunities that may impact these businesses as well.
Tobacco Operations Trends
We believe that a key factor to perform successfully in the tobacco industry is our ability to provide customers with the quality of leaf and the level of service they desire on a global basis at competitive prices, while maintaining stability of supply. We add significant value to the leaf tobacco supply chain, providing expertise in dealing with large numbers of farmers, efficiently selling various qualities of leaf produced in each crop to a broad global customer base, and delivering products and services produced in a sustainable manner that meet stringent quality and regulatory specifications. We also make the tobacco markets more efficient and provide crop development guidance at the farm level. As part of our commitment to our customers, we adapt our business model to meet their evolving needs and monitor new product developments in the tobacco industry to identify areas where we can provide additional value to them.
Mature Leaf Tobacco Markets
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, on average about a third is purchased directly by major manufacturers. Global leaf suppliers also usually purchase about a third of the tobacco, and the remainder is sourced by the smaller regional or local suppliers. In some markets the tobacco purchased directly by manufacturers is processed by the global leaf suppliers. Although we operate in a mature industry, where demand for the end products outside of China has been declining at a compound annual rate of about 0.6% over the last three years, our mission is to remain the leading global leaf tobacco supplier. In recent years, we have been and believe that we will continue to be able to grow parts of our business, and maintain performance despite declines in demand for leaf tobacco from product manufacturers. 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 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. As we look at 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.
Focus on Cost Management
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
needs, storage of green or packed leaf tobacco, and logistical services. In recent years, there has been an increase in the level of direct purchasing, sorting, processing, and other value-added services that we provide our customers, notably in the United States, Mexico, Brazil, Poland, Guatemala, the Dominican Republic, and the Philippines. We believe this increase acknowledges the efficiencies and services that we bring to the entire supply chain.
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 about 70 countries around the world, and burley tobacco is grown in about 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. We 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.
Importance of Compliant Leaf
As we have said for many years, the production of compliant leaf for the tobacco industry continues to grow in importance. To be considered compliant, leaf tobacco must be grown in a traceable, sustainable manner utilizing GAP. We have long invested significant resources in the programs and infrastructure needed to work with growers to produce compliant leaf and continue to enhance our ability to monitor and demonstrate this compliance for our customers. Our GAP focus on implementing international principles of sustainability by encouraging and training our farmers to employ sound field production and labor management practices that promote farmer profitability and minimal environmental impact. To assist farmers, Universal provides comprehensive training, technical support in the field, and crop analytics through ongoing research and development. Our commitment to compliance is reinforced through MobiLeaf™, our proprietary mobile device platform that captures and shares data in real-time, embedding sustainability throughout our supply chain and providing monitoring of GAP efforts, compliance with labor standards, and opportunities to enhance efficiencies. We believe that compliant leaf will continue to grow in importance to our customers and, as a result, will favor global suppliers who are able to deliver this product.
Growth of Alternative Tobacco Products
Most of the major tobacco product manufacturers have been developing next generation and modified risk products. These include ENDS, oral tobacco and nicotine products, and heated tobacco products. ENDS 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.
Leaf Tobacco Supply
Although flue-cured tobacco crops grown outside of China increased in fiscal year 2022 by about 4% to 1.7 billion kilos compared to fiscal year 2021, production levels remain below historical averages. In addition, these crops are projected to revert back to lower production levels, decreasing by about 4% to 1.7 billion kilos in fiscal year 2023. Global burley tobacco production also remains below historical levels and decreased by about 10% to about 398 million kilos in fiscal year 2022. Burley volumes are forecast to increase slightly to about 404 million kilos in fiscal year 2023. We estimate that as of March 31, 2022, industry uncommitted flue-cured and burley inventories, excluding China were at historically low levels, totaling about 62 million kilos, a decrease of about 34% from March 31, 2021 levels. At this time, we believe that both flue-cured tobacco and burley tobacco supply are in undersupply positions.
We also forecast that oriental and dark air-cured tobacco production will decrease by about 21% and increase by about 4%, respectively, in fiscal year 2023. We believe both oriental tobaccos and dark air-cured tobaccos are in undersupply positions. Over the long term, we believe that global tobacco production will continue to move 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. Domestic leaf tobacco inventories have built up in China over the last several years as China’s domestic leaf production has exceeded their domestic needs for the local cigarette market. China is continuing to
demonstrate efforts to re-align their domestic leaf production and inventories to balance their needs, and inventories have started to come down. These efforts could influence global supply/demand in the short term.
Leaf Tobacco Demand
Industry data shows that over the past three years, world consumption of cigarettes outside of China fell at a compound annual rate of about 0.6%. We believe that growth in world consumption of cigarettes outside of China peaked several years ago and is declining. As a result, we expect that near term global demand for leaf tobacco will continue to slowly decline in line with declining global cigarette consumption.
Our sales consist primarily of flue-cured, burley, and dark air-cured tobaccos. Flue-cured and burley 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 was flat for the three years ended in 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 believe that the supply of flue-cured tobaccos and burley tobaccos are 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 tobaccos, which are used in American-blend cigarettes, and dark tobaccos, which are 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 dark tobaccos used in cigar filler to be generally in line with supply, we are continuing to see strong demand for wrapper tobacco.
Pricing
Factors that affect green tobacco prices 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 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.
Global Regulation of Tobacco Products
Public Acceptance of Increased Global Regulation on Tobacco Products
Diminishing social acceptance of tobacco use and increasing pressure from anti-smoking groups have cultivated a political environment that accepts greater regulations on tobacco products, particularly in the United States and the European Union. While the impact of this cultural trend on our business is uncertain, the global acceptance of stringent regulations could reduce demand for tobacco products and have a material adverse effect on our results of operation.
Strengthened Global Cooperation in the Regulation on Tobacco Products
The WHO Framework Convention on Tobacco Control (“FCTC”) was ratified in 2005 to become the world’s first international public health treaty. Since its inception, the FCTC has continued to strengthen international cooperation and collaboration in tobacco control by advancing the implementation of the treaty’s 38 articles and increasing global participation. As the tenth Conference of the Parties approaches in November 2023, the FCTC is working diligently to consider amendments to the agreement and track progress in the treaty’s implementation.
While 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 recommendations of the FCTC would likely reduce demand for both tobacco products and leaf.
United States FDA’s Continued Enforcement of the Tobacco Control Act
In 2009, the U.S. Congress passed the Family Smoking Prevention and Tobacco Control Act (the "Tobacco Act”). This legislation authorizes the U.S. Food and Drug Administration (“FDA”) to regulate the manufacturing and marketing of tobacco products. The Tobacco Act additionally prohibited characterizing flavors in cigarettes, restricted youth access to tobacco products, banned advertising claims regarding certain tobacco products, and established the Center for Tobacco Products.
Over the past decade, the FDA 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 to extend FDA oversight over 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 tobacco product manufacturers to register tobacco products that were on the market on February 15, 2007, and to seek FDA authorization to sell any products modified or introduced after such date. All submissions require manufacturers to list ingredients in their products. In April 2022, FDA released two proposed rules to advance product standards intended to ban menthol in cigarettes and characterizing flavors in cigars. 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.
Although less than 5% of cigarettes manufactured worldwide are consumed in the United States, the FDA is widely considered a global leader in the “science-based” regulation of tobacco products. The FDA operates in stark contrast to the WHO’s “emotion based” approach to nicotine use. The WHO is reluctant to accept one nicotine product as more/less risky than another, and their suggested solution is either rigorous regulation or outright prohibition. The continued implementation and enforcement of the Tobacco Act in the United States is likely to influence the tobacco control measures considered by other countries and international bodies, including the WHO. It is impossible to predict the ultimate impact these developing regulations will have on our business, but any reduction in the demand for our customer’s products will adversely impact the demand for leaf tobacco.
Global Acceptance of the Continuum of Risk in the Regulation of Novel Tobacco Products
As novel tobacco products, such as e-cigarettes and heat-not-burn devices, emerge in the global market, governments are tasked with developing the appropriate, science-based approach to regulation. In 2017, then Commissioner of the FDA, Scott Gottlieb, announced a new regulatory approach for the regulation of tobacco products that embraced the placement of each product somewhere along a “continuum of risk”. This comprehensive plan on nicotine use sought to facilitate an adult tobacco consumer’s switch from combustible cigarettes to less risky products found lower on the continuum. As part of this regulatory scheme, the FDA approved the first “heat-not-burn” and “very-low nicotine” premarket tobacco applications to permit the sale of these products within the United States. Furthermore, FDA approved their first modified risk tobacco products applications to permit certain products in the heat-not-burn and smokeless categories to make modified exposure or risk claims. Although the WHO FCTC does not include specific harm-reduction provisions in the language of the treaty, a growing number of countries have established tobacco control strategies incorporating a continuum of risk concept. In addition, the global tobacco product market is continuously diversifying to include a wide array of novel tobacco products to serve as alternatives to combustible cigarettes.
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 scheme 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 result in a decrease or an increase in requirements for leaf tobacco production in the long or short terms. Since they are marketed as replacements for combustible tobacco products, the question remains whether novel products will replace traditional cigarettes in the future, add to the market, or have a balancing effect.
Increased Taxation
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. Further legislation proposing new or increased taxes on tobacco 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 have not been subject to tax (e.g. ENDS products and liquid nicotine). Increases in product taxation may reduce the affordability of, and demand for, tobacco products, which will affect requirements for leaf tobacco by tobacco product manufacturers.
Illicit Trade
Illicit trade is another factor which influences demand for legally and sustainably produced leaf tobacco. The WHO estimates that one in every ten cigarettes consumed globally is illicit. Individual governments like the United States, European Union, and Brazil have initiated substantial steps in combating illicit trade. In 2012 the WHO Framework Convention on Tobacco Control adopted an illicit trade protocol which has been so far ratified by only one third of its 182 parties. We continue to support both governmental and industry efforts to eradicate illicit trade.
Ingredients Operations Trends
Following our capital allocation strategy, we have made disciplined investments within our leaf business to take advantage of growth opportunities in tobacco as well as in plant-based ingredients businesses and markets that could utilize our assets and capabilities. Through these actions, we believe that we will be able to deliver enhanced shareholder value despite operating in the mature leaf tobacco industry.
We made significant strategic investments in our plant-based ingredients platform in fiscal years 2020, 2021, and 2022. We acquired FruitSmart in January 2020, Silva in October 2020, and Shank's in October 2021. Our ingredients businesses provide our business-to-business customers with a broad variety of plant-based ingredients for both human and pet consumption. A variety of value-added manufacturing processes are used in these businesses to convert raw materials into a wide spectrum of fruit and vegetable juices, concentrates, dehydrated products, and botanical extracts and flavorings. These businesses provide value-added agricultural processing, part of the agricultural value chain where we possess significant business expertise. We consider the agricultural value chain to consist of agricultural inputs, crop production, agricultural processing, manufacture and distribution, and retail sales. We are pleased with the ongoing integration of our plant-based ingredients platform, and we are ahead of our capital allocation strategy objectives. With the acquisition of Shank’s, we are able to expand the products that we offer by adding Shank’s portfolio of high-quality botanical extracts and flavorings to our plant-based ingredients platform.
One of the markets our plant-based ingredients business serve is the growing Global Health and Wellness Foods Market. According to industry estimates this market is projected to grow at an annual rate of 4%-6% over the next several years. In addition, with the COVID-19 pandemic, there has been and continues to be strong consumer demand for healthy foods. FruitSmart is seeing growing consumer interest in better-for-you premium ingredients, including custom blends, not-from-concentrate and dry products. It is also seeing strong growth in targeted end markets utilizing FruitSmart products, including ciders, purees and nutraceuticals. Silva is well positioned to take advantage of increasing demand for natural and clean-label products across the end markets it serves, including within the attractive and growing savory and pet food end markets. Industry estimates project annual growth of about 5% over the next several years for the pet food market in the U.S.
Item 8. Financial Statements and Supplementary Data
UNIVERSAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
| | | | | | | | | | | | | | | | | |
| Fiscal Year Ended March 31, |
(in thousands of dollars, except share and per share data) | 2022 | | 2021 | | 2020 |
Sales and other operating revenues | $ | 2,103,601 | | | $ | 1,983,357 | | | $ | 1,909,979 | |
| | | | | |
Costs and expenses | | | | | |
Cost of goods sold | 1,694,675 | | | 1,597,354 | | | 1,553,167 | |
Selling, general and administrative expenses | 240,686 | | | 219,789 | | | 222,902 | |
Other income | (2,532) | | | (4,173) | | | — | |
Restructuring and impairment costs | 10,457 | | | 22,577 | | | 7,543 | |
| | | | | |
Operating income | 160,315 | | | 147,810 | | | 126,367 | |
Equity in pretax earnings of unconsolidated affiliates | 6,095 | | | 2,985 | | | 4,211 | |
Other non-operating income (expense) | 2,687 | | | (440) | | | 986 | |
Interest income | 917 | | | 325 | | | 1,581 | |
Interest expense | 27,747 | | | 24,954 | | | 19,854 | |
| | | | | |
Income before income taxes | 142,267 | | | 125,726 | | | 113,291 | |
Income taxes | 38,663 | | | 29,412 | | | 35,288 | |
| | | | | |
Net income | 103,604 | | | 96,314 | | | 78,003 | |
Less: net income attributable to noncontrolling interests in subsidiaries | (17,027) | | | (8,904) | | | (6,323) | |
Net income attributable to Universal Corporation | $ | 86,577 | | | $ | 87,410 | | | $ | 71,680 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Earnings per share: | | | | | |
Basic | $ | 3.50 | | | $ | 3.55 | | | $ | 2.87 | |
Diluted | $ | 3.47 | | | $ | 3.53 | | | $ | 2.86 | |
| | | | | |
Weighted average common shares outstanding: | | | | | |
Basic | 24,764,177 | | | 24,656,009 | | | 24,982,259 | |
Diluted | 24,922,896 | | | 24,788,566 | | | 25,106,351 | |
See accompanying notes.
UNIVERSAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| | | | | | | | | | | | | | | | | |
| Fiscal Year Ended March 31, |
(in thousands of dollars) | 2022 | | 2021 | | 2020 |
Net income | $ | 103,604 | | | $ | 96,314 | | | $ | 78,003 | |
Other comprehensive income (loss): | | | | | |
Foreign currency translation, net of income taxes | (6,367) | | | 8,272 | | | (3,066) | |
Foreign currency hedge, net of income taxes | 3,993 | | | 11,812 | | | (11,850) | |
Interest rate hedge, net of income taxes | 18,620 | | | 7,922 | | | (26,468) | |
Pension and other postretirement benefit plans, net of income taxes | 5,943 | | | 17,038 | | | (14,766) | |
Total other comprehensive income (loss), net of income taxes | 22,189 | | | 45,044 | | | (56,150) | |
Total comprehensive income | 125,793 | | | 141,358 | | | 21,853 | |
Less: comprehensive income attributable to noncontrolling interests | (16,490) | | | (9,388) | | | (6,079) | |
| | | | | |
Comprehensive income attributable to Universal Corporation | $ | 109,303 | | | $ | 131,970 | | | $ | 15,774 | |
See accompanying notes.
UNIVERSAL CORPORATION
CONSOLIDATED BALANCE SHEETS
| | | | | | | | | | | |
| March 31, |
(in thousands of dollars) | 2022 | | 2021 |
ASSETS | | | |
Current assets | | | |
Cash and cash equivalents | $ | 81,648 | | | $ | 197,221 | |
Accounts receivable, net | 385,437 | | | 367,482 | |
Advances to suppliers, net | 129,838 | | | 121,618 | |
Accounts receivable—unconsolidated affiliates | 4,540 | | | 584 | |
Inventories—at lower of cost or net realizable value: | | | |
Tobacco | 822,513 | | | 640,653 | |
Other | 194,161 | | | 145,965 | |
Prepaid income taxes | 13,095 | | | 15,029 | |
| | | |
Other current assets | 116,779 | | | 66,806 | |
Total current assets | 1,748,011 | | | 1,555,358 | |
| | | |
Property, plant and equipment | | | |
Land | 23,959 | | | 22,400 | |
Buildings | 293,935 | | | 284,430 | |
Machinery and equipment | 668,451 | | | 658,826 | |
| 986,345 | | | 965,656 | |
Less accumulated depreciation | (641,227) | | | (616,146) | |
| 345,118 | | | 349,510 | |
Other assets | | | |
Operating lease right-of-use assets | 40,243 | | | 31,230 | |
Goodwill, net | 213,998 | | | 173,051 | |
Other intangibles, net | 92,571 | | | 72,304 | |
Investments in unconsolidated affiliates | 81,006 | | | 84,218 | |
Deferred income taxes | 11,616 | | | 12,149 | |
Pension asset | 12,667 | | | 11,950 | |
Other noncurrent assets | 41,115 | | | 52,154 | |
| 493,216 | | | 437,056 | |
| | | |
Total assets | $ | 2,586,345 | | | $ | 2,341,924 | |
UNIVERSAL CORPORATION
CONSOLIDATED BALANCE SHEETS—(Continued)
| | | | | | | | | | | |
| March 31, |
(in thousands of dollars) | 2022 | | 2021 |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | |
Current liabilities | | | |
Notes payable and overdrafts | $ | 182,639 | | | $ | 101,294 | |
Accounts payable and accrued expenses | 272,042 | | | 139,484 | |
Accounts payable—unconsolidated affiliates | 5,308 | | | 1,282 | |
Customer advances and deposits | 13,724 | | | 8,765 | |
Accrued compensation | 27,281 | | | 29,918 | |
Income taxes payable | 7,427 | | | 4,516 | |
Current portion of operating lease liabilities | 10,303 | | | 7,898 | |
Current portion of long-term debt | — | | | — | |
Total current liabilities | 518,724 | | | 293,157 | |
| | | |
Long-term debt | 518,547 | | | 518,172 | |
Pensions and other postretirement benefits | 52,890 | | | 57,637 | |
Long-term operating lease liabilities | 29,617 | | | 19,725 | |
Other long-term liabilities | 34,464 | | | 59,814 | |
Deferred income taxes | 47,334 | | | 44,994 | |
Total liabilities | 1,201,576 | | | 993,499 | |
| | | |
Shareholders’ equity | | | |
Universal Corporation: | | | |
Preferred stock: | | | |
Series A Junior Participating Preferred Stock, no par value, 500,000 shares authorized, none issued or outstanding | — | | | — | |
| | | |
Common stock, no par value, 100,000,000 shares authorized, 24,550,019 shares issued and outstanding (24,514,867 at March 31, 2021) | 330,662 | | | 326,673 | |
Retained earnings | 1,094,192 | | | 1,087,663 | |
Accumulated other comprehensive loss | (84,311) | | | (107,037) | |
Total Universal Corporation shareholders' equity | 1,340,543 | | | 1,307,299 | |
Noncontrolling interests in subsidiaries | 44,226 | | | 41,126 | |
Total shareholders' equity | 1,384,769 | | | 1,348,425 | |
| | | |
Total liabilities and shareholders' equity | $ | 2,586,345 | | | $ | 2,341,924 | |
See accompanying notes.
UNIVERSAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | | | | | | | | | | | | | | |
| Fiscal Year Ended March 31, |
(in thousands of dollars) | 2022 | | 2021 | | 2020 |
Cash Flows From Operating Activities: | | | | | |
Net income | $ | 103,604 | | | $ | 96,314 | | | $ | 78,003 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
Depreciation and amortization | 52,521 | | | 44,733 | | | 38,379 | |
| | | | | |
Provision for losses (recoveries) on advances and guaranteed loans to suppliers | 5,988 | | | 5,534 | | | 937 | |
Inventory write-downs | 19,944 | | | 13,463 | | | 10,319 | |
Stock-based compensation expense | 6,186 | | | 6,106 | | | 5,631 | |
Foreign currency remeasurement loss (gain), net | 19,029 | | | (8,475) | | | 16,422 | |
Foreign currency exchange contracts | (13,210) | | | (1,567) | | | 499 | |
Deferred income taxes | (2,473) | | | (2,335) | | | (8,697) | |
Equity in net income of unconsolidated affiliates, net of dividends | (329) | | | (296) | | | 1,101 | |
Restructuring and impairment costs | 10,457 | | | 22,577 | | | 7,543 | |
Restructuring payments | (4,134) | | | (8,283) | | | (2,787) | |
Change in estimated fair value of contingent consideration for FruitSmart acquisition | (2,532) | | | (4,173) | | | — | |
Other, net | 513 | | | (1,373) | | | (9,271) | |
Changes in operating assets and liabilities, net: | | | | | |
Accounts and notes receivable | (23,185) | | | (5,239) | | | 16,267 | |
Inventories and other assets | (261,911) | | | 43,199 | | | (94,538) | |
Income taxes | 6,644 | | | (4,516) | | | 10,927 | |
Accounts payable and other accrued liabilities | 123,102 | | | 26,171 | | | (48,534) | |
Customer advances and deposits | 4,668 | | | (1,426) | | | (11,304) | |
Net cash provided by operating activities | 44,882 | | | 220,414 | | | 10,897 | |
| | | | | |
Cash Flows From Investing Activities: | | | | | |
Purchase of property, plant and equipment | (53,203) | | | (66,154) | | | (35,227) | |
Purchase of business, net of cash held by the business | (102,462) | | | (161,751) | | | (80,180) | |
Proceeds from sale of property, plant and equipment | 13,004 | | | 11,436 | | | 8,547 | |
Other | — | | | (800) | | | 495 | |
Net cash used by investing activities | (142,661) | | | (217,269) | | | (106,365) | |
| | | | | |
Cash Flows From Financing Activities: | | | | | |
Issuance (repayment) of short-term debt, net | 79,286 | | | 29,396 | | | 24,114 | |
Issuance of long-term debt | — | | | 150,000 | | | — | |
| | | | | |
Dividends paid to noncontrolling interests in subsidiaries | (13,390) | | | (10,881) | | | (6,251) | |
| | | | | |
| | | | | |
Repurchase of common stock | (3,053) | | | — | | | (33,457) | |
| | | | | |
Dividends paid on common stock | (76,436) | | | (75,177) | | | (75,368) | |
| | | | | |
Debt issuance costs and other | (3,167) | | | (1,949) | | | (3,184) | |
Net cash provided/(used) by financing activities | (16,760) | | | 91,389 | | | (94,146) | |
| | | | | |
Effect of exchange rate changes on cash | (1,034) | | | 1,257 | | | (512) | |
Net increase (decrease) in cash and cash equivalents | (115,573) | | | 95,791 | | | (190,126) | |
Cash, restricted cash and cash equivalents at beginning of year | 203,221 | | | 107,430 | | | 297,556 | |
Cash, Restricted Cash and Cash Equivalents at End of Year | $ | 87,648 | | | $ | 203,221 | | | $ | 107,430 | |
| | | | | |
Supplemental Information: | | | | | |
Cash and cash equivalents | $ | 81,648 | | | $ | 197,221 | | | $ | 107,430 | |
Restricted cash (Other noncurrent assets) | 6,000 | | | 6,000 | | | — | |
Total cash, restricted cash and cash equivalents | $ | 87,648 | | | $ | 203,221 | | | $ | 107,430 | |
| | | | | |
Supplemental information—cash paid for: | | | | | |
Interest | $ | 27,113 | | | $ | 24,198 | | | $ | 19,376 | |
Income taxes, net of refunds | $ | 33,010 | | | $ | 36,443 | | | $ | 30,984 | |
See accompanying notes.
UNIVERSAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Universal Corporation Shareholders | | | | |
(in thousands of dollars) | | | | Common Stock | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Non- controlling Interests | | Total Shareholders' Equity |
Fiscal Year Ended March 31, 2022 | | | | | | | | | | | | |
Balance at beginning of year | | | | $ | 326,673 | | | $ | 1,087,663 | | | $ | (107,037) | | | $ | 41,126 | | | $ | 1,348,425 | |
Changes in common stock | | | | | | | | | | | | |
| | | | | | | | | | | | |
Repurchase of common stock | | | | (782) | | | — | | | — | | | — | | | (782) | |
Accrual of stock-based compensation | | | | 6,187 | | | — | | | — | | | — | | | 6,187 | |
Withholding of shares from stock-based compensation for grantee income taxes | | | | (2,486) | | | — | | | — | | | — | | | (2,486) | |
Dividend equivalents on restricted stock units (RSUs) | | | | 1,070 | | | — | | | — | | | — | | | 1,070 | |
Changes in retained earnings | | | | | | | | | | | | |
Net income | | | | — | | | 86,577 | | | — | | | 17,027 | | | 103,604 | |
Cash dividends declared on common stock ($3.12 per share) | | | | — | | | (76,707) | | | — | | | — | | | (76,707) | |
Repurchase of common stock | | | | — | | | (2,271) | | | — | | | — | | | (2,271) | |
Dividend equivalents on restricted stock units (RSUs) | | | | — | | | (1,070) | | | — | | | — | | | (1,070) | |
Other comprehensive income (loss) | | | | | | | | | | | | |
Foreign currency translation, net of income taxes | | | | — | | | — | | | (5,830) | | | (537) | | | (6,367) | |
Foreign currency hedge, net of income taxes | | | | — | | | — | | | 3,993 | | | — | | | 3,993 | |
Interest rate hedge, net of income taxes | | | | — | | | — | | | 18,620 | | | — | | | 18,620 | |
Pension and other postretirement benefit plans, net of income taxes | | | | — | | | — | | | 5,943 | | | — | | | 5,943 | |
Other changes in noncontrolling interests | | | | | | | | | | | | |
Dividends paid to noncontrolling shareholders | | | | — | | | — | | | — | | | (13,390) | | | (13,390) | |
Balance at end of year | | | | $ | 330,662 | | | $ | 1,094,192 | | | $ | (84,311) | | | $ | 44,226 | | | $ | 1,384,769 | |
UNIVERSAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY—(Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Universal Corporation Shareholders | | | | |
(in thousands of dollars) | | | | Common Stock | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Non- controlling Interests | | Total Shareholders' Equity |
Fiscal Year Ended March 31, 2021 | | | | | | | | | | | | |
Balance at beginning of year | | | | $ | 321,502 | | | $ | 1,076,760 | | | $ | (151,597) | | | $ | 42,619 | | | $ | 1,289,284 | |
Changes in common stock | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Accrual of stock-based compensation | | | | 6,106 | | | — | | | — | | | — | | | 6,106 | |
Withholding of shares from stock-based compensation for grantee income taxes | | | | (1,949) | | | — | | | — | | | — | | | (1,949) | |
Dividend equivalents on restricted stock units (RSUs) | | | | 1,014 | | | — | | | — | | | — | | | 1,014 | |
Changes in retained earnings | | | | | | | | | | | | |
Net income | | | | — | | | 87,410 | | | — | | | 8,904 | | | 96,314 | |
Cash dividends declared on common stock ($3.08 per share) | | | | — | | | (75,493) | | | — | | | — | | | (75,493) | |
| | | | | | | | | | | | |
Dividend equivalents on restricted stock units (RSUs) | | | | — | | | (1,014) | | | — | | | — | | | (1,014) | |
Other comprehensive income (loss) | | | | | | | | | | | | |
Foreign currency translation, net of income taxes | | | | — | | | — | | | 7,788 | | | 484 | | | 8,272 | |
Foreign currency hedge, net of income taxes | | | | — | | | — | | | 11,812 | | | — | | | 11,812 | |
Interest rate hedge, net of income taxes | | | | — | | | — | | | 7,922 | | | — | | | 7,922 | |
Pension and other postretirement benefit plans, net of income taxes | | | | — | | | — | | | 17,038 | | | — | | | 17,038 | |
Other changes in noncontrolling interests | | | | | | | | | | | | |
Dividends paid to noncontrolling shareholders | | | | — | | | — | | | — | | | (10,881) | | | (10,881) | |
Balance at end of year | | | | $ | 326,673 | | | $ | 1,087,663 | | | $ | (107,037) | | | $ | 41,126 | | | $ | 1,348,425 | |
UNIVERSAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY—(Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Universal Corporation Shareholders | | | | |
(in thousands of dollars) | | | | Common Stock | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Non- controlling Interests | | Total Shareholders' Equity |
Fiscal Year Ended March 31, 2020 | | | | | | | | | | | | |
Balance at beginning of year | | | | $ | 326,600 | | | $ | 1,106,178 | | | $ | (95,691) | | | $ | 42,791 | | | $ | 1,379,878 | |
Changes in common stock | | | | | | | | | | | | |
| | | | | | | | | | | | |
Repurchase of common stock | | | | (8,562) | | | — | | | — | | | — | | | (8,562) | |
Accrual of stock-based compensation | | | | 5,631 | | | — | | | — | | | — | | | 5,631 | |
Withholding of shares from stock-based compensation for grantee income taxes | | | | (3,183) | | | — | | | — | | | — | | | (3,183) | |
Dividend equivalents on restricted stock units (RSUs) | | | | 1,016 | | | — | | | — | | | — | | | 1,016 | |
Changes in retained earnings | | | | | | | | | | | | |
Net income | | | | — | | | 71,680 | | | — | | | 6,323 | | | 78,003 | |
Cash dividends declared on common stock ($3.04 per share) | | | | | | (75,187) | | | — | | | — | | | (75,187) | |
Repurchase of common stock | | | | — | | | (24,895) | | | — | | | — | | | (24,895) | |
Dividend equivalents on restricted stock units (RSUs) | | | | — | | | (1,016) | | | — | | | — | | | (1,016) | |
Other comprehensive income (loss) | | | | | | | | | | | | |
Foreign currency translation, net of income taxes | | | | — | | | — | | | (2,822) | | | (244) | | | (3,066) | |
Foreign currency hedge, net of income taxes | | | | — | | | — | | | (11,850) | | | — | | | (11,850) | |
Interest rate hedge, net of income taxes | | | | — | | | — | | | (26,468) | | | — | | | (26,468) | |
Pension and other postretirement benefit plans, net of income taxes | | | | — | | | — | | | (14,766) | | | — | | | (14,766) | |
Other changes in noncontrolling interests | | | | | | | | | | | | |
Dividends paid to noncontrolling shareholders | | | | — | | | — | | | — | | | (6,251) | | | (6,251) | |
Balance at end of year | | | | $ | 321,502 | | | $ | 1,076,760 | | | $ | (151,597) | | | $ | 42,619 | | | $ | 1,289,284 | |
UNIVERSAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY—(Continued)
| | | | | | | | | | | | | | | | | |
| Fiscal Year Ended March 31, |
| 2022 | | 2021 | | 2020 |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Common Shares Outstanding: | | | | | |
Balance at beginning of year | 24,514,867 | | | 24,421,835 | | | 24,989,946 | |
Issuance of common stock | 93,416 | | | 93,032 | | | 88,709 | |
| | | | | |
Repurchase of common stock | (58,264) | | | — | | | (656,820) | |
Balance at end of year | 24,550,019 | | | 24,514,867 | | | 24,421,835 | |
See accompanying notes.
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts are in thousands, except per share amounts or as otherwise noted.)
NOTE 1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Universal Corporation, which together with its subsidiaries is referred to herein as “Universal” or the “Company,” is a global business-to-business agri-products supplier to consumer product manufacturers. The Company is the leading global leaf tobacco supplier and provides high-quality plant-based ingredients to food and beverage end markets. The Company conducts its leaf tobacco business in over 30 countries, primarily in major tobacco-producing regions of the world.
The extent to which the ongoing COVID-19 pandemic will impact the Company's financial condition, results of operations and demand for its products and services will depend on future developments, which are highly uncertain and cannot be predicted. Such developments may include the ongoing geographic spread and mutations of COVID-19, the severity of the pandemic, the duration of the COVID-19 outbreak and the type and duration of actions that may be taken by various governmental authorities in response to the COVID-19 pandemic and the impact on the U.S. and the global economies, markets and supply chains. At March 31, 2022, it is not possible to predict the overall impact of the ongoing COVID-19 pandemic on the Company's business, financial condition, results of operations and demand for its products and services.
Consolidation
The consolidated financial statements include the accounts of Universal Corporation and all domestic and foreign subsidiaries in which the Company maintains a controlling financial interest. Control is generally determined based on a voting interest of greater than 50%, such that Universal controls all significant corporate activities of the subsidiary. All significant intercompany accounts and transactions are eliminated in consolidation.
The equity method of accounting is used for investments in companies where Universal Corporation has a voting interest of 20% to 50%. These investments are accounted for under the equity method because Universal exercises significant influence over those companies, but not control. The Company received dividends totaling $4.3 million in fiscal year 2022, $2.9 million in fiscal year 2021, and $3.9 million in fiscal year 2020, from companies accounted for under the equity method. Investments where Universal has a voting interest of less than 20% are not significant and do not have readily determinable fair values. As such, the Company has elected the alternate method of measuring these investments at cost, less any impairment. The Company's 49% ownership interest in Socotab L.L.C. (“Socotab”), a leading supplier of oriental tobaccos with operations located principally in Eastern Europe and Turkey, is the primary investment accounted for under the equity method. The investment in Socotab is an important part of the Company's overall product and service arrangements with its major customers. The Company reviews the carrying value of its investments in Socotab and its other unconsolidated affiliates on a regular basis and considers whether any factors exist that might indicate an impairment in value that is other than temporary.
The Company's operations in Zimbabwe are deconsolidated under accounting requirements that apply under certain conditions to foreign subsidiaries that are subject to foreign exchange controls and other government restrictions. The investment in the Zimbabwe operations is accounted for at cost and was zero at March 31, 2022 and 2021. The Company has a net foreign currency translation loss associated with the Zimbabwe operations of approximately $7.2 million, which remains a component of accumulated other comprehensive loss at March 31, 2022. As a regular part of its reporting, the Company reviews the conditions that resulted in the deconsolidation of the Zimbabwe operations to confirm that such accounting treatment is still appropriate. Dividends from the Zimbabwe operations are recorded in income in the period received.
The Company holds less than a 100% financial interest in certain consolidated subsidiaries. The net income and shareholders’ equity attributable to the noncontrolling interests in these subsidiaries are reported on the face of the consolidated financial statements. There were no material changes in the Company’s ownership percentage in any of these subsidiaries during fiscal years 2022, 2021, or 2020.
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Investments in Unconsolidated Affiliates
The Company’s investments in its unconsolidated affiliates, which include its Zimbabwe operations, are non-marketable securities. Universal reviews such investments for impairment whenever events or changes in circumstances indicate that the carrying amount of an investment may not be recovered. For example, the Company would review such an investment for impairment if the investee were to lose a significant customer, suffer a large reduction in sales margins, experience a major change in its business environment, or undergo any other significant change in its normal business. In assessing the recoverability of these investments, the Company follows the applicable accounting guidance in determining the fair value of the investments. In most cases, this involves the use of undiscounted and discounted cash flow models (Level 3 of the fair value hierarchy under the accounting guidance). If the fair value of an unconsolidated investee is determined to be lower than its carrying value, an impairment loss is recognized. The determination of fair value using discounted cash flow models is normally not based on observable market data from independent sources and therefore requires significant management judgment with respect to estimates of future operating earnings and the selection of an appropriate discount rate. The use of different assumptions could increase or decrease estimated future operating cash flows, and the discounted value of those cash flows, and therefore could increase or decrease any impairment charge related to these investments. During the fiscal year ended March 31, 2022, the Company recognized an immaterial impairment of an investment in an equity method investee in Africa.
In its consolidated statements of income, the Company reports its proportional share of the earnings of unconsolidated affiliates accounted for on the equity method based on the pretax earnings of those affiliates, as permitted under the applicable accounting guidance. All applicable foreign and U.S. income taxes are provided on these earnings and reported as a component of consolidated income tax expense. For unconsolidated affiliates located in foreign jurisdictions, repatriation of the Company’s share of the earnings through dividends is assumed in determining consolidated income tax expense.
The following table provides a reconciliation of (1) equity in the pretax earnings of unconsolidated affiliates, as reported in the consolidated statements of income to (2) equity in the net income of unconsolidated affiliates, net of dividends, as reported in the consolidated statements of cash flows for the fiscal years ended March 31, 2022, 2021, and 2020:
| | | | | | | | | | | | | | | | | |
| Fiscal Year Ended March 31, |
| 2022 | | 2021 | | 2020 |
| | | | | |
Equity in pretax earnings reported in the consolidated statements of income | $ | 6,095 | | | $ | 2,985 | | | $ | 4,211 | |
Less: Equity in income taxes | (1,481) | | | 180 | | | (1,390) | |
Equity in net income | 4,614 | | | 3,165 | | | 2,821 | |
Less: Dividends received on investments (1) | (4,285) | | | (2,869) | | | (3,922) | |
Equity in net income, net of dividends, reported in the consolidated statements of cash flows | $ | 329 | | | $ | 296 | | | $ | (1,101) | |
(1) In accordance with the applicable accounting guidance, dividends received from unconsolidated affiliates accounted for on the equity method that represent a return on capital (i.e., a return of earnings on a cumulative basis) are presented as operating cash flows in the consolidated statements of cash flows.
Earnings Per Share
The Company calculates basic earnings per share based on earnings available to common shareholders. The calculation uses the weighted average number of common shares outstanding during each period. Diluted earnings per share is computed in a similar manner using the weighted average number of common shares and dilutive potential common shares outstanding. Dilutive potential common shares include unvested restricted stock units and performance share units that are assumed to be fully vested and paid out in shares of common stock.
Calculations of earnings per share for the fiscal years ended March 31, 2022, 2021, and 2020, are provided in Note 5.
Cash, Restricted Cash, and Cash Equivalents
All highly liquid investments with a maturity of three months or less at the time of purchase are classified as cash equivalents. Restricted cash is associated with the acquisition of Silva International, Inc. ("Silva") and is recognized as a component of other noncurrent assets at March 31, 2022 and 2021.
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Advances to Tobacco Suppliers
In many sourcing origins where the Company operates, it provides agronomy services and seasonal advances of seed, fertilizer, and other supplies to tobacco farmers for crop production, or makes seasonal cash advances to farmers for the procurement of those inputs. These advances are typically short term, are repaid upon delivery of tobacco to the Company, and are reported in advances to suppliers in the consolidated balance sheets. In several origins, the Company has made long-term advances to tobacco farmers to finance curing barns and other farm infrastructure. In some years, due to low crop yields and other factors, individual farmers may not deliver sufficient volumes of tobacco to fully repay their seasonal advances, and the Company may extend repayment of those advances into future crop years. The long-term portion of advances is included in other noncurrent assets in the consolidated balance sheets. Both the current and the long-term portions of advances to tobacco suppliers are reported net of allowances recorded when the Company determines that amounts outstanding are not likely to be collected. Short-term and long-term advances to tobacco suppliers totaled approximately $153 million at March 31, 2022 and $144 million at March 31, 2021. The related valuation allowances totaled $19 million at March 31, 2022, and $18 million at March 31, 2021, and were estimated based on the Company’s historical loss information and crop projections. The allowances were increased by net provisions for estimated uncollectible amounts of approximately $6.0 million in fiscal year 2022, $5.5 million in fiscal year 2021, and $1.0 million in fiscal year 2020. These net provisions are included in selling, general, and administrative expenses in the consolidated statements of income. Interest on advances is recognized in earnings upon the farmers’ delivery of tobacco in payment of principal and interest. Advances on which interest accrual had been discontinued totaled approximately $4 million at both March 31, 2022 and 2021.
Inventories
Inventories are valued at the lower of cost or net realizable value. Raw materials primarily consist of unprocessed leaf tobacco, which is clearly identified by type and grade at the time of purchase. The Company tracks the costs associated with this tobacco in the final product lots, and maintains this identification through the time of sale. This method of cost accounting is referred to as the specific cost or specific identification method. The predominant cost component of the Company’s inventories is the cost of the unprocessed tobacco. Direct and indirect processing costs related to these raw materials are capitalized and allocated to inventory in a systematic manner. The Company does not capitalize any interest or sales-related costs in inventory. Freight costs are recorded in cost of goods sold. Other inventories consist primarily of unprocessed and processed food and vegetable ingredients, extracts, seed, fertilizer, packing materials, and other supplies, and are valued using the specific cost method.
Recoverable Value-Added Tax Credits
In many foreign countries, the Company’s local operating subsidiaries pay significant amounts of value-added tax (“VAT”) on purchases of unprocessed and processed tobacco, crop inputs, packing materials, and various other goods and services. In some countries, VAT is a national tax, and in other countries it is assessed at the state level. Items subject to VAT vary from jurisdiction to jurisdiction, as do the rates at which the tax is assessed. When tobacco is sold to customers in the country of origin, the operating subsidiaries generally collect VAT on those sales. The subsidiaries are normally permitted to offset their VAT payments against the collections and remit only the incremental VAT collections to the tax authorities. When tobacco is sold for export, VAT is normally not assessed. In countries where tobacco sales are predominately for export markets, VAT collections generated on downstream sales are often not sufficient to fully offset the subsidiaries’ VAT payments. In those situations, unused VAT credits can accumulate. Some jurisdictions have procedures that allow companies to apply for refunds of unused VAT credits from the tax authorities, but the refund process often takes an extended period of time, and it is not uncommon for refund applications to be challenged or rejected in part on technical grounds. Other jurisdictions may permit companies to sell or transfer unused VAT credits to third parties in private transactions, although approval for such transactions must normally be obtained from the tax authorities, limits on the amounts that can be transferred may be imposed, and the proceeds realized may be heavily discounted from the face value of the credits. Due to these factors, local operating subsidiaries in some countries can accumulate significant balances of VAT credits over time. The Company reviews these balances on a regular basis and records valuation allowances on the credits to reflect amounts that are not expected to be recovered, as well as discounts anticipated on credits that are expected to be sold or transferred. At March 31, 2022 and 2021, the aggregate balances of recoverable tax credits held by the Company’s subsidiaries totaled approximately $67 million and $49 million, respectively, and the related valuation allowances totaled approximately $21 million and $19 million, respectively. The net balances are reported in other current assets and other noncurrent assets in the consolidated balance sheets.
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Property, Plant and Equipment
Depreciation of property, plant and equipment is based upon historical cost and the estimated useful lives of the assets. Depreciation is calculated primarily using the straight-line method. Buildings include processing and blending facilities, offices, and warehouses. Machinery and equipment consists of processing and packing machinery and transport, office, and computer equipment. Estimated useful lives range as follows: buildings - 15 to 40 years; processing and packing machinery - 3 to 11 years; transport equipment - 3 to 10 years; and office and computer equipment - 3 to 12 years. Where applicable and material in amount, the Company capitalizes related interest costs during periods that property, plant and equipment are being constructed or made ready for service. No interest was capitalized in fiscal years 2022, 2021, or 2020.
Leases
The Company determines if an arrangement meets the definition of a lease at inception. The Company, as a lessee, enters into operating leases for land, buildings, equipment, and vehicles. For all operating leases with terms greater than 12 months and with fixed payment arrangements, a lease liability and corresponding right-of-use asset are recognized in the balance sheet for the term of the lease by calculating the net present value of future lease payments. On the date of lease commencement, the present value of lease liabilities is determined by discounting the future lease payments by the Company’s collateralized incremental borrowing rate, adjusted for the lease term and currency of the lease payments. If a lease contains a renewal option that the Company is reasonably certain to exercise, the Company accounts for the original lease term and expected renewal term in the calculation of the lease liability and right-of-use asset. Certain of the Company’s leases include both lease and non-lease components (e.g., common-area or other maintenance costs) which are accounted for as a single lease component, as the Company has elected the practical expedient to group lease and non-lease components for real estate leases.
Goodwill and Other Intangibles
Goodwill and other intangibles are disclosed in Note 7. Goodwill principally consists of the excess of the purchase price of acquired companies over the fair value of the net assets. Goodwill is carried at the lower of cost or fair value and is reviewed for potential impairment on an annual basis as of the end of the fiscal year. Accounting Standards Codification Topic 350 (“ASC 350”) permits companies to base their initial assessments of potential goodwill impairment on qualitative factors, and the Company elected to use that approach at March 31, 2022 and 2021. Those factors did not indicate that it was more likely than not that the fair value of any of the reporting units was less than their respective carrying value, therefore no potential impairment of the Company's recorded goodwill was noted as of those dates.
Reporting units are distinct operating subsidiaries or groups of subsidiaries that typically compose the Company’s business in a specific country or location. Goodwill is allocated to reporting units based on the country or location to which a specific acquisition relates, or by allocation based on expected future cash flows if the acquisition relates to more than one country or location. The majority of the Company’s goodwill relates to its reporting unit in Brazil and reporting units in the Ingredients operating segment. See Notes 2 and 7 for additional information. Significant adverse changes in the operations or estimated future cash flows for a reporting unit with recorded goodwill could result in an impairment charge.
Other intangibles principally consists of finite lived intangible assets including customer-related intangibles, trade names, developed technology, and noncompetition agreements. Intangible assets acquired in a business combination are recorded at fair value using a discounted cash flow approach. A discounted cash flow approach to value intangible assets requires assumptions about the timing, amount, and probability of future net cash flows, as well as the discount rate and market participant considerations. Other intangibles are amortized on a straight-line basis over the intangible asset's economic life.
Impairment of Long-Lived Assets
The Company reviews long-lived assets for impairment, disclosed in Note 4 and Note 12, whenever events, changes in business conditions, or other circumstances provide an indication that such assets may be impaired. Potential impairment is initially assessed by comparing management’s undiscounted estimates of future cash flows from the use or disposition of the assets to their carrying value. If the carrying value exceeds the undiscounted cash flows, an impairment charge is recorded to reduce the carrying value of the asset to its fair value determined in accordance with the accounting guidance. In many cases, this involves the use of discounted cash flow models that are not based on observable market data from independent sources (Level 3 of the fair value hierarchy under the accounting guidance).
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Income Taxes
The Company provides deferred income taxes on temporary differences between the book and tax basis of its assets and liabilities. Those differences arise principally from employee benefit accruals, depreciation, deferred compensation, undistributed earnings of unconsolidated affiliates, undistributed earnings of foreign subsidiaries, goodwill, intangibles, and valuation allowances on farmer advances and VAT credits. Income taxes provided on pretax amounts recorded in accumulated other comprehensive income (loss) are released when the related pretax amounts are reclassified to earnings. Additional disclosures related to the Company's income taxes are disclosed in Note 6.
Fair Values of Financial Instruments
The fair value of the Company’s long-term debt, disclosed in Note 12, approximates the carrying amount since the variable interest rates in the underlying credit agreement reflect the market interest rates that were available to the Company at March 31, 2022. In periods when fixed-rate obligations are outstanding, fair values are estimated using market prices where they are available or discounted cash flow models based on current incremental borrowing rates for similar classes of borrowers and borrowing arrangements. The fair values of interest rate swap agreements designated as cash flow hedges and used to fix the variable benchmark rate on outstanding long-term debt are determined separately and recorded in other long-term liabilities. Except for interest rate swaps and forward foreign currency exchange contracts that are discussed below, the fair values of all other assets and liabilities that qualify as financial instruments approximate their carrying amounts.
Derivative Financial Instruments
The Company recognizes all derivatives on the balance sheet at fair value. Interest rate swaps and forward foreign currency exchange contracts are used from time to time to manage interest rate risk and foreign currency risk. The Company enters into such contracts only with counterparties of good standing. The credit exposure related to non-performance by the counterparties and the Company is considered in determining the fair values of the derivatives, and the effect has not been material to the financial statements or operations of the Company. Additional disclosures related to the Company’s derivatives and hedging activities are provided in Note 11.
Translation and Remeasurement of Foreign Currencies
The financial statements of foreign subsidiaries having the local currency as the functional currency are translated into U.S. dollars using exchange rates in effect at period end for assets and liabilities and average exchange rates applicable to each reporting period for results of operations. Adjustments resulting from translation of financial statements are reflected as a separate component of other comprehensive income or loss. The financial statements of foreign subsidiaries having the U.S. dollar as the functional currency, with certain transactions denominated in a local currency, are remeasured into U.S. dollars. The remeasurement of local currency amounts into U.S. dollars creates remeasurement gains and losses that are included in earnings as a component of selling, general, and administrative expenses. The Company recognized net remeasurement losses of $19.0 million and $16.4 million in fiscal years 2022 and 2020 , and net remeasurement gains of $8.5 million in fiscal year 2021.
Foreign currency transactions and forward foreign currency exchange contracts that are not designated as hedges generate gains and losses when they are settled or when they are marked-to-market under the prescribed accounting guidance. These transaction gains and losses are also included in earnings as a component of selling, general, and administrative expenses. The Company recognized net foreign currency transaction gains of $18.0 million in fiscal year 2022 and net foreign currency transaction losses of $1.4 million and $2.9 million in fiscal years 2021 and 2020, respectively.
Revenue Recognition
Revenue is recognized when the Company completes its performance obligation for the transfer of products and services under its contractual arrangements with customers. For sales of tobacco, satisfaction of the performance obligation and recognition of the corresponding revenue is based on the transfer of the ownership and control of the product to the customer, which is substantially unchanged from the previous accounting guidance. A large percentage of the Company’s sales are to major multinational manufacturers of consumer tobacco products. The Company works closely with those customers to understand and plan for their requirements for volumes, styles, and grades of leaf tobacco from its various growing regions, and extensive coordination is maintained on an ongoing basis to determine and satisfy their requirements for transfer of ownership and physical shipment of processed tobacco. The customers typically specify, in sales contracts and in shipping documents, the precise terms for transfer of title and risk of loss for the tobacco. Customer returns and rejections are not significant, and the Company’s sales history indicates that customer-specific acceptance provisions are consistently met upon transfer of title and risk of loss.
While most of the Company’s revenue is derived from tobacco that is purchased from farmers, processed and packed in its factories, and then sold to customers, some revenue is earned from processing tobacco owned by customers and from other value-added services. The arrangements for processing services usually exist in specific markets where the customers contract directly with farmers for leaf production, and they have accounted for less than 5% of total revenue on an annual basis through the
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
fiscal year ended March 31, 2022. Processing and packing of leaf tobacco is a short-duration process. Under normal operating conditions, raw tobacco that is placed into the production line exits as processed and packed tobacco within one hour, and is then later transported to customer-designated storage facilities. The revenue for these services is recognized when the performance obligation is met upon the completion of processing, and the Company's operating history indicates that customer requirements for processed tobacco are consistently met upon completion of processing.
The Company has diversified its operations through acquisition of established companies that offer customers a wide range of both liquid and dehydrated fruit and vegetable ingredient products, as well as botanical extracts and flavors. These operations procure raw materials from domestic and international growers and suppliers and through a variety of processing steps (including sorting, cleaning, pressing, mixing, extracting, and blending), manufacture finished goods utilized in both human and pet food. The contracts for food ingredients with customers create a performance obligation to transfer the manufactured finished goods to the customer. Transaction prices for the sale of food ingredients are primarily based on negotiated fixed prices. At the point in time that the customer obtains control over the finished product, which is typically aligned with physical shipment under the contractual terms with the customer, the Company completes its performance obligation and recognizes the revenue for the sale.
Additional disclosures related to the Company's revenue from contracts with customers are provided in Note 3.
Stock-Based Compensation
Share-based payments, such as grants of restricted stock units, performance share units, restricted stock, stock appreciation rights, and stock options, are measured at fair value and reported as expense in the financial statements over the requisite service period. Additional disclosures related to stock-based compensation are included in Note 15.
Estimates and Assumptions
The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Accounting Pronouncements
Pronouncements Adopted in Fiscal Year 2021
The Company adopted FASB Accounting Standards Update No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”) effective April 1, 2020. ASU 2016-13 requires companies to measure credit losses utilizing a methodology that reflects expected credit losses and requires a consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The Company determined that the update applied to trade receivables, but that there was no material impact to the consolidated financial statements from the adoption of ASU 2016-13.
The Company adopted FASB Accounting Standards Update No. 2018-15, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of FASB Emerging Issues Task Force)” (“ASU 2018-15”) effective April 1, 2020. ASU 2018-15 aligns the requirements for capitalizing implementation costs in a cloud computing arrangement service contract with the requirements for capitalizing implementation costs incurred for an internal-use software license. Under that model, implementation costs are capitalized or expensed depending on the nature of the costs and the project stage during which they are incurred. Capitalized implementation costs are amortized over the term of the associated hosted cloud computing arrangement service contract on a straight-line basis, unless another systematic and rational basis is more representative of the pattern in which the entity expects to benefit from its right to access the hosted software. Capitalized implementation costs would then be assessed for impairment in a manner similar to long-lived assets. There was no material impact to the consolidated financial statements from the adoption of ASU 2018-15.
Pronouncements Adopted in Fiscal Year 2022
The Company adopted FASB issued Accounting Standards Update No. 2019-12, “Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes” (“ASU 2019-12”) effective April 1, 2021. ASU 2019-12 eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences related to changes in ownership of equity method investments and foreign subsidiaries. The updated guidance also simplifies aspects of accounting for franchise taxes and enacted changes in tax laws or rates, and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. There was no material impact to the consolidated financial statements from the adoption of ASU 2019-12.
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Pronouncements to be Adopted in Future Periods
In March 2020, the FASB issued Accounting Standards Update No. 2020-04, “Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”). ASU 2020-04 provides optional expedients and exceptions related to contract modifications and hedge accounting to address the transitions from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates. The guidance permits an entity to consider contract modification due to reference rate reform to be an event that does not require contract remeasurement at the modification date or reassessment of a previous accounting determination. ASU 2020-04 also temporarily allows hedge relationships to continue without de-designation upon changes due to reference rate reform. The standard is effective upon issuance and can be applied as of March 12, 2020 through December 31, 2022. The Company is currently evaluating the impact that the guidance will have on its consolidated financial statements.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year’s presentation.
NOTE 2. BUSINESS COMBINATIONS
Acquisition of Shank's Extracts, LLC
On October 4, 2021, the Company acquired 100% of the capital stock of Shank's Extract's, LLC (“Shank's”), a flavors and extracts processing company, for approximately $100 million in cash and $2.4 million of additional working capital on-hand at the date of acquisition. The acquisition of Shank's diversifies the Company's product offerings and generates new opportunities for its plant-based ingredients platform.
The goodwill and intangibles recognized for the Shank's acquisition are deductible for U.S. income tax purposes. The transaction was treated as an asset acquisition for U.S. Federal tax purposes, resulting in a step-up of tax basis to fair value.
For the fiscal year ended March 31, 2022, the Company incurred $2.3 million for acquisition-related transaction costs for the purchase of Shank's. The acquisition-related costs were expensed as incurred and recorded in selling, general, and administrative expense on the consolidated statements of income.
In November 2021, the Company acquired the land and buildings utilized by Shank's operations for $13.3 million. The purchase of the land and buildings resulted in the elimination of the $8.5 million operating lease right-of-use asset and lease liability recognized on the acquisition date for Shank's.
Acquisition of Silva International, Inc.
On October 1, 2020 the Company acquired 100% of the capital stock of Silva International, Inc. ("Silva"), a natural, specialty dehydrated vegetable, fruit, and herb processing company serving global markets, for approximately $164 million in cash and $5.9 million of additional working capital on-hand at the date of acquisition. The acquisition of Silva diversified the Company's product offerings and generates new opportunities for its plant-based ingredients platform. The tax basis of the assets acquired and liabilities assumed did not result in a step-up of tax basis and the related goodwill is not deductible for U.S. income tax purposes.
The Company continues to employ one of Silva's selling shareholders and as stipulated in the Silva purchase agreement has transferred $6.0 million to a third-party escrow account that may ultimately be earned by the selling shareholder upon completion of a post-combination service period. Since the compensation agreement for the selling shareholder who remains employed with the Company includes a post-combination service period, the Company excluded the entire $6.0 million in the purchase price to be allocated. The $6.0 million in escrow is recognized as restricted cash in other noncurrent assets on the consolidated balance sheet at March 31, 2022. The contingent consideration arrangement for the selling shareholder includes a post-combination service requirement and forfeitable payment provisions, therefore under ASC Topic 805, “Business Combinations,” must be treated as compensation expense and recognized ratably over the requisite service period in selling, general, and administrative expense on the consolidated statements of income.
For the fiscal year ended March 31, 2021, the Company incurred $3.9 million for acquisition-related transaction costs for the purchase of Silva. The acquisition-related costs were expensed as incurred and recorded in selling, general, and administrative expense on the consolidated statements of income.
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table summarizes the final purchase price allocations of the assets acquired and liabilities assumed for the Shank's and Silva acquisitions.
| | | | | | | | | | | |
| Shank's | Silva | |
Assets | October 4, 2021 | October 1, 2020 | |
Cash and cash equivalents | $ | 754 | | $ | 8,126 | | |
Accounts receivable, net | 6,643 | | 17,885 | | |
Advances to suppliers, net | — | | 3,011 | | |
Inventory | 15,792 | | 33,162 | | |
Other current assets | 415 | | 833 | | |
Property, plant and equipment | 11,000 | | 24,437 | | |
Operating lease right-of-use assets | 8,531 | | — | | |
Intangibles | | | |
Customer relationships | 24,000 | | 53,000 | | |
Developed technology | 4,500 | | — | | |
Trade names | — | | 7,800 | | |
Non-compete agreements | 3,000 | | — | | |
Goodwill | 41,061 | | 46,144 | | |
Total assets acquired | 115,696 | | 194,398 | | |
| | | |
Liabilities | | | |
Accounts payable and accrued expenses | 6,159 | | 11,683 | | |
Customer advances and deposits | 351 | | — | | |
Accrued compensation | 655 | | 3,350 | | |
Income taxes payable | — | | 946 | | |
Current portion operating lease liabilities | 8,531 | | — | | |
Deferred income taxes | — | | 14,419 | | |
Total liabilities assumed | 15,696 | | 30,398 | | |
| | | |
Total assets acquired and liabilities assumed | $ | 100,000 | | $ | 164,000 | | |
| | | |
A portion of the goodwill recorded as part of the acquisitions was attributable to the assembled workforce of Shank's and Silva, respectively. The Company determined the Shank's and Silva operations were not material to the Company’s consolidated results. Therefore, pro forma information is not presented.
NOTE 3. REVENUE FROM CONTRACTS WITH CUSTOMERS
The majority of the Company’s consolidated revenue consists of sales of processed leaf tobacco to customers. The Company also earns revenue from processing leaf tobacco owned by customers and from various other services provided to customers. Additionally, the Company has fruit and vegetable processing operations, as well as flavor and extract services that provide customers with a range of food ingredient products. Payment terms with customers vary depending on customer creditworthiness, product types, services provided, and other factors. Contract durations and payment terms for all revenue categories generally do not exceed one year. Therefore, the Company has applied a practical expedient to not adjust the transaction price for the effects of financing components, as the Company expects that the period from the time the revenue for a transaction is recognized to the time the customer pays for the related good or service transferred will be one year or less. Below is a description of the major revenue-generating categories from contracts with customers.
Tobacco Sales
The majority of the Company’s business involves purchasing leaf tobacco from farmers in the origins where it is grown, processing and packing the tobacco in its factories, and then transferring ownership and control of the tobacco to customers. On a much smaller basis, the Company also sources processed tobacco from third-party suppliers for resale to customers. The contracts for tobacco sales with customers create a performance obligation to transfer tobacco to the customer. Transaction prices for the sale of tobaccos are primarily based on negotiated fixed prices, but the Company does have a small number of cost-plus contracts with certain customers. Cost-plus arrangements provide the Company reimbursement of the cost to purchase and process the
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
tobacco, plus a contractually agreed-upon profit margin. The Company utilizes the most likely amount methodology under the accounting guidance to recognize revenue for cost-plus arrangements with customers. Shipping and handling costs under tobacco sales contracts with customers are treated as fulfillment costs and included in the transaction price. Taxes assessed by government authorities on the sale of leaf tobacco products are excluded from the transaction price. At the point in time that the customer obtains control over the tobacco, which is typically aligned with physical shipment under the contractual terms with the customer, the Company completes its performance obligation and recognizes the revenue for the sale.
Ingredient Sales
In recent fiscal years, the Company has diversified operations through acquisition of established companies that offer customers a wide range of both liquid and dehydrated fruit and vegetable ingredient products, flavors, and extracts. These operations procure raw materials from domestic and international growers and suppliers and through a variety of processing steps including sorting, cleaning, pressing, mixing, extracting, and blending to manufacture finished goods utilized in both human and pet food. The contracts for food ingredients with customers create a performance obligation to transfer the manufactured finished goods to the customer. Transaction prices for the sale of food ingredients are primarily based on negotiated fixed prices. At the point in time that the customer obtains control over the finished product, which is typically aligned with physical shipment under the contractual terms with the customer, the Company completes its performance obligation and recognizes the revenue for the sale.
Processing Revenue
Processing and packing of customer-owned tobacco and ingredients is a short-duration process. Processing charges are primarily based on negotiated fixed prices per unit of weight processed. Under normal operating conditions, customer-owned raw materials that are placed into the production line exits as processed and packed product and is then later transported to customer-designated transfer locations. The revenue for these services is recognized when the performance obligation is satisfied, which is generally when processing is completed. The Company’s operating history and contract analyses indicate that customer requirements for processed tobacco and food ingredients products are consistently met upon completion of processing.
Other Sales and Revenue from Contracts with Customers
From time to time, the Company enters into various arrangements with customers to provide other value-added services that may include blending, chemical and physical testing of products, storage, sorting, and tobacco cutting services for select manufacturers. These other arrangements and operations are a much smaller portion of the Company’s business, and are separate and distinct contractual agreements from the Company’s tobacco and food ingredients sales or third-party processing arrangements with customers. The transaction prices and timing of revenue recognition of these items are determined by the specifics of each contract.
Disaggregation of Revenue from Contracts with Customers
The following table disaggregates the Company’s revenue by significant revenue-generating category:
| | | | | | | | | | | | | | | | | |
| Fiscal Year Ended March 31, |
| 2022 | | 2021 | | 2020 |
Tobacco sales | $ | 1,703,330 | | | $ | 1,715,066 | | | $ | 1,759,769 | |
Ingredient sales | 250,595 | | | 127,393 | | | 22,014 | |
Processing revenue | 77,048 | | | 73,021 | | | 76,123 | |
Other sales and revenue from contracts with customers | 60,177 | | | 49,983 | | | 33,971 | |
Total revenue from contracts with customers | 2,091,150 | | | 1,965,463 | | | 1,891,877 | |
Other operating sales and revenues | 12,451 | | | 17,894 | | | 18,102 | |
Consolidated sales and other operating revenues | $ | 2,103,601 | | | $ | 1,983,357 | | | $ | 1,909,979 | |
Other operating sales and revenues consists principally of interest on advances to tobacco suppliers and dividend income from unconsolidated affiliates.
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Major Customers
A material part of the Company’s business is dependent upon a few customers. The Company’s seven largest customers are Altria Group, Inc, British American Tobacco plc, China Tobacco International, Inc., Imperial Brands plc, Japan Tobacco, Inc., Philip Morris International, Inc., and Swedish Match AB. In the aggregate, these customers have accounted for more than 60% of consolidated revenue for each of the past three fiscal years. For the fiscal years ended March 31, 2022, 2021, and 2020, revenue from Imperial Brands plc accounted for revenue of approximately $380 million, $340 million, and $320 million, respectively, Philip Morris International, Inc. accounted for revenue of approximately $320 million, $460 million, and $500 million, respectively, and British American Tobacco plc accounted for revenue of approximately $260 million, $210 million, and $190 million, respectively. These customers do business with various affiliates in the Company’s Tobacco Operations segment. The loss of, or substantial reduction in business from, any of these customers could have a material adverse effect on the Company.
NOTE 4. RESTRUCTURING AND IMPAIRMENT COSTS
During the fiscal years ended March 31, 2022, 2021, and 2020 Universal recorded restructuring and impairment costs related to business changes and various initiatives to adjust certain operations and reduce costs.
Fiscal Year Ended March 31, 2022
Tobacco Operations
As a result of efforts to exit the idled tobacco operations in Tanzania, the Company reevaluated the carrying values of property, plant, and equipment associated with the Tanzania operations. During the fiscal year ended March 31, 2022, the Company determined the carrying value exceeded the estimated fair value of those assets and recognized a $9.4 million impairment charge. See Note 19 for additional information.
During the fiscal year ended March 31, 2022, the Company also incurred $2.2 million of termination costs for the Tobacco Operations segment.
Ingredients Operations
During the fiscal year ended March 31, 2022, the Company recognized $1.2 million of net gains on the sale of the remaining property, plant, and equipment associated with the wind-down of the CIFI operations that was announced in fiscal year 2021.
Fiscal Year Ended March 31, 2021
Tobacco Operations
During the fiscal year ended March 31, 2021, the Company incurred $4.4 million of termination and impairment costs associated with the restructuring of tobacco buying and administrative operations in Africa, $1.2 million of combined termination costs in other regions, and a $0.9 million charge for the liquidation of an idled service entity in Tanzania. Total restructuring and impairments costs related to the Tobacco Operations segment were $6.5 million for the fiscal year ended March 31, 2021.
Ingredients Operations
In fiscal year 2021, the Company committed to a plan to wind-down its subsidiary, Carolina Innovative Food Ingredients, Inc. (“CIFI”), a sweet potato processing operation located in Nashville, North Carolina. The CIFI operation was a start-up project initially undertaken by the Company in fiscal year 2015. The decision to wind down CIFI was consistent with the Company’s capital allocation strategy to focus on delivering shareholder value through building and enhancing a plant-based ingredients platform, which includes integrating and exploring the synergies of recently acquired businesses, FruitSmart and Silva. The Company determined that CIFI was not a strategic fit for the platform’s long-term objectives. CIFI’s single-product focused processing facility and ongoing international pricing pressures, among other factors, created challenges that proved insurmountable. As a result of the decision to wind down the CIFI operations, the Company paid termination benefits totaling approximately $0.6 million to employees whose permanent positions were eliminated. In addition to the termination costs, the Company recognized various other costs associated with the wind-down of the CIFI facility. These costs include impairments of property, plant, and equipment (including the factory building), as well as inventory and supply write-downs. The total restructuring and impairment charge incurred for the CIFI wind-down was $16.1 million for the fiscal year ended March 31, 2021.
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Fiscal Year Ended March 31, 2020
Tobacco Operations
In fiscal year 2020, the Company recorded restructuring and impairment costs totaling $7.5 million, primarily related to $3.4 million of employee termination benefits for a voluntary workforce reduction at the Company's tobacco facilities in North Carolina, $1.8 million of employee termination benefits for the Company’s operations in Africa, and a $2.2 million impairment charge for machinery used by the Company's operations in Africa. Restructuring and impairment costs were also incurred in connection with downsizing efforts at several other locations around the Company.
A summary of the restructuring and impairment costs incurred during the fiscal years ended March 31, 2022, 2021, and 2020 is as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Years Ended March 31, |
| | 2022 | | 2021 | | 2020 |
Restructuring Costs: | | | | | | |
Employee termination benefits | | $ | 2,174 | | | $ | 5,237 | | | $ | 5,356 | |
Other restructuring costs | | (24) | | | 3,468 | | | — | |
| | 2,150 | | | 8,705 | | | 5,356 | |
Impairment Costs: | | | | | | |
Property, plant, and equipment and other noncurrent assets | | 8,307 | | | 13,872 | | | 2,187 | |
| | | | | | |
| | $ | 8,307 | | | $ | 13,872 | | | $ | 2,187 | |
Total restructuring and impairment costs | | $ | 10,457 | | | $ | 22,577 | | | $ | 7,543 | |
A reconciliation of the Company’s liability for employee termination benefits and other restructuring costs for fiscal years 2020 through 2022 is as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Employee Termination Benefits | | Other Costs | | Total |
Balance at April 1, 2019 | | $623 | | $223 | | $846 |
Fiscal Year 2020 Activity: | | | | | | |
Costs charged to expense | | 5,356 | | — | | 5,356 |
Payments and write-offs | | (2,564) | | (223) | | (2,787) |
Balance at March 31, 2020 | | 3,415 | | — | | 3,415 |
Fiscal Year 2021 Activity: | | | | | | |
Costs charged to expense | | 5,237 | | 3,468 | | 8,705 |
Payments and write-offs | | (7,282) | | (2,855) | | (10,137) |
Balance at March 31, 2021 | | 1,370 | | 613 | | 1,983 |
Fiscal Year 2022 Activity: | | | | | | |
Costs charged to expense | | 2,174 | | (24) | | 2,150 |
Payments and write-offs | | (3,544) | | (589) | | (4,133) |
Balance at March 31, 2022 | | $— | | $— | | $— |
Universal continually reviews its business for opportunities to realize efficiencies, reduce costs, and realign its operations in response to business changes. The Company may incur additional restructuring and impairment costs in future periods as business changes occur and additional cost savings initiatives are implemented.
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE 5. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share:
| | | | | | | | | | | | | | | | | |
| Fiscal Year Ended March 31, |
(in thousands, except share and per share data) | 2022 | | 2021 | | 2020 |
Basic Earnings Per Share | | | | | |
Numerator for basic earnings per share | | | | | |
Net income attributable to Universal Corporation | $ | 86,577 | | | $ | 87,410 | | | $ | 71,680 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Denominator for basic earnings per share | | | | | |
Weighted average shares outstanding | 24,764,177 | | | 24,656,009 | | | 24,982,259 | |
| | | | | |
Basic earnings per share | $ | 3.50 | | | $ | 3.55 | | | $ | 2.87 | |
| | | | | |
Diluted Earnings Per Share | | | | | |
Numerator for diluted earnings per share | | | | | |
Net income attributable to Universal Corporation | $ | 86,577 | | | $ | 87,410 | | | $ | 71,680 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Denominator for diluted earnings per share: | | | | | |
Weighted average shares outstanding | 24,764,177 | | | 24,656,009 | | | 24,982,259 | |
Effect of dilutive securities | | | | | |
| | | | | |
Employee and outside director share-based awards | 158,719 | | | 132,557 | | | 124,092 | |
Denominator for diluted earnings per share | 24,922,896 | | | 24,788,566 | | | 25,106,351 | |
| | | | | |
Diluted earnings per share | $ | 3.47 | | | $ | 3.53 | | | $ | 2.86 | |
NOTE 6. INCOME TAXES
The Company operates in the United States and many foreign countries and is subject to the tax laws of many jurisdictions. Changes in tax laws or the interpretation of tax laws can affect the Company’s earnings, as can the resolution of pending and contested tax issues. The Company's consolidated effective income tax rate is affected by a number of factors, including the mix of domestic and foreign earnings and the effect of exchange rate changes on local taxable income and deferred taxes in foreign countries.
For fiscal years ended March 31, 2022, 2021, and 2020 the Company's U.S. federal statutory tax rate is 21.0%. The U.S. tax system is primarily territorial based after the enactment of the Tax Cuts and Jobs Act of 2017. The U.S. tax law imposes a tax on U.S. shareholders on certain low-taxed income earned by controlled foreign corporations, referred to as global intangible low-taxed income ("GILTI”). The Company has made an accounting policy election to account for any additional tax resulting from the GILTI provisions in the year in which it is incurred and has not recorded any deferred taxes on temporary book-tax differences related to this income.
The Company continues to assume repatriation of all undistributed earnings of its consolidated foreign subsidiaries and has therefore provided for expected foreign withholding taxes on the distribution of those earnings where applicable, net of any U.S. tax credit attributable to those withholding taxes. The Company has asserted permanent reinvestment of the book basis of certain foreign subsidiaries, and accordingly, no deferred income tax liability has been recorded for any potential taxable gain that may be realized on a future disposition or liquidation of any of those subsidiaries. It is not practicable for the Company to quantify any deferred income tax liability that would be attributable to those events.
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Income Tax Expense
Income taxes for the fiscal years ended March 31, 2022, 2021, and 2020 consisted of the following:
| | | | | | | | | | | | | | | | | |
| Fiscal Year Ended March 31, |
| 2022 | | 2021 | | 2020 |
Current | | | | | |
United States | $ | 15,042 | | | $ | 9,500 | | | $ | 2,001 | |
State and local | 265 | | | 621 | | | 92 | |
Foreign | 25,828 | | | 21,626 | | | 41,892 | |
| 41,135 | | | 31,747 | | | 43,985 | |
Deferred | | | | | |
United States | (498) | | | (5,938) | | | 3,735 | |
State and local | 1,568 | | | (314) | | | (16) | |
Foreign | (3,542) | | | 3,917 | | | (12,416) | |
| (2,472) | | | (2,335) | | | (8,697) | |
Total | $ | 38,663 | | | $ | 29,412 | | | $ | 35,288 | |
Foreign taxes include any applicable U.S. tax expense on the earnings of foreign subsidiaries.
Consolidated Effective Income Tax Rate
A reconciliation of the U.S. federal statutory tax rate to the Company’s effective income tax rate is as follows:
| | | | | | | | | | | | | | | | | |
| Fiscal Year Ended March 31, |
| 2022 | | 2021 | | 2020 |
U.S. federal statutory tax rate | 21.0 | % | | 21.0 | % | | 21.0 | % |
State income taxes, net of federal benefit | 1.0 | | | 0.2 | | | 0.1 | |
| | | | | |
| | | | | |
| | | | | |
Foreign earnings taxed at rates other than the U.S. federal statutory tax rate | 3.7 | | | (0.9) | | | (2.0) | |
Foreign dividend withholding taxes | 2.3 | | | 5.3 | | | 5.1 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Changes in uncertain tax positions | (0.3) | | | — | | | 5.6 | |
Other | (0.5) | | | (2.2) | | | 1.3 | |
Effective income tax rate | 27.2 | % | | 23.4 | % | | 31.1 | % |
In fiscal year 2022, the Company recognized a $1.7 million benefit related to a final tax law ruling at a foreign subsidiary.
Final United States GILTI regulations published in July 2020 significantly changed from the proposed regulations published in 2019. The final regulations allow for an annual election for GILTI high-tax exclusion instead of a 5-year election and permitted retroactive application to years beginning after December 31, 2017. Universal elected to apply the final regulations to fiscal years 2019 and 2020 which resulted in a tax reduction of $2.7 million. In fiscal year 2021, the Company also recognized a $4.4 million net tax benefit for final U.S. tax regulations issued for hybrid dividends paid by foreign subsidiaries.
During fiscal year 2020, the Company resolved a transfer pricing matter related to a foreign subsidiary. The resolution of the uncertainty with the local country taxing authorities resulted in net additional current income tax expense of $2.8 million. The additional income tax expense for fiscal year 2020 increased the effective tax rate for the year by 2.4%
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Components of Income Before Income Taxes
The U.S. and foreign components of income before income taxes were as follows:
| | | | | | | | | | | | | | | | | |
| Fiscal Year Ended March 31, |
| 2022 | | 2021 | | 2020 |
United States | $ | 74,553 | | | $ | 30,060 | | | $ | 22,916 | |
Foreign | 67,714 | | | 95,666 | | | 90,375 | |
Total | $ | 142,267 | | | $ | 125,726 | | | $ | 113,291 | |
Deferred Income Tax Liabilities and Assets
Significant components of deferred tax liabilities and assets were as follows:
| | | | | | | | | | | |
| March 31, |
| 2022 | | 2021 |
Liabilities | | | |
Foreign withholding taxes | $ | 19,353 | | | $ | 21,711 | |
Property, plant and equipment | 10,567 | | | 8,726 | |
Undistributed earnings | 3,004 | | | 2,947 | |
Operating lease right-of-use assets | 6,621 | | | 6,856 | |
Goodwill and other intangible assets | 34,584 | | | 35,059 | |
Local currency exchange gains of foreign subsidiaries | 4,094 | | | — | |
All other | 3,414 | | | 4,876 | |
Total deferred tax liabilities | $ | 81,637 | | | $ | 80,175 | |
| | | |
Assets | | | |
Employee benefit plans | $ | 16,138 | | | $ | 17,199 | |
Reserves and accruals | 9,844 | | | 7,603 | |
Deferred income | 4,127 | | | 3,521 | |
Operating lease right-of-use liabilities | 6,538 | | | 6,718 | |
Currency translation losses of foreign subsidiaries | 2,173 | | | 2,173 | |
Local currency exchange losses of foreign subsidiaries | 595 | | | 450 | |
Interest rate swap | 302 | | | 5,178 | |
| | | |
| | | |
All other | 9,384 | | | 8,568 | |
Total deferred tax assets | 49,101 | | | 51,410 | |
Valuation allowance | (3,182) | | | (4,080) | |
Net deferred tax assets | $ | 45,919 | | | $ | 47,330 | |
At March 31, 2022, the Company had no material net operating loss carryforwards in either its domestic or foreign operations.
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Combined Income Tax Expense (Benefit)
The combined income tax expense (benefit) allocable to continuing operations and other comprehensive income was as follows:
| | | | | | | | | | | | | | | | | |
| Fiscal Year Ended March 31, |
| 2022 | | 2021 | | 2020 |
Continuing operations | $ | 38,663 | | | $ | 29,412 | | | $ | 35,288 | |
Other comprehensive loss | 6,555 | | | 9,563 | | | (14,392) | |
| | | | | |
Total | $ | 45,218 | | | $ | 38,975 | | | $ | 20,896 | |
Uncertain Tax Positions
A reconciliation of the beginning and ending balance of the gross liability for uncertain tax positions is as follows:
| | | | | | | | | | | | | | | | | |
| Fiscal Year Ended March 31, |
| 2022 | | 2021 | | 2020 |
Liability for uncertain tax positions, beginning of year | $ | 2,437 | | | $ | 2,377 | | | $ | 5,625 | |
Additions: | | | | | |
Related to tax positions for the current year | 48 | | | 49 | | | 1,746 | |
Related to tax positions for prior years | 328 | | | — | | | 4,369 | |
Reductions: | | | | | |
| | | | | |
| | | | | |
Due to lapses of statutes of limitations | (56) | | | (135) | | | (81) | |
Due to tax settlements | (814) | | | — | | | (8,948) | |
| | | | | |
Effect of currency rate changes | 81 | | | 146 | | | (334) | |
Liability for uncertain tax positions, end of year | $ | 2,024 | | | $ | 2,437 | | | $ | 2,377 | |
The liability for uncertain tax positions at March 31, 2022 includes approximately $2.0 million that could have an effect on the consolidated effective tax rate if the tax benefits are recognized. The liability for uncertain tax positions includes $0.1 million related to tax positions for which it is reasonably possible that the amounts could change significantly before March 31, 2023. This amount reflects a possible decrease in the liability for uncertain tax positions that could result from the completion and resolution of tax audits and the expiration of open tax years in various tax jurisdictions. The $0.8 million settlement in fiscal year 2022 represents the resolution of a tax matter with a local country taxing authority. The Company accrued $0.5 million of the fiscal year 2022 settlement in prior fiscal years. The settlement in fiscal year 2020 represents the resolution of a tax matter with a local country taxing authority that resulted in a $8.9 million settlement of which $4.5 million was accrued in prior fiscal years.
For the fiscal year ended March 31, 2021, the Company recognized $1.8 million as a component of interest expense related to a settlement of an uncertain tax position at a foreign subsidiary. Amounts accrued or reversed for interest were not material for fiscal years 2022 or 2020. Amounts accrued or reversed for penalties were not material for fiscal years 2022 through 2020, and liabilities recorded for penalties at March 31, 2022 and 2021 also were not material.
Universal and its subsidiaries file a U.S. federal consolidated income tax return, as well as returns in several U.S. states and a number of foreign jurisdictions. As of March 31, 2022, the Company's earliest open tax year for U.S. federal income tax purposes was its fiscal year ended March 31, 2018. Open tax years in U.S. federal, state and foreign jurisdictions range from 3 to 6 years.
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE 7. GOODWILL AND OTHER INTANGIBLES
The Company's changes in goodwill at March 31, 2022 and 2021 consisted of the following:
| | | | | | | | | | | | | | |
(in thousands) | | Fiscal Year Ended March 31, |
| | 2022 | | 2021 |
Balance at beginning of year | | $ | 173,051 | | | $ | 126,826 | |
Acquisition of business(1) (2) | | 41,061 | | | 46,144 | |
Foreign currency translation adjustment | | (114) | | | 81 | |
| | | | |
Balance at end of year | | $ | 213,998 | | | $ | 173,051 | |
(1) On October 4, 2021, the Company acquired 100% of the capital stock of Shank's for approximately $100 million in cash and $2.4 million of additional working capital on-hand at the date of acquisition.. The Shank's acquisition resulted in $41.1 million of goodwill. See Note 2 for additional information.
(2) On October 1, 2020, the Company acquired 100% of the capital stock of Silva for approximately $164.0 million in cash and $5.9 million of working capital on-hand at the date of acquisition. The Silva acquisition resulted in $46.1 million of goodwill. See Note 2 for additional information.
The Company's intangible assets primarily consist of capitalized customer-related intangibles, trade names, proprietary developed technology and noncompetition agreements. The Company's intangible assets subject to amortization consisted of the following at March 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands, except useful life) | | Fiscal Year Ended March 31, |
| | | | | 2022 | | 2021 |
| Useful Life (Years) | | Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value | | Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value |
Customer relationships(1)(2) | 11 | - | 13 | | $ | 86,500 | | | $ | (9,963) | | | $ | 76,537 | | | $ | 62,500 | | | $ | (3,323) | | | $ | 59,177 | |
Trade names(1)(2) | | 5 | | | 11,100 | | | (3,825) | | | 7,275 | | | 11,100 | | | (1,605) | | | 9,495 | |
Developed technology(1) | | 3 | | | 9,300 | | | (3,773) | | | 5,527 | | | 4,800 | | | (2,000) | | | 2,800 | |
Noncompetition agreements(1) | | 5 | | | 4,000 | | | (825) | | | 3,175 | | | 1,000 | | | (250) | | | 750 | |
Other | | 5 | | | 736 | | | (679) | | | 57 | | | 760 | | | (678) | | | 82 | |
Total intangible assets | | | | | $ | 111,636 | | | $ | (19,065) | | | $ | 92,571 | | | $ | 80,160 | | | $ | (7,856) | | | $ | 72,304 | |
(1) The Shank's acquisition resulted in $31.5 million of intangibles. See Note 2 for additional information.
(2) The Silva acquisition resulted in $60.8 million of intangibles. See Note 2 for additional information.
Intangible assets are amortized on a straight-line basis over the asset's estimated useful economic life as noted above.
The Company's amortization expense for intangible assets for the years ended March 31, 2022, 2021, and 2020:
| | | | | | | | | | | | | | | | | | | | |
(in thousands) | | Fiscal Year Ended March 31, |
| | 2022 | | 2021 | | 2020 |
Amortization Expense | | $ | 11,209 | | | $ | 6,460 | | | $ | 722 | |
Amortization expense for the developed technology intangible asset is recorded in cost of goods sold in the consolidated income statements of income. The amortization expense for the other intangible assets is recorded in selling, general, and administrative expenses in the consolidated income statements of income.
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
As of March 31, 2022, the expected future amortization expense for intangible assets is as follows:
| | | | | |
Fiscal Year | |
2023 | $ | 12,494 | |
2024 | 11,256 | |
2025 | 11,812 | |
2026 | 8,452 | |
2027 and thereafter | 48,557 | |
Total expected future amortization expense | $ | 92,571 | |
NOTE 8. CREDIT FACILITIES
Bank Credit Agreement
On December 20, 2018, the Company entered into a senior unsecured bank credit agreement that included a $430 million five-year revolving credit facility (expiring December 20, 2023), a $150 million five-year term loan (due December 20, 2023), and a $220 million seven-year term loan (due December 20, 2025). On December 17, 2020, the Company converted $150 million from the balance in the revolving credit facility into the existing term loans, splitting the balance equally between them. Additional information related to the term loans is provided in Note 9. Borrowings under the revolving credit facility bear interest at a variable rate based on either (1) LIBOR plus a margin that is based on the Company's credit measures or (2) the higher of the federal funds rate plus 0.5%, prime rate, or one-month LIBOR plus 1.0%, each plus a margin. In addition to interest, the Company pays a facility fee on the revolving credit facility. $100 million was outstanding under the revolving credit facility at March 31, 2022. The credit agreement provides for an expansion of the facility under certain conditions to allow additional borrowings of up to $200 million. The credit agreement includes financial covenants that require the Company to maintain a minimum level of tangible net worth and observe limits on debt levels. The Company was in compliance with those covenants at March 31, 2022.
Short-Term Credit Facilities
The Company maintains short-term uncommitted lines of credit in the United States and in a number of foreign countries. Foreign borrowings are generally in the form of overdraft facilities at rates competitive in the countries in which the Company operates. Generally, each foreign line is available only for borrowings related to operations of a specific country. As of March 31, 2022 and 2021, approximately $83 million and $101 million, respectively, were outstanding under these uncommitted lines of credit. The weighted-average interest rates on short-term borrowings outstanding as of March 31, 2022 and 2021 were approximately 2.7% and 4.2%, respectively. At March 31, 2022, the Company and its consolidated affiliates had unused uncommitted lines of credit totaling approximately $200 million.
NOTE 9. LONG-TERM DEBT
The Company's long-term debt at March 31, 2022 and 2021 consisted of the following:
| | | | | | | | | | | |
| March 31, |
| 2022 | | 2021 |
Senior bank term loans | $ | 520,000 | | | $ | 520,000 | |
| | | |
| | | |
| | | |
Less: current portion | — | | | — | |
Less: unamortized debt issuance costs | (1,453) | | | (1,828) | |
Long-term debt | $ | 518,547 | | | $ | 518,172 | |
As discussed in Note 8, on December 20, 2018, the Company entered into a bank credit agreement. The credit agreement includes a five-year term loan maturing in December 2023 and a seven-year term loan maturing in December 2025. At inception, the five-year and seven-year term loans had balances of $150 million and $220 million, respectively. On December 17, 2020, the Company converted $150 million from the balance in the revolving credit facility, split equally between the two term loans. Both term loans were fully funded at closing, require no amortization, and are prepayable without penalty prior to maturity. Under the credit agreement, both term loans bear interest at variable rates plus a margin based on the Company's credit measures. Interest payments on the additional $150 million of new term loans in fiscal year 2021 remain unhedged at March 31, 2022.
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
As discussed in Note 11, the Company had receive-floating/pay-fixed interest rate swap agreements in place with respect to prior loans that were initially designated and carried over to hedge the variable interest payments on the new loans. Those swap agreements were subsequently terminated in February 2019 and concurrently replaced with new interest rate swap agreements that convert the variable benchmark rate to a fixed rate through December 20, 2023 for the five-year term loan and through December 20, 2025 for the seven-year term loan. The proceeds received for the fair value of the terminated interest rate swap agreements, approximately $5.4 million, was recognized in accumulated other comprehensive income, to be amortized into earnings as a reduction of interest expense through their original maturity dates. At March 31, 2022, the entire gain from the terminated interest rate swap agreements has been amortized into interest expense. With the swap agreements in place, the effective interest rates on the original $150 million five-year loan balance and the original $220 million seven-year loan balance were 4.19% and 4.51% at March 31, 2022, respectively. The weighted average effective interest rates, when taking into consideration both the hedged and unhedged interest payments for all outstanding long-term debt, were 3.36% and 3.84% at March 31, 2022 for the five-year and seven-year term loans, respectively. Changes in the effective interest rates could result from a change in interest rates on the unhedged interest payments or a change in the Company's credit measures that impact the applicable credit spreads specified in the underlying loan agreement.
Disclosures about the fair value of long-term debt are provided in Note 12.
Shelf Registration
In November 2020, the Company filed an undenominated automatic universal shelf registration statement with the U.S. Securities and Exchange Commission to provide for the future issuance of an undefined amount of additional debt or equity securities as determined by the Company and offered in one or more prospectus supplements prior to issuance.
NOTE 10. LEASES
The Company, as a lessee, enters into operating leases for land, buildings, equipment, and vehicles. For all operating leases with terms greater than 12 months and with fixed payment arrangements, a lease liability and corresponding right-of-use asset are recognized in the balance sheet for the term of the lease by calculating the net present value of future lease payments. On the date of lease commencement, the present value of lease liabilities is determined by discounting the future lease payments by the Company’s collateralized incremental borrowing rate, adjusted for the lease term and currency of the lease payments. If a lease contains a renewal option that the Company is reasonably certain to exercise, the Company accounts for the original lease term and expected renewal term in the calculation of the lease liability and right-of-use asset.
The following table sets forth the right-of-use assets and lease liabilities for operating leases included in the Company’s consolidated balance sheet:
| | | | | | | | | | | | | | |
(in thousands) | | March 31, 2022 | | March 31, 2021 |
| | | | |
Assets | | | | |
Operating lease right-of-use assets | | $ | 40,243 | | | $ | 31,230 | |
| | | | |
Liabilities | | | | |
Current portion of operating lease liabilities | | $ | 10,303 | | | $ | 7,898 | |
Long-term operating lease liabilities | | 29,617 | | | 19,725 | |
Total operating lease liabilities | | $ | 39,920 | | | $ | 27,623 | |
The following table sets forth the location and amount of operating lease costs included in the Company's consolidated statement of income:
| | | | | | | | | | | | | | |
| | Fiscal Year Ended March 31, | | Fiscal Year Ended March 31, |
(in thousands) | | 2022 | | 2021 |
| | | | |
Income Statement Location | | | | |
Cost of goods sold | | $ | 10,874 | | | $ | 12,903 | |
Selling, general, and administrative expenses | | 9,676 | | | 9,408 | |
Total operating lease costs(1) | | $ | 20,550 | | | $ | 22,311 | |
(1)Includes variable operating lease costs.
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table reconciles the undiscounted cash flows to the operating lease liabilities in the Company’s consolidated balance sheet:
| | | | | | | | |
(in thousands) | | March 31, 2022 |
Maturity of Operating Lease Liabilities | | |
2023 | | $ | 11,977 | |
2024 | | 9,921 | |
2025 | | 7,783 | |
2026 | | 5,136 | |
2027 | | 3,895 | |
2028 and thereafter | | 8,492 | |
Total undiscounted cash flows for operating leases | | $ | 47,204 | |
Less: Imputed interest | | (7,284) | |
Total operating lease liabilities | | $ | 39,920 | |
As of March 31, 2022, the Company had entered into no additional operating leases that have not yet commenced.
The following table sets forth supplemental information related to operating leases:
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended March 31, | | Fiscal Year Ended March 31, |
(in thousands, except lease term and incremental borrowing rate) | | 2022 | | 2021 |
| | | | | | |
Supplemental Cash Flow Information | | | | | | |
Cash paid for amounts included in the measurement of operating lease liabilities | | $ | 12,018 | | | | $ | 12,855 | | |
Right-of-use assets obtained in exchange for new operating leases | | 22,506 | | | | 10,970 | | |
| | | | | | |
Weighted Average Remaining Lease Term (years) | | 5.51 | | | 5.57 | |
| | | | | | |
Weighted Average Collateralized Incremental Borrowing Rate | | 5.43 | | % | | 4.05 | | % |
As part of the acquisition of Shank's, the Company recognized $8.5 million of operating lease right-of-use assets and corresponding operating lease liabilities on the opening balance sheet related to leases of Shank's facilities. The facilities were subsequently purchased in the three months ended December 31, 2021 and therefore excluded from the lease disclosures above.
NOTE 11. DERIVATIVES AND HEDGING ACTIVITIES
Universal is exposed to various risks in its worldwide operations and uses derivative financial instruments to manage two specific types of risks – interest rate risk and foreign currency exchange rate risk. Interest rate risk has been managed by entering into interest rate swap agreements, and foreign currency exchange rate risk has been managed by entering into forward foreign currency exchange and option contracts. However, the Company’s policy also permits other types of derivative instruments. In addition, foreign currency exchange rate risk is also managed through strategies that do not involve derivative instruments, such as using local borrowings and other approaches to minimize net monetary positions in non-functional currencies. The disclosures below provide additional information about the Company’s hedging strategies, the derivative instruments used, and the effects of these activities on the consolidated statements of income and comprehensive income and the consolidated balance sheets. In the consolidated statements of cash flows, the cash flows associated with all of these activities are reported in net cash provided by operating activities.
Cash Flow Hedging Strategy for Interest Rate Risk
In February 2019, the Company entered into receive-floating/pay-fixed interest rate swap agreements that were designated and qualify as hedges of the exposure to changes in interest payment cash flows created by fluctuations in variable interest rates on two outstanding non-amortizing bank term loans that were funded as part of a new bank credit facility in December 2018. Although no significant ineffectiveness is expected with this hedging strategy, the effectiveness of the interest rate swaps is evaluated on a quarterly basis. At March 31, 2022, the total notional amount of the interest rate swaps was $370 million, which corresponded with the former original outstanding balance of the term loans. During the third quarter of fiscal year 2021, the Company converted $150 million from the balance in its revolving credit line into the existing term loans, splitting the balance equally between them. At March 31, 2022, the Company is not hedging the interest payments on the additional $150
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
million of term loans. The increase to the principal balance of the term loans does not have an impact on the effectiveness analysis of the interest rate swap agreements.
Previously, the Company had receive-floating/pay-fixed interest rate swap agreements that were designated and qualified as cash flow hedges for two outstanding non-amortizing bank loans that were repaid concurrent with closing on the new bank credit facility. Those swap agreements were subsequently terminated in February 2019 concurrent with the inception of the new swap agreements. The fair value of the previous swap agreements, approximately $5.4 million, was received from the counterparties upon termination and was amortized from accumulated other comprehensive loss into earnings as a reduction of interest expense through the original maturity dates of those agreements. As of March 31, 2022, the entire deferred gain has been amortized.
Cash Flow Hedging Strategy for Foreign Currency Exchange Rate Risk Related to Forecast Purchases of Tobacco, Tobacco Processing Costs, and Crop Input Sales
The majority of the tobacco production in most countries outside the United States where Universal operates is sold in export markets at prices denominated in U.S. dollars. However, sales of crop inputs (such as seeds and fertilizers) to farmers, purchases of tobacco from farmers and most processing costs (such as labor and energy) in those countries are usually denominated in the local currency. Changes in exchange rates between the U.S. dollar and the local currencies where tobacco is grown and processed affect the ultimate U.S. dollar sales of crop inputs and cost of processed tobacco. From time to time, the Company enters into forward and option contracts to buy U.S. dollars and sell the local currency at future dates that coincide with the sale of crop inputs to farmers. In the case of forecast purchases of tobacco and the related processing costs, the Company enters into forward and option contracts to sell U.S. dollars and buy the local currency at future dates that coincide with the expected timing of a portion of the tobacco purchases and processing costs. These strategies offset the variability of future U.S. dollar cash flows for sales of crop inputs, tobacco purchases, and processing costs for the foreign currency notional amount hedged. These hedging strategies have been used mainly for tobacco purchases, processing costs, and sales of crop inputs in Brazil, although the Company has also entered into hedges for a portion of the tobacco purchases in Africa.
The aggregate U.S. dollar notional amount of forward and option contracts entered for these purposes during fiscal years 2022, 2021, and 2020 was as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended March 31, |
(in millions) | | 2022 | | 2021 | | 2020 |
Tobacco purchases | | $ | 134.7 | | | $ | 101.3 | | | $ | 123.2 | |
Processing costs | | 32.5 | | | 27.8 | | | 35.1 | |
Crop input sales | | 65.3 | | | 23.5 | | | 21.7 | |
Total | | $ | 232.5 | | | $ | 152.6 | | | $ | 180.0 | |
Fluctuations in exchange rates and in the amount and timing of fixed-price orders from customers for their purchases from individual crop years routinely cause variations in the U.S. dollar notional amount of forward contracts entered into from one year to the next. Contracts related to tobacco purchases and crop input sales were designated and qualified as hedges of the future cash flows associated with the forecast purchases of tobacco. As a result, changes in fair values of the forward contracts have been recognized in comprehensive income as they occurred, but only recognized in earnings as a component of cost of goods sold upon sale of the related tobacco to third-party customers. In fiscal year 2022, only non-deliverable forward contracts were utilized for the sale of 2023 and 2022 crop year inputs. Premium payments for option contracts entered into for the sale of crop inputs in fiscal year 2021 were expensed into earnings as incurred.
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The table below presents the expected timing of when the remaining accumulated other comprehensive gains and losses as of March 31, 2022 for cash flows hedges of tobacco purchases and crop input sales will be recognized in earnings.
| | | | | | | | | | | |
Hedging Program | Crop Year | Geographic Location(s) | Fiscal Year Earnings |
Tobacco purchases | 2023 | Brazil | 2024 |
Tobacco purchases | 2022 | Brazil, Africa | 2023 |
Tobacco purchases | 2021 | Brazil | 2023 |
Crop input sales | 2023 | Brazil | 2024 |
Crop input sales | 2022 | Brazil | 2023 |
Forward contracts related to processing costs have not been designated as hedges, and gains and losses on those contracts have been recognized in earnings on a mark-to-market basis.
Hedging Strategy for Foreign Currency Exchange Rate Risk Related to Net Local Currency Monetary Assets and Liabilities of Foreign Subsidiaries
Most of the Company’s foreign subsidiaries transact the majority of their sales in U.S. dollars and finance the majority of their operating requirements with U.S. dollar borrowings, and therefore use the U.S. dollar as their functional currency. These subsidiaries normally have certain monetary assets and liabilities on their balance sheets that are denominated in the local currency. Those assets and liabilities can include cash and cash equivalents, accounts receivable and accounts payable, advances to farmers and suppliers, deferred income tax assets and liabilities, recoverable VAT, operating lease liabilities, and other items. Net monetary assets and liabilities denominated in the local currency are remeasured into U.S. dollars each reporting period, generating gains and losses that the Company records in earnings as a component of selling, general, and administrative expenses. The level of net monetary assets or liabilities denominated in the local currency normally fluctuates throughout the year based on the operating cycle, but it is most common for monetary assets to exceed monetary liabilities, sometimes by a significant amount. When this situation exists and the local currency weakens against the U.S. dollar, remeasurement losses are generated. Conversely, remeasurement gains are generated on a net monetary asset position when the local currency strengthens against the U.S. dollar. To manage a portion of its exposure to currency remeasurement gains and losses, the Company enters into forward contracts to buy or sell the local currency at future dates coinciding with expected changes in the overall net local currency monetary asset position of the subsidiary. Gains and losses on the forward contracts are recorded in earnings as a component of selling, general, and administrative expenses for each reporting period as they occur, and thus directly offset the related remeasurement losses or gains in the consolidated statements of income for the notional amount hedged. The Company does not designate these contracts as hedges for accounting purposes. The contracts are generally arranged to hedge the subsidiary's projected exposure to currency remeasurement risk for specified periods of time, and new contracts are entered as necessary throughout the year to replace previous contracts as they mature. The Company is currently using forward currency contracts to manage its exposure to currency remeasurement risk in Brazil. The total notional amounts of contracts outstanding at March 31, 2022 and 2021, were approximately $59.5 million and $16.6 million, respectively. To further mitigate currency remeasurement exposure, the Company’s foreign subsidiaries may utilize short-term local currency financing during certain periods. This strategy, while not involving the use of derivative instruments, is intended to minimize the subsidiary’s net monetary position by financing a portion of the local currency monetary assets with local currency monetary liabilities, thus hedging a portion of the overall position.
Several of the Company’s foreign subsidiaries transact the majority of their sales and finance the majority of their operating requirements in their local currency, and therefore use their respective local currencies as the functional currency for reporting purposes. From time to time, these subsidiaries sell tobacco to customers in transactions that are not denominated in the functional currency. In those situations, the subsidiaries routinely enter into forward exchange contracts to offset currency risk for the period of time that a fixed-price order and the related trade account receivable are outstanding with the customer. The contracts are not designated as hedges for accounting purposes.
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Effect of Derivative Financial Instruments on the Consolidated Statements of Income
The table below outlines the effects of the Company’s use of derivative financial instruments on the consolidated statements of income for the fiscal years ended March 31, 2022, 2021, and 2020.
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended March 31, |
| | 2022 | | 2021 | | 2020 |
| | | | | | |
| | | | | | |
| | | | | | |
| | |
| | | | | | |
| | |
| | | | | | |
| | |
| | | | | | |
Cash Flow Hedges - Interest Rate Swap Agreements | | | | | | |
Derivative | | | | | | |
Effective Portion of Hedge | | | | | | |
Gain (loss) recorded in accumulated other comprehensive loss | | $ | 15,651 | | | $ | 3,033 | | | $ | (32,389) | |
Gain (loss) reclassified from accumulated other comprehensive loss into earnings | | $ | (8,907) | | | $ | (8,411) | | | $ | (1,577) | |
Gain on terminated interest rate swaps amortized from accumulated other comprehensive loss into earnings | | $ | 1,061 | | | $ | 1,416 | | | $ | 2,691 | |
Location of gain (loss) reclassified from accumulated other comprehensive loss into earnings | | Interest expense |
Ineffective Portion of Hedge | | | | | | |
Gain (loss) recognized in earnings | | $ | — | | | $ | — | | | $ | — | |
Location of gain (loss) recognized in earnings | | Selling, general and administrative expenses |
Hedged Item | | | | | | |
Description of hedged item | | Floating rate interest payments on term loans |
| | | | | | |
Cash Flow Hedges - Forward Foreign Currency Exchange Contracts | | | | | | |
Derivative | | | | | | |
Effective Portion of Hedge | | | | | | |
Gain (loss) recorded in accumulated other comprehensive loss | | $ | 13,879 | | | $ | (272) | | | $ | (13,646) | |
Gain (loss) reclassified from accumulated other comprehensive loss into earnings | | $ | 5,426 | | | $ | (13,926) | | | $ | 1,108 | |
Location of gain (loss) reclassified from accumulated other comprehensive loss into earnings | | Cost of goods sold |
Ineffective Portion and Early De-designation of Hedges | | | | | | |
Gain (loss) recognized in earnings | | $ | 2,040 | | | $ | — | | | $ | — | |
Location of gain (loss) recognized in earnings | | Selling, general and administrative expenses |
Hedged Item | | | | | | |
Description of hedged item | | Forecast purchases of tobacco in Brazil and Africa |
| | | | | | |
Derivatives Not Designated as Hedges - Forward Foreign Currency Exchange Contracts | | | | | | |
Gain (loss) recognized in earnings | | $ | 16,732 | | | $ | (872) | | | $ | (4,013) | |
Location of gain (loss) recognized in earnings | | Selling, general and administrative expenses |
For the outstanding interest rate swap agreements, the effective portion of the gain or loss on the derivative is recorded in accumulated other comprehensive loss and any ineffective portion is recorded in selling, general and administrative expenses.
For the forward foreign currency exchange contracts designated as cash flow hedges of tobacco purchases in Brazil and Africa, as well as the crop input sales in Brazil, a net hedge gain of approximately $5.6 million remained in accumulated other comprehensive loss at March 31, 2022. That balance reflects gains and losses on contracts related to the 2023, 2022, and 2021 Brazil crops, the 2022 Africa crop, and the 2023 and 2022 Brazil crop input sales, less the amounts reclassified to earnings related to tobacco sold through March 31, 2022. Based on the hedging strategy, as the gain or loss is recognized in earnings, it is expected to be offset by a change in the direct cost for the tobacco or by a change in sales prices if the strategy has been mandated by the customer. Generally, margins on the sale of the tobacco will not be significantly affected.
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Effect of Derivative Financial Instruments on the Consolidated Balance Sheets
The table below outlines the effects of the Company’s derivative financial instruments on the consolidated balance sheets at March 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Derivatives in a Fair Value Asset Position | | Derivatives in a Fair Value Liability Position |
| | Balance Sheet Location | | Fair Value as of March 31, | | Balance Sheet Location | | Fair Value as of March 31, |
| | | 2022 | | 2021 | | | 2022 | | 2021 |
Derivatives Designated as Hedging Instruments | | | | | | | | | | | | |
Interest rate swap agreements | | Other non-current assets | | $ | — | | | $ | — | | | Other long-term liabilities | | $ | 1,161 | | | $ | 25,719 | |
| | | | | | | | | | | | |
Forward foreign currency exchange contracts | | Other current assets | | 10,957 | | | 1,137 | | | Accounts payable and accrued expenses | | 3,200 | | | 1,031 | |
Total | | | | $ | 10,957 | | | $ | 1,137 | | | | | $ | 4,361 | | | $ | 26,750 | |
| | | | | | | | | | | | |
Derivatives Not Designated as Hedging Instruments | | | | | | | | | | | | |
Forward foreign currency exchange contracts | | Other current assets | | $ | 13,111 | | | $ | 435 | | | Accounts payable and accrued expenses | | $ | 64 | | | $ | 791 | |
Total | | | | $ | 13,111 | | | $ | 435 | | | | | $ | 64 | | | $ | 791 | |
Substantially all of the Company's forward foreign currency exchange contracts are subject to master netting arrangements, whereby the right to offset occurs in the event of default by a participating party. The Company has elected to present these contracts on a gross basis in the consolidated balance sheets.
NOTE 12. FAIR VALUE MEASUREMENTS
Universal measures certain financial and nonfinancial assets and liabilities at fair value based on applicable accounting guidance. The financial assets and liabilities measured at fair value include money market funds, trading securities associated with deferred compensation plans, interest rate swap agreements, forward foreign currency exchange contracts, and guarantees of bank loans to tobacco growers. The application of the fair value guidance to nonfinancial assets and liabilities primarily includes the determination of fair values for goodwill and long-lived assets when indicators of potential impairment are present.
Under the accounting guidance, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The framework for measuring fair value is based on a fair value hierarchy that distinguishes between observable inputs and unobservable inputs. Observable inputs are based on market data obtained from independent sources. Unobservable inputs require the Company to make its own assumptions about the value placed on an asset or liability by market participants because little or no market data exists. There are three levels within the fair value hierarchy.
| | | | | | | | |
Level | | Description |
| | |
1 | | quoted prices in active markets for identical assets or liabilities that the Company has the ability to access as of the reporting date; |
| | |
2 | | quoted prices in active markets for similar assets or liabilities, or quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability; and |
| | |
3 | | unobservable inputs for the asset or liability. |
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
As permitted under the accounting guidance, the Company uses net asset value per share ("NAV") as a practical expedient to measure the fair value of its money market funds. The fair values for those funds are presented under the heading "NAV" in the tables that follow in this disclosure. In measuring the fair value of liabilities, the Company considers the risk of non-performance in determining fair value. Universal has not elected to report at fair value any financial instruments or any other assets or liabilities that are not required to be reported at fair value under current accounting guidance.
Recurring Fair Value Measurements
At March 31, 2022 and 2021, the Company had certain financial assets and financial liabilities that were required to be measured and reported at fair value on a recurring basis. These assets and liabilities are listed in the tables below and are classified based on how their values were determined under the fair value hierarchy or the NAV practical expedient:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2022 |
| | | | Fair Value Hierarchy | | |
| | NAV | | Level 1 | | Level 2 | | Level 3 | | Total |
Assets | | | | | | | | | | |
Money market funds | | $ | 334 | | | $ | — | | | $ | — | | | $ | — | | | $ | 334 | |
Trading securities associated with deferred compensation plans | | — | | | 13,655 | | | — | | | — | | | 13,655 | |
| | | | | | | | | | |
Forward foreign currency exchange contracts | | — | | | — | | | 24,068 | | | — | | | 24,068 | |
Total financial assets measured and reported at fair value | | $ | 334 | | | $ | 13,655 | | | $ | 24,068 | | | $ | — | | | $ | 38,057 | |
| | | | | | | | | | |
Liabilities | | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Interest rate swap agreements | | $ | — | | | $ | — | | | $ | 1,161 | | | $ | — | | | $ | 1,161 | |
Forward foreign currency exchange contracts | | — | | | — | | | 3,264 | | | — | | | 3,264 | |
Total financial liabilities measured and reported at fair value | | $ | — | | | $ | — | | | $ | 4,425 | | | $ | — | | | $ | 4,425 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | March 31, 2021 |
| | | | Fair Value Hierarchy | | |
| | NAV | | Level 1 | | Level 2 | | Level 3 | | Total |
Assets | | | | | | | | | | |
Money market funds | | $ | 1,992 | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,992 | |
Trading securities associated with deferred compensation plans | | — | | | 15,735 | | | — | | | — | | | 15,735 | |
| | | | | | | | | | |
Forward foreign currency exchange contracts | | — | | | — | | | 1,572 | | | — | | | 1,572 | |
Total financial assets measured and reported at fair value | | $ | 1,992 | | | $ | 15,735 | | | $ | 1,572 | | | $ | — | | | $ | 19,299 | |
| | | | | | | | | | |
Liabilities | | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Acquisition-related contingent consideration obligations - long-term | | $ | — | | | $ | — | | | $ | — | | | $ | 2,532 | | | $ | 2,532 | |
Interest rate swap agreements | | — | | | — | | | 25,719 | | | — | | | 25,719 | |
Forward foreign currency exchange contracts | | — | | | — | | | 1,822 | | | — | | | 1,822 | |
Total financial liabilities measured and reported at fair value | | $ | — | | | $ | — | | | $ | 27,541 | | | $ | 2,532 | | | $ | 30,073 | |
Money market funds
The fair value of money market funds, which are reported in cash and cash equivalents in the consolidated balance sheets, is based on NAV, which is the amount at which the funds are redeemable and is used as a practical expedient for fair value. These funds are not classified in the fair value hierarchy, but are disclosed as part of the fair value table above.
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Trading securities associated with deferred compensation plans
Trading securities represent mutual fund investments that are matched to employee deferred compensation obligations. These investments are bought and sold as employees defer compensation, receive distributions, or make changes in the funds underlying their accounts. Quoted market prices (Level 1) are used to determine the fair values of the mutual funds.
Interest rate swap agreements
The fair values of interest rate swap agreements are determined based on dealer quotes using a discounted cash flow model matched to the contractual terms of each instrument. Since inputs to the model are observable and significant judgment is not required in determining the fair values, interest rate swaps are classified within Level 2 of the fair value hierarchy.
Forward foreign currency exchange contracts
The fair values of forward foreign currency exchange contracts are also determined based on dealer quotes using a discounted cash flow model matched to the contractual terms of each instrument. Since inputs to the model are observable and significant judgment is not required in determining the fair values, forward foreign currency exchange contracts are classified within Level 2 of the fair value hierarchy.
Acquisition-related contingent consideration obligations
The Company estimates the fair value of acquisition-related contingent consideration obligations by applying an income approach model that utilizes probability-weighted discounted cash flows. The Company acquired FruitSmart, Inc.("FruitSmart") in fiscal year 2020 and recognized a contingent consideration liability of $6.7 million on the date of acquisition. Each reporting period the Company evaluates the fair value of the acquisition-related contingent consideration obligations. In the quarter ended June 30, 2020, the evaluation resulted in the reduction of $4.2 million of contingent consideration of the original $6.7 million liability recorded. In the quarter ended September 30, 2021, an evaluation of the contingent liability resulted in a reduction of the remaining $2.5 million contingent liability recorded. Significant judgment is applied to this model and therefore the acquisition-related contingent consideration obligation is classified within Level 3 of the fair value hierarchy.
A reconciliation of the change in the balance of the acquisition-related contingent consideration obligation (Level 3) for the fiscal years ended March 31, 2022 and 2021 is provided below.
| | | | | | | | | | | |
| Fiscal Year Ended March 31, |
| 2022 | | 2021 |
Balance beginning of year | $ | 2,532 | | | $ | 6,705 | |
| | | |
| | | |
Change in fair value of contingent consideration liability | (2,532) | | | (4,173) | |
Balance at end of year | $ | — | | | $ | 2,532 | |
Long-term Debt
The following table summarizes the fair and carrying value of the Company’s long-term debt, including the current portion at each of the balance sheet dates March 31, 2022 and 2021:
| | | | | | | | | | | |
| Fiscal Year Ended March 31, |
(in millions of dollars) | 2022 | | 2021 |
Fair market value of long term obligations | $ | 517 | | | $ | 517 | |
Carrying value of long term obligations | $ | 520 | | | $ | 520 | |
The Company estimates the fair value of its long-term debt using Level 2 inputs which are based upon quoted market prices for the same or similar obligations or on calculations that are based on the current interest rates available to the Company for debt of similar terms and maturities. See Note 9 for more information regarding long-term debt.
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Nonrecurring Fair Value Measurements
Assets and liabilities that are measured at fair value on a nonrecurring basis primarily relate to long-lived assets, right-of-use operating lease assets and liabilities, goodwill and intangibles, and other current and noncurrent assets. These assets and liabilities fair values are evaluated for impairment when potential indicators of impairment exist. Accordingly, the nonrecurring measurement of the fair value of these assets and liabilities are classified within Level 3 of the fair value hierarchy.
Acquisition Accounting for Business Combinations
The Company accounts for acquisitions qualifying under ASC 805, "Business Combinations," which requires, among other things, that the assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. The fair values of consideration transferred and net assets acquired are determined using a combination of Level 2 and Level 3 inputs as specified in the fair value hierarchy in ASC 820, “Fair Value Measurements and Disclosures.” The Company believes that the fair values assigned to the assets acquired and liabilities assumed are based on reasonable assumptions. The significant assumptions used in determining the fair value include the discount rate and forecasted results (e.g., revenue growth rates and operating profit margins).
Long-Lived Assets
The Company reviews long-lived assets for impairment whenever events, changes in business conditions, or other circumstances provide an indication that such assets may be impaired.
Assets Held for Sale
Tanzania
Due to business changes that affected the leaf tobacco market in Tanzania and the Company's operations there, an impairment charge of the long-lived assets in Tanzania was recorded in fiscal year 2019 to reduce their carrying value to fair value at March 31, 2019. As a result of efforts to sell the idled Tanzania operations, in the third quarter of fiscal year 2022 an additional impairment charge of $9.4 million was recorded. The remaining assets held for sales consist principally of receivables for VAT and the Company's office building, idled processing facility, and land. The aggregate fair value and carrying value of the assets held for sale following the impairment adjustments is approximately $7 million at March 31, 2022.
NOTE 13. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
Defined Benefit Plans
Description of Plans
The Company sponsors several defined benefit pension plans covering salaried and certain hourly employees in the U.S., as well as certain foreign and other employee groups. These plans provide retirement benefits based primarily on employee compensation and years of service. Plan assets consist primarily of equity and fixed income investments. The Company also sponsors defined benefit plans that provide postretirement health and life insurance benefits for eligible U.S. employees and retirees who have attained specific age and service levels, although postretirement life insurance benefits were discontinued several years ago for all employees who were not already retired. The health benefits are funded by the Company as the costs of those benefits are incurred. The plan design includes cost-sharing features such as deductibles and coinsurance. The life insurance benefits are funded with deposits to a reserve account held by an insurance company. The Company has the right to amend or discontinue its pension and other postretirement benefit plans at any time.
In the following disclosures, the term “accumulated benefit obligation” (“ABO”) represents the actuarial present value of estimated future benefit payments earned by participants in the Company's defined benefit pension plans as of the balance sheet date without regard to the estimated effect of future compensation increases on those benefits. The term does not apply to other postretirement benefits. “Projected benefit obligation” refers to the projected benefit obligation (“PBO”) for pension benefits and the accumulated postretirement benefit obligation (“APBO”) for other postretirement benefits. These amounts represent the actuarial present value of estimated future benefit payments earned by participants in the benefit plans as of the balance sheet date. For pension benefits, the PBO includes the estimated effect of future compensation increases on those benefits.
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Actuarial Assumptions
Assumptions used for financial reporting purposes to compute net periodic benefit cost and benefit obligations for the Company's primary defined benefit plans were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | Other Postretirement Benefits |
| 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 |
Discount rates: | | | | | | | | | | | |
Benefit cost for plan year | 3.30 | % | | 3.60 | % | | 4.00 | % | | 2.90 | % | | 3.40 | % | | 3.80 | % |
Benefit obligation at end of plan year | 3.70 | % | | 3.30 | % | | 3.60 | % | | 3.60 | % | | 2.90 | % | | 3.40 | % |
Expected long-term return on plan assets: | | | | | | | | | | | |
Benefit cost for plan year | 5.50 | % | | 6.00 | % | | 6.75 | % | | 3.00 | % | | 3.00 | % | | 3.00 | % |
| | | | | | | | | | | |
Salary scale: | | | | | | | | | | | |
Benefit cost for plan year | 4.00 | % | | 4.00 | % | | 4.00 | % | | 4.00 | % | | 4.00 | % | | 4.00 | % |
Benefit obligation at end of plan year | 4.00 | % | | 4.00 | % | | 4.00 | % | | 4.00 | % | | 4.00 | % | | 4.00 | % |
Healthcare cost trend rate | N/A | | N/A | | N/A | | 6.17 | % | | 6.17 | % | | 7.34 | % |
Changes in the discount rates in the above table reflect prevailing market interest rates at the end of each fiscal year when the benefit obligations are actuarially measured. The expected long-term return on plan assets is developed from financial models used to project future returns on the underlying assets of the funded plans and is reviewed on an annual basis. The healthcare cost trend rate used by the Company is based on a study of medical cost inflation rates that is reviewed and updated annually for continued applicability. The trend assumption of 6.17% in 2022 declines gradually to 4.44% in 2031. The Company has caps in place on postretirement medical benefits that limit its cost for a large segment of the retiree population. As a result, changes to the healthcare cost trend rate have a limited impact on the postretirement medical plan liability and expense.
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Benefit Obligations, Plan Assets, and Funded Status
The following table reflects the changes in benefit obligations and plan assets in fiscal years 2022 and 2021, as well as the funded status of the plans at March 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | Other Postretirement Benefits |
| March 31, | | March 31, |
| 2022 | | 2021 | | 2022 | | 2021 |
Actuarial present value of benefit obligation: | | | | | | | |
Accumulated benefit obligation | $ | 269,758 | | | $ | 289,901 | | | | | |
Projected benefit obligation | 277,050 | | | 297,090 | | | $ | 24,957 | | | $ | 28,926 | |
| | | | | | | |
Change in projected benefit obligation: | | | | | | | |
Projected benefit obligation, beginning of year | $ | 297,090 | | | $ | 287,082 | | | $ | 28,926 | | | $ | 30,282 | |
Service cost | 6,674 | | | 6,618 | | | 170 | | | 172 | |
Interest cost | 8,754 | | | 9,571 | | | 950 | | | 1,141 | |
Effect of discount rate change | (18,010) | | | 12,990 | | | (1,549) | | | 1,126 | |
| | | | | | | |
Foreign currency exchange rate changes | (1,160) | | | 776 | | | 566 | | | (283) | |
| | | | | | | |
| | | | | | | |
Other | 1,736 | | | (3,626) | | | (1,245) | | | 167 | |
Benefit payments | (18,034) | | | (16,321) | | | (2,861) | | | (3,679) | |
Projected benefit obligation, end of year | $ | 277,050 | | | $ | 297,090 | | | $ | 24,957 | | | $ | 28,926 | |
| | | | | | | |
Change in plan assets: | | | | | | | |
Plan assets at fair value, beginning of year | $ | 270,349 | | | $ | 238,450 | | | $ | 3,033 | | | $ | 3,369 | |
Actual return on plan assets | 864 | | | 39,757 | | | 86 | | | 114 | |
Employer contributions | 6,147 | | | 8,472 | | | 2,448 | | | 3,229 | |
| | | | | | | |
Foreign currency exchange rate changes | (3,313) | | | (9) | | | — | | | — | |
Benefit payments | (18,034) | | | (16,321) | | | (2,861) | | | (3,679) | |
Plan assets at fair value, end of year | $ | 256,013 | | | $ | 270,349 | | | $ | 2,706 | | | $ | 3,033 | |
| | | | | | | |
Funded status: | | | | | | | |
Funded status of the plans, end of year | $ | (21,037) | | | $ | (26,741) | | | $ | (22,251) | | | $ | (25,893) | |
The Company funds its non-regulated U.S. pension plan, one of its foreign pension plans, and its postretirement medical plans on a pay-as-you-go basis as the benefit payments are incurred. The unfunded PBO for those pension plans and postretirement benefit plans was $33.3 million and $20.5 million, respectively, at March 31, 2022.
The funded status of the Company’s plans at the end of fiscal years 2022 and 2021 was reported in the consolidated balance sheets as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | Other Postretirement Benefits |
| March 31, | | March 31, |
| 2022 | | 2021 | | 2022 | | 2021 |
Noncurrent assets (included in Pension asset and other noncurrent assets) | $ | 12,667 | | | $ | 11,950 | | | $ | — | | | $ | — | |
Current liability (included in Accounts payable and accrued expenses) | (1,135) | | | (4,896) | | | (1,930) | | | (2,051) | |
Noncurrent liability (reported as pensions and other postretirement benefits) | (32,569) | | | (33,795) | | | (20,321) | | | (23,842) | |
Amounts recognized in the consolidated balance sheets | $ | (21,037) | | | $ | (26,741) | | | $ | (22,251) | | | $ | (25,893) | |
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Additional information on the funded status of the Company’s plans as of the respective measurement dates for the fiscal years ended March 31, 2022 and 2021, is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | Other Postretirement Benefits |
| March 31, | | March 31, |
| 2022 | | 2021 | | 2022 | | 2021 |
For plans with a projected benefit obligation in excess of plan assets: | | | | | | | |
Aggregate projected benefit obligation (PBO) | $ | 39,988 | | | $ | 44,742 | | | $ | 24,957 | | | $ | 28,926 | |
Aggregate fair value of plan assets | 6,284 | | | 6,051 | | | 2,706 | | | 3,033 | |
For plans with an accumulated benefit obligation in excess of plan assets: | | | | | | | |
Aggregate accumulated benefit obligation (ABO) | 38,722 | | | 42,923 | | | N/A | | N/A |
Aggregate fair value of plan assets | 6,284 | | | 6,051 | | | N/A | | N/A |
Net Periodic Benefit Cost
The components of the Company’s net periodic benefit cost were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | Other Postretirement Benefits |
| Fiscal Year Ended March 31, | | Fiscal Year Ended March 31, |
| 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 |
Components of net periodic benefit cost: | | | | | | | | | | | |
Service cost | $ | 6,674 | | | $ | 6,618 | | | $ | 5,990 | | | $ | 170 | | | $ | 172 | | | $ | 199 | |
Interest cost | 8,754 | | | 9,571 | | | 10,747 | | | 950 | | | 1,141 | | | 1,306 | |
Expected return on plan assets | (13,562) | | | (14,448) | | | (16,671) | | | (86) | | | (96) | | | (106) | |
| | | | | | | | | | | |
Settlement cost | — | | | — | | | 676 | | | — | | | — | | | — | |
Net amortization and deferral | 1,679 | | | 4,863 | | | 3,709 | | | (422) | | | (591) | | | (647) | |
Net periodic benefit cost | $ | 3,545 | | | $ | 6,604 | | | $ | 4,451 | | | $ | 612 | | | $ | 626 | | | $ | 752 | |
A one-percentage-point increase or decrease in the assumed healthcare cost trend rate would not result in a significant change to the March 31, 2022 APBO or the aggregate service and interest cost components of the net periodic postretirement benefit expense for fiscal year 2023.
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Amounts Included in Accumulated Other Comprehensive Loss
Amounts included in accumulated other comprehensive loss at the beginning of the year are amortized as a component of net periodic benefit cost during the year. The amounts recognized in other comprehensive income or loss for fiscal years 2022 and 2021 and the amounts included in accumulated other comprehensive loss at the end of those fiscal years are shown below. All amounts shown are before allocated income taxes.
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | Other Postretirement Benefits |
| March 31, | | March 31, |
| 2022 | | 2021 | | 2022 | | 2021 |
Change in net actuarial loss (gain): | | | | | | | |
Net actuarial loss (gain), beginning of year | $ | 72,605 | | | $ | 97,025 | | | $ | (4,395) | | | $ | (5,365) | |
Losses (gains) arising during the year | (1,727) | | | (17,563) | | | (2,533) | | | 520 | |
| | | | | | | |
Amortization included in net periodic benefit cost during the year | (3,598) | | | (6,857) | | | 247 | | | 450 | |
Net actuarial loss (gain), end of year | 67,280 | | | 72,605 | | | (6,681) | | | (4,395) | |
| | | | | | | |
Change in prior service cost (benefit): | | | | | | | |
Prior service cost (benefit), beginning of year | (3,406) | | | (5,402) | | | (376) | | | (564) | |
| | | | | | | |
Amortization included in net periodic benefit cost during the year | 1,919 | | | 1,996 | | | 175 | | | 188 | |
Prior service cost (benefit), end of year | (1,487) | | | (3,406) | | | (201) | | | (376) | |
| | | | | | | |
Total amounts in accumulated other comprehensive loss at end of year, before income taxes | $ | 65,793 | | | $ | 69,199 | | | $ | (6,882) | | | $ | (4,771) | |
Amounts in the above table reflect the Company and its consolidated subsidiaries. The accumulated other comprehensive loss reported in the consolidated balance sheets also includes pension and other postretirement benefit amounts related to ownership interests in unconsolidated affiliates.
The Company expects to recognize approximately $3.7 million of the March 31, 2022 net actuarial loss and $1.2 million of the March 31, 2022 prior service benefit in net periodic benefit cost during fiscal year 2023.
Allocation of Pension Plan Assets
The Company has established, and periodically adjusts, target asset allocations for its investments in its U.S. ERISA-regulated defined benefit pension plan, which represents 98% of consolidated plan assets and 86% of consolidated PBO at March 31, 2022, to balance the needs of liquidity, total return, and risk control. The assets are required to be diversified across asset classes and investment styles to achieve that balance. During the year, the asset allocation is reviewed for adherence to the target policy and rebalanced to the targeted weights. The Company reviews the expected long-term returns of the asset allocation each year to help determine whether changes are needed. The return is evaluated on a weighted-average basis in relation to inflation. The assumed long-term rate of return used to calculate annual benefit expense is based on the asset allocation and expected market returns for the respective asset classes.
The weighted–average target pension asset allocation and target ranges at the March 31, 2022 measurement date and the actual asset allocations at the March 31, 2022 and 2021 measurement dates by major asset category were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Actual Allocation |
| Target Allocation | | | | | | March 31, |
Major Asset Category | | Range | | 2022 | | 2021 |
Equity securities | 29.0 | % | | 19 | % | - | 39% | | 31.1 | % | | 32.0 | % |
| | | | | | | | | |
Fixed income securities (1) | 66.0 | % | | 56 | % | - | 76% | | 63.8 | % | | 64.1 | % |
Alternative investments | 5.0 | % | | 0 | % | - | 10% | | 5.1 | % | | 3.9 | % |
| | | | | | | | | |
Total | 100.0 | % | | | | | | 100.0 | % | | 100.0 | % |
(1)Actual amounts include high yield securities and cash balances held for the payment of benefits.
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Universal makes regular contributions to its pension and other postretirement benefit plans. As previously noted, for postretirement health benefits, contributions reflect funding of those benefits as they are incurred. The Company expects to make no contributions to its ERISA regulated defined benefit pension plan and $2.3 million to its non-ERISA regulated pension plans in fiscal year 2023.
Estimated future benefit payments to be made from the Company’s plans are as follows:
| | | | | | | | | | | |
Fiscal Year | Pension Benefits | | Other Postretirement Benefits |
2023 | $ | 15,456 | | | $ | 2,392 | |
2024 | 17,007 | | | 2,259 | |
2025 | 23,499 | | | 2,130 | |
2026 | 23,608 | | | 1,995 | |
2027 | 14,937 | | | 1,898 | |
2028 - 2032 | 82,147 | | | 8,243 | |
Fair Values of Pension Plan Assets
Assets held by the Company's defined benefit pension plans primarily consist of equity securities, fixed income securities, and alternative investments. Equity securities are primarily invested in actively-traded mutual funds with underlying common stock investments in U.S. and foreign companies ranging in size from small to large corporations. Fixed income securities are also held primarily through actively-traded mutual funds with the underlying investments in both U.S. and foreign securities. The methodologies for determining the fair values of the plan assets are outlined below. Where the values are based on quoted prices for the securities in an active market, they are classified as Level 1 of the fair value hierarchy. Where secondary pricing sources are used, they are classified as Level 2 of the hierarchy. Pricing models that use significant unobservable inputs are classified as Level 3.
•Equity securities: Investments in equity securities through actively-traded mutual funds are valued based on the NAVs of the units held in the respective funds, which are determined by obtaining quoted prices on nationally recognized securities exchanges. These securities are classified as Level 1.
•Fixed income securities: Fixed income investments that are held through mutual funds are valued based on the NAVs of the units held in the respective funds, which are determined by obtaining quoted prices on nationally recognized securities exchanges. These securities are classified as Level 1. Other fixed income investments are valued at an estimated price that a dealer would pay for a similar security on the valuation date using observable market inputs and are classified as Level 2. These market inputs may include yield curves for similarly rated securities. Small amounts of cash are held in common collective trusts. Fixed income securities also include insurance assets, which are valued based on an actuarial calculation. Those securities are classified as Level 3.
•Alternative investments: Real estate assets are valued using valuation models that incorporate income and market approaches, including external appraisals, to derive fair values. The hedge fund allocation is a fund of hedge funds and is valued by the manager based on the NAV of each fund. These models use significant unobservable inputs and are classified as Level 3 within the fair value hierarchy.
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Fair values of the assets of the Company’s pension plans as of March 31, 2022 and 2021, classified based on how their values were determined under the fair value hierarchy are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2022 |
| Level 1 | | Level 2 | | Level 3 | | Total |
Equity securities | $ | 77,175 | | | $ | — | | | $ | — | | | $ | 77,175 | |
| | | | | | | |
Fixed income securities (1) | 159,956 | | | — | | | 6,284 | | | 166,240 | |
Alternative investments | — | | | — | | | 12,598 | | | 12,598 | |
| | | | | | | |
Total investments | $ | 237,131 | | | $ | — | | | $ | 18,882 | | | $ | 256,013 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2021 |
| Level 1 | | Level 2 | | Level 3 | | Total |
Equity securities | $ | 83,135 | | | $ | — | | | $ | — | | | $ | 83,135 | |
| | | | | | | |
Fixed income securities (1) | 168,201 | | | 2,920 | | | 6,051 | | | 177,172 | |
Alternative investments | — | | | — | | | 10,042 | | | 10,042 | |
| | | | | | | |
Total investments | $ | 251,336 | | | $ | 2,920 | | | $ | 16,093 | | | $ | 270,349 | |
(1)Includes high yield securities and cash and cash equivalent balances.
Other Benefit Plans
Universal and several subsidiaries offer employer defined contribution savings plans. Amounts charged to expense for these plans were approximately $3.0 million for fiscal year 2022, $2.9 million for fiscal year 2021, and $2.7 million for fiscal year 2020.
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE 14. COMMON AND PREFERRED STOCK
Common Stock
At March 31, 2022, the Company’s shareholders had authorized 100,000,000 shares of its common stock, and 24,550,019 shares were issued and outstanding. Holders of the common stock are entitled to one vote for each share held on all matters requiring a vote. Holders of the common stock are also entitled to receive dividends when, as, and if declared by the Company’s Board of Directors. The Board of Directors customarily declares and pays regular quarterly dividends on the outstanding common shares; however, such dividends are at the Board’s full discretion, and there is no obligation to continue them.
Preferred Stock
The Company is also authorized to issue up to 5,000,000 shares of preferred stock. No preferred stock was outstanding at March 31, 2022.
Share Repurchase Programs
Universal’s Board of Directors has authorized programs to repurchase outstanding shares of the Company’s capital stock (common and preferred stock). Under these programs, the Company has made and may continue to make share repurchases from time to time in the open market or in privately negotiated transactions at prices not exceeding prevailing market rates. Programs have been in place continuously throughout fiscal years 2020 through 2022. The current program, which replaced an expiring program, was authorized and became effective on November 5, 2020. It authorizes the purchase of up to $100 million of the Company's outstanding common stock and expires on the earlier of November 15, 2022, or when the funds authorized for the program have been exhausted. At March 31, 2022, $97 million of the authorization remained available for share repurchases under the current program.
Repurchases of common stock under the programs for fiscal years 2022, 2021, and 2020 were as follows:
| | | | | | | | | | | | | | | | | | | | | |
| Fiscal Year Ended March 31, |
| 2022 | | 2021 | | 2020 | | | | |
Number of shares repurchased | 58,264 | | | — | | | 656,820 | | | | | |
Cost of shares repurchased (in thousands of dollars) | $ | 3,053 | | | $ | — | | | $ | 33,457 | | | | | |
Weighted-average cost per share | $ | 52.41 | | | $ | — | | | $ | 50.94 | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
NOTE 15. EXECUTIVE STOCK PLANS AND STOCK-BASED COMPENSATION
Executive Stock Plans
The Company’s shareholders have approved executive stock plans under which officers, directors, and employees of the Company may receive grants and awards of common stock, restricted stock, restricted stock units (“RSUs”), performance share units (“PSUs”), stock appreciation rights (“SARs”), incentive stock options, and non-qualified stock options. Currently, grants are outstanding under the 1997 Executive Stock Plan, the 2002 Executive Stock Plan, the 2007 Stock Incentive Plan, and the 2017 Stock Incentive Plan. Together, these plans are referred to in this disclosure as the “Plans.” Up to 1,000,000 shares may be issued under the 2017 Stock Incentive Plan, with no specific share limit for any of the award types. New awards may no longer be issued under the 1997, 2002, and 2007 Plans.
The Company’s practice is to award grants of stock-based compensation to officers at the first regularly-scheduled meeting of the Compensation Committee of the Board of Directors (the “Compensation Committee”) in the fiscal year following the public release of the Company’s financial results for the prior year. In recent years, the Compensation Committee has awarded only grants of RSUs and PSUs. Outside directors automatically receive restricted stock units following each annual meeting of shareholders.
RSUs awarded prior to fiscal year 2022 vest 5 years after the grant date and those awarded after fiscal year 2022 vest 3 years after the grant date. After vesting RSUs are paid out in shares of common stock. Under the terms of the RSU awards, grantees receive dividend equivalents in the form of additional RSUs that vest and are paid out on the same date as the original RSU grant. The PSUs vest 3 years from the grant date, are paid out in shares of common stock at the vesting date, and do not carry rights to dividends or dividend equivalents prior to vesting. Shares ultimately paid out under PSU grants are dependent on the achievement of predetermined performance measures established by the Compensation Committee and can range from zero to 150% of the stated award. RSUs awarded to outside directors prior to fiscal year 2020 vest 3 years after the grant date and those granted after fiscal year 2020 vest 1 year after the grant date. Additionally, restricted stock vests upon the individual’s retirement from service as a director.
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
RSUs, Restricted Stock, and PSUs
The following table summarizes the Company’s RSU, restricted stock, and PSU activity for fiscal years 2020 through 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| RSUs | | Restricted Stock | | PSUs |
| Shares | | Weighted-Average Grant Date Fair Value | | Shares | | Weighted-Average Grant Date Fair Value | | Shares | | Weighted-Average Grant Date Fair Value |
Fiscal Year Ended March 31, 2020: | | | | | | | | | | | |
Unvested at beginning of year | 324,991 | | | $ | 57.12 | | | 21,250 | | | $ | 41.58 | | | 146,874 | | | $ | 55.12 | |
Granted | 85,463 | | | 56.39 | | | — | | | — | | | 60,728 | | | 50.16 | |
Vested | (74,518) | | | 54.20 | | | — | | | — | | | (67,402) | | | 49.17 | |
Forfeited | — | | | — | | | — | | | — | | | — | | | — | |
Unvested at end of year | 335,936 | | | 57.89 | | | 21,250 | | | 41.58 | | | 140,200 | | | 55.73 | |
| | | | | | | | | | | |
Fiscal Year Ended March 31, 2021: | | | | | | | | | | | |
Granted | 103,829 | | | 46.27 | | | — | | | — | | | 65,135 | | | 34.33 | |
Vested | (97,297) | | | 54.11 | | | (9,650) | | | 41.24 | | | (40,410) | | | 60.37 | |
Forfeited | — | | | — | | | — | | | — | | | (3,778) | | | 57.83 | |
Unvested at end of year | 342,468 | | | 55.44 | | | 11,600 | | | 41.86 | | | 161,147 | | | 46.20 | |
| | | | | | | | | | | |
Fiscal Year Ended March 31, 2022: | | | | | | | | | | | |
Granted | 93,564 | | | 56.18 | | | — | | | — | | | 48,650 | | | 47.95 | |
Vested | (86,488) | | | 54.33 | | | — | | | — | | | (50,242) | | | 57.12 | |
Forfeited | — | | | — | | | — | | | — | | | (1,555) | | | 57.12 | |
Unvested at end of year | 349,544 | | | $ | 55.86 | | | 11,600 | | | $ | 41.86 | | | 158,000 | | | $ | 43.16 | |
Shares granted and vested in the above table include dividend equivalents on RSUs and any shares awarded above the base grant under the performance provisions of PSUs. Shares forfeited or canceled include any reductions from the base PSU grant under those same performance provisions. The fair values of RSUs, restricted stock, and PSUs are based on the market price of the common stock on the grant date.
Stock-Based Compensation Expense
Fair value expense for stock-based compensation is recognized ratably over the period from grant date to the earlier of (1) the vesting date of the award, or (2) the date the grantee is eligible to retire without forfeiting the award. For employees who are already eligible to retire at the date an award is granted, the total fair value of the award is recognized as expense at the date of grant. For the fiscal years ended March 31, 2022, 2021, and 2020, total stock-based compensation expense and the related income tax benefit recognized were as follows:
| | | | | | | | | | | | | | | | | |
| Fiscal Year Ended March 31, |
| 2022 | | 2021 | | 2020 |
Total stock-based compensation expense | $ | 6,187 | | | $ | 6,106 | | | $ | 5,631 | |
Income tax benefit recorded on stock-based compensation expense | $ | 1,389 | | | $ | 1,282 | | | $ | 1,182 | |
At March 31, 2022, the Company had $4.5 million of unrecognized compensation expense related to stock-based awards, which will be recognized over a weighted-average period of approximately 0.9 years.
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE 16. COMMITMENTS, CONTINGENCIES, AND OTHER MATTERS
Commitments
The Company enters into contracts to purchase tobacco from farmers in a number of the countries where it operates. Contracts in most countries cover one annual growing season. Primarily with the farmer contracts in Brazil, Malawi, Mozambique, the Philippines, Guatemala, and Mexico, the Company provides seasonal financing to support the farmers’ production of their crops. At March 31, 2022, the Company had contracts to purchase approximately $599 million of tobacco to be delivered during the coming fiscal year and $124 million of tobacco to be delivered in subsequent years. These amounts are estimates since actual quantities purchased will depend on crop yields, and prices will depend on the quality of the tobacco delivered and other market factors. Tobacco purchase obligations have been partially funded by short-term advances to farmers and other suppliers, which totaled approximately $130 million, net of allowances, at March 31, 2022. The Company withholds payments due to farmers on delivery of the tobacco to satisfy repayment of the financing it provided to the farmers. In addition to its contractual obligations to purchase tobacco, the Company had commitments related to agricultural materials, approved capital expenditures, and various other requirements that approximated $132 million at March 31, 2022.
Other Contingent Liabilities
Other Contingent Liabilities (Letters of credit)
The Company had other contingent liabilities totaling approximately $1 million at March 31, 2022, primarily under outstanding letters of credit.
Value-Added Tax Assessments in Brazil
As discussed in Note 1, the Company's local operating subsidiaries pay significant amounts of VAT in connection with their normal operations. In Brazil, VAT is assessed at the state level when green tobacco is transferred between states. The Company's operating subsidiary there pays VAT when tobaccos grown in the states of Santa Catarina and Parana are transferred to its factory in the state of Rio Grande do Sul for processing. The subsidiary has received assessments for additional VAT plus interest and penalties from the tax authorities for the states of Santa Catarina and Parana based on audits of the subsidiary's VAT filings for specified periods. In June 2011, tax authorities for the state of Santa Catarina issued assessments for tax, interest, and penalties for periods from 2006 through 2009 totaling approximately $9 million. In September 2014, tax authorities for the state of Parana issued an assessment for tax, interest, and penalties for periods from 2009 through 2014 totaling approximately $12 million. These amounts are based on the exchange rate for the Brazilian currency at March 31, 2022. Management of the operating subsidiary and outside counsel believe that errors were made by the tax authorities for both states in determining all or significant portions of these assessments and that various defenses support the subsidiary's positions.
With respect to the Santa Catarina assessments, the subsidiary took appropriate steps to contest the full amount of the claims. As of March 31, 2022, a portion of the subsidiary's arguments had been accepted, and the outstanding assessment had been reduced, although interest on the remaining assessment has continued to accumulate. The reduced assessment, together with the related accumulated interest through the end of the current reporting period, totaled approximately $10 million at the March 31, 2022 exchange rate. The subsidiary is continuing to contest the full remaining amount of the assessment. While the range of reasonably possible loss is zero up to the full $10 million remaining assessment, based on the strength of the subsidiary's defenses, no loss within that range is considered probable at this time and no liability has been recorded at March 31, 2022.
With respect to the Parana assessment, management of the subsidiary and outside counsel challenged the full amount of the claim. A significant portion of the Parana assessment was based on positions taken by the tax authorities that management and outside counsel believe deviate significantly from the underlying statutes and relevant case law. In addition, under the law, the subsidiary's tax filings for certain periods covered in the assessment were no longer open to any challenge by the tax authorities. In December 2015, the Parana tax authorities withdrew the initial claim and subsequently issued a new assessment covering the same tax periods. The new assessment totaled approximately $3 million at the March 31, 2022 exchange rate, reflecting a substantial reduction from the original $12 million assessment. Notwithstanding the reduction, management and outside counsel continue to believe that the new assessment is not supported by the underlying statutes and relevant case law and have challenged the full amount of the claim. The range of reasonably possible loss is considered to be zero up to the full $3 million assessment. However, based on the strength of the subsidiary's defenses, no loss within that range is considered probable at this time and no liability has been recorded at March 31, 2022.
In both states, the process for reaching a final resolution to the assessments is expected to be lengthy, and management is not currently able to predict when either case will be concluded. Should the subsidiary ultimately be required to pay any tax, interest, or penalties in either case, the portion paid for tax would generate VAT credits that the subsidiary may be able to recover.
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Other Legal and Tax Matters
Various subsidiaries of the Company are involved in other litigation and tax examinations incidental to their business activities. While the outcome of these matters cannot be predicted with certainty, management is vigorously defending the matters and does not currently expect that any of them will have a material adverse effect on the Company’s business or financial position. However, should one or more of these matters be resolved in a manner adverse to management’s current expectation, the effect on the Company’s results of operations for a particular fiscal reporting period could be material.
NOTE 17. OPERATING SEGMENTS
As a result of acquisitions of plant-based ingredients companies in fiscal year 2020 and 2021, during the fiscal year ended March 31, 2021 management evaluated the Company’s global business activities, including product and service offerings to its customers, as well as senior management’s operational and financial responsibilities. This assessment included an analysis of how its chief operating decision maker measures business performance and allocates resources. As a result of this analysis, senior management determined the Company conducts operations across two reportable operating segments, Tobacco Operations and Ingredients Operations.
The Tobacco Operations segment activities involve contracting, procuring, processing, packing, storing, and shipping leaf tobacco for sale to, or for the account of, manufacturers of consumer tobacco products throughout the world. Through various operating subsidiaries located in tobacco-growing countries around the world and significant ownership interests in unconsolidated affiliates, the Company processes and/or sells flue-cured and burley tobaccos, dark air-cured tobaccos, and oriental tobaccos. Flue-cured, burley, and oriental tobaccos are used principally in the manufacture of cigarettes, and dark air-cured tobaccos are used mainly in the manufacture of cigars, pipe tobacco, and smokeless tobacco products. Some of these tobacco types are also increasingly used in the manufacture of next generation tobacco products that are intended to provide consumers with an alternative to traditional combustible products. The Tobacco Operations segment also provides physical and chemical product testing and smoke testing for tobacco customers. A substantial portion of the Company’s Tobacco Operations' revenues are derived from sales to a limited number of large, multinational cigarette and cigar manufacturers.
The Ingredients Operations segment provides its customers with a broad variety of plant-based ingredients for both human and pet consumption. The Ingredients Operations segment utilizes a variety of value-added manufacturing processes converting raw materials into a wide spectrum of fruit and vegetable juices, concentrates, dehydrated products, botanical extracts, and flavorings. Customers for the Ingredients Operations segment include large multinational food and beverage companies, smaller independent manufacturers, and retail organizations. FruitSmart, Silva, and Shank's are the primary operations for the Ingredients Operations segment. FruitSmart manufactures fruit and vegetable juices, purees, concentrates, essences, fibers, seeds, seed oils, and seed powders. Silva is primarily a dehydrated product manufacturer of fruit and vegetable based flakes, dices, granules, powders, and blends. Shank's manufactures botanical extracts and flavorings and also offers bottling and custom packaging for customers. In fiscal year 2021, the Company announced the wind-down of CIFI, a greenfield operation that primarily manufactured both dehydrated and liquid sweet potato products. See Note 4 for additional information about the wind-down of CIFI.
Universal incurs overhead expenses related to senior management, sales, finance, legal, and other functions that are centralized at its corporate headquarters, as well as functions performed at several sales and administrative offices around the world. These overhead expenses are currently allocated to the reportable operating segments, generally on the basis of projected annual financial and operational performance, including volumes planned to be purchased and/or processed. Management believes this method of allocation is currently representative of the value of the related services provided to the operating segments. The Company currently evaluates the performance of its segments based on operating income after allocated overhead expenses, plus equity in the pretax earnings of unconsolidated affiliates.
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Reportable segment data as of, or for, the fiscal years ended March 31, 2022, 2021, and 2020, is as follows, including a recast of fiscal year 2020 for the current reportable operating segment presentation:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Sales and Other Operating Revenues | | Operating Income |
| Fiscal Year Ended March 31, | | Fiscal Year Ended March 31, |
| 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 |
Tobacco Operations | $ | 1,835,790 | | | $ | 1,841,837 | | | $ | 1,887,084 | | | $ | 157,754 | | | $ | 168,832 | | | $ | 146,637 | |
Ingredients Operations | 267,811 | | | 141,520 | | | 22,895 | | | 16,581 | | | 367 | | | (8,516) | |
Subtotal | 2,103,601 | | | 1,983,357 | | | 1,909,979 | | | 174,335 | | | 169,199 | | | 138,121 | |
Deduct: Equity in pretax earnings of unconsolidated affiliates (1) | | | | | | | (6,095) | | | (2,985) | | | (4,211) | |
Restructuring and impairment costs (2) | | | | | | | (10,457) | | | (22,577) | | | (7,543) | |
Add: Other income (3) | | | | | | | 2,532 | | | 4,173 | | | — | |
Consolidated total | $ | 2,103,601 | | | $ | 1,983,357 | | | $ | 1,909,979 | | | $ | 160,315 | | | $ | 147,810 | | | $ | 126,367 | |
| | | | | | | | | | | |
| Segment Assets | | Accounts Receivable, net |
| March 31, | | March 31, |
| 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 |
Tobacco Operations | $ | 2,109,845 | | | $ | 2,002,059 | | | $ | 1,985,732 | | | $ | 336,638 | | | $ | 336,876 | | | $ | 330,367 | |
Ingredients Operations | 476,500 | | | 339,865 | | | 135,189 | | | 48,799 | | | 30,606 | | | 10,344 | |
Consolidated total | $ | 2,586,345 | | | $ | 2,341,924 | | | $ | 2,120,921 | | | $ | 385,437 | | | $ | 367,482 | | | $ | 340,711 | |
| | | | | | | | | | | |
| Goodwill, net | | Intangibles, net |
| March 31, | | Fiscal Year Ended March 31, |
| 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 |
Tobacco Operations | $ | 97,930 | | | $ | 98,044 | | | $ | 97,963 | | | $ | 57 | | | $ | 82 | | | $ | 59 | |
Ingredients Operations | 116,068 | | | 75,007 | | | 28,863 | | | 92,514 | | | 72,222 | | | 17,802 | |
Consolidated total | $ | 213,998 | | | $ | 173,051 | | | $ | 126,826 | | | $ | 92,571 | | | $ | 72,304 | | | $ | 17,861 | |
| | | | | | | | | | | |
| Capital Expenditures | | Depreciation and Amortization |
| Fiscal Year Ended March 31, | | Fiscal Year Ended March 31, |
| 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 |
Tobacco Operations | $ | 34,237 | | | $ | 46,037 | | | $ | 35,175 | | | $ | 36,272 | | | $ | 33,895 | | | $ | 35,251 | |
Ingredients Operations | 18,966 | | | 20,117 | | | 52 | | | 16,249 | | | 10,838 | | | 3,128 | |
Consolidated total | $ | 53,203 | | | $ | 66,154 | | | $ | 35,227 | | | $ | 52,521 | | | $ | 44,733 | | | $ | 38,379 | |
(1)Equity in pretax earnings of unconsolidated affiliates is included in reportable segment operating income, but is reported below consolidated operating income and excluded from that total in the consolidated statements of income.
(2)Restructuring and impairment costs are excluded from reportable segment operating income, but are included in consolidated operating income in the consolidated statements of income (see Note 4).
(3)Other income represents the reversal of the contingent consideration liability associated with the acquisition of FruitSmart. See Note 2 for additional information.
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Geographic data as of, or for, the fiscal years ended March 31, 2022, 2021, and 2020, is presented below. Sales and other operating revenues are attributed to individual countries based on the final destination of the shipment. Long-lived assets generally consist of net property, plant, and equipment, goodwill, and other intangibles.
| | | | | | | | | | | | | | | | | |
Geographic Data | Sales and Other Operating Revenues |
| Fiscal Year Ended March 31, |
| 2022 | | 2021 | | 2020 |
United States | $ | 495,322 | | | $ | 369,074 | | | $ | 221,428 | |
Belgium | 283,072 | | | 366,476 | | | 361,889 | |
Philippines | 147,876 | | | 94,493 | | | 68,143 | |
China | 97,826 | | | 52,837 | | | 105,683 | |
Germany | 93,057 | | | 94,519 | | | 104,525 | |
Poland | 90,270 | | | 97,001 | | | 84,011 | |
Netherlands | 45,297 | | | 40,754 | | | 55,532 | |
| | | | | |
All other countries | 850,881 | | | 868,203 | | | 908,768 | |
Consolidated total | $ | 2,103,601 | | | $ | 1,983,357 | | | $ | 1,909,979 | |
| | | | | |
| Long-Lived Assets |
| March 31, |
| 2022 | | 2021 | | 2020 |
United States | $ | 344,276 | | | $ | 266,258 | | | $ | 145,764 | |
Brazil | 136,653 | | | 134,909 | | | 138,157 | |
Mozambique | 40,228 | | | 44,206 | | | 42,964 | |
All other countries | 130,530 | | | 149,492 | | | 132,955 | |
Consolidated total | $ | 651,687 | | | $ | 594,865 | | | $ | 459,840 | |
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE 18. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table summarizes the changes in the balances for each component of accumulated other comprehensive income (loss) attributable to the Company for the fiscal years ended March 31, 2022, 2021, and 2020:
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended March 31, |
(in thousands of dollars) | | 2022 | | 2021 | | 2020 |
Foreign currency translation: | | | | | | |
Balance at beginning of year | | $ | (35,135) | | | $ | (42,923) | | | $ | (40,101) | |
Other comprehensive income (loss) attributable to Universal Corporation: | | | | | | |
Net gain (loss) on foreign currency translation (net of tax (expense) benefit of $180 in 2020) | | (6,367) | | | 8,272 | | | (3,066) | |
| | | | | | |
Less: Net loss on foreign currency translation attributable to noncontrolling interests | | 537 | | | (484) | | | 244 | |
Other comprehensive income (loss) attributable to Universal Corporation, net of income taxes | | (5,830) | | | 7,788 | | | (2,822) | |
| | | | | | |
| | | | | | |
Balance at end of year | | $ | (40,965) | | | $ | (35,135) | | | $ | (42,923) | |
| | | | | | |
Foreign currency hedge: | | | | | | |
Balance at beginning of year | | $ | (414) | | | $ | (12,226) | | | $ | (376) | |
Other comprehensive income (loss) attributable to Universal Corporation: | | | | | | |
Net gain (loss) on derivative instruments (net of tax (expense) benefit of $(2,199), $(130) and $2,880) | | 6,679 | | | 1,791 | | | (12,391) | |
Reclassification of net (gain) loss to earnings (net of tax expense (benefit) of $1,115, $(2,726), and $136)(1) | | (2,686) | | | 10,021 | | | 541 | |
Other comprehensive income (loss) attributable to Universal Corporation, net of income taxes | | 3,993 | | | 11,812 | | | (11,850) | |
Balance at end of year | | $ | 3,579 | | | $ | (414) | | | $ | (12,226) | |
| | | | | | |
Interest rate hedge: | | | | | | |
Balance at beginning of year | | $ | (19,480) | | | $ | (27,402) | | | $ | (934) | |
Other comprehensive income (loss) attributable to Universal Corporation: | | | | | | |
Net gain (loss) on derivative instruments (net of tax (expense) benefit of $(3,249), $(637), and $6,801) | | 12,402 | | | 2,396 | | | (25,588) | |
Reclassification of net (gain) loss to earnings (net of tax expense (benefit) of $(1,628), $(1,469), and $234)(2) | | 6,218 | | | 5,526 | | | (880) | |
Other comprehensive income (loss) attributable to Universal Corporation, net of income taxes | | 18,620 | | | 7,922 | | | (26,468) | |
| | | | | | |
| | | | | | |
Balance at end of year | | $ | (860) | | | $ | (19,480) | | | $ | (27,402) | |
| | | | | | |
Pension and other postretirement benefit plans: | | | | | | |
Balance at beginning of year | | $ | (52,008) | | | $ | (69,046) | | | $ | (54,280) | |
Other comprehensive income (loss) attributable to Universal Corporation: | | | | | | |
Net gain (loss) arising during the year (net of tax (expense) benefit of $(297), $(3,706), and $4,715(3) | | 2,799 | | | 13,627 | | | (16,810) | |
| | | | | | |
Amortization included in earnings (net of tax benefit of $298, $895, and $554)(4) | | 3,144 | | | 3,411 | | | 2,044 | |
Other comprehensive income (loss) attributable to Universal Corporation, net of income taxes | | 5,943 | | | 17,038 | | | (14,766) | |
| | | | | | |
| | | | | | |
Balance at end of year | | $ | (46,065) | | | $ | (52,008) | | | $ | (69,046) | |
| | | | | | |
Total accumulated other comprehensive income (loss) at end of year | | $ | (84,311) | | | $ | (107,037) | | | $ | (151,597) | |
(1) Gains (losses) on foreign currency cash flow hedges related to forecast purchases of tobacco and crop input sales are reclassified from accumulated other comprehensive income (loss) to cost of goods sold when the tobacco is sold to customers. See Note 11 for additional information.
(2) Gain (loss) on interest rate cash flow hedges is reclassified from accumulated other comprehensive income (loss) to interest expense when the related interest payments are made on the debt for open interest rate swap agreements or as amortized to interest expense over the period to original maturity for terminated swap agreements. See Note 11 for additional information.
(3) These items arise from the remeasurement of the assets and liabilities of the Company's defined benefit pension and other postretirement benefit plans. Those remeasurements are made on an annual basis at the end of the fiscal year. See Note 13 for additional information.
(4) This accumulated other comprehensive income (loss) component is included in the computation of net periodic benefit cost. See Note 13 for additional information.
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE 19. SUBSEQUENT EVENTS
On April 1, 2022, the Company entered into a sales agreement to sell all outstanding common stock of the idled tobacco companies operating in Tanzania for $8.5 million. The sale is expected to close during fiscal year 2023 and is subject to various governmental and regulatory approvals.
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Universal Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Universal Corporation (the Company) as of March 31, 2022 and 2021, the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended March 31, 2022, and the related notes and financial statement schedule listed in the Index at Item 15(a)2 (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at March 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended March 31, 2022, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of March 31, 2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated May 27, 2022 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
| | | | | | | | | | | |
| | Allowance for Advances to Suppliers | |
Description of the Matter | | The Company’s short-term and long-term advances to suppliers totaled approximately $153 million as of March 31, 2022, and the allowances totaled $19 million. As discussed in Note 1 of the financial statements, the Company provides agronomy services and seasonal advances of seed, fertilizer, and other supplies to tobacco farmers for crop production. These advances are repaid through the delivery of tobacco to the Company. Management determined the allowance based on assumptions including the assessment of historical loss information and crop projections.
Auditing Management’s estimate for the allowance on advances to suppliers was complex and involved subjective auditor judgment as the estimate relies on a number of factors that are affected by market and economic conditions outside the Company’s control. There is uncertainty associated with the assumptions used which could have a significant effect on the allowance estimate. | |
| | | |
How We Addressed the Matter in Our Audit | | We obtained an understanding, evaluated the design, and tested the operating effectiveness of the Company’s internal controls over the allowance on the advances to suppliers. For example, we tested controls over the supplier advance approval and Management’s review and approval of the models used to calculate the allowance. We also tested controls used by Management to evaluate the data used in making the estimates for completeness and accuracy.
To test the allowance for advances to suppliers, our audit procedures included, among others, evaluating the significant assumptions used in the allowance calculation. For example, we compared historical loss information to Management’s estimate of projected crop yield and analyzed the sensitivity of significant assumptions to evaluate the changes in the allowance that would result from changes in the assumptions. We analyzed subsequent events to identify potential sources of contrary information to Management’s assumptions. | |
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| | Allowance for Recoverable Value-Added Tax (“VAT”) Credits | |
Description of the Matter | | The Company’s gross balance of recoverable value-added tax (“VAT”) credits totaled approximately $67 million as of March 31, 2022, and the related allowance totaled approximately $21 million. As discussed in Note 1 of the financial statements, in many foreign countries, the Company pays and receives a significant amount of VAT on purchases and sales of tobacco and tobacco related material. Items subject to a VAT vary from jurisdiction to jurisdiction as do the rates at which the tax is assessed. Some jurisdictions allow companies to apply for refunds of unused VAT credits from the tax authorities, but the refund process may take an extended period of time and it is not uncommon for refund applications to be challenged or rejected. Some jurisdictions also permit companies to sell or transfer unused VAT credits to third parties in private transactions although the proceeds realized may be heavily discounted from the face value of the credits. Management applied judgment in calculating the valuation allowance to estimate the credits that are not expected to be recovered.
Auditing Management’s estimate of the VAT allowance was complex and involved a high degree of subjectivity as the estimate relies on a number of factors including interpretations of applicable tax laws and regulations as well as economic and political conditions outside the Company’s control. There is uncertainty associated with the assumptions used which could have a significant effect on the estimate. | |
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How We Addressed the Matter in Our Audit | | We obtained an understanding, evaluated the design, and tested the operating effectiveness of the Company’s internal controls over the allowance on the VAT. For example, we tested controls over Management’s review and approval of the models used in the allowance and the completeness and accuracy of the data inputs and outputs used in the calculation. To test the VAT allowance estimate, our audit procedures included, among others, evaluating the significant assumptions used to estimate the VAT allowance and assessing the historical accuracy of Management’s estimates. For example, we evaluated whether the historical loss of credits used in Management’s calculation was representative of the current collectability of the credits. We analyzed the sensitivity of significant assumptions to evaluate the changes in the allowance that that would result from changes in the assumptions and we considered subsequent events to identify potential sources of contrary information to Management’s assumptions. | |
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| | Accounting for Acquisition of Shank's Extracts, LLC. | |
Description of the Matter | | As described in Note 1 and 2 to the consolidated financial statements, on October 4, 2021 the Company acquired 100% of the capital stock of Shank’s Extracts, LLC. (“Shank’s”) for approximately $100 million in cash and $2.4 million of working capital on-hand at the date of acquisition. The acquisition of Shank’s was accounted for as a business combination.
Auditing the Company's accounting for its business combination was complex due to the significant estimation required by Management to determine the fair value of identifiable intangible assets including customer relationships ($24 million). Significant estimation was required due to the application of the valuation models and assumptions used by Management to measure the fair value of the customer-related intangible asset. The significant assumptions used in determining the fair value included the discount rate and forecasted results (e.g., revenue growth rates and operating profit margins). | |
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How We Addressed the Matter in Our Audit | | We tested the Company's controls over its accounting for business combinations. For example, we tested controls over the customer-related intangible asset acquired, including Management’s review of the valuation models and significant assumptions.
To test the estimated fair value of the acquired customer-related intangible asset, our audit procedures included, among others, assessing the significant assumptions used in the estimated fair value of the customer-related intangible asset. For example, we tested the completeness and accuracy of the underlying data and compared the significant assumptions to current industry, market and economic trends, historical results of the acquired business, and other guidelines used by companies within the same industry. We involved our valuation specialists to assist in evaluating the Company's use of its valuation models. We performed a sensitivity analysis of the significant assumptions to evaluate the change in the fair values that would result from changes in assumptions. | |
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 1971.
Richmond, Virginia
May 27, 2022
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm,
on Internal Control Over Financial Reporting
To the Shareholders and the Board of Directors of Universal Corporation
Opinion on Internal Control over Financial Reporting
We have audited Universal Corporation’s internal control over financial reporting as of March 31, 2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Universal Corporation, (the Company) maintained, in all material respects, effective internal control over financial reporting as of March 31, 2022, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of March 31, 2022 and 2021, and the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended March 31, 2022, and the related notes and financial statement schedule listed in the Index at Item 15(a)2 report dated May 27, 2022 expressed an unqualified opinion thereon.
As indicated in the accompanying Management’s Report on Internal Control over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Shank's Extracts, LLC, which is included in the 2022 consolidated financial statements of the Company and constituted 4.7% and 7.3% of total and net assets, respectively, as of March 31, 2022 and 1.5% and 0.9% of consolidated sales and other operating revenues and net income, respectively, for the year then ended. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of Shank's Extracts, LLC.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definitions and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Richmond, Virginia
May 27, 2022