Universal Corp 10-Q for FY2022 Q2
Universal Corp (UVV)
10-Q
2021-11-03
For: 2021-09-30
View Original
Added on
April 10, 2026
About this 10-Q
Universal Corp filed this 10-Q on November 3, 2021, covering the quarter ended September 30, 2021 (FY2022 Q2).
Headline figures
Quarter ended September 30, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $453.25M
- up 20.4% from $376.35M a year earlier
- Net income
- $19.51M
- up 160.1% from net income of $7.5M a year earlier
- Diluted EPS
- $0.78
- up 160.0% from $0.30 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||||||||
| FOR THE QUARTERLY PERIOD ENDED | |||||||||||
| OR | |||||||||||
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||||||||
| FOR THE TRANSITION PERIOD FROM ______________TO_______________ | |||||||||||
Commission File Number: 001-00652
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) | ||||||||||
| (Address of principal executive offices) | (Zip Code) | ||||||||||
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
| Title of each class | Trading Symbol(s) | Name of Exchange on which registered | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
| þ | Accelerated filer | ☐ | Non-accelerated filer | ☐ | |||||||||||||
| Smaller reporting company | Emerging growth company | ||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
As of November 1, 2021, the total number of shares of common stock outstanding was 24,607,384 .
UNIVERSAL CORPORATION
FORM 10-Q
TABLE OF CONTENTS
| Item No. | Page | |||||||
PART I - FINANCIAL INFORMATION | ||||||||
| 1. | ||||||||
| 2. | ||||||||
| 3. | ||||||||
| 4. | ||||||||
PART II - OTHER INFORMATION | ||||||||
| 1. | ||||||||
| 2. | Unregistered Sales of Equity Securities and Use of Proceeds | |||||||
6. | ||||||||
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNIVERSAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(in thousands, except share and per share data)
| Three Months Ended September 30, | Six Months Ended September 30, | |||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||
| (Unaudited) | (Unaudited) | |||||||||||||||||||||||||
| Sales and other operating revenues | $ | $ | $ | $ | ||||||||||||||||||||||
| Costs and expenses | ||||||||||||||||||||||||||
| Cost of goods sold | ||||||||||||||||||||||||||
| Selling, general and administrative expenses | ||||||||||||||||||||||||||
| Other income | ( | ( | ( | |||||||||||||||||||||||
| Restructuring and impairment costs | ||||||||||||||||||||||||||
| Operating income | ||||||||||||||||||||||||||
| Equity in pretax earnings (loss) of unconsolidated affiliates | ||||||||||||||||||||||||||
| Other non-operating income (expense) | ( | ( | ||||||||||||||||||||||||
| Interest income | ||||||||||||||||||||||||||
| Interest expense | ||||||||||||||||||||||||||
| Income before income taxes and other items | ||||||||||||||||||||||||||
| Income taxes | ( | |||||||||||||||||||||||||
| Net income | ||||||||||||||||||||||||||
| Less: net loss (income) attributable to noncontrolling interests in subsidiaries | ( | ( | ( | |||||||||||||||||||||||
| Net income attributable to Universal Corporation | $ | $ | $ | $ | ||||||||||||||||||||||
| Earnings per share: | ||||||||||||||||||||||||||
Basic | $ | $ | $ | $ | ||||||||||||||||||||||
Diluted | $ | $ | $ | $ | ||||||||||||||||||||||
| Weighted average common shares outstanding: | ||||||||||||||||||||||||||
Basic | ||||||||||||||||||||||||||
Diluted | ||||||||||||||||||||||||||
| Total comprehensive income, net of income taxes | $ | $ | $ | $ | ||||||||||||||||||||||
| Less: comprehensive (income) loss attributable to noncontrolling interests | ( | ( | ( | |||||||||||||||||||||||
| Comprehensive income (loss) attributable to Universal Corporation | $ | $ | $ | $ | ||||||||||||||||||||||
| Dividends declared per common share | $ | $ | $ | $ | ||||||||||||||||||||||
See accompanying notes.
3
UNIVERSAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars)
| September 30, | September 30, | March 31, | ||||||||||||||||||
| 2021 | 2020 | 2021 | ||||||||||||||||||
| (Unaudited) | (Unaudited) | |||||||||||||||||||
| ASSETS | ||||||||||||||||||||
| Current assets | ||||||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | |||||||||||||||||
| Accounts receivable, net | ||||||||||||||||||||
| Advances to suppliers, net | ||||||||||||||||||||
| Accounts receivable—unconsolidated affiliates | ||||||||||||||||||||
| Inventories—at lower of cost or net realizable value: | ||||||||||||||||||||
| Tobacco | ||||||||||||||||||||
| Other | ||||||||||||||||||||
| Prepaid income taxes | ||||||||||||||||||||
| Other current assets | ||||||||||||||||||||
| Total current assets | ||||||||||||||||||||
| Property, plant and equipment | ||||||||||||||||||||
| Land | ||||||||||||||||||||
| Buildings | ||||||||||||||||||||
| Machinery and equipment | ||||||||||||||||||||
| Less accumulated depreciation | ( | ( | ( | |||||||||||||||||
| Other assets | ||||||||||||||||||||
| Operating lease right-of-use assets | ||||||||||||||||||||
| Goodwill, net | ||||||||||||||||||||
| Other intangibles, net | ||||||||||||||||||||
| Investments in unconsolidated affiliates | ||||||||||||||||||||
| Deferred income taxes | ||||||||||||||||||||
| Pension asset | ||||||||||||||||||||
| Other noncurrent assets | ||||||||||||||||||||
| Total assets | $ | $ | $ | |||||||||||||||||
See accompanying notes.
4
UNIVERSAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars)
| September 30, | September 30, | March 31, | ||||||||||||||||||
| 2021 | 2020 | 2021 | ||||||||||||||||||
| (Unaudited) | (Unaudited) | |||||||||||||||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||||||
| Current liabilities | ||||||||||||||||||||
| Notes payable and overdrafts | $ | $ | $ | |||||||||||||||||
| Accounts payable and accrued expenses | ||||||||||||||||||||
| Accounts payable—unconsolidated affiliates | ||||||||||||||||||||
| Customer advances and deposits | ||||||||||||||||||||
| Accrued compensation | ||||||||||||||||||||
| Income taxes payable | ||||||||||||||||||||
| Current portion of operating lease liabilities | ||||||||||||||||||||
| Current portion of long-term debt | ||||||||||||||||||||
| Total current liabilities | ||||||||||||||||||||
| Long-term debt | ||||||||||||||||||||
| Pensions and other postretirement benefits | ||||||||||||||||||||
| Long-term operating lease liabilities | ||||||||||||||||||||
| Other long-term liabilities | ||||||||||||||||||||
| Deferred income taxes | ||||||||||||||||||||
| Total liabilities | ||||||||||||||||||||
| Shareholders’ equity | ||||||||||||||||||||
| Universal Corporation: | ||||||||||||||||||||
| Preferred stock: | ||||||||||||||||||||
Series A Junior Participating Preferred Stock, no par value, | ||||||||||||||||||||
Common stock, no par value, | ||||||||||||||||||||
| Retained earnings | ||||||||||||||||||||
| Accumulated other comprehensive loss | ( | ( | ( | |||||||||||||||||
| Total Universal Corporation shareholders' equity | ||||||||||||||||||||
| Noncontrolling interests in subsidiaries | ||||||||||||||||||||
| Total shareholders' equity | ||||||||||||||||||||
| Total liabilities and shareholders' equity | $ | $ | $ | |||||||||||||||||
See accompanying notes.
5
UNIVERSAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
| Six Months Ended September 30, | ||||||||||||||
| 2021 | 2020 | |||||||||||||
| (Unaudited) | ||||||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||||
| Net income | $ | $ | ||||||||||||
| Adjustments to reconcile net income to net cash used by operating activities: | ||||||||||||||
| Depreciation and amortization | ||||||||||||||
| Net provision for losses (recoveries) on advances to suppliers | ( | |||||||||||||
| Foreign currency remeasurement (gain) loss, net | ( | |||||||||||||
| Foreign currency exchange contracts | ( | |||||||||||||
| Restructuring and impairment costs | ||||||||||||||
| Restructuring payments | ( | ( | ||||||||||||
| Change in estimated fair value of contingent consideration for FruitSmart acquisition | ( | ( | ||||||||||||
| Other, net | ( | |||||||||||||
| Changes in operating assets and liabilities, net | ( | ( | ||||||||||||
| Net cash provided (used) by operating activities | ( | ( | ||||||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||||
| Purchase of property, plant and equipment | ( | ( | ||||||||||||
| Proceeds from sale of property, plant and equipment | ||||||||||||||
| Net cash used by investing activities | ( | ( | ||||||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||||
| Issuance of short-term debt, net | ||||||||||||||
| Dividends paid to noncontrolling interests | ( | ( | ||||||||||||
| Dividends paid on common stock | ( | ( | ||||||||||||
| Other | ( | ( | ||||||||||||
| Net cash provided (used) by financing activities | ||||||||||||||
| Effect of exchange rate changes on cash, restricted cash and cash equivalents | ( | |||||||||||||
| Net decrease in cash, restricted cash and cash equivalents | ( | ( | ||||||||||||
| Cash, restricted cash and cash equivalents at beginning of year | ||||||||||||||
| Cash, restricted cash and cash equivalents at end of period | $ | $ | ||||||||||||
| Supplemental Information: | ||||||||||||||
| Cash and cash equivalents | $ | $ | ||||||||||||
| Restricted cash (Other noncurrent assets) | ||||||||||||||
| Total cash, restricted cash and cash equivalents | $ | $ | ||||||||||||
See accompanying notes.
6
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
NOTE 2. ACCOUNTING PRONOUNCEMENTS
Recently Adopted Pronouncements
In December 2019, the FASB issued Accounting Standards Update No. 2019-12, “Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes” (“ASU 2019-12”). 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. The guidance in ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, although early adoption is permitted. The Company adopted the new standard effective April 1, 2021, which was the beginning of its fiscal year ending March 31, 2022. There was no material impact to the consolidated financial statements from the adoption of ASU 2019-12.
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.
NOTE 3. BUSINESS COMBINATION
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 diversifies the Company's product offerings and generates new opportunities for its plant-based ingredients platform.
The Company continues to employ one of Silva's selling shareholders and as stipulated in the Silva purchase agreement has transferred $6 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 has excluded the entire $6 million in the
7
purchase price to be allocated. The $6 million in escrow is recognized as restricted cash in other noncurrent assets on the consolidated balance sheet at September 30, 2021. 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. This expense is being recognized ratably over the requisite service period in selling, general, and administrative expense on the consolidated statements of income.
The following table summarizes the final purchase price allocation of the assets acquired and liabilities assumed on October 1, 2020.
| (in thousands of dollars) | ||||||||||||||
| Assets | ||||||||||||||
| Cash and cash equivalents | $ | |||||||||||||
| Accounts receivable, net | ||||||||||||||
| Advances to suppliers, net | ||||||||||||||
| Inventory | ||||||||||||||
| Other current assets | ||||||||||||||
| Property, plant and equipment (net) | ||||||||||||||
| Intangibles | ||||||||||||||
| Customer relationships | ||||||||||||||
| Trade names | ||||||||||||||
| Goodwill | ||||||||||||||
| Total assets acquired | ||||||||||||||
| Liabilities | ||||||||||||||
| Accounts payable and accrued expenses | ||||||||||||||
| Accrued compensation | ||||||||||||||
| Income taxes payable | ||||||||||||||
| Deferred income taxes | ||||||||||||||
| Total liabilities assumed | ||||||||||||||
| Total assets acquired and liabilities assumed | $ | |||||||||||||
A portion of the goodwill recorded as part of the acquisition was attributable to the assembled workforce of Silva. The goodwill recognized for the Silva acquisition is not deductible for U.S. income tax purposes. The tax basis of the assets acquired and liabilities assumed did not result in a step-up of tax basis. The Company determined the Silva operations are not material to the Company’s consolidated results. Therefore, pro forma information is not presented.
NOTE 4. RESTRUCTURING AND IMPAIRMENT COSTS
Universal continually reviews its business for opportunities to realize efficiencies, reduce costs, and realign its operations in response to business changes. Restructuring and impairment costs are periodically incurred in connection with those activities.
Tobacco Operations
In the six months ended September 30, 2021, the Company incurred and paid $1.5 million of termination costs associated with restructuring of tobacco processing and administrative operations in Africa.
Ingredients Operations
In the six months ended September 30, 2021, the Company incurred $0.5 million of impairment costs on property, plant, and equipment associated with the wind-down of the Carolina Innovative Food Ingredients, Inc. ("CIFI") operations that was announced in fiscal year 2021.
There were zero
8
NOTE 5. 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 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 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. These operations procure raw materials from domestic and international growers and suppliers and through a variety of processing steps including sorting, cleaning, pressing, mixing, 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 Operating Sales and Revenue
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, 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.
9
Disaggregation of Revenue from Contracts with Customers
The following table disaggregates the Company’s revenue by significant revenue-generating category:
| Three Months Ended September 30, | Six Months Ended September 30, | |||||||||||||||||||||||||
| (in thousands of dollars) | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||
| Tobacco sales | $ | $ | $ | $ | ||||||||||||||||||||||
| Ingredient sales | ||||||||||||||||||||||||||
| Processing revenue | ||||||||||||||||||||||||||
| Other sales and revenue from contracts with customers | ||||||||||||||||||||||||||
| Total revenue from contracts with customers | ||||||||||||||||||||||||||
| Other operating sales and revenues | ||||||||||||||||||||||||||
| Consolidated sales and other operating revenues | $ | $ | $ | $ | ||||||||||||||||||||||
Other operating sales and revenues consists principally of interest on advances to suppliers.
NOTE 6. OTHER CONTINGENT LIABILITIES AND OTHER MATTERS
Other Contingent Liabilities
Other Contingent Liabilities (Letters of credit)
The Company had other contingent liabilities totaling approximately $1 million at September 30, 2021, primarily related to outstanding letters of credit.
Value-Added Tax Assessments in Brazil
As further discussed below, the Company’s local operating subsidiaries pay significant amounts of value-added tax (“VAT”) in connection with their operations, which generate tax credits that they normally are entitled to recover through offset, refund, or sale to third parties. 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 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 $10 million. Those amounts are based on the exchange rate for the Brazilian currency at September 30, 2021. 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 September 30, 2021, a portion of the subsidiary’s arguments had been accepted, and the outstanding assessment had been reduced. The reduced assessment, together with the related accumulated interest through the end of the current reporting period, totaled approximately $9 million (at the September 30, 2021 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 $9 million remaining assessment with interest, 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 September 30, 2021.
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, reflecting a substantial reduction from the original assessment. In fiscal year 2020, the Parana tax authorities acknowledged the statute of limitations related to claims prior to December 2010 had expired and reduced the assessment to $3 million (at the September 30, 2021 exchange rate). Notwithstanding the reduced assessment, 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
10
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 September 30, 2021.
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.
Other Legal and Tax Matters
Various subsidiaries of the Company are involved in 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.
Advances to Suppliers
In many sourcing origins where the Company operates, it provides agronomy services and seasonal advances of seed, seedlings, 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 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 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 suppliers totaled $98 million at September 30, 2021, $81 million at September 30, 2020, and $144 million at March 31, 2021. The related valuation allowances totaled $14 million at September 30, 2021, $14 million at September 30, 2020, and $18 million at March 31, 2021, and were estimated based on the Company’s historical loss information and crop projections. The allowances were reduced by net recoveries of approximately $44 thousand and increased by net provisions of approximately $0.3 million in the six-month periods ended September 30, 2021 and 2020, respectively. These net recoveries and 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.
Recoverable Value-Added Tax Credits
In many foreign countries, the Company’s local operating subsidiaries pay significant amounts of 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 September 30, 2021, the aggregate balance of recoverable tax credits held by the Company’s subsidiaries totaled approximately $55 million ($51 million at September 30, 2020, and $49 million at March 31, 2021), and the related valuation allowances totaled approximately $20 million ($18 million at September 30, 2020, and $19 million at March 31, 2021). The net balances are reported in other current assets and other noncurrent assets in the consolidated balance sheets.
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Long-Term Debt
In December 2020, the Company repaid $150 million of revolving credit borrowings used to finance the purchase of Silva with term loans under its existing senior unsecured bank credit facility. The Company increased the borrowings of the senior unsecured five-year and seven-year term loans by $75 225 million and $295 million, respectively. Under the senior unsecured bank credit facility, the additional $150 million of terms loans bear interest at variable rates plus a margin based on the Company's credit metrics and interest payments remained unhedged at September 30, 2021. The Company maintains receive-floating/pay-fixed interest rates swap agreements for a portion of the outstanding five and seven-year term loans. See Note 11 for additional information on outstanding interest rate swap agreements.
Shelf Registration and Stock Repurchase Plan
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 securities as determined by the Company and offered in one or more prospectus supplements prior to issuance.
NOTE 7. EARNINGS PER SHARE
| Three Months Ended September 30, | Six Months Ended September 30, | |||||||||||||||||||||||||
| (in thousands, except share and per share data) | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||
| Basic Earnings Per Share | ||||||||||||||||||||||||||
| Numerator for basic earnings per share | ||||||||||||||||||||||||||
| Net income attributable to Universal Corporation | $ | $ | $ | $ | ||||||||||||||||||||||
| Denominator for basic earnings per share | ||||||||||||||||||||||||||
| Weighted average shares outstanding | ||||||||||||||||||||||||||
| Basic earnings per share | $ | $ | $ | $ | ||||||||||||||||||||||
| Diluted Earnings Per Share | ||||||||||||||||||||||||||
| Numerator for diluted earnings per share | ||||||||||||||||||||||||||
| Net income attributable to Universal Corporation | $ | $ | $ | $ | ||||||||||||||||||||||
| Denominator for diluted earnings per share: | ||||||||||||||||||||||||||
| Weighted average shares outstanding | ||||||||||||||||||||||||||
| Effect of dilutive securities | ||||||||||||||||||||||||||
| Employee and outside director share-based awards | ||||||||||||||||||||||||||
| Denominator for diluted earnings per share | ||||||||||||||||||||||||||
| Diluted earnings per share | $ | $ | $ | $ | ||||||||||||||||||||||
NOTE 8. INCOME TAXES
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pending and contested tax issues. The Company's consolidated effective income tax rate is affected by a number of factors, including the mix and timing of domestic and foreign earnings, discrete items, and the effect of exchange rate changes on taxes.
The consolidated effective income tax rate for the three months and six months ended September 30, 2021 was 15.1 % and 16.5 %, respectively. The consolidated effective income tax rate for the three and six months ended September 30, 2021 was affected by a $1.7 million benefit related to a final tax law ruling at a foreign subsidiary. Without this item, the consolidated effective income tax rate for the three and six months ended September 30, 2021 would have been approximately 21.7 % and 22.0 %, respectively.
NOTE 9. GOODWILL AND OTHER INTANGIBLES
The Company's changes in goodwill at September 30, 2021 and 2020 consisted of the following:
| (in thousands of dollars) | Six Months Ended September 30, | ||||||||||
| 2021 | 2020 | ||||||||||
| Balance at beginning of fiscal year | $ | $ | |||||||||
Foreign currency translation adjustment | ( | ||||||||||
| Balance at end of period | $ | $ | |||||||||
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 September 30, 2021 and 2020 and at March 31, 2021:
| (in thousands, except useful life) | September 30, 2021 | |||||||||||||||||||||||||||||||
| Useful Life (years) | Gross Carrying Value | Accumulated Amortization | Net Carrying Value | |||||||||||||||||||||||||||||
Customer relationships(1) | — | $ | $ | ( | $ | |||||||||||||||||||||||||||
Trade names(1) | ( | |||||||||||||||||||||||||||||||
Developed technology(1) | ( | |||||||||||||||||||||||||||||||
Noncompetition agreements(1) | ( | |||||||||||||||||||||||||||||||
| Other | ( | |||||||||||||||||||||||||||||||
| Total intangible assets | $ | $ | ( | $ | ||||||||||||||||||||||||||||
| September 30, 2020 | |||||||||||||||||||||||||||||
| Useful Life (years) | Gross Carrying Value | Accumulated Amortization | Net Carrying Value | ||||||||||||||||||||||||||
| Customer relationships | $ | $ | ( | $ | |||||||||||||||||||||||||
| Trade names | $ | ( | |||||||||||||||||||||||||||
| Developed technology | $ | ( | |||||||||||||||||||||||||||
| Noncompetition agreements | $ | ( | |||||||||||||||||||||||||||
| Other | $ | ( | |||||||||||||||||||||||||||
| Total intangible assets | $ | $ | ( | $ | |||||||||||||||||||||||||
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| March 31, 2021 | |||||||||||||||||||||||||||||
| Useful Life (years) | Gross Carrying Value | Accumulated Amortization | Net Carrying Value | ||||||||||||||||||||||||||
| Customer relationships(1) | — | $ | $ | ( | $ | ||||||||||||||||||||||||
| Trade names(1) | ( | ||||||||||||||||||||||||||||
| Developed technology(1) | ( | ||||||||||||||||||||||||||||
| Noncompetition agreements(1) | ( | ||||||||||||||||||||||||||||
| Other | ( | ||||||||||||||||||||||||||||
| Total intangible assets | $ | $ | ( | $ | |||||||||||||||||||||||||
(1)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 $60.8 million of intangibles. See Note 3 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 three and six months ended September 30, 2021 and 2020 was:
| (in thousands of dollars) | Three Months Ended September 30, | Six Months Ended September 30, | |||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Amortization Expense | $ | $ | $ | $ | |||||||||||||||||||
As of September 30, 2021, the expected future amortization expense for intangible assets is as follows:
| Fiscal Year (in thousands of dollars) | |||||
2022 (excluding the six months ended September 30, 2021) | $ | ||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| 2026 and thereafter | |||||
| Total expected future amortization expense | $ | ||||
NOTE 10. LEASES
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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 of dollars) | September 30, 2021 | September 30, 2020 | March 31, 2021 | |||||||||||||||||
| Assets | ||||||||||||||||||||
| Operating lease right-of-use assets | $ | $ | $ | |||||||||||||||||
| Liabilities | ||||||||||||||||||||
| Current portion of operating lease liabilities | $ | $ | $ | |||||||||||||||||
| Long-term operating lease liabilities | ||||||||||||||||||||
| Total operating lease liabilities | $ | $ | $ | |||||||||||||||||
The following table sets forth the location and amount of operating lease costs included in the Company's consolidated statement of income:
| Three Months Ended September 30, | Six Months Ended September 30, | |||||||||||||||||||||||||
| (in thousands of dollars) | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||
| Income Statement Location | ||||||||||||||||||||||||||
| Cost of goods sold | $ | $ | $ | $ | ||||||||||||||||||||||
| Selling, general, and administrative expenses | ||||||||||||||||||||||||||
Total operating lease costs(1) | $ | $ | $ | $ | ||||||||||||||||||||||
The following table reconciles the undiscounted cash flows to the operating lease liabilities in the Company’s consolidated balance sheet:
| (in thousands of dollars) | September 30, 2021 | |||||||
| Maturity of Operating Lease Liabilities | ||||||||
2022 (excluding the six months ended September 30, 2021) | $ | |||||||
| 2023 | ||||||||
| 2024 | ||||||||
| 2025 | ||||||||
| 2026 | ||||||||
| 2027 and thereafter | ||||||||
| Total undiscounted cash flows for operating leases | $ | |||||||
| Less: Imputed interest | ( | |||||||
| Total operating lease liabilities | $ | |||||||
As of September 30, 2021, the Company had no leases that did not yet commence.
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The following table sets forth supplemental information related to operating leases:
| Three Months Ended September 30, | Six Months Ended September 30, | |||||||||||||||||||||||||||||||
| (in thousands, except lease term and incremental borrowing rate) | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||||||||
| Supplemental Cash Flow Information | ||||||||||||||||||||||||||||||||
| Cash paid for amounts included in the measurement of operating lease liabilities | $ | $ | $ | $ | ||||||||||||||||||||||||||||
| Right-of-use assets obtained in exchange for new operating leases | ||||||||||||||||||||||||||||||||
| Weighted Average Remaining Lease Term (years) | ||||||||||||||||||||||||||||||||
| Weighted Average Collateralized Incremental Borrowing Rate | % | % | ||||||||||||||||||||||||||||||
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 and option foreign currency exchange 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 September 30, 2021, 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 September 30, 2021, the Company is not hedging the interest payments on the additional $150 million of term loans. The increase to the principal balance of the term loans does not have an impact to 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 is being amortized from accumulated other comprehensive loss into earnings as a reduction of interest expense through the original maturity dates of those agreements. As of September 30, 2021, $0.4 million remained in accumulated other comprehensive loss to be amortized through December 31, 2021.
Cash Flow Hedging Strategy for Foreign Currency Exchange Rate Risk Related to Sales of Crop Inputs, Forecast Purchases of Tobacco, and Related Processing Costs
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
16
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 into for these purposes during the six-month periods in fiscal years 2022 and 2021 was as follows:
| Six Months Ended September 30, | ||||||||||||||
| (in millions of dollars) | 2021 | 2020 | ||||||||||||
| Tobacco purchases | $ | $ | ||||||||||||
| Processing costs | ||||||||||||||
| Crop input sales | ||||||||||||||
Total | $ | $ | ||||||||||||
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. All 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 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.
The table below presents the expected timing of when the remaining accumulated other comprehensive gains and losses as of September 30, 2021 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 | 2023 | ||||||||
| Tobacco purchases | 2021 | Brazil, Africa | 2022 | ||||||||
| Tobacco purchases | 2020 | Brazil | 2022 | ||||||||
| Crop input sales | 2022 | Brazil | 2023 | ||||||||
| Crop input sales | 2021 | Brazil | 2022 | ||||||||
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 value-added taxes, 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
17
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 September 30, 2021 and 2020, and March 31, 2021, were approximately $22.3 million, $19.8 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.
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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:
| Three Months Ended September 30, | Six Months Ended September 30, | |||||||||||||||||||||||||
| (in thousands of dollars) | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||
| Cash Flow Hedges - Interest Rate Swap Agreements | ||||||||||||||||||||||||||
Derivative | ||||||||||||||||||||||||||
Effective Portion of Hedge | ||||||||||||||||||||||||||
| Gain (loss) recorded in accumulated other comprehensive loss | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||
Gain (loss) reclassified from accumulated other comprehensive loss into earnings | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||
Gain on terminated interest rate swaps amortized from accumulated other comprehensive loss into earnings | $ | $ | $ | $ | ||||||||||||||||||||||
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 loan | |||||||||||||||||||||||||
| Cash Flow Hedges - Foreign Currency Exchange Contracts | ||||||||||||||||||||||||||
Derivative | ||||||||||||||||||||||||||
Effective Portion of Hedge | ||||||||||||||||||||||||||
| Gain (loss) recorded in accumulated other comprehensive loss | $ | ( | $ | ( | $ | $ | ( | |||||||||||||||||||
Gain (loss) reclassified from accumulated other comprehensive loss into earnings | $ | $ | ( | $ | $ | ( | ||||||||||||||||||||
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 | $ | ( | $ | $ | $ | |||||||||||||||||||||
| 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 - Foreign Currency Exchange Contracts | ||||||||||||||||||||||||||
| Gain (loss) recognized in earnings | $ | ( | $ | ( | $ | $ | ( | |||||||||||||||||||
| Location of gain (loss) recognized in earnings | Selling, general and administrative expenses | |||||||||||||||||||||||||
For the 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 and the crop input sales in Brazil, a net hedge gain of approximately $0.5 million remained in accumulated other comprehensive loss at September 30, 2021. That balance reflects gains and losses on contracts related to the 2023, 2022, 2021, and 2020 Brazil crops, the 2021 Africa crop, and the 2022 and 2021 Brazil crop input sales, less the amounts reclassified to earnings related to tobacco sold through September 30, 2021. Based on the hedging strategy, as the gain or loss is recognized in
19
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.
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 September 30, 2021 and 2020, and March 31, 2021:
| Derivatives in a Fair Value Asset Position | Derivatives in a Fair Value Liability Position | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balance Sheet Location | Fair Value as of | Balance Sheet Location | Fair Value as of | |||||||||||||||||||||||||||||||||||||||||||||||
| (in thousands of dollars) | September 30, 2021 | September 30, 2020 | March 31, 2021 | September 30, 2021 | September 30, 2020 | March 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||
| Derivatives Designated as Hedging Instruments | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest rate swap agreements | Other non-current assets | $ | $ | $ | Other long-term liabilities | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||
| Foreign currency exchange contracts | Other current assets | Accounts payable and accrued expenses | ||||||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||
| Derivatives Not Designated as Hedging Instruments | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency exchange contracts | Other current assets | $ | $ | $ | Accounts payable and accrued expenses | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||
Substantially all of the Company's foreign exchange derivative instruments 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 acquisition-related contingent consideration obligations. 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. | |||||||
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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 September 30, 2021 and 2020, and at March 31, 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:
| September 30, 2021 | ||||||||||||||||||||||||||||||||
| Fair Value Hierarchy | ||||||||||||||||||||||||||||||||
| (in thousands of dollars) | NAV | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||||||||||
Money market funds | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
Trading securities associated with deferred compensation plans | ||||||||||||||||||||||||||||||||
Interest rate swap agreements | — | — | — | — | — | |||||||||||||||||||||||||||
Foreign currency exchange contracts | ||||||||||||||||||||||||||||||||
Total financial assets measured and reported at fair value | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Liabilities | ||||||||||||||||||||||||||||||||
Interest rate swap agreements | ||||||||||||||||||||||||||||||||
Foreign currency exchange contracts | ||||||||||||||||||||||||||||||||
Total financial liabilities measured and reported at fair value | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| September 30, 2020 | ||||||||||||||||||||||||||||||||
| Fair Value Hierarchy | ||||||||||||||||||||||||||||||||
| (in thousands of dollars) | NAV | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||||||||||
Money market funds | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
Trading securities associated with deferred compensation plans | ||||||||||||||||||||||||||||||||
Foreign currency exchange contracts | ||||||||||||||||||||||||||||||||
Total financial assets measured and reported at fair value | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Liabilities | ||||||||||||||||||||||||||||||||
Acquisition-related contingent consideration obligations - long term | $ | $ | $ | $ | ||||||||||||||||||||||||||||
Interest rate swap agreements | ||||||||||||||||||||||||||||||||
Foreign currency exchange contracts | ||||||||||||||||||||||||||||||||
Total financial liabilities measured and reported at fair value | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
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| March 31, 2021 | ||||||||||||||||||||||||||||||||
| Fair Value Hierarchy | ||||||||||||||||||||||||||||||||
| (in thousands of dollars) | NAV | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||||||||||
Money market funds | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
Trading securities associated with deferred compensation plans | ||||||||||||||||||||||||||||||||
Foreign currency exchange contracts | ||||||||||||||||||||||||||||||||
Total financial assets measured and reported at fair value | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Liabilities | ||||||||||||||||||||||||||||||||
Acquisition-related contingent consideration obligations - long-term | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
Interest rate swap agreements | ||||||||||||||||||||||||||||||||
Foreign currency exchange contracts | ||||||||||||||||||||||||||||||||
Total financial liabilities measured and reported at fair value | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
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.
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.
Foreign currency exchange contracts
The fair values of forward and option 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 and option 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. in fiscal year 2020 and recognized a contingent consideration liability of $6.7 million on the date of acquisition. Each period the Company evaluates the fair value of the acquisition-related contingent consideration obligations. During the year ended March 31, 2021, the evaluation resulted in a reduction of $4.2 million of contingent consideration of the original $6.7 million liability recorded. During the quarter ended September 30, 2021, an evaluation of the contingent liability resulted in a reduction of the remaining $2.5 million contingent consideration 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.
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A reconciliation of the change in the balance of the acquisition-related contingent consideration obligation (Level 3) for the six months ended September 30, 2021 and 2020 is provided below.
| (in thousands of dollars) | Six Months Ended September 30, | ||||||||||
| 2021 | 2020 | ||||||||||
| Balance beginning of year | $ | $ | |||||||||
| Change in fair value of contingent consideration liability | ( | ( | |||||||||
| Balance at end of period | $ | $ | |||||||||
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 September 30, 2021, and 2020 and March 31, 2021:
| (in millions of dollars) | September 30, 2021 | September 30, 2020 | March 31, 2021 | ||||||||||||||
| Fair market value of long term obligations | $ | $ | $ | ||||||||||||||
| Carrying value of long term obligations | $ | $ | $ | ||||||||||||||
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.
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 also 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.
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.
CIFI
As a result of the wind-down of the CIFI operation, the Company recognized restructuring and impairment charges in the first quarter of fiscal year 2022 and during fiscal year 2021. At September 30, 2021 assets for the idled CIFI operation consisted of land and buildings. The aggregate fair value and carrying value of those assets was approximately $4 million at September 30, 2021.
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. The long-lived assets consist principally of the Company's processing facility and equipment, storage facilities, tobacco buying and receiving stations, employee housing, and vehicles and transportation equipment. The aggregate fair value and carrying value of those assets following the impairment adjustments was approximately $17 million. The fair values of the property, plant and equipment were determined based principally on a probability-weighting of the discounted cash
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NOTE 13. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
The Company sponsors several defined benefit pension plans covering eligible U.S. salaried employees and certain foreign and other employee groups. These plans provide retirement benefits based primarily on employee compensation and years of service. The Company also sponsors defined benefit plans that provide postretirement health and life insurance benefits for eligible U.S. employees attaining specific age and service levels, although postretirement life insurance is no longer provided for active employees.
The components of the Company’s net periodic benefit cost were as follows:
| Pension Benefits | Other Postretirement Benefits | |||||||||||||||||||||||||
| Three Months Ended September 30, | Three Months Ended September 30, | |||||||||||||||||||||||||
| (in thousands of dollars) | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||
| Service cost | $ | $ | $ | $ | ||||||||||||||||||||||
| Interest cost | ||||||||||||||||||||||||||
| Expected return on plan assets | ( | ( | ( | ( | ||||||||||||||||||||||
| Net amortization and deferral | ( | ( | ||||||||||||||||||||||||
Net periodic benefit cost | $ | $ | $ | $ | ||||||||||||||||||||||
| Pension Benefits | Other Postretirement Benefits | |||||||||||||||||||||||||
| Six Months Ended September 30, | Six Months Ended September 30, | |||||||||||||||||||||||||
| (in thousands of dollars) | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||
| Service cost | $ | $ | $ | $ | ||||||||||||||||||||||
| Interest cost | ||||||||||||||||||||||||||
| Expected return on plan assets | ( | ( | ( | ( | ||||||||||||||||||||||
| Net amortization and deferral | ( | ( | ||||||||||||||||||||||||
Net periodic benefit cost | $ | $ | $ | $ | ||||||||||||||||||||||
During the six months ended September 30, 2021, the Company made contributions of approximately $4.3 million to its pension plans. Additional contributions of $1.9 million are expected during the remaining six months of fiscal year 2022.
NOTE 14. STOCK-BASED COMPENSATION
Universal’s shareholders have approved the Executive Stock Plan (“Plan”) 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, incentive stock options, and non-qualified stock options. The Company’s practice is to award grants of stock-based compensation to officers on an annual basis 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. The Compensation Committee administers the Company’s Plan consistently, following previously defined guidelines. In recent years, the Compensation Committee has awarded only grants of RSUs and PSUs. Awards of restricted stock, RSUs, and PSUs are currently outstanding under the Plan.
The RSUs granted to employees vest in either or five years from the grant date and are then 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 at the end of a performance period of three years that begins with the year of the grant, are paid out in shares of common stock shortly after 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
24
achievement of predetermined performance measures established by the Compensation Committee and can range from zero to 150 % of the stated award. The Company’s outside directors receive RSUs following the annual meeting of shareholders. RSUs awarded to outside directors vest in or three years from the grant date. Restricted shares vest upon the individual’s retirement from service as a director.
During the six-month periods ended September 30, 2021 and 2020, Universal issued the following stock-based awards, representing the regular annual grants to officers and outside directors of the Company:
| Six Months Ended September 30, | ||||||||||||||
| (in thousands, except share fair value) | 2021 | 2020 | ||||||||||||
| RSUs: | ||||||||||||||
| Number granted | ||||||||||||||
| Grant date fair value | $ | $ | ||||||||||||
| PSUs: | ||||||||||||||
| Number granted | ||||||||||||||
| Grant date fair value | $ | $ | ||||||||||||
Fair value expense for restricted stock units 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 all non-forfeitable awards is recognized as expense at the date of grant. As a result, Universal typically incurs higher stock compensation expense in the first quarter of each fiscal year when grants are awarded to officers than in the other three quarters. For PSUs, the Company generally recognizes fair value expense ratably over the performance and vesting period based on management’s judgment of the ultimate award that is likely to be paid out based on the achievement of the predetermined performance measures. The Company accounts for forfeitures of stock-based awards as they occur. For the six-month periods ended September 30, 2021 and 2020, the Company recorded total stock-based compensation expense of approximately $4.1 million and $3.7 million, respectively. The Company expects to recognize stock-based compensation expense of approximately $2.0 million during the remaining six months of fiscal year 2022.
NOTE 15. OPERATING SEGMENTS
As a result of recent acquisitions of plant-based ingredients companies, during the three months ended December 31, 2020 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 selecting, procuring, processing, packing, storing, shipping, and financing 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 non-combustible 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, and dehydrated products. Customers for the Ingredients Operations segment include large multinational food and beverage companies, as well as smaller independent entities. FruitSmart and Silva 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. In fiscal year 2021, the Company
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announced the wind-down of CIFI, a greenfield operation that primarily manufactured both dehydrated and liquid sweet potato products.
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. Operating results for the Company’s reportable segments for each period presented in the consolidated statements of income and comprehensive income were as follows, including a recast of the new reportable operating segments presentation for all periods presented below:
| Three Months Ended September 30, | Six Months Ended September 30, | |||||||||||||||||||||||||
| (in thousands of dollars) | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||
| SALES AND OTHER OPERATING REVENUES | ||||||||||||||||||||||||||
| Tobacco Operations | $ | $ | $ | $ | ||||||||||||||||||||||
| Ingredients Operations | ||||||||||||||||||||||||||
| Consolidated sales and other operating revenues | $ | $ | $ | $ | ||||||||||||||||||||||
| OPERATING INCOME | ||||||||||||||||||||||||||
| Tobacco Operations | $ | $ | $ | $ | ||||||||||||||||||||||
| Ingredients Operations | ( | ( | ||||||||||||||||||||||||
| Segment operating income | ||||||||||||||||||||||||||
Deduct: Equity in pretax (earnings) loss of unconsolidated affiliates (1) | ( | ( | ( | ( | ||||||||||||||||||||||
Restructuring and impairment costs (2) | ( | |||||||||||||||||||||||||
Add: Other income (loss)(3) | ||||||||||||||||||||||||||
| Consolidated operating income | $ | $ | $ | $ | ||||||||||||||||||||||
(1)Equity in pretax earnings (loss) of unconsolidated affiliates is included in segment operating income (Tobacco Operations), but is reported below consolidated operating income and excluded from that total in the consolidated statements of income and comprehensive income.
(2)Restructuring and impairment costs are excluded from segment operating income, but are included in consolidated operating income in the consolidated statements of income and comprehensive income. See Note 4 for additional information.
(3)Other income represents the reversal of a portion of the contingent consideration liability associated with the acquisition of FruitSmart. See Note 12 for additional information.
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NOTE 16. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
| Six Months Ended September 30, | ||||||||||||||
| (in thousands of dollars) | 2021 | 2020 | ||||||||||||
| Foreign currency translation: | ||||||||||||||
| Balance at beginning of year | $ | ( | $ | ( | ||||||||||
| Other comprehensive income (loss) attributable to Universal Corporation: | ||||||||||||||
| Net gain (loss) on foreign currency translation | ( | |||||||||||||
| Less: Net (gain) loss on foreign currency translation attributable to noncontrolling interests | ||||||||||||||
| Other comprehensive income (loss) attributable to Universal Corporation, net of income taxes | ( | |||||||||||||
| Balance at end of period | $ | ( | $ | ( | ||||||||||
| Foreign currency hedge: | ||||||||||||||
| Balance at beginning of year | $ | ( | $ | ( | ||||||||||
| Other comprehensive income (loss) attributable to Universal Corporation: | ||||||||||||||
Net gain (loss) on derivative instruments (net of tax (expense) benefit of $( | ||||||||||||||
Reclassification of (gain) loss to earnings (net of tax expense (benefit) of $ | ( | |||||||||||||
| Other comprehensive income (loss) attributable to Universal Corporation, net of income taxes | ( | |||||||||||||
| Balance at end of period | $ | ( | $ | ( | ||||||||||
| Interest rate hedge: | ||||||||||||||
| Balance at beginning of year | $ | ( | $ | ( | ||||||||||
| Other comprehensive income (loss) attributable to Universal Corporation: | ||||||||||||||
Net gain (loss) on derivative instruments (net of tax (expense) benefit of $ | ( | ( | ||||||||||||
Reclassification of (gain) loss to earnings (net of tax expense (benefit) of $( | ||||||||||||||
| Other comprehensive income (loss) attributable to Universal Corporation, net of income taxes | ( | |||||||||||||
| Balance at end of period | $ | ( | $ | ( | ||||||||||
| Pension and other postretirement benefit plans: | ||||||||||||||
| Balance at beginning of year | $ | ( | $ | ( | ||||||||||
| Other comprehensive income (loss) attributable to Universal Corporation: | ||||||||||||||
Amortization included in earnings (net of tax expense (benefit) of $( | ||||||||||||||
| Other comprehensive income (loss) attributable to Universal Corporation, net of income taxes | ||||||||||||||
| Balance at end of period | $ | ( | $ | ( | ||||||||||
| Total accumulated other comprehensive loss at end of period | $ | ( | $ | ( | ||||||||||
(1) Gain (loss) on foreign currency cash flow hedges related to forecast purchases of tobacco and crop input sales is 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 underlying debt, or as amortized to interest expense over the period to original maturity for terminated swap agreements. See Note 11 for additional information.
(3) This accumulated other comprehensive income (loss) component is included in the computation of net periodic benefit cost. See Note 13 for additional information.
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NOTE 17. CHANGES IN SHAREHOLDERS' EQUITY AND NONCONTROLLING INTERESTS IN SUBSIDIARIES
A reconciliation of the changes in Universal Corporation shareholders’ equity and noncontrolling interests in subsidiaries for the three and six months ended September 30, 2021 and 2020 is as follows:
| Three Months Ended September 30, 2021 | Three Months Ended September 30, 2020 | |||||||||||||||||||||||||||||||||||||
| (in thousands of dollars) | Universal Corporation | Non-controlling Interests | Total | Universal Corporation | Non-controlling Interests | Total | ||||||||||||||||||||||||||||||||
| Balance at beginning of three-month period | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
| Changes in common stock | ||||||||||||||||||||||||||||||||||||||
| Accrual of stock-based compensation | ||||||||||||||||||||||||||||||||||||||
Withholding of shares from stock-based compensation for grantee income taxes | ( | ( | ( | ( | ||||||||||||||||||||||||||||||||||
| Dividend equivalents on RSUs | ||||||||||||||||||||||||||||||||||||||
| Changes in retained earnings | ||||||||||||||||||||||||||||||||||||||
| Net income | ||||||||||||||||||||||||||||||||||||||
| Cash dividends declared | ||||||||||||||||||||||||||||||||||||||
Common stock | ( | ( | ( | ( | ||||||||||||||||||||||||||||||||||
| Dividend equivalents on RSUs | ( | ( | ( | ( | ||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | ( | ( | ( | |||||||||||||||||||||||||||||||||||
| Other changes in noncontrolling interests | ||||||||||||||||||||||||||||||||||||||
Dividends paid to noncontrolling shareholders | ( | ( | ( | ( | ||||||||||||||||||||||||||||||||||
| Balance at end of period | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
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| Six Months Ended September 30, 2021 | Six Months Ended September 30, 2020 | |||||||||||||||||||||||||||||||||||||
| (in thousands of dollars) | Universal Corporation | Non-controlling Interests | Total | Universal Corporation | Non-controlling Interests | Total | ||||||||||||||||||||||||||||||||
| Balance at beginning of year | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
| Changes in common stock | ||||||||||||||||||||||||||||||||||||||
| Accrual of stock-based compensation | ||||||||||||||||||||||||||||||||||||||
Withholding of shares from stock-based compensation for grantee income taxes | ( | ( | ( | ( | ||||||||||||||||||||||||||||||||||
| Dividend equivalents on RSUs | ||||||||||||||||||||||||||||||||||||||
| Changes in retained earnings | ||||||||||||||||||||||||||||||||||||||
| Net income | ( | |||||||||||||||||||||||||||||||||||||
| Cash dividends declared | ||||||||||||||||||||||||||||||||||||||
Common stock | ( | ( | ( | ( | ||||||||||||||||||||||||||||||||||
| Dividend equivalents on RSUs | ( | ( | ( | ( | ||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | ( | |||||||||||||||||||||||||||||||||||||
| Other changes in noncontrolling interests | ||||||||||||||||||||||||||||||||||||||
Dividends paid to noncontrolling shareholders | ( | ( | ( | ( | ||||||||||||||||||||||||||||||||||
| Balance at end of period | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
NOTE 18. SUBSEQUENT EVENTS
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Unless the context otherwise requires, the terms “we,” “our,” “us” or “Universal” or the “Company” refer to Universal Corporation together with its subsidiaries. This Quarterly Report on Form 10-Q and the following “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Among other things, these statements relate to the Company’s financial condition, results of operation, and future business plans, operations, opportunities, and prospects. In addition, the Company and its representatives may from time to time make written or oral forward-looking statements, including statements contained in other filings with the Securities and Exchange Commission and in reports to shareholders. These forward-looking statements are generally identified by the use of words such as we “expect,” “believe,” “anticipate,” “could,” “should,” “may,” “plan,” “will,” “predict,” “estimate,” and similar expressions or words of similar import. These forward-looking statements are based upon management’s current knowledge and assumptions about future events and involve risks and uncertainties that could cause actual results, performance, or achievements to be materially different from any anticipated results, prospects, performance, or achievements expressed or implied by such forward-looking statements. Such risks and uncertainties include, but are not limited to: impacts of the ongoing COVID-19 pandemic; success in pursuing strategic investments or acquisitions and integration of new businesses and the impact of these new businesses on future results; product purchased not meeting quality and quantity requirements; reliance on a few large customers; our ability to maintain effective information systems and safeguard confidential information; anticipated levels of demand for and supply of our products and services; costs incurred in providing these products and services; timing of shipments to customers; changes in market structure; government regulation; product taxation; industry consolidation and evolution; changes in exchange rates and interest rates; impacts of regulation and litigation on our customers; industry-specific risks related to our plant-based ingredient businesses; exposure to certain regulatory and financial risks related to climate change; changes in estimates and assumptions underlying our critical accounting policies; the promulgation and adoption of new accounting standards; new government regulations and interpretation of existing standards and regulations; and general economic, political, market, and weather conditions. For a further description of factors that may cause actual results to differ materially from such forward-looking statements, see Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended March 31, 2021. We caution investors not to place undue reliance on any forward-looking statements as these statements speak only as of the date when made, and we undertake no obligation to update any forward-looking statements made in this report. This Form 10-Q should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended March 31, 2021.
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 15. "Operating Segments" to the consolidated financial statements. 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.
Overview
In the six months ended September 30, 2021, tobacco operations results improved on a favorable product mix consisting of a higher percentage of lamina tobacco and fewer carryover sales of lower margin tobaccos, compared to the same period in the prior fiscal year. In addition, our uncommitted inventory level of 11% of tobacco inventories at September 30, 2021, was significantly below our uncommitted inventory level of 16% of tobacco inventories at September 30, 2020. At the same time, we continue to have logistical challenges related to worldwide shipping availability stemming from the ongoing COVID-19 pandemic. To address these challenges, we are working closely with our customers to accelerate tobacco shipments in some origins where vessels and containers have been available while diligently managing slower tobacco shipments in origins with reduced container and vessel availability. Our lamina tobacco sales volumes for the first half of fiscal year 2022 were just slightly
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below those in the first half of fiscal year 2021, and we expect our tobacco crop shipments to be heavily weighted to the second half of fiscal year 2022.
We are continuing to monitor global supply chain constraints. However, at this time, we do not know if we will encounter significant shipment timing delays which may push shipments into fiscal year 2023. We are also seeing rising rates of inflation, increases in freight costs, and labor constraints in some locations which are driving up costs. Although we currently do not know the significance of the impact at this time, we are anticipating these increased costs will especially affect our ingredient operations later in the fiscal year.
On October 4, 2021, we announced the closing of our purchase of Shank’s, which will enhance our plant-based ingredients platform through growing the value-added services available to our customers by adding flavors, custom packaging and bottling, and product development capabilities.
As we move into the second half of fiscal year 2022, we look to maintain our strong level of performance despite ongoing global supply chain challenges. At the same time, we remain committed to setting high standards of social and environmental performance essential to supporting a sustainable supply chain, and recently released goals and targets around agricultural labor practices and environmental impacts, which are available on our website.
| FINANCIAL HIGHLIGHTS | |||||||||||||||||||||||
| Six Months Ended September 30, | Change | ||||||||||||||||||||||
| (in millions of dollars, except per share data) | 2021 | 2020 | $ | % | |||||||||||||||||||
| Consolidated Results | |||||||||||||||||||||||
| Sales and other operating revenue | $ | 804.0 | $ | 692.8 | $ | 111.1 | 16 | % | |||||||||||||||
| Cost of goods sold | $ | 648.8 | $ | 570.3 | $ | 78.5 | 14 | % | |||||||||||||||
| Gross Profit Margin | 19.3 | % | 17.7 | % | 160 bps | ||||||||||||||||||
| Selling, general and administrative expenses | $ | 115.2 | $ | 101.8 | $ | 13.4 | 13 | % | |||||||||||||||
| Restructuring and impairment costs | $ | 2.0 | $ | — | $ | 2.0 | (100) | % | |||||||||||||||
| Operating income (as reported) | $ | 40.4 | $ | 24.9 | $ | 15.5 | 62 | % | |||||||||||||||
| Adjusted operating income (non-GAAP)* | $ | 41.6 | $ | 22.4 | $ | 19.3 | 86 | % | |||||||||||||||
| Diluted earnings per share (as reported) | $ | 1.04 | $ | 0.60 | $ | 0.44 | 73 | % | |||||||||||||||
| Adjusted diluted earnings per share (non-GAAP)* | $ | 0.96 | $ | 0.40 | $ | 0.56 | 140 | % | |||||||||||||||
| Segment Results | |||||||||||||||||||||||
| Tobacco operations sales and other operating revenues | $ | 690.6 | $ | 655.0 | $ | 35.6 | 5 | % | |||||||||||||||
| Tobacco operations operating income | $ | 35.8 | $ | 23.5 | $ | 12.3 | 52 | % | |||||||||||||||
| Ingredients operations sales and other operating revenues | $ | 113.4 | $ | 37.8 | $ | 75.5 | 200 | % | |||||||||||||||
| Ingredient operations operating income | $ | 7.1 | $ | (2.2) | $ | 9.3 | 415 | % | |||||||||||||||
*See Reconciliation of Certain Non-GAAP Financial Measures in Other Items below.
Net income for the six months ended September 30, 2021, was $25.9 million, or $1.04 per diluted share, compared with $14.8 million, or $0.60 per diluted share, for the six months ended September 30, 2020. Excluding restructuring and impairment costs and certain other non-recurring items, detailed in Other Items below, net income and diluted earnings per share increased by $14.2 million and $0.56, respectively, for the six months ended September 30, 2021, compared to the six months ended September 30, 2020. Operating income of $40.4 million for the six months ended September 30, 2021, increased by $15.5 million, compared to operating income of $24.9 million for the six months ended September 30, 2020. Adjusted operating income, detailed in Other Items below, of $41.6 million increased by $19.3 million for the first half of fiscal year 2022, compared to adjusted operating income of $22.4 million for the first half of fiscal year 2021.
Net income for the quarter ended September 30, 2021, was $19.5 million, or $0.78 per diluted share, compared with $7.5 million, or $0.30 per diluted share, for the quarter ended September 30, 2020. Excluding restructuring and impairment costs and certain other non-recurring items, detailed in Other Items below, net income and diluted earnings per share increased by $7.4 million and $0.29, respectively, for the quarter ended September 30, 2021, compared to the quarter ended September 30, 2020. Operating income of $29.8 million for the quarter ended September 30, 2021, increased by $13.4 million, compared to operating
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income of $16.4 million for the quarter ended September 30, 2020. Adjusted operating income, detailed in Other Items below, of $29.0 million increased by $11.0 million for the second quarter of fiscal year 2022, compared to adjusted operating income of $18.0 million for the second quarter of fiscal year 2021.
Consolidated revenues increased by $111.1 million to $804.0 million and by $76.9 million to $454.0 million, respectively, for the six months and quarter ended September 30, 2021, compared to the same periods in fiscal year 2021, on the addition of the business acquired in October 2020 in the Ingredients Operations segment and a better product mix and higher sales prices in the Tobacco Operations segment.
Tobacco Operations
Operating income for the Tobacco Operations segment increased by $12.3 million to $35.8 million and by $8.4 million to $26.9 million, respectively, for the six months and quarter ended September 30, 2021, compared to the same periods in fiscal year 2021. Tobacco Operations segment results improved largely due to a favorable product mix consisting of a higher percentage of lamina tobacco and a reduced amount of carryover sales of lower margin tobaccos, as well as increased value-added services to customers, in the six months and quarter ended September 30, 2021, compared to the six months and quarter ended September 30, 2020. Africa sales volumes were higher in the six months and quarter ended September 30, 2021, compared to the same periods in fiscal year 2021, on accelerated shipments as well as some shipments of carryover tobacco. In contrast, sales volumes for Brazil were lower in the six months and quarter ended September 30, 2021, compared to the same periods in the prior year, when high volumes of lower margin carryover tobaccos shipped. In addition, reduced vessel availability slowed shipments out of Brazil. Our operations in Asia saw a more favorable product mix, as well as increased value-added services for customers during the quarter ended September 30, 2021, compared to the quarter ended September 30, 2020. Selling, general, and administrative expenses for the Tobacco Operations segment were higher in the six months and quarter ended September 30, 2021, compared to the six months and quarter ended September 30, 2020, primarily due to unfavorable foreign currency comparisons, mainly remeasurement. Revenues for the Tobacco Operations segment of $690.6 million for the six months and $396.8 million for the quarter ended September 30, 2021, were up $35.6 million and $40.1 million, respectively, compared to the same periods in the prior fiscal year, on a more favorable product mix as well as higher sales prices.
Ingredients Operations
Operating income for the Ingredients Operations segment was $7.1 million and $2.7 million, respectively, for the six months and quarter ended September 30, 2021, compared to operating losses of $2.2 million and $1.5 million, respectively, for the six months and quarter ended September 30, 2020. Results for the segment improved in the six months and quarter ended September 30, 2021, compared to the same periods in the prior fiscal year, on the inclusion of the October 2020 Silva acquisition. For both the six months and quarter ended September 30, 2021, 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 suffering during the ongoing COVID-19 pandemic. Selling, general, and administrative expenses for the segment increased in the six months and quarter ended September 30, 2021, compared to the same periods in the prior fiscal year, on the addition of the acquired business. Revenues for the Ingredients Operations segment increased by $75.5 million to $113.4 million and by $36.8 million to $57.2 million, respectively, for the six months and quarter ended September 30, 2021, compared to the six months and quarter ended September 30, 2020, primarily on the addition of the revenues for the acquired business.
COVID-19 Pandemic Impact
On March 11, 2020, the World Health Organization declared the coronavirus (“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, including imposing stay-at-home orders and closing “non-essential” businesses and their operations. We continue to closely monitor developments related to the ongoing COVID-19 pandemic and have taken and continue to take steps intended to mitigate the potential risks 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 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 ongoing pandemic. To date, we have not experienced a material impact to our supply chain, although the ongoing COVID-19 pandemic resulted in delays in certain operations during fiscal year 2021. In addition, our plant-based ingredients platform has seen some shifts in product mix due to the ongoing COVID-19 pandemic related to changes in customer demand. 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
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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 ongoing 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 ongoing 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.
Other Items
Cost of goods sold in the six months and quarter ended September 30, 2021, increased by 14% and 17% to $648.8 million and $361.3 million, respectively, compared with the same periods in the prior fiscal year, as a result of the acquisition of Silva in the Ingredients Operations segment as well as variances in product mix in the Tobacco Operations segment. Selling, general, and administrative costs for the six months and quarter ended September 30, 2021, increased by $13.4 million to $115.2 million and by $13.0 million to $65.4 million, respectively, compared to the same periods in the prior fiscal year, on unfavorable foreign currency comparisons, mainly remeasurement, as well as additional costs from the acquisition of Silva in the Ingredients Operations segment. Unfavorable foreign currency comparisons were approximately $6.4 million and $1.4 million, respectively, in the six months and quarter ended September 30, 2021, compared to the same periods in the prior year. Interest expense for the six months and quarter ended September 30, 2021, increased by $0.9 million to $13.3 million and by $1.5 million to $7.1 million, respectively, largely on increased costs from higher debt balances. Interest expense for the six months ended September 30, 2020, included a non-recurring interest expense item of $1.8 million associated with the settlement of an uncertain tax matter at a foreign subsidiary.
For the six months and quarter ended September 30, 2021, the Company’s effective tax rate on pre-tax income was 15.1% and 16.5% respectively. In the three months ended September 30, 2021, the Company recognized a $1.7 million income tax benefit related to a foreign subsidiary. Without this income tax benefit, the adjusted effective tax rates were 22.0% and 21.7% for the six months and quarter ended September 30, 2021, respectively. For the six months and quarter ended September 30, 2020, the Company’s effective tax rate on pre-tax income was (14%) and 28%, respectively. For the six months ended September 30, 2020, income taxes included a $4.4 million benefit for final tax regulations regarding the treatment of dividends paid by foreign subsidiaries. Without this benefit, income taxes for the six months ended September 30, 2020, would have been an expense of approximately $2.5 million, or a consolidated effective tax rate of approximately 19%.
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 | |||||||||||||||||||||||
| Three Months Ended September 30, | Six Months Ended September 30, | ||||||||||||||||||||||
| (in thousands) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| As Reported: Consolidated operating income | $ | 29,813 | $ | 16,351 | $ | 40,418 | $ | 24,879 | |||||||||||||||
Transaction costs for acquisitions(1) | 1,713 | 1,663 | 1,713 | 1,663 | |||||||||||||||||||
Restructuring and impairment costs(2) | — | — | 2,024 | — | |||||||||||||||||||
Fair value adjustment to contingent consideration for FruitSmart acquisition(3) | (2,532) | — | (2,532) | (4,173) | |||||||||||||||||||
| Adjusted operating income | $ | 28,994 | $ | 18,014 | $ | 41,623 | $ | 22,369 | |||||||||||||||
| Adjusted Net Income and Diluted Earnings Per Share | |||||||||||||||||||||||
| (in thousands and reported net of income taxes) | Three Months Ended September 30, | Six Months Ended September 30, | |||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| As Reported: Net income available to Universal Corporation | $ | 19,510 | $ | 7,502 | $ | 25,867 | $ | 14,776 | |||||||||||||||
Transaction costs for acquisitions(1) | 1,713 | 1,663 | 1,713 | 1,663 | |||||||||||||||||||
Restructuring and impairment costs(2) | — | — | 1,005 | — | |||||||||||||||||||
Fair value adjustment to contingent consideration for FruitSmart acquisition(3) | (2,532) | — | (2,532) | (4,173) | |||||||||||||||||||
| Interest (income) expense related to tax matters at foreign subsidiaries | (470) | — | (470) | 1,849 | |||||||||||||||||||
Income tax benefit on a final tax ruling (fiscal year 2022) and dividends paid from foreign subsidiaries (fiscal year 2021)(4) | (1,686) | — | (1,686) | (4,421) | |||||||||||||||||||
| Adjusted net income available to Universal Corporation | $ | 16,535 | $ | 9,165 | $ | 23,897 | $ | 9,694 | |||||||||||||||
| As reported: Diluted earnings per share | $ | 0.78 | $ | 0.30 | $ | 1.04 | $ | 0.60 | |||||||||||||||
| As adjusted: Diluted earnings per share | $ | 0.66 | $ | 0.37 | $ | 0.96 | $ | 0.40 | |||||||||||||||
(1)The Company incurred selling, general, and administrative expenses for due diligence and other transaction costs associated with the acquisitions of Shank's (effective October 4, 2021) and Silva (effective October 1, 2020). These costs are not deductible for U.S. income tax purposes.
(2)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.
(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)The Company recognized an income tax benefit in both fiscal years presented 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).
Liquidity and Capital Resources
Overview
Our first six months of the fiscal year is usually a period of significant working capital investment in both Africa and South America as tobacco crops are delivered by farmers. We funded our working capital needs in the six months ended September 30, 2021, using a combination of cash on hand, short-term borrowings, customer advances, and operating cash flows. We expect tobacco crop shipments to be weighted to the second half of the fiscal year.
Our liquidity and operating capital resource requirements are predominantly short term in nature and primarily relate to working capital for tobacco crop purchases. Working capital needs are seasonal within each geographic region. The geographic dispersion and the timing of working capital needs permit us to predict our general level of cash requirements, although tobacco crop size, prices paid to farmers, shipment and delivery timing, and currency fluctuations affect requirements each year. Peak working capital requirements are generally reached during the first and second fiscal quarters. Each geographic area follows a
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cycle of buying, processing, and shipping tobacco, and in many regions, we also provide agricultural materials to 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 crop financing. Despite a predominance of short-term needs, we maintain a portion of our total debt as long-term to reduce liquidity risk. We also periodically have large cash balances that we utilize to meet our working capital requirements.
To date, the ongoing COVID-19 pandemic has not had a material impact on our operations, although we are seeing logistical constraints around worldwide vessel and container availability and increased costs stemming from the ongoing 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 ongoing 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.
Operating Activities
We used $121.3 million in net cash flows from our operations during the six months ended September 30, 2021. That amount was $28.6 million lower than during the same period last fiscal year. Tobacco inventory levels increased by $213.7 million from March 31, 2021 levels to $854.3 million at September 30, 2021, on seasonal leaf purchases. Tobacco inventory levels were $33.9 million below September 30, 2020 levels, mainly due to tobacco shipment timing. We generally do not purchase material quantities of tobacco on a speculative basis. However, when we contract directly with tobacco farmers, we are often obligated to buy all stalk positions, which may contain less marketable leaf styles. At September 30, 2021, our uncommitted tobacco inventories were $94.5 million, or about 11% of total tobacco inventory, compared to $139.2 million, or about 22% of our March 31, 2021 tobacco inventory, and $141.5 million, or about 16% of our September 30, 2020 tobacco inventory. While we target committed inventory levels of 80% or more of total tobacco inventory, the level of these uncommitted inventory percentages is influenced by timing of farmer deliveries of new crops, as well as the receipt of customer orders.
Our balance sheet accounts reflected seasonal patterns in the six months ended September 30, 2021, on deliveries of crops by farmers in both South America, Africa, and North America. Cash and cash equivalent balances and accounts receivable decreased by $96.5 million and $70.0 million, respectively, from March 31, 2021 levels, as we used cash, including collections on receivables, to fund seasonal working capital needs. Advances to suppliers were $82.2 million at September 30, 2021, a reduction of $39.4 million from March 31, 2021, as tobacco crops were delivered in payment on some of those balances, net of new advances on current tobacco crops. Accounts receivable—unconsolidated affiliates and notes payable and overdrafts were up $62.5 million and $83.7 million, respectively, from March 31, 2021 levels, on seasonal increases and shipment timing.
Accounts receivable were down $31.9 million for the six months ended September 30, 2021, compared to the same period in the prior fiscal year, on the timing of crop purchases and shipments. Inventories—Other were up $44.7 million in the six months ended September 30 2021, compared to the six months ended September 30, 2020, primarily on our acquisition of Silva. We used $121.3 million in net cash flows from our operations during the six months ended September 30, 2021. That amount was $28.6 million lower than during the same period last fiscal year. Tobacco inventory levels increased by $213.7 million from March 31, 2021 levels to $854.3 million at September 30, 2021, on seasonal leaf purchases. Tobacco inventory levels were $33.9 million below September 30, 2020 levels, mainly due to tobacco shipment timing. We generally do not purchase material quantities of tobacco on a speculative basis. However, when we contract directly with tobacco farmers, we are often obligated to buy all stalk positions, which may contain less marketable leaf styles. At September 30, 2021, our uncommitted tobacco inventories were $94.5 million, or about 11% of total tobacco inventory, compared to $139.2 million, or about 22% of our March 31, 2021 tobacco inventory, and $141.5 million, or about 16% of our September 30, 2020 tobacco inventory. While we target committed inventory levels of 80% or more of total tobacco inventory, the level of these uncommitted inventory percentages is influenced by timing of farmer deliveries of new crops, as well as the receipt of customer orders.
Our balance sheet accounts reflected seasonal patterns in the six months ended September 30, 2021, on deliveries of crops by farmers in both South America, Africa, and North America. Cash and cash equivalent balances and accounts receivable decreased by $96.5 million and $70.0 million, respectively, from March 31, 2021 levels, as we used cash, including collections on receivables, to fund seasonal working capital needs. Advances to suppliers were $82.2 million at September 30, 2021, a reduction of $39.4 million from March 31, 2021, as tobacco crops were delivered in payment on some of those balances, net of new advances on current tobacco crops. Accounts receivable—unconsolidated affiliates and notes payable and overdrafts were up $62.5 million and $83.7 million, respectively, from March 31, 2021 levels, on seasonal increases and shipment timing.
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Accounts receivable were down $31.9 million for the six months ended September 30, 2021, compared to the same period in the prior fiscal year, on the timing of crop purchases and shipments. Inventories—Other were up $44.7 million in the six months ended September 30 2021, compared to the six months ended September 30, 2020, primarily on our acquisition of Silva.
Investing Activities
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 for our plant-based ingredients platform that utilize our assets and capabilities; and returning excess capital to our shareholders. In deciding where to invest capital resources, we look for opportunities where we believe we can earn an adequate return as well as leverage our assets and expertise or enhance our farmer base. In line with our capital allocation strategy, we acquired Shank’s for approximately $100 million on October 4, 2021. The acquisition expands our plant-based ingredients platform, adding to our product offerings and growing the value-added services available to our customers by adding flavors, custom packaging and bottling, and product development capabilities.
Our capital expenditures are generally limited to those that add value, replace or maintain equipment, increase efficiency, or position us for future growth. During the six months ended September 30, 2021 and 2020, we invested about $18.6 million and $22.8 million, respectively, in our property, plant and equipment. Depreciation expense was approximately $19.8 million and $18.8 million for the six months ended September 30, 2021 and 2020, respectively. Typically, our capital expenditures for maintenance projects are less than $30 million per fiscal year. In addition, from time to time, we undertake projects that require capital expenditures when we identify opportunities to improve efficiencies, add value for our customers, and position ourselves for future growth. We currently expect to spend approximately $50 to $60 million over the next twelve months on capital projects for maintenance of our facilities and other investments to grow and improve our businesses, including approximately $13 million in the third quarter of fiscal year 2022 to purchase the real property assets related to the Shank’s acquisition.
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 the three months ended September 30, 2021, we did not purchase any shares of common stock. As of September 30, 2021, approximately 24.6 million shares of our common stock were outstanding and our available authorization under our current share repurchase program was $100 million.
Financing Activities
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. Net debt as a percentage of net capitalization was approximately 33% at September 30, 2021, up from the September 30, 2020 level of approximately 31%, largely on higher debt balances due in part to the Silva acquisition in October 2020, and up from the March 31, 2021 level of approximately 25% on seasonal working capital borrowings. As of September 30, 2021, we had $100.7 million in cash and cash equivalents, our short-term debt totaled 185.0 million, and we were in compliance with all covenants of our debt agreements, which require us to maintain certain levels of tangible net worth and observe restrictions on debt levels.
As of September 30, 2021, we had $350 million available under a committed revolving credit facility that will mature in December 2023, and we had about $169 million in unused, uncommitted credit lines. On October 4, 2021, we closed and funded the approximately $100 million acquisition of Shank’s using cash-on-hand and borrowings under our committed revolving credit facility. We also maintain an effective, undenominated universal shelf registration statement that provides for future issuance of additional debt or equity securities. We have no long-term debt maturing until fiscal year 2024. Our seasonal working capital requirements for our tobacco business typically increase significantly between March and September and decline after mid-year. Available capital resources from our cash balances, committed credit facility, and uncommitted credit lines exceed our normal working capital needs and currently anticipated capital expenditure requirements over the next twelve months.
Derivatives
From time to time, we use interest rate swap agreements to manage our exposure to changes in interest rates. At September 30, 2021, the fair value of our outstanding interest rate swap agreements was a liability of about $23 million, and the notional amount swapped was $370 million. We entered into these agreements to eliminate the variability of cash flows in the
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interest payments on a portion of our variable-rate term loans. Under the swap agreements we receive variable rate interest and pay fixed rate interest. The swaps are accounted for as cash flow hedges.
We also use derivative instruments from time to time to hedge certain foreign currency exposures, primarily related to forecasted purchases of tobacco, related processing costs, and crop input sales in Brazil, as well as our net monetary balance sheet exposures in local currency there. We generally account for our hedges of forecasted tobacco purchases as cash flow hedges. At September 30, 2021, the fair value of our open hedges was a net liability of about $2.3 million. We had forward contracts outstanding that were not designated as hedges, and the fair value of those contracts was a net asset of approximately $0.4 million at September 30, 2021.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Currency
The international leaf tobacco trade generally is conducted in U.S. dollars, thereby limiting foreign exchange risk to that which is related to leaf purchase and production costs, overhead, and income taxes in the source country. We also provide farmer advances that are directly related to leaf purchases and are denominated in the local currency. Any currency gains or losses on those advances are usually offset by decreases or increases in the cost of tobacco, which is priced in the local currency. However, the effect of the offset may not occur until a subsequent quarter or fiscal year. Most of our tobacco operations are accounted for using the U.S. dollar as the functional currency. Because there are no forward foreign exchange markets in many of our major countries of tobacco origin, we often manage our foreign exchange risk by matching funding for inventory purchases with the currency of sale, which is usually the U.S. dollar, and by minimizing our net local currency monetary position in individual countries. We are vulnerable to currency remeasurement gains and losses to the extent that monetary assets and liabilities denominated in local currency do not offset each other. In addition to foreign exchange gains and losses, we are exposed to changes in the cost of tobacco due to changes in the value of the local currency in relation to the U.S. dollar. We routinely enter forward currency exchange contracts to hedge against the effects of currency movements on purchases of tobacco to reduce the volatility of costs. In addition, from time-to-time we enter forward contracts to hedge balance sheet exposures.
In certain tobacco markets that are primarily domestic, we use the local currency as the functional currency. Examples of these markets are Poland and the Philippines. In other markets, such as Western Europe, where export sales have been primarily in local currencies, we also use the local currency as the functional currency. In each case, reported earnings are affected by the translation of the local currency into the U.S. dollar.
Interest Rates
We generally use both fixed and floating interest rate debt to finance our operations. Changes in market interest rates expose us to changes in cash flows for floating rate instruments and to changes in fair value for fixed-rate instruments. We normally maintain a proportion of our debt in both variable and fixed interest rates to manage this exposure, and from time to time we may enter hedge agreements to swap the interest rates. In addition, our customers may pay market rates of interest for inventory purchased on order, which could mitigate a portion of the floating interest rate exposure. We also periodically have large cash balances and may receive deposits from customers, both of which we use to fund seasonal purchases of tobacco, reducing our financing needs. Excluding the portion of our bank term loans that have been converted to fixed-rate borrowings with interest rate swaps, debt carried at variable interest rates was approximately $335 million at September 30, 2021. Although a hypothetical 1% change in short-term interest rates would result in a change in annual interest expense of approximately $3.3 million, that amount would be at least partially mitigated by changes in charges to customers.
Derivatives Policies
Hedging interest rate exposure using swaps and hedging foreign exchange exposure using forward contracts are specifically contemplated to manage risk in keeping with management's policies. We may use derivative instruments, such as swaps, forwards, or futures, which are based directly or indirectly upon interest rates and currencies to manage and reduce the risks inherent in interest rate and currency fluctuations. When we use foreign currency derivatives to mitigate our exposure to exchange rate fluctuations, we may choose not to designate them as hedges for accounting purposes, which may result in the effects of the derivatives being recognized in our earnings in periods different from the items that created the exposure.
We do not utilize derivatives for speculative purposes, and we do not enter into market risk-sensitive instruments for trading purposes. Derivatives are transaction specific so that a specific debt instrument, forecast purchase, contract, or invoice determines the amount, maturity, and other specifics of the hedge. We routinely review counterparty risk as part of our derivative program.
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ITEM 4. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in reports we file under the Securities Exchange Act of 1934 (the “Exchange Act”), as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to management, including our Chief Executive Officer (our Principal Executive Officer) and Chief Financial Officer (our Principal Financial Officer), as appropriate, to allow for timely decisions regarding required disclosure.
We have excluded Silva International, Inc. ("Silva"), our wholly-owned subsidiary we acquired on October 1, 2020, which is included in our Consolidated Financial Statements, from our assessment of internal control over financial reporting as of September 30, 2021. Silva represented 8% of consolidated total assets as of September 30, 2021 and 8% of consolidated sales and other operating revenues for the six months ending September 30, 2021. Our Chief Executive Officer and Chief Financial Officer evaluated, with the participation of other members of management, the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, management concluded that our disclosure controls and procedures were effective.
There have been no changes in our internal control over financial reporting during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Other Legal Matters
Some of our subsidiaries are involved in litigation or legal matters incidental to their business activities. While the outcome of these matters cannot be predicted with certainty, we are vigorously defending them and do not currently expect that any of them will have a material adverse effect on our business or financial position. However, should one or more of these matters be resolved in a manner adverse to our current expectation, the effect on our results of operations for a particular fiscal reporting period could be material.
ITEM 1A. RISK FACTORS
As of the date of this report, there are no material changes to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended March 31, 2021 (the "2021 Annual Report on Form 10-K"). In evaluating our risks, readers should carefully consider the risk factors discussed in our 2021 Annual Report on Form 10-K, which could materially affect our business, financial condition or operating results, in addition to the other information set forth in this report and in our other filings with the Securities and Exchange Commission.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
As indicated in the following table, we did not repurchase shares of our common stock during the three-month period ended September 30, 2021:
Period (1) | Total Number of Shares Repurchased | Average Price Paid Per Share (2) | Total Number of Shares Repurchased as Part of Publicly Announced Plans or Programs (3) | Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (3) | ||||||||||||||||||||||||||||||||||||||||
| July 1-31, 2021 | — | $ | — | — | $ | 100,000,000 | ||||||||||||||||||||||||||||||||||||||
| August 1-31, 2021 | — | — | — | 100,000,000 | ||||||||||||||||||||||||||||||||||||||||
| September 1-30, 2021 | — | — | — | 100,000,000 | ||||||||||||||||||||||||||||||||||||||||
| Total | — | $ | — | — | $ | 100,000,000 | ||||||||||||||||||||||||||||||||||||||
(1)Repurchases are based on the date the shares were traded. This presentation differs from the consolidated statement of cash flows, where the cost of share repurchases is based on the date the transactions were settled.
(2)Amounts listed for average price paid per share include broker commissions paid in the transactions.
(3)A stock repurchase plan, which was authorized by our Board of Directors, became effective and was publicly announced on November 5, 2020. This stock repurchase plan authorizes the purchase of up to $100 million in common and/or preferred stock in open market or privately negotiated transactions through November 15, 2022 or when we have exhausted the funds authorized for the program, subject to market conditions and other factors.
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ITEM 6. EXHIBITS
| 2.1 | ||||||||
| 31.1 | ||||||||
| 31.2 | ||||||||
| 32.1 | ||||||||
| 32.2 | ||||||||
| 101 | Interactive Data File (submitted electronically herewith).* | |||||||
| 101.INS XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. 101.SCH XBRL Taxonomy Extension Schema Document 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF XBRL Taxonomy Extension Definition Linkbase Document 101.LAB XBRL Taxonomy Extension Label Linkbase Document 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section and shall not be part of any registration or other document filed under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filing. | ||||||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | |||||||
__________
*Filed herewith
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Date: | November 3, 2021 | UNIVERSAL CORPORATION | |||||||||
(Registrant) | |||||||||||
| /s/ Johan C. Kroner | |||||||||||
| Johan C. Kroner, Senior Vice President and Chief Financial Officer | |||||||||||
| (Principal Financial Officer) | |||||||||||
| /s/ Scott J. Bleicher | |||||||||||
| Scott J. Bleicher, Vice President and Controller | |||||||||||
| (Principal Accounting Officer) | |||||||||||
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