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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
                        FOR THE QUARTERLY PERIOD ENDED
JUNE 30, 2020
 
 
OR
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE TRANSITION PERIOD FROM ______________TO_______________

Commission File Number: 001-00652

UNIVERSAL CORPORATION
(Exact name of registrant as specified in its charter)
Virginia
 
 
54-0414210
(State or other jurisdiction of
incorporation or organization)
 
 
(I.R.S. Employer
Identification Number)
 
 
 
 
9201 Forest Hill Avenue,
Richmond,
Virginia
23235
(Address of principal executive offices)
 
(Zip Code)


804-359-9311
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class
Trading Symbols
Name of Exchange on which registered
Common Stock, no par value
UVV
New 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.    Yesþ No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer
þ
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No
As of August 3, 2020, the total number of shares of common stock outstanding was 24,488,964.



UNIVERSAL CORPORATION
FORM 10-Q
TABLE OF CONTENTS

2




PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

UNIVERSAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(in thousands, except share and per share data)

 
 
Three Months Ended June 30,
 
 
2020
 
2019
 
 
(Unaudited)
Sales and other operating revenues
 
$
315,811

 
$
296,915

Costs and expenses
 
 
 
 
Cost of goods sold
 
262,046

 
238,265

Selling, general and administrative expenses
 
49,410

 
51,136

Other income
 
(4,173
)
 

Operating income
 
8,528

 
7,514

Equity in pretax earnings (loss) of unconsolidated affiliates
 
(7
)
 
40

Other non-operating income (expense)
 
(18
)
 
627

Interest income
 
159

 
1,008

Interest expense
 
6,810

 
4,028

Income before income taxes and other items
 
1,852

 
5,161

Income taxes
 
(5,048
)
 
4,266

Net income
 
6,900

 
895

Less: net loss (income) attributable to noncontrolling interests in subsidiaries
 
374

 
1,177

Net income attributable to Universal Corporation
 
$
7,274

 
$
2,072

 
 
 
 
 
Earnings per share:
 
 
 
 
Basic
 
$
0.30

 
$
0.08

Diluted
 
$
0.29

 
$
0.08

 
 
 
 
 
Weighted average common shares outstanding:
 
 
 
 
Basic
 
24,602,610

 
25,158,369

Diluted
 
24,703,579

 
25,284,258

 
 
 
 
 
Total comprehensive income, net of income taxes
 
$
7,209

 
$
(3,452
)
Less: comprehensive income attributable to noncontrolling interests
 
530

 
1,054

Comprehensive income (loss) attributable to Universal Corporation
 
$
7,739

 
$
(2,398
)
 
 
 
 
 
Dividends declared per common share
 
$
0.77

 
$
0.76


See accompanying notes.


3


UNIVERSAL CORPORATION     
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars)

 
 
June 30,
 
June 30,
 
March 31,
 
 
2020
  
2019
 
2020
 
 
(Unaudited)
 
(Unaudited)
 
 
ASSETS
 
 
 
 
 
 
Current assets
 
 
  
 
 
 
Cash and cash equivalents
 
$
100,015

  
$
167,996

 
$
107,430

Accounts receivable, net
 
222,162

  
217,905

 
340,711

Advances to suppliers, net
 
65,221

  
80,032

 
133,778

Accounts receivable—unconsolidated affiliates
 
32,827

  
63,388

 
11,483

Inventories—at lower of cost or net realizable value:
 
 
  
 
 
 
Tobacco
 
858,940

  
898,409

 
707,298

Other
 
104,399

  
77,654

 
99,275

Prepaid income taxes
 
13,426

  
20,985

 
12,144

Other current assets
 
65,675

  
75,689

 
67,498

Total current assets
 
1,462,665

  
1,602,058

 
1,479,617

 
 
 
 
 
 
 
Property, plant and equipment
 
 
  
 
 
 
Land
 
21,454

  
22,785

 
21,376

Buildings
 
258,306

  
262,688

 
256,488

Machinery and equipment
 
644,092

  
611,209

 
634,395

 
 
923,852

  
896,682

 
912,259

Less accumulated depreciation
 
(608,173
)
  
(597,257
)
 
(597,106
)
 
 
315,679

  
299,425

 
315,153

Other assets
 
 
  
 
 
 
Operating lease right-of-use assets
 
37,576

 
34,472

 
39,256

Goodwill and other intangibles, net
 
143,976

  
98,029

 
144,687

Investments in unconsolidated affiliates
 
79,198

  
80,985

 
77,543

Deferred income taxes
 
23,085

  
15,582

 
20,954

Other noncurrent assets
 
44,661

  
47,333

 
43,711

 
 
328,496

  
276,401

 
326,151

 
 
 
 
 
 
 
Total assets
 
$
2,106,840

  
$
2,177,884

 
$
2,120,921


See accompanying notes.

4


UNIVERSAL CORPORATION     
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars)

 
 
June 30,
 
June 30,
 
March 31,
 
 
2020
  
2019
 
2020
 
 
(Unaudited)
  
(Unaudited)
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
Current liabilities
 
 
  
 
 
 
Notes payable and overdrafts
 
$
92,758

 
$
73,640

 
$
78,033

Accounts payable and accrued expenses
 
133,621

 
179,297

 
140,202

Accounts payable—unconsolidated affiliates
 

 
10

 
55

Customer advances and deposits
 
10,575

 
4,397

 
10,242

Accrued compensation
 
16,373

 
23,084

 
23,710

Income taxes payable
 
2,359

 
1,576

 
5,334

Current portion of operating lease liabilities
 
9,914

 
8,938

 
9,823

Current portion of long-term debt
 

 

 

Total current liabilities
 
265,600

  
290,942

 
267,399

 
 
 
 
 
 
 
Long-term debt
 
368,829

 
368,568

 
368,764

Pensions and other postretirement benefits
 
70,473

 
59,364

 
70,680

Long-term operating lease liabilities
 
24,040

 
23,098

 
25,893

Other long-term liabilities
 
75,130

 
52,387

 
69,427

Deferred income taxes
 
24,435

 
31,447

 
29,474

Total liabilities
 
828,507

 
825,806

 
831,637

 
 
 
 
 
 
 
Shareholders’ equity
 
 
  
 
 
 
Universal Corporation:
 
 
 
 
 
 
Preferred stock:
 
 
  
 
 
 
Series A Junior Participating Preferred Stock, no par value, 500,000 shares authorized, none issued or outstanding
 

  

 

Common stock, no par value, 100,000,000 shares authorized 24,488,964 shares issued and outstanding at June 30, 2020 (24,971,489 at June 30, 2019 and 24,421,835 at March 31, 2020)
 
322,449

 
325,515

 
321,502

Retained earnings
 
1,064,927

  
1,084,987

 
1,076,760

Accumulated other comprehensive loss
 
(151,132
)
  
(100,161
)
 
(151,597
)
Total Universal Corporation shareholders' equity
 
1,236,244

  
1,310,341

 
1,246,665

Noncontrolling interests in subsidiaries
 
42,089

 
41,737

 
42,619

Total shareholders' equity
 
1,278,333

 
1,352,078

 
1,289,284

 
 
 
 
 
 
 
Total liabilities and shareholders' equity
 
$
2,106,840

  
$
2,177,884

 
$
2,120,921


See accompanying notes.



5


UNIVERSAL CORPORATION     
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
 
 
Three Months Ended June 30,
 
 
2020
 
2019
 
 
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
Net income
 
$
6,900

 
$
895

Adjustments to reconcile net income to net cash used by operating activities:
 
 
 
 
Depreciation and amortization
 
10,105

 
9,067

Net provision for losses (recoveries) on advances and guaranteed loans to suppliers
 
57

 
(165
)
Foreign currency remeasurement (gain) loss, net
 
(4,691
)
 
(1,497
)
Foreign currency exchange contracts
 
(13,951
)
 
733

Restructuring payments
 
(2,937
)
 

Change in estimated fair value of contingent consideration for FruitSmart acquisition
 
(4,173
)
 

Other, net
 
(3,350
)
 
3,047

Changes in operating assets and liabilities, net
 
12,087

 
(128,819
)
Net cash provided (used) by operating activities
 
47

 
(116,739
)
 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
Purchase of property, plant and equipment
 
(8,386
)
 
(5,679
)
Proceeds from sale of property, plant and equipment
 
218

 
226

Net cash used by investing activities
 
(8,168
)
 
(5,453
)
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
Issuance of short-term debt, net
 
20,688

 
19,257

Repurchase of common stock
 

 
(5,214
)
Dividends paid on common stock
 
(18,567
)
 
(18,742
)
Other
 
(1,930
)
 
(2,883
)
Net cash provided (used) by financing activities
 
191

 
(7,582
)
 
 
 
 
 
Effect of exchange rate changes on cash
 
515

 
214

Net decrease in cash and cash equivalents
 
(7,415
)
 
(129,560
)
Cash and cash equivalents at beginning of year
 
107,430

 
297,556

 
 
 
 
 
Cash and cash equivalents at end of period
 
$
100,015

 
$
167,996


See accompanying notes.


6


UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.   BASIS OF PRESENTATION

Universal Corporation, which together with its subsidiaries is referred to herein as “Universal” or the “Company,” is the leading global leaf tobacco supplier. 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. Certain amounts in prior year statements have been reclassified to conform to the current year presentation. 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, 2020.

The extent to which the ongoing COVID-19 pandemic will impact the Company's financial condition, results of operations and demand for the Company's products and services will depend on future developments, which are highly uncertain and cannot be predicted. Such developments may include the ongoing geographic spread 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, 2020, 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 our products and services.

NOTE 2.   ACCOUNTING PRONOUNCEMENTS

Recently Adopted Pronouncements

In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" (“ASU 2016-13”).  ASU 2016-13 requires companies to measure credit losses utilizing a methodology that reflects expected credit losses and requires a consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company adopted ASU 2016-13 effective April 1, 2020. The Company determined that the update applied to trade receivables, but that there was no material impact to the consolidated financial statements from the adoption of ASU 2016-13.

In August 2018, the FASB issued Accounting Standards Update No. 2018-15, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of FASB Emerging Issues Task Force)" ("ASU 2018-15"). ASU 2018-15 aligns the requirements for capitalizing implementation costs in a cloud computing arrangement service contract with the requirements for capitalizing implementation costs incurred for an internal-use software license. Under that model, implementation costs are capitalized or expensed depending on the nature of the costs and the project stage during which they are incurred. Capitalized implementation costs are amortized over the term of the associated hosted cloud computing arrangement service contract on a straight-line basis, unless another systematic and rational basis is more representative of the pattern in which the entity expects to benefit from its right to access the hosted software. Capitalized implementation costs would then be assessed for impairment in a manner similar to long-lived assets. The Company adopted ASU 2018-15 effective April 1, 2020. There was no material impact to the consolidated financial statements from the adoption of ASU 2018-15.

Pronouncements to be Adopted in Future Periods

In December 2019, the FASB issued Accounting Standards Update No. 2019-12, "Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes" ("ASU 2019-12"). ASU 2019-12 eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences related to changes in ownership of equity method investments and foreign subsidiaries. The updated guidance also simplifies aspects of accounting for franchise taxes and enacted changes in tax laws or rates, and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The guidance in ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, although early adoption is permitted. The Company will be required to adopt the new standard effective April 1, 2021, which is the beginning of its fiscal year ending March 31, 2022, and is currently evaluating the impact that the guidance will have on its consolidated financial statements.
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

7


expedients and exceptions related to contract modifications and hedge accounting to address the transitions from the London Interbank Offered Rate ("LIBOR") and other interbank offered rates to alternative reference rates. The guidance permits an entity to consider contract modification due to reference rate reform to be an event that does not require contract remeasurement at the modification date or reassessment of a previous accounting determination. ASU 2020-04 also temporarily allows hedge relationships to continue without de-designation upon changes due to reference rate reform. The standard is effective upon issuance and can be applied as of March 12, 2020 through December 31, 2022. The Company is currently evaluating the impact that the guidance will have on its consolidated financial statements.

NOTE 3.   BUSINESS COMBINATION
On January 1, 2020 the Company acquired 100% of the capital stock of FruitSmart, Inc. (“FruitSmart”), an independent specialty fruit and vegetable ingredient processor serving global markets, for approximately $80 million in cash, up to $25 million of contingent consideration payments, and $3.8 million of working capital on-hand at the date of acquisition. The contingent consideration is based on FruitSmart’s achievement of certain adjusted gross profit metrics in calendar years 2020 and 2021. The fair value of the contingent consideration, approximately $6.7 million, was recognized on the acquisition date and was measured using unobservable (Level 3) inputs. At June 30, 2020 the forecasted calendar year 2020 adjusted gross profit for FruitSmart was not expected to achieve the adjusted gross profit threshold required for a contingent consideration payment. Therefore, in the quarter ended ended June 30, 2020 the Company recorded $4.2 million in other operating income for the reversal of a portion of the contingent consideration liability. As of June 30, 2020, $2.5 million of contingent consideration liability related to the Fruitsmart acquisition is included in other long-term liabilities on the consolidated balance sheet.
The following final allocation of the purchase price was based on third-party valuations and assumptions. The following table summarizes the final purchase price allocation of the assets acquired and liabilities assumed on January 1, 2020.
Assets
 
Cash and cash equivalents
$
1,298

Accounts receivable, net
7,707

Inventory
23,793

Other current assets
310

Property, plant and equipment (net)
23,400

Intangibles
 
Customer relationships
9,500

Developed technology
4,800

Trade names
3,300

Non-compete agreements
1,000

Goodwill
28,863

Total assets acquired
103,971

 
 
Liabilities
 
Current liabilities
8,262

Deferred income taxes
9,004

Total liabilities assumed
17,266

 
 
Total assets acquired and liabilities assumed
$
86,705


A portion of the goodwill recorded as part of the acquisition was attributable to the assembled workforce of FruitSmart. The tax basis of the assets acquired and liabilities did not result in a step-up of tax basis and the related goodwill is not deductible for U.S. income tax purposes. The Company determined the FruitSmart operations are not material to the Company’s consolidated results. Therefore, pro forma information is not presented.

NOTE 4.  REVENUE FROM CONTRACTS WITH CUSTOMERS

The majority of the Company’s consolidated revenue consists of sales of processed leaf tobacco to customers. The Company also earns revenue from processing leaf tobacco owned by customers and from various other services provided to customers. 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

8


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.

Processing Revenue

Processing and packing of customer-owned leaf tobacco 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 tobacco that is placed into the production line exits as processed and packed tobacco within one hour and is then later transported to customer-designated storage facilities. The revenue for these services is recognized when the performance obligation is satisfied, which is generally when processing is completed. The Company’s operating history and contract analyses indicate that customer requirements for processed tobacco 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 tobacco, and service cutting for select manufacturers. The Company also has fruit and vegetable processing operations that provide customers with a range of food ingredient products. 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 sales or tobacco processing arrangements with customers. The transaction prices and timing of revenue recognition of these items are determined by the specifics of each contract.

Disaggregation of Revenue from Contracts with Customers

The following table disaggregates the Company’s revenue by significant revenue-generating category:

 
 
Three Months Ended June 30,
(in thousands of dollars)
 
2020
 
2019
 
 
 
 
 
Tobacco sales
 
$
275,142

 
$
268,057

Processing revenue
 
16,230

 
18,434

Other sales and revenue from contracts with customers
 
24,028

 
9,410

   Total revenue from contracts with customers
 
315,400

 
295,901

Other operating sales and revenues
 
411

 
1,014

   Consolidated sales and other operating revenues
 
$
315,811

 
$
296,915


Other operating sales and revenues consists principally of interest on advances to suppliers and dividend income from unconsolidated affiliates.

NOTE 5.   GUARANTEES, OTHER CONTINGENT LIABILITIES, AND OTHER MATTERS

9



Guarantees and Other Contingent Liabilities

Guarantees of Bank Loans and Other Contingent Liabilities

Guarantees of bank loans to tobacco growers for crop financing have long been industry practice in Brazil and support the farmers’ production of tobacco there. The Company's operating subsidiary in Brazil had guarantees outstanding at June 30, 2020, all of which expire within one year. The subsidiary withholds payments due to the farmers on delivery of tobacco and forwards those payments to the third-party banks. Failure of farmers to deliver sufficient quantities of tobacco to the subsidiary to cover its obligations to the third-party banks could result in a liability for the subsidiary under the related guarantees; however, in that case, the subsidiary would have recourse against the farmers. The maximum potential amount of future payments that the Company’s subsidiary could be required to make at June 30, 2020, was the face amount, $1.0 million including unpaid accrued interest ($2 million at June 30, 2019, and $3 million at March 31, 2020). The fair value of the guarantees was a liability of approximately $0.1 million at June 30, 2020 ($0.8 million at June 30, 2019, and $0.1 million at March 31, 2020). In addition to these guarantees, the Company has other contingent liabilities totaling approximately $1 million at June 30, 2020, primarily related to outstanding letters of credit.

Value-Added Tax Assessments in Brazil
As further discussed below, the Company’s local operating subsidiaries pay significant amounts of value-added tax (“VAT”) in connection with their operations, which generate tax credits that they normally are entitled to recover through offset, refund, or sale to third parties. In Brazil, VAT is assessed at the state level when green tobacco is transferred between states. The Company’s operating subsidiary there pays VAT when tobaccos grown in the states of Santa Catarina and Parana are transferred to its factory in the state of Rio Grande do Sul for processing. The subsidiary has received assessments for additional VAT plus interest and penalties from tax authorities for the states of Santa Catarina and Parana based on audits of the subsidiary’s VAT filings for specified periods. In June 2011, tax authorities for the state of Santa Catarina issued assessments for tax, interest, and penalties for periods from 2006 through 2009 totaling approximately $9 million. In September 2014, tax authorities for the state of Parana issued an assessment for tax, interest, and penalties for periods from 2009 through 2014 totaling approximately $10 million. Those amounts are based on the exchange rate for the Brazilian currency at June 30, 2020. 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, 2020, a portion of the subsidiary’s arguments had been accepted, and the outstanding assessment had been reduced. The reduced assessment, together with the related accumulated interest through the end of the current reporting period, totaled approximately $9 million (at the June 30, 2020 exchange rate). The subsidiary is continuing to contest the full remaining amount of the assessment. While the range of reasonably possible loss is zero up to the full $9 million remaining assessment with interest, based on the strength of the subsidiary’s defenses, no loss within that range is considered probable at this time and no liability has been recorded at June 30, 2020.
With respect to the Parana assessment, management of the subsidiary and outside counsel challenged the full amount of the claim. A significant portion of the Parana assessment was based on positions taken by the tax authorities that management and outside counsel believe deviate significantly from the underlying statutes and relevant case law. In addition, under the law, the subsidiary’s tax filings for certain periods covered in the assessment were no longer open to any challenge by the tax authorities. In December 2015, the Parana tax authorities withdrew the initial claim and subsequently issued a new assessment covering the same tax periods, reflecting a substantial reduction from the original assessment. In fiscal year 2020, the Parana tax authorities acknowledged the statute of limitations related to claims prior to December 2010 had expired and reduced the assessment to $3 million (at the June 30, 2020 exchange rate). Notwithstanding the reduced assessment, management and outside counsel continue to believe that the new assessment is not supported by the underlying statutes and relevant case law and have challenged the full amount of the claim. The range of reasonably possible loss is considered to be zero up to the full $3 million assessment. However, based on the strength of the subsidiary's defenses, no loss within that range is considered probable at this time and no liability has been recorded at June 30, 2020.

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


10


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 $83 million at June 30, 2020, $101 million at June 30, 2019, and $153 million at March 31, 2020. The related valuation allowances totaled $16 million at June 30, 2020, $18 million at June 30, 2019, and $16 million at March 31, 2020, and were estimated based on the Company’s historical loss information and crop projections. The allowances were increased by net provisions of approximately $0.1 million and reduced by net recoveries of approximately $0.2 million in the three-month periods ended June 30, 2020 and 2019, respectively. These net provisions and recoveries 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 value-added tax (“VAT”) on purchases of unprocessed and processed tobacco, crop inputs, packing materials, and various other goods and services. In some countries, VAT is a national tax, and in other countries it is assessed at the state level. Items subject to VAT vary from jurisdiction to jurisdiction, as do the rates at which the tax is assessed. When tobacco is sold to customers in the country of origin, the operating subsidiaries generally collect VAT on those sales. The subsidiaries are normally permitted to offset their VAT payments against the collections and remit only the incremental VAT collections to the tax authorities. When tobacco is sold for export, VAT is normally not assessed. In countries where tobacco sales are predominately for export markets, VAT collections generated on downstream sales are often not sufficient to fully offset the subsidiaries’ VAT payments. In those situations, unused VAT credits can accumulate. Some jurisdictions have procedures that allow companies to apply for refunds of unused VAT credits from the tax authorities, but the refund process often takes an extended period of time and it is not uncommon for refund applications to be challenged or rejected in part on technical grounds. Other jurisdictions may permit companies to sell or transfer unused VAT credits to third parties in private transactions, although approval for such transactions must normally be obtained from the tax authorities, limits on the amounts that can be transferred may be imposed, and the proceeds realized may be heavily discounted from the face value of the credits. Due to these factors, local operating subsidiaries in some countries can accumulate significant balances of VAT credits over time. The Company reviews these balances on a regular basis and records valuation allowances on the credits to reflect amounts that are not expected to be recovered, as well as discounts anticipated on credits that are expected to be sold or transferred. At June 30, 2020, the aggregate balance of recoverable tax credits held by the Company’s subsidiaries totaled approximately $54 million ($61 million at June 30, 2019, and $52 million at March 31, 2020), and the related valuation allowances totaled approximately $17 million ($18 million at June 30, 2019, and $19 million at March 31, 2020). The net balances are reported in other current assets and other noncurrent assets in the consolidated balance sheets.

Stock Repurchase Plan

A stock repurchase plan, which was authorized by our Board of Directors, became effective and was publicly announced on November 7, 2017 and further extended on May 29, 2019. This stock repurchase plan authorized the purchase of up to $100 million in common and/or preferred stock in open market or privately negotiated transactions, subject to market conditions and other factors. This stock repurchase program will expire on the earlier of November 15, 2020, or when the funds authorized for the program are exhausted. The program had $56.1 million of remaining capacity for repurchases of common and/or preferred stock at June 30, 2020.



11


NOTE 6.   EARNINGS PER SHARE

The 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)
 
2020
 
2019
 
 
 
 
 
Basic Earnings Per Share
 
 
 
 
Numerator for basic earnings per share
 
 
 
 
Net income attributable to Universal Corporation
 
$
7,274

 
$
2,072

 
 
 
 
 
Denominator for basic earnings per share
 
 
 
 
Weighted average shares outstanding
 
24,602,610

 
25,158,369

 
 
 
 
 
Basic earnings per share
 
$
0.30

 
$
0.08

 
 
 
 
 
Diluted Earnings Per Share
 
 
 
 
Numerator for diluted earnings per share
 
 
 
 
Net income attributable to Universal Corporation
 
$
7,274

 
$
2,072

 
 
 
 
 
Denominator for diluted earnings per share:
 
 
 
 
Weighted average shares outstanding
 
24,602,610

 
25,158,369

Effect of dilutive securities
 
 
 
 
Employee and outside director share-based awards
 
100,969

 
125,889

Denominator for diluted earnings per share
 
24,703,579

 
25,284,258

 
 
 
 
 
Diluted earnings per share
 
$
0.29

 
$
0.08


NOTE 7.   INCOME TAXES

The Company operates in the United States and many foreign countries and is subject to the tax laws of many jurisdictions. Changes in tax laws or the interpretation of tax laws can affect the Company’s earnings, as can the resolution of pending and contested tax issues. The Company's consolidated effective income tax rate is affected by a number of factors, including the mix of domestic and foreign earnings and the effect of exchange rate changes on taxes.
    
The consolidated effective income tax rate for the quarter ended June 30, 2020 was a benefit of 273% . The Company's consolidated effective income tax rate for the three months ended June 30, 2020 was affected by a $4.4 million net tax benefit for final U.S. tax regulations issued in the current quarter for hybrid dividends paid by foreign subsidiaries.  Without this discrete item for the final U.S. tax regulations, the consolidated effective income tax rate for the three months ended June 30, 2020 would have been a benefit of approximately 34%. Additionally, for the three months ended June 30, 2020 the Company recognized $1.8 million as a component of interest expense related to on-going settlement discussions for an uncertain tax position at foreign subsidiary.

The consolidated effective income tax rate for the quarter ended June 30, 2019 was approximately 83% was affected by a $2.8 million net tax provision related to a tax settlement at a foreign subsidiary.  Without this discrete item, the consolidated effective income tax rate for the three months ended June 30, 2019 would have been approximately 29% .


12


NOTE 8.   GOODWILL AND OTHER INTANGIBLES
The Company's changes in goodwill at June 30, 2020 and 2019 consisted of the following:
(in thousands)
Three Months Ended June 30,
 
2020
 
2019
Balance at beginning of year
$
126,826

 
$
97,907

Foreign currency translation adjustment
36

 
42

Balance at end of period
$
126,862

 
$
97,949



The Company's intangible assets primarily consist of capitalized customer-related intangibles, trade names, proprietary developed technology and noncompetition agreements. The Company's intangible assets subject to amortization consisted of the following at June 30, 2020 and 2019:
(in thousands, except useful life)
 
 
June 30,
 
 
 
2020
 
2019
 
Useful Life
 
Gross Carrying Value
 
Accumulated Amortization
 
Net Carrying Value
 
Gross Carrying Value
 
Accumulated Amortization
 
Net Carrying Value
Customer relationships(1)
13
 
$
9,500

 
$
(365
)
 
$
9,135

 
$

 
$

 
$

Trade names(1)
5
 
3,300

 
(330
)
 
2,970

 

 

 

Developed technology(1)
3
 
4,800

 
(800
)
 
4,000

 

 

 

Noncompetition agreements(1)
5
 
1,000

 
(100
)
 
900

 

 

 

Other
5
 
734

 
(625
)
 
109

 
774

 
(694
)
 
80

Total intangible assets
 
 
$
19,334

 
$
(2,220
)
 
$
17,114

 
$
774

 
$
(694
)
 
$
80

(1) On January 1, 2020 the Company acquired 100% of the capital stock of FruitSmart, an independent specialty fruit and vegetable ingredient processor serving global markets, for approximately $80.0 million in cash and up to $25.0 million of contingent consideration payments. The FruitSmart acquisition resulted in $28.9 million of goodwill and $18.6 million intangibles. See Note 3 for additional information.
Intangible assets are amortized on a straight-line basis over the asset's estimated useful economic life as noted above.
Amortization expense for intangible assets was approximately $0.8 million and less than $0.1 million for the three months ended June 30, 2020 and 2019, respectively. Amortization expense for the developed technology intangible asset is recorded in cost of goods sold in the consolidated income statements of income. The amortization expense for the other intangible assets is recorded in selling, general, and administrative expenses in the consolidated income statements of income.
As of June 30, 2020, the expected future amortization expense for intangible assets is as follows:
Fiscal Year
 
2021
$
2,443

2022
3,250

2023
2,791

2024
1,591

2025 and thereafter
7,039

Total expected future amortization expense
$
17,114



NOTE 9.   LEASES

The Company, as a lessee, enters into operating leases for land, buildings, equipment, and vehicles. For all operating leases with terms greater than 12 months and with fixed payment arrangements, a lease liability and corresponding right-of-use asset are recognized in the balance sheet for the term of the lease by calculating the net present value of future lease payments. On the date of lease commencement, the present value of lease liabilities is determined by discounting the future lease payments by the Company’s collateralized incremental borrowing rate, adjusted for the lease term and currency of the lease payments. If a lease contains a renewal option that the Company is reasonably certain to exercise, the Company accounts for the original lease term and expected renewal term in the calculation of the lease liability and right-of-use asset.


13


The following table sets forth the right-of-use assets and lease liabilities for operating leases included in the Company’s consolidated balance sheet:
(in thousands)
 
June 30, 2020
 
June 30, 2019
 
March 31, 2020
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
   Operating lease right-of-use assets
 
$
37,576

 
$
34,472

 
$
39,256

 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
    Current portion of operating lease liabilities
 
$
9,914

 
$
8,938

 
$
9,823

    Long-term operating lease liabilities
 
24,040

 
23,098

 
25,893

          Total operating lease liabilities
 
$
33,954

 
$
32,036

 
$
35,716


The following table sets forth the location and amount of operating lease costs included in the Company's consolidated statement of income:
 
 
Three Months Ended June 30,
(in thousands)
 
2020
 
2019
 
 
 
 
 
Income Statement Location
 
 
 
 
   Cost of goods sold
 
$
2,911

 
$
2,617

   Selling, general, and administrative expenses
 
2,190

 
1,987

          Total operating lease costs(1)
 
$
5,101

 
$
4,604

(1) 
Includes variable operating lease costs.

The following table reconciles the undiscounted cash flows to the operating lease liabilities in the Company’s consolidated balance sheet:
(in thousands)
 
June 30, 2020
Maturity of Operating Lease Liabilities
 
 
2021 (excluding the three months ended June 30, 2020)
 
$
8,624

2022
 
7,628

2023
 
6,330

2024
 
4,916

2025
 
4,050

2026 and thereafter
 
6,828

          Total undiscounted cash flows for operating leases
 
$
38,376

          Less: Imputed interest
 
(4,422
)
Total operating lease liabilities
 
$
33,954



As of June 30, 2020, the Company had no leases that have not yet commenced.


14


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)
 
2020
 
2019
 
 
 
 
 
Supplemental Cash Flow Information
 
 
 
 
Cash paid for amounts included in the measurement of operating lease liabilities
 
$
3,028

 
$
3,046

Right-of-use assets obtained in exchange for new operating leases
 
1,023

 
468

 
 
 
 
 
Weighted Average Remaining Lease Term (years)
 
5.55

 
5.98

 
 
 
 
 
Weighted Average Collateralized Incremental Borrowing Rate
 
4.04
%
 
4.93
%

NOTE 10.   DERIVATIVES AND HEDGING ACTIVITIES

Universal is exposed to various risks in its worldwide operations and uses derivative financial instruments to manage two specific types of risks – interest rate risk and foreign currency exchange rate risk. Interest rate risk has been managed by entering into interest rate swap agreements, and foreign currency exchange rate risk has been managed by entering into forward and option foreign currency exchange contracts. However, the Company’s policy also permits other types of derivative instruments. In addition, foreign currency exchange rate risk is also managed through strategies that do not involve derivative instruments, such as using local borrowings and other approaches to minimize net monetary positions in non-functional currencies. The disclosures below provide additional information about the Company’s hedging strategies, the derivative instruments used, and the effects of these activities on the consolidated statements of income and comprehensive income and the consolidated balance sheets. In the consolidated statements of cash flows, the cash flows associated with all of these activities are reported in net cash provided by operating activities.

Cash Flow Hedging Strategy for Interest Rate Risk
    
In February 2019, the Company entered into receive-floating/pay-fixed interest rate swap agreements that were designated and qualify as hedges of the exposure to changes in interest payment cash flows created by fluctuations in variable interest rates on two outstanding non-amortizing bank term loans that were funded as part of a new bank credit facility in December 2018. Although no significant ineffectiveness is expected with this hedging strategy, the effectiveness of the interest rate swaps is evaluated on a quarterly basis. At June 30, 2020, the total notional amount of the interest rate swaps was $370 million, which corresponded with the aggregate outstanding balance of the term loans.
Previously, the Company had receive-floating/pay-fixed interest rate swap agreements that were designated and qualified as cash flow hedges for two outstanding non-amortizing bank loans that were repaid concurrent with closing on the new bank credit facility. Those swap agreements were subsequently terminated in February 2019 concurrent with the inception of the new swap agreements. The fair value of the previous swap agreements, approximately $5.4 million, was received from the counterparties upon termination and is being amortized from accumulated other comprehensive loss into earnings as a reduction of interest expense through the original maturity dates of those agreements. As of June 30, 2020, $2.1 million remained in accumulated other comprehensive loss to be amortized through December 31, 2021.

Cash Flow Hedging Strategy for Foreign Currency Exchange Rate Risk Related to Sales of Crop Inputs, Forecast Purchases of Tobacco, and Related Processing Costs

The majority of the tobacco production in most countries outside the United States where Universal operates is sold in export markets at prices denominated in U.S. dollars. However, sales of crop inputs (such as seeds and fertilizers) to farmers, purchases of tobacco from farmers, and most processing costs (such as labor and energy) in those countries are usually denominated in the local currency. Changes in exchange rates between the U.S. dollar and the local currencies where tobacco is grown and processed affect the ultimate U.S. dollar sales of crop inputs and cost of processed tobacco. From time to time, the Company enters into forward and option contracts to buy U.S. dollars and sell the local currency at future dates that coincide with the sale of crop inputs to farmers. In the case of forecast purchases of tobacco and the related processing costs, the Company enters into forward and option contracts to sell U.S. dollars and buy the local currency at future dates that coincide with the expected timing of a portion of the tobacco purchases and processing costs. These strategies offset the variability of future U.S. dollar cash flows for sales of crop inputs, tobacco purchases, and processing costs for the foreign currency notional amount 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.

15


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 2021 and 2020 was as follows:
 
 
Three Months Ended June 30,
(in millions of dollars)
 
2020
 
2019
 
 
 
 
 
Tobacco purchases
 
$
30.2

 
$
72.0

Processing costs
 
8.0

 
26.3

Crop input sales
 
23.5

 
21.7

Total
 
$
61.7

 
$
120.0



The decreased U.S. dollar notional amounts for tobacco purchases and processing costs hedged during the three months ended June 30, 2020 compared to the three months ended June 30, 2019, primarily reflect a difference in timing of the purchase and processing hedges entered into for the 2021 and 2020 crop years in Brazil. The 2020 crop year tobacco purchases hedges were largely entered into during the first quarter of fiscal year 2020. A portion of the 2021 crop year hedges were entered into during the first quarter of fiscal year 2021, with more contracts expected to be entered into later in fiscal year 2021. All derivative contracts related to tobacco purchases were designated and qualify 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 loss as they occurred, but only recognized in earnings upon sale of the related tobacco to third-party customers. For substantially all hedge gains and losses related to 2020 crop purchases recorded in accumulated other comprehensive loss at June 30, 2020, the Company expects to complete the sale of the tobacco and recognize the amounts in earnings during fiscal year 2021. For substantially all hedge gains and losses related to the 2021 crop purchases recorded in accumulated other comprehensive loss at June 30, 2020, the Company expects to complete the sale of tobacco and recognize the amounts in earnings during fiscal year 2022.

Forward contracts related to processing costs have not been designated as hedges, and gains and losses on those contracts have been recognized in earnings on a mark-to-market basis.

In fiscal year 2020, option contracts entered for the sale of crop inputs were not designated for hedge accounting. The gains and losses for the fiscal year 2020 option contracts entered for the sale of crop inputs were recognized in earnings on a mark-to-market basis. In fiscal year 2021, option contracts entered for the sale of crop inputs were designated and qualify as hedges of future cash flows, therefore the changes in fair value of the fiscal year 2021 option contracts have been recognized in accumulated other comprehensive loss and will be recognized in earnings upon the sale of the related tobacco to third-party customers. Premium payments for option contracts entered into for the sale of crop inputs in fiscal year 2021 and 2020 were expensed into earnings as incurred. For substantially all hedge gains and losses related to the 2021 crop inputs sales recorded in accumulated other comprehensive loss at June 30, 2020, the Company expects to complete the sale of related tobacco to third-party customers and recognize the amounts in earnings during fiscal year 2022.

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.

16


The Company is currently using forward currency contracts to manage its exposure to currency remeasurement risk in Brazil.  The total notional amounts of contracts outstanding at June 30, 2020 and 2019, and March 31, 2020, were approximately $11.8 million, $7.6 million, and $8.9 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.

17



Effect of Derivative Financial Instruments on the Consolidated Statements of Income

The table below outlines the effects of the Company’s use of derivative financial instruments on the consolidated statements of income:

 
 
Three Months Ended June 30,
(in thousands of dollars)
 
2020
 
2019
 
 
 
 
 
Cash Flow Hedges - Interest Rate Swap Agreements
 
 
 
 
Derivative
 
 
 
 
Effective Portion of Hedge
 
 
 
 
Gain (loss) recorded in accumulated other comprehensive loss
 
$
(3,697
)
 
$
(9,812
)
Gain (loss) reclassified from accumulated other comprehensive loss into earnings
 
$
(1,838
)
 
$
(5
)
Gain on terminated interest rate swaps amortized from accumulated other comprehensive loss into earnings
 
$
354

 
$
779

Location of gain (loss) reclassified from accumulated other comprehensive loss into earnings
 
Interest expense
Ineffective Portion of Hedge
 
 
 
 
Gain (loss) recognized in earnings
 
$

 
$

Location of gain (loss) recognized in earnings
 
Selling, general and administrative expenses
Hedged Item
 
 
 
 
Description of hedged item
 
Floating rate interest payments on term loan
 
 
 
 
 
Cash Flow Hedges - Foreign Currency Exchange Contracts
 
 
 
 
Derivative
 
 
 
 
Effective Portion of Hedge
 
 
 
 
Gain (loss) recorded in accumulated other comprehensive loss
 
$
(1,447
)
 
$
2,032

Gain (loss) reclassified from accumulated other comprehensive loss into earnings
 
$
(734
)
 
$
(11
)
Location of gain (loss) reclassified from accumulated other comprehensive loss into earnings
 
Cost of goods sold
Ineffective Portion and Early De-designation of Hedges
 
 
 
 
Gain (loss) recognized in earnings
 
$

 
$

Location of gain (loss) recognized in earnings
 
Selling, general and administrative expenses
Hedged Item
 
 
 
 
Description of hedged item
 
 Forecast purchases of tobacco in Brazil and Africa
 
 
 
 
 
Derivatives Not Designated as Hedges - Foreign Currency Exchange Contracts
 
 
 
 
Gain (loss) recognized in earnings
 
$
(144
)
 
$
51

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 loss of approximately $15.2 million remained in accumulated other comprehensive loss at June 30, 2020. That balance reflects gains and losses on contracts related to the 2020 and 2021 Brazil crops, the 2020 and

18


2021 Africa crops, and the 2021 Brazil crop input sales, less the loss amount reclassified to earnings related to tobacco sold through June 30, 2020. The balance in accumulated other comprehensive loss associated with the 2020 Brazil and Africa crops are expected to be recognized in earnings as a component of cost of goods sold in fiscal year 2021 as those tobaccos are sold to customers. The balance in accumulated other comprehensive loss related to the 2021 Brazil and Africa crops are expected to be recognized in earnings in fiscal year 2022 as those tobaccos are sold to customers. The balance in accumulated other comprehensive loss associated with the 2021 Brazil crop input sales is expected to be recognized in earnings in fiscal year 2022 as those tobaccos are sold to customers. Based on the hedging strategy, as the gain or loss is recognized in earnings, it is expected to be offset by a change in the direct cost for the tobacco or by a change in sales prices if the strategy has been mandated by the customer. Generally, margins on the sale of the tobacco will not be significantly affected.

Effect of Derivative Financial Instruments on the Consolidated Balance Sheets

The table below outlines the effects of the Company’s derivative financial instruments on the consolidated balance sheets at June 30, 2020 and 2019, and March 31, 2020:

 
 
Derivatives in a Fair Value Asset Position
 
Derivatives in a Fair Value Liability Position
 
 
Balance
Sheet
Location
 
Fair Value as of
 
Balance
Sheet
Location
 
Fair Value as of
(in thousands of dollars)
 
 
June 30, 2020
 
June 30, 2019
 
March 31, 2020
 
 
June 30, 2020
 
June 30, 2019
 
March 31, 2020
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives Designated as Hedging Instruments
 
 
 
 
 
 
 
 
 
 
Interest rate swap agreements
 
Other
non-current
assets
 
$

 
$

 
$

 
Other
long-term
liabilities
 
$
39,022

 
$
16,158

 
$
37,163

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency exchange contracts
 
Other
current
assets
 
571

 
1,812

 

 
Accounts
payable and
accrued
expenses
 
1,390

 
19

 
11,467

Total
 
 
 
$
571

 
$
1,812

 
$

 
 
 
$
40,412

 
$
16,177

 
$
48,630

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives Not Designated as Hedging Instruments
 
 
 
 
 
 
 
 
 
 
Foreign currency exchange contracts
 
Other
current
assets
 
$
149

 
$
1,052

 
$
314

 
Accounts
payable and
accrued
expenses
 
$
702

 
$
46

 
$
4,375

Total
 
 
 
$
149

 
$
1,052

 
$
314

 
 
 
$
702

 
$
46

 
$
4,375


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 11.   FAIR VALUE MEASUREMENTS

Universal measures certain financial and nonfinancial assets and liabilities at fair value based on applicable accounting guidance. The financial assets and liabilities measured at fair value include money market funds, trading securities associated with deferred compensation plans, interest rate swap agreements, forward foreign currency exchange contracts, and guarantees of bank loans to tobacco growers. The application of the fair value guidance to nonfinancial assets and liabilities primarily includes the determination of fair values for goodwill and long-lived assets when indicators of potential impairment are present.

Under the accounting guidance, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The framework for measuring fair value is based on a fair value hierarchy that distinguishes between observable inputs and unobservable inputs. Observable inputs are based on market data obtained from independent sources. Unobservable inputs require the Company to make its own assumptions about the value placed on an asset or liability by market participants because little or no market data exists.

19


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.

As permitted under the accounting guidance, the Company uses net asset value per share ("NAV") as a practical expedient to measure the fair value of its money market funds. The fair values for those funds are presented under the heading "NAV" in the tables that follow in this disclosure. In measuring the fair value of liabilities, the Company considers the risk of non-performance in determining fair value. Universal has not elected to report at fair value any financial instruments or any other assets or liabilities that are not required to be reported at fair value under current accounting guidance.

Recurring Fair Value Measurements

At June 30, 2020 and 2019, and at March 31, 2020, 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:
 
 
June 30, 2020
 
 
 
 
Fair Value Hierarchy
 
 
(in thousands of dollars)
 
NAV
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
Money market funds
 
$
4,013

 
$

 
$

 
$

 
$
4,013

Trading securities associated with deferred compensation plans
 

 
13,963

 

 

 
13,963

Foreign currency exchange contracts
 

 

 
720

 

 
720

Total financial assets measured and reported at fair value
 
$
4,013

 
$
13,963

 
$
720

 
$

 
$
18,696

 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
Guarantees of bank loans to tobacco growers
 
$

 
$

 
$

 
$
100

 
$
100

Acquisition-related contingent consideration obligations - short term
 

 

 

 

 

Acquisition-related contingent consideration obligations - long term
 

 

 

 
2,532

 
2,532

Interest rate swap agreements
 

 

 
39,022

 

 
39,022

Foreign currency exchange contracts
 

 

 
2,092

 

 
2,092

Total financial liabilities measured and reported at fair value
 
$

 
$

 
$
41,114

 
$
2,632

 
$
43,746



20


 
 
June 30, 2019
 
 
 
 
Fair Value Hierarchy
 
 
(in thousands of dollars)
 
NAV
 
Level 1