Item 8. Financial Statements and Supplementary Data
UNIVERSAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
| | | | | | | | | | | | | | | | | |
| Fiscal Year Ended March 31, |
| (in thousands of dollars, except share and per share data) | 2024 | | 2023 | | 2022 |
| Sales and other operating revenues | $ | 2,748,573 | | | $ | 2,569,824 | | | $ | 2,103,601 | |
| | | | | |
| Costs and expenses | | | | | |
| Cost of goods sold | 2,212,475 | | | 2,111,539 | | | 1,694,675 | |
| Selling, general and administrative expenses | 310,566 | | | 277,213 | | | 240,686 | |
| Other income | — | | | — | | | (2,532) | |
| Restructuring and impairment costs | 3,523 | | | — | | | 10,457 | |
| | | | | |
| Operating income | 222,009 | | | 181,072 | | | 160,315 | |
| Equity in pretax earnings of unconsolidated affiliates | 756 | | | 2,383 | | | 6,095 | |
| Other non-operating income | 3,084 | | | 1,791 | | | 2,687 | |
| Interest income | 4,504 | | | 6,023 | | | 917 | |
| Interest expense | 66,273 | | | 49,300 | | | 27,747 | |
| | | | | |
| Income before income taxes | 164,080 | | | 141,969 | | | 142,267 | |
| Income taxes | 31,109 | | | 11,733 | | | 38,663 | |
| | | | | |
| Net income | 132,971 | | | 130,236 | | | 103,604 | |
| Less: net income attributable to noncontrolling interests in subsidiaries | (13,373) | | | (6,184) | | | (17,027) | |
| Net income attributable to Universal Corporation | $ | 119,598 | | | $ | 124,052 | | | $ | 86,577 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Earnings per share: | | | | | |
| Basic | $ | 4.81 | | | $ | 5.01 | | | $ | 3.50 | |
| Diluted | $ | 4.78 | | | $ | 4.97 | | | $ | 3.47 | |
| | | | | |
| Weighted average common shares outstanding: | | | | | |
| Basic | 24,851,858 | | | 24,773,710 | | | 24,764,177 | |
| Diluted | 25,040,914 | | | 24,943,841 | | | 24,922,896 | |
See accompanying notes.
UNIVERSAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| | | | | | | | | | | | | | | | | |
| Fiscal Year Ended March 31, |
| (in thousands of dollars) | 2024 | | 2023 | | 2022 |
| Net income | $ | 132,971 | | | $ | 130,236 | | | $ | 103,604 | |
| Other comprehensive income (loss): | | | | | |
| Foreign currency translation, net of income taxes | (1,531) | | | (3,166) | | | (6,367) | |
| Foreign currency hedge, net of income taxes | (5,515) | | | 1,320 | | | 3,993 | |
| Interest rate hedge, net of income taxes | 3,235 | | | 6,113 | | | 18,620 | |
| Pension and other postretirement benefit plans, net of income taxes | (1,666) | | | 3,089 | | | 5,943 | |
| Total other comprehensive income (loss), net of income taxes | (5,477) | | | 7,356 | | | 22,189 | |
| Total comprehensive income | 127,494 | | | 137,592 | | | 125,793 | |
| Less: comprehensive income attributable to noncontrolling interests | (12,424) | | | (6,286) | | | (16,490) | |
| | | | | |
| Comprehensive income attributable to Universal Corporation | $ | 115,070 | | | $ | 131,306 | | | $ | 109,303 | |
See accompanying notes.
UNIVERSAL CORPORATION
CONSOLIDATED BALANCE SHEETS
| | | | | | | | | | | |
| March 31, |
| (in thousands of dollars) | 2024 | | 2023 |
| ASSETS | | | |
| Current assets | | | |
| Cash and cash equivalents | $ | 55,593 | | | $ | 64,690 | |
| Accounts receivable, net | 525,262 | | | 402,073 | |
| Advances to suppliers, net | 139,064 | | | 170,801 | |
| Accounts receivable—unconsolidated affiliates | 5,385 | | | 12,210 | |
| Inventories—at lower of cost or net realizable value: | | | |
| Tobacco | 1,070,580 | | | 833,876 | |
| Other | 193,518 | | | 202,907 | |
| Prepaid income taxes | 19,484 | | | 16,493 | |
| | | |
| Other current assets | 93,655 | | | 99,840 | |
| Total current assets | 2,102,541 | | | 1,802,890 | |
| | | |
| Property, plant and equipment | | | |
| Land | 26,244 | | | 24,926 | |
| Buildings | 323,969 | | | 311,138 | |
| Machinery and equipment | 693,868 | | | 689,220 | |
| 1,044,081 | | | 1,025,284 | |
| Less accumulated depreciation | (678,201) | | | (674,122) | |
| 365,880 | | | 351,162 | |
| Other assets | | | |
| Operating lease right-of-use assets | 32,510 | | | 40,505 | |
| Goodwill, net | 213,869 | | | 213,922 | |
| Other intangibles, net | 68,883 | | | 80,101 | |
| Investments in unconsolidated affiliates | 76,289 | | | 76,184 | |
| Deferred income taxes | 15,181 | | | 13,091 | |
| Pension asset | 11,857 | | | 9,984 | |
| Other noncurrent assets | 50,229 | | | 51,343 | |
| 468,818 | | | 485,130 | |
| | | |
| Total assets | $ | 2,937,239 | | | $ | 2,639,182 | |
UNIVERSAL CORPORATION
CONSOLIDATED BALANCE SHEETS—(Continued)
| | | | | | | | | | | |
| March 31, |
| (in thousands of dollars) | 2024 | | 2023 |
| LIABILITIES AND SHAREHOLDERS’ EQUITY | | | |
| Current liabilities | | | |
| Notes payable and overdrafts | $ | 417,217 | | | $ | 195,564 | |
| Accounts payable | 108,727 | | | 83,213 | |
| Accounts payable—unconsolidated affiliates | 1,621 | | | 5,830 | |
| Customer advances and deposits | 17,179 | | | 3,061 | |
| Accrued compensation | 39,766 | | | 33,108 | |
| Income taxes payable | 7,477 | | | 3,274 | |
| Current portion of operating lease liabilities | 10,356 | | | 11,404 | |
| Accrued expenses and other current liabilities | 109,015 | | | 106,533 | |
| Current portion of long-term debt | — | | | — | |
| Total current liabilities | 711,358 | | | 441,987 | |
| | | |
| Long-term debt | 617,364 | | | 616,809 | |
| Pensions and other postretirement benefits | 43,251 | | | 42,769 | |
| Long-term operating lease liabilities | 19,302 | | | 25,540 | |
| Other long-term liabilities | 27,902 | | | 32,512 | |
| Deferred income taxes | 39,139 | | | 42,613 | |
| Total liabilities | 1,458,316 | | | 1,202,230 | |
| | | |
| Shareholders’ equity | | | |
| Universal Corporation: | | | |
| Preferred stock: | | | |
Series A Junior Participating Preferred Stock, no par value, 500,000 shares authorized, none issued or outstanding | — | | | — | |
| | | |
Common stock, no par value, 100,000,000 shares authorized, 24,573,408 shares issued and outstanding (24,555,361 at March 31, 2023) | 345,596 | | | 337,247 | |
| Retained earnings | 1,173,196 | | | 1,136,898 | |
| Accumulated other comprehensive loss | (81,585) | | | (77,057) | |
| Total Universal Corporation shareholders' equity | 1,437,207 | | | 1,397,088 | |
| Noncontrolling interests in subsidiaries | 41,716 | | | 39,864 | |
| Total shareholders' equity | 1,478,923 | | | 1,436,952 | |
| | | |
| Total liabilities and shareholders' equity | $ | 2,937,239 | | | $ | 2,639,182 | |
See accompanying notes.
UNIVERSAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | | | | | | | | | | | | | | |
| Fiscal Year Ended March 31, |
| (in thousands of dollars) | 2024 | | 2023 | | 2022 |
| Cash Flows From Operating Activities: | | | | | |
| Net income | $ | 132,971 | | | $ | 130,236 | | | $ | 103,604 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
| Depreciation and amortization | 58,326 | | | 57,300 | | | 52,521 | |
| | | | | |
| Provision for losses (recoveries) on advances | 14,090 | | | 10,584 | | | 5,988 | |
| Inventory write-downs | 9,234 | | | 13,995 | | | 19,944 | |
| Stock-based compensation expense | 12,063 | | | 8,420 | | | 6,187 | |
| Foreign currency remeasurement loss (gain), net | 5,114 | | | (3,892) | | | 19,029 | |
| Foreign currency exchange contracts | (365) | | | 14,163 | | | (13,210) | |
| Deferred income taxes | (5,404) | | | (7,657) | | | (2,473) | |
| Equity in net income of unconsolidated affiliates, net of dividends | (1,239) | | | 4,010 | | | (329) | |
| Brazil tax ruling | — | | | (29,236) | | | — | |
| Restructuring and impairment costs | 3,523 | | | — | | | 10,457 | |
| Restructuring payments | (1,181) | | | — | | | (4,134) | |
| Change in estimated fair value of contingent consideration for FruitSmart acquisition | — | | | — | | | (2,532) | |
| Other, net | 1,001 | | | (6,249) | | | 512 | |
| Changes in operating assets and liabilities, net: | | | | | |
| Accounts and notes receivable | (109,681) | | | (74,657) | | | (23,185) | |
| Inventories | (236,243) | | | (41,867) | | | (245,920) | |
| Other assets | (768) | | | 10,821 | | | (15,991) | |
| Accounts payable | 20,806 | | | (84,588) | | | 108,746 | |
| Accrued expenses and other current liabilities | 8,414 | | | 3,365 | | | 14,356 | |
| Income taxes | 342 | | | (7,811) | | | 6,644 | |
| Customer advances and deposits | 14,365 | | | (7,494) | | | 4,668 | |
| Net cash provided (used) by operating activities | (74,632) | | | (10,557) | | | 44,882 | |
| | | | | |
| Cash Flows From Investing Activities: | | | | | |
| Purchase of property, plant and equipment | (66,013) | | | (54,674) | | | (53,203) | |
| Purchase of business, net of cash held by the business | — | | | — | | | (102,462) | |
| Proceeds from sale of business, less cash of businesses sold | 3,757 | | | 3,245 | | | — | |
| Proceeds from sale of property, plant and equipment | 2,257 | | | 1,079 | | | 13,004 | |
| | | | | |
| Net cash used by investing activities | (59,999) | | | (50,350) | | | (142,661) | |
| | | | | |
| Cash Flows From Financing Activities: | | | | | |
| Issuance (repayment) of short-term debt, net | 223,000 | | | 24,712 | | | 79,286 | |
| Issuance of long-term debt | — | | | 123,481 | | | — | |
| Repayment of long-term debt | — | | | (23,481) | | | — | |
| Dividends paid to noncontrolling interests in subsidiaries | (10,572) | | | (10,221) | | | (13,390) | |
| | | | | |
| | | | | |
| Repurchase of common stock | (4,744) | | | (3,448) | | | (3,053) | |
| | | | | |
| Dividends paid on common stock | (78,402) | | | (77,391) | | | (76,436) | |
| Proceeds from termination of interest rate swap agreements | — | | | 11,786 | | | — | |
| Debt issuance costs and other | (3,607) | | | (6,489) | | | (3,167) | |
| Net cash provided (used) by financing activities | 125,675 | | | 38,949 | | | (16,760) | |
| | | | | |
| Effect of exchange rate changes on cash | (141) | | | (1,000) | | | (1,034) | |
| Net increase (decrease) in cash and cash equivalents | (9,097) | | | (22,958) | | | (115,573) | |
| Cash, restricted cash and cash equivalents at beginning of year | 64,690 | | | 87,648 | | | 203,221 | |
Cash, Restricted Cash and Cash Equivalents at End of Year | $ | 55,593 | | | $ | 64,690 | | | $ | 87,648 | |
| | | | | |
| Supplemental Information: | | | | | |
Cash and cash equivalents | $ | 55,593 | | | $ | 64,690 | | | $ | 81,648 | |
Restricted cash (Other noncurrent assets) | — | | | — | | | 6,000 | |
Total cash, restricted cash and cash equivalents | $ | 55,593 | | | $ | 64,690 | | | $ | 87,648 | |
| | | | | |
| Supplemental information—cash paid for: | | | | | |
| Interest | $ | 61,084 | | | $ | 49,882 | | | $ | 27,113 | |
| Income taxes, net of refunds | $ | 38,084 | | | $ | 49,073 | | | $ | 33,010 | |
See accompanying notes.
UNIVERSAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Universal Corporation Shareholders | | | | |
| (in thousands of dollars) | | | | Common
Stock | | Retained
Earnings | | Accumulated
Other
Comprehensive
Income
(Loss) | | Non-
controlling
Interests | | Total
Shareholders'
Equity |
| Fiscal Year Ended March 31, 2024 | | | | | | | | | | | | |
| Balance at beginning of year | | | | $ | 337,247 | | | $ | 1,136,898 | | | $ | (77,057) | | | $ | 39,864 | | | $ | 1,436,952 | |
| Changes in common stock | | | | | | | | | | | | |
| | | | | | | | | | | | |
| Repurchase of common stock | | | | (1,373) | | | — | | | — | | | — | | | (1,373) | |
| Accrual of stock-based compensation | | | | 12,063 | | | — | | | — | | | — | | | 12,063 | |
| Withholding of shares from stock-based compensation for grantee income taxes | | | | (3,607) | | | — | | | — | | | — | | | (3,607) | |
| Dividend equivalents on restricted stock units (RSUs) | | | | 1,266 | | | — | | | — | | | — | | | 1,266 | |
| Changes in retained earnings | | | | | | | | | | | | |
| Net income | | | | — | | | 119,598 | | | — | | | 13,373 | | | 132,971 | |
Cash dividends declared on common stock ($3.20 per share) | | | | — | | | (78,663) | | | — | | | — | | | (78,663) | |
| Repurchase of common stock | | | | — | | | (3,371) | | | — | | | — | | | (3,371) | |
| Dividend equivalents on restricted stock units (RSUs) | | | | — | | | (1,266) | | | — | | | — | | | (1,266) | |
| Other comprehensive income (loss) | | | | | | | | | | | | |
| Foreign currency translation, net of income taxes | | | | — | | | — | | | (582) | | | (949) | | | (1,531) | |
| Foreign currency hedge, net of income taxes | | | | — | | | — | | | (5,515) | | | — | | | (5,515) | |
| Interest rate hedge, net of income taxes | | | | — | | | — | | | 3,235 | | | — | | | 3,235 | |
| Pension and other postretirement benefit plans, net of income taxes | | | | — | | | — | | | (1,666) | | | — | | | (1,666) | |
| Other changes in noncontrolling interests | | | | | | | | | | | | |
| Dividends paid to noncontrolling shareholders | | | | — | | | — | | | — | | | (10,572) | | | (10,572) | |
| | | | | | | | | | | | |
| Balance at end of year | | | | $ | 345,596 | | | $ | 1,173,196 | | | $ | (81,585) | | | $ | 41,716 | | | $ | 1,478,923 | |
UNIVERSAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY—(Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Universal Corporation Shareholders | | | | |
| (in thousands of dollars) | | | | Common
Stock | | Retained
Earnings | | Accumulated
Other
Comprehensive
Income
(Loss) | | Non-
controlling
Interests | | Total
Shareholders'
Equity |
| Fiscal Year Ended March 31, 2023 | | | | | | | | | | | | |
| Balance at beginning of year | | | | $ | 330,662 | | | $ | 1,094,192 | | | $ | (84,311) | | | $ | 44,226 | | | $ | 1,384,769 | |
| Changes in common stock | | | | | | | | | | | | |
| | | | | | | | | | | | |
| Repurchase of common stock | | | | (893) | | | — | | | — | | | — | | | (893) | |
| Accrual of stock-based compensation | | | | 8,420 | | | — | | | — | | | — | | | 8,420 | |
| Withholding of shares from stock-based compensation for grantee income taxes | | | | (2,090) | | | — | | | — | | | — | | | (2,090) | |
| Dividend equivalents on restricted stock units (RSUs) | | | | 1,148 | | | — | | | — | | | — | | | 1,148 | |
| Changes in retained earnings | | | | | | | | | | | | |
| Net income | | | | — | | | 124,052 | | | — | | | 6,184 | | | 130,236 | |
Cash dividends declared on common stock ($3.16 per share) | | | | — | | | (77,643) | | | — | | | — | | | (77,643) | |
| Repurchase of common stock | | | | — | | | (2,555) | | | — | | | — | | | (2,555) | |
| Dividend equivalents on restricted stock units (RSUs) | | | | — | | | (1,148) | | | — | | | — | | | (1,148) | |
| Other comprehensive income (loss) | | | | | | | | | | | | |
| Foreign currency translation, net of income taxes | | | | — | | | — | | | (3,268) | | | 102 | | | (3,166) | |
| Foreign currency hedge, net of income taxes | | | | — | | | — | | | 1,320 | | | — | | | 1,320 | |
| Interest rate hedge, net of income taxes | | | | — | | | — | | | 6,113 | | | — | | | 6,113 | |
| Pension and other postretirement benefit plans, net of income taxes | | | | — | | | — | | | 3,089 | | | — | | | 3,089 | |
| Other changes in noncontrolling interests | | | | | | | | | | | | |
| Dividends paid to noncontrolling shareholders | | | | — | | | — | | | — | | | (10,221) | | | (10,221) | |
| Other | | | | — | | | — | | | — | | | (427) | | | (427) | |
| Balance at end of year | | | | $ | 337,247 | | | $ | 1,136,898 | | | $ | (77,057) | | | $ | 39,864 | | | $ | 1,436,952 | |
UNIVERSAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY—(Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Universal Corporation Shareholders | | | | |
| (in thousands of dollars) | | | | Common
Stock | | Retained
Earnings | | Accumulated
Other
Comprehensive
Income
(Loss) | | Non-
controlling
Interests | | Total
Shareholders'
Equity |
| Fiscal Year Ended March 31, 2022 | | | | | | | | | | | | |
| Balance at beginning of year | | | | $ | 326,673 | | | $ | 1,087,663 | | | $ | (107,037) | | | $ | 41,126 | | | $ | 1,348,425 | |
| Changes in common stock | | | | | | | | | | | | |
| | | | | | | | | | | | |
| Repurchase of common stock | | | | (782) | | | — | | | — | | | — | | | (782) | |
| Accrual of stock-based compensation | | | | 6,187 | | | — | | | — | | | — | | | 6,187 | |
| Withholding of shares from stock-based compensation for grantee income taxes | | | | (2,486) | | | — | | | — | | | — | | | (2,486) | |
| Dividend equivalents on restricted stock units (RSUs) | | | | 1,070 | | | — | | | — | | | — | | | 1,070 | |
| Changes in retained earnings | | | | | | | | | | | | |
| Net income | | | | — | | | 86,577 | | | — | | | 17,027 | | | 103,604 | |
Cash dividends declared on common stock ($3.12 per share) | | | | | | (76,707) | | | — | | | — | | | (76,707) | |
| Repurchase of common stock | | | | — | | | (2,271) | | | — | | | — | | | (2,271) | |
| Dividend equivalents on restricted stock units (RSUs) | | | | — | | | (1,070) | | | — | | | — | | | (1,070) | |
| Other comprehensive income (loss) | | | | | | | | | | | | |
| Foreign currency translation, net of income taxes | | | | — | | | — | | | (5,830) | | | (537) | | | (6,367) | |
| Foreign currency hedge, net of income taxes | | | | — | | | — | | | 3,993 | | | — | | | 3,993 | |
| Interest rate hedge, net of income taxes | | | | — | | | — | | | 18,620 | | | — | | | 18,620 | |
| Pension and other postretirement benefit plans, net of income taxes | | | | — | | | — | | | 5,943 | | | — | | | 5,943 | |
| Other changes in noncontrolling interests | | | | | | | | | | | | |
| Dividends paid to noncontrolling shareholders | | | | — | | | — | | | — | | | (13,390) | | | (13,390) | |
| Balance at end of year | | | | $ | 330,662 | | | $ | 1,094,192 | | | $ | (84,311) | | | $ | 44,226 | | | $ | 1,384,769 | |
UNIVERSAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY—(Continued)
| | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended March 31, |
| 2024 | | 2023 | | 2022 |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Common Shares Outstanding: | | | | | |
| Balance at beginning of year | 24,555,361 | | | 24,550,019 | | | 24,514,867 | |
| Issuance of common stock | 118,047 | | | 71,466 | | | 93,416 | |
| | | | | |
| Repurchase of common stock | (100,000) | | | (66,124) | | | (58,264) | |
| Balance at end of year | 24,573,408 | | | 24,555,361 | | | 24,550,019 | |
See accompanying notes.
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts are in thousands, except per share amounts or as otherwise noted.)
NOTE 1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Universal Corporation, which together with its subsidiaries is referred to herein as “Universal” or the “Company,” is a global business-to-business agriproducts company. The Company is the leading global leaf tobacco supplier and provides high-quality plant-based ingredients to food and beverage end markets. The Company conducts its leaf tobacco business in over 30 countries, primarily in major tobacco-producing regions of the world.
Consolidation
The consolidated financial statements include the accounts of Universal Corporation and all domestic and foreign subsidiaries in which the Company maintains a controlling financial interest. Control is generally determined based on a voting interest of greater than 50%, such that Universal controls all significant corporate activities of the subsidiary. All significant intercompany accounts and transactions are eliminated in consolidation.
The equity method of accounting is used for investments in companies where Universal Corporation has a voting interest of 20% to 50%. These investments are accounted for under the equity method because Universal exercises significant influence over those companies, but not control. The Company received no dividends in fiscal year 2024, $5.6 million in fiscal year 2023, and $4.3 million in fiscal year 2022, from companies accounted for under the equity method. Investments where Universal has a voting interest of less than 20% are not significant and do not have readily determinable fair values. As such, the Company has elected the alternate method of measuring these investments at cost, less any impairment. The Company's 49% ownership interest in Socotab L.L.C. (“Socotab”), a leading supplier of oriental tobaccos with operations located principally in Eastern Europe and Turkey, is the primary investment accounted for under the equity method. The investment in Socotab is an important part of the Company's overall product and service arrangements with its major customers. The Company reviews the carrying value of its investments in Socotab and its other unconsolidated affiliates on a regular basis and considers whether any factors exist that might indicate an impairment in value that is other than temporary.
The Company's operations in Zimbabwe are deconsolidated under accounting requirements that apply under certain conditions to foreign subsidiaries that are subject to foreign exchange controls and other government restrictions. The investment in the Zimbabwe operations is accounted for at cost and was zero at March 31, 2024 and 2023. The Company has a net foreign currency translation loss associated with the Zimbabwe operations of approximately $7.2 million, which remains a component of accumulated other comprehensive loss at March 31, 2024. As a regular part of its reporting, the Company reviews the conditions that resulted in the deconsolidation of the Zimbabwe operations to confirm that such accounting treatment is still appropriate. Dividends from the Zimbabwe operations are recorded in income in the period received.
The Company holds less than a 100% financial interest in certain consolidated subsidiaries. The net income and shareholders’ equity attributable to the noncontrolling interests in these subsidiaries are reported on the face of the consolidated financial statements. There were no material changes in the Company’s ownership percentage in any of these subsidiaries during fiscal years 2024, 2023, or 2022.
Investments in Unconsolidated Affiliates
The Company’s investments in its unconsolidated affiliates, which include its Zimbabwe operations, are non-marketable securities. Universal reviews such investments for impairment whenever events or changes in circumstances indicate that the carrying amount of an investment may not be recovered. For example, the Company would review such an investment for impairment if the investee were to lose a significant customer, suffer a large reduction in sales margins, experience a major change in its business environment, or undergo any other significant change in its normal business. In assessing the recoverability of these investments, the Company follows the applicable accounting guidance in determining the fair value of the investments. In most cases, this involves the use of undiscounted and discounted cash flow models (Level 3 of the fair value hierarchy under the accounting guidance). If the fair value of an unconsolidated investee is determined to be lower than its carrying value, an impairment loss is recognized. The determination of fair value using discounted cash flow models is normally not based on observable market data from independent sources and therefore requires significant management judgment with respect to estimates of future operating earnings and the selection of an appropriate discount rate. The use of different assumptions could increase or decrease estimated future operating cash flows, and the discounted value of those cash flows, and therefore could increase or decrease any impairment charge related to these investments. During the fiscal year ended March 31, 2022, the Company recognized an immaterial impairment of an investment in an equity method investee in Africa.
In its consolidated statements of income, the Company reports its proportional share of the earnings of unconsolidated affiliates accounted for on the equity method based on the pretax earnings of those affiliates, as permitted under the applicable accounting guidance. All applicable foreign and U.S. income taxes are provided on these earnings and reported as a component of
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
consolidated income tax expense. For unconsolidated affiliates located in foreign jurisdictions, repatriation of the Company’s share of the earnings through dividends is assumed in determining consolidated income tax expense.
The following table provides a reconciliation of (1) equity in the pretax earnings of unconsolidated affiliates, as reported in the consolidated statements of income to (2) equity in the net income of unconsolidated affiliates, net of dividends, as reported in the consolidated statements of cash flows for the fiscal years ended March 31, 2024, 2023, and 2022:
| | | | | | | | | | | | | | | | | |
| Fiscal Year Ended March 31, |
| 2024 | | 2023 | | 2022 |
| | | | | |
| Equity in pretax earnings reported in the consolidated statements of income | $ | 756 | | | $ | 2,383 | | | $ | 6,095 | |
| Less: Equity in income taxes | 483 | | | (781) | | | (1,481) | |
| Equity in net income | 1,239 | | | 1,602 | | | 4,614 | |
Less: Dividends received on investments (1) | — | | | (5,612) | | | (4,285) | |
| Equity in net income, net of dividends, reported in the consolidated statements of cash flows | $ | 1,239 | | | $ | (4,010) | | | $ | 329 | |
(1) In accordance with the applicable accounting guidance, dividends received from unconsolidated affiliates accounted for on the equity method that represent a return on capital (i.e., a return of earnings on a cumulative basis) are presented as operating cash flows in the consolidated statements of cash flows.
Earnings Per Share
The Company calculates basic earnings per share based on Net income attributable to Universal Corporation. The calculation uses the weighted average number of common shares outstanding during each period. Diluted earnings per share is computed in a similar manner using the weighted average number of common shares and dilutive potential common shares outstanding. Dilutive potential common shares include unvested restricted stock units and performance share units that are assumed to be fully vested and paid out in shares of common stock.
Calculations of earnings per share for the fiscal years ended March 31, 2024, 2023, and 2022, are provided in Note 5.
Cash, Restricted Cash, and Cash Equivalents
All highly liquid investments with a maturity of three months or less at the time of purchase are classified as cash equivalents. Restricted cash was associated with the acquisition of Silva International, Inc. ("Silva") and was recognized as a component of other noncurrent assets at March 31, 2022. The restricted cash associated with the Silva acquisition was released to the selling shareholder during the fiscal year ended March 31, 2023. See Note 2 for more information about the release of restricted cash.
Advances to Tobacco Suppliers
In many sourcing origins where the Company operates, it provides agronomy services and seasonal advances of seed, fertilizer, and other supplies to tobacco farmers for crop production, or makes seasonal cash advances to farmers for the procurement of those inputs. These advances are typically short term, are repaid upon delivery of tobacco to the Company, and are reported in advances to suppliers in the consolidated balance sheets. In several origins, the Company has made long-term advances to tobacco farmers to finance curing barns and other farm infrastructure. In some years, due to low crop yields and other factors, individual farmers may not deliver sufficient volumes of tobacco to fully repay their seasonal advances, and the Company may extend repayment of those advances into future crop years. The long-term portion of advances is included in other noncurrent assets in the consolidated balance sheets. Both the current and the long-term portions of advances to tobacco suppliers are reported net of allowances recorded when the Company determines that amounts outstanding are not likely to be collected. Short-term and long-term advances to tobacco suppliers totaled approximately $162 million at March 31, 2024 and $199 million at March 31, 2023. The related valuation allowances totaled $20 million at March 31, 2024, and $24 million at March 31, 2023, and were estimated based on the Company’s historical loss information and crop projections. The allowances were increased by net provisions for estimated uncollectible amounts of approximately $14.1 million in fiscal year 2024, $10.6 million in fiscal year 2023, and $6.0 million in fiscal year 2022. These net provisions are included in selling, general, and administrative expenses in the consolidated statements of income. Interest on advances is recognized in earnings upon the farmers’ delivery of tobacco in payment of principal and interest. Advances on which interest accruals had been discontinued totaled approximately $2 million and $3 million at March 31, 2024 and 2023, respectively.
Inventories
Inventories are valued at the lower of cost or net realizable value. Raw materials primarily consist of unprocessed leaf tobacco, which is clearly identified by type and grade at the time of purchase. The Company tracks the costs associated with this
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
tobacco in the final product lots, and maintains this identification through the time of sale. This method of cost accounting is referred to as the specific cost or specific identification method. The predominant cost component of the Company’s inventories is the cost of the unprocessed tobacco. Direct and indirect processing costs related to these raw materials are capitalized and allocated to inventory in a systematic manner. The Company does not capitalize any interest or sales-related costs in inventory. In-bound freight costs are recorded in cost of goods sold. Other inventories consist primarily of unprocessed and processed food and vegetable ingredients, botanical extracts, seed, fertilizer, packing materials, and other supplies, and are valued using the specific cost method.
Recoverable Value-Added Tax Credits
In many foreign countries, the Company’s local operating subsidiaries pay significant amounts of value-added tax (“VAT”) on purchases of unprocessed and processed tobacco, crop inputs, packing materials, and various other goods and services. In some countries, VAT is a national tax, and in other countries it is assessed at the state level. Items subject to VAT vary from jurisdiction to jurisdiction, as do the rates at which the tax is assessed. When tobacco is sold to customers in the country of origin, the operating subsidiaries generally collect VAT on those sales. The subsidiaries are normally permitted to offset their VAT payments against the collections and remit only the incremental VAT collections to the tax authorities. When tobacco is sold for export, VAT is normally not assessed. In countries where tobacco sales are predominantly for export markets, VAT collections generated on downstream sales are often not sufficient to fully offset the subsidiaries’ VAT payments. In those situations, unused VAT credits can accumulate. Some jurisdictions have procedures that allow companies to apply for refunds of unused VAT credits from the tax authorities, but the refund process often takes an extended period of time, and it is not uncommon for refund applications to be challenged or rejected in part on technical grounds. Other jurisdictions may permit companies to sell or transfer unused VAT credits to third parties in private transactions, although approval for such transactions must normally be obtained from the tax authorities, limits on the amounts that can be transferred may be imposed, and the proceeds realized may be heavily discounted from the face value of the credits. Due to these factors, local operating subsidiaries in some countries can accumulate significant balances of VAT credits over time. The Company reviews these balances on a regular basis and records valuation allowances on the credits to reflect amounts that are not expected to be recovered, as well as discounts anticipated on credits that are expected to be sold or transferred. At March 31, 2024 and 2023, the aggregate balances of recoverable tax credits held by the Company’s subsidiaries totaled approximately $72 million and $64 million, respectively, and the related valuation allowances totaled approximately $21 million and $22 million, respectively. The net balances are reported in other current assets and other noncurrent assets in the consolidated balance sheets.
Property, Plant and Equipment
Depreciation of property, plant and equipment is based upon historical cost and the estimated useful lives of the assets. Depreciation is calculated primarily using the straight-line method. Buildings include processing and blending facilities, offices, and warehouses. Machinery and equipment consists of processing and packing machinery and transport, office, and computer equipment. Estimated useful lives range as follows: buildings - 15 to 40 years; processing and packing machinery - 3 to 11 years; transport equipment - 3 to 10 years; and office and computer equipment - 3 to 12 years. Where applicable and material in amount, the Company capitalizes related interest costs during periods that property, plant and equipment are being constructed or made ready for service. No interest was capitalized in fiscal years 2024, 2023, or 2022.
Leases
The Company determines if an arrangement meets the definition of a lease at inception. The Company, as a lessee, enters into operating leases for land, buildings, equipment, and vehicles. For all operating leases with terms greater than 12 months and with fixed payment arrangements, a lease liability and corresponding right-of-use asset are recognized in the balance sheet for the term of the lease by calculating the net present value of future lease payments. On the date of lease commencement, the present value of lease liabilities is determined by discounting the future lease payments by the Company’s collateralized incremental borrowing rate, adjusted for the lease term and currency of the lease payments. If a lease contains a renewal option that the Company is reasonably certain to exercise, the Company accounts for the original lease term and expected renewal term in the calculation of the lease liability and right-of-use asset. Certain of the Company’s leases include both lease and non-lease components (e.g., common-area or other maintenance costs) which are accounted for as a single lease component, as the Company has elected the practical expedient to group lease and non-lease components for real estate leases.
Additional disclosures related to the Company's leases are provided in Note 10.
Goodwill and Other Intangibles
Goodwill and other intangibles are disclosed in Note 7. Goodwill principally consists of the excess of the purchase price of acquired companies over the fair value of the net assets. Goodwill is carried at the lower of cost or fair value and is reviewed for potential impairment on an annual basis as of the end of the fiscal year.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Reporting units are distinct operating subsidiaries or groups of subsidiaries that typically compose the Company’s business in a specific country or location. Goodwill is allocated to reporting units based on the country or location to which a specific acquisition relates, or by allocation based on expected future cash flows if the acquisition relates to more than one country or location. The majority of the Company’s goodwill relates to its reporting unit in Brazil and reporting units in the Ingredients operating segment. See Notes 2 and 7 for additional information. Significant adverse changes in the operations or estimated future cash flows for a reporting unit with recorded goodwill could result in an impairment charge.
Accounting Standards Codification Topic 350 ("ASC 350") permits companies to base initial assessments of potential goodwill impairment on qualitative factors, but also allows companies to bypass the qualitative assessment and perform a quantitative assessment. The Company elected to bypass the qualitative assessment and perform a quantitative assessment of goodwill impairment at March 31, 2024. The quantitative goodwill assessment consists of comparing the fair value of each reporting unit to the carrying value of that reporting unit. In the event that the carrying value of the reporting unit exceeds its fair value, an impairment of the reporting unit's goodwill is recognized, up to the amount of goodwill allocated to that reporting unit. Fair value was assessed using a discounted cash flow model, comprised of estimates of future cash flows and discount rates. Based on this quantitative assessment, the Company determined there was no impairment of goodwill for any of its reporting units as of March 31, 2024.
The Company elected to use the qualitative approach at March 31, 2023. The qualitative assessment did not indicate that it was more likely than not that the fair value of any of the reporting units was less than their respective carrying value, therefore no potential impairment of the Company's recorded goodwill was noted as of that date.
Other intangibles principally consists of finite lived intangible assets including customer-related intangibles, trade names, developed technology, and noncompetition agreements. Intangible assets acquired in a business combination are recorded at fair value using a discounted cash flow approach. A discounted cash flow approach to value intangible assets requires assumptions about the timing, amount, and probability of future net cash flows, as well as the discount rate and market participant considerations. Other intangibles are amortized on a straight-line basis over the intangible asset's economic life.
Impairment of Long-Lived Assets
The Company reviews long-lived assets for impairment, disclosed in Note 4 and Note 12, whenever events, changes in business conditions, or other circumstances provide an indication that such assets may be impaired. Potential impairment is initially assessed by comparing management’s undiscounted estimates of future cash flows from the use or disposition of the assets to their carrying value. If the carrying value exceeds the undiscounted cash flows, an impairment charge is recorded to reduce the carrying value of the asset to its fair value determined in accordance with the accounting guidance. In many cases, this involves the use of discounted cash flow models that are not based on observable market data from independent sources (Level 3 of the fair value hierarchy under the accounting guidance).
Income Taxes
The Company provides deferred income taxes on temporary differences between the book and tax basis of its assets and liabilities. Those differences arise principally from employee benefit accruals, depreciation, deferred compensation, undistributed earnings of unconsolidated affiliates, undistributed earnings of foreign subsidiaries, goodwill, intangibles, and valuation allowances on farmer advances and VAT credits. Income taxes provided on pretax amounts recorded in accumulated other comprehensive income (loss) are released when the related pretax amounts are reclassified to earnings. Additional disclosures related to the Company's income taxes are disclosed in Note 6.
Fair Values of Financial Instruments
The fair value of the Company’s long-term debt, disclosed in Note 12, approximates the carrying amount since the variable interest rates in the underlying credit agreement reflect the market interest rates that were available to the Company at March 31, 2024. In periods when fixed-rate obligations are outstanding, fair values are estimated using market prices where they are available or discounted cash flow models based on current incremental borrowing rates for similar classes of borrowers and borrowing arrangements. The fair values of interest rate swap agreements designated as cash flow hedges and used to fix the variable benchmark rate on outstanding long-term debt are determined separately and recorded in other long-term liabilities. Except for interest rate swaps and forward foreign currency exchange contracts that are discussed below, the fair values of all other assets and liabilities that qualify as financial instruments approximate their carrying amounts.
Derivative Financial Instruments
The Company recognizes all derivatives on the balance sheet at fair value. Interest rate swaps and forward foreign currency exchange contracts are used from time to time to manage interest rate risk and foreign currency risk. The Company enters into such contracts only with counterparties of good standing. The credit exposure related to non-performance by the counterparties and the Company is considered in determining the fair values of the derivatives, and the effect has not been
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
material to the financial statements or operations of the Company. Additional disclosures related to the Company’s derivatives and hedging activities are provided in Note 11.
Translation and Remeasurement of Foreign Currencies
The financial statements of foreign subsidiaries having the local currency as the functional currency are translated into U.S. dollars using exchange rates in effect at period end for assets and liabilities and average exchange rates applicable to each reporting period for results of operations. Adjustments resulting from translation of financial statements are reflected as a separate component of other comprehensive income or loss. The financial statements of foreign subsidiaries having the U.S. dollar as the functional currency, with certain transactions denominated in a local currency, are remeasured into U.S. dollars. The remeasurement of local currency amounts into U.S. dollars creates remeasurement gains and losses that are included in earnings as a component of selling, general, and administrative expenses. The Company recognized net remeasurement losses of $5.1 million and $19.0 million in fiscal years 2024 and 2022, respectively, and net remeasurement gains of $3.9 million in fiscal year 2023.
Foreign currency transactions and forward foreign currency exchange contracts that are not designated as hedges generate gains and losses when they are settled or when they are marked-to-market under the prescribed accounting guidance. These transaction gains and losses are also included in earnings as a component of selling, general, and administrative expenses. The Company recognized net foreign currency transaction losses of $3.2 million and $8.8 million in fiscal years 2024 and 2023, respectively, and net foreign currency transaction gains of $18.0 million in fiscal year 2022 .
Customer Advances and Deposits
From time to time, the Company receives advances and deposits from customers for future delivery of finished goods. The advance payments are applied against customer receivables after performance obligations are completed and recognition of revenue is appropriate.
Revenue Recognition
Revenue is recognized when the Company completes its performance obligation for the transfer of products and services under its contractual arrangements with customers. For sales of tobacco, satisfaction of the performance obligation and recognition of the corresponding revenue is based on the transfer of the ownership and control of the product to the customer. A large percentage of the Company’s sales are to major multinational manufacturers of consumer tobacco products. The Company works closely with those customers to understand and plan for their requirements for volumes, styles, and grades of leaf tobacco from its various growing regions, and extensive coordination is maintained on an ongoing basis to determine and satisfy their requirements for transfer of ownership and physical shipment of processed tobacco. The customers typically specify, in sales contracts and in shipping documents, the precise terms for transfer of title and risk of loss for the tobacco. Customer returns and rejections are not significant, and the Company’s sales history indicates that customer-specific acceptance provisions are consistently met upon transfer of title and risk of loss.
While most of the Company’s revenue is derived from tobacco that is purchased from farmers, processed and packed in its factories, and then sold to customers, some revenue is earned from processing tobacco owned by customers and from other value-added services. The arrangements for processing services usually exist in specific markets where the customers contract directly with farmers for leaf production, and they have accounted for less than 5% of total revenue on an annual basis through the fiscal year ended March 31, 2024. Processing and packing of leaf tobacco is a short-duration process. Under normal operating conditions, raw tobacco that is placed into the production line exits as processed and packed tobacco within one hour, and is then later transported to customer-designated storage facilities. The revenue for these services is recognized when the performance obligation is met upon the completion of processing, and the Company's operating history indicates that customer requirements for processed tobacco are consistently met upon completion of processing.
The Company has diversified its operations through acquisition of established companies that offer customers a wide range of both liquid and dehydrated fruit and vegetable ingredient products, as well as botanical extracts and flavors. These operations procure raw materials from domestic and international growers and suppliers and through a variety of processing steps (including sorting, cleaning, pressing, mixing, extracting, and blending), manufacture finished goods utilized in both human and pet food. The contracts for food ingredients with customers create a performance obligation to transfer the manufactured finished goods to the customer. Transaction prices for the sale of food ingredients are primarily based on negotiated fixed prices. At the point in time that the customer obtains control over the finished product, which is typically aligned with physical shipment under the contractual terms with the customer, the Company completes its performance obligation and recognizes the revenue for the sale.
Additional disclosures related to the Company's revenue from contracts with customers are provided in Note 3.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Stock-Based Compensation
Share-based payments, such as grants of restricted stock units, performance share units, restricted stock, stock appreciation rights, and stock options, are measured at fair value and reported as expense in the financial statements over the requisite service or performance periods. Additional disclosures related to stock-based compensation are included in Note 15.
Estimates and Assumptions
The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Accounting Pronouncements
Pronouncements Adopted in Fiscal Year 2022
The Company adopted FASB issued Accounting Standards Update No. 2019-12, “Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes” (“ASU 2019-12”) effective April 1, 2021. ASU 2019-12 eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences related to changes in ownership of equity method investments and foreign subsidiaries. The updated guidance also simplifies aspects of accounting for franchise taxes and enacted changes in tax laws or rates, and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. There was no material impact to the consolidated financial statements from the adoption of ASU 2019-12.
Pronouncements Adopted in Fiscal Year 2023
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 Company adopted the new standard effective December 31, 2022. There was no material impact to the consolidated financial statements from the adoption of ASU 2020-04.
Accounting Pronouncements to be Adopted in Future Years
In November 2023, the FASB issued Accounting Standards Update No. 2023-07, "Segment Reporting (Topic 280) - Improvements to Reportable Segment Disclosures" ("ASU 2023-07"). ASU 2023-07 requires additional disclosures about profitability measures utilized by the chief operating decision maker and significant segment expenses. ASU 2023-07 also requires all annual disclosures regarding profit or loss and assets to be included in interim disclosures. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023 and for interim periods in fiscal years beginning after December 15, 2024, although early adoption is permitted. The Company is currently evaluating the impact of adopting this standard on its operating segments disclosures.
In December 2023, the FASB issued Accounting Standards Update No. 2023-09, "Income Taxes (Topic 740) - Improvements to Income Tax Disclosures" ("ASU 2023-09"). ASU 2023-09 requires additional disclosures reconciling the rates of different categories of income tax (i.e. federal , state, foreign, etc.) and a disaggregation of taxes paid and refunded. ASU 2023-09 is effective for fiscal years beginning after December 15, 2024 and for interim periods in fiscal years beginning after December 15, 2025, although early adoption is permitted. The Company is currently evaluating the impact of adopting this standard on its income tax disclosures.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year’s presentation.
NOTE 2. BUSINESS COMBINATIONS
Acquisition of Shank's Extracts, LLC
On October 4, 2021, the Company acquired 100% of the capital stock of Shank's Extract's, LLC (“Shank's”), a flavors and botanical extracts processing company, for approximately $100 million in cash and $2.4 million of additional working capital on-hand at the date of acquisition. The acquisition of Shank's diversifies the Company's product offerings and generates new opportunities for its plant-based ingredients platform.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
A portion of the goodwill recorded as part of the acquisition was attributable to the assembled workforce of Shank's. The goodwill and intangibles recognized for the Shank's acquisition are deductible for U.S. income tax purposes. The transaction was treated as an asset acquisition for U.S. Federal tax purposes, resulting in a step-up of tax basis to fair value. The Company determined the Shank's operations are not material to the Company’s consolidated results. Therefore, pro forma information is not presented.
For the fiscal year ended March 31, 2022, the Company incurred $2.3 million for acquisition-related transaction costs for the purchase of Shank's. The acquisition-related costs were expensed as incurred and recorded in selling, general, and administrative expense on the consolidated statements of income.
In November 2021, the Company acquired the land and buildings utilized by Shank's operations for $13.3 million. The purchase of the land and buildings resulted in the elimination of the $8.5 million operating lease right-of-use asset and lease liability recognized on the acquisition date for Shank's.
The following table summarizes the final purchase price allocations of the assets acquired and liabilities assumed for the Shank's acquisition.
| | | | | | | |
| Shank's | | |
| Assets | October 4, 2021 | | |
| Cash and cash equivalents | $ | 754 | | | |
| Accounts receivable, net | 6,643 | | | |
| | | |
| Inventory | 15,792 | | | |
| Other current assets | 415 | | | |
| Property, plant and equipment | 11,000 | | | |
| Operating lease right-of-use assets | 8,531 | | | |
| Intangibles | | | |
| Customer relationships | 24,000 | | | |
| Developed technology | 4,500 | | | |
| | | |
| Non-compete agreements | 3,000 | | | |
| Goodwill | 41,061 | | | |
Total assets acquired | 115,696 | | | |
| | | |
| Liabilities | | | |
| Accounts payable and accrued expenses | 6,159 | | | |
| Customer advances and deposits | 351 | | | |
| Accrued compensation | 655 | | | |
| | | |
| Current portion operating lease liabilities | 8,531 | | | |
| | | |
Total liabilities assumed | 15,696 | | | |
| | | |
Total assets acquired and liabilities assumed | $ | 100,000 | | | |
| | | |
Restricted Cash Release of Deferred Proceeds from Acquisition of Silva International, Inc.
During the three months ended December 31, 2022, the Company released $6.0 million, held in a third-party escrow account, to one of Silva's selling shareholders. The amounts were held in escrow since the date of acquisition, as the employee had a post-combination service requirement with forfeitable payment provisions. Therefore, under ASC Topic 805, "Business Combinations," the amounts held in escrow were treated as a contingent consideration arrangement and expensed as compensation expense in selling, general, and administrative expense on the consolidated statements of income. As of December 31, 2022, all amounts have been released to the selling shareholder, who remains employed by the Company, and expensed in the Company's consolidated statements of income.
NOTE 3. REVENUE FROM CONTRACTS WITH CUSTOMERS
The majority of the Company’s consolidated revenue consists of sales of processed leaf tobacco to customers. The Company also earns revenue from processing leaf tobacco owned by customers and from various other services provided to customers. Additionally, the Company has fruit and vegetable processing operations, as well as flavor and extract services that provide customers with a range of food ingredient products. Payment terms with customers vary depending on customer
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 tobacco 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
The Company has diversified operations through acquisition of established companies that offer customers a wide range of both liquid and dehydrated fruit and vegetable ingredient products, flavors, and botanical extracts. These operations procure raw materials from domestic and international growers and suppliers and through a variety of processing steps including sorting, cleaning, pressing, mixing, extracting, and blending to manufacture finished goods utilized in both human and pet food. The contracts for food ingredients with customers create a performance obligation to transfer the manufactured finished goods to the customer. Transaction prices for the sale of food ingredients are primarily based on negotiated fixed prices. At the point in time that the customer obtains control over the finished product, which is typically aligned with physical shipment under the contractual terms with the customer, the Company completes its performance obligation and recognizes the revenue for the sale.
Processing Revenue
Processing and packing of customer-owned tobacco and ingredients is a short-duration process. Processing charges are primarily based on negotiated fixed prices per unit of weight processed. Under normal operating conditions, customer-owned raw materials that are placed into the production line exits as processed and packed product and is then later transported to customer-designated transfer locations. The revenue for these services is recognized when the performance obligation is satisfied, which is generally when processing is completed. The Company’s operating history and contract analyses indicate that customer requirements for processed tobacco and food ingredients products are consistently met upon completion of processing.
Other Sales and Revenue from Contracts with Customers
From time to time, the Company enters into various arrangements with customers to provide other value-added services that may include blending, chemical and physical testing of products, storage, logistics, sorting, and tobacco cutting services for select manufacturers. These other arrangements and operations are a much smaller portion of the Company’s business, and are separate and distinct contractual agreements from the Company’s tobacco and food ingredients sales or third-party processing arrangements with customers. The transaction prices and timing of revenue recognition of these items are determined by the specifics of each contract.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Disaggregation of Revenue from Contracts with Customers
The following table disaggregates the Company’s revenue by significant revenue-generating category:
| | | | | | | | | | | | | | | | | |
| Fiscal Year Ended March 31, |
| 2024 | | 2023 | | 2022 |
| Tobacco sales | $ | 2,268,600 | | | $ | 2,093,493 | | | $ | 1,703,330 | |
| Ingredient sales | 292,291 | | | 294,302 | | | 250,595 | |
| Processing revenue | 82,976 | | | 78,357 | | | 77,048 | |
| Other sales and revenue from contracts with customers | 77,777 | | | 83,666 | | | 60,177 | |
| Total revenue from contracts with customers | 2,721,644 | | | 2,549,818 | | | 2,091,150 | |
| Other operating sales and revenues | 26,929 | | | 20,006 | | | 12,451 | |
| Consolidated sales and other operating revenues | $ | 2,748,573 | | | $ | 2,569,824 | | | $ | 2,103,601 | |
Other operating sales and revenues consists principally of interest on advances to tobacco suppliers and dividend income from unconsolidated affiliates.
Major Customers
A material part of the Company’s business is dependent upon a few customers. The Company’s six largest customers are Altria Group, Inc, British American Tobacco plc, China Tobacco International, Inc., Imperial Brands plc, Japan Tobacco, Inc., and Philip Morris International, Inc. In the aggregate, these customers have accounted for approximately 60% of consolidated revenue for each of the past three fiscal years. For the fiscal years ended March 31, 2024, 2023, and 2022, revenue from Philip Morris International, Inc. accounted for revenue of approximately $630 million, $460 million, and $320 million, respectively, Imperial Brands plc accounted for revenue of approximately $340 million, $430 million, and $380 million, respectively, and Japan Tobacco, Inc. accounted for revenue of approximately $260 million, $160 million, and $120 million, respectively. These customers do business with various affiliates in the Company’s Tobacco Operations segment. The loss of, or substantial reduction in business from, any of these customers could have a material adverse effect on the Company.
NOTE 4. RESTRUCTURING AND IMPAIRMENT COSTS
During the fiscal years ended March 31, 2024 and 2022, Universal recorded restructuring and impairment costs related to business changes and various initiatives to adjust certain operations and reduce costs. There were no restructuring costs incurred for the fiscal year ended March 31, 2023.
Fiscal Year Ended March 31, 2024
Tobacco Operations
During the fiscal year ended March 31, 2024, the Company restructured operations at its Global Laboratory Services, Inc ("GLS") facility in Wilson, NC. GLS provides testing for crop protection agents and tobacco constituents in seed, leaf, and finished products, including e-cigarette liquids and vapors, and has capabilities for testing non-tobacco products. As a result of the restructuring of the GLS operations, the Company incurred $1.8 million of restructuring and impairment costs for the fiscal year ended March 31, 2024.
During the fiscal year ended March 31, 2024, the Company also incurred $1.7 million of termination and impairment costs in other areas of the Tobacco Operations segment.
Fiscal Year Ended March 31, 2022
Tobacco Operations
As a result of efforts to exit the idled tobacco operations in Tanzania, the Company reevaluated the carrying values of property, plant, and equipment associated with the Tanzania operations. During the fiscal year ended March 31, 2022, the Company determined the carrying value exceeded the estimated fair value of those assets and recognized a $9.4 million impairment charge. During the fiscal year ended March 31, 2023, the Company sold all outstanding common stock, which included all properties, of the idled companies in Tanzania for $8.5 million.
During the fiscal year ended March 31, 2022, the Company also incurred $2.2 million of termination costs for the Tobacco Operations segment.
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Ingredients Operations
During the fiscal year ended March 31, 2022, the Company recognized $1.2 million of net gains on the sale of the remaining property, plant, and equipment associated with the wind-down of the CIFI operations that was announced in fiscal year 2021.
A summary of the restructuring and impairment costs incurred during the fiscal years ended March 31, 2024, 2023, and 2022 is as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Years Ended March 31, |
| | 2024 | | 2023 | | 2022 |
| Restructuring Costs: | | | | | | |
| Employee termination benefits | | $ | 1,615 | | | $ | — | | | $ | 2,174 | |
| Other restructuring costs | | (181) | | | — | | | (24) | |
| | 1,434 | | | — | | | 2,150 | |
| Impairment Costs: | | | | | | |
| Property, plant, and equipment and other noncurrent assets | | 2,089 | | | — | | | 8,307 | |
| | | | | | |
| | | | | | |
| Total restructuring and impairment costs | | $ | 3,523 | | | $ | — | | | $ | 10,457 | |
A reconciliation of the Company’s liability for employee termination benefits and other restructuring costs for fiscal years 2022 through 2024 is as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Employee
Termination
Benefits | | Other Costs | | Total |
| Balance at April 1, 2021 | | $ | 1,370 | | | $ | 613 | | | $ | 1,983 | |
| Fiscal Year 2022 Activity: | | | | | | |
| Costs charged to expense | | 2,174 | | | (24) | | | 2,150 | |
| Payments and write-offs | | (3,544) | | | (589) | | | (4,133) | |
| Balance at March 31, 2022 | | — | | | — | | | — | |
| Fiscal Year 2023 Activity: | | | | | | |
| Costs charged to expense | | — | | | — | | | — | |
| Payments and write-offs | | — | | | — | | | — | |
| Balance at March 31, 2023 | | — | | | — | | | — | |
| Fiscal Year 2024 Activity: | | | | | | |
| Costs charged to expense | | 1,615 | | | (181) | | | 1,434 | |
| Payments and write-offs | | (1,362) | | | 181 | | | (1,181) | |
| Balance at March 31, 2024 | | $ | 253 | | | $ | — | | | $ | 253 | |
Universal continually reviews its business for opportunities to realize efficiencies, reduce costs, and realign its operations in response to business changes. The Company may incur additional restructuring and impairment costs in future periods as business changes occur and additional cost savings initiatives are implemented.
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE 5. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share:
| | | | | | | | | | | | | | | | | |
| Fiscal Year Ended March 31, |
| (in thousands, except share and per share data) | 2024 | | 2023 | | 2022 |
| Basic Earnings Per Share | | | | | |
| Numerator for basic earnings per share | | | | | |
| Net income attributable to Universal Corporation | $ | 119,598 | | | $ | 124,052 | | | $ | 86,577 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Denominator for basic earnings per share | | | | | |
| Weighted average shares outstanding | 24,851,858 | | | 24,773,710 | | | 24,764,177 | |
| | | | | |
Basic earnings per share | $ | 4.81 | | | $ | 5.01 | | | $ | 3.50 | |
| | | | | |
| Diluted Earnings Per Share | | | | | |
| Numerator for diluted earnings per share | | | | | |
| Net income attributable to Universal Corporation | $ | 119,598 | | | $ | 124,052 | | | $ | 86,577 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Denominator for diluted earnings per share: | | | | | |
| Weighted average shares outstanding | 24,851,858 | | | 24,773,710 | | | 24,764,177 | |
| Effect of dilutive securities | | | | | |
| | | | | |
| Employee and outside director share-based awards | 189,056 | | | 170,131 | | | 158,719 | |
| Denominator for diluted earnings per share | 25,040,914 | | | 24,943,841 | | | 24,922,896 | |
| | | | | |
Diluted earnings per share | $ | 4.78 | | | $ | 4.97 | | | $ | 3.47 | |
NOTE 6. INCOME TAXES
The Company operates in the United States and many foreign countries and is subject to the tax laws of many jurisdictions. Changes in tax laws or the interpretation of tax laws can affect the Company’s earnings, as can the resolution of pending and contested tax issues. The Company's consolidated effective income tax rate is affected by a number of factors, including the mix of domestic and foreign earnings and the effect of exchange rate changes on local taxable income and deferred taxes in foreign countries.
For fiscal years ended March 31, 2024, 2023, and 2022 the Company's U.S. federal statutory tax rate is 21.0%. The U.S. tax system is primarily territorial based after the enactment of the Tax Cuts and Jobs Act of 2017. The U.S. tax law imposes a tax on U.S. shareholders on certain low-taxed income earned by controlled foreign corporations, referred to as global intangible low-taxed income ("GILTI"). The Company has made an accounting policy election to account for any additional tax resulting from the GILTI provisions in the year in which it is incurred and has not recorded any deferred taxes on temporary book-tax differences related to this income.
The Company continues to assume repatriation of all undistributed earnings of its consolidated foreign subsidiaries and has therefore provided for expected foreign withholding taxes on the distribution of those earnings where applicable, net of any U.S. tax credit attributable to those withholding taxes. The Company has asserted permanent reinvestment of the book basis of certain foreign subsidiaries, and accordingly, no deferred income tax liability has been recorded for any potential taxable gain that may be realized on a future disposition or liquidation of any of those subsidiaries. It is not practicable for the Company to quantify any deferred income tax liability that would be attributable to those events.
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Income Tax Expense
Income taxes for the fiscal years ended March 31, 2024, 2023, and 2022 consisted of the following:
| | | | | | | | | | | | | | | | | |
| Fiscal Year Ended March 31, |
| 2024 | | 2023 | | 2022 |
| Current | | | | | |
| United States | $ | 5,107 | | | $ | 9,967 | | | $ | 15,042 | |
| State and local | 696 | | | 1,134 | | | 265 | |
| Foreign | 30,711 | | | 8,289 | | | 25,828 | |
| 36,514 | | | 19,390 | | | 41,135 | |
| Deferred | | | | | |
| United States | (824) | | | (4,727) | | | (498) | |
| State and local | (138) | | | 613 | | | 1,568 | |
| Foreign | (4,443) | | | (3,543) | | | (3,542) | |
| (5,405) | | | (7,657) | | | (2,472) | |
| Total | $ | 31,109 | | | $ | 11,733 | | | $ | 38,663 | |
Foreign taxes include any applicable U.S. tax expense on the earnings of foreign subsidiaries.
Consolidated Effective Income Tax Rate
A reconciliation of the U.S. federal statutory tax rate to the Company’s effective income tax rate is as follows:
| | | | | | | | | | | | | | | | | |
| Fiscal Year Ended March 31, |
| 2024 | | 2023 | | 2022 |
| U.S. federal statutory tax rate | 21.0 | % | | 21.0 | % | | 21.0 | % |
| State income taxes, net of federal benefit | 0.3 | | | 1.0 | | | 1.0 | |
| | | | | |
| | | | | |
| | | | | |
| Foreign earnings taxed at rates other than the U.S. federal statutory tax rate | (5.2) | | | (1.5) | | | 3.7 | |
| Foreign dividend withholding taxes | 2.9 | | | 2.6 | | | 2.3 | |
| Brazil tax ruling | — | | | (17.1) | | | — | |
| | | | | |
| | | | | |
| | | | | |
| Changes in uncertain tax positions | (0.2) | | | (0.1) | | | (0.3) | |
| Other | 0.2 | | | 2.4 | | | (0.5) | |
| Effective income tax rate | 19.0 | % | | 8.3 | % | | 27.2 | % |
In fiscal year 2023, one of the Company's subsidiaries in Brazil received a favorable final judgement from the Brazilian Superior Court of Justice. The lawsuit asserted certain tax credits on exported goods should be excluded from taxable income. The Brazilian revenue authority asserted certain tax credits generated on purchased goods and services that were ultimately exported from Brazil should be included in the calculation of taxable income. The Brazilian Superior Court of Justice affirmed the tax credits are non-taxable in accordance with the historical and existing tax legislation in Brazil. The ruling resulted in recognition of $26.6 million of Brazilian tax credits due to the recalculation of federal income taxes in Brazil for years 2015 through 2022. The affirmative ruling also resulted in recognition of $5.0 million of interest income for the fiscal year ended March 31, 2023. The tax credits and associated interest income credits are being used to reduce federal non-income tax liabilities through the end of calendar year 2027. The tax credits were recognized as both current and noncurrent assets on the consolidated balance sheet based on when the credits are expected to be realized. Additionally, any unused tax credits will earn tax-exempt interest income through the expiration date, which can be used to reduce both non-income tax and income tax liabilities. The Brazilian federal tax authority has formally acknowledged the tax credits and related interest credits to be used by one of the Company's Brazilian subsidiaries. The ruling resulted in a net income tax benefit of $24.2 million in fiscal year 2023. The net income tax benefit included a $2.4 million income tax provision for U.S. federal income taxes related to the fiscal year 2018 consolidated federal tax return that will need to be amended. The Company sold its idled Tanzania operations and recognized $1.1 million of income taxes in the fiscal year ended March 31, 2023.
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
In fiscal year 2022, the Company recognized a $1.7 million benefit related to a final tax law ruling at a foreign subsidiary.
Components of Income Before Income Taxes
The U.S. and foreign components of income before income taxes were as follows:
| | | | | | | | | | | | | | | | | |
| Fiscal Year Ended March 31, |
| 2024 | | 2023 | | 2022 |
| United States | $ | 22,517 | | | $ | 27,942 | | | $ | 74,553 | |
| Foreign | 141,563 | | | 114,027 | | | 67,714 | |
| Total | $ | 164,080 | | | $ | 141,969 | | | $ | 142,267 | |
Deferred Income Tax Liabilities and Assets
Significant components of deferred tax liabilities and assets were as follows:
| | | | | | | | | | | |
| March 31, |
| 2024 | | 2023 |
| Liabilities | | | |
| Foreign withholding taxes | $ | 15,350 | | | $ | 17,123 | |
| Property, plant and equipment | 10,604 | | | 10,617 | |
| Undistributed earnings | 3,145 | | | 3,772 | |
| Operating lease right-of-use assets | 8,119 | | | 5,791 | |
| Goodwill and other intangible assets | 32,232 | | | 33,781 | |
| Interest rate swap | 3,036 | | | 1,885 | |
| All other | 1,168 | | | 2,786 | |
| Total deferred tax liabilities | $ | 73,654 | | | $ | 75,755 | |
| | | |
| Assets | | | |
| Employee benefit plans | $ | 15,938 | | | $ | 15,654 | |
| Reserves and accruals | 6,973 | | | 5,692 | |
| Deferred income | 5,827 | | | 5,573 | |
| Operating lease right-of-use liabilities | 7,407 | | | 5,500 | |
| Currency translation losses of foreign subsidiaries | 2,156 | | | 2,173 | |
| Local currency exchange losses of foreign subsidiaries | 2,075 | | | 1,084 | |
| | | |
| Foreign tax credit carryforward | 8,196 | | | 5,578 | |
| Capital loss carryforwards | 4,143 | | | 4,197 | |
| All other | 9,997 | | | 11,016 | |
| Total deferred tax assets | 62,712 | | | 56,467 | |
| Valuation allowance | (13,016) | | | (10,234) | |
| Net deferred tax assets | $ | 49,696 | | | $ | 46,233 | |
At March 31, 2024, the Company had no material net operating loss carryforwards in either its domestic or foreign operations.
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Combined Income Tax Expense (Benefit)
The combined income tax expense (benefit) allocable to continuing operations and other comprehensive income was as follows:
| | | | | | | | | | | | | | | | | |
| Fiscal Year Ended March 31, |
| 2024 | | 2023 | | 2022 |
| Continuing operations | $ | 31,109 | | | $ | 11,733 | | | $ | 38,663 | |
| Other comprehensive loss | (1,056) | | | 3,551 | | | 6,555 | |
| | | | | |
| Total | $ | 30,053 | | | $ | 15,284 | | | $ | 45,218 | |
Uncertain Tax Positions
A reconciliation of the beginning and ending balance of the gross liability for uncertain tax positions is as follows:
| | | | | | | | | | | | | | | | | |
| Fiscal Year Ended March 31, |
| 2024 | | 2023 | | 2022 |
| Liability for uncertain tax positions, beginning of year | $ | 1,415 | | | $ | 2,024 | | | $ | 2,437 | |
| Additions: | | | | | |
| Related to tax positions for the current year | 65 | | | 1,198 | | | 48 | |
| Related to tax positions for prior years | — | | | — | | | 328 | |
| Reductions: | | | | | |
| | | | | |
| | | | | |
| Due to lapses of statutes of limitations | (56) | | | (75) | | | (56) | |
| Due to tax settlements | (311) | | | (1,661) | | | (814) | |
| | | | | |
| Effect of currency rate changes | (43) | | | (71) | | | 81 | |
| Liability for uncertain tax positions, end of year | $ | 1,070 | | | $ | 1,415 | | | $ | 2,024 | |
The liability for uncertain tax positions at March 31, 2024 includes approximately $1.1 million that could have an effect on the consolidated effective tax rate if the tax benefits are recognized. The liability for uncertain tax positions includes $0.8 million related to tax positions for which it is reasonably possible that the amounts could change significantly before March 31, 2025. This amount reflects a possible decrease in the liability for uncertain tax positions that could result from the completion and resolution of tax audits and the expiration of open tax years in various tax jurisdictions. The $1.7 million settlement in fiscal year 2023 represents the resolution of a tax matter with a foreign tax authority.
The $0.8 million settlement in fiscal year 2022 represents the resolution of a tax matter with a local country taxing authority. The Company accrued $0.5 million of the fiscal year 2022 settlement in prior fiscal years.
For fiscal year ended March 31, 2023, the Company recognized $1.8 million as a reduction to interest expense related to an uncertain tax position on the Tanzania operations that were sold in fiscal year 2023. Amounts accrued or reversed for interest were not material for fiscal years 2024 and 2022. Amounts accrued or reversed for penalties were not material for fiscal years 2024 through 2022, and liabilities recorded for penalties at March 31, 2024 and 2023 also were not material.
Universal and its subsidiaries file a U.S. federal consolidated income tax return, as well as returns in several U.S. states and a number of foreign jurisdictions. As of March 31, 2024, the Company's earliest open tax year for U.S. federal income tax purposes was its fiscal year ended March 31, 2018. Open tax years in U.S. federal, state and foreign jurisdictions range from 3 to 6 years.
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE 7. GOODWILL AND OTHER INTANGIBLES
The Company's changes in goodwill at March 31, 2024 and 2023 consisted of the following:
| | | | | | | | | | | | | | |
| | Fiscal Year Ended March 31, |
| | 2024 | | 2023 |
| Balance at beginning of year | | $ | 213,922 | | | $ | 213,998 | |
| | | | |
Foreign currency translation adjustment | | (53) | | | (76) | |
| | | | |
| Balance at end of year | | $ | 213,869 | | | $ | 213,922 | |
The Company's intangible assets primarily consist of capitalized customer-related intangibles, trade names, proprietary developed technology and noncompetition agreements. The Company's intangible assets subject to amortization consisted of the following at March 31, 2024 and 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2024 |
| (in thousands, except useful life) | Useful Life (Years) | | Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value |
| Customer relationships | 11 | - | 13 | | $ | 86,500 | | | $ | (25,424) | | | $ | 61,076 | |
| Trade names | | 5 | | | 11,100 | | | (8,265) | | | 2,835 | |
| Developed technology | | 13 | | | 9,300 | | | (5,665) | | | 3,635 | |
| Noncompetition agreements | 4 | - | 5 | | 4,000 | | | (2,725) | | | 1,275 | |
| Other | | 5 | | | 782 | | | (720) | | | 62 | |
| Total intangible assets | | | | | $ | 111,682 | | | $ | (42,799) | | | $ | 68,883 | |
| | | | | | | | | |
| | | | | March 31, 2023 |
| Useful Life (Years) | | Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value |
| Customer relationships | 11 | - | 13 | | $ | 86,500 | | | $ | (17,693) | | | $ | 68,807 | |
| Trade names | | 5 | | | 11,100 | | | (6,045) | | | 5,055 | |
| Developed technology | | 13 | | | 9,300 | | | (5,319) | | | 3,981 | |
| Noncompetition agreements | 4 | - | 5 | | 4,000 | | | (1,775) | | | 2,225 | |
| Other | | 5 | | | 721 | | | (688) | | | 33 | |
| Total intangible assets | | | | | $ | 111,621 | | | $ | (31,520) | | | $ | 80,101 | |
Intangible assets are amortized on a straight-line basis over the asset's estimated useful economic life as noted above.
The Company's amortization expense for intangible assets for the years ended March 31, 2024, 2023, and 2022:
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended March 31, |
| | 2024 | | 2023 | | 2022 |
| Amortization Expense | | $ | 11,279 | | | $ | 12,455 | | | $ | 11,209 | |
Amortization expense for the developed technology intangible asset is recorded in cost of goods sold in the consolidated income statements of income. The amortization expense for the other intangible assets is recorded in selling, general, and administrative expenses in the consolidated income statements of income.
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
As of March 31, 2024, the expected future amortization expense for intangible assets is as follows:
| | | | | |
| Fiscal Year | |
| 2025 | $ | 11,073 | |
| 2026 | 9,253 | |
| 2027 | 8,077 | |
| 2028 | 8,077 | |
| 2029 and thereafter | 32,403 | |
| Total expected future amortization expense | $ | 68,883 | |
NOTE 8. CREDIT FACILITIES
Bank Credit Agreement
On December 15, 2022, the Company entered into a senior unsecured bank credit agreement that included a $530 million five-year revolving credit facility (expiring December 15, 2027), a $275 million five-year term loan (due December 15, 2027), and a $345 million seven-year term loan (due December 15, 2029). Borrowings under the revolving credit facility bear interest at a variable rate benchmarked to the Secured Overnight Financing Rate ("SOFR"), plus a margin that is based on the Company's credit measures. In addition to interest, the Company pays a facility fee on the revolving credit facility. $125 million was outstanding under the revolving credit facility at March 31, 2024. The credit agreement provides for an expansion of the facility under certain conditions to allow additional borrowings of up to $200 million. Additional information related to the term loans is provided in Note 9. The credit agreement includes financial covenants that require the Company to maintain a minimum level of tangible net worth and observe limits on debt levels. The Company was in compliance with those covenants at March 31, 2024.
Short-Term Credit Facilities
The Company maintains short-term uncommitted lines of credit in the United States and in a number of foreign countries. Foreign borrowings are generally in the form of overdraft facilities at rates competitive in the countries in which the Company operates. Generally, each foreign line is available only for borrowings related to operations of a specific country. As of March 31, 2024 and 2023, approximately $292 million and $166 million, respectively, were outstanding under these uncommitted lines of credit. The weighted-average interest rates on short-term borrowings outstanding as of March 31, 2024 and 2023 were approximately 6.7% and 6.2%, respectively. At March 31, 2024, the Company and its consolidated affiliates had unused uncommitted lines of credit totaling approximately $135 million.
NOTE 9. LONG-TERM DEBT
The Company's long-term debt at March 31, 2024 and 2023 consisted of the following:
| | | | | | | | | | | |
| March 31, |
| 2024 | | 2023 |
| Senior bank term loans | $ | 620,000 | | | $ | 620,000 | |
| | | |
| | | |
| | | |
| Less: current portion | — | | | — | |
| Less: unamortized debt issuance costs | (2,636) | | | (3,191) | |
| Long-term debt | $ | 617,364 | | | $ | 616,809 | |
As discussed in Note 8, on December 15, 2022, the Company entered into a bank credit agreement that included a $275 million five-year term loan and a $345 million seven-year term loan. Both term loans were fully funded at closing, require no amortization, and are repayable without penalty prior to maturity. Under the credit agreement, both term loans bear interest at a variable rate benchmarked to the SOFR plus a margin that is based on the Company's credit measures.
As discussed in Note 11, the Company had receive-floating/pay-fixed interest rate swap agreements in place with respect to the prior term loans through December 20, 2023 for the five-year term loan and through December 20, 2025 for the seven-year term loan. These agreements were terminated concurrently with the repayment of the prior term loans and replaced with new interest rate swap agreements that will continue to convert a portion of the variable benchmark rate to a fixed rate on each term loan through their respective maturity dates. The proceeds for the fair value of the terminated interest rate swap agreements, approximately $11.8 million, were recognized in accumulated other comprehensive income and are being amortized into earnings as a reduction of interest expense through their original maturity dates. With the swap agreements in place, the effective interest rates on the swapped portions of the five-year and seven-year term loans were 5.50% and 5.65% at March 31, 2024, respectively.
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The weighted average effective interest rates, when taking into consideration both the swapped and unswapped interest payments for all outstanding long-term debt, were 6.46% and 6.66% at March 31, 2024 for the five-year and seven-year term loans, respectively. Changes in the effective interest rates could result from a change in interest rates on the unhedged interest payments or a change in the Company's credit measures that impact the applicable credit spreads specified in the underlying loan agreement.
Disclosures about the fair value of long-term debt are provided in Note 12.
Shelf Registration
In November 2023, the Company filed an undenominated automatic universal shelf registration statement with the U.S. Securities and Exchange Commission to provide for the future issuance of an undefined amount of additional debt or equity securities as determined by the Company and offered in one or more prospectus supplements prior to issuance.
NOTE 10. LEASES
The Company, as a lessee, enters into operating leases for land, buildings, equipment, and vehicles. For all operating leases with terms greater than 12 months and with fixed payment arrangements, a lease liability and corresponding right-of-use asset are recognized in the balance sheet for the term of the lease by calculating the net present value of future lease payments. On the date of lease commencement, the present value of lease liabilities is determined by discounting the future lease payments by the Company’s collateralized incremental borrowing rate, adjusted for the lease term and currency of the lease payments. If a lease contains a renewal option that the Company is reasonably certain to exercise, the Company accounts for the original lease term and expected renewal term in the calculation of the lease liability and right-of-use asset.
The following table sets forth the right-of-use assets and lease liabilities for operating leases included in the Company’s consolidated balance sheet:
| | | | | | | | | | | | | | |
| | March 31, 2024 | | March 31, 2023 |
| | | | |
| Assets | | | | |
| Operating lease right-of-use assets | | $ | 32,510 | | | $ | 40,505 | |
| | | | |
| Liabilities | | | | |
| Current portion of operating lease liabilities | | $ | 10,356 | | | $ | 11,404 | |
| Long-term operating lease liabilities | | 19,302 | | | 25,540 | |
| Total operating lease liabilities | | $ | 29,658 | | | $ | 36,944 | |
The following table sets forth the location and amount of operating lease costs included in the Company's consolidated statement of income:
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended March 31, |
| | 2024 | | 2023 | | 2022 |
| | | | | | |
| Income Statement Location | | | | | | |
| Cost of goods sold | | $ | 11,806 | | | $ | 11,036 | | | $ | 10,874 | |
| Selling, general, and administrative expenses | | 10,691 | | | 10,890 | | | 9,676 | |
Total operating lease costs(1) | | $ | 22,497 | | | $ | 21,926 | | | $ | 20,550 | |
(1)Includes variable operating lease costs.
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table reconciles the undiscounted cash flows to the operating lease liabilities in the Company’s consolidated balance sheet:
| | | | | | | | |
| | March 31, 2024 |
| Fiscal Year Maturity of Operating Lease Liabilities | | |
| 2025 | | $ | 11,661 | |
| 2026 | | 7,632 | |
| 2027 | | 5,085 | |
| 2028 | | 3,405 | |
| 2029 | | 2,498 | |
| 2030 and thereafter | | 4,290 | |
| Total undiscounted cash flows for operating leases | | $ | 34,571 | |
| Less: Imputed interest | | (4,913) | |
| Total operating lease liabilities | | $ | 29,658 | |
As of March 31, 2024, the Company had entered into no additional operating leases that have not yet commenced.
The following table sets forth supplemental information related to operating leases:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended March 31, |
| (in thousands, except lease term and incremental borrowing rate) | | 2024 | | 2023 | | 2022 |
| Supplemental Cash Flow Information | | | | | | | | | |
| Cash paid for amounts included in the measurement of operating lease liabilities | | $ | 13,898 | | | | $ | 13,818 | | | | $ | 12,018 | | |
| | | | | | | | | |
| Right-of-use assets obtained in exchange for new operating leases | | 8,507 | | | | 13,536 | | | | 22,506 | | |
| | | | | | | | | |
Weighted Average Remaining Lease Term (years) | | 4.59 | | | 4.86 | | | 5.51 | |
| | | | | | | | | |
Weighted Average Collateralized Incremental Borrowing Rate | | 6.10 | | % | | 5.93 | | % | | 5.43 | | % |
NOTE 11. DERIVATIVES AND HEDGING ACTIVITIES
Universal is exposed to various risks in its worldwide operations and uses derivative financial instruments to manage two specific types of risks – interest rate risk and foreign currency exchange rate risk. Interest rate risk has been managed by entering into interest rate swap agreements, and foreign currency exchange rate risk has been managed by entering into forward foreign currency exchange and option contracts. However, the Company’s policy also permits other types of derivative instruments. In addition, foreign currency exchange rate risk is also managed through strategies that do not involve derivative instruments, such as using local borrowings and other approaches to minimize net monetary positions in non-functional currencies. The disclosures below provide additional information about the Company’s hedging strategies, the derivative instruments used, and the effects of these activities on the consolidated statements of income and comprehensive income and the consolidated balance sheets. In the consolidated statements of cash flows, the cash flows associated with all of these activities are reported in net cash provided by operating activities.
Cash Flow Hedging Strategy for Interest Rate Risk
In December 2022, 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 2022 (see Note 9 for additional information). Although no significant ineffectiveness is expected with this hedging strategy, the effectiveness of the interest rate swaps is evaluated on a quarterly basis. At March 31, 2024, the total notional amount of the interest rate swaps was $310 million, which corresponded to a portion of the aggregate balance of the term loans.
Previously, the Company had receive-floating/pay-fixed interest rate swap agreements that were designated and qualified as cash flow hedges for two non-amortizing bank loans that were repaid concurrent with closing on the new bank credit facility in December 2022. Those swap agreements, which had an aggregate notional amount of $370 million corresponding to a portion of the principal balance on the repaid loans, were terminated concurrent with the inception of the new swap agreements. The fair value of the previous swap agreements, approximately $11.8 million, was received from the counterparties upon termination and
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
is being amortized from accumulated other comprehensive loss into earnings as a reduction of interest expense through the original maturity dates of those agreements.
In February 2019, the Company had receive-floating/pay-fixed interest rate swap agreements that were designated and qualified as cash flow hedges for the two non-amortizing bank loans that were repaid in December 2018 and carried over to hedge the variable interest payments for the two non-amortizing bank loans that were repaid in December 2022. Those swap agreements were terminated in February 2019. The fair value of the two swap agreements terminated in February 2019, approximately $5.4 million, was received in February 2019 from the counterparties upon termination and was amortized from accumulated other comprehensive loss into earnings as a reduction of interest expense through the original maturity dates of those agreements. As of March 31, 2024, the entire deferred gain has been amortized.
Cash Flow Hedging Strategy for Foreign Currency Exchange Rate Risk Related to Forecast Purchases of Tobacco, Tobacco Processing Costs, and Crop Input Sales
The majority of the tobacco production in most countries outside the United States where Universal operates is sold in export markets at prices denominated in U.S. dollars. However, sales of crop inputs (such as seeds and fertilizers) to farmers, purchases of tobacco from farmers and most processing costs (such as labor and energy) in those countries are usually denominated in the local currency. Changes in exchange rates between the U.S. dollar and the local currencies where tobacco is grown and processed affect the ultimate U.S. dollar sales of crop inputs and cost of processed tobacco. From time to time, the Company enters into forward and option contracts to buy U.S. dollars and sell the local currency at future dates that coincide with the sale of crop inputs to farmers. In the case of forecast purchases of tobacco and the related processing costs, the Company enters into forward and option contracts to sell U.S. dollars and buy the local currency at future dates that coincide with the expected timing of a portion of the tobacco purchases and processing costs. These strategies offset the variability of future U.S. dollar cash flows for sales of crop inputs, tobacco purchases, and processing costs for the foreign currency notional amount hedged. These hedging strategies have been used mainly for tobacco purchases, processing costs, and sales of crop inputs in Brazil, although the Company has also entered into hedges for a portion of the tobacco purchases in Africa.
The aggregate U.S. dollar notional amount of forward and option contracts entered for these purposes during fiscal years 2024, 2023, and 2022 was as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended March 31, |
| (in millions) | | 2024 | | 2023 | | 2022 |
| Tobacco purchases | | $ | 30.3 | | | $ | 47.1 | | | $ | 134.7 | |
| Processing costs | | 4.9 | | | 9.7 | | | 32.5 | |
| Crop input sales | | 30.1 | | | 35.2 | | | 65.3 | |
| Total | | $ | 65.3 | | | $ | 92.0 | | | $ | 232.5 | |
Fluctuations in exchange rates and in the amount and timing of fixed-price orders from customers for their purchases from individual crop years routinely cause variations in the U.S. dollar notional amount of forward contracts entered into from one year to the next. Contracts related to tobacco purchases and crop input sales were designated and qualified as hedges of the future cash flows associated with the forecast purchases of tobacco. As a result, changes in fair values of the forward contracts have been recognized in comprehensive income as they occurred, but only recognized in earnings as a component of cost of goods sold upon sale of the related tobacco to third-party customers. The Company de-designates ineffective tobacco purchases and crop input sales hedges to selling, general, and administrative expense when the forecasted tobacco purchases or crop input sales are no longer expected to occur.
The table below presents the expected timing of when the remaining accumulated other comprehensive gains and losses as of March 31, 2024 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 | 2025 |
| Crop input sales | 2025 | Brazil | 2026 |
| Crop input sales | 2024 | Brazil | 2025 |
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.
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Hedging Strategy for Foreign Currency Exchange Rate Risk Related to Net Local Currency Monetary Assets and Liabilities of Foreign Subsidiaries
Most of the Company’s foreign subsidiaries transact the majority of their sales in U.S. dollars and finance the majority of their operating requirements with U.S. dollar borrowings, and therefore use the U.S. dollar as their functional currency. These subsidiaries normally have certain monetary assets and liabilities on their balance sheets that are denominated in the local currency. Those assets and liabilities can include cash and cash equivalents, accounts receivable and accounts payable, advances to farmers and suppliers, deferred income tax assets and liabilities, recoverable VAT, operating lease liabilities, and other items. Net monetary assets and liabilities denominated in the local currency are remeasured into U.S. dollars each reporting period, generating gains and losses that the Company records in earnings as a component of selling, general, and administrative expenses. The level of net monetary assets or liabilities denominated in the local currency normally fluctuates throughout the year based on the operating cycle, but it is most common for monetary assets to exceed monetary liabilities, sometimes by a significant amount. When this situation exists and the local currency weakens against the U.S. dollar, remeasurement losses are generated. Conversely, remeasurement gains are generated on a net monetary asset position when the local currency strengthens against the U.S. dollar. To manage a portion of its exposure to currency remeasurement gains and losses, the Company enters into forward contracts to buy or sell the local currency at future dates coinciding with expected changes in the overall net local currency monetary asset position of the subsidiary. Gains and losses on the forward contracts are recorded in earnings as a component of selling, general, and administrative expenses for each reporting period as they occur, and thus directly offset the related remeasurement losses or gains in the consolidated statements of income for the notional amount hedged. The Company does not designate these contracts as hedges for accounting purposes. The contracts are generally arranged to hedge the subsidiary's projected exposure to currency remeasurement risk for specified periods of time, and new contracts are entered as necessary throughout the year to replace previous contracts as they mature. The Company is currently using forward currency contracts to manage its exposure to currency remeasurement risk in Brazil. The total notional amounts of contracts outstanding at March 31, 2024 and 2023, were approximately $20.9 million and $42.8 million, respectively. To further mitigate currency remeasurement exposure, the Company’s foreign subsidiaries may utilize short-term local currency financing during certain periods. This strategy, while not involving the use of derivative instruments, is intended to minimize the subsidiary’s net monetary position by financing a portion of the local currency monetary assets with local currency monetary liabilities, thus hedging a portion of the overall position.
Several of the Company’s foreign subsidiaries transact the majority of their sales and finance the majority of their operating requirements in their local currency, and therefore use their respective local currencies as the functional currency for reporting purposes. From time to time, these subsidiaries sell tobacco to customers in transactions that are not denominated in the functional currency. In those situations, the subsidiaries routinely enter into forward exchange contracts to offset currency risk for the period of time that a fixed-price order and the related trade account receivable are outstanding with the customer. The contracts are not designated as hedges for accounting purposes.
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Effect of Derivative Financial Instruments on the Consolidated Statements of Income
The table below outlines the effects of the Company’s use of derivative financial instruments on the consolidated statements of income for the fiscal years ended March 31, 2024, 2023, and 2022.
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended March 31, |
| | 2024 | | 2023 | | 2022 |
| | | | | | |
| | | | | | |
| | | | | | |
| | |
| | | | | | |
| | |
| | | | | | |
| | |
| | | | | | |
| Cash Flow Hedges - Interest Rate Swap Agreements | | | | | | |
| Derivative | | | | | | |
| Effective Portion of Hedge | | | | | | |
| Gain (loss) recorded in accumulated other comprehensive loss | | $ | 15,375 | | | $ | 9,804 | | | $ | 15,651 | |
| Gain (loss) reclassified from accumulated other comprehensive loss into earnings | | $ | 5,592 | | | $ | (66) | | | $ | (8,907) | |
| Gain on terminated interest rate swaps amortized from accumulated other comprehensive loss into earnings | | $ | 5,397 | | | $ | 1,570 | | | $ | 1,061 | |
| Location of gain (loss) reclassified from accumulated other comprehensive loss into earnings | | Interest expense |
| Ineffective Portion of Hedge | | | | | | |
| Gain (loss) recognized in earnings | | $ | — | | | $ | — | | | $ | — | |
| Location of gain (loss) recognized in earnings | | Selling, general and administrative expenses |
| Hedged Item | | | | | | |
| Description of hedged item | | Floating rate interest payments on term loans |
| | | | | | |
| Cash Flow Hedges - Forward Foreign Currency Exchange Contracts | | | | | | |
| Derivative | | | | | | |
| Effective Portion of Hedge | | | | | | |
| Gain (loss) recorded in accumulated other comprehensive loss | | $ | 2,088 | | | $ | 5,274 | | | $ | 13,879 | |
| Gain (loss) reclassified from accumulated other comprehensive loss into earnings | | $ | 7,996 | | | $ | 4,469 | | | $ | 5,426 | |
| 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 | | $ | 1,138 | | | $ | (520) | | | $ | 2,040 | |
| Location of gain (loss) recognized in earnings | | Selling, general and administrative expenses |
| Hedged Item | | | | | | |
| Description of hedged item | | Forecast purchases of tobacco and sales of crop inputs in Brazil and Africa |
| | | | | | |
Derivatives Not Designated as Hedges -
Forward Foreign Currency Exchange Contracts | | | | | | |
| Gain (loss) recognized in earnings | | $ | (3,484) | | | $ | (4,811) | | | $ | 16,732 | |
| Location of gain (loss) recognized in earnings | | Selling, general and administrative expenses |
For the outstanding interest rate swap agreements, the effective portion of the gain or loss on the derivative is recorded in accumulated other comprehensive loss and any ineffective portion is recorded in selling, general and administrative expenses.
For the forward foreign currency exchange contracts designated as cash flow hedges of tobacco purchases in Brazil and Africa, as well as the crop input sales in Brazil, a net hedge loss of approximately $0.1 million remained in accumulated other comprehensive loss at March 31, 2024. That balance reflects gains and losses on contracts related to the 2023 Brazil crops and the 2025 and 2024 Brazil crop input sales, less the amounts reclassified to earnings related to tobacco sold through March 31, 2024. Based on the hedging strategy, as the gain or loss is recognized in earnings, it is expected to be offset by a change in the direct cost for the tobacco or by a change in sales prices if the strategy has been mandated by the customer. Generally, margins on the sale of the tobacco will not be significantly affected.
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Effect of Derivative Financial Instruments on the Consolidated Balance Sheets
The table below outlines the effects of the Company’s derivative financial instruments on the consolidated balance sheets at March 31, 2024 and 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Derivatives in a Fair Value
Asset Position | | Derivatives in a Fair Value
Liability Position |
| | Balance
Sheet
Location | | Fair Value as of March 31, | | Balance
Sheet
Location | | Fair Value as of March 31, |
| | | 2024 | | 2023 | | | 2024 | | 2023 |
| Derivatives Designated as Hedging Instruments | | | | | | | | | | | | |
| Interest rate swap agreements | | Other
non-current
assets | | $ | 6,706 | | | $ | — | | | Other
long-term
liabilities | | $ | — | | | $ | 3,077 | |
| | | | | | | | | | | | |
| Forward foreign currency exchange contracts | | Other
current
assets | | 77 | | | 7,102 | | | Accounts
payable and
accrued
expenses | | 9 | | | 890 | |
| Total | | | | $ | 6,783 | | | $ | 7,102 | | | | | $ | 9 | | | $ | 3,967 | |
| | | | | | | | | | | | |
| Derivatives Not Designated as Hedging Instruments | | | | | | | | | | | | |
| Forward foreign currency exchange contracts | | Other
current
assets | | $ | 245 | | | $ | 1,320 | | | Accounts
payable and
accrued
expenses | | $ | 12 | | | $ | 435 | |
| Total | | | | $ | 245 | | | $ | 1,320 | | | | | $ | 12 | | | $ | 435 | |
Substantially all of the Company's forward foreign currency exchange contracts are subject to master netting arrangements, whereby the right to offset occurs in the event of default by a participating party. The Company has elected to present these contracts on a gross basis in the consolidated balance sheets.
NOTE 12. FAIR VALUE MEASUREMENTS
Universal measures certain financial and nonfinancial assets and liabilities at fair value based on applicable accounting guidance. The financial assets and liabilities measured at fair value include money market funds, trading securities associated with deferred compensation plans, interest rate swap agreements, forward foreign currency exchange contracts, and guarantees of bank loans to tobacco growers. The application of the fair value guidance to nonfinancial assets and liabilities primarily includes the determination of fair values for goodwill and long-lived assets when indicators of potential impairment are present.
Under the accounting guidance, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The framework for measuring fair value is based on a fair value hierarchy that distinguishes between observable inputs and unobservable inputs. Observable inputs are based on market data obtained from independent sources. Unobservable inputs require the Company to make its own assumptions about the value placed on an asset or liability by market participants because little or no market data exists.
There are three levels within the fair value hierarchy.
| | | | | | | | |
| Level | | Description |
| | |
| 1 | | quoted prices in active markets for identical assets or liabilities that the Company has the ability to access as of the reporting date; |
| | |
| 2 | | quoted prices in active markets for similar assets or liabilities, or quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability; and |
| | |
| 3 | | unobservable inputs for the asset or liability. |
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
As permitted under the accounting guidance, the Company uses net asset value per share ("NAV") as a practical expedient to measure the fair value of its money market funds. The fair values for those funds are presented under the heading "NAV" in the tables that follow in this disclosure. In measuring the fair value of liabilities, the Company considers the risk of non-performance in determining fair value. Universal has not elected to report at fair value any financial instruments or any other assets or liabilities that are not required to be reported at fair value under current accounting guidance.
Recurring Fair Value Measurements
At March 31, 2024 and 2023, the Company had certain financial assets and financial liabilities that were required to be measured and reported at fair value on a recurring basis. These assets and liabilities are listed in the tables below and are classified based on how their values were determined under the fair value hierarchy or the NAV practical expedient:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2024 |
| | | | Fair Value Hierarchy | | |
| | NAV | | Level 1 | | Level 2 | | Level 3 | | Total |
| Assets | | | | | | | | | | |
| Money market funds | | $ | 145 | | | $ | — | | | $ | — | | | $ | — | | | $ | 145 | |
| Trading securities associated with deferred compensation plans | | — | | | 12,409 | | | — | | | — | | | 12,409 | |
| Interest rate swap agreements | | — | | | — | | | 6,706 | | | — | | | 6,706 | |
| Forward foreign currency exchange contracts | | — | | | — | | | 322 | | | — | | | 322 | |
| Total financial assets measured and reported at fair value | | $ | 145 | | | $ | 12,409 | | | $ | 7,028 | | | $ | — | | | $ | 19,582 | |
| | | | | | | | | | |
| Liabilities | | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Forward foreign currency exchange contracts | | $ | — | | | $ | — | | | $ | 21 | | | $ | — | | | $ | 21 | |
| Total financial liabilities measured and reported at fair value | | $ | — | | | $ | — | | | $ | 21 | | | $ | — | | | $ | 21 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | March 31, 2023 |
| | | | Fair Value Hierarchy | | |
| | NAV | | Level 1 | | Level 2 | | Level 3 | | Total |
| Assets | | | | | | | | | | |
| Money market funds | | $ | 400 | | | $ | — | | | $ | — | | | $ | — | | | $ | 400 | |
| Trading securities associated with deferred compensation plans | | — | | | 11,698 | | | — | | | — | | | 11,698 | |
| | | | | | | | | | |
| Forward foreign currency exchange contracts | | — | | | — | | | 8,422 | | | — | | | 8,422 | |
| Total financial assets measured and reported at fair value | | $ | 400 | | | $ | 11,698 | | | $ | 8,422 | | | $ | — | | | $ | 20,520 | |
| | | | | | | | | | |
| Liabilities | | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Interest rate swap agreements | | $ | — | | | $ | — | | | $ | 3,077 | | | $ | — | | | $ | 3,077 | |
| Forward foreign currency exchange contracts | | — | | | — | | | 1,325 | | | — | | | 1,325 | |
| Total financial liabilities measured and reported at fair value | | $ | — | | | $ | — | | | $ | 4,402 | | | $ | — | | | $ | 4,402 | |
Money market funds
The fair value of money market funds, which are reported in cash and cash equivalents in the consolidated balance sheets, is based on NAV, which is the amount at which the funds are redeemable and is used as a practical expedient for fair value. These funds are not classified in the fair value hierarchy, but are disclosed as part of the fair value table above.
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Trading securities associated with deferred compensation plans
Trading securities represent mutual fund investments that are matched to employee deferred compensation obligations. These investments are bought and sold as employees defer compensation, receive distributions, or make changes in the funds underlying their accounts. Quoted market prices (Level 1) are used to determine the fair values of the mutual funds.
Interest rate swap agreements
The fair values of interest rate swap agreements are determined based on dealer quotes using a discounted cash flow model matched to the contractual terms of each instrument. Since inputs to the model are observable and significant judgment is not required in determining the fair values, interest rate swaps are classified within Level 2 of the fair value hierarchy.
Forward foreign currency exchange contracts
The fair values of forward foreign currency exchange contracts are also determined based on dealer quotes using a discounted cash flow model matched to the contractual terms of each instrument. Since inputs to the model are observable and significant judgment is not required in determining the fair values, forward foreign currency exchange contracts are classified within Level 2 of the fair value hierarchy.
Long-term Debt
The following table summarizes the fair and carrying value of the Company’s long-term debt, including the current portion at each of the balance sheet dates March 31, 2024 and 2023:
| | | | | | | | | | | |
| Fiscal Year Ended March 31, |
| (in millions of dollars) | 2024 | | 2023 |
| Fair market value of long term obligations | $ | 618 | | | $ | 621 | |
| Carrying value of long term obligations | $ | 620 | | | $ | 620 | |
The Company estimates the fair value of its long-term debt using Level 2 inputs which are based upon quoted market prices for the same or similar obligations or on calculations that are based on the current interest rates available to the Company for debt of similar terms and maturities. See Note 9 for more information regarding long-term debt.
Nonrecurring Fair Value Measurements
Assets and liabilities that are measured at fair value on a nonrecurring basis primarily relate to long-lived assets, right-of-use operating lease assets and liabilities, goodwill and intangibles, and other current and noncurrent assets. These assets and liabilities fair values are evaluated for impairment when potential indicators of impairment exist. Accordingly, the nonrecurring measurement of the fair value of these assets and liabilities are classified within Level 3 of the fair value hierarchy.
Acquisition Accounting for Business Combinations
The Company accounts for acquisitions qualifying under ASC 805, "Business Combinations," which requires, among other things, that the assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. The fair values of consideration transferred and net assets acquired are determined using a combination of Level 2 and Level 3 inputs as specified in the fair value hierarchy in ASC 820, “Fair Value Measurements and Disclosures.” The Company believes that the fair values assigned to the assets acquired and liabilities assumed are based on reasonable assumptions. The significant assumptions used in determining the fair value include the discount rate and forecasted results (e.g., revenue growth rates and operating profit margins).
Long-Lived Assets
The Company reviews long-lived assets for impairment whenever events, changes in business conditions, or other circumstances provide an indication that such assets may be impaired.
NOTE 13. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
Defined Benefit Plans
Description of Plans
The Company sponsors several defined benefit pension plans covering salaried and certain hourly employees in the U.S., as well as certain foreign and other employee groups. These plans provide retirement benefits based primarily on employee compensation and years of service. Plan assets consist primarily of equity and fixed income investments. The Company also sponsors defined benefit plans that provide postretirement health and life insurance benefits for eligible U.S. employees and
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
retirees who have attained specific age and service levels, although postretirement life insurance benefits were discontinued in fiscal year 2015 for all employees who were not already retired. The health benefits are funded by the Company as the costs of those benefits are incurred. The plan design includes cost-sharing features such as deductibles and coinsurance. The life insurance benefits are funded with deposits to a reserve account held by an insurance company. The Company has the right to amend or discontinue its pension and other postretirement benefit plans at any time.
In the following disclosures, the term “accumulated benefit obligation” (“ABO”) represents the actuarial present value of estimated future benefit payments earned by participants in the Company's defined benefit pension plans as of the balance sheet date without regard to the estimated effect of future compensation increases on those benefits. The term does not apply to other postretirement benefits. “Projected benefit obligation” refers to the projected benefit obligation (“PBO”) for pension benefits and the accumulated postretirement benefit obligation (“APBO”) for other postretirement benefits. These amounts represent the actuarial present value of estimated future benefit payments earned by participants in the benefit plans as of the balance sheet date. For pension benefits, the PBO includes the estimated effect of future compensation increases on those benefits.
Actuarial Assumptions
Assumptions used for financial reporting purposes to compute net periodic benefit cost and benefit obligations for the Company's primary defined benefit plans were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | Other Postretirement Benefits |
| 2024 | | 2023 | | 2022 | | 2024 | | 2023 | | 2022 |
| Discount rates: | | | | | | | | | | | |
| Benefit cost for plan year | 5.00 | % | | 3.70 | % | | 3.30 | % | | 4.90 | % | | 3.60 | % | | 2.90 | % |
| Benefit obligation at end of plan year | 5.27 | % | | 5.00 | % | | 3.70 | % | | 5.17 | % | | 4.90 | % | | 3.60 | % |
| Expected long-term return on plan assets: | | | | | | | | | | | |
| Benefit cost for plan year | 6.50 | % | | 5.50 | % | | 5.50 | % | | 3.00 | % | | 3.00 | % | | 3.00 | % |
| | | | | | | | | | | |
| Salary scale: | | | | | | | | | | | |
| Benefit cost for plan year | 4.00 | % | | 4.00 | % | | 4.00 | % | | 4.00 | % | | 4.00 | % | | 4.00 | % |
| Benefit obligation at end of plan year | 4.00 | % | | 4.00 | % | | 4.00 | % | | 4.00 | % | | 4.00 | % | | 4.00 | % |
| Healthcare cost trend rate | N/A | | N/A | | N/A | | 6.97 | % | | 6.97 | % | | 6.17 | % |
Changes in the discount rates in the above table reflect prevailing market interest rates at the end of each fiscal year when the benefit obligations are actuarially measured. The expected long-term return on plan assets is developed from financial models used to project future returns on the underlying assets of the funded plans and is reviewed on an annual basis. The healthcare cost trend rate used by the Company is based on a study of medical cost inflation rates that is reviewed and updated annually for continued applicability. The trend assumption of 6.97% in 2024 declines gradually to 4.44% in 2032. The Company has caps in place on postretirement medical benefits that limit its cost for a large segment of the retiree population. As a result, changes to the healthcare cost trend rate have a limited impact on the postretirement medical plan liability and expense.
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Benefit Obligations, Plan Assets, and Funded Status
The following table reflects the changes in benefit obligations and plan assets in fiscal years 2024 and 2023, as well as the funded status of the plans at March 31, 2024 and 2023:
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension
Benefits | | Other Postretirement Benefits |
| March 31, | | March 31, |
| 2024 | | 2023 | | 2024 | | 2023 |
| Actuarial present value of benefit obligation: | | | | | | | |
| Accumulated benefit obligation | $ | 231,685 | | | $ | 235,540 | | | | | |
| Projected benefit obligation | 237,626 | | | 241,399 | | | $ | 20,077 | | | $ | 20,716 | |
| | | | | | | |
| Change in projected benefit obligation: | | | | | | | |
| Projected benefit obligation, beginning of year | $ | 241,399 | | | $ | 277,050 | | | $ | 20,716 | | | $ | 24,957 | |
| Service cost | 5,214 | | | 6,172 | | | 239 | | | 115 | |
| Interest cost | 11,566 | | | 9,670 | | | 1,049 | | | 944 | |
| Effect of discount rate change | (5,147) | | | (31,621) | | | (255) | | | (1,906) | |
| | | | | | | |
| Foreign currency exchange rate changes | (298) | | | (543) | | | 30 | | | (145) | |
| | | | | | | |
| | | | | | | |
| Other | 2,197 | | | (2,120) | | | 589 | | | (659) | |
| Benefit payments | (17,305) | | | (17,209) | | | (2,291) | | | (2,590) | |
| Projected benefit obligation, end of year | $ | 237,626 | | | $ | 241,399 | | | $ | 20,077 | | | $ | 20,716 | |
| | | | | | | |
| Change in plan assets: | | | | | | | |
| Plan assets at fair value, beginning of year | $ | 221,953 | | | $ | 256,013 | | | $ | 2,257 | | | $ | 2,706 | |
| Actual return on plan assets | 11,666 | | | (20,613) | | | 174 | | | 73 | |
| Employer contributions | 4,257 | | | 4,038 | | | 1,794 | | | 2,068 | |
| | | | | | | |
| Foreign currency exchange rate changes | (235) | | | (276) | | | — | | | — | |
| Benefit payments | (17,305) | | | (17,209) | | | (2,291) | | | (2,590) | |
| Plan assets at fair value, end of year | $ | 220,336 | | | $ | 221,953 | | | $ | 1,934 | | | $ | 2,257 | |
| | | | | | | |
| Funded status: | | | | | | | |
| Funded status of the plans, end of year | $ | (17,290) | | | $ | (19,446) | | | $ | (18,143) | | | $ | (18,459) | |
The Company funds its non-regulated U.S. pension plan, one of its foreign pension plans, and its postretirement medical plans on a pay-as-you-go basis as the benefit payments are incurred. The unfunded PBO for those pension plans and postretirement benefit plans was $27.9 million and $16.6 million, respectively, at March 31, 2024.
The funded status of the Company’s plans at the end of fiscal years 2024 and 2023 was reported in the consolidated balance sheets as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension
Benefits | | Other Postretirement Benefits |
| March 31, | | March 31, |
| 2024 | | 2023 | | 2024 | | 2023 |
| Noncurrent assets (included in Pension asset) | $ | 11,857 | | | $ | 9,984 | | | $ | — | | | $ | — | |
| Current liability (included in Accrued expenses and other current liabilities) | (2,344) | | | (3,352) | | | (1,695) | | | (1,768) | |
| Noncurrent liability (reported as Pensions and other postretirement benefits) | (26,803) | | | (26,078) | | | (16,448) | | | (16,691) | |
| Amounts recognized in the consolidated balance sheets | $ | (17,290) | | | $ | (19,446) | | | $ | (18,143) | | | $ | (18,459) | |
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Additional information on the funded status of the Company’s plans as of the respective measurement dates for the fiscal years ended March 31, 2024 and 2023, is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension
Benefits | | Other Postretirement Benefits |
| March 31, | | March 31, |
| 2024 | | 2023 | | 2024 | | 2023 |
| For plans with a projected benefit obligation in excess of plan assets: | | | | | | | |
| Aggregate projected benefit obligation (PBO) | $ | 36,842 | | | $ | 29,430 | | | $ | 20,078 | | | $ | 20,716 | |
| Aggregate fair value of plan assets | — | | | — | | | 1,934 | | | 2,257 | |
| For plans with an accumulated benefit obligation in excess of plan assets: | | | | | | | |
| Aggregate accumulated benefit obligation (ABO) | 35,640 | | | 28,487 | | | N/A | | N/A |
| Aggregate fair value of plan assets | — | | | — | | | N/A | | N/A |
Net Periodic Benefit Cost
The components of the Company’s net periodic benefit cost were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | Other Postretirement Benefits |
| Fiscal Year Ended March 31, | | Fiscal Year Ended March 31, |
| 2024 | | 2023 | | 2022 | | 2024 | | 2023 | | 2022 |
| Components of net periodic benefit cost: | | | | | | | | | | | |
| Service cost | $ | 5,214 | | | $ | 6,172 | | | $ | 6,674 | | | $ | 239 | | | $ | 115 | | | $ | 170 | |
| Interest cost | 11,566 | | | 9,670 | | | 8,754 | | | 1,049 | | | 944 | | | 950 | |
| Expected return on plan assets | (15,504) | | | (13,630) | | | (13,562) | | | (63) | | | (76) | | | (86) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Net amortization and deferral | 659 | | | 2,038 | | | 1,679 | | | (791) | | | (737) | | | (422) | |
| Net periodic benefit cost | $ | 1,935 | | | $ | 4,250 | | | $ | 3,545 | | | $ | 434 | | | $ | 246 | | | $ | 612 | |
A one-percentage-point increase or decrease in the assumed healthcare cost trend rate would not result in a significant change to the March 31, 2024 APBO or the aggregate service and interest cost components of the net periodic postretirement benefit expense for fiscal year 2025.
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Amounts Included in Accumulated Other Comprehensive Loss
Amounts included in accumulated other comprehensive loss at the beginning of the year are amortized as a component of net periodic benefit cost during the year. The amounts recognized in other comprehensive income or loss for fiscal years 2024 and 2023 and the amounts included in accumulated other comprehensive loss at the end of those fiscal years are shown below. All amounts shown are before allocated income taxes.
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension
Benefits | | Other Postretirement Benefits |
| March 31, | | March 31, |
| 2024 | | 2023 | | 2024 | | 2023 |
| Change in net actuarial loss (gain): | | | | | | | |
| Net actuarial loss (gain), beginning of year | $ | 64,114 | | | $ | 67,280 | | | $ | (8,332) | | | $ | (6,681) | |
| Losses (gains) arising during the year | 107 | | | (98) | | | 377 | | | (2,223) | |
| | | | | | | |
| Amortization included in net periodic benefit cost during the year | (793) | | | (3,068) | | | 786 | | | 572 | |
| Net actuarial loss (gain), end of year | 63,428 | | | 64,114 | | | (7,169) | | | (8,332) | |
| | | | | | | |
| Change in prior service cost (benefit): | | | | | | | |
| Prior service cost (benefit), beginning of year | (457) | | | (1,487) | | | (36) | | | (201) | |
| Prior service cost (benefit) arising during the year | 692 | | | — | | | — | | | — | |
| Amortization included in net periodic benefit cost during the year | 134 | | | 1,030 | | | 5 | | | 165 | |
| Prior service cost (benefit), end of year | 369 | | | (457) | | | (31) | | | (36) | |
| | | | | | | |
Total amounts in accumulated other comprehensive loss at end of year, before income taxes | $ | 63,797 | | | $ | 63,657 | | | $ | (7,200) | | | $ | (8,368) | |
Amounts in the above table reflect the Company and its consolidated subsidiaries. The accumulated other comprehensive loss reported in the consolidated balance sheets also includes pension and other postretirement benefit amounts related to ownership interests in unconsolidated affiliates.
The Company expects to recognize approximately $0.2 million of the March 31, 2024 net actuarial loss and $0.1 million of the March 31, 2024 prior service benefit in net periodic benefit cost during fiscal year 2025.
Allocation of Pension Plan Assets
The Company has established, and periodically adjusts, target asset allocations for its investments in its U.S. ERISA-regulated defined benefit pension plan, which represents 97% of consolidated plan assets and 84% of consolidated PBO at March 31, 2024, to balance the needs of liquidity, total return, and risk control. The assets are required to be diversified across asset classes and investment styles to achieve that balance. During the year, the asset allocation is reviewed for adherence to the target policy and rebalanced to the targeted weights. The Company reviews the expected long-term returns of the asset allocation each year to help determine whether changes are needed. The return is evaluated on a weighted-average basis in relation to inflation. The assumed long-term rate of return used to calculate annual benefit expense is based on the asset allocation and expected market returns for the respective asset classes.
The weighted–average target pension asset allocation and target ranges at the March 31, 2024 measurement date and the actual asset allocations at the March 31, 2024 and 2023 measurement dates by major asset category were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Actual Allocation |
| Target Allocation | | | | | | March 31, |
| Major Asset Category | | Range | | 2024 | | 2023 |
| Equity securities | 29.0 | % | | 19 | % | - | 39% | | 26.7 | % | | 27.5 | % |
| | | | | | | | | |
Fixed income securities (1) | 66.0 | % | | 56 | % | - | 76% | | 67.3 | % | | 66.0 | % |
| Alternative investments | 5.0 | % | | 0 | % | - | 10% | | 6.0 | % | | 6.5 | % |
| | | | | | | | | |
| Total | 100.0 | % | | | | | | 100.0 | % | | 100.0 | % |
(1)Actual amounts include high yield securities and cash balances held for the payment of benefits.
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Universal makes regular contributions to its pension and other postretirement benefit plans. As previously noted, for postretirement health benefits, contributions reflect funding of those benefits as they are incurred. The Company expects to make no contributions to its ERISA regulated defined benefit pension plan and $4.1 million to its non-ERISA regulated pension plans in fiscal year 2025.
Estimated future benefit payments to be made from the Company’s plans are as follows:
| | | | | | | | | | | |
| Pension
Benefits | | Other
Postretirement
Benefits |
| Fiscal Year | | | |
| 2025 | $ | 17,126 | | | $ | 2,100 | |
| 2026 | 18,141 | | | 1,929 | |
| 2027 | 23,644 | | | 1,856 | |
| 2028 | 19,017 | | | 1,774 | |
| 2029 | 17,345 | | | 1,681 | |
| 2030 - 2033 | 85,512 | | | 7,729 | |
Fair Values of Pension Plan Assets
Assets held by the Company's defined benefit pension plans primarily consist of equity securities, fixed income securities, and alternative investments. Equity securities are primarily invested in actively-traded mutual funds with underlying common stock investments in U.S. and foreign companies ranging in size from small to large corporations. Fixed income securities are also held primarily through actively-traded mutual funds with the underlying investments in both U.S. and foreign securities. The methodologies for determining the fair values of the plan assets are outlined below. Where the values are based on quoted prices for the securities in an active market, they are classified as Level 1 of the fair value hierarchy. Where secondary pricing sources are used, they are classified as Level 2 of the hierarchy. Pricing models that use significant unobservable inputs are classified as Level 3.
•Equity securities: Investments in equity securities through actively-traded mutual funds are valued based on the NAVs of the units held in the respective funds, which are determined by obtaining quoted prices on nationally recognized securities exchanges. These securities are classified as Level 1.
•Fixed income securities: Fixed income investments that are held through mutual funds are valued based on the NAVs of the units held in the respective funds, which are determined by obtaining quoted prices on nationally recognized securities exchanges. These securities are classified as Level 1. Other fixed income investments are valued at an estimated price that a dealer would pay for a similar security on the valuation date using observable market inputs and are classified as Level 2. These market inputs may include yield curves for similarly rated securities. Small amounts of cash are held in common collective trusts. Fixed income securities also include insurance assets, which are valued based on an actuarial calculation. Those securities are classified as Level 3.
•Alternative investments: Real estate assets are valued using valuation models that incorporate income and market approaches, including external appraisals, to derive fair values. The hedge fund allocation is a fund of hedge funds and is valued by the manager based on the NAV of each fund. These models use significant unobservable inputs and are classified as Level 3 within the fair value hierarchy.
Fair values of the assets of the Company’s pension plans as of March 31, 2024 and 2023, classified based on how their values were determined under the fair value hierarchy are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2024 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| Equity securities | $ | 56,243 | | | $ | — | | | $ | — | | | $ | 56,243 | |
| | | | | | | |
Fixed income securities (1) | 143,740 | | | — | | | 7,695 | | | 151,435 | |
| Alternative investments | — | | | — | | | 12,658 | | | 12,658 | |
| | | | | | | |
| Total investments | $ | 199,983 | | | $ | — | | | $ | 20,353 | | | $ | 220,336 | |
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| Equity securities | $ | 58,745 | | | $ | — | | | $ | — | | | $ | 58,745 | |
| | | | | | | |
Fixed income securities (1) | 142,335 | | | — | | | 6,917 | | | 149,252 | |
| Alternative investments | — | | | — | | | 13,956 | | | 13,956 | |
| | | | | | | |
| Total investments | $ | 201,080 | | | $ | — | | | $ | 20,873 | | | $ | 221,953 | |
(1)Includes high yield securities and cash and cash equivalent balances.
Other Benefit Plans
Universal and several subsidiaries offer employer defined contribution savings plans. Amounts charged to expense for these plans were approximately $4.3 million for fiscal year 2024, $3.4 million for fiscal year 2023, and $3.0 million for fiscal year 2022.
NOTE 14. COMMON AND PREFERRED STOCK
Common Stock
At March 31, 2024, the Company’s shareholders had authorized 100,000,000 shares of its common stock, and 24,573,408 shares were issued and outstanding. Holders of the common stock are entitled to one vote for each share held on all matters requiring a vote. Holders of the common stock are also entitled to receive dividends when, as, and if declared by the Company’s Board of Directors. The Board of Directors customarily declares and pays regular quarterly dividends on the outstanding common shares; however, such dividends are at the Board’s full discretion, and there is no obligation to continue them.
Preferred Stock
The Company is also authorized to issue up to 5,000,000 shares of preferred stock. No preferred stock was outstanding at March 31, 2024.
Share Repurchase Programs
Universal’s Board of Directors has authorized programs to repurchase outstanding shares of the Company’s capital stock (common and preferred stock). Under these programs, the Company has made and may continue to make share repurchases from time to time in the open market or in privately negotiated transactions at prices not exceeding prevailing market rates. Programs have been in place continuously throughout fiscal years 2022 through 2024. The current program, which replaced an expiring program, was authorized and became effective on November 3, 2022. It authorizes the purchase of up to $100 million of the Company's outstanding common stock and expires on the earlier of November 15, 2024, or when the funds authorized for the program have been exhausted. At March 31, 2024, $95 million of the authorization remained available for share repurchases under the current program.
Repurchases of common stock under the programs for fiscal years 2024, 2023, and 2022 were as follows:
| | | | | | | | | | | | | | | | | | | | | |
| Fiscal Year Ended March 31, |
| 2024 | | 2023 | | 2022 | | | | |
| Number of shares repurchased | 100,000 | | | 66,124 | | | 58,264 | | | | | |
| Cost of shares repurchased (in thousands of dollars) | $ | 4,744 | | | $ | 3,448 | | | $ | 3,053 | | | | | |
| Weighted-average cost per share | $ | 47.44 | | | $ | 52.12 | | | $ | 52.41 | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
NOTE 15. EXECUTIVE STOCK PLANS AND STOCK-BASED COMPENSATION
Executive Stock Plans
The Company’s shareholders have approved executive stock plans under which officers, directors, and employees of the Company may receive grants and awards of common stock, restricted stock, restricted stock units (“RSUs”), performance share units (“PSUs”), stock appreciation rights (“SARs”), incentive stock options, and non-qualified stock options. Currently, grants are outstanding under the 1997 Executive Stock Plan, the 2002 Executive Stock Plan, the 2007 Stock Incentive Plan, the 2017 Stock Incentive Plan, and the 2023 Stock Incentive Plan. Together, these plans are referred to in this disclosure as the “Plans.” Up to 1,250,000 shares may be issued under the 2023 Stock Incentive Plan, with no specific share limit for any of the award types. New awards may no longer be issued under the 1997, 2002, 2007, and 2017 Plans.
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The Company’s practice is to award grants of stock-based compensation to officers at the first regularly-scheduled meeting of the Compensation Committee of the Board of Directors (the “Compensation Committee”) in the fiscal year following the public release of the Company’s financial results for the prior fiscal year. In recent years, the Compensation Committee has awarded only grants of RSUs and PSUs. Outside directors automatically receive restricted stock units following each annual meeting of shareholders.
RSUs awarded prior to fiscal year 2022 vest 5 years after the grant date and those awarded after fiscal year 2022 vest 3 years after the grant date. After vesting RSUs are paid out in shares of common stock. Under the terms of the RSU awards, grantees receive dividend equivalents in the form of additional RSUs that vest and are paid out on the same vesting date as the original RSU grant. The PSUs vest 3 years from the grant date, are paid out in shares of common stock at the vesting date, and do not carry rights to dividends or dividend equivalents prior to vesting. Shares ultimately paid out under PSU grants are dependent on the achievement of predetermined performance measures established by the Compensation Committee and can range from zero to 150% of the stated award. RSUs awarded to outside directors vest 1 year after the grant date. Additionally, restricted stock vests upon the individual’s retirement from service as a director.
RSUs, Restricted Stock, and PSUs
The following table summarizes the Company’s RSU, restricted stock, and PSU activity for fiscal years 2022 through 2024:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| RSUs | | Restricted Stock | | PSUs |
| Shares | | Weighted-Average
Grant Date
Fair Value | | Shares | | Weighted-Average
Grant Date
Fair Value | | Shares | | Weighted-Average
Grant Date
Fair Value |
| Fiscal Year Ended March 31, 2022: | | | | | | | | | | | |
| Unvested at beginning of year | 342,468 | | | $ | 55.44 | | | 11,600 | | | $ | 41.86 | | | 161,147 | | | $ | 46.20 | |
| Granted | 93,564 | | | 56.18 | | | — | | | — | | | 48,650 | | | 47.95 | |
| Vested | (86,488) | | | 54.33 | | | — | | | — | | | (50,242) | | | 57.12 | |
| Forfeited | — | | | — | | | — | | | — | | | (1,555) | | | 57.12 | |
| Unvested at end of year | 349,544 | | | 55.86 | | | 11,600 | | | 41.86 | | | 158,000 | | | 43.16 | |
| | | | | | | | | | | |
| Fiscal Year Ended March 31, 2023: | | | | | | | | | | | |
| Granted | 100,105 | | | 60.89 | | | — | | | — | | | 48,315 | | | 54.46 | |
| Vested | (67,239) | | | 62.39 | | | — | | | — | | | (37,040) | | | 50.16 | |
| Forfeited | — | | | — | | | — | | | — | | | (9,260) | | | 50.16 | |
| Unvested at end of year | 382,410 | | | 56.03 | | | 11,600 | | | 41.86 | | | 160,015 | | | 44.55 | |
| | | | | | | | | | | |
| Fiscal Year Ended March 31, 2024: | | | | | | | | | | | |
| Granted | 117,103 | | | 51.90 | | | — | | | — | | | 65,645 | | | 43.01 | |
| Vested | (109,877) | | | 61.75 | | | — | | | — | | | (73,963) | | | 34.45 | |
| Forfeited | — | | | — | | | — | | | — | | | (467) | | | 34.33 | |
| Unvested at end of year | 389,636 | | | $ | 53.18 | | | 11,600 | | | $ | 41.86 | | | 151,230 | | | $ | 48.22 | |
Shares granted and vested in the above table include dividend equivalents on RSUs and any shares awarded above the base grant under the performance provisions of PSUs. Shares forfeited or canceled include any reductions from the base PSU grant under those same performance provisions. The fair values of RSUs, restricted stock, and PSUs are based on the market price of the common stock on the grant date.
Stock-Based Compensation Expense
Fair value expense for stock-based compensation is recognized ratably over the period from grant date to the earlier of (1) the vesting date of the award, or (2) the date the grantee is eligible to retire without forfeiting the award. For employees who are already eligible to retire at the date an award is granted, the total fair value of the award is recognized as expense at the date of
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
grant. For the fiscal years ended March 31, 2024, 2023, and 2022, total stock-based compensation expense and the related income tax benefit recognized were as follows:
| | | | | | | | | | | | | | | | | |
| Fiscal Year Ended March 31, |
| 2024 | | 2023 | | 2022 |
| Total stock-based compensation expense | $ | 12,063 | | | $ | 8,419 | | | $ | 6,186 | |
| Income tax benefit recorded on stock-based compensation expense | $ | 2,713 | | | $ | 1,899 | | | $ | 1,389 | |
At March 31, 2024, the Company had $1.7 million of unrecognized compensation expense related to stock-based awards, which will be recognized over a weighted-average period of approximately 0.6 years.
NOTE 16. COMMITMENTS, CONTINGENCIES, AND OTHER MATTERS
Commitments
The Company enters into contracts to purchase tobacco from farmers in a number of the countries where it operates. Contracts in most countries cover one annual growing season. Primarily with the farmer contracts in Brazil, Malawi, Mozambique, the Philippines, Guatemala, and Mexico, the Company provides seasonal financing to support the farmers’ production of their crops. At March 31, 2024, the Company had contracts to purchase approximately $642 million of tobacco to be delivered during the coming fiscal year and $189 million of tobacco to be delivered in subsequent years. These amounts are estimates since actual quantities purchased will depend on crop yields, and prices will depend on the quality of the tobacco delivered and other market factors. Tobacco purchase obligations have been partially funded by short-term advances to farmers and other suppliers, which totaled approximately $139 million, net of allowances, at March 31, 2024. The Company withholds payments due to farmers on delivery of the tobacco to satisfy repayment of the financing it provided to the farmers. In addition to its contractual obligations to purchase tobacco, the Company had commitments related to agricultural materials, approved capital expenditures, and various other requirements that approximated $102 million at March 31, 2024.
Other Contingent Liabilities
Other Contingent Liabilities (Letters of credit)
The Company had other contingent liabilities totaling approximately $0.5 million at March 31, 2024, primarily under outstanding letters of credit.
Value-Added Tax Assessments in Brazil
As discussed in Note 1, the Company's local operating subsidiaries pay significant amounts of VAT in connection with their normal operations. In Brazil, VAT is assessed at the state level when green tobacco is transferred between states. The Company's operating subsidiary there pays VAT when tobaccos grown in the states of Santa Catarina and Parana are transferred to its factory in the state of Rio Grande do Sul for processing. The subsidiary received assessments for additional VAT plus interest and penalties from the tax authorities for the states of Santa Catarina and Parana based on audits of the subsidiary's VAT filings for specified periods.
In June 2011, tax authorities for the state of Santa Catarina issued assessments for tax, interest, and penalties for periods from 2006 through 2009 totaling approximately $14 million. In September 2014, tax authorities for the state of Santa Catarina issued a reduced assessment for tax, interest, and penalties for periods from 2009 through 2014. The subsidiary contested the assessment through a variety of judicial hearings. In March 2024, the subsidiary elected to participate in a voluntary state government sponsored program that significantly reduced the assessed penalties and interest. The subsidiary's participation in the program resulted in the matter being settled for $5 million and eliminates any further litigation regarding the matter.
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 $11 million. These amounts are based on the exchange rate for the Brazilian currency at March 31, 2024. Management of the operating subsidiary and outside counsel believe that errors were made by the tax authorities for the state of Parana in determining all or significant portions of this assessment and that various defenses support the subsidiary's position. Management of the subsidiary and outside counsel challenged the full amount of the claim. A significant portion of the Parana assessment was based on positions taken by the tax authorities that management and outside counsel believe deviate significantly from the underlying statutes and relevant case law. In addition, under the law, the subsidiary's tax filings for certain periods covered in the assessment were no longer open to any challenge by the tax authorities. In December 2015, the Parana tax authorities withdrew the initial claim and subsequently issued a new assessment covering the same tax periods. The new assessment totaled approximately $3 million at the March 31, 2024 exchange rate, reflecting a substantial reduction from the original $11 million assessment. Notwithstanding the reduction, management and outside counsel continue to believe that the new
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
assessment is not supported by the underlying statutes and relevant case law and have challenged the full amount of the claim. The range of reasonably possible loss is considered to be zero up to the full $3 million assessment. However, based on the strength of the subsidiary's defenses, no loss within that range is considered probable at this time and no liability has been recorded at March 31, 2024.
The process for reaching a final resolution to the Parana assessment is expected to be lengthy, and management is not currently able to predict when the case will be concluded. Should the subsidiary ultimately be required to pay any tax, interest, or penalties, 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 other litigation and tax examinations incidental to their business activities. While the outcome of these matters cannot be predicted with certainty, management is vigorously defending the matters and does not currently expect that any of them will have a material adverse effect on the Company’s business or financial position. However, should one or more of these matters be resolved in a manner adverse to management’s current expectation, the effect on the Company’s results of operations for a particular fiscal reporting period could be material.
NOTE 17. OPERATING SEGMENTS
Management regularly evaluates the Company’s global business activities, including product and service offerings to its customers, as well as senior management’s operational and financial responsibilities. Assessments include an analysis of how its chief operating decision maker measures business performance and allocates resources. As a result of this analysis, senior management has determined the Company conducts operations across two reportable operating segments, Tobacco Operations and Ingredients Operations.
The Tobacco Operations segment activities involve contracting, procuring, processing, packing, storing, and shipping leaf tobacco for sale to, or for the account of, manufacturers of consumer tobacco products throughout the world. Through various operating subsidiaries located in tobacco-growing countries around the world and significant ownership interests in unconsolidated affiliates, the Company processes and/or sells flue-cured and burley tobaccos, dark air-cured tobaccos, and oriental tobaccos. Flue-cured, burley, and oriental tobaccos are used principally in the manufacture of cigarettes, and dark air-cured tobaccos are used mainly in the manufacture of cigars, pipe tobacco, and smokeless tobacco products. Some of these tobacco types are also increasingly used in the manufacture of next generation tobacco products that are intended to provide consumers with an alternative to traditional combustible products. The Tobacco Operations segment also provides physical and chemical product testing for tobacco customers. A substantial portion of the Company’s Tobacco Operations' revenues are derived from sales to a limited number of large, multinational cigarette and cigar manufacturers.
The Ingredients Operations segment provides its customers with a broad variety of plant-based ingredients for both human and pet consumption. The Ingredients Operations segment utilizes a variety of value-added manufacturing processes converting raw materials into a wide spectrum of fruit and vegetable juices, concentrates, dehydrated products, botanical extracts, and flavorings. Customers for the Ingredients Operations segment include large multinational food and beverage companies, smaller independent manufacturers, and retail organizations. FruitSmart, Silva, and Shank's are the primary operations for the Ingredients Operations segment. FruitSmart supplies a broad set of juices, concentrates, pomaces, purees, fruit fibers, seeds, seed powders, and other value-added products to food, beverage, and flavor companies throughout the United States and internationally. Silva procures dehydrated vegetables, fruits, and herbs from around the world and specializes in processing natural materials into custom designed dehydrated vegetable and fruit-based ingredients for a variety of end products. Shank's offers a diversified portfolio of botanical extracts, distillates, natural flavors, and color for industrial and private label customers worldwide, and is known for their significant vanilla expertise. Shank's is also equipped to offer customers custom bottling and packaging for their products.
Universal incurs overhead expenses related to senior management, sales, finance, legal, and other functions that are centralized at its corporate headquarters, as well as functions performed at several sales and administrative offices around the world. These overhead expenses are currently allocated to the reportable operating segments, generally on the basis of projected annual financial and operational performance, including volumes planned to be purchased and/or processed. Management believes this method of allocation is currently representative of the value of the related services provided to the operating segments. The Company currently evaluates the performance of its segments based on operating income after allocated overhead expenses, plus equity in the pretax earnings of unconsolidated affiliates.
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Reportable segment data as of, or for, the fiscal years ended March 31, 2024, 2023, and 2022, is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Sales and Other Operating Revenues | | Operating Income |
| Fiscal Year Ended March 31, | | Fiscal Year Ended March 31, |
| 2024 | | 2023 | | 2022 | | 2024 | | 2023 | | 2022 |
| Tobacco Operations | $ | 2,438,775 | | | $ | 2,258,260 | | | $ | 1,835,790 | | | $ | 222,352 | | | $ | 172,889 | | | $ | 157,754 | |
| Ingredients Operations | 309,798 | | | 311,564 | | | 267,811 | | | 3,936 | | | 10,566 | | | 16,581 | |
| Subtotal | 2,748,573 | | | 2,569,824 | | | 2,103,601 | | | 226,288 | | | 183,455 | | | 174,335 | |
Deduct: Equity in pretax earnings of unconsolidated affiliates (1) | | | | | | | (756) | | | (2,383) | | | (6,095) | |
Restructuring and impairment costs (2) | | | | | | | (3,523) | | | — | | | (10,457) | |
Add: Other income (3) | | | | | | | — | | | — | | | 2,532 | |
| Consolidated total | $ | 2,748,573 | | | $ | 2,569,824 | | | $ | 2,103,601 | | | $ | 222,009 | | | $ | 181,072 | | | $ | 160,315 | |
| | | | | | | | | | | |
| Segment Assets | | Accounts Receivable, net |
| March 31, | | March 31, |
| 2024 | | 2023 | | 2022 | | 2024 | | 2023 | | 2022 |
| Tobacco Operations | $ | 2,451,895 | | | $ | 2,164,600 | | | $ | 2,109,845 | | | $ | 472,357 | | | $ | 350,014 | | | $ | 336,638 | |
| Ingredients Operations | 485,344 | | | 474,582 | | | 476,500 | | | 52,905 | | | 52,059 | | | 48,799 | |
| Consolidated total | $ | 2,937,239 | | | $ | 2,639,182 | | | $ | 2,586,345 | | | $ | 525,262 | | | $ | 402,073 | | | $ | 385,437 | |
| | | | | | | | | | | |
| Goodwill, net | | Intangibles, net |
| March 31, | | Fiscal Year Ended March 31, |
| 2024 | | 2023 | | 2022 | | 2024 | | 2023 | | 2022 |
| Tobacco Operations | $ | 97,801 | | | $ | 97,854 | | | $ | 97,930 | | | $ | 62 | | | $ | 34 | | | $ | 57 | |
Ingredients Operations | 116,068 | | | 116,068 | | | 116,068 | | | 68,821 | | | 80,067 | | | 92,514 | |
| Consolidated total | $ | 213,869 | | | $ | 213,922 | | | $ | 213,998 | | | $ | 68,883 | | | $ | 80,101 | | | $ | 92,571 | |
| | | | | | | | | | | |
| Capital Expenditures | | Depreciation and Amortization |
| Fiscal Year Ended March 31, | | Fiscal Year Ended March 31, |
| 2024 | | 2023 | | 2022 | | 2024 | | 2023 | | 2022 |
| Tobacco Operations | $ | 35,173 | | | $ | 38,084 | | | $ | 34,237 | | | $ | 40,267 | | | $ | 38,650 | | | $ | 36,272 | |
| Ingredients Operations | 30,840 | | | 16,590 | | | 18,966 | | | 18,059 | | | 18,650 | | | 16,249 | |
| Consolidated total | $ | 66,013 | | | $ | 54,674 | | | $ | 53,203 | | | $ | 58,326 | | | $ | 57,300 | | | $ | 52,521 | |
(1)Equity in pretax earnings of unconsolidated affiliates is included in reportable segment operating income, but is reported below consolidated operating income and excluded from that total in the consolidated statements of income.
(2)Restructuring and impairment costs are excluded from reportable segment operating income, but are included in consolidated operating income in the consolidated statements of income (see Note 4).
(3)Other income represents the reversal of the contingent consideration liability associated with the acquisition of FruitSmart.
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Geographic data as of, or for, the fiscal years ended March 31, 2024, 2023, and 2022, is presented below. Sales and other operating revenues are attributed to individual countries based on the final destination of the shipment. Long-lived assets generally consist of net property, plant, and equipment, goodwill, and other intangibles.
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| Geographic Data | Sales and Other Operating Revenues |
| Fiscal Year Ended March 31, |
| 2024 | | 2023 | | 2022 |
| Belgium | $ | 552,208 | | | $ | 395,616 | | | $ | 283,072 | |
| United States | 547,923 | | | 530,467 | | | 495,322 | |
| China | 219,979 | | | 204,139 | | | 97,826 | |
| Philippines | 133,656 | | | 149,867 | | | 147,876 | |
| Indonesia | 117,019 | | | 45,089 | | | 41,738 | |
| Poland | 97,723 | | | 119,629 | | | 90,270 | |
| Germany | 95,350 | | | 108,844 | | | 93,057 | |
| Netherlands | 42,492 | | | 51,843 | | | 45,297 | |
| Mexico | 26,438 | | | 51,847 | | | 29,514 | |
| France | 16,669 | | | 64,563 | | | 39,307 | |
| All other countries | 899,116 | | | 847,920 | | | 740,322 | |
| Consolidated total | $ | 2,748,573 | | | $ | 2,569,824 | | | $ | 2,103,601 | |
| | | | | |
| Long-Lived Assets |
| March 31, |
| (in thousands) | 2024 | | 2023 | | 2022 |
| United States | $ | 355,905 | | | $ | 343,470 | | | $ | 344,276 | |
| Brazil | 139,642 | | | 134,232 | | | 136,653 | |
| Mozambique | 35,845 | | | 38,979 | | | 40,228 | |
| All other countries | 117,240 | | | 128,504 | | | 130,530 | |
| Consolidated total | $ | 648,632 | | | $ | 645,185 | | | $ | 651,687 | |
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE 18. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table summarizes the changes in the balances for each component of accumulated other comprehensive income (loss) attributable to the Company for the fiscal years ended March 31, 2024, 2023, and 2022:
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended March 31, |
| | 2024 | | 2023 | | 2022 |
| Foreign currency translation: | | | | | | |
| Balance at beginning of year | | $ | (44,233) | | | $ | (40,965) | | | $ | (35,135) | |
| Other comprehensive income (loss) attributable to Universal Corporation: | | | | | | |
| Net gain (loss) on foreign currency translation | | (1,531) | | | (3,166) | | | (6,367) | |
| | | | | | |
| Less: Net loss on foreign currency translation attributable to noncontrolling interests | | 949 | | | (102) | | | 537 | |
| Other comprehensive income (loss) attributable to Universal Corporation, net of income taxes | | (582) | | | (3,268) | | | (5,830) | |
| | | | | | |
| | | | | | |
| Balance at end of year | | $ | (44,815) | | | $ | (44,233) | | | $ | (40,965) | |
| | | | | | |
| Foreign currency hedge: | | | | | | |
| Balance at beginning of year | | $ | 4,899 | | | $ | 3,579 | | | $ | (414) | |
| Other comprehensive income (loss) attributable to Universal Corporation: | | | | | | |
Net gain (loss) on derivative instruments (net of tax (expense) benefit of $17, $(1,160) and $(2,199)) | | (187) | | | 2,562 | | | 6,679 | |
Reclassification of net (gain) loss to earnings (net of tax expense (benefit) of $1,718, $389, and $1,115)(1) | | (5,328) | | | (1,242) | | | (2,686) | |
| Other comprehensive income (loss) attributable to Universal Corporation, net of income taxes | | (5,515) | | | 1,320 | | | 3,993 | |
| Balance at end of year | | $ | (616) | | | $ | 4,899 | | | $ | 3,579 | |
| | | | | | |
| Interest rate hedge: | | | | | | |
| Balance at beginning of year | | $ | 5,253 | | | $ | (860) | | | $ | (19,480) | |
| Other comprehensive income (loss) attributable to Universal Corporation: | | | | | | |
Net gain (loss) on derivative instruments (net of tax (expense) benefit of $(4,035), $(2,583), and $(3,249)) | | 11,340 | | | 7,220 | | | 12,402 | |
Reclassification of net (gain) loss to earnings (net of tax expense (benefit) of $2,884, $396, and $(1,628))(2) | | (8,105) | | | (1,107) | | | 6,218 | |
| Other comprehensive income (loss) attributable to Universal Corporation, net of income taxes | | 3,235 | | | 6,113 | | | 18,620 | |
| | | | | | |
| | | | | | |
| Balance at end of year | | $ | 8,488 | | | $ | 5,253 | | | $ | (860) | |
| | | | | | |
| Pension and other postretirement benefit plans: | | | | | | |
| Balance at beginning of year | | $ | (42,976) | | | $ | (46,065) | | | $ | (52,008) | |
| Other comprehensive income (loss) attributable to Universal Corporation: | | | | | | |
Net gain (loss) arising during the year (net of tax (expense) benefit of $149, $(370), and $(297)(3) | | (430) | | | 1,947 | | | 2,799 | |
| | | | | | |
Amortization included in earnings (net of tax benefit of $339, $223, and $298)(4) | | (1,236) | | | 1,142 | | | 3,144 | |
| Other comprehensive income (loss) attributable to Universal Corporation, net of income taxes | | (1,666) | | | 3,089 | | | 5,943 | |
| | | | | | |
| | | | | | |
| Balance at end of year | | $ | (44,642) | | | $ | (42,976) | | | $ | (46,065) | |
| | | | | | |
| Total accumulated other comprehensive income (loss) at end of year | | $ | (81,585) | | | $ | (77,057) | | | $ | (84,311) | |
(1) Gains (losses) on foreign currency cash flow hedges related to forecast purchases of tobacco and crop input sales are reclassified from accumulated other comprehensive income (loss) to cost of goods sold when the tobacco is sold to customers. See Note 11 for additional information.
(2) Gain (loss) on interest rate cash flow hedges is reclassified from accumulated other comprehensive income (loss) to interest expense when the related interest payments are made on the debt for open interest rate swap agreements or as amortized to interest expense over the period to original maturity for terminated swap agreements. See Note 11 for additional information.
(3) These items arise from the remeasurement of the assets and liabilities of the Company's defined benefit pension and other postretirement benefit plans. Those remeasurements are made on an annual basis at the end of the fiscal year. See Note 13 for additional information.
(4) This accumulated other comprehensive income (loss) component is included in the computation of net periodic benefit cost. See Note 13 for additional information.
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Universal Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Universal Corporation (the Company) as of March 31, 2024 and 2023, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for each of the three years in the period ended March 31, 2024, and the related notes and financial statement schedule listed in the Index at Item 15(a)2 (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at March 31, 2024 and 2023, and the results of its operations and its cash flows for each of the three years in the period ended March 31, 2024, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of March 31, 2024, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated May 29, 2024, except for the effects of the material weakness described in the second and third paragraphs, as to which the date is April 21, 2025, expressed an adverse opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
| | | | | | | | | |
| | Allowance for Advances to Tobacco Suppliers | |
| Description of the Matter | | The Company’s short-term and long-term advances to tobacco suppliers totaled approximately $162 million as of March 31, 2024, and the allowances totaled $20 million. As discussed in Note 1 of the financial statements, the Company provides agronomy services and seasonal advances of seed, fertilizer, and other supplies to tobacco farmers for crop production. These advances are repaid through the delivery of tobacco to the Company. Management determined the allowance based on assumptions including the assessment of historical loss information and crop projections. Auditing Management’s estimate for the allowance on advances to tobacco suppliers was complex and involved subjective auditor judgment as the estimate relies on a number of factors that are affected by market and economic conditions outside the Company’s control. There is uncertainty associated with the assumptions used which could have a significant effect on the allowance estimate.
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| | | |
| | | | | | | | | |
| How We Addressed the Matter in Our Audit | | We obtained an understanding, evaluated the design, and tested the operating effectiveness of the Company’s internal controls over the allowance on the advances to tobacco suppliers. For example, we tested controls over the supplier advance approval and Management’s review and approval of the models used to calculate the allowance. We also tested controls used by Management to evaluate the data used in making the estimates for completeness and accuracy. Further, the identified material weakness relating to the lack of competence or integrity of the individuals executing controls at the Mozambique subsidiary affected our audit procedures in this area. To test the allowance for advances to tobacco suppliers, our audit procedures included, among others, evaluating the significant assumptions used in the allowance calculation. For example, we compared historical loss information to Management’s estimate of projected crop yield and analyzed the sensitivity of significant assumptions to evaluate the changes in the allowance that would result from changes in the assumptions. We analyzed subsequent events to identify potential sources of contrary information to Management’s assumptions. The nature and extent of our audit procedures related to the Mozambique subsidiary considered the inability to rely on controls over Management’s farmer advance allowance process as a result of the material weakness described above.
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| | | |
| | Allowance for Recoverable Value-Added Tax (“VAT”) Credits | |
| Description of the Matter | | The Company’s gross balance of recoverable value-added tax (“VAT”) credits totaled approximately $72 million as of March 31, 2024, and the related allowance totaled approximately $21 million. As discussed in Note 1 of the financial statements, in many foreign countries, the Company pays and receives a significant amount of VAT on purchases and sales of tobacco and tobacco related material. Items subject to a VAT vary from jurisdiction to jurisdiction as do the rates at which the tax is assessed. Some jurisdictions allow companies to apply for refunds of unused VAT credits from the tax authorities, but the refund process may take an extended period of time and it is not uncommon for refund applications to be challenged or rejected. Some jurisdictions also permit companies to sell or transfer unused VAT credits to third parties in private transactions although the proceeds realized may be heavily discounted from the face value of the credits. Management applied judgment in calculating the valuation allowance to estimate the credits that are not expected to be recovered. Auditing Management’s estimate of the VAT allowance was complex and involved a high degree of subjectivity as the estimate relies on a number of factors including interpretations of applicable tax laws and regulations as well as economic and political conditions outside the Company’s control. There is uncertainty associated with the assumptions used which could have a significant effect on the estimate. Additionally, auditing the allowance for VAT was especially challenging due to the material weakness identified by the Company relating to the lack of competence or integrity of the individuals executing controls at the Mozambique subsidiary. This material weakness required an increased extent of audit effort to test the reasonableness of the assumptions used in the determination of the allowance.
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| | | |
| How We Addressed the Matter in Our Audit | | To test the VAT allowance estimate, our audit procedures included, among others, evaluating the significant assumptions used to estimate the VAT allowance and assessing the historical accuracy of Management’s estimates. For example, we evaluated whether the historical loss of credits used in Management’s calculation was representative of the current collectability of the credits. We analyzed the sensitivity of significant assumptions to evaluate the changes in the allowance that that would result from changes in the assumptions and we considered subsequent events to identify potential sources of contrary information to Management’s assumptions. The nature and extent of our audit procedures considered the inability to rely on controls over Management’s VAT allowance process as a result of the material weakness described above. | |
| | | |
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 1971.
Richmond, Virginia
May 29, 2024, except for the effects of the material weakness related to the Mozambique subsidiary described in the second paragraph of the Opinion on the Financial Statements and the Critical Audit Matters for Allowance for Advances to Tobacco Suppliers and Allowance for Recoverable Value-Added Tax (“VAT”) Credits described above, as to which the date is April 21, 2025.
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Universal Corporation
Opinion on Internal Control over Financial Reporting
We have audited Universal Corporation’s internal control over financial reporting as of March 31, 2024, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, because of the effect of the material weakness described below on the achievement of the objectives of the control criteria, Universal Corporation (the Company) has not maintained effective internal control over financial reporting as of March 31, 2024, based on the COSO criteria.
In our report dated May 29, 2024, we expressed an unqualified opinion that the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2024, based on the COSO criteria. Management has subsequently identified deficiencies in controls related to the Mozambique subsidiary and has further concluded that such deficiencies represented a material weakness as of March 31, 2024. As a result, management has revised its assessment, as presented in the accompanying Management’s Report on Internal Control over Financial Reporting, to conclude that the Company’s internal control over financial reporting was not effective as of March 31, 2024. Accordingly, our present opinion on the effectiveness of internal control over financial reporting as of March 31, 2024, as expressed herein, is different from that expressed in our previous report.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management’s assessment. Management has identified a material weakness in controls related to the Company’s subsidiary in Mozambique, including controls that failed to prevent or detect an embezzlement in a timely manner and the inability to rely on controls performed at this subsidiary due to the lack of competence or integrity of the individuals executing the controls.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of March 31, 2024 and 2023, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for each of the three years in the period ended March 31, 2024, and the related notes and financial statement schedule. This material weakness was considered in determining the nature, timing and extent of audit tests applied in our audit of the 2024 consolidated financial statements, and this report does not affect our report dated May 29, 2024, except for the effects of the material weakness related to the Mozambique subsidiary described in the second paragraph of the Opinion on the Financial Statements and the Critical Audit Matters for Allowance for Advances to Tobacco Suppliers and Allowance for Recoverable Value-Added Tax (“VAT”) Credits, as to which the date is April 21, 2025, which expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definitions and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Richmond, Virginia
May 29, 2024, except for the effect of the material weakness related to the Mozambique subsidiary described in the second and third paragraphs above, as to which the date is April 21, 2025.
