What changed in this filing

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Item 1. Financial Statements

2020-11-05 compared with 2020-08-05 · 265 added, 157 removed, 608 unchanged (41% of the section changed)

3 unchanged sentences

(in thousands, except share and per share data)

Three Months Ended June 30,

Three Months Ended September 30, Six Months Ended September 30,

2020 2019 2020 2019

(Unaudited) (Unaudited)

Sales and other operating revenues $ 377,025 $ 475,921 $ 692,836 $ 772,836

2 unchanged sentences

Selling, general and administrative expenses 52,407 52,830 101,817 103,966

Other income — — ( 4,173 ) —

Operating income 16,351 43,199 24,879 50,713

4 unchanged sentences

Income before income taxes and other items 11,427 41,246 13,279 46,407

Income taxes 3,178 11,499 ( 1,870 ) 15,765

Net income 8,249 29,747 15,149 30,642

net loss (income) attributable to noncontrolling interests in subsidiaries ( 747 ) ( 1,670 ) ( 373 ) ( 493 )

1 unchanged sentence

Earnings per share:

$ 0.30 $ 1.12 $ 0.60 $ 1.20

$ 0.30 $ 1.11 $ 0.60 $ 1.19

Weighted average common shares outstanding:

24,658,895 25,086,580 24,630,886 25,122,283

24,770,421 25,197,325 24,737,134 25,240,600

Total comprehensive income, net of income taxes $ 22,060 $ 14,908 $ 29,269 $ 11,456

6 unchanged sentences

(in thousands of dollars)

September 30, September 30, March 31,

2020 2019 2020

(Unaudited) (Unaudited)

Current assets

4 unchanged sentences

Inventories—at lower of cost or net realizable value:

Tobacco 888,213 918,592 707,298

Other 116,299 97,536 99,275

Prepaid income taxes 20,712 13,454 12,144

2 unchanged sentences

Property, plant and equipment

Land 21,515 22,696 21,376

Buildings 259,875 261,599 256,488

Machinery and equipment 657,435 609,320 634,395

938,825 893,615 912,259

Less accumulated depreciation ( 617,553 ) ( 598,184 ) ( 597,106 )

321,272 295,431 315,153

Operating lease right-of-use assets 35,665 34,838 39,256

3 unchanged sentences

Other noncurrent assets 42,239 45,085 43,711

326,366 273,243 326,151

Total assets $ 2,242,292 $ 2,218,232 $ 2,120,921

See accompanying notes.

2 unchanged sentences

(in thousands of dollars)

September 30, September 30, March 31,

2020 2019 2020

(Unaudited) (Unaudited)

LIABILITIES AND SHAREHOLDERS’ EQUITY

19 unchanged sentences

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)

Common stock, no par value, 100,000,000 shares authorized 24,514,867 shares issued and outstanding at September 30, 2020 ( 24,841,863 at September 30, 2019 and 24,421,835 at March 31, 2020)

323,761 324,927 321,502

Retained earnings 1,053,295 1,088,608 1,076,760

8 unchanged sentences

(in thousands of dollars)

Three Months Ended June 30,

Six Months Ended September 30,

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income $ 15,149 $ 30,642

Adjustments to reconcile net income to net cash used by operating activities:

5 unchanged sentences

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

Other, net 3,049 472

Changes in operating assets and liabilities, net ( 168,502 ) ( 327,975 )

6 unchanged sentences

Issuance of short-term debt, net 162,646 104,003

Dividends paid to noncontrolling interests ( 3,695 ) ( 3,359 )

Repurchase of common stock — ( 12,338 )

Dividends paid on common stock ( 37,424 ) ( 37,721 )

Other ( 1,949 ) ( 2,883 )

Net cash provided (used) by financing activities 119,578 47,702

7 unchanged sentences

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.

Universal Corporation, which together with its subsidiaries is referred to herein as “Universal” or the “Company,” is an agri-products supplier and 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.

2 unchanged sentences

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.

The extent to which the ongoing COVID-19 pandemic will impact the Company's financial condition, results of operations and demand for our 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.

At September 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.

ACCOUNTING PRONOUNCEMENTS

3 unchanged sentences

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.

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.

18 unchanged sentences

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.

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.

8 unchanged sentences

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.

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 September 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.

(in thousands of dollars)

Cash and cash equivalents $ 1,298

Accounts receivable, net 7,707

Inventory 23,793

Other current assets 310

2 unchanged sentences

Developed technology 4,800

Trade names 3,300

Non-compete agreements 1,000

Goodwill 28,863

Total assets acquired 103,971

13 unchanged sentences

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.

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.

9 unchanged sentences

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

Tobacco Processing Revenue

Processing and packing of customer-owned leaf tobacco is a short-duration process.

10 unchanged sentences

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

Three Months Ended June 30,

Three Months Ended September 30, Six Months Ended September 30,

(in thousands of dollars) 2020 2019 2020 2019

Tobacco sales $ 334,545 $ 449,431 $ 609,687 $ 717,488

Processing revenue

Tobacco processing revenue 12,474 16,701 28,774 35,135

Other sales and revenue from contracts with customers 29,329 8,381 53,287 17,791

6 unchanged sentences

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;

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 September 30, 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 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.

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 September 30, 2020, $ 5 million at September 30, 2019, and $ 3 million at March 31, 2020.

The fair value of the guarantees was zero liability at September 30, 2020, $ 0.1 million at September 30, 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 September 30, 2020, primarily related to outstanding letters of credit.

Value-Added Tax Assessments in Brazil

5 unchanged sentences

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 .

Those amounts are based on the exchange rate for the Brazilian currency at September 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).

As of September 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 $ 8 million (at the September 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 .

While the range of reasonably possible loss is zero up to the full $ 8 million remaining assessment with interest, based on the strength of the subsidiary’s defenses, no loss within that range is considered probable at this time and no liability has been recorded at September 30, 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.

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 .

However, based on the strength of the subsidiary's defenses, no loss within that range is considered probable at this time and no liability has been recorded at September 30, 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.

11 unchanged sentences

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.

Short-term and long-term advances to suppliers totaled $ 81 million at September 30, 2020, $ 94 million at September 30, 2019, and $ 153 million at March 31, 2020.

The related valuation allowances totaled $ 14 million at September 30, 2020, $ 16 million at September 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 $ 0.3 million and reduced by net recoveries of approximately $ 1.9 million in the six-month periods ended September 30, 2020 and 2019, respectively.

These net provisions and recoveries are included in selling, general, and administrative expenses in the consolidated statements of income.

12 unchanged sentences

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 Company reviews these balances on a

regular basis and records valuation allowances on the credits to reflect amounts that are not expected to be recovered, as well as discounts anticipated on credits that are expected to be sold or transferred.

At September 30, 2020, the aggregate balance of recoverable tax credits held by the Company’s subsidiaries totaled approximately $ 51 million ($ 56 million at September 30, 2019, and $ 52 million at March 31, 2020), and the related valuation allowances totaled approximately $ 18 million ($ 20 million at September 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.

2 unchanged sentences

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 .

The program had $ 56.1 million of remaining capacity for repurchases of common and/or preferred stock at September 30, 2020.

This stock repurchase program was replaced in November 2020 when our Board of Directors approved a new authorization for the purchase of up to $ 100 million in common and/or preferred stock through November 15, 2022, or when authorized funds for the program have been exhausted.

EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per share:

Three Months Ended June 30,

Three Months Ended September 30, Six Months Ended September 30,

(in thousands, except share and per share data) 2020 2019 2020 2019

16 unchanged sentences

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.

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 quarter and six months ended September 30, 2020 were 28 % and a benefit of 14 %, respectively.

The Company's consolidated effective income tax rate for the six months ended September 30, 2020 was affected by a $ 4.4 million net tax benefit for final U.S.

tax regulations issued 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 % .

tax regulations, the consolidated effective income tax rate for the six months ended September 30, 2020 would have been approximately 19 %.

Additionally, for the six months ended September 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 and six months ended September 30, 2019 were approximately 28 % and 34 %, respectively.

Income taxes for the six months ended September 30, 2019 were 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 September 30, 2019 would have been approximately 28 %.

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,

Balance at beginning of year

The Company's changes in goodwill at September 30, 2020 and 2019 consisted of the following:

(in thousands of dollars) Six Months Ended September 30,

Balance at beginning of fiscal year $ 126,826 $ 97,907

Foreign currency translation adjustment

1 unchanged sentence

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)

Gross Carrying Value

Accumulated Amortization

Net Carrying Value

Gross Carrying Value

Accumulated Amortization

Net Carrying Value

The Company's intangible assets subject to amortization consisted of the following at September 30, 2020 and 2019:

(in thousands, except useful life) September 30,

Useful Life Gross Carrying Value Accumulated Amortization Net Carrying Value Gross Carrying Value Accumulated Amortization Net Carrying Value

Customer relationships (1)

13 $ 9,500 $ ( 548 ) $ 8,952 $ — $ — $ —

Trade names (1)

5 3,300 ( 495 ) 2,805 — — —

Developed technology (1)

3 4,800 ( 1,200 ) 3,600 — — —

Noncompetition agreements (1)

5 1,000 ( 150 ) 850 — — —

Other 5 762 ( 660 ) 102 737 ( 669 ) 68

Total intangible assets $ 19,362 $ ( 3,053 ) $ 16,309 $ 737 $ ( 669 ) $ 68

(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.

(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.

1 unchanged sentence

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.

The Company's amortization expense for intangible assets for the three and six months ended September 30, 2020 and 2019:

(in thousands of dollars) Three Months Ended September 30, Six Months Ended September 30,

2020 2019 2020 2019

Amortization Expense $ 809 $ 9 $ 1,617 $ 17

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:

As of September 30, 2020, the expected future amortization expense for intangible assets is as follows:

Fiscal Year (in thousands of dollars)

2021 (excluding the six months ended September 30, 2020)

2025 and thereafter 7,039

5 unchanged sentences

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

(in thousands of dollars) September 30, 2020 September 30, 2019 March 31, 2020

Operating lease right-of-use assets $ 35,665 $ 34,838 $ 39,256

3 unchanged sentences

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)

Three Months Ended September 30, Six Months Ended September 30,

(in thousands of dollars) 2020 2019 2020 2019

Income Statement Location

2 unchanged sentences

Total operating lease costs (1)

$ 5,685 $ 4,655 $ 10,786 $ 9,259

(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

(in thousands of dollars) September 30, 2020

Maturity of Operating Lease Liabilities

2021 (excluding the three months ended June 30, 2020)

2021(excluding the six months ended September 30, 2020)

2026 and thereafter 7,032

2 unchanged sentences

Total operating lease liabilities $ 31,918

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

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

The following table sets forth supplemental information related to operating leases:

Three Months Ended June 30,

Three Months Ended September 30, Six Months Ended September 30,

(in thousands, except lease term and incremental borrowing rate) 2020 2019 2020 2019

14 unchanged sentences

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.

At September 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.

1 unchanged sentence

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.

As of September 30, 2020, $ 1.8 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

12 unchanged sentences

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,

dollar notional amount of forward and option contracts entered into for these purposes during the six-month periods in fiscal years 2021 and 2020 was as follows:

Six Months Ended September 30,

(in millions of dollars) 2020 2019

2 unchanged sentences

Crop input sales 23.5 21.7

$ 73.5 $ 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.

dollar notional amounts for tobacco purchases and processing costs hedged during the six months ended September 30, 2020 compared to the six months ended September 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.

A portion of the 2021 crop year hedges were entered into during the first and second quarters 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.

For substantially all hedge gains and losses related to 2020 crop purchases recorded in accumulated other comprehensive loss at September 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 September 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.

3 unchanged sentences

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.

For substantially all hedge gains and losses related to the 2021 crop inputs sales recorded in accumulated other comprehensive loss at September 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

12 unchanged sentences

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.

amount hedged.

The Company does not designate these contracts as hedges for accounting purposes.

1 unchanged sentence

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.

The total notional amounts of contracts outstanding at September 30, 2020 and 2019, and March 31, 2020, were approximately $ 19.8 million, $ 36.0 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.

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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,

Three Months Ended September 30, Six Months Ended September 30,

(in thousands of dollars) 2020 2019 2020 2019

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Gain (loss) reclassified from accumulated other comprehensive loss into earnings

$ ( 2,189 ) $ ( 220 ) $ ( 4,027 ) $ ( 225 )

Gain on terminated interest rate swaps amortized from accumulated other comprehensive loss into earnings

$ 354 $ 779 $ 708 $ 1,558

Location of gain (loss) reclassified from accumulated other comprehensive loss into earnings

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Gain (loss) recognized in earnings $ — $ — $ — $ —

Location of gain (loss) recognized in earnings

Selling, general and administrative expenses

Description of hedged item

Floating rate interest payments on term loan

Location of gain (loss) recognized in earnings Selling, general and administrative expenses

Description of hedged item Floating rate interest payments on term loan

Cash Flow Hedges - Foreign Currency Exchange Contracts

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Gain (loss) reclassified from accumulated other comprehensive loss into earnings

$ ( 6,479 ) $ 276 $ ( 7,213 ) $ 265

Location of gain (loss) reclassified from accumulated other comprehensive loss into earnings

2 unchanged sentences

Gain (loss) recognized in earnings $ — $ — $ — $ —

Location of gain (loss) recognized in earnings

Selling, general and administrative expenses

Location of gain (loss) recognized in earnings Selling, general and administrative expenses

Description of hedged item

2 unchanged sentences

Gain (loss) recognized in earnings $ ( 272 ) $ ( 2 ) $ ( 416 ) $ 49

Location of gain (loss) recognized in earnings

Selling, general and administrative expenses

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

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 .

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 $ 9.0 million remained in accumulated other comprehensive loss at September 30, 2020.

That balance reflects gains and losses on contracts related to the 2020 and 2021

Brazil crops, the 2020 and 2021 Africa crops, and the 2021 Brazil crop input sales, less the amounts reclassified to earnings related to tobacco sold through September 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.

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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

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

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

Derivatives in a Fair Value Asset Position Derivatives in a Fair Value Liability Position

Location Fair Value as of Balance

Location Fair Value as of

(in thousands of dollars) September 30, 2020 September 30, 2019 March 31, 2020 September 30, 2020 September 30, 2019 March 31, 2020

Derivatives Designated as Hedging Instruments

Interest rate swap agreements

Foreign currency exchange contracts

Interest rate swap agreements Other

assets $ — $ — $ — Other

liabilities $ 37,109 $ 21,381 $ 37,163

Foreign currency exchange contracts Other

assets 1 — — Accounts

expenses 982 762 11,467

Total $ 1 $ — $ — $ 38,091 $ 22,143 $ 48,630

Derivatives Not Designated as Hedging Instruments

Foreign currency exchange contracts

Foreign currency exchange contracts Other

assets $ 290 $ 45 $ 314 Accounts

expenses $ 418 $ 532 $ 4,375

Total $ 290 $ 45 $ 314 $ 418 $ 532 $ 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.

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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;

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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.

At September 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

September 30, 2020

Fair Value Hierarchy

(in thousands of dollars)

(in thousands of dollars) NAV Level 1 Level 2 Level 3 Total

Money market funds

$ 1,991 $ — $ — $ — $ 1,991

Trading securities associated with deferred compensation plans

— 14,495 — — 14,495

Foreign currency exchange contracts

— — 291 — 291

Total financial assets measured and reported at fair value

Guarantees of bank loans to tobacco growers

Acquisition-related contingent consideration obligations - short term

$ 1,991 $ 14,495 $ 291 $ — $ 16,777

Acquisition-related contingent consideration obligations - long term

$ — $ — $ — $ 2,532 $ 2,532

Interest rate swap agreements

— — 37,109 — 37,109

Foreign currency exchange contracts

— — 1,400 — 1,400

Total financial liabilities measured and reported at fair value

June 30, 2019

$ — $ — $ 38,509 $ 2,532 $ 41,041

September 30, 2019

Fair Value Hierarchy

(in thousands of dollars)

(in thousands of dollars) NAV Level 1 Level 2 Level 3 Total

Money market funds

$ 2,032 $ — $ — $ — $ 2,032

Trading securities associated with deferred compensation plans

— 16,100 — — 16,100

Foreign currency exchange contracts

Total financial assets measured and reported at fair value

$ 2,032 $ 16,100 $ 45 $ — $ 18,177

Guarantees of bank loans to tobacco growers

$ — $ — $ — $ 137 $ 137

Interest rate swap agreements

— — 21,381 — 21,381

Foreign currency exchange contracts

— — 1,293 — 1,293

Total financial liabilities measured and reported at fair value

$ — $ — $ 22,674 $ 137 $ 22,811

March 31, 2020

Fair Value Hierarchy

(in thousands of dollars)

(in thousands of dollars) NAV Level 1 Level 2 Level 3 Total

Money market funds

$ 4,011 $ — $ — $ — $ 4,011

Trading securities associated with deferred compensation plans

— 12,635 — — 12,635

Foreign currency exchange contracts

— — 314 — 314

Total financial assets measured and reported at fair value

$ 4,011 $ 12,635 $ 314 $ — $ 16,960

Guarantees of bank loans to tobacco growers

$ — $ — $ — $ 103 $ 103

Acquisition-related contingent consideration obligations - short-term

— — — 4,173 4,173

Acquisition-related contingent consideration obligations - long-term

— — — 2,532 2,532

Interest rate swap agreements

— — 37,163 — 37,163

Foreign currency exchange contracts

— — 15,842 — 15,842

Total financial liabilities measured and reported at fair value

$ — $ — $ 53,005 $ 6,808 $ 59,813

Money market funds

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Each period the Company evaluates the fair value of the acquisition-related contingent consideration obligations.

For the three months ended June 30, 2020, the evaluation resulted in the reduction of $ 4.2 million of contingent consideration of the original $ 6.7 million liability recorded.

In the quarter ended June 30, 2020, the evaluation resulted in the reduction of $ 4.2 million of contingent consideration of the original $ 6.7 million liability recorded.

Significant judgment is applied to this model and therefore the acquisition-related contingent consideration obligation is classified within Level 3 of the fair value hierarchy.

A reconciliation of the change in the balance of the acquisition-related contingent consideration obligation (Level 3) for the three months ended June 30, 2020 and 2019 is provided below.

Three Months Ended June 30,

A reconciliation of the change in the balance of the acquisition-related contingent consideration obligation (Level 3) for the six months ended September 30, 2020 and 2019 is provided below.

(in thousands of dollars) Six Months Ended September 30,

Balance beginning of year $ 6,705 $ —

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Guarantees of bank loans to tobacco growers

The Company guarantees bank loans to tobacco growers in Brazil for crop financing.

In the event that the farmers default on their payments to the banks, the Company would be required to perform under the guarantees.

The Company regularly evaluates the likelihood of farmer defaults based on an expected loss analysis and records the fair value of its guarantees as an obligation in its consolidated financial statements.

The fair value of the guarantees is determined using the expected loss data for all loans outstanding at each measurement date.

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 September 30, 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.

In the event that the farmers defaulted on their payments to the banks, the Company would be required to perform under the guarantees.

The Company regularly evaluated the likelihood of farmer defaults based on an expected loss analysis and records the fair value of its guarantees as an obligation in its consolidated financial statements.

The fair value of the guarantees was determined using the expected loss data for all loans outstanding at each measurement date.

The present value of the cash flows associated with the estimated losses is then calculated at a risk-adjusted interest rate that is aligned with the expected duration of the liability and includes an adjustment for nonperformance risk.

This approach is sometimes referred to as the “contingent claims valuation method.” Although historical loss data is an observable input, significant judgment is required in applying this information to the portfolio of guaranteed loans outstanding at each measurement date and in selecting a risk-adjusted interest rate.

This approach is sometimes referred to as the “contingent claims valuation method.” Although historical loss data is an observable input, significant judgment was required in applying this information to the portfolio of guaranteed loans outstanding at each measurement date and in selecting a risk-adjusted interest rate.

Significant increases or decreases in the risk-adjusted interest rate may result in a significantly higher or lower fair value measurement.

The guarantees of bank loans to tobacco growers are therefore classified within Level 3 of the fair value hierarchy.

A reconciliation of the change in the balance of the financial liability for guarantees of bank loans to tobacco growers (Level 3) for the three months ended June 30, 2020 and 2019 is provided below.

Three Months Ended

The guarantees of bank loans to tobacco growers were therefore classified within Level 3 of the fair value hierarchy.

A reconciliation of the change in the balance of the financial liability for guarantees of bank loans to tobacco growers (Level 3) for the six months ended September 30, 2020 and 2019 is provided below.

(in thousands of dollars) Six Months Ended September 30,

Balance at beginning of year $ 103 $ 803

Payments under the guarantees and transfers to allowance for loss on direct loans to farmers (removal of prior crop year loans from the portfolio)

( 96 ) ( 651 )

Provision for loss or transfers from allowance for loss on direct loans to farmers (addition of current crop year loans)

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Long-term Debt

The fair value of the Company’s long-term debt, including the current portion, was approximately $ 370 million at each of the balance sheet dates June 30, 2020 , June 30, 2019 , and March 31, 2020 .

The fair value of the Company’s long-term debt, including the current portion, was approximately $ 370 million at each of the balance sheet dates September 30, 2020, September 30, 2019, and March 31, 2020.

The Company estimates the fair value of its long-term debt using Level 2 inputs which are based upon quoted market prices for the same or similar obligations or on calculations that are based on the current interest rates available to the Company for debt of similar terms and maturities.

Nonrecurring Fair Value Measurements

Assets and liabilities that are measured at fair value on a nonrecurring basis primarily relate to long-lived assets, right-of-use operating lease assets and liabilities, goodwill and intangibles, and other noncurrent assets.

These assets and liabilities fair values are evaluated for impairment when potential indicators of impairment exist.

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The components of the Company’s net periodic benefit cost were as follows:

Pension Benefits

What changed 10-Q

Item 1. Financial Statements