Item 1. Financial Statements
ITEM 1. FINANCIAL STATEMENTS
UNIVERSAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(in thousands, except share and per share data)
Three Months Ended September 30, Six Months Ended September 30,
2024 2023 2024 2023
(Unaudited) (Unaudited)
Sales and other operating revenues $ 710,762 $ 638,484 $ 1,307,812 $ 1,156,206
Costs and expenses
Cost of goods sold 567,617 506,767 1,068,746 937,977
Selling, general and administrative expenses 63,836 73,806 142,532 149,283
Restructuring and impairment costs 10,573 2,599 10,573 2,599
Operating income 68,736 55,312 85,961 66,347
Equity in pretax earnings (loss) of unconsolidated affiliates ( 642 ) ( 713 ) ( 502 ) ( 4,879 )
Other non-operating income (expense) 461 728 925 1,453
Interest income 295 953 1,103 2,318
Interest expense 21,273 17,053 42,007 32,596
Income (loss) before income taxes and other items 47,577 39,227 45,480 32,643
Income taxes 13,608 8,439 14,335 7,016
Net income (loss) 33,969 30,788 31,145 25,627
Less: net loss (income) attributable to noncontrolling interests in subsidiaries ( 8,029 ) ( 2,660 ) ( 5,075 ) 437
Net income (loss) attributable to Universal Corporation $ 25,940 $ 28,128 $ 26,070 $ 26,064
Earnings per share:
Basic
$ 1.04 $ 1.13 $ 1.05 $ 1.05
Diluted
$ 1.03 $ 1.12 $ 1.04 $ 1.04
Weighted average common shares outstanding:
Basic
24,946,632 24,869,697 24,911,681 24,855,974
Diluted
25,135,973 25,015,369 25,101,295 24,997,899
Total comprehensive income (loss), net of income taxes $ 33,531 $ 28,549 $ 25,181 $ 27,754
Less: comprehensive (income) loss attributable to noncontrolling interests ( 8,026 ) ( 2,541 ) ( 4,682 ) 700
Comprehensive income (loss) attributable to Universal Corporation $ 25,505 $ 26,008 $ 20,499 $ 28,454
Dividends declared per common share $ 0.81 $ 0.80 $ 1.62 $ 1.60
See accompanying notes.
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UNIVERSAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars)
September 30, September 30, March 31,
2024 2023 2024
(Unaudited) (Unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 80,118 $ 99,683 $ 55,593
Accounts receivable, net 537,602 368,924 525,262
Advances to suppliers, net 139,766 105,637 139,064
Accounts receivable—unconsolidated affiliates 66,646 55,409 5,385
Inventories—at lower of cost or net realizable value:
Tobacco 1,070,655 1,086,240 1,070,580
Other 211,476 212,268 193,518
Prepaid income taxes 20,771 23,918 19,484
Other current assets 84,884 95,634 93,655
Total current assets 2,211,918 2,047,713 2,102,541
Property, plant and equipment
Land 25,972 26,262 26,244
Buildings 330,407 316,180 323,969
Machinery and equipment 705,246 705,977 693,868
1,061,625 1,048,419 1,044,081
Less accumulated depreciation ( 685,883 ) ( 691,811 ) ( 678,201 )
375,742 356,608 365,880
Other assets
Operating lease right-of-use assets 32,487 36,318 32,510
Goodwill, net 213,872 213,856 213,869
Other intangibles, net 63,263 74,475 68,883
Investments in unconsolidated affiliates 78,774 70,618 76,289
Deferred income taxes 15,526 16,192 15,181
Pension asset 12,293 10,650 11,857
Other noncurrent assets 41,711 35,342 50,229
457,926 457,451 468,818
Total assets $ 3,045,586 $ 2,861,772 $ 2,937,239
See accompanying notes.
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UNIVERSAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars)
September 30, September 30, March 31,
2024 2023 2024
(Unaudited) (Unaudited)
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Notes payable and overdrafts $ 579,132 $ 301,379 $ 417,217
Accounts payable 87,106 70,737 108,727
Accounts payable—unconsolidated affiliates 174 166 1,621
Customer advances and deposits 6,837 166,505 17,179
Accrued compensation 29,266 26,772 39,766
Income taxes payable 7,948 4,494 7,477
Current portion of operating lease liabilities 10,325 10,469 10,356
Accrued expenses and other current liabilities 128,634 120,623 109,015
Current portion of long-term debt — — —
Total current liabilities 849,422 701,145 711,358
Long-term debt 617,641 617,086 617,364
Pensions and other postretirement benefits 36,734 42,378 43,251
Long-term operating lease liabilities 19,038 22,804 19,302
Other long-term liabilities 28,425 15,769 27,902
Deferred income taxes 36,322 45,082 39,139
Total liabilities 1,587,582 1,444,264 1,458,316
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 24,715,625 shares issued and outstanding at September 30, 2024 ( 24,558,493 at September 30, 2023 and 24,573,408 at March 31, 2024)
349,064 339,241 345,596
Retained earnings 1,158,658 1,119,615 1,173,196
Accumulated other comprehensive loss ( 87,156 ) ( 74,667 ) ( 81,585 )
Total Universal Corporation shareholders' equity 1,420,566 1,384,189 1,437,207
Noncontrolling interests in subsidiaries 37,438 33,319 41,716
Total shareholders' equity 1,458,004 1,417,508 1,478,923
Total liabilities and shareholders' equity $ 3,045,586 $ 2,861,772 $ 2,937,239
See accompanying notes.
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UNIVERSAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
Six Months Ended September 30,
2024 2023
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 31,145 $ 25,627
Adjustments to reconcile net income (loss) to net cash used by operating activities:
Depreciation and amortization 29,420 29,009
Net provision for losses (recoveries) on advances to suppliers ( 5,562 ) 3,835
Inventory writedowns 5,231 2,870
Stock-based compensation expense 6,583 5,711
Foreign currency remeasurement (gain) loss, net 1,334 7,528
Foreign currency exchange contracts 3,225 2,563
Deferred income taxes 153 ( 3,560 )
Equity in net loss (income) of unconsolidated affiliates, net of dividends 404 3,135
Restructuring and impairment costs 10,573 2,599
Restructuring payments ( 350 ) ( 806 )
Other, net ( 217 ) 1,012
Changes in operating assets and liabilities, net:
Accounts and notes receivable ( 63,420 ) 46,724
Inventories ( 21,682 ) ( 269,422 )
Other assets 9,029 10,235
Accounts payable ( 22,066 ) ( 18,874 )
Accrued expenses and other current liabilities ( 19,970 ) 4,680
Income taxes ( 1,238 ) ( 5,995 )
Customer advances and deposits ( 10,005 ) 163,663
Net cash provided (used) by operating activities ( 47,413 ) 10,534
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment ( 38,796 ) ( 32,630 )
Proceeds from sale of business, net of cash held by the business — 3,757
Proceeds from sale of property, plant and equipment 1,412 713
Net cash used by investing activities ( 37,384 ) ( 28,160 )
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of short-term debt, net 161,611 105,649
Dividends paid to noncontrolling interests ( 8,960 ) ( 5,845 )
Repurchase of common stock — ( 4,744 )
Dividends paid on common stock ( 39,646 ) ( 39,108 )
Other ( 3,716 ) ( 2,963 )
Net cash provided (used) by financing activities 109,289 52,989
Effect of exchange rate changes on cash, restricted cash and cash equivalents 33 ( 370 )
Net increase (decrease) in cash, restricted cash and cash equivalents 24,525 34,993
Cash, restricted cash and cash equivalents at beginning of year 55,593 64,690
Cash, restricted cash and cash equivalents at end of period $ 80,118 $ 99,683
See accompanying notes.
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UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
Universal Corporation, which together with its subsidiaries is referred to herein as “Universal” or the “Company,” is a global business-to-business agri-products supplier to consumer product manufacturers. The Company is the leading global leaf tobacco supplier and provides high-quality plant-based ingredients to food and beverage end markets. Because of the seasonal nature of the Company’s business, the results of operations for any fiscal quarter will not necessarily be indicative of results to be expected for other quarters or a full fiscal year. All adjustments necessary to state fairly the results for the period have been included and were of a normal recurring nature. This Quarterly Report on Form 10-Q should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2024, as amended by Amendment No. 1 thereto (the “2024 Annual Report on Form 10-K”).
Accounting Pronouncements to be Adopted in Future Years
In November 2023, the Financial Accounting Standard Board ("FASB") issued Accounting Standards Update No. 2023-07, “Segment Reporting (Topic 280) - Improvements to Reportable Segment Disclosures” (“ASU 2023-07”). ASU 2023-07 requires additional disclosures about profitability measures utilized by the chief operating decision maker and significant segment expenses. ASU 2023-07 also requires all annual disclosures regarding profit or loss and assets to be included in interim disclosures. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023 and for interim periods in fiscal years beginning after December 15, 2024, although early adoption is permitted. The Company is currently evaluating the impact of adopting this standard on its segment disclosures.
In December 2023, the FASB issued Accounting Standards Update No. 2023-09, “Income Taxes (Topic 740) - Improvements to Income Tax Disclosures” (“ASU 2023-09”). ASU 2023-09 requires additional disclosures reconciling the rates of different categories of income tax (i.e. federal, state, foreign, etc.) and a disaggregation of taxes paid and refunded. ASU 2023-09 is effective for fiscal years beginning after December 15, 2024 and for interim periods in fiscal years beginning after December 15, 2025, although early adoption is permitted. The Company is currently evaluating the impact of adopting this standard on its income tax disclosures.
In November 2024, the FASB issued Accounting Standards Update No. 2024-03, “Income Statement-Reporting Comprehensive Income-Expense Disaggregation Disclosures (Subtopic 220-40) - Disaggregation of Income Statement Expenses” (“ASU 2024-03”). ASU 2024-03 requires additional disclosures about certain types of costs and expenses. ASU 2024-03 is effective for fiscal years beginning after December 15, 2026 and for interim periods beginning after December 15, 2027, although early adoption is permitted. The Company is currently evaluating the impact of adopting this standard on its consolidated financial statements.
NOTE 2. RESTRUCTURING AND IMPAIRMENT COSTS
Universal regularly reviews its business for opportunities to realize efficiencies, reduce costs, and realign its operations in response to business changes. Restructuring and impairment costs are periodically incurred in connection with those activities.
Tobacco Operations
During the six months ended September 30, 2024, the Company began consolidating its European sheet tobacco operations into the Company's facility in the Netherlands, by initiating a wind-down of activities at its sheet facility in Germany, incurring $10.5 million of restructuring and impairment costs. Additionally, during the six months ended September 30, 2024, the Company also incurred $ 0.1 million of termination and impairment costs in other areas of the Tobacco Operations segment.
During the six months ended September 30, 2023, the Company incurred $ 1.8 million of restructuring and impairment costs for its Global Labs Services ("GLS") facility in Wilson, NC. GLS provided testing for crop protection agents and tobacco constituents in seed, leaf, and finished products, including e-cigarette liquids and vapors, and had capabilities for testing non-tobacco products. The restructuring and impairment costs were net of approximately $0.2 million of income from the sale of GLS processes and procedures to a third-party buyer. Additionally, during the six months ended September 30, 2023, the Company also incurred $ 0.8 million of termination and impairment costs in other areas of the Tobacco Operations segment.
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A summary of the restructuring and impairment costs recorded for the three and six months ended September 30, 2024 and 2023 were as follows:
Three Months Ended September 30, Six Months Ended September 30,
(in thousands) 2024 2023 2024 2023
Restructuring costs:
Employee termination benefits $ 4,342 $ 1,403 $ 4,342 $ 1,403
Other 1,372 (182) 1,372 (182)
Total restructuring costs 5,714 1,221 5,714 1,221
Impairment costs:
Property, plant and equipment 4,859 1,378 4,859 1,378
Total impairment costs 4,859 1,378 4,859 1,378
Total restructuring and impairment costs $ 10,573 $ 2,599 $ 10,573 $ 2,599
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 earns revenue from processing leaf tobacco owned by customers and from various other services provided to customers. Additionally, the Company has fruit and vegetable processing operations, as well as flavor and extract services that provide customers with a range of ingredient products. Payment terms with customers vary depending on customer creditworthiness, product types, services provided, and other factors. Contract durations and payment terms for all revenue categories generally do not exceed one year. Therefore, the Company has applied a practical expedient to not adjust the transaction price for the effects of financing components, as the Company expects that the period from the time the revenue for a transaction is recognized to the time the customer pays for the related good or service transferred will be one year or less. Below is a description of the major revenue-generating categories from contracts with customers.
Tobacco Sales
The majority of the Company’s business involves purchasing leaf tobacco from farmers in the origins where it is grown, processing and packing the tobacco in its factories, and then transferring ownership and control of the tobacco to customers. On a much smaller basis, the Company also sources processed tobacco from third-party suppliers for resale to customers. The contracts for tobacco sales with customers create a performance obligation to transfer tobacco to the customer. Transaction prices for the sale of tobaccos are primarily based on negotiated fixed prices, but the Company does have a small number of cost-plus contracts with certain customers. Cost-plus arrangements provide the Company reimbursement of the cost to purchase and process the tobacco, plus a contractually agreed-upon profit margin. The Company utilizes the most likely amount methodology under the accounting guidance to recognize revenue for cost-plus arrangements with customers. Shipping and handling costs under tobacco sales contracts with customers are treated as fulfillment costs and included in the transaction price. Taxes assessed by government authorities on the sale of leaf tobacco products are excluded from the transaction price. At the point in time that the customer obtains control over the tobacco, which is typically aligned with physical shipment under the contractual terms with the customer, the Company completes its performance obligation and recognizes the revenue for the sale.
Ingredients Sales
The Company has diversified operations through the acquisition of established companies that offer customers a wide range of both liquid and dehydrated fruit and vegetable ingredient products, flavors, and extracts. These operations procure raw materials from domestic and international growers and suppliers and through a variety of processing steps including sorting, cleaning, pressing, mixing, extracting, and blending to manufacture finished goods utilized in beverages and both human and pet food. The contracts for ingredients with customers create a performance obligation to transfer the manufactured finished goods to the customer. Transaction prices for the sale of ingredients are primarily based on negotiated fixed prices, but the Company does have cost-plus contracts with certain customers. 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.
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Processing Revenue
Processing and packing of customer-owned tobacco and ingredients is a short-duration process. Processing charges are primarily based on negotiated fixed prices per unit of weight processed. Under normal operating conditions, customer-owned raw materials that are placed into the production line exits as processed and packed product and is then later transported to customer-designated transfer locations. The revenue for these services is recognized when the performance obligation is satisfied, which is generally when processing is completed. The Company’s operating history and contract analyses indicate that customer requirements for processed tobacco and food ingredients products are consistently met upon completion of processing.
Other Sales and Revenue from Contracts with Customers
From time to time, the Company enters into various arrangements with customers to provide other value-added services that may include blending, chemical and physical testing of products, storage, logistics, sorting, and tobacco cutting services for select manufacturers. These other arrangements and operations are a much smaller portion of the Company’s business, and are separate and distinct contractual agreements from the Company’s tobacco and food ingredients sales or third-party processing arrangements with customers. The transaction prices and timing of revenue recognition of these items are determined by the specifics of each contract.
Disaggregation of Revenue from Contracts with Customers
The following table disaggregates the Company’s revenue by significant revenue-generating category:
Three Months Ended September 30, Six Months Ended September 30,
(in thousands of dollars) 2024 2023 2024 2023
Tobacco sales $ 601,590 $ 525,534 $ 1,089,821 $ 940,890
Ingredients sales 76,543 78,397 157,237 149,055
Processing revenue 14,080 18,830 28,749 37,894
Other sales and revenue from contracts with customers 16,155 13,046 28,964 24,338
Total revenue from contracts with customers 708,368 635,807 1,304,771 1,152,177
Other operating sales and revenues 2,394 2,677 3,041 4,029
Consolidated sales and other operating revenues $ 710,762 $ 638,484 $ 1,307,812 $ 1,156,206
Other operating sales and revenues consists principally of interest on advances to suppliers and dividend payments from deconsolidated affiliates.
NOTE 4. OTHER CONTINGENT LIABILITIES AND OTHER MATTERS
Other Contingent Liabilities
Other Contingent Liabilities (Letters of credit)
The Company had other contingent liabilities totaling approximately $ 1 million at September 30, 2024, primarily related to outstanding letters of credit.
Value-Added Tax Assessments in Brazil
As further discussed below, the Company’s local operating subsidiaries pay significant amounts of value-added tax (“VAT”) in connection with their operations, which generate tax credits that they normally are entitled to recover through offset, refund, or sale to third parties. In Brazil, VAT is assessed at the state level when green tobacco is transferred between states. The Company’s Brazilian operating subsidiary pays VAT when tobaccos grown outside the state of Rio Grande do Sul are transferred to the factory for processing. The subsidiary has received assessments for additional VAT plus interest and penalties from tax authorities for the state of Parana based on audits of the subsidiary’s VAT filings for specified periods. In September 2014, tax authorities for the state of Parana issued an assessment for tax, interest, and penalties for periods from 2009 through 2014 totaling approximately $ 10 million. Those amounts are based on the exchange rate for the Brazilian currency at September 30, 2024. Management of the operating subsidiary and outside counsel believe that errors were made by the tax authorities in determining all or significant portions of this assessment and that various defenses support the subsidiary’s positions.
Management of the subsidiary and outside counsel challenged the full amount of the Parana assessment claim. A significant portion of the Parana assessment was based on positions taken by the tax authorities that management and outside
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counsel believe deviate significantly from the underlying statutes and relevant case law. In addition, under the law, the subsidiary’s tax filings for certain periods covered in the assessment were no longer open to any challenge by the tax authorities. In December 2015, the Parana tax authorities withdrew the initial claim and subsequently issued a new assessment covering the same tax periods, reflecting a substantial reduction from the original assessment. In fiscal year 2020, the Parana tax authorities acknowledged the statute of limitations related to claims prior to December 2010 had expired and reduced the assessment to $ 3 million (at the September 30, 2024 exchange rate). Notwithstanding the reduced assessment, management and outside counsel continue to believe that the new assessment is not supported by the underlying statutes and relevant case law and have challenged the full amount of the claim. The range of reasonably possible loss is considered to be zero up to the full $ 3 million assessment. However, based on the strength of the subsidiary's defenses, no loss within that range is considered probable at this time and no liability has been recorded at September 30, 2024.
The process for reaching a final resolution to the assessment is expected to be lengthy, and management is not currently able to predict when the case will be concluded. Should the subsidiary ultimately be required to pay any tax, interest, or penalties in the case, the portion paid for tax would generate VAT credits that the subsidiary may be able to recover.
Other Legal and Tax Matters
Various subsidiaries of the Company are involved in litigation and tax examinations incidental to their business activities. While the outcome of these matters cannot be predicted with certainty, management is vigorously defending the matters and does not currently expect that any of them will have a material adverse effect on the Company’s business or financial position. However, should one or more of these matters be resolved in a manner adverse to management’s current expectation, the effect on the Company’s results of operations for a particular fiscal reporting period could be material.
Advances to Suppliers
In many sourcing origins where the Company operates, it provides agronomy services and seasonal advances of seed, seedlings, fertilizer, and other supplies to tobacco farmers for crop production, or makes seasonal cash advances to farmers for the procurement of those inputs. These advances are short term, are repaid upon delivery of tobacco to the Company, and are reported in advances to suppliers in the consolidated balance sheets. In several origins, the Company has made long-term advances to tobacco farmers to finance curing barns and other farm infrastructure. In some years, due to low crop yields and other factors, individual farmers may not deliver sufficient volumes of tobacco to fully repay their seasonal advances, and the Company may extend repayment of those advances into future crop years. The long-term portion of advances is included in other noncurrent assets in the consolidated balance sheets. Both the current and the long-term portions of advances to suppliers are reported net of allowances recorded when the Company determines that amounts outstanding are not likely to be collected. Short-term and long-term advances to suppliers totaled $ 151 million at September 30, 2024, $ 127 million at September 30, 2023, and $ 162 million at March 31, 2024. The related valuation allowances totaled $ 11 million at September 30, 2024, $ 20 million at September 30, 2023, and $ 20 million at March 31, 2024, and were estimated based on the Company’s historical loss information and crop projections. The allowances were decreased by net recoveries of $ 5.6 million in the six-month period ended September 30, 2024 and increased by net provisions of approximately $ 3.8 million in the six-month period ended September 30, 2023. These net recoveries and provisions are included in selling, general, and administrative expenses in the consolidated statements of income. Interest on advances is recognized in earnings upon the farmers’ delivery of tobacco in payment of principal and interest.
Recoverable Value-Added Tax Credits
In many foreign countries, the Company’s local operating subsidiaries pay significant amounts of VAT on purchases of unprocessed and processed tobacco, crop inputs, packing materials, and various other goods and services. In some countries, VAT is a national tax, and in other countries it is assessed at the state level. Items subject to VAT vary from jurisdiction to jurisdiction, as do the rates at which the tax is assessed. When tobacco is sold to customers in the country of origin, the operating subsidiaries generally collect VAT on those sales. The subsidiaries are normally permitted to offset their VAT payments against the collections and remit only the incremental VAT collections to the tax authorities. When tobacco is sold for export, VAT is normally not assessed. In countries where tobacco sales are predominately for export markets, VAT collections generated on downstream sales are often not sufficient to fully offset the subsidiaries’ VAT payments. In those situations, unused VAT credits can accumulate. Some jurisdictions have procedures that allow companies to apply for refunds of unused VAT credits from the tax authorities, but the refund process often takes an extended period of time and it is not uncommon for refund applications to be challenged or rejected in part on technical grounds. Other jurisdictions may permit companies to sell or transfer unused VAT credits to third parties in private transactions, although approval for such transactions must normally be obtained from the tax authorities, limits on the amounts that can be transferred may be imposed, and the proceeds realized may be heavily discounted from the face value of the credits. Due to these factors, local operating subsidiaries in some countries can accumulate significant balances of VAT credits over time. The Company reviews these balances on a regular basis and records valuation allowances on the credits to reflect amounts that are not expected to be recovered, as well as discounts anticipated on credits that are expected to
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be sold or transferred. At September 30, 2024, the aggregate balance of recoverable tax credits held by the Company’s subsidiaries totaled approximately $ 63 million ($ 61 million at September 30, 2023 and $ 72 million at March 31, 2024). The related valuation allowances totaled approximately $ 21 million at September 30, 2024 and 2023, and March 31, 2024. The net balances are reported in other current assets and other noncurrent assets in the consolidated balance sheets.
Stock Repurchase Program
A stock repurchase program, which was authorized by the Company's Board of Directors, became effective and was publicly announced on November 2, 2022. This stock repurchase program authorized the purchase of up to $ 100 million in common stock in open market or privately negotiated transactions through November 15, 2024, subject to market conditions and other factors. The program had $ 95 million of remaining capacity for repurchases of common stock at September 30, 2024.
This stock repurchase program was replaced on November 6, 2024 when the Company's Board of Directors authorized a new stock repurchase program up to $ 100 million in common stock through November 15, 2026, subject to market conditions and other factors.
NOTE 5. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share:
Three Months Ended September 30, Six Months Ended September 30,
(in thousands, except share and per share data) 2024 2023 2024 2023
Basic Earnings (Loss) Per Share
Numerator for basic earnings (loss) per share
Net income (loss) attributable to Universal Corporation $ 25,940 $ 28,128 $ 26,070 $ 26,064
Denominator for basic earnings (loss) per share
Weighted average shares outstanding 24,946,632 24,869,697 24,911,681 24,855,974
Basic earnings (loss) per share $ 1.04 $ 1.13 $ 1.05 $ 1.05
Diluted Earnings (Loss) Per Share
Numerator for diluted earnings (loss) per share
Net income (loss) attributable to Universal Corporation $ 25,940 $ 28,128 $ 26,070 $ 26,064
Denominator for diluted earnings (loss) per share:
Weighted average shares outstanding 24,946,632 24,869,697 24,911,681 24,855,974
Effect of dilutive securities
Employee and outside director share-based awards 189,341 145,672 189,614 141,925
Denominator for diluted earnings (loss) per share 25,135,973 25,015,369 25,101,295 24,997,899
Diluted earnings (loss) per share $ 1.03 $ 1.12 $ 1.04 $ 1.04
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 various factors, including the mix and timing of domestic and foreign earnings, discrete items, and the effect of exchange rate changes on taxes.
Numerous countries in which Company operates have enacted or are in the process of enacting legislation to adopt a global minimum effective tax rate described in the Global Anti-Base Erosion framework rules, or Pillar Two, issued by the Organization for Economic Co-operation and Development (“OECD”). The Pillar Two legislation includes establishing a 15 % global minimum tax rate on a country-by-country basis and is effective for the Company's fiscal year 2025. The Company
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performed an assessment of the potential impact on income taxes from enactment of the Pillar Two legislation. Based on the assessment, the Company does not anticipate a material impact to the consolidated financial statements from the Pillar Two legislation in fiscal year 2025.
Three and six months ended September 30, 2024
The Company's consolidated effective income tax rate for the three and six months ended September 30, 2024 was 28.6 % and 31.5 %, respectively.
Three and six months ended September 30, 2023
The Company's consolidated effective income tax rate for the three and six months ended September 30, 2023 was 21.5 % respectively.
NOTE 7. GOODWILL AND OTHER INTANGIBLES
The Company's changes in goodwill at September 30, 2024 and 2023 consisted of the following:
(in thousands of dollars) Six Months Ended September 30,
2024 2023
Balance at beginning of fiscal year $ 213,869 $ 213,922
Foreign currency translation adjustment
3 ( 66 )
Balance at end of period $ 213,872 $ 213,856
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 September 30, 2024 and 2023 and at March 31, 2024:
(in thousands, except useful life) September 30, 2024
Useful Life (years) Gross Carrying Value Accumulated Amortization Net Carrying Value
Customer relationships 11 — 13 $ 86,500 $ ( 29,289 ) $ 57,211
Trade names 5 11,100 ( 9,375 ) 1,725
Developed technology 13 9,300 ( 5,838 ) 3,462
Noncompetition agreements 4 — 5 4,000 ( 3,200 ) 800
Other 5 826 ( 761 ) 65
Total intangible assets $ 111,726 $ ( 48,463 ) $ 63,263
September 30, 2023
Useful Life (years) Gross Carrying Value Accumulated Amortization Net Carrying Value
Customer relationships 11 — 13 $ 86,500 $ ( 21,559 ) $ 64,941
Trade names 5 11,100 ( 7,155 ) 3,945
Developed technology 13 9,300 ( 5,492 ) 3,808
Noncompetition agreements 4 — 5 4,000 ( 2,250 ) 1,750
Other 5 708 ( 677 ) 31
Total intangible assets $ 111,608 $ ( 37,133 ) $ 74,475
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March 31, 2024
Useful Life (years) Gross Carrying Value Accumulated Amortization Net Carrying Value
Customer relationships 11 — 13 $ 86,500 $ ( 25,424 ) $ 61,076
Trade names 5 11,100 ( 8,265 ) 2,835
Developed technology 13 9,300 ( 5,665 ) 3,635
Noncompetition agreements 4 — 5 4,000 ( 2,725 ) 1,275
Other 5 782 ( 720 ) 62
Total intangible assets $ 111,682 $ ( 42,799 ) $ 68,883
Intangible assets are amortized on a straight-line basis over the asset's estimated useful economic life, as noted above.
The Company's amortization expense for intangible assets for the three and six months ended September 30, 2024 and 2023 was:
(in thousands of dollars) Three Months Ended September 30, Six Months Ended September 30,
2024
2023 2024 2023
Amortization Expense $ 2,852 $ 2,786 $ 5,664 $ 5,613
Amortization expense for the developed technology intangible asset is recorded in cost of goods sold in the consolidated statements of income. The amortization expense for other intangible assets is recorded in selling, general, and administrative expenses in the consolidated statements of income.
As of September 30, 2024, the expected future amortization expense for intangible assets is as follows:
Fiscal Year (in thousands of dollars)
2025 (excluding the six months ended September 30, 2024)
$ 5,427
2026 9,279
2027 8,077
2028 8,077
2029 and thereafter 32,403
Total expected future amortization expense $ 63,263
NOTE 8. DERIVATIVES AND HEDGING ACTIVITIES
Universal is exposed to various risks in its worldwide operations and uses derivative financial instruments to manage two specific types of risks – interest rate risk and foreign currency exchange rate risk. Interest rate risk has been managed by entering into interest rate swap agreements, and foreign currency exchange rate risk has been managed by entering into forward and option foreign currency exchange contracts. However, the Company’s policy also permits other types of derivative instruments. In addition, foreign currency exchange rate risk is also managed through strategies that do not involve derivative instruments, such as using local borrowings and other approaches to minimize net monetary positions in non-functional currencies. The disclosures below provide additional information about the Company’s hedging strategies, the derivative instruments used, and the effects of these activities on the consolidated statements of income and comprehensive income and the consolidated balance sheets. In the consolidated statements of cash flows, the cash flows associated with all of these activities are reported in net cash provided (used) by operating activities.
Cash Flow Hedging Strategy for Interest Rate Risk
In December 2022, 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 2022. Although no significant ineffectiveness is expected with this hedging strategy, the effectiveness of the interest rate swaps is evaluated on a quarterly basis. At September 30, 2024, the total notional amount of the interest rate swaps was $ 310 million, which corresponded to a portion of the aggregate outstanding balance of the term loans.
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Previously, the Company had receive-floating/pay-fixed interest rate swap agreements that were designated and qualified as cash flow hedges for two non-amortizing bank loans that were repaid concurrent with closing on the new bank credit facility in December 2022. Those swap agreements, which had an aggregate notional amount of $ 370 million corresponding to a portion of the principal balance on the repaid loans, were terminated concurrent with the inception of the new swap agreements. The fair value of the previous swap agreements, approximately $ 11.8 million, was received from the counterparties in December 2022 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.
Cash Flow Hedging Strategy for Foreign Currency Exchange Rate Risk Related to Sales of Crop Inputs, Forecast Purchases of Tobacco, and Related Processing Costs
The majority of the tobacco production in most countries outside the United States where Universal operates is sold in export markets at prices denominated in U.S. dollars. However, sales of crop inputs (such as seeds and fertilizers) to farmers, purchases of tobacco from farmers, and most processing costs (such as labor and energy) in those countries are usually denominated in the local currency. Changes in exchange rates between the U.S. dollar and the local currencies where tobacco is grown and processed affect the ultimate U.S. dollar sales of crop inputs and cost of processed tobacco. From time to time, the Company enters into forward and option contracts to buy U.S. dollars and sell the local currency at future dates that coincide with the sale of crop inputs to farmers. In the case of forecast purchases of tobacco and the related processing costs, the Company enters into forward and option contracts to sell U.S. dollars and buy the local currency at future dates that coincide with the expected timing of a portion of the tobacco purchases and processing costs. These strategies offset the variability of future U.S. dollar cash flows for sales of crop inputs, tobacco purchases, and processing costs for the foreign currency notional amount hedged. These hedging strategies have been used mainly for tobacco purchases, processing costs, and sales of crop inputs in Brazil. Additionally, the Company initiated a strategy in Brazil and Mexico to hedge a portion of the forecasted local currency-denominated operating costs in fiscal year 2025 by entering into derivative contracts to buy the local currencies and sell the U.S. dollar.
The aggregate U.S. dollar notional amounts of forward and option contracts entered into for these purposes during the six-month periods in fiscal years 2025 and 2024 was as follows:
Six Months Ended September 30,
(in millions of dollars) 2024 2023
Tobacco purchases $ 97.0 $ 30.3
Processing costs 15.2 4.9
Operating costs 28.9 —
Total
$ 141.1 $ 35.2
Fluctuations in exchange rates and in the amount and timing of fixed-price orders from customers for their purchases from individual crop years routinely cause variations in the U.S. dollar notional amount of forward contracts entered into from one year to the next. All contracts related to tobacco purchases and crop input sales were initially designated and qualified as hedges of the future cash flows associated with the forecast purchases of tobacco. As a result, changes in fair values of the forward contracts have been recognized in comprehensive income as they occurred, but only recognized in earnings as a component of cost of goods sold upon sale of the related tobacco to third-party customers. The Company de-designates ineffective tobacco purchases and crop input sales hedges to selling, general, and administrative expense when the forecasted tobacco purchases or crop input sales are no longer expected to occur.
The table below presents the expected timing of when the remaining accumulated other comprehensive gains and losses as of September 30, 2024 for cash flows hedges of tobacco purchases and crop input sales are expected to be recognized in earnings.
Hedging Program Crop Year Geographic Location(s) Fiscal Year Earnings
Tobacco purchases 2023 Brazil 2025
Tobacco purchases 2025 Brazil 2026
Crop input sales 2024 Brazil 2025
Crop input sales 2025 Brazil 2026
Forward contracts related to processing costs and operating costs have not been designated as hedges, and gains and losses on those contracts have been recognized in earnings on a mark-to-market basis.
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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 September 30, 2024 and 2023, and March 31, 2024, were approximately $ 88.5 million, $ 101.1 million, and $ 20.9 million, respectively. To further mitigate currency remeasurement exposure, the Company’s foreign subsidiaries may utilize short-term local currency financing during certain periods. This strategy, while not involving the use of derivative instruments, is intended to minimize the subsidiary’s net monetary position by financing a portion of the local currency monetary assets with local currency monetary liabilities, thus hedging a portion of the overall position.
Several of the Company’s foreign subsidiaries transact the majority of their sales and finance the majority of their operating requirements in their local currency, and therefore use their respective local currencies as the functional currency for reporting purposes. From time to time, these subsidiaries sell tobacco to customers in transactions that are not denominated in the functional currency. In those situations, the subsidiaries routinely enter into forward exchange contracts to offset currency risk for the period of time that a fixed-price order and the related trade account receivable are outstanding with the customer. The contracts are not designated as hedges for accounting purposes.
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Effect of Derivative Financial Instruments on the Consolidated Statements of Income
The table below outlines the effects of the Company’s use of derivative financial instruments on the consolidated statements of income:
Three Months Ended September 30, Six Months Ended September 30,
(in thousands of dollars) 2024 2023 2024 2023
Cash Flow Hedges - Interest Rate Swap Agreements
Derivative
Effective Portion of Hedge
Gain (loss) recorded in accumulated other comprehensive loss $ ( 8,969 ) $ 7,968 $ ( 6,346 ) $ 18,064
Gain (loss) reclassified from accumulated other comprehensive loss into earnings
$ 1,514 $ 1,417 $ 2,989 $ 2,626
Gain on terminated interest rate swaps amortized from accumulated other comprehensive loss into earnings
$ 688 $ 1,569 $ 1,377 $ 3,139
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 - Foreign Currency Exchange Contracts
Derivative
Effective Portion of Hedge
Gain (loss) recorded in accumulated other comprehensive loss $ 2,685 $ ( 61 ) $ ( 2,552 ) $ 2,019
Gain (loss) reclassified from accumulated other comprehensive loss into earnings
$ 12 $ 3,334 $ 604 $ 4,140
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 $ — $ ( 772 ) $ — $ 1,138
Location of gain (loss) recognized in earnings Selling, general and administrative expenses
Hedged Item
Description of hedged item
Forecast purchases of tobacco in Brazil
Derivatives Not Designated as Hedges - Foreign Currency Exchange Contracts
Gain (loss) recognized in earnings $ ( 2,352 ) $ 1,717 $ ( 589 ) $ ( 769 )
Location of gain (loss) recognized in earnings Selling, general and administrative expenses
For the interest rate swap agreements, the effective portion of the gain or loss on the derivative is recorded in accumulated other comprehensive loss and any ineffective portion is recorded in selling, general and administrative expenses.
For the forward foreign currency exchange contracts designated as cash flow hedges of tobacco purchases and the crop input sales in Brazil, a net hedge loss of approximately $ 3.3 million remained in accumulated other comprehensive loss at September 30, 2024. That balance reflects gains and losses on contracts related to the 2025 and 2023 Brazil crops, and the 2025 and 2024 Brazil crop input sales, less the amounts reclassified to earnings related to tobacco sold through September 30, 2024. 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
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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 September 30, 2024 and 2023, and March 31, 2024:
Derivatives in a Fair Value Asset Position Derivatives in a Fair Value Liability Position
Balance
Sheet
Location Fair Value as of Balance
Sheet
Location Fair Value as of
(in thousands of dollars) September 30, 2024 September 30, 2023 March 31, 2024 September 30, 2024 September 30, 2023 March 31, 2024
Derivatives Designated as Hedging Instruments
Interest rate swap agreements Other
non-current
assets $ — $ 12,361 $ 6,706 Other
long-term
liabilities $ 2,629 $ — $ —
Foreign currency exchange contracts Other
current
assets — — 77 Accounts
payable and
accrued
expenses 3,626 — 9
Total $ — $ 12,361 $ 6,783 $ 6,255 $ — $ 9
Derivatives Not Designated as Hedging Instruments
Foreign currency exchange contracts Other
current
assets $ 144 $ 1,081 $ 245 Accounts
payable and
accrued
expenses $ 3,344 $ 14 $ 12
Total $ 144 $ 1,081 $ 245 $ 3,344 $ 14 $ 12
Substantially all of the Company's foreign exchange derivative instruments are subject to master netting arrangements whereby the right to offset occurs in the event of default by a participating party. The Company has elected to present these contracts on a gross basis in the consolidated balance sheets.
NOTE 9. 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, and forward foreign currency exchange contracts. 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.
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As permitted under the accounting guidance, the Company uses net asset value per share ("NAV") as a practical expedient to measure the fair value of its money market funds. The fair values for those funds are presented under the heading "NAV" in the tables that follow in this disclosure. In measuring the fair value of liabilities, the Company considers the risk of non-performance in determining fair value. Universal has not elected to report at fair value any financial instruments or any other assets or liabilities that are not required to be reported at fair value under current accounting guidance.
Recurring Fair Value Measurements
At September 30, 2024 and 2023, and at March 31, 2024, 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:
September 30, 2024
Fair Value Hierarchy
(in thousands of dollars) NAV Level 1 Level 2 Level 3 Total
Assets
Money market funds
$ 148 $ — $ — $ — $ 148
Trading securities associated with deferred compensation plans
— 12,376 — — 12,376
Foreign currency exchange contracts
— — 144 — 144
Total financial assets measured and reported at fair value
$ 148 $ 12,376 $ 144 $ — $ 12,668
Liabilities
Interest rate swap agreements
$ — $ — $ 2,629 $ — $ 2,629
Foreign currency exchange contracts
— — 6,970 — 6,970
Total financial liabilities measured and reported at fair value
$ — $ — $ 9,599 $ — $ 9,599
September 30, 2023
Fair Value Hierarchy
(in thousands of dollars) NAV Level 1 Level 2 Level 3 Total
Assets
Money market funds
$ 145 $ — $ — $ — $ 145
Trading securities associated with deferred compensation plans
— 11,238 — — 11,238
Interest rate swap agreements
— — 12,361 — 12,361
Foreign currency exchange contracts
— — 1,081 — 1,081
Total financial assets measured and reported at fair value
$ 145 $ 11,238 $ 13,442 $ — $ 24,825
Liabilities
Foreign currency exchange contracts
$ — $ — $ 14 $ — $ 14
Total financial liabilities measured and reported at fair value
$ — $ — $ 14 $ — $ 14
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March 31, 2024
Fair Value Hierarchy
(in thousands of dollars) NAV Level 1 Level 2 Level 3 Total
Assets
Money market funds
$ 145 $ — $ — $ — $ 145
Trading securities associated with deferred compensation plans
— 12,409 — — 12,409
Interest rate swap agreements
— — 6,706 — 6,706
Foreign currency exchange contracts
— — 322 — 322
Total financial assets measured and reported at fair value
$ 145 $ 12,409 $ 7,028 $ — $ 19,582
Liabilities
Foreign currency exchange contracts
$ — $ — $ 21 $ — $ 21
Total financial liabilities measured and reported at fair value
$ — $ — $ 21 $ — $ 21
Money market funds
The fair value of money market funds, which are reported in cash and cash equivalents in the consolidated balance sheets, is based on NAV, which is the amount at which the funds are redeemable and is used as a practical expedient for fair value. These funds are not classified in the fair value hierarchy, but are disclosed as part of the fair value table above.
Trading securities associated with deferred compensation plans
Trading securities represent mutual fund investments that are matched to employee deferred compensation obligations. These investments are bought and sold as employees defer compensation, receive distributions, or make changes in the funds underlying their accounts. Quoted market prices (Level 1) are used to determine the fair values of the mutual funds.
Interest rate swap agreements
The fair values of interest rate swap agreements are determined based on dealer quotes using a discounted cash flow model matched to the contractual terms of each instrument. Since inputs to the model are observable and significant judgment is not required in determining the fair values, interest rate swaps are classified within Level 2 of the fair value hierarchy.
Foreign currency exchange contracts
The fair values of forward and option foreign currency exchange contracts are also determined based on dealer quotes using a discounted cash flow model matched to the contractual terms of each instrument. Since inputs to the model are observable and significant judgment is not required in determining the fair values, forward and option foreign currency exchange contracts are classified within Level 2 of the fair value hierarchy.
Long-term Debt
The following table summarizes the fair and carrying value of the Company’s long-term debt, and if applicable any current portion, at each of the balance sheet dates September 30, 2024, and 2023 and March 31, 2024:
(in millions of dollars) September 30, 2024 September 30, 2023 March 31, 2024
Fair market value of long term obligations $ 615 $ 615 $ 618
Carrying value of long term obligations $ 620 $ 620 $ 620
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.
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Nonrecurring Fair Value Measurements
Assets and liabilities that are measured at fair value on a nonrecurring basis primarily relate to long-lived assets, right-of-use operating lease assets and liabilities, goodwill and intangibles, and other current and noncurrent assets. These assets and liabilities fair values are also evaluated for impairment when potential indicators of impairment exist. Accordingly, the nonrecurring measurement of the fair value of these assets and liabilities are classified within Level 3 of the fair value hierarchy.
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.
Consolidation of tobacco sheet operations
As discussed in Note 2, the Company initiated a plan to consolidate the European Sheet tobacco operations into the Company's facility in the Netherlands. The Company is in the process of winding down its operations in Germany, resulting in an impairment charge of $ 4.9 million for the long-lived assets in the three-month period ended September 30, 2024, to reduce their carrying value to fair value. The long-lived assets primarily consist of a processing facility, machinery and equipment, and administrative offices. As part of the wind-down, the Company also recognized other impairment charges associated with inventory, certain accounts receivable and other assets during the three-month period ended September 30, 2024.
NOTE 10. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
The Company sponsors several defined benefit pension plans covering eligible U.S. salaried employees and certain foreign and other employee groups. These plans provide retirement benefits based primarily on employee compensation and years of service. The Company also sponsors defined benefit plans that provide postretirement health and life insurance benefits for eligible U.S. employees attaining specific age and service levels, although postretirement life insurance is no longer provided for active employees.
The components of the Company’s net periodic benefit cost were as follows:
Pension Benefits Other Postretirement Benefits
Three Months Ended September 30, Three Months Ended September 30,
(in thousands of dollars) 2024 2023 2024 2023
Service cost $ 1,319 $ 1,286 $ 23 $ 24
Interest cost 2,882 2,898 264 266
Expected return on plan assets ( 3,607 ) ( 3,888 ) ( 14 ) ( 16 )
Net amortization and deferral 174 203 ( 160 ) ( 191 )
Net periodic benefit cost
$ 768 $ 499 $ 113 $ 83
Pension Benefits Other Postretirement Benefits
Six Months Ended September 30, Six Months Ended September 30,
(in thousands of dollars) 2024 2023 2024 2023
Service cost $ 2,641 $ 2,568 $ 47 $ 49
Interest cost 5,754 5,799 535 530
Expected return on plan assets ( 7,214 ) ( 7,776 ) ( 28 ) ( 32 )
Net amortization and deferral 348 406 ( 320 ) ( 380 )
Net periodic benefit cost
$ 1,529 $ 997 $ 234 $ 167
During the six months ended September 30, 2024, the Company made contributions of approximately $ 1.4 million to its pension plans. Additional contributions of $ 1.5 million are expected during the remaining six months of fiscal year 2025.
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NOTE 11. STOCK-BASED COMPENSATION
The Company's shareholders approved the Universal Corporation 2023 Stock Incentive Plan (“Plan”) under which officers, directors, and employees of the Company may receive grants and awards of common stock, restricted stock, restricted stock units (“RSUs”), performance share units (“PSUs”), stock appreciation rights, incentive stock options, and non-qualified stock options. The Company’s practice is to award grants of stock-based compensation to officers on an annual basis at the first regularly-scheduled meeting of the Compensation Committee of the Board of Directors (the “Compensation Committee”) in the fiscal year following the public release of the Company’s financial results for the prior fiscal year. The Compensation Committee administers the Plan consistently, following previously defined guidelines. In recent years, the Compensation Committee has awarded only grants of RSUs and PSUs. Awards of restricted stock, RSUs, and PSUs are currently outstanding.
RSUs awarded prior to fiscal year 2022 vest 5 years after the grant date and those awarded beginning with fiscal year 2022 vest 3 years after the grant date. After vesting RSUs are paid out in shares of common stock. Under the terms of the RSU awards, grantees receive dividend equivalents in the form of additional RSUs that vest and are paid out on the same date as the original RSU grant. The PSUs vest at the end of a performance period of three years that begins with the year of the grant, are paid out in shares of common stock shortly after the vesting date, and do not carry rights to dividends or dividend equivalents prior to vesting. Shares ultimately paid out under PSU grants are dependent on the achievement of predetermined performance measures established by the Compensation Committee and can range from zero to 150 % of the stated award. The Company’s outside directors receive RSUs following the annual meeting of shareholders. RSUs awarded to outside directors vest 1 year after the grant date. Restricted shares vest upon the individual’s retirement from service as a director.
During the six-month periods ended September 30, 2024 and 2023, the Company issued the following stock-based awards, representing the regular annual grants to officers and outside directors of the Company:
Six Months Ended September 30,
2024 2023
RSUs:
Number granted 96,230 93,300
Grant date fair value $ 47.81 $ 51.34
PSUs:
Number granted 62,085 54,700
Grant date fair value $ 38.23 $ 43.01
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. The Company accounts for forfeitures of stock-based awards as they occur. For the six-month periods ended September 30, 2024 and 2023, the Company recorded total stock-based compensation expense of approximately $ 6.6 million and $ 5.7 million, respectively. The Company expects to recognize stock-based compensation expense of approximately $ 0.9 million during the remaining six months of fiscal year 2025.
NOTE 12. OPERATING SEGMENTS
The Company conducts operations across two reportable operating segments, Tobacco Operations and Ingredients Operations.
The Tobacco Operations segment activities involve contracting, procuring, processing, packing, storing, and shipping 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 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 manufacturing of cigars, pipe tobacco, and smokeless tobacco products. Some of these tobacco types are also increasingly used in the manufacture of next generation tobacco products that are intended to provide consumers with an alternative to traditional combustible products. The Tobacco Operations segment also provides physical and chemical
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product testing for tobacco customers. A substantial portion of the Company’s Tobacco Operations' revenues are derived from sales to a limited number of large, multinational cigarette and cigar manufacturers.
The Ingredients Operations segment provides its customers with a broad variety of plant-based ingredients for both human and pet consumption. The Ingredients Operations segment utilizes a variety of value-added manufacturing processes converting raw materials into a wide spectrum of fruit and vegetable juices, concentrates, dehydrated products, botanical extracts, and flavorings. Customers for the Ingredients Operations segment include large multinational food and beverage companies, smaller independent manufacturers, and retail organizations. FruitSmart, Silva, and Shank's are the primary operations for the Ingredients Operations segment. FruitSmart supplies a broad set of juices, concentrates, pomaces, purees, fruit fibers, seeds, seed powders, and other value-added products to food, beverage, and flavor companies throughout the United States and internationally. Silva procures dehydrated vegetables, fruits, and herbs from around the world and specializes in processing natural materials into custom designed dehydrated vegetable and fruit-based ingredients for a variety of end products. Shank's offers a diversified portfolio of botanical extracts, distillates, natural flavors, and color for industrial and private label customers worldwide, and is known for their significant vanilla expertise. Shank's is also equipped to offer customers custom bottling and packaging for their products.
The Company currently evaluates the performance of its segments based on operating income after allocated overhead expenses, plus equity in the pretax earnings (loss) of unconsolidated affiliates. Operating results for the Company’s reportable segments for each period presented in the consolidated statements of income and comprehensive income were as follows.
Three Months Ended September 30, Six Months Ended September 30,
(in thousands of dollars) 2024 2023 2024 2023
SALES AND OTHER OPERATING REVENUES
Tobacco Operations $ 630,212 $ 554,653 $ 1,142,167 $ 998,561
Ingredients Operations 80,550 83,831 165,645 157,645
Consolidated sales and other operating revenues $ 710,762 $ 638,484 $ 1,307,812 $ 1,156,206
OPERATING INCOME (LOSS)
Tobacco Operations $ 77,334 $ 52,387 $ 91,788 $ 61,270
Ingredients Operations 1,333 4,811 4,244 2,797
Segment operating income 78,667 57,198 96,032 64,067
Deduct: Equity in pretax (earnings) loss of unconsolidated affiliates (1)
642 713 502 4,879
Restructuring and impairment costs (2)
( 10,573 ) ( 2,599 ) ( 10,573 ) ( 2,599 )
Consolidated operating income $ 68,736 $ 55,312 $ 85,961 $ 66,347
(1) Equity in pretax earnings (loss) of unconsolidated affiliates is included in segment operating income (Tobacco Operations), but is reported below consolidated operating income and excluded from that total in the consolidated statements of income and comprehensive income.
(2) Restructuring and impairment costs are excluded from segment operating income, but are included in consolidated operating income in the consolidated statements of income and comprehensive income. See Note 2 for additional information.
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NOTE 13. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table summarizes the changes in the accumulated balances for each component of accumulated other comprehensive income (loss) attributable to the Company for the six months ended September 30, 2024 and 2023:
Six Months Ended September 30,
(in thousands of dollars) 2024 2023
Foreign currency translation:
Balance at beginning of year $ ( 44,815 ) $ ( 44,233 )
Other comprehensive income (loss) attributable to Universal Corporation:
Net gain (loss) on foreign currency translation 3,933 ( 3,481 )
Less: Net (gain) loss on foreign currency translation attributable to noncontrolling interests 393 263
Other comprehensive income (loss) attributable to Universal Corporation, net of income taxes 4,326 ( 3,218 )
Balance at end of period $ ( 40,489 ) $ ( 47,451 )
Foreign currency hedge:
Balance at beginning of year $ ( 616 ) $ 4,899
Other comprehensive income (loss) attributable to Universal Corporation:
Net gain (loss) on derivative instruments (net of tax (expense) benefit of $ 515 and $( 53 ))
( 911 ) ( 812 )
Reclassification of (gain) loss to earnings (net of tax expense (benefit) of $ 145 and $ 908 ) (1)
( 507 ) ( 2,817 )
Other comprehensive income (loss) attributable to Universal Corporation, net of income taxes ( 1,418 ) ( 3,629 )
Balance at end of period $ ( 2,034 ) $ 1,270
Interest rate hedge:
Balance at beginning of year $ 8,488 $ 5,253
Other comprehensive income (loss) attributable to Universal Corporation:
Net gain (loss) on derivative instruments (net of tax (expense) benefit of $ 1,779 and $( 4,769 ))
( 4,567 ) 13,295
Reclassification of (gain) loss to earnings (net of tax expense (benefit) of $ 1,224 and $ 1,522 ) (2)
( 3,142 ) ( 4,243 )
Other comprehensive income (loss) attributable to Universal Corporation, net of income taxes ( 7,709 ) 9,052
Balance at end of period $ 779 $ 14,305
Pension and other postretirement benefit plans:
Balance at beginning of year $ ( 44,642 ) $ ( 42,976 )
Other comprehensive income (loss) attributable to Universal Corporation:
Amortization included in earnings (net of tax expense (benefit) of $ 0 and $( 33 )) (3)
( 770 ) 185
Other comprehensive income (loss) attributable to Universal Corporation, net of income taxes ( 770 ) 185
Balance at end of period $ ( 45,412 ) $ ( 42,791 )
Total accumulated other comprehensive loss at end of period $ ( 87,156 ) $ ( 74,667 )
(1) Gain (loss) on foreign currency cash flow hedges related to forecast purchases of tobacco and crop input sales is reclassified from accumulated other comprehensive income (loss) to cost of goods sold when the tobacco is sold to customers. See Note 8 for additional information.
(2) Gain (loss) on interest rate cash flow hedges is reclassified from accumulated other comprehensive income (loss) to interest expense when the related interest payments are made on the underlying debt, or as amortized to interest expense over the period to original maturity for terminated swap agreements. See Note 8 for additional information.
(3) This accumulated other comprehensive income (loss) component is included in the computation of net periodic benefit cost. See Note 10 for additional information.
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NOTE 14. CHANGES IN SHAREHOLDERS' EQUITY AND NONCONTROLLING INTERESTS IN SUBSIDIARIES
A reconciliation of the changes in Universal Corporation shareholders’ equity and noncontrolling interests in subsidiaries for the three and six months ended September 30, 2024 and 2023 is as follows:
Three Months Ended September 30, 2024 Three Months Ended September 30, 2023
(in thousands of dollars) Universal Corporation Non-controlling Interests Total Universal Corporation Non-controlling Interests Total
Balance at beginning of three-month period $ 1,413,457 $ 30,042 $ 1,443,499 $ 1,380,720 $ 32,459 $ 1,413,179
Changes in common stock
Repurchase of common stock — — — ( 1,373 ) — ( 1,373 )
Accrual of stock-based compensation 1,942 — 1,942 1,852 — 1,852
Withholding of shares from stock-based compensation for grantee income taxes
( 318 ) — ( 318 ) — — —
Dividend equivalents on RSUs 288 — 288 317 — 317
Changes in retained earnings
Net income (loss) 25,940 8,029 33,969 28,128 2,660 30,788
Cash dividends declared
Common stock ( 20,020 ) — ( 20,020 ) ( 19,647 ) — ( 19,647 )
Repurchase of common stock — — — ( 3,371 ) — ( 3,371 )
Dividend equivalents on RSUs ( 288 ) — ( 288 ) ( 317 ) — ( 317 )
Other comprehensive income (loss) ( 435 ) ( 3 ) ( 438 ) ( 2,120 ) ( 119 ) ( 2,239 )
Other changes in noncontrolling interests
Dividends paid to noncontrolling shareholders
— ( 630 ) ( 630 ) — ( 1,681 ) ( 1,681 )
Balance at end of period $ 1,420,566 $ 37,438 $ 1,458,004 $ 1,384,189 $ 33,319 $ 1,417,508
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Six Months Ended September 30, 2024 Six Months Ended September 30, 2023
(in thousands of dollars) Universal Corporation Non-controlling Interests Total Universal Corporation Non-controlling Interests Total
Balance at beginning of year $ 1,437,207 $ 41,716 $ 1,478,923 $ 1,397,088 $ 39,864 $ 1,436,952
Changes in common stock
Repurchase of common stock — — — ( 1,373 ) — ( 1,373 )
Accrual of stock-based compensation 6,583 — 6,583 5,711 — 5,711
Withholding of shares from stock-based compensation for grantee income taxes
( 3,715 ) — ( 3,715 ) ( 2,963 ) — ( 2,963 )
Dividend equivalents on RSUs 600 — 600 619 — 619
Changes in retained earnings
Net income 26,070 5,075 31,145 26,064 ( 437 ) 25,627
Cash dividends declared
Common stock
( 40,008 ) — ( 40,008 ) ( 39,357 ) — ( 39,357 )
Repurchase of common stock — — — ( 3,371 ) — ( 3,371 )
Dividend equivalents on RSUs ( 600 ) — ( 600 ) ( 619 ) — ( 619 )
Other comprehensive income (loss) ( 5,571 ) ( 393 ) ( 5,964 ) 2,390 ( 263 ) 2,127
Other changes in noncontrolling interests
Dividends paid to noncontrolling shareholders
— ( 8,960 ) ( 8,960 ) — ( 5,845 ) ( 5,845 )
Balance at end of period $ 1,420,566 $ 37,438 $ 1,458,004 $ 1,384,189 $ 33,319 $ 1,417,508
NOTE 15. SUBSEQUENT EVENTS
Pension De-Risking
In March 2025, the Company's management undertook a de-risking strategy for the Company-sponsored qualified defined benefit pension plan that covers certain domestic employees and retirees. The Company purchased an annuity for a limited group of retirees currently receiving benefit payments. The annuity purchase and transfer of risk to a third-party insurance company resulted in de-recognition of approximately $45 million of projected benefit obligation. The transaction triggered settlement accounting that requires immediate recognition of a portion of the accumulated other comprehensive losses associated with the defined benefit plan. The Company expects to recognize a non-cash settlement charge of approximately $15 million in the fourth quarter of fiscal year 2025.
Debt Covenant Consents
Due to the delays resulting from the previously disclosed investigation of the embezzlement at the Company's subsidiary in Mozambique, the Company was unable to timely file its quarterly reports on Form 10-Q for the second and third quarters of fiscal year 2025 with the Securities and Exchange Commission ("SEC"). The delayed filings resulted in the Company obtaining lender consents (the "Consents") under its Credit Agreement, dated December 15, 2022, among the Company, the lenders party thereto from time to time, and JP Morgan Chase Bank, N.A., as Administrative Agent (the "Credit Agreement"). The Consents provided for, among other things, an extension until June 16, 2025 to file the second and third quarter financial statements with the SEC and resulted in approximately $1.4 million of additional selling, general, and administrative costs. Based on the Company's September 30, 2024 financial statements and its December 31, 2024 financial statements, it was in compliance with the financial covenants in the Credit Agreement, as of the end of each of the second and third quarters of fiscal year 2025.
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