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Comprehensive Income
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Intangibles
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(Exact name of registrant as specified in its charter)
iVirginia
i54-0414210
(State
or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification Number)
i9201 Forest Hill Avenue,
iRichmond,
iVirginia
i23235
(Address
of principal executive offices)
(Zip Code)
i804-i359-9311
(Registrant's telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Exchange Act:
Title of each class
Trading Symbol(s)
Name of Exchange on which registered
iCommon Stock, no par value
iUVV
iNew
York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYesþNo o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYesþNo o
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
iLarge
Accelerated Filer
þ
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging growth company
i☐
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes i☐ No
☑
As of August 1, 2022, the total number of shares of common stock outstanding was i24,602,321.
Series A Junior Participating Preferred Stock, no par value, iii500,000//
shares authorized, iiiiiinone/////
issued or outstanding
i—
i—
i—
Common
stock, no par value, iii100,000,000//
shares authorized ii24,605,889/ shares issued and
outstanding at June 30, 2022 (ii24,577,254/
at June 30, 2021 and ii24,550,019/
at March 31, 2022)
Proceeds
from sale of business, net of cash held by the business
i1,168
i—
Proceeds
from sale of property, plant and equipment
i292
i1,589
Net
cash used by investing activities
(i13,610)
(i12,839)
CASH
FLOWS FROM FINANCING ACTIVITIES:
Issuance of short-term debt, net
i271,663
i49,439
Dividends
paid to noncontrolling interests
(i5,145)
(i980)
Dividends
paid on common stock
(i19,155)
(i18,876)
Other
(i1,892)
(i2,432)
Net
cash provided (used) by financing activities
i245,471
i27,151
Effect
of exchange rate changes on cash, restricted cash and cash equivalents
(i1,172)
i78
Net
decrease in cash, restricted cash and cash equivalents
i4,918
(i112,533)
Cash,
restricted cash and cash equivalents at beginning of year
i87,648
i203,221
Cash,
restricted cash and cash equivalents at end of period
$
i92,566
$
i90,688
Supplemental
Information:
Cash and cash equivalents
$
i86,566
$
i84,688
Restricted
cash (Other noncurrent assets)
i6,000
i6,000
Total
cash, restricted cash and cash equivalents
$
i92,566
$
i90,688
See
accompanying notes.
6
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. iBASIS
OF PRESENTATION
Universal Corporation, which together with its subsidiaries is referred to herein as “Universal” or the “Company,” is a global business-to-business agri-products supplier to consumer product manufacturers. The Company is the leading global leaf tobacco supplier and provides high-quality plant-based ingredients to food and beverage end markets. Because of the seasonal nature of the Company’s business, the results of operations for any fiscal quarter will not necessarily be indicative of results to be expected for other quarters or a full fiscal year. All adjustments necessary to state fairly the results
for the period have been included and were of a normal recurring nature. This Form 10-Q should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2022.
The extent to which the ongoing COVID-19 pandemic will impact the Company's financial condition, results of operations and demand for its products and services will depend on future developments, which are highly uncertain and cannot be predicted. Such developments may include the ongoing geographic spread and mutations of COVID-19, the severity of the pandemic, the duration of the COVID-19 outbreak and the type
and duration of actions that may be taken by various governmental authorities in response to the COVID-19 pandemic and the impact on the U.S. and the global economies, markets and supply chains. At June 30, 2022, it is not possible to predict the overall impact of the ongoing COVID-19 pandemic on the Company's business, financial condition, results of operations and demand for its products and services.
NOTE 2. iACCOUNTING
PRONOUNCEMENTS
Pronouncements to be Adopted in Future Periods
In March 2020, the FASB issued Accounting Standards Update No. 2020-04, "Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting" ("ASU 2020-04"). ASU 2020-04 provides optional expedients and exceptions related to contract modifications and hedge accounting to address the transitions from the London Interbank Offered Rate ("LIBOR") and other interbank offered rates to alternative reference rates. The guidance permits an entity to consider contract modification due to reference rate reform to be an event that does not
require contract remeasurement at the modification date or reassessment of a previous accounting determination. ASU 2020-04 also temporarily allows hedge relationships to continue without de-designation upon changes due to reference rate reform. The standard is effective upon issuance and can be applied as of March 12, 2020 through December 31, 2022. The Company is currently evaluating the impact that the guidance will have on its consolidated financial statements.
NOTE 3. iBUSINESS
COMBINATION
Acquisition of Shank's Extracts, LLC
On October 4, 2021, the Company acquired i100% of the capital stock of Shank's Extracts, LLC. (“Shank's”), a flavors and extracts processing company, for approximately $i100
million in cash and $i2.4 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.
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 $i2.3
million of 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 $i13.3 million. The purchase of the
land and buildings resulted in the elimination of the $i8.5 million operating lease right-of-use asset and lease liability recognized on the acquisition date for Shank's.
7
i
The
following table summarizes the final purchase price allocation of the assets acquired and liabilities assumed for the Shank's acquisition.
Universal continually reviews its business for opportunities to realize efficiencies, reduce costs, and realign its operations in response to business changes. Restructuring and impairment costs are periodically incurred in connection with those activities.
There were no restructuring and impairment costs incurred for the three months ended June 30,
2022.
Tobacco Operations
During the three months ended June 30, 2021, the Company incurred $i1.5 million of termination and impairment costs associated with restructuring of tobacco buying and administrative operations in Africa.
Ingredients
Operations
During the three months ended June 30, 2021, the Company incurred $i0.5 million of impairment costs on property, plant, and equipment associated with wind-down of our subsidiary, Carolina Innovative Food Ingredients, Inc. (“CIFI”), a sweet potato processing operation located in Nashville, North Carolina that was announced in fiscal year 2021.
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
8
provide customers with a range of food ingredient products. Payment terms with customers vary depending on customer creditworthiness, product types, services provided, and other factors. Contract durations and payment terms for all revenue categories generally do not exceed one year. Therefore, the Company has applied a practical
expedient to not adjust the transaction price for the effects of financing components, as the Company expects that the period from the time the revenue for a transaction is recognized to the time the customer pays for the related good or service transferred will be one year or less. Below is a description of the major revenue-generating categories from contracts with customers.
Tobacco Sales
The majority of the Company’s business involves purchasing leaf tobacco from farmers in the origins where it is grown, processing and packing the tobacco in its factories, and then transferring ownership
and control of the tobacco to customers. On a much smaller basis, the Company also sources processed tobacco from third-party suppliers for resale to customers. The contracts for tobacco sales with customers create a performance obligation to transfer tobacco to the customer. Transaction prices for the sale of tobaccos are primarily based on negotiated fixed prices, but the Company does have a small number of cost-plus contracts with certain customers. Cost-plus arrangements provide the Company reimbursement of the cost to purchase and process
the tobacco, plus a contractually agreed-upon profit margin. The Company utilizes the most likely amount methodology under the accounting guidance to recognize revenue for cost-plus arrangements with customers. Shipping and handling costs under tobacco sales contracts with customers are treated as fulfillment costs and included in the transaction price. Taxes assessed by government authorities on the sale of leaf tobacco products are excluded from the transaction price. At the point in time that the customer obtains control over the tobacco, which is typically aligned with physical shipment under the contractual terms with the customer, the Company completes its performance obligation and recognizes the revenue
for the sale.
Ingredient Sales
In recent fiscal years, the Company has diversified operations through acquisition of established companies that offer customers a wide range of both liquid and dehydrated fruit and vegetable ingredient products, flavors, and extracts. These operations procure raw materials from domestic and international growers and suppliers and through a variety of processing steps including sorting, cleaning, pressing, mixing, extracting, and blending to manufacture finished goods utilized in both human and pet food. The contracts for food ingredients with customers create a performance obligation to transfer the manufactured finished goods to the
customer. Transaction prices for the sale of food ingredients are primarily based on negotiated fixed prices. At the point in time that the customer obtains control over the finished product, which is typically aligned with physical shipment under the contractual terms with the customer, the Company completes its performance obligation and recognizes the revenue for the sale.
Processing Revenue
Processing and packing of customer-owned tobacco and ingredients is a short-duration process. Processing charges are primarily based on negotiated fixed prices per unit of weight processed. Under normal operating conditions, customer-owned raw materials that are placed into the production line exits as processed and packed product and is then later transported to customer-designated
transfer locations. The revenue for these services is recognized when the performance obligation is satisfied, which is generally when processing is completed. The Company’s operating history and contract analyses indicate that customer requirements for processed tobacco and food ingredients products are consistently met upon completion of processing.
Other Operating Sales and Revenue
From time to time, the Company enters into various arrangements with customers to provide other value-added services that may include blending, chemical and physical testing of products, storage, and tobacco
cutting services for select manufacturers. These other arrangements and operations are a much smaller portion of the Company’s business, and are separate and distinct contractual agreements from the Company’s tobacco and food ingredients sales or third-party processing arrangements with customers. The transaction prices and timing of revenue recognition of these items are determined by the specifics of each contract.
9
Disaggregation of Revenue from Contracts
with Customers
i
The following table disaggregates the Company’s revenue by significant revenue-generating category:
Three
Months Ended June 30,
(in thousands of dollars)
2022
2021
Tobacco sales
$
i320,017
$
i270,264
Ingredient
sales
i77,546
i51,888
Processing
revenue
i19,492
i16,696
Other
sales and revenue from contracts with customers
Other
operating sales and revenues consists principally of interest on advances to suppliers.
/
NOTE 6. OTHER iCONTINGENT LIABILITIES AND OTHER MATTERS
Other
Contingent Liabilities
Other Contingent Liabilities (Letters of credit)
The Company had other contingent liabilities totaling approximately $i1 million at June 30, 2022, primarily related to outstanding letters of credit.
Value-Added Tax Assessments
in Brazil
As further discussed below, the Company’s local operating subsidiaries pay significant amounts of value-added tax (“VAT”) in connection with their operations, which generate tax credits that they normally are entitled to recover through offset, refund, or sale to third parties. In Brazil, VAT is assessed at the state level when green tobacco is transferred between states. The Company’s operating subsidiary there pays VAT when tobaccos grown in the states of Santa Catarina and Parana are transferred to its factory in the state of Rio Grande do Sul for processing. The subsidiary has received assessments for additional VAT plus interest and penalties
from tax authorities for the states of Santa Catarina and Parana based on audits of the subsidiary’s VAT filings for specified periods. In June 2011, tax authorities for the state of Santa Catarina issued assessments for tax, interest, and penalties for periods from 2006 through 2009 totaling approximately $i9 million. In September 2014, tax authorities for the state of Parana issued an assessment for tax, interest, and penalties for periods from 2009 through
2014 totaling approximately $i11 million. Those amounts are based on the exchange rate for the Brazilian currency at June 30, 2022. Management of the operating subsidiary and outside counsel believe that errors were made by the tax authorities for both states in determining all or significant portions of these assessments and that various defenses support the subsidiary’s positions.
With
respect to the Santa Catarina assessments, the subsidiary took appropriate steps to contest the full amount of the claims. As of June 30, 2022, a portion of the subsidiary’s arguments had been accepted, and the outstanding assessment had been reduced. The reduced assessment, together with the related accumulated interest through the end of the current reporting period, totaled approximately $i9
million (at the June 30, 2022 exchange rate). The subsidiary is continuing to contest the full remaining amount of the assessment. While the range of reasonably possible loss is izero up to the full $i9
million remaining assessment with interest, based on the strength of the subsidiary’s defenses, no loss within that range is considered probable at this time and ino liability has been recorded at June 30, 2022.
With respect to the Parana assessment, management of the subsidiary and outside counsel challenged the full amount of the claim. A significant portion of the Parana assessment was based on positions taken by the
tax authorities that management and outside counsel believe deviate significantly from the underlying statutes and relevant case law. In addition, under the law, the subsidiary’s tax filings for certain periods covered in the assessment were no longer open to any challenge by the tax authorities. In December 2015, the Parana tax authorities withdrew the initial claim and subsequently issued a new assessment covering the same tax periods, reflecting a substantial reduction from the original assessment. In fiscal year 2020, the Parana tax authorities acknowledged the statute of limitations related to claims prior to December 2010 had expired and reduced the assessment to $i3
million (at the June 30, 2022 exchange rate). Notwithstanding the reduced assessment, management and outside counsel continue to believe that the new assessment is not supported by the underlying statutes and relevant case law and have
10
challenged the full amount of the claim. The range of reasonably possible loss is considered to be izero
up to the full $i3 million assessment. However, based on the strength of the subsidiary's defenses, no loss within that range is considered probable at this time and ino
liability has been recorded at June 30, 2022.
In both states, the process for reaching a final resolution to the assessments is expected to be lengthy, and management is not currently able to predict when either case will be concluded. Should the subsidiary ultimately be required to pay any tax, interest, or penalties in either case, the portion paid for tax would generate VAT credits that the subsidiary may be able to recover.
Other Legal and Tax Matters
Various subsidiaries of the Company are involved in litigation and tax examinations
incidental to their business activities. While the outcome of these matters cannot be predicted with certainty, management is vigorously defending the matters and does not currently expect that any of them will have a material adverse effect on the Company’s business or financial position. However, should one or more of these matters be resolved in a manner adverse to management’s current expectation, the effect on the Company’s results of operations for a particular fiscal reporting period could be material.
Advances to Suppliers
In many sourcing origins where the Company
operates, it provides agronomy services and seasonal advances of seed, seedlings, fertilizer, and other supplies to tobacco farmers for crop production, or makes seasonal cash advances to farmers for the procurement of those inputs. These advances are short term, are repaid upon delivery of tobacco to the Company, and are reported in advances to suppliers in the consolidated balance sheets. In several origins, the Company has made long-term advances to tobacco farmers to finance curing barns and other farm infrastructure. In some years, due to low crop yields and other factors, individual farmers may not deliver sufficient volumes of tobacco to fully repay their seasonal advances, and the Company may extend repayment
of those advances into future crop years. The long-term portion of advances is included in other noncurrent assets in the consolidated balance sheets. Both the current and the long-term portions of advances to suppliers are reported net of allowances recorded when the Company determines that amounts outstanding are not likely to be collected. Short-term and long-term advances to suppliers totaled $i120 million at June 30, 2022,
$i92 million at June 30, 2021, and $i153 million at March 31,
2022. The related valuation allowances totaled $i17 million at June 30, 2022, $i18 million
at June 30, 2021, and $i19 million at March 31, 2022, and were estimated based on the Company’s historical loss information and crop projections. The allowances were increased by net recoveries of approximately $i42
thousand and $i328 thousand in the three-month periods ended June 30, 2022 and 2021, respectively. These net recoveries and provisions are included in selling, general, and administrative expenses in the consolidated statements of income. Interest on advances is recognized in earnings upon the farmers’ delivery of tobacco in payment of principal and interest.
Recoverable
Value-Added Tax Credits
In many foreign countries, the Company’s local operating subsidiaries pay significant amounts of VAT on purchases of unprocessed and processed tobacco, crop inputs, packing materials, and various other goods and services. In some countries, VAT is a national tax, and in other countries it is assessed at the state level. Items subject to VAT vary from jurisdiction to jurisdiction, as do the rates at which the tax is assessed. When tobacco is sold to customers in the country of origin, the operating subsidiaries generally collect VAT on those sales. The subsidiaries
are normally permitted to offset their VAT payments against the collections and remit only the incremental VAT collections to the tax authorities. When tobacco is sold for export, VAT is normally not assessed. In countries where tobacco sales are predominately for export markets, VAT collections generated on downstream sales are often not sufficient to fully offset the subsidiaries’ VAT payments. In those situations, unused VAT credits can accumulate. Some jurisdictions have procedures that allow companies to apply for refunds of unused VAT credits from the tax authorities, but the refund process often takes an extended period of time and it is not uncommon for refund applications to be challenged or rejected in part on technical grounds. Other jurisdictions may permit companies to sell or transfer unused VAT credits to third parties in private transactions, although approval
for such transactions must normally be obtained from the tax authorities, limits on the amounts that can be transferred may be imposed, and the proceeds realized may be heavily discounted from the face value of the credits. Due to these factors, local operating subsidiaries in some countries can accumulate significant balances of VAT credits over time. The Company reviews these balances on a regular basis and records valuation allowances on the credits to reflect amounts that are not expected to be recovered, as well as discounts anticipated on credits that are expected to be sold or transferred. At June 30, 2022, the aggregate balance of recoverable tax credits held by the
Company’s subsidiaries totaled approximately $i77 million ($i61
million at June 30, 2021, and $i67 million at March 31, 2022), and the related valuation allowances totaled approximately $i22
million ($i19 million at June 30, 2021, and $i21 million at March 31,
2022). The net balances are reported in other current assets and other noncurrent assets in the consolidated balance sheets.
11
Long-Term Debt
At June 30, 2022, the Company had a $i225
million five-year term loan maturing December 2023 and a $i295 million seven-year term loan maturing December 2025. Under the senior unsecured bank credit facility, $i150 million of terms loans bear interest at variable rates plus a margin based
on the Company's credit metrics and interest payments remained unhedged at June 30, 2022. The Company maintains receive-floating/pay-fixed interest rates swap agreements for a portion of the outstanding five and seven-year term loans. See Note 11 for additional information on outstanding interest rate swap agreements.
Shelf Registration and Stock Repurchase Plan
In November 2020, the Company filed an undenominated automatic universal shelf registration statement with the U.S. Securities and Exchange Commission
to provide for the future issuance of an undefined amount of securities as determined by the Company and offered in one or more prospectus supplements prior to issuance.
A stock repurchase plan, which was authorized by the Company's Board of Directors, became effective and was publicly announced on November 5, 2020. This stock repurchase plan authorizes the purchase of up to $i100
million in common and/or preferred stock in open market or privately negotiated transactions through November 15, 2022 or when funds for the program have been exhausted, subject to market conditions and other factors. The program had $i97 million of remaining capacity for repurchases of common and/or preferred stock at June 30, 2022.
Sale
of Idled Tanzania Operations
During the three months ended June 30, 2022, the Company entered into a sales agreement to sell all outstanding common stock, which included all properties, of the idled companies in Tanzania for $i8.5 million. The
Company received $i1.3 million when the transaction closed in June 2022. The remaining proceeds will be received in installments by June 2023.
NOTE 7. iEARNINGS
PER SHARE
iThe following table sets forth the computation of basic and diluted earnings per share:
Three
Months Ended June 30,
(in thousands, except share and per share data)
2022
2021
Basic Earnings Per Share
Numerator
for basic earnings per share
Net income attributable to Universal Corporation
$
i6,830
$
i6,357
Denominator
for basic earnings per share
Weighted average shares outstanding
i24,769,015
i24,694,489
Basic
earnings per share
$
i0.28
$
i0.26
Diluted
Earnings Per Share
Numerator for diluted earnings per share
Net
income attributable to Universal Corporation
$
i6,830
$
i6,357
Denominator
for diluted earnings per share:
Weighted average shares outstanding
i24,769,015
i24,694,489
Effect
of dilutive securities
Employee and outside director share-based awards
i166,539
i157,662
Denominator
for diluted earnings per share
i24,935,554
i24,852,151
Diluted
earnings per share
$
i0.27
$
i0.26
12
NOTE 8. iINCOME 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 and timing of domestic and foreign earnings, discrete items, and the effect of exchange rate changes on taxes.
The Company's consolidated effective income tax rate for the three months ended June 30, 2022 was i54.6%. The consolidated
effective income tax rate for the three months ended June 30, 2022 was affected by the sale of the idled Tanzania operations that resulted in $i1.1 million of additional income taxes. Without this item, them consolidated effective income tax rate for the three months ended June 30, 2022 would have been approximately i36.2%.
Additionally, the sale of the idled Tanzania operations resulted in a $i1.8 million reduction to consolidated interest expense related to the removal of an uncertain tax position.
The Company's consolidated effective income tax rate for the three months ended June 30, 2021 was i23.7%. There
were no discrete items that impacted the income tax provision for the three months ended June 30, 2021.
The
Company's intangible assets primarily consist of capitalized customer-related intangibles, trade names, proprietary developed technology and noncompetition agreements. iThe Company's intangible assets subject to amortization consisted of the following at June 30, 2022 and 2021 and at March 31, 2022:
(1)On October
4, 2021, the Company acquired i100% of the capital stock of Shank's for approximately $i100
million in cash and $i2.4 million of additional working capital on-hand at the date of acquisition. The Shank's acquisition resulted in $i31.5
million of intangible assets. See Note 3 for additional information.
Intangible assets are amortized on a straight-line basis over the asset's estimated useful economic life as noted above.
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 other intangible assets is recorded in selling, general, and administrative expenses in the consolidated statements of income.
i
As of June 30, 2022, the expected future amortization expense for intangible assets is as follows:
Fiscal
Year (in thousands of dollars)
2023 (excluding the three months ended June 30, 2022)
$
i9,263
2024
i11,268
2025
i11,812
2026
i8,452
2027
and thereafter
i48,557
Total expected future amortization expense
$
i89,352
/
NOTE
10. iLEASES
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.
14
i
The
following table sets forth the right-of-use assets and lease liabilities for operating leases included in the Company’s consolidated balance sheet:
The
following table sets forth supplemental information related to operating leases:
Three Months Ended June 30,
(in thousands, except lease term and incremental borrowing rate)
2022
2021
Supplemental
Cash Flow Information
Cash paid for amounts included in the measurement of operating lease liabilities
$
i3,290
$
i2,777
Right-of-use
assets obtained in exchange for new operating leases
i4,527
i2,741
Weighted
Average Remaining Lease Term (years)
i5.31
i5.44
Weighted
Average Collateralized Incremental Borrowing Rate
i5.81
%
i4.12
%
/
NOTE
11. iDERIVATIVES AND HEDGING ACTIVITIES
Universal is exposed to various risks in its worldwide operations and uses derivative financial instruments to manage two specific types of risks – interest rate risk and foreign currency exchange rate risk. Interest rate risk has been managed by entering into interest rate swap agreements, and foreign currency exchange rate risk has been managed by entering into forward and option foreign currency exchange
contracts. However, the Company’s policy also permits other types of derivative instruments. In addition, foreign currency exchange rate risk is also managed through strategies that do not involve derivative instruments, such as using local borrowings and other approaches to minimize net monetary positions in non-functional currencies. The disclosures below provide additional information about the Company’s hedging strategies, the derivative instruments used, and the effects of these activities on the consolidated statements of income and comprehensive income and the consolidated balance sheets. In the consolidated statements of cash flows, the cash flows associated with all of these activities are reported
in net cash provided by operating activities.
Cash Flow Hedging Strategy for Interest Rate Risk
In February 2019, the Company entered into receive-floating/pay-fixed interest rate swap agreements that were designated and qualify as hedges of the exposure to changes in interest payment cash flows created by fluctuations in variable interest rates on two outstanding non-amortizing bank term loans that were funded as part of a new bank credit facility in December 2018. Although no significant ineffectiveness is expected with this hedging strategy, the effectiveness of the interest rate swaps is evaluated on a quarterly basis. At June 30, 2022, the total notional amount of the interest rate swaps was $i370
million, which corresponded with the original outstanding balance of the term loans. During the third quarter of fiscal year 2021, the Company converted $i150 million from the balance in its revolving credit line into the existing term loans, splitting the balance equally between them. At June 30, 2022, the Company is not hedging the interest payments
on the additional $i150 million of term loans. The increase to the principal balance of the term loans does not have an impact to the effectiveness analysis of the interest rate swap agreements.
Previously, the Company had receive-floating/pay-fixed interest rate swap agreements that were designated and qualified as cash flow hedges for two outstanding non-amortizing bank loans that were repaid concurrent with closing on the new bank
credit facility. Those swap agreements were subsequently terminated in February 2019 concurrent with the inception of the new swap agreements. The fair value of the previous swap agreements, approximately $i5.4 million, was received from the counterparties upon termination and was amortized from accumulated other comprehensive loss into earnings as a reduction of interest expense through the original maturity dates of those agreements. As of June 30, 2022, the entire deferred gain has been amortized.
Cash
Flow Hedging Strategy for Foreign Currency Exchange Rate Risk Related to Sales of Crop Inputs, Forecast Purchases of Tobacco, and Related Processing Costs
The majority of the tobacco production in most countries outside the United States where Universal operates is sold in export markets at prices denominated in U.S. dollars. However, sales of crop inputs (such as seeds and fertilizers) to farmers, purchases of tobacco from farmers, and most processing costs (such as labor and energy) in those countries are usually denominated in the local currency. Changes in exchange rates between the U.S. dollar and the local currencies where tobacco is grown and processed affect the ultimate U.S. dollar sales of crop inputs and cost of processed tobacco. From time to time, the Company enters into forward and option contracts
to buy U.S. dollars and sell the local currency at future dates that coincide with the sale of crop inputs to farmers. In the case of forecast purchases of tobacco and the related processing costs, the Company enters into forward and option contracts to sell U.S. dollars and buy the local currency at future dates that coincide with the expected timing of a portion of the tobacco purchases and processing costs. These strategies offset the variability of future U.S.
16
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.
i
The aggregate U.S. dollar notional amount of forward and option contracts entered into for these purposes during the three-month periods in fiscal years
2023 and 2022 was as follows:
Three Months Ended June 30,
(in millions of dollars)
2022
2021
Tobacco
purchases
$
i—
$
i42.0
Processing
costs
i1.0
i10.2
Crop
input sales
i—
i20.8
Total
$
i1.0
$
i73.0
/
Fluctuations
in exchange rates and in the amount and timing of fixed-price orders from customers for their purchases from individual crop years routinely cause variations in the U.S. dollar notional amount of forward contracts entered into from one year to the next. All contracts related to tobacco purchases and crop input sales were designated and qualified as hedges of the future cash flows associated with the forecast purchases of tobacco. As a result, changes in fair values of the forward contracts have been recognized in comprehensive income as they occurred, but only recognized in earnings as a component of cost of goods sold upon sale of the related tobacco to third-party customers.
The
table below presents the expected timing of when the remaining accumulated other comprehensive gains and losses as of June 30, 2022 for cash flows hedges of tobacco purchases and crop input sales are expected to be recognized in earnings.
Hedging Program
Crop Year
Geographic Location(s)
Fiscal Year Earnings
Tobacco purchases
2023
Brazil
2024
Tobacco
purchases
2022
Brazil, Africa
2023
Tobacco purchases
2021
Brazil
2023
Crop input sales
2023
Brazil
2024
Crop input sales
2022
Brazil
2023
Forward
contracts related to processing costs have not been designated as hedges, and gains and losses on those contracts have been recognized in earnings on a mark-to-market basis.
Hedging Strategy for Foreign Currency Exchange Rate Risk Related to Net Local Currency Monetary Assets and Liabilities of Foreign Subsidiaries
Most of the Company’s foreign subsidiaries transact the majority of their sales in U.S.
dollars and finance the majority of their operating requirements with U.S. dollar borrowings, and therefore use the U.S. dollar as their functional currency. These subsidiaries normally have certain monetary assets and liabilities on their balance sheets that are denominated in the local currency. Those assets and liabilities can include cash and cash equivalents, accounts receivable and accounts payable, advances to farmers and suppliers, deferred income tax assets and liabilities, recoverable value-added taxes, operating lease liabilities, and other items. Net monetary assets and liabilities denominated in the local currency are remeasured into U.S. dollars each reporting period, generating gains and losses that the Company records in earnings as a component of selling, general, and administrative
expenses. The level of net monetary assets or liabilities denominated in the local currency normally fluctuates throughout the year based on the operating cycle, but it is most common for monetary assets to exceed monetary liabilities, sometimes by a significant amount. When this situation exists and the local currency weakens against the U.S. dollar, remeasurement losses are generated. Conversely, remeasurement gains are generated on a net monetary asset position when the local currency strengthens against the U.S. dollar. To manage a portion of its exposure to currency remeasurement gains and losses, the Company enters into forward contracts to buy or sell the local currency at future dates coinciding with expected changes in the overall net local currency monetary asset position of the subsidiary.
Gains and losses on the forward contracts are recorded in earnings as a component of selling, general, and administrative expenses for each reporting period as they occur, and thus directly offset the related remeasurement losses or gains in the consolidated statements of income for the notional amount hedged. The Company does not designate these contracts as hedges for accounting purposes. The contracts are generally arranged to hedge the subsidiary's projected exposure to currency remeasurement risk for specified periods of time, and new contracts
are entered as necessary throughout the year to replace previous contracts as they mature. The Company is currently using forward currency contracts to
17
manage its exposure to currency remeasurement risk in Brazil. The total notional amounts of contracts outstanding at June 30, 2022 and 2021, and March 31,
2022, were approximately $i110.1 million, $i16.7 million, and $i59.5
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.
18
Effect of Derivative Financial Instruments on the Consolidated Statements of Income
i
The table below outlines the effects of the Company’s use of derivative
financial instruments on the consolidated statements of income:
Three Months Ended June 30,
(in thousands of dollars)
2022
2021
Cash
Flow Hedges - Interest Rate Swap Agreements
Derivative
Effective Portion of Hedge
Gain
(loss) recorded in accumulated other comprehensive loss
$
i3,901
$
(i1,396)
Gain
(loss) reclassified from accumulated other comprehensive loss into earnings
$
(i1,605)
$
(i2,223)
Gain
on terminated interest rate swaps amortized from accumulated other comprehensive loss into earnings
$
i—
$
i353
Location
of gain (loss) reclassified from accumulated other comprehensive loss into earnings
Gain
(loss) recorded in accumulated other comprehensive loss
$
(i947)
$
i8,233
Gain
(loss) reclassified from accumulated other comprehensive loss into earnings
$
i957
$
(i516)
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
$
(i1,125)
$
i668
Location
of gain (loss) recognized in earnings
Selling, general and administrative expenses
Hedged Item
Description of hedged item
Forecast purchases of tobacco in Brazil and Africa
Derivatives
Not Designated as Hedges - Foreign Currency Exchange Contracts
Gain (loss) recognized in earnings
$
(i1,007)
$
i4,604
Location
of gain (loss) recognized in earnings
Selling, general and administrative expenses
/
For the interest rate swap agreements, the effective portion of the gain or loss on the derivative is recorded in accumulated other comprehensive loss and any ineffective portion is recorded in selling, general and administrative expenses.
For the forward foreign currency exchange contracts
designated as cash flow hedges of tobacco purchases in Brazil and Africa and the crop input sales in Brazil, a net hedge gain of approximately $i4.8 million remained in accumulated other comprehensive loss at June 30, 2022. That balance reflects gains and losses on contracts related to the 2023, 2022, and 2021 Brazil crops, the 2022 Africa crop, and the 2022 Brazil crop
input sales, less the amounts reclassified to earnings related to tobacco sold through June 30, 2022. Based on the hedging strategy, as the gain or loss is recognized in earnings, it is expected to
19
be offset by a change in the direct cost for the tobacco or by a change in sales prices if the strategy has been mandated by the customer. Generally, margins on the sale of the tobacco will not be significantly affected.
Effect of Derivative Financial Instruments on the Consolidated Balance Sheets
i
The
table below outlines the effects of the Company’s derivative financial instruments on the consolidated balance sheets at June 30, 2022 and 2021, and March 31, 2022:
Substantially
all of the Company's foreign exchange derivative instruments are subject to master netting arrangements whereby the right to offset occurs in the event of default by a participating party. The Company has elected to present these contracts on a gross basis in the consolidated balance sheets.
NOTE 12. iFAIR
VALUE MEASUREMENTS
Universal measures certain financial and nonfinancial assets and liabilities at fair value based on applicable accounting guidance. The financial assets and liabilities measured at fair value include money market funds, trading securities associated with deferred compensation plans, interest rate swap agreements, forward foreign currency exchange contracts and acquisition-related contingent consideration obligations. The application of the fair value guidance to nonfinancial assets and liabilities primarily includes the determination of fair values for goodwill and long-lived assets when indicators of potential impairment are present.
Under the accounting guidance, fair value is defined as the
price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The framework for measuring fair value is based on a fair value hierarchy that distinguishes between observable inputs and unobservable inputs. Observable inputs are based on market data obtained from independent sources. Unobservable inputs require the Company to make its own assumptions about the value placed on an asset or liability by market participants because little or no market data exists.
There are three levels within the fair value hierarchy:
Level
Description
1
quoted
prices in active markets for identical assets or liabilities that the Company has the ability to access as of the reporting date;
2
quoted prices in active markets for similar assets or liabilities, or quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability; and
3
unobservable inputs
for the asset or liability.
20
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
i
At June 30, 2022 and 2021, and at March 31,
2022, 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:
Total
financial liabilities measured and reported at fair value
$
i—
$
i—
$
i4,425
$
i—
$
i4,425
Money
market funds
The fair value of money market funds, which are reported in cash and cash equivalents in the consolidated balance sheets, is based on NAV, which is the amount at which the funds are redeemable and is used as a practical expedient for fair value. These funds are not classified in the fair value hierarchy, but are disclosed as part of the fair value table above.
Trading securities associated with deferred compensation plans
Trading securities represent mutual fund investments that are matched to employee deferred compensation obligations. These investments are bought and sold as employees defer compensation, receive distributions, or make changes in the funds underlying their accounts. Quoted market prices
(Level 1) are used to determine the fair values of the mutual funds.
Interest rate swap agreements
The fair values of interest rate swap agreements are determined based on dealer quotes using a discounted cash flow model matched to the contractual terms of each instrument. Since inputs to the model are observable and significant judgment is not required in determining the fair values, interest rate swaps are classified within Level 2 of the fair value hierarchy.
The fair values of forward and option foreign currency exchange
contracts are also determined based on dealer quotes using a discounted cash flow model matched to the contractual terms of each instrument. Since inputs to the model are observable and significant judgment is not required in determining the fair values, forward and option foreign currency exchange contracts are classified within Level 2 of the fair value hierarchy.
The Company estimates the fair value of acquisition-related contingent consideration obligations by applying an income
approach model that utilizes probability-weighted discounted cash flows. The Company acquired FruitSmart, Inc. in fiscal year 2020 and recognized a contingent consideration liability of $i6.7 million on the date of acquisition. Each period the Company evaluates the fair value of the acquisition-related contingent
consideration obligations. During the year ended March 31, 2021, the evaluation resulted in a reduction of $i4.2 million of contingent consideration of the original $i6.7
million liability recorded. During the year ended March 31, 2022, the evaluation of the contingent liability resulted in a reduction of the remaining $i2.5 million contingent consideration recorded. Significant judgment is applied to this model and therefore the acquisition-related contingent consideration obligation
was classified within Level 3 of the fair value hierarchy.
22
i
A reconciliation of the change in the balance of the acquisition-related contingent consideration obligation (Level 3) for the three months ended June 30, 2022 and 2021
is provided below.
Change
in fair value of contingent consideration liability
i
i—
Balance
at end of period
$
i—
$
i2,532
/
Long-term
Debt
i
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 June 30, 2022, and 2021 and March 31, 2022:
The
Company estimates the fair value of its long-term debt using Level 2 inputs which are based upon quoted market prices for the same or similar obligations or on calculations that are based on the current interest rates available to the Company for debt of similar terms and maturities.
Nonrecurring Fair Value Measurements
Assets and liabilities that are measured at fair value on a nonrecurring basis primarily relate to long-lived assets, right-of-use operating lease assets and liabilities, goodwill and intangibles, and other current and noncurrent assets. These assets and liabilities fair values are also evaluated for impairment when potential indicators of impairment exist. Accordingly,
the nonrecurring measurement of the fair value of these assets and liabilities are classified within Level 3 of the fair value hierarchy.
Acquisition Accounting for Business Combinations
The Company accounts for acquisitions qualifying under ASC 805, "Business Combinations," which requires, among other things, that the assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. The fair values of consideration transferred and net assets acquired are determined using a combination of Level 2 and Level 3 inputs as specified in the fair value hierarchy in ASC 820, “Fair Value Measurements and Disclosures.”The
Company believes that the fair values assigned to the assets acquired and liabilities assumed are based on reasonable assumptions.
Long-Lived Assets
The Company reviews long-lived assets for impairment whenever events, changes in business conditions, or other circumstances provide an indication that such assets may be impaired.
NOTE 13. iPENSION
AND OTHER POSTRETIREMENT BENEFIT PLANS
The Company sponsors several defined benefit pension plans covering eligible U.S. salaried employees and certain foreign and other employee groups. These plans provide retirement benefits based primarily on employee compensation and years of service. The Company also sponsors defined benefit plans that provide postretirement health and life insurance benefits for eligible U.S. employees attaining specific age and service levels, although postretirement life insurance is no longer provided for active employees.
23
i
The components of the Company’s net periodic benefit cost were as follows:
Pension
Benefits
Other Postretirement Benefits
Three Months Ended June 30,
Three Months Ended June 30,
(in thousands of dollars)
2022
2021
2022
2021
Service
cost
$
i1,545
$
i1,650
$
i32
$
i47
Interest
cost
i2,335
i2,259
i241
i239
Expected
return on plan assets
(i3,324)
(i3,385)
(i19)
(i22)
Net
amortization and deferral
i1,001
i976
(i172)
(i115)
Net
periodic benefit cost
$
i1,557
$
i1,500
$
i82
$
i149
/
During
the three months ended June 30, 2022, the Company made contributions of approximately $i0.9 million to its pension plans. Additional contributions of $i3.3
million are expected during the remaining nine months of fiscal year 2023.
NOTE 14. iSTOCK-BASED COMPENSATION
Universal’s shareholders have approved the Executive Stock Plan (“Plan”) under which officers, directors, and employees of the
Company may receive grants and awards of common stock, restricted stock, restricted stock units (“RSUs”), performance share units (“PSUs”), stock appreciation rights, incentive stock options, and non-qualified stock options. The Company’s practice is to award grants of stock-based compensation to officers on an annual basis at the first regularly-scheduled meeting of the Compensation Committee of the Board of Directors (the “Compensation Committee”) in the fiscal year following the public release of the Company’s financial results for the prior year. The Compensation Committee administers the Company’s Plan consistently, following previously defined guidelines. In recent years, the Compensation
Committee has awarded only grants of RSUs and PSUs. Awards of restricted stock, RSUs, and PSUs are currently outstanding under the Plan.
RSUs awarded prior to fiscal year 2022 vest i5 years after the grant date and those awarded beginning in fiscal year 2022 vest i3
years after the grant date. After vesting RSUs are paid out in shares of common stock. Under the terms of the RSU awards, grantees receive dividend equivalents in the form of additional RSUs that vest and are paid out on the same date as the original RSU grant. The PSUs vest at the end of a performance period of ithree years that begins with the year of the grant, are paid out in shares of common stock shortly after the vesting date, and do not carry rights to dividends or dividend equivalents prior to vesting. Shares
ultimately paid out under PSU grants are dependent on the achievement of predetermined performance measures established by the Compensation Committee and can range from izero to i150%
of the stated award. The Company’s outside directors receive RSUs following the annual meeting of shareholders. RSUs awarded to outside directors prior to fiscal year 2020 vest i3 years after the grant date and those granted beginning in fiscal year 2020 vest i1
year after the grant date. Restricted shares vest upon the individual’s retirement from service as a director.
i
During the three-month periods ended June 30, 2022 and 2021, Universal issued the following stock-based awards, representing the regular annual grants to officers and outside directors of the
Company:
Fair
value expense for restricted stock units is recognized ratably over the period from grant date to the earlier of: (1) the vesting date of the award, or (2) the date the grantee is eligible to retire without forfeiting the award. For employees who are already eligible to retire at the date an award is granted, the total fair value of all non-forfeitable awards is recognized as expense
24
at the date of grant. As a result, Universal typically incurs higher stock compensation expense in the first quarter of each fiscal year when grants are awarded to officers than in the other three quarters. For PSUs, the Company generally recognizes fair value expense ratably over the performance and
vesting period based on management’s judgment of the ultimate award that is likely to be paid out based on the achievement of the predetermined performance measures. The Company accounts for forfeitures of stock-based awards as they occur. For the three-month periods ended June 30, 2022 and 2021, the Company recorded total stock-based compensation expense of approximately $i3.7
million and $i3.0 million, respectively. The Company expects to recognize stock-based compensation expense of approximately $i3.6
million during the remaining nine months of fiscal year 2023.
NOTE 15. iOPERATING SEGMENTS
The Company conducts operations across two reportable operating segments, Tobacco Operations and Ingredients Operations.
The Tobacco Operations segment activities involve selecting, procuring, processing, packing, storing, shipping, and financing leaf tobacco for sale to, or for the account of, manufacturers of consumer tobacco products throughout the world. Through various operating subsidiaries located in tobacco-growing countries around the world and significant ownership interests in unconsolidated affiliates, the Company processes and/or sells flue-cured and burley tobaccos, dark air-cured tobaccos, and oriental tobaccos. Flue-cured, burley, and oriental tobaccos are used principally in the manufacture of cigarettes, and dark air-cured tobaccos are used mainly in the manufacture of cigars, pipe tobacco,
and smokeless tobacco products. Some of these tobacco types are also increasingly used in the manufacture of non-combustible tobacco products that are intended to provide consumers with an alternative to traditional combustible products. The Tobacco Operations segment also provides physical and chemical product testing and smoke testing for tobacco customers. A substantial portion of the Company’s Tobacco Operations' revenues are derived from sales to a limited number of large, multinational cigarette and cigar manufacturers.
The Ingredients Operations segment provides its customers with a broad variety of plant-based ingredients for both human and pet consumption. The Ingredients Operations segment utilizes a variety of value-added manufacturing processes converting raw materials into a wide spectrum
of fruit and vegetable juices, concentrates, dehydrated products, flavors, and botanical extracts. Customers for the Ingredients Operations segment include large multinational food and beverage companies, smaller independent manufacturers, and retail organizations. FruitSmart, Silva, and Shank's are the primary operations for the Ingredients Operations segment. FruitSmart manufactures fruit and vegetable juices, purees, concentrates, essences, fibers, seeds, seed oils, and seed powders. Silva is primarily a dehydrated product manufacturer of fruit and vegetable based flakes, dices, granules, powders, and blends. Shank's manufactures flavors and botanical extracts and also offers bottling and custom packaging for customers.
25
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. iOperating results for the Company’s reportable segments for each period presented in the consolidated statements of income and comprehensive income were as follows.
Three
Months Ended June 30,
(in thousands of dollars)
2022
2021
SALES AND OTHER OPERATING REVENUES
Tobacco
Operations
$
i348,063
$
i293,843
Ingredients
Operations
i81,759
i56,186
Consolidated
sales and other operating revenues
$
i429,822
$
i350,029
OPERATING
INCOME
Tobacco Operations
$
i8,116
$
i8,889
Ingredients
Operations
i4,597
i4,349
Segment
operating income
i12,713
i13,238
Deduct:
Equity in pretax (earnings) loss of unconsolidated affiliates (1)
i553
(i609)
Restructuring
and impairment costs (2)
i—
(i2,024)
Consolidated
operating income
$
i13,266
$
i10,605
(1)Equity
in pretax earnings (loss) of unconsolidated affiliates is included in segment operating income (Tobacco Operations), but is reported below consolidated operating income and excluded from that total in the consolidated statements of income and comprehensive income.
(2)Restructuring and impairment costs are excluded from segment operating income, but are included in consolidated operating income in the consolidated statements of income and comprehensive income. See Note 4 for additional information.
26
NOTE 16. iACCUMULATED
OTHER COMPREHENSIVE INCOME (LOSS)
iThe following table summarizes the changes in the accumulated balances for each component of accumulated other comprehensive income (loss) attributable to the Company for the three months ended June 30, 2022 and 2021:
Three
Months Ended June 30,
(in thousands of dollars)
2022
2021
Foreign currency translation:
Balance at beginning of year
$
(i40,965)
$
(i35,135)
Other
comprehensive income (loss) attributable to Universal Corporation:
Net gain (loss) on foreign currency translation
(i6,888)
i1,719
Less:
Net (gain) loss on foreign currency translation attributable to noncontrolling interests
i329
(i29)
Other
comprehensive income (loss) attributable to Universal Corporation, net of income taxes
(i6,559)
i1,690
Balance
at end of period
$
(i47,524)
$
(i33,445)
Foreign
currency hedge:
Balance at beginning of year
$
i3,579
$
(i414)
Other
comprehensive income (loss) attributable to Universal Corporation:
Net gain (loss) on derivative instruments (net of tax (expense) benefit of $i25 and $(i1,566))
(i1,611)
i5,698
Reclassification
of (gain) loss to earnings (net of tax expense (benefit) of $i218 and $(i108))(1)
(i508)
i284
Other
comprehensive income (loss) attributable to Universal Corporation, net of income taxes
(i2,119)
i5,982
Balance
at end of period
$
i1,460
$
i5,568
Interest
rate hedge:
Balance at beginning of year
$
(i860)
$
(i19,480)
Other
comprehensive income (loss) attributable to Universal Corporation:
Net gain (loss) on derivative instruments (net of tax (expense) benefit of $(i819) and $i293)
i3,082
(i1,103)
Reclassification
of (gain) loss to earnings (net of tax expense (benefit) of $(i337) and $(i392))(2)
i1,268
i1,477
Other
comprehensive income (loss) attributable to Universal Corporation, net of income taxes
i4,350
i374
Balance
at end of period
$
i3,490
$
(i19,106)
Pension
and other postretirement benefit plans:
Balance at beginning of year
$
(i46,065)
$
(i52,008)
Other
comprehensive income (loss) attributable to Universal Corporation:
Amortization included in earnings (net of tax expense (benefit) of $(i144)
and $(i175))(3)
i573
i759
Other
comprehensive income (loss) attributable to Universal Corporation, net of income taxes
i573
i759
Balance
at end of period
$
(i45,492)
$
(i51,249)
Total
accumulated other comprehensive loss at end of period
$
(i88,066)
$
(i98,232)
(1) Gain
(loss) on foreign currency cash flow hedges related to forecast purchases of tobacco and crop input sales is reclassified from accumulated other comprehensive income (loss) to cost of goods sold when the tobacco is sold to customers. See Note 11 for additional information.
(2) Gain (loss) on interest rate cash flow hedges is reclassified from accumulated other comprehensive income (loss) to interest expense when the related interest payments are made on the underlying debt, or as amortized to interest expense over the period to original maturity for terminated swap agreements. See Note 11 for additional information.
(3) This accumulated other comprehensive income (loss) component is included in the computation of net periodic benefit cost. See Note 13 for additional information.
27
NOTE 17. iCHANGES IN SHAREHOLDERS' EQUITY AND NONCONTROLLING INTERESTS IN SUBSIDIARIES
i
A
reconciliation of the changes in Universal Corporation shareholders’ equity and noncontrolling interests in subsidiaries for the three months ended June 30, 2022 and 2021 is as follows:
Withholding
of shares from stock-based compensation for grantee income taxes
(i2,090)
i—
(i2,090)
(i2,432)
i—
(i2,432)
Dividend
equivalents on RSUs
i266
i—
i266
i264
i—
i264
Changes
in retained earnings
Net income
i6,830
(i4,029)
i2,801
i6,357
(i2,445)
i3,912
Cash
dividends declared
Common stock
(i19,447)
i—
(i19,447)
(i19,170)
i—
(i19,170)
Dividend
equivalents on RSUs
(i266)
i—
(i266)
(i264)
i—
(i264)
Other
comprehensive income (loss)
(i3,755)
(i329)
(i4,084)
i8,805
i29
i8,834
Other
changes in noncontrolling interests
Dividends paid to noncontrolling shareholders
i—
(i5,145)
(i5,145)
i—
(i980)
(i980)
Other
i—
(i427)
(i427)
i—
i—
i—
Balance
at end of period
$
i1,325,763
$
i34,296
$
i1,360,059
$
i1,303,825
$
i37,730
$
i1,341,555
/
28
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Unless the context otherwise requires, the terms “we,”“our,”“us” or “Universal” or the “Company” refer to Universal Corporation together with its subsidiaries. This Quarterly Report on Form 10-Q and the following “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Among other
things, these statements relate to the Company’s financial condition, results of operation, and future business plans, operations, opportunities, and prospects. In addition, the Company and its representatives may from time to time make written or oral forward-looking statements, including statements contained in other filings with the Securities and Exchange Commission and in reports to shareholders. These forward-looking statements are generally identified by the use of words such as we “expect,”“believe,”“anticipate,”“could,”“should,”“may,”“plan,”“will,”“predict,”“estimate,” and similar expressions or words of similar import. These forward-looking statements are based upon management’s current knowledge and assumptions
about future events and involve risks and uncertainties that could cause actual results, performance, or achievements to be materially different from any anticipated results, prospects, performance, or achievements expressed or implied by such forward-looking statements. Such risks and uncertainties include, but are not limited to: impacts of the COVID-19 pandemic; success in pursuing strategic investments or acquisitions and integration of new businesses and the impact of these new businesses on future results; product purchased not meeting quality and quantity requirements; reliance on a few large customers; our ability to maintain effective information systems and safeguard confidential information; anticipated levels of demand for and supply of our products and services; costs incurred in providing these products and services; timing of shipments to customers; changes in market structure; government regulation and other stakeholder expectations; economic and political
conditions in the countries in which we and our customers operate, including the ongoing impacts from the conflict in Ukraine; product taxation; industry consolidation and evolution; changes in exchange rates and interest rates; impacts of regulation and litigation on our customers; industry-specific risks related to our plant-based ingredient businesses; exposure to certain regulatory and financial risks related to climate change; changes in estimates and assumptions underlying our critical accounting policies; the promulgation and adoption of new accounting standards; new government regulations and interpretation of existing standards and regulations; and general economic, political, market, and weather conditions. For a further description of factors that may cause actual results to differ materially from such forward-looking statements, see Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended March
31, 2022. We caution investors not to place undue reliance on any forward-looking statements as these statements speak only as of the date when made, and we undertake no obligation to update any forward-looking statements made in this report. This Form 10-Q should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended March 31, 2022.
Results of Operations
Amounts described as net income (loss) and earnings (loss) per diluted share in the following discussion are attributable to Universal Corporation and exclude earnings related to non-controlling interests in subsidiaries. Adjusted operating income (loss), adjusted
net income (loss) attributable to Universal Corporation, adjusted diluted earnings (loss) per share, and the total for segment operating income (loss) referred to in this discussion are non-GAAP financial measures. These measures are not financial measures calculated in accordance with GAAP and should not be considered as substitutes for operating income (loss), net income (loss) attributable to Universal Corporation, diluted earnings (loss) per share, cash from operating activities or any other operating or financial performance measure calculated in accordance with GAAP, and may not be comparable to similarly-titled measures reported by other companies. A reconciliation of adjusted operating income (loss) to consolidated operating (income), adjusted net income (loss) attributable to Universal Corporation to consolidated net income (loss) attributable to Universal Corporation and adjusted diluted earnings (loss) per share to diluted earnings (loss) per share are provided
in Other Items below. In addition, we have provided a reconciliation of the total for segment operating income (loss) to consolidated operating income (loss) in Note 15. "Operating Segments" to the consolidated financial statements. Management evaluates the consolidated Company and segment performance excluding certain significant charges or credits. We believe these non-GAAP financial measures, which exclude items that we believe are not indicative of our core operating results, provide investors with important information that is useful in understanding our business results and trends.
Overview
We are pleased with our start to fiscal year 2023. In the quarter ended June 30, 2022, we continued to effectively navigate increased costs, particularly
rising prices for green leaf tobacco, and shipping constraints. We succeeded in getting a significant amount of carryover tobacco shipped out of Brazil, and our plant-based ingredients platform continued to exceed our expectations.
Results for our Tobacco Operations segment were down modestly in the quarter ended June 30, 2022, compared to the quarter ended June 30, 2021, largely on unfavorable foreign currency comparisons due to the strong U.S. dollar. Demand for leaf tobacco remains strong, and flue-cured, burley, oriental, and wrapper tobacco remain in an undersupply position. We are also
29
anticipating
a reduction in African burley tobacco crop sizes due to weather conditions there. While we were able to ship a greater amount of carryover tobacco out of Brazil in the quarter ended June 30, 2022, compared to the quarter ended June 30, 2021, we continue to face a challenging logistical environment. We are also continuing to see increased costs for leaf tobacco across virtually all markets.
Our Ingredients Operations segment performed well in the first quarter of fiscal year 2023. Sales for all of our businesses in this segment were up in the quarter ended June 30, 2022, compared to the quarter ended June 30, 2021, with strong volumes for both human and pet food product categories. In
our Ingredients Operations segment, we are also seeing rising costs for raw materials and the impact of higher freight costs. Synergies captured across the plant-based ingredients platform continue to make good progress. Our businesses are working together on new product development and strategies to serve the platform’s diverse customers which utilize our portfolio of plant-based ingredients and botanical extracts and flavorings offerings. Results for the Ingredients Operations segment for the quarter ended June 30, 2022, include our October 2021 purchase of Shank’s Extracts, LLC (“Shank’s”).
Our elevated borrowing levels reflect our acquisition of Shank’s as well as higher tobacco inventory levels, largely due to higher green leaf tobacco prices and tobacco shipment timing. We expect our seasonal borrowing levels to decrease
in the second half of our fiscal year in line with our tobacco crop shipments, which are weighted to that period.
At Universal, we are committed to providing transparency around our sustainability efforts and goals. We recently completed our submission to the global non-profit organization CDP regarding climate change, forestry, and water risk to provide more information on our achievements in these areas to our stakeholders. We are also excited to announce that we have engaged a third party to aid in analyzing and communicating our climate change policy as well as to provide independent, third party verification of our results.
FINANCIAL
HIGHLIGHTS
Three Months Ended June 30,
Change
(in millions of dollars, except per share data)
2022
2021
$
%
Consolidated
Results
Sales and other operating revenue
$
429.8
$
350.0
$
79.8
23
%
Cost of goods sold
$
350.1
$
287.6
$
62.5
22
%
Gross
Profit Margin
18.5
%
17.8
%
70 bps
Selling, general and administrative expenses
$
66.5
$
49.8
$
16.6
33
%
Restructuring
and impairment costs
$
—
$
2.0
$
(2.0)
(100)
%
Operating income (as reported)
$
13.3
$
10.6
$
2.7
25
%
Adjusted
operating income (non-GAAP)*
$
13.3
$
12.6
$
0.6
5
%
Diluted earnings per share (as reported)
$
0.27
$
0.26
$
0.01
4
%
Adjusted
diluted earnings per share (non-GAAP)*
$
0.25
$
0.30
$
(0.05)
(17)
%
Segment Results
Tobacco operations sales and other operating revenues
$
348.1
$
293.8
$
54.2
18
%
Tobacco
operations operating income
$
8.1
$
8.9
$
(0.8)
(9)
%
Ingredients operations sales and other operating revenues
$
81.8
$
56.2
$
25.6
46
%
Ingredient
operations operating income
$
4.6
$
4.3
$
0.2
6
%
*See Reconciliation of Certain Non-GAAP Financial Measures in Other Items below.
Net income for the quarter ended June 30, 2022, was $6.8 million, or $0.27 per diluted share, compared with $6.4 million, or $0.26 per diluted share, for
the quarter ended June 30, 2021. Excluding restructuring and impairment costs and certain other non-recurring items, detailed in Other Items below, net income and diluted earnings per share decreased by $1.2 million and $0.05, respectively, for the quarter ended June 30, 2022, compared to the quarter ended June 30, 2021. Operating income of $13.3 million for the quarter ended June 30, 2022, increased by $2.7 million, compared to operating income of $10.6 million for the quarter ended June 30, 2021. Adjusted operating income, detailed in Other Items below, of $13.3 million increased by $0.6 million for the first quarter of fiscal year 2023, compared to adjusted operating income of $12.6 million for the first quarter of
fiscal year 2022.
30
Consolidated revenues increased by $79.8 million to $429.8 million for the three months ended June 30, 2022, compared to the same period in fiscal year 2022, on higher carryover tobacco sales volumes and prices as well as the addition of Shank’s in October 2021 in the Ingredients Operations segment.
Tobacco Operations
The first fiscal quarter is historically a slow quarter for our tobacco businesses. Operating income for the Tobacco Operations segment decreased by $0.8 million to $8.1 million
for the quarter ended June 30, 2022, compared with the quarter ended June 30, 2021. Although tobacco sales volumes were up modestly, Tobacco Operations segment results were down largely on unfavorable foreign currency comparisons due to the strong U.S. dollar in the quarter ended June 30, 2022, compared to the same quarter in the prior fiscal year. Carryover crop shipments were higher in Brazil in the quarter ended June 30, 2022, compared to the same quarter in the prior fiscal year, largely due to increased shipping availability. In Africa, carryover shipments were down in the quarter ended June 30, 2022, compared to the quarter ended June 30, 2021, on smaller crops grown
in fiscal year 2022. Selling, general, and administrative expenses for the Tobacco Operations segment were higher in the quarter ended June 30, 2022, compared to June 30, 2021, primarily on unfavorable foreign currency comparisons. Revenues for the Tobacco Operations segment of $348.1 million for the quarter ended June 30, 2022, were up $54.2 million, compared to the same period in the prior fiscal year, on higher tobacco sales volumes and prices.
Ingredients Operations
Operating income for the Ingredients Operations segment was $4.6 million for the quarter ended June 30, 2022, compared to $4.3 million for
the quarter ended June 30, 2021. Results for the segment improved year-over-year on the inclusion of the October 2021 Shank’s acquisition. Sales for all of our businesses in this segment were up in the quarter ended June 30, 2022, compared to the quarter ended June 30, 2021, with continued strong volumes for both human and pet food product categories. Selling, general, and administrative expenses for this segment increased in the quarter ended June 30, 2022, compared to the same quarter in the prior fiscal year, on the addition of Shank’s as well as higher labor costs. In the quarter ended June 30, 2022, the allocation of corporate overhead charges to the Ingredients Operations segment was also up, compared to the quarter
ended June 30, 2021. Revenues for the Ingredients Operations segment of $81.8 million for the quarter ended June 30, 2022, were up $25.6 million compared to the quarter ended June 30, 2021, largely on the addition of the revenues for Shank’s as well as higher sales volumes and prices.
Other Items
Cost of goods sold in the quarter ended June 30, 2022, increased by 22% to $350.1 million, compared with the same period in the prior fiscal year, consistent with the similar percentage increase in revenues for the current period. Selling, general, and administrative costs for the quarter ended June
30, 2022, increased by $16.6 million to $66.5 million, compared to the same period in the prior fiscal year, primarily on additional costs from the acquisition of Shank’s in the Ingredients Operations segment and unfavorable foreign currency comparisons as well as inflationary increases in compensation and travel costs. Unfavorable foreign currency comparisons were approximately $6.6 million in the quarter ended June 30, 2022, compared to the quarter ended June 30, 2021. Interest expense for the quarter ended June 30, 2022, increased by $0.5 million to $6.7 million on increased costs from higher debt balances and interest rates, partially offset by a $1.8 million interest expense accrual reversal related to the sale of our previously idled operations in Tanzania.
For
the three months ended June 30, 2022, the Company’s consolidated effective income tax rate on pre-tax income was 54.6%. The consolidated effective income tax rate for the three months ended June 30, 2022 was affected by the sale of our Tanzania operations which resulted in $1.1 million of additional income taxes. Without this item, the consolidated effective income tax rate for the three months ended June 30, 2022 would have been approximately 36.2%. Additionally, the sale of our Tanzania operations resulted in a $1.8 million reduction to consolidated interest expense related to an uncertain tax position.
For the three months ended June
30, 2021, the Company’s effective tax rate on pre-tax income was 23.7%.
Reconciliation of Certain Non-GAAP Financial Measures
The following tables set forth certain non-recurring items included in reported results to reconcile adjusted operating income to consolidated operating income and adjusted net income to net income attributable to Universal Corporation:
31
Adjusted
Operating Income Reconciliation
Three Months Ended June 30,
(in thousands)
2022
2021
As Reported: Consolidated operating income
$
13,266
$
10,605
Restructuring
and impairment costs(1)
—
2,024
Adjusted operating income
$
13,266
$
12,629
Adjusted
Net Income and Diluted Earnings Per Share
As Reported: Net income available to Universal Corporation
$
6,830
$
6,357
Restructuring
and impairment costs(1)
—
1,005
Interest expense reversal on uncertain tax position and income tax from sale of operations
in Tanzania
(684)
—
Adjusted net income available to Universal Corporation
$
6,146
$
7,362
As
reported: Diluted earnings per share
$
0.27
$
0.26
As adjusted: Diluted earnings per share
$
0.25
$
0.30
(1)Restructuring
and impairment costs are included in Consolidated operating income in the consolidated statements of income, but excluded for purposes of Adjusted operating income, Adjusted net income available to Universal Corporation, and Adjusted diluted earnings per share. See Note 4 for additional information.
COVID-19 Pandemic Impact
On March 11, 2020, the World Health Organization declared the coronavirus (“COVID-19”) a pandemic. Foreign governmental organizations and governmental organizations in the United States have taken various actions to combat the spread of COVID-19 and its subsequent variants, including imposing stay-at-home orders, closing “non-essential” businesses and their operations, and restricting international travel. We continue
to closely monitor developments related to the COVID-19 pandemic and have taken and continue to take steps intended to mitigate the potential risks and impacts to us. It is paramount that our employees who operate our businesses are safe and informed. We have assessed and regularly update our existing business continuity plans for our business in the context of this pandemic. For example, we took precautions during the pandemic with regard to employee and facility hygiene, imposed travel limitations on our employees, implemented work-from-home procedures, and we continue to assess and reevaluate protocols designed to protect our employees, customers and the public.
We continue to work with our suppliers to mitigate the impacts to our supply chain due to the pandemic. To date, we have not experienced a material impact to our supply chain, although the COVID-19 pandemic resulted in delays
in certain operations during fiscal year 2021. Since March 2020, we have at times also experienced increased volatility in foreign currency exchange rates, which we believe has in part related to the uncertainties from COVID-19, as well as actions taken by governments and central banks in response to COVID-19. We are currently seeing and monitoring some logistical constraints around worldwide vessel and container availability and increased costs stemming from the COVID-19 pandemic.
We believe we currently have sufficient liquidity to meet our current obligations and our business operations remain fundamentally unchanged other than shipping delays, which could continue to impact quarterly comparisons. This remains, however, a rapidly evolving situation, and we cannot predict the extent, resurgence, or duration of the COVID-19 pandemic, the effects of it on the global, national or local
economy, including the impacts on our ability to access capital, or its effects on our business, financial position, results of operations, and cash flows. We continue to monitor developments affecting our employees, customers and operations. We will take additional steps and reevaluate current protocols to address the spread of COVID-19 and its impacts, as necessary, and remain thankful for the hard work of our employees and the continued support of our customers, growers, and other partners during these challenging times.
32
Liquidity and Capital Resources
Overview
Our
first fiscal quarter is usually a period of significant working capital investment in both Africa and South America as tobacco crops are delivered by farmers.We funded our working capital needs in the quarter ended June 30, 2022, using a combination of cash on hand, short-term borrowings, customer advances, and operating cash flows. We are expecting higher and longer duration working capital needs in fiscal year 2023 compared to historical levels due to increased costs, specifically higher leaf tobacco costs, and tobacco shipment timing.Tobacco crop shipments are expected to be weighted to the second half of our fiscal year.
Our liquidity and operating capital resource requirements are predominantly short term in nature and primarily relate
to working capital for tobacco crop purchases. Working capital needs are seasonal within each geographic region. The geographic dispersion and the timing of working capital needs permit us to predict our general level of cash requirements, although tobacco crop size, prices paid to farmers, shipment and delivery timing, and currency fluctuations affect requirements each year. Peak working capital requirements are generally reached during the first and second fiscal quarters. Each geographic area follows a cycle of buying, processing, and shipping tobacco, and in many regions, we also provide agricultural materials to farmers during the growing season. The timing of the elements of each cycle is influenced by such factors as local weather conditions and individual customer shipping requirements, which may change the level or the duration of crop financing. Despite a predominance of short-term needs, we maintain a portion of our total debt as long-term to reduce liquidity
risk. We also periodically have large cash balances that we utilize to meet our working capital requirements.
To date, COVID-19 has not had a significant impact on our operations, and we currently anticipate our current cash balances, cash flows from operations, and our available sources of liquidity will be sufficient to meet our cash requirements for at least the next twelve months. This continues, however, to be a rapidly evolving situation, and we cannot predict the extent, resurgence, or duration of the ongoing COVID-19 pandemic, the effects of it on the global, national or local economy, including the impacts on our ability to access capital, or its effects on our business, financial position, results of operations, and cash flows. We continue to monitor developments affecting our employees, customers and operations.
Operating
Activities
We used $225.8 million in net cash flows from our operations during the quarter ended June 30, 2022.That amount was $98.8 million higher than during the same period in fiscal year 2022.Our working capital needs to fund our operations in the quarter ended June 30, 2022, were higher, compared to the quarter ended June 30, 2021, primarily on higher green tobacco costs as well as tobacco shipment and purchase timing.Tobacco inventory levels increased by $258.0 million from March 31, 2022 levels to $1.1 billion at June
30, 2022, on seasonal leaf purchases.Tobacco inventory levels were $206.1 million above June 30, 2021 levels, mainly due to higher green tobacco costs and tobacco shipment timing. We generally do not purchase material quantities of tobacco on a speculative basis.However, when we contract directly with tobacco farmers, we are often obligated to buy all stalk positions, which may contain less marketable leaf styles.At June 30, 2022, our uncommitted tobacco inventories were $164.3 million, or about 15% of total tobacco inventory, compared to $130.1 million, or about 16% of our March 31, 2022
tobacco inventory, and $158.6 million, or about 18% of our June 30, 2021 tobacco inventory.While we target committed inventory levels of 80% or more of total tobacco inventory, the level of these uncommitted inventory percentages is influenced by timing of farmer deliveries of new crops, as well as the receipt of customer orders.
Our balance sheet accounts reflected seasonal patterns in the quarter ended June 30, 2022, on deliveries of crops by farmers in both South America and Africa.Accounts receivable decreased by $66.3 million from March 31, 2022 levels, as we used collections on receivables, to fund seasonal working capital needs.Advances
to suppliers were $99.9 million at June 30, 2022, a reduction of $30.0 million from March 31, 2022, as tobacco crops were delivered in payment on some of those balances, net of new advances on current tobacco crops.Accounts receivable—unconsolidated affiliates were up $44.0 million in the three months ended June 30, 2022, on the timing of tobacco crop purchases and shipments.Notes payable and overdrafts were up $272.0 million from March 31, 2022 levels, on increased notes payable usage rather than cash on hand to fund seasonal working capital needs. Cash balances available at March
31, 2022, were reduced due to the Shank's acquisition and working capital requirements in fiscal year 2022.
33
Accounts receivable were up $39.2 million for the quarter ended June 30, 2022, compared to the same quarter in the prior fiscal year, on the timing of tobacco crop purchases and shipments as well as higher leaf tobacco costs.Advances to suppliers were up $29.5 million at June 30, 2022, compared to at June 30, 2021, partly due to higher crop input costs.Inventories—Other
were also up in the quarter ended June 30 2022, compared to the quarter ended June 30, 2021, on our acquisition of Shank’s.Notes payable and overdrafts were up $301.3 million compared to June 30, 2021 levels, on higher tobacco inventory costs and the acquisition of Shank’s in October 2021.Accounts payable and accrued expenses were up $77.6 million for the quarter ended June 30, 2022 compared to the quarter ended June 30, 2021, primarily on tobacco purchases.
Investing Activities
Our capital allocation strategy focuses on four strategic
priorities: strengthening and investing for growth in our leaf tobacco business; increasing our strong dividend; exploring growth opportunities for our plant-based ingredientsplatform that utilize our assets and capabilities; and returning excess capital to our shareholders.In deciding where to invest capital resources, we look for opportunities where we believe we can earn an adequate return as well as leverage our assets and expertise or enhance our farmer base.Our capital expenditures are generally limited to those that add value, replace or maintain equipment, increase efficiency, or position us for future growth.During the quarters ended June 30, 2022 and 2021, we invested
about $15.1 million and $14.4 million, respectively, in our property, plant and equipment.Depreciation expense was approximately $10.9 million and $9.7 million for the three months ended June 30, 2022 and 2021, respectively.Typically, our capital expenditures for maintenance projects are less than $30 million per fiscal year.In addition, from time to time, we undertake projects that require capital expenditures when we identify opportunities to improve efficiencies, add value for our customers, and position ourselves for future growth.We currently expect to spend approximately $40 to $50 million over the next twelve months on capital projects for maintenance of our facilities
and other investments to grow and improve our businesses.
Our Board of Directors approved our current share repurchase program in November 2020. The program authorizes the purchase of up to $100 million of our common stock through November 15, 2022.Under the current authorization, we may purchase shares from time to time on the open market or in privately negotiated transactions at prices not exceeding prevailing market rates.Repurchases of shares under the repurchase program may vary based on management discretion, as well as changes in cash flow generation and availability.During the three months ended June 30, 2022, we did not purchase any
shares of common stock.As of June 30, 2022, approximately 24.6 million shares of our common stock were outstanding, and our available authorization under our current share repurchase program was about $96.9 million.
Financing Activities
We consider the sum of notes payable and overdrafts, long-term debt (including any current portion), and customer advances and deposits, less cash, cash equivalents, and short-term investments on our balance sheet to be our net debt.We also consider our net debt plus shareholders' equity to be our net capitalization.Net debt as a percentage of net capitalization was approximately 41% at June
30, 2022, up from the June 30, 2021 level of approximately 31%, largely on higher debt balances due in part to the Shank’s acquisition in October 2021 as well as higher working capital requirements, and up from the March 31, 2022 level of approximately 32%.As of June 30, 2022, we had $86.6 million in cash and cash equivalents, our short-term debt totaled $454.7 million, and we were in compliance with all covenants of our debt agreements, which require us to maintain certain levels of tangible net worth and observe restrictions on debt levels.
As of June 30, 2022, we had $155 million available under a committed revolving credit facility that will mature
in December 2023, and we had about $84 million in unused, uncommitted credit lines. We also maintain an effective, undenominated universal shelf registration statement that provides for future issuance of additional debt or equity securities. We have no long-term debt maturing until fiscal year 2024. Our seasonal working capital requirements for our tobacco business typically increase significantly between March and September and decline after mid-year.Available capital resources from our cash balances, committed credit facility, and uncommitted credit lines exceed our normal working capital needs and currently anticipated capital expenditure requirements over the next twelve months.
Derivatives
From time to time, we use interest rate swap agreements to manage our
exposure to changes in interest rates.At June 30, 2022, the fair value of our outstanding interest rate swap agreements was an asset of about $4.3 million, and the notional amount swapped was $370 million. We entered into these agreements to eliminate the variability of cash flows in the interest
34
payments on a portion of our variable-rate term loans.Under the swap agreements we receive variable rate interest and pay fixed rate interest.The swaps are accounted for as cash flow hedges.
We also use derivative
instruments from time to time to hedge certain foreign currency exposures, primarily related to forecasted purchases of tobacco, related processing costs, and crop input sales in Brazil, as well as our net monetary balance sheet exposures in local currency there.We generally account for our hedges of forecasted tobacco purchases as cash flow hedges.At June 30, 2022, the fair value of our open hedges was a net asset of about $0.8 million.We had forward contracts outstanding that were not designated as hedges, and the fair value of those contracts was a net asset of approximately $7.5 million at June
30, 2022.
35
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Currency
The international leaf tobacco trade generally is conducted in U.S. dollars, thereby limiting foreign exchange risk to that which is related to leaf purchase and production costs, overhead, and income taxes in the source country. We also provide farmer
advances that are directly related to leaf purchases and are denominated in the local currency. Any currency gains or losses on those advances are usually offset by decreases or increases in the cost of tobacco, which is priced in the local currency. However, the effect of the offset may not occur until a subsequent quarter or fiscal year. Most of our tobacco operations are accounted for using the U.S. dollar as the functional currency. Because there are no forward foreign exchange markets in many of our major countries of tobacco origin, we often manage our foreign exchange risk by matching funding for inventory purchases with the currency of sale, which is usually the U.S. dollar, and by minimizing our net local currency monetary position in individual countries. We are vulnerable to currency remeasurement gains and losses to the extent that monetary assets and liabilities denominated in local currency do not offset each other. In addition to foreign exchange gains
and losses, we are exposed to changes in the cost of tobacco due to changes in the value of the local currency in relation to the U.S. dollar. We routinely enter forward currency exchange contracts to hedge against the effects of currency movements on purchases of tobacco to reduce the volatility of costs. In addition, from time-to-time we enter forward contracts to hedge balance sheet exposures.
In certain tobacco markets that are primarily domestic, we use the local currency as the functional currency. Examples of these markets are Poland and the Philippines. In other markets, such as Western Europe, where export sales have been primarily in local currencies, we also use the local currency as the functional
currency. In each case, reported earnings are affected by the translation of the local currency into the U.S. dollar.
Interest Rates
We generally use both fixed and floating interest rate debt to finance our operations. Changes in market interest rates expose us to changes in cash flows for floating rate instruments and to changes in fair value for fixed-rate instruments. We normally maintain a proportion of our debt in both variable and fixed interest rates to manage this exposure, and from time to time we may enter hedge agreements to swap the interest rates. In addition, our customers may pay market rates of interest for inventory purchased on order, which could mitigate a portion of the floating interest rate exposure. We also periodically have large cash balances and may receive deposits from customers, both of which we use
to fund seasonal purchases of tobacco, reducing our financing needs. Excluding the portion of our bank term loans that have been converted to fixed-rate borrowings with interest rate swaps, debt carried at variable interest rates was approximately $605 million at June 30, 2022. Although a hypothetical 1% change in short-term interest rates would result in a change in annual interest expense of approximately $6.0 million, that amount would be at least partially mitigated by changes in charges to customers.
Derivatives Policies
Hedging interest rate exposure using swaps and hedging foreign exchange exposure using forward contracts are specifically contemplated to
manage risk in keeping with management's policies. We may use derivative instruments, such as swaps, forwards, or futures, which are based directly or indirectly upon interest rates and currencies to manage and reduce the risks inherent in interest rate and currency fluctuations. When we use foreign currency derivatives to mitigate our exposure to exchange rate fluctuations, we may choose not to designate them as hedges for accounting purposes, which may result in the effects of the derivatives being recognized in our earnings in periods different from the items that created the exposure.
We do not utilize derivatives for speculative purposes, and we do not enter into market risk-sensitive instruments for trading purposes. Derivatives are transaction specific so that a specific debt instrument, forecast purchase, contract,
or invoice determines the amount, maturity, and other specifics of the hedge. We routinely review counterparty risk as part of our derivative program.
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ITEM 4. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in reports we file under the Securities Exchange Act of 1934 (the “Exchange Act”), as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated
and communicated to management, including our Chief Executive Officer (our Principal Executive Officer) and Chief Financial Officer (our Principal Financial Officer), as appropriate, to allow for timely decisions regarding required disclosure.
We have excluded Shank's, our wholly-owned subsidiary we acquired on October 4, 2021, which is included in our Consolidated Financial Statements, from our assessment of internal control over financial reporting as of June 30, 2022. Shank's represented 4% of consolidated total assets as of June 30, 2022 and 3% of consolidated sales and other operating revenues for the three months ending June 30, 2022. Our Chief Executive Officer and Chief Financial
Officer evaluated, with the participation of other members of management, the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, management concluded that our disclosure controls and procedures were effective.
There have been no changes in our internal control over financial reporting during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Other Legal Matters
Some of our subsidiaries are involved in litigation or legal matters incidental to their business activities. While the outcome of these matters cannot be predicted with certainty, we are vigorously defending them and do not currently expect that any of them will have a material adverse effect on our business or financial position. However, should one or more of these matters be resolved in a manner adverse to our current
expectation, the effect on our results of operations for a particular fiscal reporting period could be material.
ITEM 1A. RISK FACTORS
As of the date of this report, there are no material changes to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended March 31, 2022 (the "2022 Annual Report on Form 10-K"). In evaluating our risks, readers should carefully consider the risk factors discussed in our 2022 Annual Report on Form 10-K, which could materially affect our business, financial condition or operating results, in addition to the other information set forth in this report and in our other filings with the Securities
and Exchange Commission.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
As indicated in the following table, we did not repurchase shares of our common stock during the three-month period ended June 30, 2022:
Period
(1)
Total Number of Shares Repurchased
Average Price Paid Per Share (2)
Total Number of Shares Repurchased as Part of Publicly Announced Plans or Programs (3)
Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (3)
April
1-30, 2022
—
$
—
—
$
96,946,661
May 1-31, 2022
—
—
—
96,946,661
June
1-30, 2022
—
—
—
96,946,661
Total
—
$
—
—
$
96,946,661
(1)Repurchases
are based on the date the shares were traded. This presentation differs from the consolidated statement of cash flows, where the cost of share repurchases is based on the date the transactions were settled.
(2)Amounts listed for average price paid per share include broker commissions paid in the transactions.
(3)A stock repurchase plan, which was authorized by our Board of Directors, became effective and was publicly announced on November 5, 2020. This stock repurchase plan authorizes the purchase of up to $100 million in common and/or preferred stock in open market or privately negotiated transactions through November 15, 2022 or when we have exhausted
the funds authorized for the program, subject to market conditions and other factors.
Our current dividend policy anticipates the payment of quarterly dividends in the future. However, the declaration and payment of dividends to holders of common stock is at the discretion of the Board of Directors and will be dependent upon our future earnings, financial condition, and capital requirements. Under certain of our credit facilities, we must meet financial covenants relating to minimum tangible net worth and maximum levels of debt. If we were not in compliance with them, these financial covenants could restrict our ability to pay dividends. We were in compliance with all such covenants at June 30, 2022.
Interactive Data File (submitted electronically herewith).*
101.INS XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. 101.SCH XBRL Taxonomy Extension Schema Document 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF XBRL Taxonomy Extension Definition Linkbase Document 101.LAB XBRL Taxonomy Extension Label
Linkbase Document 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section and shall not be part of any registration or other document filed under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.
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Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
