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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 DECEMBER 31, 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)
Virginia54-0414210
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
9201 Forest Hill Avenue,Richmond,Virginia23235
(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 classTrading Symbol(s)Name of Exchange on which registered
Common Stock, no par valueUVVNew 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 FilerþAccelerated 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 February 2, 2021, the total number of shares of common stock outstanding was 24,514,867.



UNIVERSAL CORPORATION
FORM 10-Q
TABLE OF CONTENTS
Item No.Page
PART I - FINANCIAL INFORMATION
1.
2.
3.
4.
PART II - OTHER INFORMATION
1.
2.
Unregistered Sales of Equity Securities and Use of Proceeds
6.
2




PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

UNIVERSAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(in thousands, except share and per share data)
Three Months Ended December 31,Nine Months Ended December 31,
2020201920202019
(Unaudited)(Unaudited)
Sales and other operating revenues$672,931 $505,049 $1,365,767 $1,277,885 
Costs and expenses
Cost of goods sold533,431 412,076 1,103,744 1,030,233 
Selling, general and administrative expenses59,335 48,858 161,152 152,824 
Other income  (4,173) 
Restructuring and impairment costs19,979  19,979  
Operating income60,186 44,115 85,065 94,828 
Equity in pretax earnings (loss) of unconsolidated affiliates1,506 (69)2,089 2,281 
Other non-operating income (expense)30 633 (8)1,893 
Interest income2 164 262 1,412 
Interest expense6,735 5,197 19,140 14,361 
Income before income taxes and other items54,989 39,646 68,268 86,053 
Income taxes14,548 10,328 12,678 26,093 
Net income40,441 29,318 55,590 59,960 
Less: net loss (income) attributable to noncontrolling interests in subsidiaries(7,168)(3,352)(7,541)(3,845)
Net income attributable to Universal Corporation$33,273 $25,966 $48,049 $56,115 
Earnings per share:
Basic
$1.35 $1.04 $1.95 $2.24 
Diluted
$1.34 $1.04 $1.94 $2.23 
Weighted average common shares outstanding:
Basic
24,677,122 24,931,711 24,646,342 25,058,525 
Diluted
24,818,918 25,055,054 24,764,439 25,178,517 
Total comprehensive income, net of income taxes$55,681 $40,023 $84,950 $51,479 
Less: comprehensive (income) loss attributable to noncontrolling interests(7,114)(3,491)(7,566)(3,983)
Comprehensive income (loss) attributable to Universal Corporation$48,567 $36,532 $77,384 $47,496 
Dividends declared per common share$0.77 $0.76 $2.31 $2.28 

See accompanying notes.

3


UNIVERSAL CORPORATION     
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars)
December 31,December 31,March 31,
202020192020
(Unaudited)(Unaudited)
ASSETS
Current assets
Cash and cash equivalents$95,405 $64,734 $107,430 
Accounts receivable, net354,676 271,981 340,711 
Advances to suppliers, net102,795 120,079 133,778 
Accounts receivable—unconsolidated affiliates6,197 24,748 11,483 
Inventories—at lower of cost or net realizable value:
Tobacco814,287 937,661 707,298 
Other144,333 84,621 99,275 
Prepaid income taxes18,174 13,619 12,144 
Other current assets68,928 61,450 67,498 
Total current assets1,604,795 1,578,893 1,479,617 
Property, plant and equipment
Land22,499 22,510 21,376 
Buildings268,377 255,202 256,488 
Machinery and equipment662,854 609,976 634,395 
953,730 887,688 912,259 
Less accumulated depreciation(621,928)(592,457)(597,106)
331,802 295,231 315,153 
Other assets
Operating lease right-of-use assets34,717 34,230 39,256 
Goodwill and other intangibles, net255,365 98,042 144,687 
Investments in unconsolidated affiliates85,610 77,783 77,543 
Deferred income taxes22,281 16,354 20,954 
Other noncurrent assets54,071 50,186 43,711 
452,044 276,595 326,151 
Total assets$2,388,641 $2,150,719 $2,120,921 

See accompanying notes.
4


UNIVERSAL CORPORATION     
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars)

December 31,December 31,March 31,
202020192020
(Unaudited)(Unaudited)
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Notes payable and overdrafts$129,603 $92,592 $78,033 
Accounts payable and accrued expenses156,421 130,165 140,202 
Accounts payable—unconsolidated affiliates7,416 7,494 55 
Customer advances and deposits14,498 8,230 10,242 
Accrued compensation22,744 21,761 23,710 
Income taxes payable6,650 1,991 5,334 
Current portion of operating lease liabilities9,014 8,394 9,823 
Current portion of long-term debt   
Total current liabilities346,346 270,627 267,399 
Long-term debt518,047 368,698 368,764 
Pensions and other postretirement benefits66,764 55,305 70,680 
Long-term operating lease liabilities22,709 23,465 25,893 
Other long-term liabilities71,346 51,185 69,427 
Deferred income taxes46,414 28,228 29,474 
Total liabilities1,071,626 797,508 831,637 
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 24,514,867 shares issued and outstanding at December 31, 2020 (24,693,557 at December 31, 2019 and 24,421,835 at March 31, 2020)
325,350 324,388 321,502 
Retained earnings1,067,437 1,089,718 1,076,760 
Accumulated other comprehensive loss(122,262)(104,310)(151,597)
Total Universal Corporation shareholders' equity1,270,525 1,309,796 1,246,665 
Noncontrolling interests in subsidiaries46,490 43,415 42,619 
Total shareholders' equity1,317,015 1,353,211 1,289,284 
Total liabilities and shareholders' equity$2,388,641 $2,150,719 $2,120,921 

See accompanying notes.


5


UNIVERSAL CORPORATION     
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
Nine Months Ended December 31,
20202019
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income$55,590 $59,960 
Adjustments to reconcile net income to net cash used by operating activities:
Depreciation and amortization32,626 27,500 
Net provision for losses (recoveries) on advances and guaranteed loans to suppliers2,753 93 
Foreign currency remeasurement (gain) loss, net(8,823)(2,179)
Foreign currency exchange contracts(7,723)(698)
Restructuring and impairment costs19,979  
Restructuring payments(5,179)(444)
Change in estimated fair value of contingent consideration for FruitSmart acquisition(4,173) 
Other, net5,260 3,412 
Changes in operating assets and liabilities, net(51,687)(260,542)
Net cash provided (used) by operating activities38,623 (172,898)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment(33,794)(21,692)
Purchase of business, net of cash held by the business(161,095) 
Proceeds from sale of property, plant and equipment4,086 2,946 
Other(800)496 
Net cash used by investing activities(191,603)(18,250)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of short-term debt, net57,207 41,201 
Issuance of long-term debt150,000  
Dividends paid to noncontrolling interests(3,695)(3,359)
Repurchase of common stock (20,125)
Dividends paid on common stock(56,301)(56,601)
Other(1,949)(2,883)
Net cash provided (used) by financing activities145,262 (41,767)
Effect of exchange rate changes on cash1,693 93 
Net decrease in cash, restricted cash and cash equivalents(6,025)(232,822)
Cash, restricted cash and cash equivalents at beginning of year107,430 297,556 
Cash, restricted cash and cash equivalents at end of period$101,405 $64,734 
Supplemental Information:
Cash and cash equivalents$95,405 $64,734 
Restricted cash (Other noncurrent assets)6,000  
Total cash, restricted cash and cash equivalents$101,405 $64,734 

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 an agri-products supplier. 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. During the three months ended December 31, 2020, the Company realigned its reportable operating segments. As a result of this realignment, the Company now reports two reportable operating segments, Tobacco Operations and Ingredients Operations. See Note 15 for additional information. 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 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 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 December 31, 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 its 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 was 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.
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In March 2020, the FASB issued Accounting Standards Update No. 2020-04, "Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting" ("ASU 2020-04"). ASU 2020-04 provides optional expedients and exceptions related to contract modifications and hedge accounting to address the transitions from the London Interbank Offered Rate ("LIBOR") and other interbank offered rates to alternative reference rates. The guidance permits an entity to consider contract modification due to reference rate reform to be an event that does not require contract remeasurement at the modification date or reassessment of a previous accounting determination. ASU 2020-04 also temporarily allows hedge relationships to continue without de-designation upon changes due to reference rate reform. The standard is effective upon issuance and can be applied as of March 12, 2020 through December 31, 2022. The Company is currently evaluating the impact that the guidance will have on its consolidated financial statements.

NOTE 3.   BUSINESS COMBINATION
Acquisition of Silva International, Inc.
On October 1, 2020 the Company acquired 100% of the capital stock of Silva International, Inc. (“Silva”), a natural, specialty dehydrated vegetable, fruit, and herb processing company serving global markets, for approximately $164 million in cash and $8.9 million of additional working capital on-hand at the date of acquisition. The acquisition of Silva diversifies the Company's product offerings and generates new opportunities for its plant-based ingredients platform.

The Company continues to employ one of Silva's selling shareholders and as stipulated in the Silva purchase agreement has transferred $6 million to a third-party escrow account that may ultimately be earned by the selling shareholder upon completion of a post-combination service period. Since the compensation agreement for the selling shareholder who remains employed with the Company includes a post-combination service period, the Company has excluded the entire $6 million in the purchase price to be allocated. The $6 million in escrow is recognized as restricted cash in other noncurrent assets on the consolidated balance sheet at December 31, 2020. The contingent consideration arrangement for the selling shareholder includes a post-combination service requirement and forfeitable payment provisions, therefore under ASC Topic 805, "Business Combinations," must be treated as compensation expense and recognized ratably over the requisite service period in selling, general, and administrative expense on the consolidated statements of income.
For the three and nine months ending December 31, 2020, the Company incurred $2.2 million and $3.9 million for acquisition-related transaction costs for the purchase of Silva, respectively. The acquisition-related costs were expensed as incurred and recorded in selling, general, and administrative expense on the consolidated statements of income.



















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The following preliminary allocation of the purchase price was based on third-party valuations and assumptions. At December 31, 2020, the Company is finalizing working capital acquired and income tax related assets and liabilities. The final purchase price allocation is expected to be completed in the fourth quarter of fiscal year 2021. The following table summarizes the preliminary purchase price allocation of the assets acquired and liabilities assumed on October 1, 2020.
(in thousands of dollars)
Assets
Cash and cash equivalents$8,126 
Accounts receivable, net17,885 
Advances to suppliers, net3,011 
Inventory33,162 
Other current assets833 
Property, plant and equipment (net)24,437 
Intangibles
Customer relationships53,000 
Trade names7,800 
Goodwill53,728 
Total assets acquired201,982 
Liabilities
Accounts payable and accrued expenses13,103 
Accrued compensation3,350 
Income taxes payable1,042 
Deferred income taxes20,487 
Total liabilities assumed37,982 
Total assets acquired and liabilities assumed$164,000 

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

Acquisition of FruitSmart, Inc.
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 additional 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 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 December 31, 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.
9

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.
(in thousands of dollars)
Assets
Cash and cash equivalents$1,298 
Accounts receivable, net7,707 
Inventory23,793 
Other current assets310 
Property, plant and equipment (net)23,400 
Intangibles
Customer relationships9,500 
Developed technology4,800 
Trade names3,300 
Non-compete agreements1,000 
Goodwill28,863 
Total assets acquired103,971 
Liabilities
Accounts payable and accrued expenses7,592 
Accrued compensation670 
Deferred income taxes9,004 
Total liabilities assumed17,266 
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 goodwill recognized for the FruitSmart acquisition is not deductible for U.S. income tax purposes. The tax basis of the assets acquired and liabilities assumed did not result in a step-up of tax basis. The Company determined the FruitSmart operations are not material to the Company’s consolidated results. Therefore, pro forma information is not presented.
For the three and nine month ending December 31, 2019, the Company incurred $1.0 million and $1.9 million for acquisition-related transaction costs for the purchase of FruitSmart, respectively. The acquisition-related costs were expensed as incurred and recorded in selling, general, and administrative expense on the consolidated statements of income.

NOTE 4.  RESTRUCTURING AND IMPAIRMENT COSTS

Universal continually reviews its business for opportunities to realize efficiencies, reduce costs, and realign its operations in response to business changes. Restructuring and impairment costs are periodically incurred in connection with those activities.
Ingredients Operations
During the three months ended December 31, 2020, the Company committed to a plan to wind-down its subsidiary, Carolina Innovative Food Ingredients, Inc. ("CIFI"), a sweet potato processing operation located in Nashville, North Carolina. The CIFI operation was a start-up project initially undertaken by the Company in fiscal year 2015. The decision to wind down CIFI is consistent with the Company’s capital allocation strategy to focus on delivering shareholder value through building and enhancing a plant-based ingredients platform, which includes integrating and exploring the synergies of recently acquired businesses FruitSmart and Silva. The Company determined that CIFI was not a strategic fit for the platform’s long-term objectives. CIFI’s single-product focused processing facility and ongoing international pricing pressures, among other factors, created challenges that proved insurmountable. Sales of existing inventory and certain administrative activities at CIFI will continue into fiscal year 2022, but no manufacturing occurred subsequent to December 31, 2020. As a result of the decision to wind down the CIFI operations, the Company will pay termination benefits totaling approximately $0.6 million to employees whose permanent positions are being eliminated, with termination benefits due to be paid before the end of February 2021. In addition to the termination costs, the Company recognized various other costs associated with the wind-down of the CIFI facility. These costs include impairments of property, plant, and equipment (including the factory building), as well as inventory and
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supply write-downs. The restructuring and impairment charge incurred for the CIFI wind-down was $16.1 million for the three and nine months ended December 31, 2020.
Tobacco Operations
During the three and nine months ended December 31, 2020, the Company incurred $2.6 million of termination and impairment costs associated with restructuring of tobacco buying and administrative operations in Africa, as well as a $0.9 million charge for the liquidation of an idled service entity in Tanzania, and $0.4 million of termination benefits in North America. Total restructuring and impairments costs related to the Tobacco Operations segment for the three and nine months ended December 31, 2020 were $3.9 million.
A summary of the restructuring and impairment costs recorded in the quarter ended December 31, 2020 were as follows:
(in thousands)Three Months Ended December 31, 2020
Restructuring costs:
  Employee termination benefits$2,625 
  Other1,766 
    Total restructuring costs4,391 
Impairment costs:
  Property, plant and equipment13,886 
  Inventory1,702 
    Total impairment costs15,588 
      Total restructuring and impairment costs$19,979 
For the three and nine months ended December 31, 2020, the restructuring and impairment costs reduced operating income and income before income taxes by $20.0 million, net income attributable to Universal Corporation by $16.1 million, and diluted earnings per share by $0.65.
A reconciliation of the liability for termination benefits through December 31, 2020 is as follows:
(in thousands)Nine Months Ended December 31, 2020
Balance at April 1, 2020$3,404 
Costs charged to expense2,625 
Payments(5,179)
Balance at December 31, 2020$850 

NOTE 5.  REVENUE FROM CONTRACTS WITH CUSTOMERS

The majority of the Company’s consolidated revenue consists of sales of processed leaf tobacco to customers. The Company also earns revenue from processing leaf tobacco owned by customers and from various other services provided to customers. The Company also has fruit and vegetable processing operations that provide customers with a range of food ingredient products. Payment terms with customers vary depending on customer creditworthiness, product types, services provided, and other factors. Contract durations and payment terms for all revenue categories generally do not exceed one year. Therefore, the Company has applied a practical expedient to not adjust the transaction price for the effects of financing components, as the Company expects that the period from the time the revenue for a transaction is recognized to the time the customer pays for the related good or service transferred will be one year or less. Below is a description of the major revenue-generating categories from contracts with customers.
Tobacco Sales
The majority of the Company’s business involves purchasing leaf tobacco from farmers in the origins where it is grown, processing and packing the tobacco in its factories, and then transferring ownership and control of the tobacco to customers. On a much smaller basis, the Company also sources processed tobacco from third-party suppliers for resale to customers. The contracts for tobacco sales with customers create a performance obligation to transfer tobacco to the customer. Transaction prices for the sale of tobaccos are primarily based on negotiated fixed prices, but the Company does have a small number of cost-plus contracts with certain customers. Cost-plus arrangements provide the Company reimbursement of the cost to purchase and process the
11

tobacco, plus a contractually agreed-upon profit margin. The Company utilizes the most likely amount methodology under the accounting guidance to recognize revenue for cost-plus arrangements with customers. Shipping and handling costs under tobacco sales contracts with customers are treated as fulfillment costs and included in the transaction price. Taxes assessed by government authorities on the sale of leaf tobacco products are excluded from the transaction price. At the point in time that the customer obtains control over the tobacco, which is typically aligned with physical shipment under the contractual terms with the customer, the Company completes its performance obligation and recognizes the revenue for the sale.
Ingredient Sales
In recent fiscal years, the Company has diversified operations through acquisition of established companies that offer customers a wide range of both liquid and dehydrated fruit and vegetable ingredient products. These operations procure raw materials from domestic and international growers and suppliers and through a variety of processing steps including sorting, cleaning, pressing, mixing, and blending to manufacture finished goods utilized in both human and pet food. The contracts for food ingredients with customers create a performance obligation to transfer the manufactured finished goods to the customer. Transaction prices for the sale of food ingredients are primarily based on negotiated fixed prices. At the point in time that the customer obtains control over the finished product, which is typically aligned with physical shipment under the contractual terms with the customer, the Company completes its performance obligation and recognizes the revenue for the sale.
Processing Revenue
Processing and packing of customer-owned tobacco and ingredients is a short-duration process. Processing charges are primarily based on negotiated fixed prices per unit of weight processed. Under normal operating conditions, customer-owned raw materials that are placed into the production line exits as processed and packed product and is then later transported to customer-designated transfer locations. The revenue for these services is recognized when the performance obligation is satisfied, which is generally when processing is completed. The Company’s operating history and contract analyses indicate that customer requirements for processed tobacco and food ingredients products are consistently met upon completion of processing.
Other Operating Sales and Revenue
From time to time, the Company enters into various arrangements with customers to provide other value-added services that may include blending, chemical and physical testing of products, storage, and tobacco cutting services for select manufacturers. These other arrangements and operations are a much smaller portion of the Company’s business, and are separate and distinct contractual agreements from the Company’s tobacco and food ingredients sales or third-party processing arrangements with customers. The transaction prices and timing of revenue recognition of these items are determined by the specifics of each contract.
Disaggregation of Revenue from Contracts with Customers
The following table disaggregates the Company’s revenue by significant revenue-generating category:
Three Months Ended December 31,Nine Months Ended December 31,
(in thousands of dollars)2020201920202019
Tobacco sales$583,543 $475,574 $1,193,230 $1,193,062 
Ingredient sales47,337 1,064 82,820 2,705 
Processing revenue18,831 20,112 47,605 55,247 
Other sales and revenue from contracts with customers14,867 6,623 32,671 22,773 
   Total revenue from contracts with customers664,578 503,373 1,356,326 1,273,787 
Other operating sales and revenues8,353 1,676 9,441 4,098 
   Consolidated sales and other operating revenues$672,931 $505,049 $1,365,767 $1,277,885 

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

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NOTE 6.   GUARANTEES, OTHER CONTINGENT LIABILITIES, AND OTHER MATTERS

Guarantees and Other Contingent Liabilities

Guarantees of Bank Loans and Other Contingent Liabilities

The majority of crop financing utilized for fiscal year 2021 in Brazil did not require guaranteed bank loans to tobacco growers, resulting in the elimination of guarantees at December 31, 2020. For the majority of crop financing prior to fiscal year 2021, the Company relied heavily on guaranteed bank loans to tobacco growers in Brazil for crop financing. Bank guarantees for the Company's operating subsidiary in Brazil normally expire within one year. The subsidiary withheld payments due to the farmers on delivery of tobacco and forwarded 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 would 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 was the face amount (which includes unpaid accrued interest), which was zero at December 31, 2020, $5.1 million at December 31, 2019, and $3.0 million at March 31, 2020. The fair value of the guarantees was zero liability at December 31, 2020, $0.1 million at December 31, 2019, and $0.1 million at March 31, 2020. In addition to these guarantees, the Company had other contingent liabilities totaling approximately $1 million at December 31, 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 $11 million. Those amounts are based on the exchange rate for the Brazilian currency at December 31, 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 December 31, 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 December 31, 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 December 31, 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 December 31, 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 December 31, 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.
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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 $122 million at December 31, 2020, $142 million at December 31, 2019, and $153 million at March 31, 2020. The related valuation allowances totaled $16 million at December 31, 2020, $18 million at December 31, 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 $2.8 million and reduced by net recoveries of approximately $0.1 million in the nine-month periods ended December 31, 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 December 31, 2020, the aggregate balance of recoverable tax credits held by the Company’s subsidiaries totaled approximately $53 million ($58 million at December 31, 2019, and $52 million at March 31, 2020), and the related valuation allowances totaled approximately $18 million ($20 million at December 31, 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.

Long-Term Debt

In December 2020, the Company repaid $150 million of revolving credit borrowings used to finance the purchase of Silva with term loans under its existing senior unsecured bank credit facility. The Company increased the borrowings of the senior unsecured five-year and seven-year term loans by $75 million each. At December 31, 2020, the five-year term loan maturing December 2023 and the seven-year term loan maturing December 2025 had outstanding borrowings of $225 million and $295 million, respectively. Under the senior unsecured bank credit facility, the additional $150 million of terms loans bear interest at variable rates plus a margin based on the Company's credit metrics and interest payments remained unhedged at December 31,
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2020. 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 $100 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 $100 million of remaining capacity for repurchases of common and/or preferred stock at December 31, 2020.

NOTE 7.   EARNINGS PER SHARE

    The following table sets forth the computation of basic and diluted earnings per share:
Three Months Ended December 31,Nine Months Ended December 31,
(in thousands, except share and per share data)2020201920202019
Basic Earnings Per Share
Numerator for basic earnings per share
Net income attributable to Universal Corporation$33,273 $25,966 $48,049 $56,115 
Denominator for basic earnings per share
Weighted average shares outstanding24,677,122 24,931,711 24,646,342 25,058,525 
Basic earnings per share$1.35 $1.04 $1.95 $2.24 
Diluted Earnings Per Share
Numerator for diluted earnings per share
Net income attributable to Universal Corporation$33,273 $25,966 $48,049 $56,115 
Denominator for diluted earnings per share:
Weighted average shares outstanding24,677,122 24,931,711 24,646,342 25,058,525 
Effect of dilutive securities
Employee and outside director share-based awards141,796 123,343 118,097 119,992 
Denominator for diluted earnings per share24,818,918 25,055,054 24,764,439 25,178,517 
Diluted earnings per share$1.34 $1.04 $1.94 $2.23 

NOTE 8.   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 and timing of domestic and foreign earnings, discrete items, and the effect of exchange rate changes on taxes.
    
    The consolidated effective income tax rate for the three and nine months ended December 31, 2020 was 26% and 19%, respectively. The Company recognized a $2.9 million income tax benefit in the three and nine months ended December 31, 2020 in connection with amending and finalizing of prior year consolidated U.S. income tax returns. The Company's consolidated effective income tax rate for the nine months ended December 31, 2020 was also affected by a $4.4 million net tax benefit for final U.S. tax regulations issued for hybrid dividends paid by foreign subsidiaries. Without these items, the consolidated effective
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income tax rate for the three and nine months ended December 31, 2020 would have been approximately 32% and 29%, respectively. Additionally, for the nine months ended December 31, 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 three and nine months ended December 31, 2019 was approximately 26% and 30%, respectively. Income taxes for the nine months ended December 31, 2019 were affected by a $2.8 million net tax provision related to a tax settlement at a foreign subsidiary. The Company recognized a $1.5 million income tax benefit in the three and nine months ended December 31, 2019 in connection with amending and finalizing of prior year consolidated U.S. income tax returns. Without these items, the consolidated effective income tax rate for the three months and nine months ended December 31, 2019 would have been approximately 30% and 29%, respectively.

NOTE 9.   GOODWILL AND OTHER INTANGIBLES
The Company's changes in goodwill at December 31, 2020 and 2019 consisted of the following:
(in thousands of dollars)Nine Months Ended December 31,
20202019
Balance at beginning of fiscal year$126,826 $97,907 
Acquisition of business(1)
53,728  
Foreign currency translation adjustment
101 62 
Balance at end of period$180,655 $97,969 
(1) On October 1, 2020 the Company acquired 100% of the capital stock of Silva International, Inc. for approximately $164.0 million in cash and $8.9 million of working capital on-hand at the date of acquisition. The Silva acquisition resulted in $53.7 million of goodwill. See Note 3 for additional information.

The Company's intangible assets primarily consist of capitalized customer-related intangibles, trade names, proprietary developed technology and noncompetition agreements. The Company's intangible assets subject to amortization consisted of the following at December 31, 2020 and 2019:
(in thousands, except useful life)December 31,
20202019
Useful Life (years)Gross Carrying ValueAccumulated AmortizationNet Carrying ValueGross Carrying ValueAccumulated AmortizationNet Carrying Value
Customer relationships(1) (2)
1113$62,500 $(1,935)$60,565 $ $ $ 
Trade names(1) (2)
511,100 (1,050)10,050    
Developed technology(1)
34,800 (1,600)3,200    
Noncompetition agreements(1)
51,000 (200)800    
Other5796 (701)95 774 (701)73 
Total intangible assets$80,196 $(5,486)$74,710 $774 $(701)$73 
(1) On January 1, 2020 the Company acquired 100% of the capital stock of FruitSmart 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.
(2) On October 1, 2020 the Company acquired 100% of the capital stock of Silva International, Inc. for approximately $164.0 million in cash and $8.9 million of working capital on-hand at the date of acquisition. The Silva acquisition resulted in $60.8 million of intangibles. See Note 3 for additional information.
Intangible assets are amortized on a straight-line basis over the asset's estimated useful economic life as noted above.

The Company's amortization expense for intangible assets for the three and nine months ended December 31, 2020 and 2019:
(in thousands of dollars)Three Months Ended December 31,Nine Months Ended December 31,
2020201920202019
Amortization Expense$2,404 $9 $4,021 $26 

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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 December 31, 2020, the expected future amortization expense for intangible assets is as follows:
Fiscal Year (in thousands of dollars)
2021 (excluding the nine months ended December 31, 2020)
$2,407 
20229,611 
20239,208 
20247,969 
2025 and thereafter45,515 
Total expected future amortization expense$74,710 

NOTE 10.   LEASES

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

The following table sets forth the right-of-use assets and lease liabilities for operating leases included in the Company’s consolidated balance sheet:
(in thousands of dollars)December 31, 2020December 31, 2019March 31, 2020
Assets
   Operating lease right-of-use assets$34,717 $34,230 $39,256 
Liabilities
    Current portion of operating lease liabilities$9,014 $8,394 $9,823 
    Long-term operating lease liabilities22,709 23,465 25,893 
          Total operating lease liabilities$31,723 $31,859 $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 December 31,Nine Months Ended December 31,
(in thousands of dollars)2020201920202019
Income Statement Location
   Cost of goods sold$3,401 $2,786 $9,531 $7,995 
   Selling, general, and administrative expenses2,520 2,132 7,176 6,182 
          Total operating lease costs(1)
$5,921 $4,918 $16,707 $14,177 
(1)Includes variable operating lease costs.

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The following table reconciles the undiscounted cash flows to the operating lease liabilities in the Company’s consolidated balance sheet:
(in thousands of dollars)December 31, 2020
Maturity of Operating Lease Liabilities
2021(excluding the nine months ended December 31, 2020)
$3,158 
20228,760 
20237,038 
20245,302 
20254,286 
2026 and thereafter7,264 
          Total undiscounted cash flows for operating leases$35,808 
          Less: Imputed interest(4,085)
Total operating lease liabilities$31,723 

As of December 31, 2020, the Company had no leases that did not yet commence.
The following table sets forth supplemental information related to operating leases:
Three Months Ended December 31,Nine Months Ended December 31,
(in thousands, except lease term and incremental borrowing rate)2020201920202019
Supplemental Cash Flow Information
Cash paid for amounts included in the measurement of operating lease liabilities$3,171 $3,805 $9,358 $11,064 
Right-of-use assets obtained in exchange for new operating leases1,532 1,512 3,122 5,613 
Weighted Average Remaining Lease Term (years)5.336.01
Weighted Average Collateralized Incremental Borrowing Rate4.21 %4.82 %

NOTE 11.   DERIVATIVES AND HEDGING ACTIVITIES

Universal is exposed to various risks in its worldwide operations and uses derivative financial instruments to manage two specific types of risks – interest rate risk and foreign currency exchange rate risk. Interest rate risk has been managed by entering into interest rate swap agreements, and foreign currency exchange rate risk has been managed by entering into forward and option foreign currency exchange contracts. However, the Company’s policy also permits other types of derivative instruments. In addition, foreign currency exchange rate risk is also managed through strategies that do not involve derivative instruments, such as using local borrowings and other approaches to minimize net monetary positions in non-functional currencies. The disclosures below provide additional information about the Company’s hedging strategies, the derivative instruments used, and the effects of these activities on the consolidated statements of income and comprehensive income and the consolidated balance sheets. In the consolidated statements of cash flows, the cash flows associated with all of these activities are reported in net cash provided by operating activities.
Cash Flow Hedging Strategy for Interest Rate Risk
In February 2019, the Company entered into receive-floating/pay-fixed interest rate swap agreements that were designated and qualify as hedges of the exposure to changes in interest payment cash flows created by fluctuations in variable interest rates on two outstanding non-amortizing bank term loans that were funded as part of a new bank credit facility in December 2018. Although no significant ineffectiveness is expected with this hedging strategy, the effectiveness of the interest rate swaps is evaluated on a quarterly basis. At December 31, 2020, the total notional amount of the interest rate swaps was $370 million, which corresponded with the former original outstanding balance of the term loans. During the third quarter of fiscal year 2021, the Company converted $150 million from the balance in its revolving credit line into the existing term loans, splitting the balance equally between them. At December 31, 2020, the Company is not hedging the interest payments on the additional $150 million of term loans. The increase to the principal balance of the term loans does not have an impact to the effectiveness analysis of the interest rate swap agreements.
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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 December 31, 2020, $1.4 million remained in accumulated other comprehensive loss to be amortized through December 31, 2021.
Cash Flow Hedging Strategy for Foreign Currency Exchange Rate Risk Related to Sales of Crop Inputs, Forecast Purchases of Tobacco, and Related Processing Costs
The majority of the tobacco production in most countries outside the United States where Universal operates is sold in export markets at prices denominated in U.S. dollars. However, sales of crop inputs (such as seeds and fertilizers) to farmers, purchases of tobacco from farmers, and most processing costs (such as labor and energy) in those countries are usually denominated in the local currency. Changes in exchange rates between the U.S. dollar and the local currencies where tobacco is grown and processed affect the ultimate U.S. dollar sales of crop inputs and cost of processed tobacco. From time to time, the Company enters into forward and option contracts to buy U.S. dollars and sell the local currency at future dates that coincide with the sale of crop inputs to farmers. In the case of forecast purchases of tobacco and the related processing costs, the Company enters into forward and option contracts to sell U.S. dollars and buy the local currency at future dates that coincide with the expected timing of a portion of the tobacco purchases and processing costs. These strategies offset the variability of future U.S. dollar cash flows for sales of crop inputs, tobacco purchases, and processing costs for the foreign currency notional amount 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.