UNIVERSAL CORP /VA/ 10-K

Item 8. Financial Statements and Supplementary Data UNIVERSAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME Fiscal Year Ended March 31, (in thousands of dollars, except share and per share data) 2021 2020 2019 Sales and other operating revenues $ 1,983,357 $ 1,909,979 $ 2,227,153 Costs and expenses Cost of goods sold 1,597,354 1,553,167 1,820,562 Selling, general and administrative expenses 219,789 222,902 225,118 Other income ( 4,173 ) — — Restructuring and impairment costs 22,577 7,543 20,304 Operating income 147,810 126,367 161,169 Equity in pretax earnings of unconsolidated affiliates 2,985 4,211 5,299 Other non-operating income (expense) ( 440 ) 986 832 Interest income 325 1,581 1,532 Interest expense 24,954 19,854 17,510 Income before income taxes 125,726 113,291 151,322 Income taxes 29,412 35,288 41,188 Net income 96,314 78,003 110,134 Less: net income attributable to noncontrolling interests in subsidiaries ( 8,904 ) ( 6,323 ) ( 6,013 ) Net income attributable to Universal Corporation $ 87,410 $ 71,680 $ 104,121 Earnings per share: Basic $ 3.55 $ 2.87 $ 4.14 Diluted $ 3.53 $ 2.86 $ 4.11 Weighted average common shares outstanding: Basic 24,656,009 24,982,259 25,129,192 Diluted 24,788,566 25,106,351 25,330,437 See accompanying notes. 42 UNIVERSAL CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Fiscal Year Ended March 31, (in thousands of dollars) 2021 2020 2019 Net income $ 96,314 $ 78,003 $ 110,134 Other comprehensive income (loss): Foreign currency translation, net of income taxes 8,272 ( 3,066 ) ( 16,316 ) Foreign currency hedge, net of income taxes 11,812 ( 11,850 ) ( 341 ) Interest rate hedge, net of income taxes 7,922 ( 26,468 ) ( 7,462 ) Pension and other postretirement benefit plans, net of income taxes 17,038 ( 14,766 ) ( 11,665 ) Total other comprehensive income (loss), net of income taxes 45,044 ( 56,150 ) ( 35,784 ) Total comprehensive income 141,358 21,853 74,350 Less: comprehensive income attributable to noncontrolling interests ( 9,388 ) ( 6,079 ) ( 5,856 ) Comprehensive income attributable to Universal Corporation $ 131,970 $ 15,774 $ 68,494 See accompanying notes. 43 UNIVERSAL CORPORATION CONSOLIDATED BALANCE SHEETS March 31, (in thousands of dollars) 2021 2020 ASSETS Current assets Cash and cash equivalents $ 197,221 $ 107,430 Accounts receivable, net 367,482 340,711 Advances to suppliers, net 121,618 133,778 Accounts receivable—unconsolidated affiliates 584 11,483 Inventories—at lower of cost or net realizable value: Tobacco 640,653 707,298 Other 145,965 99,275 Prepaid income taxes 15,029 12,144 Other current assets 66,806 67,498 Total current assets 1,555,358 1,479,617 Property, plant and equipment Land 22,400 21,376 Buildings 284,430 256,488 Machinery and equipment 658,826 634,395 965,656 912,259 Less accumulated depreciation ( 616,146 ) ( 597,106 ) 349,510 315,153 Other assets Operating lease right-of-use assets 31,230 39,256 Goodwill, net 173,051 126,826 Other intangibles, net 72,304 17,861 Investments in unconsolidated affiliates 84,218 77,543 Deferred income taxes 12,149 20,954 Pension asset 11,950 — Other noncurrent assets 52,154 43,711 437,056 326,151 Total assets $ 2,341,924 $ 2,120,921 44 UNIVERSAL CORPORATION CONSOLIDATED BALANCE SHEETS—(Continued) March 31, (in thousands of dollars) 2021 2020 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities Notes payable and overdrafts $ 101,294 $ 78,033 Accounts payable and accrued expenses 139,484 140,202 Accounts payable—unconsolidated affiliates 1,282 55 Customer advances and deposits 8,765 10,242 Accrued compensation 29,918 23,710 Income taxes payable 4,516 5,334 Current portion of operating lease liabilities 7,898 9,823 Current portion of long-term debt — — Total current liabilities 293,157 267,399 Long-term debt 518,172 368,764 Pensions and other postretirement benefits 57,637 70,680 Long-term operating lease liabilities 19,725 25,893 Other long-term liabilities 59,814 69,427 Deferred income taxes 44,994 29,474 Total liabilities 993,499 831,637 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 ( 24,421,835 at March 31, 2020) 326,673 321,502 Retained earnings 1,087,663 1,076,760 Accumulated other comprehensive loss ( 107,037 ) ( 151,597 ) Total Universal Corporation shareholders' equity 1,307,299 1,246,665 Noncontrolling interests in subsidiaries 41,126 42,619 Total shareholders' equity 1,348,425 1,289,284 Total liabilities and shareholders' equity $ 2,341,924 $ 2,120,921 See accompanying notes. 45 UNIVERSAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS Fiscal Year Ended March 31, (in thousands of dollars) 2021 2020 2019 Cash Flows From Operating Activities: Net income $ 96,314 $ 78,003 $ 110,134 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 44,733 38,379 37,104 Provision for losses (recoveries) on advances and guaranteed loans to suppliers 5,534 937 ( 2,339 ) Inventory write-downs 13,463 10,319 4,002 Stock-based compensation expense 6,106 5,631 8,152 Foreign currency remeasurement loss (gain), net ( 8,475 ) 16,422 1,786 Foreign currency exchange contracts ( 1,567 ) 499 ( 32 ) Deferred income taxes ( 2,335 ) ( 8,697 ) 3,873 Equity in net income of unconsolidated affiliates, net of dividends ( 296 ) 1,101 3,659 Restructuring and impairment costs 22,577 7,543 20,304 Restructuring payments ( 8,283 ) ( 2,787 ) ( 4,014 ) Change in estimated fair value of contingent consideration for FruitSmart acquisition ( 4,173 ) — — Other, net ( 1,373 ) ( 9,271 ) 5,645 Changes in operating assets and liabilities, net: Accounts and notes receivable ( 5,239 ) 16,267 ( 8,373 ) Inventories and other assets 43,199 ( 94,538 ) 33,796 Income taxes ( 4,516 ) 10,927 ( 8,981 ) Accounts payable and other accrued liabilities 26,171 ( 48,534 ) ( 54,912 ) Customer advances and deposits ( 1,426 ) ( 11,304 ) 14,718 Net cash provided by operating activities 220,414 10,897 164,522 Cash Flows From Investing Activities: Purchase of property, plant and equipment ( 66,154 ) ( 35,227 ) ( 38,760 ) Purchase of business, net of cash held by the business ( 161,751 ) ( 80,180 ) — Proceeds from sale of property, plant and equipment 11,436 8,547 2,061 Other ( 800 ) 495 2,000 Net cash used by investing activities ( 217,269 ) ( 106,365 ) ( 34,699 ) Cash Flows From Financing Activities: Issuance (repayment) of short-term debt, net 29,396 24,114 12,036 Issuance of long-term debt 150,000 — 41,147 Repayment of long-term debt — — ( 41,147 ) Dividends paid to noncontrolling interests in subsidiaries ( 10,881 ) ( 6,251 ) ( 5,938 ) Repurchase of common stock — ( 33,457 ) ( 1,443 ) Dividends paid on common stock ( 75,177 ) ( 75,368 ) ( 69,883 ) Proceeds from termination of interest rate swap agreements — — 5,428 Debt issuance costs and other ( 1,949 ) ( 3,184 ) ( 5,987 ) Net cash provided/(used) by financing activities 91,389 ( 94,146 ) ( 65,787 ) Effect of exchange rate changes on cash 1,257 ( 512 ) ( 608 ) Net increase (decrease) in cash and cash equivalents 95,791 ( 190,126 ) 63,428 Cash, restricted cash and cash equivalents at beginning of year 107,430 297,556 234,128 Cash, Restricted Cash and Cash Equivalents at End of Year $ 203,221 $ 107,430 $ 297,556 Supplemental Information: Cash and cash equivalents $ 197,221 $ 107,430 $ 297,556 Restricted cash (Other noncurrent assets) 6,000 — — Total cash, restricted cash and cash equivalents $ 203,221 $ 107,430 $ 297,556 Supplemental information—cash paid for: Interest $ 24,198 $ 19,376 $ 16,462 Income taxes, net of refunds $ 36,443 $ 30,984 $ 44,856 See accompanying notes. 46 UNIVERSAL CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY Universal Corporation Shareholders (in thousands of dollars) Common Stock Retained Earnings Accumulated Other Comprehensive Income (Loss) Non- controlling Interests Total Shareholders' Equity Fiscal Year Ended March 31, 2021 Balance at beginning of year $ 321,502 $ 1,076,760 $ ( 151,597 ) $ 42,619 $ 1,289,284 Changes in common stock Accrual of stock-based compensation 6,106 — — — 6,106 Withholding of shares from stock-based compensation for grantee income taxes ( 1,949 ) — — — ( 1,949 ) Dividend equivalents on restricted stock units (RSUs) 1,014 — — — 1,014 Changes in retained earnings Net income — 87,410 — 8,904 96,314 Cash dividends declared on common stock ($ 3.08 per share) — ( 75,493 ) — — ( 75,493 ) Dividend equivalents on restricted stock units (RSUs) — ( 1,014 ) — — ( 1,014 ) Other comprehensive income (loss) Foreign currency translation, net of income taxes — — 7,788 484 8,272 Foreign currency hedge, net of income taxes — — 11,812 — 11,812 Interest rate hedge, net of income taxes — — 7,922 — 7,922 Pension and other postretirement benefit plans, net of income taxes — — 17,038 — 17,038 Other changes in noncontrolling interests Dividends paid to noncontrolling shareholders — — — ( 10,881 ) ( 10,881 ) Balance at end of year $ 326,673 $ 1,087,663 $ ( 107,037 ) $ 41,126 $ 1,348,425 47 UNIVERSAL CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY—(Continued) Universal Corporation Shareholders (in thousands of dollars) Common Stock Retained Earnings Accumulated Other Comprehensive Income (Loss) Non- controlling Interests Total Shareholders' Equity Fiscal Year Ended March 31, 2020 Balance at beginning of year $ 326,600 $ 1,106,178 $ ( 95,691 ) $ 42,791 $ 1,379,878 Changes in common stock Repurchase of common stock ( 8,562 ) — — — ( 8,562 ) Accrual of stock-based compensation 5,631 — — — 5,631 Withholding of shares from stock-based compensation for grantee income taxes ( 3,183 ) — — — ( 3,183 ) Dividend equivalents on restricted stock units (RSUs) 1,016 — — — 1,016 Changes in retained earnings Net income — 71,680 — 6,323 78,003 Cash dividends declared on common stock ($ 3.04 per share) — ( 75,187 ) — — ( 75,187 ) Repurchase of common stock — ( 24,895 ) — — ( 24,895 ) Dividend equivalents on restricted stock units (RSUs) — ( 1,016 ) — — ( 1,016 ) Other comprehensive income (loss) Foreign currency translation, net of income taxes — — ( 2,822 ) ( 244 ) ( 3,066 ) Foreign currency hedge, net of income taxes — — ( 11,850 ) — ( 11,850 ) Interest rate hedge, net of income taxes — — ( 26,468 ) — ( 26,468 ) Pension and other postretirement benefit plans, net of income taxes — — ( 14,766 ) — ( 14,766 ) Other changes in noncontrolling interests Dividends paid to noncontrolling shareholders — — — ( 6,251 ) ( 6,251 ) Balance at end of year $ 321,502 $ 1,076,760 $ ( 151,597 ) $ 42,619 $ 1,289,284 48 UNIVERSAL CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY—(Continued) Universal Corporation Shareholders (in thousands of dollars) Common Stock Retained Earnings Accumulated Other Comprehensive Income (Loss) Non- controlling Interests Total Shareholders' Equity Fiscal Year Ended March 31, 2019 Balance at beginning of year $ 321,559 $ 1,080,934 $ ( 60,064 ) $ 42,873 $ 1,385,302 Changes in common stock Repurchase of common stock ( 397 ) — — — ( 397 ) Accrual of stock-based compensation 8,152 — — — 8,152 Withholding of shares from stock-based compensation for grantee income taxes ( 3,697 ) — — — ( 3,697 ) Dividend equivalents on restricted stock units (RSUs) 983 — — — 983 Changes in retained earnings Net income — 104,121 — 6,013 110,134 Cash dividends declared on common stock ($ 3.00 per share) ( 74,914 ) — — ( 74,914 ) Repurchase of common stock — ( 1,046 ) — — ( 1,046 ) Dividend equivalents on restricted stock units (RSUs) — ( 983 ) — — ( 983 ) Adoption of FASB Accounting Standards Update 2016-16 eliminating deferred income taxes on unrecognized gains on intra-entity transfers of assets other than inventory — (1,934) — — (1,934) Other comprehensive income (loss) Foreign currency translation, net of income taxes — — ( 16,159 ) ( 157 ) ( 16,316 ) Foreign currency hedge, net of income taxes — — ( 341 ) — ( 341 ) Interest rate hedge, net of income taxes — — ( 7,462 ) — ( 7,462 ) Pension and other postretirement benefit plans, net of income taxes — — ( 11,665 ) — ( 11,665 ) Other changes in noncontrolling interests Dividends paid to noncontrolling shareholders — — — ( 5,938 ) ( 5,938 ) Balance at end of year $ 326,600 $ 1,106,178 $ ( 95,691 ) $ 42,791 $ 1,379,878 49 UNIVERSAL CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY—(Continued) Fiscal Year Ended March 31, 2021 2020 2019 Common Shares Outstanding: Balance at beginning of year 24,421,835 24,989,946 24,930,725 Issuance of common stock 93,032 88,709 89,998 Repurchase of common stock — ( 656,820 ) ( 30,777 ) Balance at end of year 24,514,867 24,421,835 24,989,946 See accompanying notes. 50 UNIVERSAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (All dollar amounts are in thousands, except per share amounts or as otherwise noted.) NOTE 1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES Nature of Operations Universal Corporation, which together with its subsidiaries is referred to herein as “Universal” or the “Company,” is a global business-to-business agri-products supplier to consumer product manufacturers. The Company is the leading global leaf tobacco supplier and provides high-quality plant-based ingredients to food and beverage end markets. The Company conducts its leaf tobacco business in over 30 countries, primarily in major tobacco-producing regions of the world. The extent to which the ongoing COVID-19 pandemic will impact the Company's financial condition, results of operations and demand for its products and services will depend on future developments, which are highly uncertain and cannot be predicted. Such developments may include the ongoing geographic spread and mutations of COVID-19, the severity of the pandemic, the duration of the COVID-19 outbreak and the type and duration of actions that may be taken by various governmental authorities in response to the COVID-19 pandemic and the impact on the U.S. and the global economies, markets and supply chains. At March 31, 2021, 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. Consolidation The consolidated financial statements include the accounts of Universal Corporation and all domestic and foreign subsidiaries in which the Company maintains a controlling financial interest. Control is generally determined based on a voting interest of greater than 50%, such that Universal controls all significant corporate activities of the subsidiary. All significant intercompany accounts and transactions are eliminated in consolidation. The equity method of accounting is used for investments in companies where Universal Corporation has a voting interest of 20% to 50%. These investments are accounted for under the equity method because Universal exercises significant influence over those companies, but not control. The Company received dividends totaling $ 2.9 million in fiscal year 2021, $ 3.9 million in fiscal year 2020, and $ 7.5 million in fiscal year 2019, from companies accounted for under the equity method. Investments where Universal has a voting interest of less than 20% are not significant and do not have readily determinable fair values. As such, the Company has elected the alternate method of measuring these investments at cost, less any impairment. The Company's 49% ownership interest in Socotab L.L.C. (“Socotab”), a leading supplier of oriental tobaccos with operations located principally in Eastern Europe and Turkey, is the primary investment accounted for under the equity method. The investment in Socotab is an important part of the Company's overall product and service arrangements with its major customers. The Company reviews the carrying value of its investments in Socotab and its other unconsolidated affiliates on a regular basis and considers whether any factors exist that might indicate an impairment in value that is other than temporary. For the fiscal year ended March 31, 2021, the Company determined that no such factors existed with respect to those investments. The Company's operations in Zimbabwe are deconsolidated under accounting requirements that apply under certain conditions to foreign subsidiaries that are subject to foreign exchange controls and other government restrictions. The investment in the Zimbabwe operations is accounted for at cost less impairment, and was zero at March 31, 2021 and 2020. The Company has a net foreign currency translation loss associated with the Zimbabwe operations of approximately $ 7.2 million, which remains a component of accumulated other comprehensive loss at March 31, 2021. As a regular part of its reporting, the Company reviews the conditions that resulted in the deconsolidation of the Zimbabwe operations to confirm that such accounting treatment is still appropriate. Dividends from the Zimbabwe operations are recorded in income in the period received. The Company holds less than a 100% financial interest in certain consolidated subsidiaries. The net income and shareholders’ equity attributable to the noncontrolling interests in these subsidiaries are reported on the face of the consolidated financial statements. There were no material changes in the Company’s ownership percentage in any of these subsidiaries during fiscal years 2021, 2020, or 2019. Investments in Unconsolidated Affiliates The Company’s investments in its unconsolidated affiliates, which include its Zimbabwe operations, are non-marketable securities. Universal reviews such investments for impairment whenever events or changes in circumstances indicate that the carrying amount of an investment may not be recovered. For example, the Company would review such an investment for impairment if the investee were to lose a significant customer, suffer a large reduction in sales margins, experience a major change in its business environment, or undergo any other significant change in its normal business. In assessing the recoverability of these investments, the Company follows the applicable accounting guidance in determining the fair value of the investments. In most cases, this involves the use of undiscounted and discounted cash flow models (Level 3 of the fair value hierarchy under the accounting guidance). If the fair value of an unconsolidated investee is determined to be lower than its carrying value, an impairment loss is recognized. The determination of fair value using discounted cash flow models is normally not based on 51 UNIVERSAL CORPORATION CONSOLIDATED FINANCIAL STATEMENTS—(Continued) observable market data from independent sources and therefore requires significant management judgment with respect to estimates of future operating earnings and the selection of an appropriate discount rate. The use of different assumptions could increase or decrease estimated future operating cash flows, and the discounted value of those cash flows, and therefore could increase or decrease any impairment charge related to these investments. In its consolidated statements of income, the Company reports its proportional share of the earnings of unconsolidated affiliates accounted for on the equity method based on the pretax earnings of those affiliates, as permitted under the applicable accounting guidance. All applicable foreign and U.S. income taxes are provided on these earnings and reported as a component of consolidated income tax expense. For unconsolidated affiliates located in foreign jurisdictions, repatriation of the Company’s share of the earnings through dividends is assumed in determining consolidated income tax expense. The following table provides a reconciliation of (1) equity in the pretax earnings of unconsolidated affiliates, as reported in the consolidated statements of income to (2) equity in the net income of unconsolidated affiliates, net of dividends, as reported in the consolidated statements of cash flows for the fiscal years ended March 31, 2021, 2020, and 2019: Fiscal Year Ended March 31, 2021 2020 2019 Equity in pretax earnings reported in the consolidated statements of income $ 2,985 $ 4,211 $ 5,299 Less: Equity in income taxes 180 ( 1,390 ) ( 1,441 ) Equity in net income 3,165 2,821 3,858 Less: Dividends received on investments (1) ( 2,869 ) ( 3,922 ) ( 7,517 ) Equity in net income, net of dividends, reported in the consolidated statements of cash flows $ 296 $ ( 1,101 ) $ ( 3,659 ) (1) In accordance with the applicable accounting guidance, dividends received from unconsolidated affiliates accounted for on the equity method that represent a return on capital (i.e., a return of earnings on a cumulative basis) are presented as operating cash flows in the consolidated statements of cash flows. Earnings Per Share The Company calculates basic earnings per share based on earnings available to common shareholders. The calculation uses the weighted average number of common shares outstanding during each period. Diluted earnings per share is computed in a similar manner using the weighted average number of common shares and dilutive potential common shares outstanding. Dilutive potential common shares include unvested restricted stock units and performance share units that are assumed to be fully vested and paid out in shares of common stock. Calculations of earnings per share for the fiscal years ended March 31, 2021, 2020, and 2019, are provided in Note 5. Cash and Cash Equivalents All highly liquid investments with a maturity of three months or less at the time of purchase are classified as cash equivalents. Advances to Tobacco Suppliers In many sourcing origins where the Company operates, it provides agronomy services and seasonal advances of seed, fertilizer, and other supplies to tobacco farmers for crop production, or makes seasonal cash advances to farmers for the procurement of those inputs. These advances are short term, are repaid upon delivery of tobacco to the Company, and are reported in advances to suppliers in the consolidated balance sheets. In several origins, the Company has made long-term advances to tobacco farmers to finance curing barns and other farm infrastructure. In some years, due to low crop yields and other factors, individual farmers may not deliver sufficient volumes of tobacco to fully repay their seasonal advances, and the Company may extend repayment of those advances into future crop years. The long-term portion of advances is included in other noncurrent assets in the consolidated balance sheets. Both the current and the long-term portions of advances to tobacco suppliers are reported net of allowances recorded when the Company determines that amounts outstanding are not likely to be collected. Short-term and long-term advances to tobacco suppliers totaled approximately $ 144 million at March 31, 2021 and $ 153 million at March 31, 2020. The related valuation allowances totaled $ 18 million at March 31, 2021, 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 for estimated uncollectible amounts of approximately $ 5.5 million in fiscal year 2021 and $ 1.0 million in fiscal year 2020, respectively, and reduced by net recoveries of approximately $ 2.3 million in fiscal year 2019. 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. Advances on 52 UNIVERSAL CORPORATION CONSOLIDATED FINANCIAL STATEMENTS—(Continued) which interest accrual had been discontinued totaled approximately $ 4 million at March 31, 2021 and $ 5 million at March 31, 2020. Inventories Inventories are valued at the lower of cost or net realizable value. Raw materials primarily consist of unprocessed leaf tobacco, which is clearly identified by type and grade at the time of purchase. The Company tracks the costs associated with this tobacco in the final product lots, and maintains this identification through the time of sale. This method of cost accounting is referred to as the specific cost or specific identification method. The predominant cost component of the Company’s inventories is the cost of the unprocessed tobacco. Direct and indirect processing costs related to these raw materials are capitalized and allocated to inventory in a systematic manner. The Company does not capitalize any interest or sales-related costs in inventory. Freight costs are recorded in cost of goods sold. Other inventories consist primarily of unprocessed and processed food and vegetable ingredients, seed, fertilizer, packing materials, and other supplies, and are valued principally at the lower of average cost or net realizable value. 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 March 31, 2021 and 2020, the aggregate balances of recoverable tax credits held by the Company’s subsidiaries totaled approximately $ 49 million and $ 52 million, respectively, and the related valuation allowances totaled approximately $ 19 million at both dates. The net balances are reported in other current assets and other noncurrent assets in the consolidated balance sheets. Property, Plant and Equipment Depreciation of property, plant and equipment is based upon historical cost and the estimated useful lives of the assets. Depreciation is calculated primarily using the straight-line method. Buildings include processing and blending facilities, offices, and warehouses. Machinery and equipment consists of processing and packing machinery and transport, office, and computer equipment. Estimated useful lives range as follows: buildings - 15 to 40 years; processing and packing machinery - 3 to 11 years; transport equipment - 3 to 10 years; and office and computer equipment - 3 to 12 years. Where applicable and material in amount, the Company capitalizes related interest costs during periods that property, plant and equipment are being constructed or made ready for service. No interest was capitalized in fiscal years 2021, 2020, or 2019. Leases As discussed below under "Accounting Pronouncements", the Company adopted updated comprehensive accounting guidance for leases at the beginning of fiscal year 2020 (Accounting Standards Update No. 2016-02, "Leases (Topic 842)" and supplemental amendments, which superseded the lease accounting requirements in Topic 840). The Company determines if an arrangement meets the definition of a lease at inception. The Company, as a lessee, enters into operating leases for land, buildings, equipment, and vehicles. For all operating leases with terms greater than 12 months and with fixed payment arrangements, a lease liability and corresponding right-of-use asset are recognized in the balance sheet for the term of the lease by calculating the net present value of future lease payments. On the date of lease commencement, the present value of lease liabilities is determined by discounting the future lease payments by the Company’s collateralized incremental borrowing rate, adjusted for the lease term and currency of the lease payments. If a lease contains a renewal option that the Company is reasonably certain to exercise, the Company accounts for the original lease term and expected renewal term in the calculation of the lease liability and right-of-use asset. Certain of the Company’s leases include both lease and non-lease 53 UNIVERSAL CORPORATION CONSOLIDATED FINANCIAL STATEMENTS—(Continued) components (e.g., common-area or other maintenance costs) which are accounted for as a single lease component, as the Company has elected the practical expedient to group lease and non-lease components for real estate leases. Goodwill and Other Intangibles Goodwill and other intangibles are disclosed in Note 7. Goodwill principally consists of the excess of the purchase price of acquired companies over the fair value of the net assets. Goodwill is carried at the lower of cost or fair value and is reviewed for potential impairment on an annual basis as of the end of the fiscal year. Accounting Standards Codification Topic 350 (“ASC 350”) permits companies to base their initial assessments of potential goodwill impairment on qualitative factors, and the Company elected to use that approach at March 31, 2021 and 2020. Those factors did not indicate that it was more likely than not that the fair value of any of the reporting units was less than their respective carrying value, therefore no potential impairment of the Company's recorded goodwill was noted as of those dates. Reporting units are distinct operating subsidiaries or groups of subsidiaries that typically compose the Company’s business in a specific country or location. Goodwill is allocated to reporting units based on the country or location to which a specific acquisition relates, or by allocation based on expected future cash flows if the acquisition relates to more than one country or location. The majority of the Company’s goodwill relates to its reporting unit in Brazil and recent acquisitions of Silva International Inc. and FruitSmart, Inc. See Note 2 for additional information. Significant adverse changes in the operations or estimated future cash flows for a reporting unit with recorded goodwill could result in an impairment charge. Other intangibles principally consists of finite lived intangible assets including customer-related intangibles, trade names, developed technology, and noncompetition agreements. Intangible assets acquired in a business combination are recorded at fair value using a discounted cash flow approach. A discounted cash flow approach to value intangible assets requires assumptions about the timing, amount, and probability of future net cash flows, as well as the discount rate and market participant considerations. Other intangibles are amortized on a straight-line basis over the intangible asset's economic life. Impairment of Long-Lived Assets The Company reviews long-lived assets for impairment, disclosed in Note 4 and Note 12, whenever events, changes in business conditions, or other circumstances provide an indication that such assets may be impaired. Potential impairment is initially assessed by comparing management’s undiscounted estimates of future cash flows from the use or disposition of the assets to their carrying value. If the carrying value exceeds the undiscounted cash flows, an impairment charge is recorded to reduce the carrying value of the asset to its fair value determined in accordance with the accounting guidance. In many cases, this involves the use of discounted cash flow models that are not based on observable market data from independent sources (Level 3 of the fair value hierarchy under the accounting guidance). Income Taxes The Company provides deferred income taxes on temporary differences between the book and tax basis of its assets and liabilities. Those differences arise principally from employee benefit accruals, depreciation, deferred compensation, undistributed earnings of unconsolidated affiliates, undistributed earnings of foreign subsidiaries, goodwill, and valuation allowances on farmer advances and value-added tax credits. Income taxes provided on pretax amounts recorded in accumulated other comprehensive income (loss) are released when the related pretax amounts are reclassified to earnings. Additional disclosures related to the Company's income taxes are disclosed in Note 6. Fair Values of Financial Instruments The fair value of the Company’s long-term debt, disclosed in Note 12, approximates the carrying amount since the variable interest rates in the underlying credit agreement reflect the market interest rates that were available to the Company at March 31, 2021. In periods when fixed-rate obligations are outstanding, fair values are estimated using market prices where they are available or discounted cash flow models based on current incremental borrowing rates for similar classes of borrowers and borrowing arrangements. The fair values of interest rate swap agreements designated as cash flow hedges and used to fix the variable benchmark rate on outstanding long-term debt are determined separately and recorded in other long-term liabilities. Except for interest rate swaps and forward foreign currency exchange contracts that are discussed below, the fair values of all other assets and liabilities that qualify as financial instruments approximate their carrying amounts. Derivative Financial Instruments The Company recognizes all derivatives on the balance sheet at fair value. Interest rate swaps and forward foreign currency exchange contracts are used from time to time to manage interest rate risk and foreign currency risk. The Company enters into such contracts only with counterparties of good standing. The credit exposure related to non-performance by the counterparties and the Company is considered in determining the fair values of the derivatives, and the effect has not been 54 UNIVERSAL CORPORATION CONSOLIDATED FINANCIAL STATEMENTS—(Continued) material to the financial statements or operations of the Company. Additional disclosures related to the Company’s derivatives and hedging activities are provided in Note 11. Translation and Remeasurement of Foreign Currencies The financial statements of foreign subsidiaries having the local currency as the functional currency are translated into U.S. dollars using exchange rates in effect at period end for assets and liabilities and average exchange rates applicable to each reporting period for results of operations. Adjustments resulting from translation of financial statements are reflected as a separate component of other comprehensive income or loss. The financial statements of foreign subsidiaries having the U.S. dollar as the functional currency, with certain transactions denominated in a local currency, are remeasured into U.S. dollars. The remeasurement of local currency amounts into U.S. dollars creates remeasurement gains and losses that are included in earnings as a component of selling, general, and administrative expenses. The Company recognized net remeasurement gains of $ 8.5 million in fiscal year 2021, and net remeasurement losses of $ 16.4 million in fiscal year 2020 and $ 1.8 million in fiscal year 2019. Foreign currency transactions and forward foreign currency exchange contracts that are not designated as hedges generate gains and losses when they are settled or when they are marked-to-market under the prescribed accounting guidance. These transaction gains and losses are also included in earnings as a component of selling, general, and administrative expenses. The Company recognized net foreign currency transaction losses of $ 1.4 million in fiscal year 2021, $ 2.9 million in fiscal year 2020, and $ 4.3 million in fiscal year 2019. Revenue Recognition Revenue is recognized when the Company completes its performance obligation for the transfer of products and services under its contractual arrangements with customers. For sales of tobacco, satisfaction of the performance obligation and recognition of the corresponding revenue is based on the transfer of the ownership and control of the product to the customer, which is substantially unchanged from the previous accounting guidance. A large percentage of the Company’s sales are to major multinational manufacturers of consumer tobacco products. The Company works closely with those customers to understand and plan for their requirements for volumes, styles, and grades of leaf tobacco from its various growing regions, and extensive coordination is maintained on an ongoing basis to determine and satisfy their requirements for transfer of ownership and physical shipment of processed tobacco. The customers typically specify, in sales contracts and in shipping documents, the precise terms for transfer of title and risk of loss for the tobacco. Customer returns and rejections are not significant, and the Company’s sales history indicates that customer-specific acceptance provisions are consistently met upon transfer of title and risk of loss. While most of the Company’s revenue is derived from tobacco that is purchased from farmers, processed and packed in its factories, and then sold to customers, some revenue is earned from processing tobacco owned by customers and from other value-added services. The arrangements for processing services usually exist in specific markets where the customers contract directly with farmers for leaf production, and they have accounted for less than 5 % of total revenue on an annual basis through the fiscal year ended March 31, 2021. Processing and packing of leaf tobacco is a short-duration process. Under normal operating conditions, raw tobacco that is placed into the production line exits as processed and packed tobacco within one hour, and is then later transported to customer-designated storage facilities. The revenue for these services is recognized when the performance obligation is met upon the completion of processing, and the Company's operating history indicates that customer requirements for processed tobacco are consistently met upon completion of processing. The Company has diversified its operations through acquisition of established companies that offer customers a wide range of both liquid and dehydrated fruit and vegetable ingredient products. 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), manufacture finished goods utilized in both human and pet food. The contracts for food ingredients with customers create a performance obligation to transfer the manufactured finished goods to the customer. Transaction prices for the sale of food ingredients are primarily based on negotiated fixed prices. At the point in time that the customer obtains control over the finished product, which is typically aligned with physical shipment under the contractual terms with the customer, the Company completes its performance obligation and recognizes the revenue for the sale. Additional disclosures related to the Company's revenue from contracts with customers are provided in Note 3. Stock-Based Compensation Share-based payments, such as grants of restricted stock units, performance share units, restricted stock, stock appreciation rights, and stock options, are measured at fair value and reported as expense in the financial statements over the requisite service period. Additional disclosures related to stock-based compensation are included in Note 15. 55 UNIVERSAL CORPORATION CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Estimates and Assumptions The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Accounting Pronouncements Pronouncements Adopted in Fiscal Year 2019 In October 2016, the FASB issued Accounting Standards Update No. 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory” (“ASU 2016-16”). ASU 2016-16 requires companies to recognize the income tax effects of intercompany sales or transfers of assets other than inventory in the income statement as income tax expense in the period the sale or transfer occurs, rather than deferring those tax effects until the asset has been sold to a third-party or otherwise recognized in earnings through depreciation, amortization, or impairment. In prior fiscal reporting periods, various subsidiaries of the Company sold tobacco processing equipment to other subsidiaries, and the related income effects have been deferred as required under the previous accounting guidance. The Company adopted ASU 2016-16 effective April 1, 2018, the beginning of fiscal year 2019. Under the modified retrospective transition method required by the guidance, the Company recorded a $ 1.9 million reduction to retained earnings for the fiscal year ended March 31, 2019 for the cumulative effect of recognizing the deferred income tax effects on all prior intercompany sales of equipment as of the date of adoption. Pronouncements Adopted in Fiscal Year 2020 The Company adopted FASB Accounting Standards Update No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”) effective April 1, 2019, the beginning of the current fiscal year. For leases with fixed payment arrangements, ASU 2016-02 requires a lessee to recognize lease payment obligations as a lease liability and corresponding right-of-use asset in the balance sheet for the term of the lease. This guidance superseded Topic 840 “Leases.” The Company elected the practical expedient to not include leases with terms less than 12 months on the consolidated balance sheet. The Company elected the transition package of practical expedients that retained the historical lease identification, lease classification, and treatment of initial direct costs for leases prior to the adoption of ASU 2016-02. Additionally, as permitted under the new guidance the Company elected to not separate lease and non-lease components for certain classes of leased assets, including real estate. The Company elected the modified retrospective transition adoption method. Accordingly, on the date of adoption $ 36.6 million of operating lease right-of use assets and corresponding operating lease liabilities of $ 34.2 million were recognized on the Company's consolidated balance sheet. The adoption of ASU 2016-02 did not result in a cumulative-effect adjustment to retained earnings. The disclosures required for lease accounting are provided in Note 10. The Company adopted FASB Accounting Standards Update No. 2017-04, “Intangibles - Goodwill and Other (Topic 350)” (“ASU 2017-04”) effective July 1, 2019. Under current accounting guidance, the fair value of a reporting unit to which a specific goodwill balance relates is first compared to its carrying value in the financial statements (Step 1). If that comparison indicates that the goodwill is impaired, an implied fair value for the goodwill must then be calculated by deducting the individual fair values of all other assets and liabilities, including any unrecognized intangible assets, from the total fair value of the reporting unit. ASU 2017-04 simplifies the accounting guidance by eliminating Step 2 from the goodwill impairment test and using the fair value of the reporting unit determined in Step 1 to measure the goodwill impairment loss. There was no material impact to the consolidated financial statements from the adoption of ASU 2017-04. Pronouncements Adopted in Fiscal Year 2021 The Company adopted FASB Accounting Standards Update No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”) effective April 1, 2020. 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. 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. The Company adopted FASB 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”) effective April 1, 2020. 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 56 UNIVERSAL CORPORATION CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 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. There was no material impact to the consolidated financial statements from the adoption of ASU 2018-15. Pronouncements to be Adopted in Future Periods In December 2019, the FASB issued Accounting Standards Update No. 2019-12, “Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes” (“ASU 2019-12”). ASU 2019-12 eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences related to changes in ownership of equity method investments and foreign subsidiaries. The updated guidance also simplifies aspects of accounting for franchise taxes and enacted changes in tax laws or rates, and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The guidance in ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, although early adoption is permitted. The Company will be required to adopt the new standard effective April 1, 2021, which is the beginning of its fiscal year ending March 31, 2022, and is currently evaluating the impact that the guidance will have on its consolidated financial statements. In March 2020, the FASB issued Accounting Standards Update No. 2020-04, “Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”). ASU 2020-04 provides optional 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. Reclassifications Certain prior year amounts have been reclassified to conform to the current year’s presentation. NOTE 2. BUSINESS COMBINATIONS 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 $ 5.9 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 initial allocation of the purchase price for Silva was based on preliminary valuations and assumptions and is subject to change within the 12-month measurement period following the date of acquisition (October 1, 2020). The Company finalized a working capital settlement in the fourth quarter of fiscal year 2021 and adjusted the beginning balance sheet for certain tax related assets and liabilities. The Company is still reviewing tax related assets and liabilities. The final purchase price allocation will be completed by the second quarter of fiscal year 2022. 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 March 31, 2021 . The contingent consideration arrangement for the selling shareholder includes a post-combination service requirement and forfeitable payment provisions, therefore under ASC Topic 805, “Business Combination s ,” 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 fiscal year ended March 31, 2021 , the Company incurred $ 3.9 million for acquisition-related transaction costs for the purchase of Silva. The acquisition-related costs were expensed as incurred and recorded in selling, general, and administrative expense on the consolidated statements of income. 57 UNIVERSAL CORPORATION CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 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 March 31, 2021, $ 2.5 million of contingent consideration liability related to the FruitSmart acquisition is included in accounts payable and accrued expenses on the consolidated balance sheet. For the fiscal year ended March 31, 2020, the Company incurred $ 4.7 million of acquisition-related transaction costs for the purchase of FruitSmart. The acquisition-related costs were expensed as incurred and recorded as selling, general, and administrative expenses on the consolidated statements of income. The following table summarizes the preliminary purchase price allocation of the assets acquired and liabilities assumed for the Silva acquisition and final purchase price allocation for the FruitSmart acquisition. Silva FruitSmart Assets October 1, 2020 January 1, 2020 Cash and cash equivalents $ 8,126 $ 1,298 Accounts receivable, net 17,885 7,707 Advances to suppliers, net 3,011 — Inventory 33,162 23,793 Other current assets 833 310 Property, plant and equipment (net) 24,437 23,400 Intangibles Customer relationships 53,000 9,500 Developed technology — 4,800 Trade names 7,800 3,300 Non-compete agreements — 1,000 Goodwill 46,144 28,863 Total assets acquired 194,398 103,971 Liabilities Accounts payable and accrued expenses 11,683 7,592 Accrued compensation 3,350 670 Income taxes payable 946 — Deferred income taxes 14,419 9,004 Total liabilities assumed 30,398 17,266 Total assets acquired and liabilities assumed $ 164,000 $ 86,705 A portion of the goodwill recorded as part of the acquisitions was attributable to the assembled workforce of FruitSmart and Silva, respectively. The tax basis of the assets acquired and liabilities did not result in a step-up of tax basis and the related goodwill is not deductible for U.S. income tax purposes. The Company determined the FruitSmart and Silva operations were not material to the Company’s consolidated results. Therefore, pro forma information is not presented. NOTE 3. REVENUE FROM CONTRACTS WITH CUSTOMERS The majority of the Company’s consolidated revenue consists of sales of processed leaf tobacco to customers. The Company also has fruit and vegetable processing operations that provide customers with a range of food ingredient products. In addition, the Company earns revenue from processing leaf tobacco owned by customers and from various other services provided to customers. Payment terms with customers vary depending on customer creditworthiness, product types, services provided, and 58 UNIVERSAL CORPORATION CONSOLIDATED FINANCIAL STATEMENTS—(Continued) other factors. Contract durations and payment terms for all revenue categories generally do not exceed one year. Therefore, the Company has applied a practical expedient to not adjust the transaction price for the effects of financing components, as the Company expects that the period from the time the revenue for a transaction is recognized to the time the customer pays for the related good or service transferred will be one year or less. Below is a description of the major revenue-generating categories from contracts with customers. Tobacco Sales The majority of the Company’s business involves purchasing leaf tobacco from farmers in the origins where it is grown, processing and packing the tobacco in its factories, and then transferring ownership and control of the tobacco to customers. On a much smaller basis, the Company also sources processed tobacco from third-party suppliers for resale to customers. The contracts for tobacco sales with customers create a performance obligation to transfer tobacco to the customer. Transaction prices for the sale of tobaccos are primarily based on negotiated fixed prices, but the Company does have a small number of cost-plus contracts with certain customers. Cost-plus arrangements provide the Company reimbursement of the cost to purchase and process the tobacco, plus a contractually agreed-upon profit margin. The Company utilizes the most likely amount methodology under the accounting guidance to recognize revenue for cost-plus arrangements with customers. Shipping and handling costs under tobacco sales contracts with customers are treated as fulfillment costs and included in the transaction price. Taxes assessed by government authorities on the sale of leaf tobacco products are excluded from the transaction price. At the point in time that the customer obtains control over the tobacco, which is typically aligned with physical shipment under the contractual terms with the customer, the Company completes its performance obligation and recognizes the revenue for the sale. Ingredient Sales In recent fiscal years, the Company has diversified its 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) 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 food 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 exit as processed and packed product and are 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 sorting, blending, bobbinizing, chemical and physical testing of products, storage, and other tobacco 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. 59 UNIVERSAL CORPORATION CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Disaggregation of Revenue from Contracts with Customers The following table disaggregates the Company’s revenue by significant revenue-generating category: Fiscal Year Ended March 31, 2021 2020 2019 Tobacco sales $ 1,715,066 $ 1,759,769 $ 2,085,001 Ingredient sales 127,393 22,014 4,769 Processing revenue 73,021 76,123 85,426 Other sales and revenue from contracts with customers 49,983 33,971 37,930 Total revenue from contracts with customers 1,965,463 1,891,877 2,213,126 Other operating sales and revenues 17,894 18,102 14,027 Consolidated sales and other operating revenues $ 1,983,357 $ 1,909,979 $ 2,227,153 Other operating sales and revenues consists principally of interest on advances to tobacco suppliers and dividend income from unconsolidated affiliates. Major Customers A material part of the Company’s business is dependent upon a few customers. The Company’s seven largest customers are Altria Group, Inc, British American Tobacco plc, China Tobacco International, Inc., Imperial Brands plc, Japan Tobacco, Inc., Philip Morris International, Inc., and Swedish Match AB. In the aggregate, these customers have accounted for approximately 70 % of consolidated revenue for each of the past three fiscal years. For the fiscal years ended March 31, 2021, 2020, and 2019, revenue from Philip Morris International, Inc. was approximately $ 460 million, $ 500 million, and $ 650 million, respectively. For the same periods, Imperial Brands plc accounted for revenue of approximately $ 340 million, $ 320 million, and $ 360 million, respectively, and British American Tobacco plc accounted for revenue of approximately $ 210 million, $ 190 million, and $ 270 million, respectively. These customers do business with various affiliates in the Company’s Tobacco Operations segment. The loss of, or substantial reduction in business from, any of these customers could have a material adverse effect on the Company. NOTE 4. RESTRUCTURING AND IMPAIRMENT COSTS During the fiscal years ended March 31, 2021, 2020, and 2019 Universal recorded restructuring and impairment costs related to business changes and various initiatives to adjust certain operations and reduce costs. Fiscal Year Ended March 31, 2021 Tobacco Operations In fiscal year 2021, the Company incurred $ 4.4 million of termination and impairment costs associated with restructuring of tobacco buying and administrative operations in Africa, $ 1.2 million of combined termination costs in other regions, and a $ 0.9 million charge for the liquidation of an idled service entity in Tanzania. Total restructuring and impairments costs related to the Tobacco Operations segment were $ 6.5 million for the fiscal year ended March 31, 2021. Ingredients Operations In fiscal year 2021, 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 incurred termination costs totaling approximately $ 0.6 million for employees whose permanent positions were eliminated. 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 60 UNIVERSAL CORPORATION CONSOLIDATED FINANCIAL STATEMENTS—(Continued) inventory and supply write-downs. The total restructuring and impairment charge incurred for the CIFI wind-down was $ 16.1 million for the fiscal year ended March 31, 2021. Fiscal Year Ended March 31, 2020 Tobacco Operations In fiscal year 2020, the Company recorded restructuring and impairment costs totaling $ 7.5 million, primarily related to $ 3.4 million of employee termination benefits for a voluntary workforce reduction at the Company's tobacco facilities in North Carolina, $ 1.8 million of employee termination benefits for the Company’s operations in Africa, and a $ 2.2 million impairment charge for machinery used by the Company's operations in Africa. Restructuring and impairment costs were also incurred in connection with downsizing efforts at several other locations around the Company. Fiscal Year Ended March 31, 2019 Tobacco Operations Due to the decline in customer demand for tobaccos from Tanzania, as well as regulatory, tax, and other business and operating considerations, the Company undertook a formal review of the Tanzania leaf tobacco market and its operations there in the third quarter of fiscal year 2019. Based on that review, the Company’s operating subsidiaries in Tanzania took steps to reduce operating costs going forward, including discontinuation of a year-round workforce. As a result of that initiative, the subsidiaries recorded a $ 4.0 million restructuring charge for termination benefits paid to employees whose permanent positions were eliminated. All amounts related to termination benefit costs were paid by the end of fiscal year 2019. In addition, as a result of the decrease in production volumes of Tanzania tobaccos and the associated reduced profitability, the Company determined that indicators of impairment in the carrying value of the property, plant and equipment comprising the Tanzania operations were present at December 31, 2018. Accordingly, based on the applicable accounting guidance, the Company tested the recoverability of those long-lived assets using undiscounted estimates of the future cash flows from the use of those assets and their eventual disposition. The property, plant and equipment were evaluated for recoverability using two distinct asset groups: (1) the land, building, and equipment comprising the processing facility, and (2) all remaining assets, which are substantially devoted to buying and receiving delivery of unprocessed leaf from farmers and marketing and shipping the processed tobacco to customers. The recoverability tests indicated that both asset groups were impaired at December 31, 2018. As a result, the Company determined the fair value of each asset group based principally on a probability-weighting of the discounted cash flows expected under multiple operating and disposition scenarios. An impairment charge of approximately $ 14.6 million was recorded to reduce the carrying value of the assets to their indicated fair values. The property, plant and equipment assets are used in buying, processing, and shipping and remain classified as “held and used” at this time as provided for under the accounting guidance. Should the expected cash flows from the future use and/or disposition of the assets change from the estimates on which their fair values were determined, additional impairment charges could be required, or gains or losses on any disposition of the assets could be recorded. The Company also had goodwill related to the Tanzanian operations of approximately $ 0.9 million which was separately tested for recoverability and fully written off based on the results of that test. Additional restructuring costs of approximately $ 0.9 million were incurred in connection with downsizing efforts at other locations around the Company during fiscal year 2019. A summary of the restructuring and impairment costs incurred during the fiscal years ended March 31, 2021, 2020, and 2019 is as follows: Fiscal Years Ended March 31, 2021 2020 2019 Restructuring Costs: Employee termination benefits $ 5,237 $ 5,356 $ 4,608 Other restructuring costs 3,468 — 223 8,705 5,356 4,831 Impairment Costs: Property, plant, and equipment and other noncurrent assets 13,872 2,187 14,584 Goodwill — — 889 $ 13,872 $ 2,187 $ 15,473 Total restructuring and impairment costs $ 22,577 $ 7,543 $ 20,304 61 UNIVERSAL CORPORATION CONSOLIDATED FINANCIAL STATEMENTS—(Continued) A reconciliation of the Company’s liability for employee termination benefits and other restructuring costs for fiscal years 2019 through 2021 is as follows: Employee Termination Benefits Other Costs Total Balance at April 1, 2019 $ 29 $ — $ 29 Fiscal Year 2019 Activity: Costs charged to expense 4,608 223 4,831 Payments and write-offs ( 4,014 ) — ( 4,014 ) Balance at March 31, 2019 623 223 846 Fiscal Year 2020 Activity: Costs charged to expense 5,356 — 5,356 Payments and write-offs ( 2,564 ) ( 223 ) ( 2,787 ) Balance at March 31, 2020 3,415 — 3,415 Fiscal Year 2021 Activity: Costs charged to expense 5,237 3,468 8,705 Payments and write-offs ( 7,282 ) ( 2,855 ) ( 10,137 ) Balance at March 31, 2021 $ 1,370 $ 613 $ 1,983 The restructuring liability at March 31, 2021 is expected to be paid during fiscal year 2022. Universal continually reviews its business for opportunities to realize efficiencies, reduce costs, and realign its operations in response to business changes. The Company may incur additional restructuring and impairment costs in future periods as business changes occur and additional cost savings initiatives are implemented. NOTE 5. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share: Fiscal Year Ended March 31, (in thousands, except share and per share data) 2021 2020 2019 Basic Earnings Per Share Numerator for basic earnings per share Net income attributable to Universal Corporation $ 87,410 $ 71,680 $ 104,121 Denominator for basic earnings per share Weighted average shares outstanding 24,656,009 24,982,259 25,129,192 Basic earnings per share $ 3.55 $ 2.87 $ 4.14 Diluted Earnings Per Share Numerator for diluted earnings per share Net income attributable to Universal Corporation $ 87,410 $ 71,680 $ 104,121 Denominator for diluted earnings per share: Weighted average shares outstanding 24,656,009 24,982,259 25,129,192 Effect of dilutive securities Employee and outside director share-based awards 132,557 124,092 201,245 Denominator for diluted earnings per share 24,788,566 25,106,351 25,330,437 Diluted earnings per share $ 3.53 $ 2.86 $ 4.11 62 UNIVERSAL CORPORATION CONSOLIDATED FINANCIAL STATEMENTS—(Continued) NOTE 6. INCOME TAXES The Company operates in the United States and many foreign countries and is subject to the tax laws of many jurisdictions. Changes in tax laws or the interpretation of tax laws can affect the Company’s earnings, as can the resolution of pending and contested tax issues. The Company's consolidated effective income tax rate is affected by a number of factors, including the mix of domestic and foreign earnings and the effect of exchange rate changes on local taxable income and deferred taxes in foreign countries. For fiscal years ended March 31, 2021, 2020, and 2019 the Company's U.S. federal statutory tax rate is 21.0 %. The U.S. tax system is primarily territorial based after the enactment of the Tax Cuts and Jobs Act of 2017. The U.S. tax law imposes a tax on U.S. shareholders on certain low-taxed income earned by controlled foreign corporations, referred to as global intangible low-taxed income ("GILTI”). The Company has made an accounting policy election to account for any additional tax resulting from the GILTI provisions in the year in which it is incurred and has not recorded any deferred taxes on temporary book-tax differences related to this income. The Company continues to assume repatriation of all undistributed earnings of its consolidated foreign subsidiaries and has therefore provided for expected foreign withholding taxes on the distribution of those earnings where applicable, net of any U.S. tax credit attributable to those withholding taxes. The Company has asserted permanent reinvestment of the book basis of certain foreign subsidiaries, and accordingly, no deferred income tax liability has been recorded for any potential taxable gain that may be realized on a future disposition or liquidation of any of those subsidiaries. It is not practicable for the Company to quantify any deferred income tax liability that would be attributable to those events. Income Tax Expense Income taxes for the fiscal years ended March 31, 2021, 2020, and 2019 consisted of the following: Fiscal Year Ended March 31, 2021 2020 2019 Current United States $ 9,500 $ 2,001 $ ( 2,639 ) State and local 621 92 377 Foreign 21,626 41,892 39,578 31,747 43,985 37,316 Deferred United States ( 5,938 ) 3,735 5,713 State and local ( 314 ) ( 16 ) ( 4 ) Foreign 3,917 ( 12,416 ) ( 1,837 ) ( 2,335 ) ( 8,697 ) 3,872 Total $ 29,412 $ 35,288 $ 41,188 Foreign taxes include any applicable U.S. tax expense on the earnings of foreign subsidiaries. 63 UNIVERSAL CORPORATION CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Consolidated Effective Income Tax Rate A reconciliation of the U.S. federal statutory tax rate to the Company’s effective income tax rate is as follows: Fiscal Year Ended March 31, 2021 2020 2019 U.S. federal statutory tax rate 21.0 % 21.0 % 21.0 % State income taxes, net of federal benefit 0.2 0.1 0.2 Foreign earnings taxed at rates other than the U.S. federal statutory tax rate ( 0.9 ) ( 2.0 ) 7.1 Foreign dividend withholding taxes 5.3 5.1 3.7 Reversal of dividend withholding tax due to foreign subsidiary tax holiday — — ( 5.1 ) Changes in uncertain tax positions — 5.6 1.4 Other ( 2.2 ) 1.3 ( 1.1 ) Effective income tax rate 23.4 % 31.1 % 27.2 % Final United States GILTI regulations published in July 2020 significantly changed from the proposed regulations published in 2019. The final regulations allow for an annual election for GILTI high-tax exclusion instead of a 5-year election and permitted retroactive application to years beginning after December 31, 2017. Universal elected to apply the final regulations to fiscal years 2019 and 2020 which resulted in a tax reduction of $ 2.7 million. In fiscal year 2021, the Company also recognized a $ 4.4 million net tax benefit for final U.S. tax regulations issued for hybrid dividends paid by foreign subsidiaries. During fiscal year 2020, the Company resolved a transfer pricing matter related to a foreign subsidiary. The resolution of the uncertainty with the local country taxing authorities resulted in net additional current income tax expense of $ 2.8 million. The additional income tax expense for fiscal year 2020 increased the effective tax rate for the year by 2.4 % During fiscal year 2019, the Company reversed amounts previously recorded for dividend withholding taxes on distributed and undistributed retained earnings of a foreign subsidiary. The reversal followed the resolution of uncertainties with the local country taxing authorities with respect to the inclusion of the tax under a tax holiday applicable to the subsidiary and was attributable to cumulative retained earnings amounts previously distributed or expected to be distributed prior to the expiration of the tax holiday. The reversal reduced income tax expense for fiscal year 2019 by approximately $ 7.8 million, which decreased the effective tax rate for the year by 5.1 %, as noted in the above rate reconciliation. Components of Income Before Income Taxes The U.S. and foreign components of income before income taxes were as follows: Fiscal Year Ended March 31, 2021 2020 2019 United States $ 30,060 $ 22,916 $ 37,478 Foreign 95,666 90,375 113,844 Total $ 125,726 $ 113,291 $ 151,322 64 UNIVERSAL CORPORATION CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Deferred Income Tax Liabilities and Assets Significant components of deferred tax liabilities and assets were as follows: March 31, 2021 2020 Liabilities Foreign withholding taxes $ 21,711 $ 19,870 Property, plant and equipment 8,726 10,078 Undistributed earnings 2,947 7,298 Operating lease right-of-use assets 6,856 9,877 Goodwill and other intangible assets 35,059 23,435 All other 4,876 4,813 Total deferred tax liabilities $ 80,175 $ 75,371 Assets Employee benefit plans $ 17,199 $ 22,773 Reserves and accruals 7,603 7,708 Deferred income 3,521 4,833 Operating lease right-of-use liabilities 6,718 9,650 Currency translation losses of foreign subsidiaries 2,173 2,173 Local currency exchange losses of foreign subsidiaries 450 8,360 Interest rate swap 5,178 7,284 All other 8,568 7,464 Total deferred tax assets 51,410 70,245 Valuation allowance ( 4,080 ) ( 3,394 ) Net deferred tax assets $ 47,330 $ 66,851 At March 31, 2021, the Company had no material net operating loss carryforwards in either its domestic or foreign operations. Combined Income Tax Expense (Benefit) The combined income tax expense (benefit) allocable to continuing operations and other comprehensive income was as follows: Fiscal Year Ended March 31, 2021 2020 2019 Continuing operations $ 29,412 $ 35,288 $ 41,188 Other comprehensive loss ( 9,563 ) ( 14,392 ) ( 5,390 ) Total $ 19,849 $ 20,896 $ 35,798 65 UNIVERSAL CORPORATION CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Uncertain Tax Positions A reconciliation of the beginning and ending balance of the gross liability for uncertain tax positions is as follows: Fiscal Year Ended March 31, 2021 2020 2019 Liability for uncertain tax positions, beginning of year $ 2,377 $ 5,625 $ 3,673 Additions: Related to tax positions for the current year 49 1,746 85 Related to tax positions for prior years — 4,369 2,169 Reductions: Due to lapses of statutes of limitations ( 135 ) ( 81 ) ( 90 ) Due to tax settlements — ( 8,948 ) — Effect of currency rate changes 146 ( 334 ) ( 212 ) Liability for uncertain tax positions, end of year $ 2,437 $ 2,377 $ 5,625 Of the total liability for uncertain tax positions at March 31, 2021, approximately $ 2.4 million could have an effect on the consolidated effective tax rate if the tax benefits are recognized. The liability for uncertain tax positions includes $ 0.1 million related to tax positions for which it is reasonably possible that the amounts could change significantly before March 31, 2022. This amount reflects a possible decrease in the liability for uncertain tax positions that could result from the completion and resolution of tax audits and the expiration of open tax years in various tax jurisdictions. During fiscal year 2020, the Company resolved a transfer pricing matter related to a foreign subsidiary. The settlement in fiscal year 2020 represents the resolution of a tax matter with a local country taxing authority that resulted in a $ 8.9 million settlement of which $ 4.5 million was accrued in prior fiscal years. For the fiscal year ended March 31, 2021, the Company recognized $ 1.8 million as a component of interest expense related to a settlement of an uncertain tax position at a foreign subsidiary. Amounts accrued or reversed for interest were not material for fiscal years 2020 or 2019. Amounts accrued or reversed for penalties were not material for fiscal years 2019 through 2021, and liabilities recorded for interest and penalties at March 31, 2021 and 2020 also were not material. Universal and its subsidiaries file a U.S. federal consolidated income tax return, as well as returns in several U.S. states and a number of foreign jurisdictions. As of March 31, 2021, the Company's earliest open tax year for U.S. federal income tax purposes was its fiscal year ended March 31, 2017. Open tax years in U.S. federal, state and foreign jurisdictions range from 3 to 6 years. NOTE 7. GOODWILL AND OTHER INTANGIBLES The Company's changes in goodwill at March 31, 2021 and 2020 consisted of the following: (in thousands) Fiscal Year Ended March 31, 2021 2020 Balance at beginning of year $ 126,826 $ 97,907 Acquisition of business (1) (2) 46,144 28,863 Foreign currency translation adjustment 81 56 Balance at end of year $ 173,051 $ 126,826 (1) On January 1, 2020 the Company acquired 100 % of the capital stock of FruitSmart for approximately $ 80 million in cash and up to $ 25 million of contingent consideration payments. The FruitSmart acquisition resulted in $ 28.9 million of goodwill. See Note 2 for additional information. (2) On October 1, 2020 the Company acquired 100 % of the capital stock of Silva for approximately $ 164.0 million in cash and $ 5.9 million of working capital on-hand at the date of acquisition. The Silva acquisition resulted in $ 46.1 million of goodwill. See Note 2 for additional information. 66 UNIVERSAL CORPORATION CONSOLIDATED FINANCIAL STATEMENTS—(Continued) The Company's intangible assets primarily consist of capitalized customer-related intangibles, trade names, proprietary developed technology and noncompetition agreements. The Company's intangible assets subject to amortization consisted of the following at March 31, 2021 and 2020: (in thousands, except useful life) Fiscal Year Ended March 31, 2021 2020 Useful Life (Years) Gross Carrying Value Accumulated Amortization Net Carrying Value Gross Carrying Value Accumulated Amortization Net Carrying Value Customer relationships (1)(2) 11 - 13 $ 62,500 $ ( 3,323 ) $ 59,177 $ 9,500 $ ( 183 ) $ 9,317 Trade names (1)(2) 5 11,100 ( 1,605 ) 9,495 3,300 ( 165 ) 3,135 Developed technology (1) 3 4,800 ( 2,000 ) 2,800 4,800 ( 400 ) 4,400 Noncompetition agreements (1) 5 1,000 ( 250 ) 750 1,000 ( 50 ) 950 Other 5 760 ( 678 ) 82 657 ( 598 ) 59 Total intangible assets $ 80,160 $ ( 7,856 ) $ 72,304 $ 19,257 $ ( 1,396 ) $ 17,861 (1) The FruitSmart acquisition resulted in $ 18.6 million of intangibles. See Note 2 for additional information. (2) The Silva acquisition resulted in $ 60.8 million of intangibles. See Note 2 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 years ended March 31, 2021 and 2020: (in thousands) Fiscal Year Ended March 31, 2021 2020 Amortization Expense $ 6,424 $ 832 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 March 31, 2021, the expected future amortization expense for intangible assets is as follows: Fiscal Year 2022 $ 9,608 2023 9,212 2024 7,969 2025 8,534 2026 and thereafter 36,981 Total expected future amortization expense $ 72,304 NOTE 8. CREDIT FACILITIES Bank Credit Agreement On December 20, 2018, the Company entered into a senior unsecured bank credit agreement that included a $ 430 million five -year revolving credit facility (expiring December 20, 2023), a $ 150 million five -year term loan (due December 20, 2023), and a $ 220 million seven -year term loan (due December 20, 2025). On December 17, 2020, the Company converted $ 150 million from the balance in the revolving credit facility into the existing term loans, splitting the balance equally between them. Additional information related to the term loans is provided in Note 9. Borrowings under the revolving credit facility bear interest at a variable rate based on either (1) LIBOR plus a margin that is based on the Company's credit measures or (2) the higher of the federal funds rate plus 0.5 %, prime rate, or one-month LIBOR plus 1.0 %, each plus a margin. In addition to interest, the Company pays a facility fee on the revolving credit facility. No amounts were outstanding under the revolving credit facility at March 31, 2021. The credit agreement provides for an expansion of the facility under certain conditions to allow additional borrowings of up to $ 200 million. The credit agreement includes financial covenants that require the Company to maintain a 67 UNIVERSAL CORPORATION CONSOLIDATED FINANCIAL STATEMENTS—(Continued) minimum level of tangible net worth and observe limits on debt levels. The Company was in compliance with those covenants at March 31, 2021. Short-Term Credit Facilities The Company maintains short-term uncommitted lines of credit in the United States and in a number of foreign countries. Foreign borrowings are generally in the form of overdraft facilities at rates competitive in the countries in which the Company operates. Generally, each foreign line is available only for borrowings related to operations of a specific country. As of March 31, 2021 and 2020, approximately $ 101 million and $ 78 million, respectively, were outstanding under these uncommitted lines of credit. The weighted-average interest rates on short-term borrowings outstanding was 4.2 % as of both March 31, 2021 and 2020. At March 31, 2021, the Company and its consolidated affiliates had unused uncommitted lines of credit totaling approximately $ 172 million. NOTE 9. LONG-TERM DEBT The Company's long-term debt at March 31, 2021 and 2020 consisted of the following: March 31, 2021 2020 Senior bank term loans $ 520,000 $ 370,000 Less: current portion — — Less: unamortized debt issuance costs ( 1,828 ) ( 1,236 ) Long-term debt $ 518,172 $ 368,764 As discussed in Note 8, on December 20, 2018, the Company entered into a bank credit agreement. The credit agreement includes a five -year term loan maturing in December 2023 and a seven -year term loan maturing in December 2025. At inception, the five -year and seven -year term loans had balances of $ 150 million and $ 220 million, respectively. On December 17, 2020, the Company converted $ 150 million from the balance in the revolving credit facility, split equally between the two term loans. Both term loans were fully funded at closing, require no amortization, and are prepayable without penalty prior to maturity. Under the credit agreement, both term loans bear interest at variable rates plus a margin based on the Company's credit measures. Interest payments on the additional $ 150 million of new term loans in fiscal year 2021 remain unhedged at March 31, 2021. As discussed in Note 11, the Company had receive-floating/pay-fixed interest rate swap agreements in place with respect to prior loans that were initially designated and carried over to hedge the variable interest payments on the new loans. Those swap agreements were subsequently terminated in February 2019 and concurrently replaced with new interest rate swap agreements that convert the variable benchmark rate to a fixed rate through December 20, 2023 for the five -year term loan and through December 20, 2025 for the seven -year term loan. The proceeds received for the fair value of the terminated interest rate swap agreements, approximately $ 5.4 million, is being amortized from accumulated other comprehensive income into earnings as a reduction of interest expense through their original maturity dates. At March 31, 2021, $ 1.1 million remains to be amortized into interest expense. With the swap agreements in place, the effective interest rates on the original $ 150 million five -year loan balance and the original $ 220 million seven -year loan balance were 3.94 % and 4.26 % at March 31, 2021, respectively. The weighted average effective interest rates, when taking into consideration both the hedged and unhedged interest payments for all outstanding long-term debt, were 3.72 % and 4.09 % at March 31, 2021 for the five -year and seven -year term loans, respectively. Changes in the effective interest rates could result from a change in interest rates on the unhedged interest payments or a change in the Company's credit measures that impact the applicable credit spreads specified in the underlying loan agreement. Disclosures about the fair value of long-term debt are provided in Note 12. Shelf Registration In November 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 additional debt or equity securities as determined by the Company and offered in one or more prospectus supplements prior to issuance. NOTE 10. LEASES The Company, as a lessee, enters into operating leases for land, buildings, equipment, and vehicles. For all operating leases with terms greater than 12 months and with fixed payment arrangements, a lease liability and corresponding right-of-use asset are recognized in the balance sheet for the term of the lease by calculating the net present value of future lease payments. 68 UNIVERSAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 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) March 31, 2021 March 31, 2020 Assets Operating lease right-of-use assets $ 31,230 $ 39,256 Liabilities Current portion of operating lease liabilities $ 7,898 $ 9,823 Long-term operating lease liabilities 19,725 25,893 Total operating lease liabilities $ 27,623 $ 35,716 The following table sets forth the location and amount of operating lease costs included in the Company's consolidated statement of income: Fiscal Year Ended March 31, Fiscal Year Ended March 31, (in thousands) 2021 2020 Income Statement Location Cost of goods sold $ 12,903 $ 10,954 Selling, general, and administrative expenses 9,408 8,574 Total operating lease costs (1) $ 22,311 $ 19,528 (1) Includes variable operating lease costs . For the fiscal year ended March 31, 2019, the Company recorded $ 17.3 million of total expense for operating leases. The following table reconciles the undiscounted cash flows to the operating lease liabilities in the Company’s consolidated balance sheet: (in thousands) March 31, 2021 Maturity of Operating Lease Liabilities 2022 $ 8,743 2023 6,371 2024 4,723 2025 3,793 2026 2,396 2027 and thereafter 5,290 Total undiscounted cash flows for operating leases $ 31,316 Less: Imputed interest ( 3,693 ) Total operating lease liabilities $ 27,623 As of March 31, 2021, the Company had entered into no additional operating leases that have not yet commenced. 69 UNIVERSAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) The following table sets forth supplemental information related to operating leases: Fiscal Year Ended March 31, Fiscal Year Ended March 31, (in thousands, except lease term and incremental borrowing rate) 2021 2020 Supplemental Cash Flow Information Cash paid for amounts included in the measurement of operating lease liabilities $ 12,855 $ 11,983 Right-of-use assets obtained in exchange for new operating leases 10,970 14,957 Weighted Average Remaining Lease Term (years) 5.57 5.61 Weighted Average Collateralized Incremental Borrowing Rate 4.05 % 4.10 % NOTE 11. DERIVATIVES AND HEDGING ACTIVITIES Universal is exposed to various risks in its worldwide operations and uses derivative financial instruments to manage two specific types of risks – interest rate risk and foreign currency exchange rate risk. Interest rate risk has been managed by entering into interest rate swap agreements, and foreign currency exchange rate risk has been managed by entering into forward foreign currency exchange and option contracts. However, the Company’s policy also permits other types of derivative instruments. In addition, foreign currency exchange rate risk is also managed through strategies that do not involve derivative instruments, such as using local borrowings and other approaches to minimize net monetary positions in non-functional currencies. The disclosures below provide additional information about the Company’s hedging strategies, the derivative instruments used, and the effects of these activities on the consolidated statements of income and comprehensive income and the consolidated balance sheets. In the consolidated statements of cash flows, the cash flows associated with all of these activities are reported in net cash provided by operating activities. Cash Flow Hedging Strategy for Interest Rate Risk In 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 March 31, 2021, 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 March 31, 2021, 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 on the effectiveness analysis of the interest rate swap agreements. Previously, the Company had receive-floating/pay-fixed interest rate swap agreements that were designated and qualified as cash flow hedges for two outstanding non-amortizing bank loans that were repaid concurrent with closing on the new bank credit facility. Those swap agreements were subsequently terminated in February 2019 concurrent with the inception of the new swap agreements. The fair value of the previous swap agreements, approximately $ 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 March 31, 2021, $ 1.1 million remained in accumulated other comprehensive loss to be amortized through December 31, 2021. Cash Flow Hedging Strategy for Foreign Currency Exchange Rate Risk Related to Forecast Purchases of Tobacco, Tobacco Processing Costs, and Crop Input Sales The majority of the tobacco production in most countries outside the United States where Universal operates is sold in export markets at prices denominated in U.S. dollars. However, sales of crop inputs (such as seeds and fertilizers) to farmers, purchases of tobacco from farmers and most processing costs (such as labor and energy) in those countries are usually denominated in the local currency. Changes in exchange rates between the U.S. dollar and the local currencies where tobacco is grown and processed affect the ultimate U.S. dollar sales of crop inputs and cost of processed tobacco. From time to time, the Company enters into forward and option contracts to buy U.S. dollars and sell the local currency at future dates that coincide with the sale of crop inputs to farmers. In the case of forecast purchases of tobacco and the related processing costs, the Company enters into forward and option contracts to sell U.S. dollars and buy the local currency at future dates that coincide with the expected timing of a portion of the tobacco purchases and processing costs. These strategies offset the variability of future U.S. 70 UNIVERSAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) dollar cash flows for sales of crop inputs, tobacco purchases, and processing costs for the foreign currency notional amount hedged. These hedging strategies have been used mainly for tobacco purchases, processing costs, and sales of crop inputs in Brazil, although the Company has also entered into hedges for a portion of the tobacco purchases in Africa. The aggregate U.S. dollar notional amount of forward and option contracts entered for these purposes during fiscal years 2021, 2020, and 2019 was as follows: Fiscal Year Ended March 31, (in millions) 2021 2020 2019 Tobacco purchases $ 101.3 $ 123.2 $ 76.9 Processing costs 27.8 35.1 19.8 Crop input sales 23.5 21.7 — Total $ 152.6 $ 180.0 $ 96.7 Variations in exchange rates and in the amount and timing of fixed-price orders from customers for their purchases from individual crop years routinely cause variations in the U.S. dollar notional amount of forward contracts entered into from one year to the next. All contracts related to tobacco purchases and 2021 crop year input sales were designated and qualified as hedges of the future cash flows associated with the forecast purchases of tobacco. As a result, changes in fair values of the forward contracts have been recognized in comprehensive income as they occurred, but only recognized in earnings upon sale of the related tobacco to third-party customers. 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 marked-to-market basis. In fiscal year 2020, option contracts entered for the sale of 2020 crop year input sales were not designated for hedge accounting. The gains and losses for the 2020 crop year option contracts entered into for the sale of crop inputs were recognized in earnings on a marked-to-market basis. For the remaining hedge gains and losses related to 2020 crops recorded in accumulated other comprehensive loss at March 31, 2021, the Company expects to complete the sale of the tobacco and recognize the amounts in earnings during fiscal year 2022. At March 31, 2021, all hedged forecast purchases of tobacco and crop input sales not yet completed remained probable of occurring within the originally designated time period and, as a result, no hedges had been discontinued. Purchases of the 2021 crops in Brazil and Africa are expected to be completed by August 2021, and all forward contracts to hedge those purchases will mature and be settled by that time. Purchases of the 2022 crops in Brazil are expected to be completed by August 2022 and all forward contracts to hedge those purchases will mature and be settled by that time. Hedging Strategy for Foreign Currency Exchange Rate Risk Related to Net Local Currency Monetary Assets and Liabilities of Foreign Subsidiaries Most of the Company’s foreign subsidiaries transact the majority of their sales in U.S. dollars and finance the majority of their operating requirements with U.S. dollar borrowings, and therefore use the U.S. dollar as their functional currency. These subsidiaries normally have certain monetary assets and liabilities on their balance sheets that are denominated in the local currency. Those assets and liabilities can include cash and cash equivalents, accounts receivable and accounts payable, advances to farmers and suppliers, deferred income tax assets and liabilities, recoverable value-added taxes, operating lease liabilities, and other items. Net monetary assets and liabilities denominated in the local currency are remeasured into U.S. dollars each reporting period, generating gains and losses that the Company records in earnings as a component of selling, general, and administrative expenses. The level of net monetary assets or liabilities denominated in the local currency normally fluctuates throughout the year based on the operating cycle, but it is most common for monetary assets to exceed monetary liabilities, sometimes by a significant amount. When this situation exists and the local currency weakens against the U.S. dollar, remeasurement losses are generated. Conversely, remeasurement gains are generated on a net monetary asset position when the local currency strengthens against the U.S. dollar. To manage a portion of its exposure to currency remeasurement gains and losses, the Company enters into forward contracts to buy or sell the local currency at future dates coinciding with expected changes in the overall net local currency monetary asset position of the subsidiary. Gains and losses on the forward contracts are recorded in earnings as a component of selling, general, and administrative expenses for each reporting period as they occur, and thus directly offset the related remeasurement losses or gains in the consolidated statements of income for the notional amount hedged. The Company does not designate these contracts as hedges for accounting purposes. The contracts are generally arranged to hedge the subsidiary's projected exposure to currency remeasurement risk for specified periods of time, and new contracts are entered as necessary throughout the year to replace previous contracts as they mature. The Company is currently using forward currency contracts to manage its exposure to currency remeasurement risk in Brazil. The total notional amounts of contracts outstanding at March 31, 2021 and 2020, were approximately $ 16.6 million and $ 8.9 million, respectively. To further mitigate currency remeasurement 71 UNIVERSAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) exposure, the Company’s foreign subsidiaries may utilize short-term local currency financing during certain periods. This strategy, while not involving the use of derivative instruments, is intended to minimize the subsidiary’s net monetary position by financing a portion of the local currency monetary assets with local currency monetary liabilities, thus hedging a portion of the overall position. Several of the Company’s foreign subsidiaries transact the majority of their sales and finance the majority of their operating requirements in their local currency, and therefore use their respective local currencies as the functional currency for reporting purposes. From time to time, these subsidiaries sell tobacco to customers in transactions that are not denominated in the functional currency. In those situations, the subsidiaries routinely enter into forward exchange contracts to offset currency risk for the period of time that a fixed-price order and the related trade account receivable are outstanding with the customer. The contracts are not designated as hedges for accounting purposes. Effect of Derivative Financial Instruments on the Consolidated Statements of Income The table below outlines the effects of the Company’s use of derivative financial instruments on the consolidated statements of income for the fiscal years ended March 31, 2021, 2020, and 2019. Fiscal Year Ended March 31, 2021 2020 2019 Cash Flow Hedges - Interest Rate Swap Agreements Derivative Effective Portion of Hedge Gain (loss) recorded in accumulated other comprehensive loss $ 3,033 $ ( 32,389 ) $ ( 7,496 ) Gain (loss) reclassified from accumulated other comprehensive loss into earnings $ ( 8,411 ) $ ( 1,577 ) $ 1,689 Gain on terminated interest rate swaps amortized from accumulated other comprehensive loss into earnings $ 1,416 $ 2,691 $ 260 Location of gain (loss) reclassified from accumulated other comprehensive loss into earnings Interest expense Ineffective Portion of Hedge Gain (loss) recognized in earnings $ — $ — $ — Location of gain (loss) recognized in earnings Selling, general and administrative expenses Hedged Item Description of hedged item Floating rate interest payments on term loans Cash Flow Hedges - Forward Foreign Currency Exchange Contracts Derivative Effective Portion of Hedge Gain (loss) recorded in accumulated other comprehensive loss $ ( 272 ) $ ( 13,646 ) $ ( 2,623 ) Gain (loss) reclassified from accumulated other comprehensive loss into earnings $ ( 13,926 ) $ 1,108 $ ( 3,034 ) Location of gain (loss) reclassified from accumulated other comprehensive loss into earnings Cost of goods sold Ineffective Portion and Early De-designation of Hedges Gain (loss) recognized in earnings $ — $ — $ — Location of gain (loss) recognized in earnings Selling, general and administrative expenses Hedged Item Description of hedged item Forecast purchases of tobacco in Brazil and Africa Derivatives Not Designated as Hedges - Forward Foreign Currency Exchange Contracts Gain (loss) recognized in earnings $ ( 872 ) $ ( 4,013 ) $ ( 4,671 ) Location of gain (loss) recognized in earnings Selling, general and administrative expenses For the outstanding interest rate swap agreements, the effective portion of the gain or loss on the derivative is recorded in accumulated other comprehensive loss and any ineffective portion is recorded in selling, general and administrative expenses. For the terminated interest rates swaps previously designated as cash flow hedges, a $ 1.1 million net realized hedge gain remained in 72 UNIVERSAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) accumulated other comprehensive loss at March 31, 2021. The Company expects to amortize the remaining unamortized gain into earnings as a reduction of interest expense in fiscal year 2022. For the forward foreign currency exchange contracts designated as cash flow hedges of tobacco purchases in Brazil and Africa, as well as the crop input sales in Brazil, a net hedge loss of approximately $ 0.8 million remained in accumulated other comprehensive loss at March 31, 2021. That balance reflects gains and losses on contracts related to the 2020, 2021, and 2022 Brazil crops, the 2021 Africa crop, and the 2021 Brazil crop input sales, less the amounts reclassified to earnings related to tobacco sold through March 31, 2021. The remaining balance in accumulated other comprehensive loss associated with the 2020 and 2021 Brazil crop purchase hedges, along with the balances associated with the 2021 Brazil crop input sales and the 2021 Africa crops are expected to be recognized in earnings as a component of cost of goods sold in fiscal year 2022 as those tobaccos are sold to customers. The balance in accumulated other comprehensive loss related to the 2022 Brazil crop is expected to be recognized in earnings as a component of cost of goods sold in fiscal year 2023 when those tobaccos are sold to customers. Based on the hedging strategy, as the gain or loss is recognized in earnings, it is expected to be offset by a change in the direct cost for the tobacco or by a change in sales prices if the strategy has been mandated by the customer. Generally, margins on the sale of the tobacco will not be significantly affected. Effect of Derivative Financial Instruments on the Consolidated Balance Sheets The table below outlines the effects of the Company’s derivative financial instruments on the consolidated balance sheets at March 31, 2021 and 2020: Derivatives in a Fair Value Asset Position Derivatives in a Fair Value Liability Position Balance Sheet Location Fair Value as of March 31, Balance Sheet Location Fair Value as of March 31, 2021 2020 2021 2020 Derivatives Designated as Hedging Instruments Interest rate swap agreements Other non-current assets $ — $ — Other long-term liabilities $ 25,719 $ 37,163 Forward foreign currency exchange contracts Other current assets 1,137 — Accounts payable and accrued expenses 1,031 11,467 Total $ 1,137 $ — $ 26,750 $ 48,630 Derivatives Not Designated as Hedging Instruments Forward foreign currency exchange contracts Other current assets $ 435 $ 314 Accounts payable and accrued expenses $ 791 $ 4,375 Total $ 435 $ 314 $ 791 $ 4,375 Substantially all of the Company's forward foreign currency exchange contracts are subject to master netting arrangements, whereby the right to offset occurs in the event of default by a participating party. The Company has elected to present these contracts on a gross basis in the consolidated balance sheets. 73 UNIVERSAL CORPORATION CONSOLIDATED FINANCIAL STATEMENTS—(Continued) NOTE 12. FAIR VALUE MEASUREMENTS Universal measures certain financial and nonfinancial assets and liabilities at fair value based on applicable accounting guidance. The financial assets and liabilities measured at fair value include money market funds, trading securities associated with deferred compensation plans, interest rate swap agreements, forward foreign currency exchange contracts, and guarantees of bank loans to tobacco growers. The application of the fair value guidance to nonfinancial assets and liabilities primarily includes the determination of fair values for goodwill and long-lived assets when indicators of potential impairment are present. Under the accounting guidance, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The framework for measuring fair value is based on a fair value hierarchy that distinguishes between observable inputs and unobservable inputs. Observable inputs are based on market data obtained from independent sources. Unobservable inputs require the Company to make its own assumptions about the value placed on an asset or liability by market participants because little or no market data exists. There are three levels within the fair value hierarchy. Level Description 1 quoted prices in active markets for identical assets or liabilities that the Company has the ability to access as of the reporting date; 2 quoted prices in active markets for similar assets or liabilities, or quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability; and 3 unobservable inputs for the asset or liability. As permitted under the accounting guidance, the Company uses net asset value per share ("NAV") as a practical expedient to measure the fair value of its money market funds. The fair values for those funds are presented under the heading "NAV" in the tables that follow in this disclosure. In measuring the fair value of liabilities, the Company considers the risk of non-performance in determining fair value. Universal has not elected to report at fair value any financial instruments or any other assets or liabilities that are not required to be reported at fair value under current accounting guidance. 74 UNIVERSAL CORPORATION CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Recurring Fair Value Measurements At March 31, 2021 and 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: March 31, 2021 Fair Value Hierarchy NAV Level 1 Level 2 Level 3 Total Assets Money market funds $ 1,992 $ — $ — $ — $ 1,992 Trading securities associated with deferred compensation plans — 15,735 — — 15,735 Forward foreign currency exchange contracts — — 1,572 — 1,572 Total financial assets measured and reported at fair value $ 1,992 $ 15,735 $ 1,572 $ — $ 19,299 Liabilities Acquisition-related contingent consideration obligations - long-term $ — $ — $ — $ 2,532 $ 2,532 Interest rate swap agreements — — 25,719 — 25,719 Forward foreign currency exchange contracts — — 1,822 — 1,822 Total financial liabilities measured and reported at fair value $ — $ — $ 27,541 $ 2,532 $ 30,073 March 31, 2020 Fair Value Hierarchy NAV Level 1 Level 2 Level 3 Total Assets Money market funds $ 4,011 $ — $ — $ — $ 4,011 Trading securities associated with deferred compensation plans — 12,635 — — 12,635 Forward foreign currency exchange contracts — — 314 — 314 Total financial assets measured and reported at fair value $ 4,011 $ 12,635 $ 314 $ — $ 16,960 Liabilities 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 Forward 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 The fair value of money market funds, which are reported in cash and cash equivalents in the consolidated balance sheets, is based on NAV, which is the amount at which the funds are redeemable and is used as a practical expedient for fair value. These funds are not classified in the fair value hierarchy, but are disclosed as part of the fair value table above. 75 UNIVERSAL CORPORATION CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Trading securities associated with deferred compensation plans Trading securities represent mutual fund investments that are matched to employee deferred compensation obligations. These investments are bought and sold as employees defer compensation, receive distributions, or make changes in the funds underlying their accounts. Quoted market prices (Level 1) are used to determine the fair values of the mutual funds. Interest rate swap agreements The fair values of interest rate swap agreements are determined based on dealer quotes using a discounted cash flow model matched to the contractual terms of each instrument. Since inputs to the model are observable and significant judgment is not required in determining the fair values, interest rate swaps are classified within Level 2 of the fair value hierarchy. Forward foreign currency exchange contracts The fair values of forward foreign currency exchange contracts are also determined based on dealer quotes using a discounted cash flow model matched to the contractual terms of each instrument. Since inputs to the model are observable and significant judgment is not required in determining the fair values, forward foreign currency exchange contracts are classified within Level 2 of the fair value hierarchy. Acquisition-related contingent consideration obligations The Company estimates the fair value of acquisition-related contingent consideration obligations by applying an income approach model that utilizes probability-weighted discounted cash flows. The Company acquired FruitSmart, Inc. in fiscal year 2020 and recognized a contingent consideration liability of $ 6.7 million on the date of acquisition. Each reporting period the Company evaluates the fair value of the acquisition-related contingent consideration obligations. 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 fiscal years ended March 31, 2021 and 2020 is provided below. Fiscal Year Ended March 31, 2021 2020 Balance beginning of year $ 6,705 $ — Additions — 6,705 Change in fair value of contingent consideration liability ( 4,173 ) — Balance at end of year $ 2,532 $ 6,705 As of March 31, 2021, $ 2.5 million of contingent consideration liability related to the FruitSmart acquisition is included in accounts payable and accrued expenses on the consolidated balance sheet. Guarantees of bank loans to tobacco growers 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 March 31, 2021 . 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 was then calculated at a risk-adjusted interest rate that was aligned with the expected duration of the liability and included 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 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 were therefore classified within Level 3 of the fair value hierarchy. 76 UNIVERSAL CORPORATION CONSOLIDATED FINANCIAL STATEMENTS—(Continued) A reconciliation of the change in the balance of the financial liability for guarantees of bank loans to tobacco growers (Level 3) for the fiscal years ended March 31, 2021 and 2020 is provided below. Fiscal Year Ended March 31, 2021 2020 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 ) ( 659 ) Provision for loss or transfers from allowance for loss on direct loans to farmers (addition of current crop year loans) — ( 5 ) Change in discount rate and estimated collection period ( 2 ) ( 7 ) Currency remeasurement ( 5 ) ( 29 ) Balance at end of year $ — $ 103 Long-term Debt The following table summarizes the fair and carrying value of the Company’s long-term debt, including the current portion at each of the balance sheet dates March 31, 2021 and 2020: Fiscal Year Ended March 31, (in millions of dollars) 2021 2020 Fair market value of long term obligations $ 517 $ 370 Carrying value of long term obligations $ 520 $ 370 The Company estimates the fair value of its long-term debt using Level 2 inputs which are based upon quoted market prices for the same or similar obligations or on calculations that are based on the current interest rates available to the Company for debt of similar terms and maturities. See Note 9 for more information regarding long-term debt. Nonrecurring Fair Value Measurements Assets and liabilities that are measured at fair value on a nonrecurring basis primarily relate to long-lived assets, right-of-use operating lease assets and liabilities, goodwill and intangibles, and other current and noncurrent assets. These assets and liabilities fair values are evaluated for impairment when potential indicators of impairment exist. Accordingly, the nonrecurring measurement of the fair value of these assets and liabilities are classified within Level 3 of the fair value hierarchy. Acquisition Accounting for Business Combinations The Company accounts for acquisitions qualifying under ASC 805, "Business Combinations," which requires, among other things, that the assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. The fair values of consideration transferred and net assets acquired are determined using a combination of Level 2 and Level 3 inputs as specified in the fair value hierarchy in ASC 820, “Fair Value Measurements and Disclosures.” The Company believes that the fair values assigned to the assets acquired and liabilities assumed are based on reasonable assumptions. The significant assumptions used in determining the fair value include the discount rate and forecasted results (e.g., revenue growth rates and operating profit margins). Long-Lived Assets The Company reviews long-lived assets for impairment whenever events, changes in business conditions, or other circumstances provide an indication that such assets may be impaired. CIFI As a result of the announcement of the wind-down of the CIFI operation, an impairment of the related long-lived assets was recorded during the quarter ended December 31, 2020. The long-lived assets primarily consist of buildings, processing equipment, and other manufacturing related assets. The aggregate fair value and carrying value of those assets following the impairment adjustments was approximately $ 6 million. The fair values of the property, plant and equipment were principally determined using a market-based approach with consideration of the assets fair values to potential third-parties. Significant judgment was required in estimating the amount and timing of the future cash flows associated with the disposition of the assets. 77 UNIVERSAL CORPORATION CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Tanzania Due to business changes that affected the leaf tobacco market in Tanzania and the Company's operations there, an impairment charge of the long-lived assets in Tanzania was recorded in fiscal year 2019 to reduce their carrying value to fair value at March 31, 2019. The long-lived assets consist principally of the Company's processing facility and equipment, storage facilities, tobacco buying and receiving stations, employee housing, and vehicles and transportation equipment. The aggregate fair value and carrying value of those assets following the impairment adjustments was approximately $ 17 million. The fair values of the property, plant and equipment were determined based principally on a probability-weighting of the discounted cash flows expected under multiple operating and disposition scenarios. Significant judgment was required in estimating the amount and timing of the future cash flows associated with the use and disposition of the assets, as well as the probabilities associated with the respective operating and disposition scenarios. NOTE 13. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS Defined Benefit Plans Description of Plans The Company sponsors several defined benefit pension plans covering salaried and certain hourly employees in the U.S., as well as certain foreign and other employee groups. These plans provide retirement benefits based primarily on employee compensation and years of service. Plan assets consist primarily of equity and fixed income investments. The Company also sponsors defined benefit plans that provide postretirement health and life insurance benefits for eligible U.S. employees and retirees who have attained specific age and service levels, although postretirement life insurance benefits were discontinued several years ago for all employees who were not already retired. The health benefits are funded by the Company as the costs of those benefits are incurred. The plan design includes cost-sharing features such as deductibles and coinsurance. The life insurance benefits are funded with deposits to a reserve account held by an insurance company. The Company has the right to amend or discontinue its pension and other postretirement benefit plans at any time. In the following disclosures, the term “accumulated benefit obligation” (“ABO”) represents the actuarial present value of estimated future benefit payments earned by participants in the Company's defined benefit pension plans as of the balance sheet date without regard to the estimated effect of future compensation increases on those benefits. The term does not apply to other postretirement benefits. “Projected benefit obligation” refers to the projected benefit obligation (“PBO”) for pension benefits and the accumulated postretirement benefit obligation (“APBO”) for other postretirement benefits. These amounts represent the actuarial present value of estimated future benefit payments earned by participants in the benefit plans as of the balance sheet date. For pension benefits, the projected benefit obligation includes the estimated effect of future compensation increases on those benefits. Actuarial Assumptions Assumptions used for financial reporting purposes to compute net periodic benefit cost and benefit obligations for the Company's primary defined benefit plans were as follows: Pension Benefits Other Postretirement Benefits 2021 2020 2019 2021 2020 2019 Discount rates: Benefit cost for plan year 3.60 % 4.00 % 4.10 % 3.40 % 3.80 % 3.90 % Benefit obligation at end of plan year 3.30 % 3.60 % 4.00 % 2.90 % 3.40 % 3.80 % Expected long-term return on plan assets: Benefit cost for plan year 6.00 % 6.75 % 6.75 % 3.00 % 3.00 % 3.00 % Salary scale: Benefit cost for plan year 4.00 % 4.00 % 4.00 % 4.00 % 4.00 % 4.00 % Benefit obligation at end of plan year 4.00 % 4.00 % 4.00 % 4.00 % 4.00 % 4.00 % Healthcare cost trend rate N/A N/A N/A 6.17 % 7.34 % 7.60 % Changes in the discount rates in the above table reflect prevailing market interest rates at the end of each fiscal year when the benefit obligations are actuarially measured. The expected long-term return on plan assets is developed from financial models used to project future returns on the underlying assets of the funded plans and is reviewed on an annual basis. The healthcare cost trend rate used by the Company is based on a study of medical cost inflation rates that is reviewed and updated annually for 78 UNIVERSAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) continued applicability. The revised trend assumption of 6.17 % in 2021 declines gradually to 4.44 % in 2029 . The Company has caps in place on postretirement medical benefits that limit its cost for a large segment of the retiree population. As a result, changes to the healthcare cost trend rate have a limited impact on the postretirement medical plan liability and expense. Benefit Obligations, Plan Assets, and Funded Status The following table reflects the changes in benefit obligations and plan assets in fiscal years 2021 and 2020, as well as the funded status of the plans at March 31, 2021 and 2020: Pension Benefits Other Postretirement Benefits March 31, March 31, 2021 2020 2021 2020 Actuarial present value of benefit obligation: Accumulated benefit obligation $ 289,901 $ 281,242 Projected benefit obligation 297,090 287,082 $ 28,926 $ 30,282 Change in projected benefit obligation: Projected benefit obligation, beginning of year $ 287,082 $ 278,189 $ 30,282 $ 31,635 Service cost 6,618 5,990 172 199 Interest cost 9,571 10,747 1,141 1,306 Effect of discount rate change 12,990 14,479 1,126 1,326 Foreign currency exchange rate changes 776 ( 1,477 ) ( 283 ) ( 1,012 ) Settlements — ( 6,038 ) — — Other ( 3,626 ) 1,029 167 ( 744 ) Benefit payments ( 16,321 ) ( 15,837 ) ( 3,679 ) ( 2,428 ) Projected benefit obligation, end of year $ 297,090 $ 287,082 $ 28,926 $ 30,282 Change in plan assets: Plan assets at fair value, beginning of year $ 238,450 $ 244,969 $ 3,369 $ 3,717 Actual return on plan assets 39,757 10,551 114 152 Employer contributions 8,472 6,037 3,229 1,928 Settlements — ( 6,038 ) — — Foreign currency exchange rate changes ( 9 ) ( 1,232 ) — — Benefit payments ( 16,321 ) ( 15,837 ) ( 3,679 ) ( 2,428 ) Plan assets at fair value, end of year $ 270,349 $ 238,450 $ 3,033 $ 3,369 Funded status: Funded status of the plans, end of year $ ( 26,741 ) $ ( 48,632 ) $ ( 25,893 ) $ ( 26,913 ) The Company funds its non-regulated U.S. pension plan, one of its foreign pension plans, and its postretirement medical plans on a pay-as-you-go basis as the benefit payments are incurred. The unfunded projected benefit obligation for those pension plans and postretirement benefit plans was $ 38.1 million and $ 23.7 million, respectively, at March 31, 2021. 79 UNIVERSAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) The funded status of the Company’s plans at the end of fiscal years 2021 and 2020 was reported in the consolidated balance sheets as follows: Pension Benefits Other Postretirement Benefits March 31, March 31, 2021 2020 2021 2020 Noncurrent assets (included in Pension asset and other noncurrent assets) $ 11,950 $ 346 $ — $ — Current liability (included in Accounts payable and accrued expenses) ( 4,896 ) ( 2,978 ) ( 2,051 ) ( 2,233 ) Noncurrent liability (reported as pensions and other postretirement benefits) ( 33,795 ) ( 46,000 ) ( 23,842 ) ( 24,680 ) Amounts recognized in the consolidated balance sheets $ ( 26,741 ) $ ( 48,632 ) $ ( 25,893 ) $ ( 26,913 ) Additional information on the funded status of the Company’s plans as of the respective measurement dates for the fiscal years ended March 31, 2021 and 2020, is as follows: Pension Benefits Other Postretirement Benefits March 31, March 31, 2021 2020 2021 2020 For plans with a projected benefit obligation in excess of plan assets: Aggregate projected benefit obligation (PBO) $ 44,742 $ 284,327 $ 28,926 $ 30,282 Aggregate fair value of plan assets 6,051 235,349 3,033 3,369 For plans with an accumulated benefit obligation in excess of plan assets: Aggregate accumulated benefit obligation (ABO) 42,923 278,515 N/A N/A Aggregate fair value of plan assets 6,051 235,349 N/A N/A Net Periodic Benefit Cost The components of the Company’s net periodic benefit cost were as follows: Pension Benefits Other Postretirement Benefits Fiscal Year Ended March 31, Fiscal Year Ended March 31, 2021 2020 2019 2021 2020 2019 Components of net periodic benefit cost: Service cost $ 6,618 $ 5,990 $ 6,008 $ 172 $ 199 $ 222 Interest cost 9,571 10,747 10,810 1,141 1,306 1,371 Expected return on plan assets ( 14,448 ) ( 16,671 ) ( 15,695 ) ( 96 ) ( 106 ) ( 99 ) Settlement cost — 676 — — — — Net amortization and deferral 4,863 3,709 3,491 ( 591 ) ( 647 ) ( 710 ) Net periodic benefit cost $ 6,604 $ 4,451 $ 4,614 $ 626 $ 752 $ 784 A one-percentage-point increase or decrease in the assumed healthcare cost trend rate would not result in a significant change to the March 31, 2021 accumulated postretirement benefit obligation or the aggregate service and interest cost components of the net periodic postretirement benefit expense for fiscal year 2022. Amounts Included in Accumulated Other Comprehensive Loss Amounts included in accumulated other comprehensive loss at the beginning of the year are amortized as a component of net periodic benefit cost during the year. The amounts recognized in other comprehensive income or loss for fiscal years 2021 80 UNIVERSAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) and 2020 and the amounts included in accumulated other comprehensive loss at the end of those fiscal years are shown below. All amounts shown are before allocated income taxes. Pension Benefits Other Postretirement Benefits March 31, March 31, 2021 2020 2021 2020 Change in net actuarial loss (gain): Net actuarial loss (gain), beginning of year $ 97,025 $ 81,502 $ ( 5,365 ) $ ( 6,201 ) Losses (gains) arising during the year ( 17,563 ) 21,838 520 302 Settlement — ( 529 ) — — Amortization included in net periodic benefit cost during the year ( 6,857 ) ( 5,786 ) 450 534 Net actuarial loss (gain), end of year 72,605 97,025 ( 4,395 ) ( 5,365 ) Change in prior service cost (benefit): Prior service cost (benefit), beginning of year ( 5,402 ) ( 7,479 ) ( 564 ) ( 766 ) Amortization included in net periodic benefit cost during the year 1,996 2,077 188 202 Prior service cost (benefit), end of year ( 3,406 ) ( 5,402 ) ( 376 ) ( 564 ) Total amounts in accumulated other comprehensive loss at end of year, before income taxes $ 69,199 $ 91,623 $ ( 4,771 ) $ ( 5,929 ) Amounts in the above table reflect the Company and its consolidated subsidiaries. The accumulated other comprehensive loss reported in the consolidated balance sheets also includes pension and other postretirement benefit amounts related to ownership interests in unconsolidated affiliates. The Company expects to recognize approximately $ 5.6 million of the March 31, 2021 net actuarial loss and $ 2.1 million of the March 31, 2021 prior service benefit in net periodic benefit cost during fiscal year 2022. Allocation of Pension Plan Assets The Company has established, and periodically adjusts, target asset allocations for its investments in its U.S. ERISA-regulated defined benefit pension plan, which represents 97 % of consolidated plan assets and 84 % of consolidated PBO at March 31, 2021, to balance the needs of liquidity, total return, and risk control. The assets are required to be diversified across asset classes and investment styles to achieve that balance. During the year, the asset allocation is reviewed for adherence to the target policy and rebalanced to the targeted weights. The Company reviews the expected long-term returns of the asset allocation each year to help determine whether changes are needed. The return is evaluated on a weighted-average basis in relation to inflation. The assumed long-term rate of return used to calculate annual benefit expense is based on the asset allocation and expected market returns for the respective asset classes. The weighted–average target pension asset allocation and target ranges at the March 31, 2021 measurement date and the actual asset allocations at the March 31, 2021 and 2020 measurement dates by major asset category were as follows: Actual Allocation Target Allocation March 31, Major Asset Category Range 2021 2020 Equity securities 29.0 % 19 % - 39 % 32.0 % 25.4 % Fixed income securities (1) 66.0 % 56 % - 76 % 64.1 % 70.3 % Alternative investments 5.0 % 0 % - 10 % 3.9 % 4.3 % Total 100.0 % 100.0 % 100.0 % (1) Actual amounts include high yield securities and cash balances held for the payment of benefits. Universal makes regular contributions to its pension and other postretirement benefit plans. As previously noted, for postretirement health benefits, contributions reflect funding of those benefits as they are incurred. The Company expects to make contributions of approximately $ 1.4 million to its ERISA regulated defined benefit pension plan and $ 5.9 million to its non-ERISA regulated pension plans in fiscal year 2022. 81 UNIVERSAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Estimated future benefit payments to be made from the Company’s plans are as follows: Fiscal Year Pension Benefits Other Postretirement Benefits 2022 $ 19,611 $ 2,484 2023 18,777 2,375 2024 18,656 2,265 2025 17,979 2,173 2026 22,893 2,047 2027 - 2031 84,154 8,882 Fair Values of Pension Plan Assets Assets held by the Company's defined benefit pension plans primarily consist of equity securities, fixed income securities, and alternative investments. Equity securities are primarily invested in actively-traded mutual funds with underlying common stock investments in U.S. and foreign companies ranging in size from small to large corporations. Fixed income securities are also held primarily through actively-traded mutual funds with the underlying investments in both U.S. and foreign securities. The methodologies for determining the fair values of the plan assets are outlined below. Where the values are based on quoted prices for the securities in an active market, they are classified as Level 1 of the fair value hierarchy. Where secondary pricing sources are used, they are classified as Level 2 of the hierarchy. Pricing models that use significant unobservable inputs are classified as Level 3. • Equity securities: Investments in equity securities through actively-traded mutual funds are valued based on the net asset values of the units held in the respective funds, which are determined by obtaining quoted prices on nationally recognized securities exchanges. These securities are classified as Level 1. • Fixed income securities: Fixed income investments that are held through mutual funds are valued based on the net asset values of the units held in the respective funds, which are determined by obtaining quoted prices on nationally recognized securities exchanges. These securities are classified as Level 1. Other fixed income investments are valued at an estimated price that a dealer would pay for a similar security on the valuation date using observable market inputs and are classified as Level 2. These market inputs may include yield curves for similarly rated securities. Small amounts of cash are held in common collective trusts. Fixed income securities also include insurance assets, which are valued based on an actuarial calculation. Those securities are classified as Level 3. • Alternative investments: Real estate assets are valued using valuation models that incorporate income and market approaches, including external appraisals, to derive fair values. The hedge fund allocation is a fund of hedge funds and is valued by the manager based on the net asset value of each fund. These models use significant unobservable inputs and are classified as Level 3 within the fair value hierarchy. 82 UNIVERSAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Fair values of the assets of the Company’s pension plans as of March 31, 2021 and 2020, classified based on how their values were determined under the fair value hierarchy are as follows: March 31, 2021 Level 1 Level 2 Level 3 Total Equity securities $ 83,135 $ — $ — $ 83,135 Fixed income securities (1) 168,201 2,920 6,051 177,172 Alternative investments — — 10,042 10,042 Total investments $ 251,336 $ 2,920 $ 16,093 $ 270,349 March 31, 2020 Level 1 Level 2 Level 3 Total Equity securities $ 58,204 $ — $ — $ 58,204 Fixed income securities (1) 162,667 3,101 4,668 170,436 Alternative investments — — 9,810 9,810 Total investments $ 220,871 $ 3,101 $ 14,478 $ 238,450 (1) Includes high yield securities and cash and cash equivalent balances. Other Benefit Plans Universal and several subsidiaries offer employer defined contribution savings plans. Amounts charged to expense for these plans were approximately $ 2.9 million for fiscal year 2021, $ 2.7 million for fiscal year 2020, and $ 2.6 million for fiscal year 2019. 83 UNIVERSAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) NOTE 14. COMMON AND PREFERRED STOCK Common Stock At March 31, 2021, the Company’s shareholders had authorized 100,000,000 shares of its common stock, and 24,514,867 shares were issued and outstanding. Holders of the common stock are entitled to one vote for each share held on all matters requiring a vote. Holders of the common stock are also entitled to receive dividends when, as, and if declared by the Company’s Board of Directors. The Board of Directors customarily declares and pays regular quarterly dividends on the outstanding common shares; however, such dividends are at the Board’s full discretion, and there is no obligation to continue them. Preferred Stock The Company is also authorized to issue up to 5,000,000 shares of preferred stock. No preferred stock was outstanding at March 31, 2021. Share Repurchase Programs Universal’s Board of Directors has authorized programs to repurchase outstanding shares of the Company’s capital stock (common and preferred stock). Under these programs, the Company has made and may continue to make share repurchases from time to time in the open market or in privately negotiated transactions at prices not exceeding prevailing market rates. Programs have been in place continuously throughout fiscal years 2019 through 2021. The current program, which replaced an expiring program, was authorized and became effective on November 5, 2020. It authorizes the purchase of up to $ 100 million of the Company's outstanding common stock and expires on the earlier of November 15, 2022, or when the funds authorized for the program have been exhausted. At March 31, 2021, the full $ 100 million authorization remained available for share repurchases under the current program. Repurchases of common stock under the programs for fiscal years 2021, 2020, and 2019 were as follows: Fiscal Year Ended March 31, 2021 2020 2019 Number of shares repurchased — 656,820 30,777 Cost of shares repurchased (in thousands of dollars) $ — $ 33,457 $ 1,443 Weighted-average cost per share $ — $ 50.94 $ 46.87 NOTE 15. EXECUTIVE STOCK PLANS AND STOCK-BASED COMPENSATION Executive Stock Plans The Company’s shareholders have approved executive stock plans under which officers, directors, and employees of the Company may receive grants and awards of common stock, restricted stock, restricted stock units (“RSUs”), performance share units (“PSUs”), stock appreciation rights (“SARs”), incentive stock options, and non-qualified stock options. Currently, grants are outstanding under the 1997 Executive Stock Plan, the 2002 Executive Stock Plan, the 2007 Stock Incentive Plan, and the 2017 Stock Incentive Plan. Together, these plans are referred to in this disclosure as the “Plans.” Up to 1,000,000 shares may be issued under the 2017 Stock Incentive Plan, with no specific share limit for any of the award types. New awards may no longer be issued under the 1997, 2002, and 2007 Plans. The Company’s practice is to award grants of stock-based compensation to officers at the first regularly-scheduled meeting of the Compensation Committee of the Board of Directors (the “Compensation Committee”) in the fiscal year following the public release of the Company’s financial results for the prior year. In recent years, the Compensation Committee has awarded only grants of RSUs and PSUs. Outside directors automatically receive restricted stock units following each annual meeting of shareholders. RSUs awarded under the Plans vest 5 years from the grant date and are then paid out in shares of common stock. Under the terms of the RSU awards, grantees receive dividend equivalents in the form of additional RSUs that vest and are paid out on the same date as the original RSU grant. The PSUs vest 3 years from the grant date, are paid out in shares of common stock at the vesting date, and do not carry rights to dividends or dividend equivalents prior to vesting. Shares ultimately paid out under PSU grants are dependent on the achievement of predetermined performance measures established by the Compensation Committee and can range from zero to 150 % of the stated award. RSUs awarded to outside directors prior to fiscal 2020 vest 3 years after the grant date and those granted in fiscal 2020 vest in 1 year. Additionally, restricted stock vests upon the individual’s retirement from service as a director. 84 UNIVERSAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) RSUs, Restricted Stock, and PSUs The following table summarizes the Company’s RSU, restricted stock, and PSU activity for fiscal years 2019 through 2021: RSUs Restricted Stock PSUs Shares Weighted-Average Grant Date Fair Value Shares Weighted-Average Grant Date Fair Value Shares Weighted-Average Grant Date Fair Value Fiscal Year Ended March 31, 2019: Unvested at beginning of year 336,919 $ 55.77 30,200 $ 42.37 151,000 $ 50.50 Granted 87,621 64.53 — — 54,800 57.12 Vested ( 99,549 ) 59.09 ( 8,950 ) 44.25 ( 49,092 ) 45.06 Forfeited — — — — ( 9,834 ) 45.55 Unvested at end of year 324,991 57.12 21,250 42.37 146,874 55.12 Fiscal Year Ended March 31, 2020: Granted 85,463 56.39 — — 60,728 50.16 Vested ( 74,518 ) 54.20 — — ( 67,402 ) 49.17 Forfeited — — — — — — Unvested at end of year 335,936 57.89 21,250 41.58 140,200 55.73 Fiscal Year Ended March 31, 2021: Granted 103,829 46.27 — — 65,135 34.33 Vested ( 97,297 ) 54.11 ( 9,650 ) 41.24 ( 40,410 ) 60.37 Forfeited — — — — ( 3,778 ) 57.83 Unvested at end of year 342,468 $ 55.44 11,600 $ 41.86 161,147 $ 46.20 Shares granted and vested in the above table include dividend equivalents on RSUs and any shares awarded above the base grant under the performance provisions of PSUs. Shares forfeited or canceled include any reductions from the base PSU grant under those same performance provisions. The fair values of RSUs, restricted stock, and PSUs are based on the market price of the common stock on the grant date. Stock-Based Compensation Expense Fair value expense for stock-based compensation is recognized ratably over the period from grant date to the earlier of (1) the vesting date of the award, or (2) the date the grantee is eligible to retire without forfeiting the award. For employees who are already eligible to retire at the date an award is granted, the total fair value of the award is recognized as expense at the date of grant. For the fiscal years ended March 31, 2021, 2020, and 2019, total stock-based compensation expense and the related income tax benefit recognized were as follows: Fiscal Year Ended March 31, 2021 2020 2019 Total stock-based compensation expense $ 6,106 $ 5,631 $ 8,152 Income tax benefit recorded on stock-based compensation expense $ 1,282 $ 1,182 $ 1,712 At March 31, 2021, the Company had $ 4.6 million of unrecognized compensation expense related to stock-based awards, which will be recognized over a weighted-average period of approximately 1.1 years. 85 UNIVERSAL CORPORATION CONSOLIDATED FINANCIAL STATEMENTS—(Continued) NOTE 16. COMMITMENTS, CONTINGENCIES, AND OTHER MATTERS Commitments The Company enters into contracts to purchase tobacco from farmers in a number of the countries where it operates. Contracts in most countries cover one annual growing season. Primarily with the farmer contracts in Brazil, Malawi, Mozambique, the Philippines, Guatemala, and Mexico, the Company provides seasonal financing to support the farmers’ production of their crops or guarantees their financing from third-party banks. At March 31, 2021, the Company had contracts to purchase approximately $ 442 million of tobacco to be delivered during the coming fiscal year and $ 123 million of tobacco to be delivered in subsequent years. These amounts are estimates since actual quantities purchased will depend on crop yields, and prices will depend on the quality of the tobacco delivered and other market factors. Tobacco purchase obligations have been partially funded by short-term advances to farmers and other suppliers, which totaled approximately $ 122 million, net of allowances, at March 31, 2021. The Company withholds payments due to farmers on delivery of the tobacco to satisfy repayment of the financing it provided to the farmers. As noted above and discussed in more detail below, the Company also has arrangements to guarantee bank loans to farmers in Brazil, and payments are also withheld on delivery of tobacco to satisfy repayment of those loans. In addition to its contractual obligations to purchase tobacco, the Company had commitments related to agricultural materials, approved capital expenditures, and various other requirements that approximated $ 103 million at March 31, 2021. 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 March 31, 2021. 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 would have been be required to make at March 31, 2020, was the face amount (which includes unpaid interest), which was $ 3 million. The fair value of the guarantees was a liability of approximately $ 0.1 million at March 31, 2020. In addition to these guarantees, the Company has other contingent liabilities totaling approximately $ 1 million at March 31, 2021, primarily under outstanding letters of credit. Value-Added Tax Assessments in Brazil As discussed in Note 1, the Company's local operating subsidiaries pay significant amounts of value-added tax ("VAT") in connection with their normal operations. In Brazil, VAT is assessed at the state level when green tobacco is transferred between states. The Company's operating subsidiary there pays VAT when tobaccos grown in the states of Santa Catarina and Parana are transferred to its factory in the state of Rio Grande do Sul for processing. The subsidiary has received assessments for additional VAT plus interest and penalties from the tax authorities for the states of Santa Catarina and Parana based on audits of the subsidiary's VAT filings for specified periods. In June 2011, tax authorities for the state of Santa Catarina issued assessments for tax, interest, and penalties for periods from 2006 through 2009 totaling approximately $ 7 million. In September 2014, tax authorities for the state of Parana issued an assessment for tax, interest, and penalties for periods from 2009 through 2014 totaling approximately $ 10 million. These amounts are based on the exchange rate for the Brazilian currency at March 31, 2021. 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 March 31, 2021, a portion of the subsidiary's arguments had been accepted, and the outstanding assessment had been reduced, although interest on the remaining assessment has continued to accumulate. The reduced assessment, together with the related accumulated interest through the end of the current reporting period, totaled approximately $ 8 million at the March 31, 2021 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 $ 8 million remaining assessment, based on the strength of the subsidiary's defenses, no loss within that range is considered probable at this time and no liability has been recorded at March 31, 2021. 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 86 UNIVERSAL CORPORATION CONSOLIDATED FINANCIAL STATEMENTS—(Continued) covering the same tax periods. The new assessment totaled approximately $ 3 million at the March 31, 2021 exchange rate, reflecting a substantial reduction from the original $ 10 million assessment. Notwithstanding the reduction, 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 March 31, 2021. 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 value-added tax credits that the subsidiary may be able to recover. Other Legal and Tax Matters Various subsidiaries of the Company are involved in other litigation and tax examinations incidental to their business activities. While the outcome of these matters cannot be predicted with certainty, management is vigorously defending the matters and does not currently expect that any of them will have a material adverse effect on the Company’s business or financial position. However, should one or more of these matters be resolved in a manner adverse to management’s current expectation, the effect on the Company’s results of operations for a particular fiscal reporting period could be material. NOTE 17. OPERATING SEGMENTS As a result of recent acquisitions of plant-based ingredients companies in fiscal year 2020 and 2021, during the fiscal year ended March 31, 2021 management evaluated the Company’s global business activities, including product and service offerings to its customers, as well as senior management’s operational and financial responsibilities. This assessment included an analysis of how its chief operating decision maker measures business performance and allocates resources. As a result of this analysis, senior management determined the Company conducts operations across two reportable operating segments, Tobacco Operations and Ingredients Operations. The Tobacco Operations segment activities involve selecting, procuring, processing, packing, storing, shipping, and financing leaf tobacco for sale to, or for the account of, manufacturers of consumer tobacco products throughout the world. Through various operating subsidiaries located in tobacco-growing countries around the world and significant ownership interests in unconsolidated affiliates, the Company processes and/or sells flue-cured and burley tobaccos, dark air-cured tobaccos, and oriental tobaccos. Flue-cured, burley, and oriental tobaccos are used principally in the manufacture of cigarettes, and dark air-cured tobaccos are used mainly in the manufacture of cigars, pipe tobacco, and smokeless tobacco products. Some of these tobacco types are also increasingly used in the manufacture of non-combustible tobacco products that are intended to provide consumers with an alternative to traditional combustible products. The Tobacco Operations segment also provides physical and chemical product testing and smoke testing for tobacco customers. A substantial portion of the Company’s Tobacco Operations' revenues are derived from sales to a limited number of large, multinational cigarette and cigar manufacturers. The Ingredients Operations segment provides its customers with a broad variety of plant-based ingredients for both human and pet consumption. The Ingredients Operations segment utilizes a variety of value-added manufacturing processes converting raw materials into a wide spectrum of fruit and vegetable juices, concentrates, and dehydrated products. Customers for the Ingredients Operations segment include large multinational food and beverage companies, as well as smaller independent entities. FruitSmart, Silva, and CIFI are the primary operations for the Ingredients Operations segment. FruitSmart manufactures fruit and vegetable juices, purees, concentrates, essences, fibers, seeds, seed oils, and seed powders. Silva is primarily a dehydrated product manufacturer of fruit and vegetable based flakes, dices, granules, powders, and blends. In December 2020, the Company announced the wind-down of CIFI, a greenfield operation that primarily manufactured both dehydrated and liquid sweet potato products. See Note 4 for additional information about the wind-down of CIFI. Universal incurs overhead expenses related to senior management, sales, finance, legal, and other functions that are centralized at its corporate headquarters, as well as functions performed at several sales and administrative offices around the world. These overhead expenses are currently allocated to the reportable operating segments, generally on the basis of volumes planned to be purchased and/or processed. Management believes this method of allocation is currently representative of the value of the related services provided to the operating segments. The Company currently evaluates the performance of its segments based on operating income after allocated overhead expenses, plus equity in the pretax earnings of unconsolidated affiliates. 87 UNIVERSAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Reportable segment data as of, or for, the fiscal years ended March 31, 2021, 2020, and 2019, is as follows, including a recast of the new reportable operating segments presentation for all periods: Sales and Other Operating Revenues Operating Income Fiscal Year Ended March 31, Fiscal Year Ended March 31, 2021 2020 2019 2021 2020 2019 Tobacco Operations $ 1,841,837 $ 1,887,084 $ 2,222,246 $ 168,832 $ 146,637 $ 195,383 Ingredients Operations 141,520 22,895 4,907 367 ( 8,516 ) ( 8,611 ) Subtotal 1,983,357 1,909,979 2,227,153 169,199 138,121 186,772 Deduct: Equity in pretax earnings of unconsolidated affiliates (1) ( 2,985 ) ( 4,211 ) ( 5,299 ) Restructuring and impairment costs (2) ( 22,577 ) ( 7,543 ) ( 20,304 ) Add: Other income (3) 4,173 — — Consolidated total $ 1,983,357 $ 1,909,979 $ 2,227,153 $ 147,810 $ 126,367 $ 161,169 Segment Assets Accounts Receivable, net March 31, March 31, 2021 2020 2019 2021 2020 2019 Tobacco Operations $ 2,002,059 $ 1,985,732 $ 2,108,641 $ 336,876 $ 330,367 $ 367,579 Ingredients Operations 339,865 135,189 24,543 30,606 10,344 531 Consolidated total $ 2,341,924 $ 2,120,921 $ 2,133,184 $ 367,482 $ 340,711 $ 368,110 Goodwill, net Intangibles, net March 31, Fiscal Year Ended March 31, 2021 2020 2019 2021 2020 2019 Tobacco Operations $ 98,044 $ 97,963 $ 97,907 $ 82 $ 59 $ 87 Ingredients Operations 75,007 28,863 — 72,222 17,802 — Consolidated total $ 173,051 $ 126,826 $ 97,907 $ 72,304 $ 17,861 $ 87 Capital Expenditures Depreciation and Amortization Fiscal Year Ended March 31, Fiscal Year Ended March 31, 2021 2020 2019 2021 2020 2019 Tobacco Operations $ 46,037 $ 35,175 $ 38,206 $ 33,895 $ 35,251 $ 35,449 Ingredients Operations 20,117 52 554 10,838 3,128 1,655 Consolidated total $ 66,154 $ 35,227 $ 38,760 $ 44,733 $ 38,379 $ 37,104 (1) Equity in pretax earnings of unconsolidated affiliates is included in reportable segment operating income, but is reported below consolidated operating income and excluded from that total in the consolidated statements of income. (2) Restructuring and impairment costs are excluded from reportable segment operating income, but are included in consolidated operating income in the consolidated statements of income (see Note 4) . (3) Other income represents the reversal of a portion of the contingent consideration liability associated with the acquisition of FruitSmart. See Note 2 for additional information. 88 UNIVERSAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Geographic data as of, or for, the fiscal years ended March 31, 2021, 2020, and 2019, is presented below. Sales and other operating revenues are attributed to individual countries based on the final destination of the shipment. Long-lived assets generally consist of net property, plant, and equipment, goodwill, and other intangibles. Geographic Data Sales and Other Operating Revenues Fiscal Year Ended March 31, 2021 2020 2019 United States $ 369,074 $ 221,428 $ 227,771 Belgium 366,476 361,889 390,433 Poland 97,001 84,011 145,478 Germany 94,519 104,525 166,397 Philippines 94,493 68,143 69,820 China 52,837 105,683 115,174 Mexico 51,448 35,475 64,700 All other countries 857,509 928,825 1,047,380 Consolidated total $ 1,983,357 $ 1,909,979 $ 2,227,153 Long-Lived Assets March 31, 2021 2020 2019 United States $ 266,258 $ 145,764 $ 81,270 Brazil 134,909 138,157 139,624 Mozambique 44,206 42,964 45,051 All other countries 149,492 132,955 134,543 Consolidated total $ 594,865 $ 459,840 $ 400,488 89 UNIVERSAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) NOTE 18. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) The following table summarizes the changes in the balances for each component of accumulated other comprehensive income (loss) attributable to the Company for the fiscal years ended March 31, 2021, 2020, and 2019: Fiscal Year Ended March 31, (in thousands of dollars) 2021 2020 2019 Foreign currency translation: Balance at beginning of year $ ( 42,923 ) $ ( 40,101 ) $ ( 23,942 ) Other comprehensive income (loss) attributable to Universal Corporation: Net gain (loss) on foreign currency translation (net of tax (expense) benefit of $ 180 in 2020) 8,272 ( 3,066 ) ( 16,316 ) Less: Net loss on foreign currency translation attributable to noncontrolling interests ( 484 ) 244 157 Other comprehensive income (loss) attributable to Universal Corporation, net of income taxes 7,788 ( 2,822 ) ( 16,159 ) Balance at end of year $ ( 35,135 ) $ ( 42,923 ) $ ( 40,101 ) Foreign currency hedge: Balance at beginning of year $ ( 12,226 ) $ ( 376 ) $ ( 35 ) Other comprehensive income (loss) attributable to Universal Corporation: Net gain (loss) on derivative instruments (net of tax (expense) benefit of $( 130 ), $ 2,880 and $ 602 ) 1,791 ( 12,391 ) ( 6,490 ) Reclassification of net (gain) loss to earnings (net of tax expense (benefit) of $( 2,726 ), $ 136 , and $( 640 )) (1) 10,021 541 6,149 Other comprehensive income (loss) attributable to Universal Corporation, net of income taxes 11,812 ( 11,850 ) ( 341 ) Balance at end of year $ ( 414 ) $ ( 12,226 ) $ ( 376 ) Interest rate hedge: Balance at beginning of year $ ( 27,402 ) $ ( 934 ) $ 6,528 Other comprehensive income (loss) attributable to Universal Corporation: Net gain (loss) on derivative instruments (net of tax (expense) benefit of $( 637 ), $ 6,801 , and $ 1,574 ) 2,396 ( 25,588 ) ( 5,922 ) Reclassification of net (gain) loss to earnings (net of tax expense (benefit) of $( 1,469 ), $ 234 , and $ 409 ) (2) 5,526 ( 880 ) ( 1,540 ) Other comprehensive income (loss) attributable to Universal Corporation, net of income taxes 7,922 ( 26,468 ) ( 7,462 ) Balance at end of year $ ( 19,480 ) $ ( 27,402 ) $ ( 934 ) Pension and other postretirement benefit plans: Balance at beginning of year $ ( 69,046 ) $ ( 54,280 ) $ ( 42,615 ) Other comprehensive income (loss) attributable to Universal Corporation: Net gain (loss) arising during the year (net of tax (expense) benefit of $( 3,706 ), $ 4,715 , and $ 4,073 (3) 13,627 ( 16,810 ) ( 13,927 ) Amortization included in earnings (net of tax benefit of $ 895 , $ 554 , and $ 628 ) (4) 3,411 2,044 2,262 Other comprehensive income (loss) attributable to Universal Corporation, net of income taxes 17,038 ( 14,766 ) ( 11,665 ) Balance at end of year $ ( 52,008 ) $ ( 69,046 ) $ ( 54,280 ) Total accumulated other comprehensive income (loss) at end of year $ ( 107,037 ) $ ( 151,597 ) $ ( 95,691 ) (1) Gains (losses) on foreign currency cash flow hedges related to forecast purchases of tobacco and crop input sales are reclassified from accumulated other comprehensive income (loss) to cost of goods sold when the tobacco is sold to customers. See Note 11 for additional information. (2) Gain (loss) on interest rate cash flow hedges is reclassified from accumulated other comprehensive income (loss) to interest expense when the related interest payments are made on the debt for open interest rate swap agreements, or as amortized to interest expense over the period to original maturity for terminated swap agreements. See Note 11 for additional information. (3) These items arise from the remeasurement of the assets and liabilities of the Company's defined benefit pension and other postretirement benefit plans. Those remeasurements are made on an annual basis at the end of the fiscal year. See Note 13 for additional information. (4) This accumulated other comprehensive income (loss) component is included in the computation of net periodic benefit cost. See Note 13 for additional information. 90 Report of Ernst & Young LLP, Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of Universal Corporation Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Universal Corporation (the Company) as of March 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended March 31, 2021, and the related notes and financial statement schedule listed in the Index at Item 15(a)2 (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at March 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended March 31, 2021, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of March 31, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated May 28, 2021 expressed an unqualified opinion thereon. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. 91 Allowance for Advances to Suppliers Description of the Matter The Company’s short-term and long-term advances to suppliers totaled approximately $144 million as of March 31, 2021, and the allowances totaled $18 million. As discussed in Note 1 of the financial statements, the Company provides agronomy services and seasonal advances of seed, fertilizer, and other supplies to tobacco farmers for crop production. These advances are repaid through the delivery of tobacco to the Company. Management determined the allowance based on assumptions including the assessment of historical loss information and crop projections. Auditing Management’s estimate for the allowance on advances to suppliers was complex and involved subjective auditor judgment as the estimate relies on a number of factors that are affected by market and economic conditions outside the Company’s control. There is uncertainty associated with the assumptions used which could have a significant effect on the allowance estimate. How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design, and tested the operating effectiveness of the Company’s internal controls over the allowance on the advances to suppliers. For example, we tested controls over the supplier advance approval and Management’s review and approval of the models used to calculate the allowance. We also tested controls used by Management to evaluate the data used in making the estimates for completeness and accuracy. To test the allowance for advances to suppliers, our audit procedures included, among others, evaluating the significant assumptions used in the allowance calculation. For example, we compared historical loss information to Management’s estimate of projected crop yield and analyzed the sensitivity of significant assumptions to evaluate the changes in the allowance that would result from changes in the assumptions. We analyzed subsequent events to identify potential sources of contrary information to Management’s assumptions. Allowance for Recoverable Value-Added Tax (“VAT”) Credits Description of the Matter The Company’s gross balance of recoverable value-added tax (“VAT”) credits totaled approximately $49 million as of March 31, 2021, and the related allowance totaled approximately $19 million. As discussed in Note 1 of the financial statements, in many foreign countries, the Company pays and receives a significant amount of VAT on purchases and sales of tobacco and tobacco related material. Items subject to a VAT vary from jurisdiction to jurisdiction as do the rates at which the tax is assessed. Some jurisdictions allow companies to apply for refunds of unused VAT credits from the tax authorities, but the refund process may take an extended period of time and it is not uncommon for refund applications to be challenged or rejected. Some jurisdictions also permit companies to sell or transfer unused VAT credits to third parties in private transactions although the proceeds realized may be heavily discounted from the face value of the credits. Management applied judgment in calculating the valuation allowance to estimate the credits that are not expected to be recovered. Auditing Management’s estimate of the VAT allowance was complex and involved a high degree of subjectivity as the estimate relies on a number of factors including interpretations of applicable tax laws and regulations as well as economic and political conditions outside the Company’s control. There is uncertainty associated with the assumptions used which could have a significant effect on the estimate. How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design, and tested the operating effectiveness of the Company’s internal controls over the allowance on the VAT. For example, we tested controls over Management’s review and approval of the models used in the allowance and the completeness and accuracy of the data inputs and outputs used in the calculation. To test the VAT allowance estimate, our audit procedures included, among others, evaluating the significant assumptions used to estimate the VAT allowance and assessing the historical accuracy of Management’s estimates. For example, we evaluated whether the historical loss of credits used in Management’s calculation was representative of the current collectability of the credits. We analyzed the sensitivity of significant assumptions to evaluate the changes in the allowance that that would result from changes in the assumptions and we considered subsequent events to identify potential sources of contrary information to Management’s assumptions. 92 Accounting for Acquisition of Silva International, Inc. Description of the Matter As described in Note 1 and 2 to the consolidated financial statements, on October 1, 2020 the Company acquired 100% of the capital stock of Silva International, Inc. (“Silva”) for approximately $164 million in cash and $5.9 million of working capital on-hand at the date of acquisition. The acquisition of Silva was accounted for as a business combination. Auditing the Company's accounting for its business combination was complex due to the significant estimation required by Management to determine the fair value of identifiable intangible assets including customer relationships ($53 million). Significant estimation was required due to the application of the valuation models and assumptions used by Management to measure the fair value of the customer-related intangible asset. The significant assumptions used in determining the fair value included the discount rate and forecasted results (e.g., revenue growth rates and operating profit margins). How We Addressed the Matter in Our Audit We tested the Company's controls over its accounting for business combinations. For example, we tested controls over the customer-related intangible asset acquired, including Management’s review of the valuation models and significant assumptions. To test the estimated fair value of the acquired customer-related intangible asset, our audit procedures included, among others, assessing the significant assumptions used in the estimated fair value of the customer-related intangible asset. For example, we tested the completeness and accuracy of the underlying data and compared the significant assumptions to current industry, market and economic trends, historical results of the acquired business, and other guidelines used by companies within the same industry. We involved our valuation specialists to assist in evaluating the Company's use of its valuation models. We performed a sensitivity analysis of the significant assumptions to evaluate the change in the fair values that would result from changes in assumptions. /s/ Ernst & Young LLP We have served as the Company’s auditor since 1971. Richmond, Virginia May 28, 2021 93 Report of Ernst & Young LLP, Independent Registered Public Accounting Firm, on Internal Control Over Financial Reporting To the Shareholders and the Board of Directors of Universal Corporation Opinion on Internal Control over Financial Reporting We have audited Universal Corporation’s internal control over financial reporting as of March 31, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Universal Corporation, (the Company) maintained, in all material respects, effective internal control over financial reporting as of March 31, 2021, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of March 31, 2021 and 2020, and the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended March 31, 2021, and the related notes and financial statement schedule listed in the Index at Item 15(a)2 report dated May 28, 2021 expressed an unqualified opinion thereon. As indicated in the accompanying Management’s Report on Internal Control over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Silva International, Inc., which is included in the 2021 consolidated financial statements of the Company and constituted 8.5% and 12.5% of total and net assets, respectively, as of March 31, 2021 and 3.1% and 5.7% of net sales and net income, respectively, for the year then ended. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of Silva International, Inc. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definitions and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Ernst & Young LLP Richmond, Virginia May 28, 2021 94 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure For the three years ended March 31, 2021, there were no changes in independent auditors, nor were there any disagreements between the Company and its independent auditors on any matter of accounting principles, practices, or financial disclosures.