2017
ANNUAL REPORT
......................................................................................
Established 1918
ABOUT THE COMPANY
Universal Corporation, headquartered in Richmond, Virginia, is the leading global leaf tobacco supplier. Tobacco has
been its principal focus since its founding in 1918. The largest portion of the company’s business involves procuring and
processing fl ue-cured and burley leaf tobacco for manufacturers of consumer tobacco products. Universal conducts
its business in more than 30 countries on 5 continents and employs over 24,000 permanent and seasonal workers.
FINANCIAL HIGHLIGHTS
in thousands, except per share data
Fiscal Year Ended
March 31, 2017
Fiscal Year Ended
March 31, 2016
Fiscal Year Ended
March 31, 2015
OPERATIONS
Sales and other operating revenues
$ 2,071,218
$ 2,120,373
$ 2,271,801
Operating income
Segment operating income
Net income
Net income attributable to Universal Corporation
PER COMMON SHARE
Net income attributable to Universal Corporation
178,351
188,484
112,506
106,304
181,647
186,068
118,148
109,016
167,874
167,225
120,461
114,608
common shareholders—diluted
$ 0.88
**
$ 3.92
$ 4.06
Dividends declared
Indicated 12-month dividend rate
Market price at year end
AT YEAR END
Working capital
2.14
2.16
70.75
2.10
2.12
56.81
2.06
2.08
47.16
$ 1,293,403
$ 1,392,276
$ 1,329,770
Total Universal Corporation shareholders’ equity
1,286,489
1,414,222
1,362,725
Net Income per Diluted Share *
Dividends Declared
Operating Income
in dollars
in dollars
in millions of dollars
4
1
.
2
0
1
.
2
6
0
.
2
2
0
.
2
8
9
.
1
2
.
6
4
2
0
.
3
2
2
4
.
8
7
1
6
.
1
8
1
9
.
7
6
1
5
2
.
5
6
6
.
4
2
9
.
3
6
0
.
4
*
*
8
8
.
0
17
16
15
14
13
17
16
15
14
13
17
16
15
14
13
* Attributable to Universal Corporation common shareholders after deducting amounts attributable to noncontrolling interests in
consolidated subsidiaries.
** Includes a one-time reduction of earnings available to common shareholders of $74 million, or $2.99 per diluted share, from the
conversion for cash of the remaining shares of the Company’s Series B 6.75% Convertible Perpetual Preferred Stock.
1
BOARD OF DIRECTORS
Universal Corporation
George C. Freeman, III 1 * 3
Chairman, President, and
Chief Executive Offi cer
Universal Corporation
Diana F. Cantor 2 3 * 5
Partner
Alternative Investment
Management, LLC
John B. Adams, Jr. 1 2 3 4
President and
Chief Executive Offi cer
Bowman Companies
Lennart R. Freeman 1 4 5
Retired Executive
Vice President
Swedish Match AB
Thomas H. Johnson 1 5 *
Chief Executive Offi cer
The Taffrail Group, LLC
Michael T. Lawton 2 4
Retired Executive
Vice President and
Chief Finanical Offi cer
Domino’s Pizza, Inc.
Eddie N. Moore, Jr. 2 3 4 *
President and
Chief Executive Offi cer
Norfolk State University
Robert C. Sledd 2 * 3 4
Managing Partner
Pinnacle Ventures, LLC
CHAIRMEN EMERITUS
Henry H. Harrell
Allen B. King
1 Executive Committee
2 Pension Investment Committee
3 Finance Committee
4 Audit Committee
5
Executive Compensation, Nominating, and Corporate
Governance Committee
* Committee Chairman
2
OFFICERS
Universal Corporation
George C. Freeman, III
Chairman, President, and
Chief Executive Offi cer
Candace C. Formacek
Vice President and
Treasurer
H. Michael Ligon
Vice President,
Corporate Affairs
John F. Shomaker, III
Corporate Director,
Taxes
Airton L. Hentschke
Senior Vice President and
Chief Operating Offi cer
Robert M. Peebles
Vice President and
Controller
Harvard B. Smith
Vice President and Chief
Compliance Offi cer
Jennifer S. Rowe
Assistant Vice President,
Capital Markets
David C. Moore
Senior Vice President and
Chief Financial Offi cer
Preston D. Wigner
Vice President, General
Counsel, and Secretary
Joseph W. Hearington, Jr.
Vice President,
Internal Auditing
Catherine H. Claiborne
Assistant Secretary
DIRECTORS
Universal Leaf Tobacco Company, Inc.
George C. Freeman, III
Chairman, President and
Chief Executive Offi cer
Airton L. Hentschke
Executive Vice President and
Chief Operating Offi cer
Paul G. Beevor
Managing Director,
Asia Region
David C. Moore
Executive Vice President and
Chief Financial Offi cer
James A. Huffman
Senior Vice President,
Information and Planning
Friedrich G. Bossert
Managing Director,
Dark Air-Cured Region
Domenico Cardinali
Managing Director,
Europe Region
Clayton G. Frazier
Managing Director,
North America Region
Theodore G. Broome
Executive Vice President and
Sales Director
Preston D. Wigner
Senior Vice President,
General Counsel, and
Assistant Secretary
Cesar A. Bünecker
Managing Director,
South America Region
Gary S. Taylor
Managing Director,
Africa Region
Jonathan R. Wertheimer
President,
Socotab, L.L.C.
3
TO OUR SHAREHOLDERS
Fiscal year 2017 was a good year for your company despite supply headwinds, most notably from weather-
reduced crop sizes in Brazil and ongoing challenging market conditions in Tanzania. Although we had
anticipated ending the year with slightly lower volumes, earlier shipment timing as well as additional
purchases by our customers due to attractive green prices in some origins boosted shipments prior to
the end of our fi scal year. Due to these factors, we improved our market share and achieved lamina sales
volumes that were slightly above those of the prior year.
Net income for the fi scal year ended March 31, 2017, was $106.3 million, or $0.88 per diluted share,
compared with fi scal year 2016’s net income of $109.0 million, or $3.92 per diluted share. The fi scal
year 2017 results included a one-time reduction of earnings available to common shareholders of $74.4
million, or $2.99 per diluted share, from the conversion for cash of the remaining outstanding shares of
our Series B 6.75% Convertible Perpetual Preferred Stock (“Series B Preferred Stock”) in January 2017.
Excluding that reduction and certain other non-recurring items, diluted earnings per share for the fi scal
year of $3.97 increased $0.07 compared to the same period last year. Operating income of $178.4 million
for the fi scal year ended March 31, 2017, was down $3.3 million compared to the fi scal year ended March
31, 2016. Segment operating income, which excludes non-recurring items, was $188.5 million for fi scal
year 2017, an increase of $2.4 million from the prior year, primarily attributable to improved results for
the North America segment. Revenues of $2.1 billion for fi scal year 2017 were relatively fl at compared
with fi scal year 2016, as the slightly higher volumes and a benefi t from earlier receipt of distributions from
unconsolidated subsidiaries were offset by lower green leaf costs and lower processing revenues.
We continue work on delivering value to you, our shareholders, and maintaining our strong capital
structure. In fi scal year 2017, we converted our Series B Preferred Stock, increased our common dividend
rate, and returned more than $60 million in dividends. At the same time, we conserved our cash balances
which will support our working capital needs in fi scal year 2018.
At Universal, we are also dedicated to having a positive impact on the communities in which we operate.
As we introduced to you last year, we are calling the benefi cial impact of the actions we take the “Universal
Effect” to remind us that every decision each of us makes, whether immediate or long-term, has continuing,
sometimes unintended, impacts on the communities we both serve and on whom we depend. In this
year’s annual report, we have featured one of our many programs around the world—sustainable wood
production in Brazil. We support preservation of the native trees and reforestation by fi nancing the
production of tree seedlings by commercial nurseries and distributing them to our contracted farmers.
4
Between 2001 and 2016 we supplied over 80 million tree seedlings in Brazil and are proud to report on
average, our contracted farmers in Brazil are 110% self-suffi cient in their wood requirements. I encourage
you to read more about this exciting initiative in this annual report as well as our many other programs
featured in the Impact section of our website.
As we approach our 100th year as Universal, I continue to believe that our success refl ects our ongoing
efforts to bring effi ciencies to the leaf tobacco supply chain. Through the hard work of our dedicated
employees around the world, we have been able to expand services that we provide our customers and
maintained our volumes handled in fi scal year 2017, despite the slow decline in demand for consumer
tobacco products. In fi scal year 2018, we will continue to strive to provide value to our shareholders and
to be our customers’ supplier of choice, providing them the compliant products and quality services that
they need at a competitive price.
George C. Freeman, III
Chairman, President, and Chief Executive Offi cer
5
The UNIVERSAL EFFECT
SUSTAINABLE WOOD PRODUCTION IN BRAZIL:
In the south of Brazil, over 154,000 family farms currently grow tobacco and about 98% of the tobacco
grown is cultivated in the states of Rio Grande do Sul, Santa Catarina, and Parana. In these areas,
farmers need access to a sustainable source of wood to produce tobacco. Flue-Cured Virginia (FCV)
represents about 85% of the total tobacco production of Brazil. FCV is cured in barns with the addition of
supplemental heat, while other types of tobacco are air-cured in ventilated barns.
The tobacco growing regions are located in the Atlantic Forest (Mata Atlântica), which is considered to
be one of the most important biomes in Brazil. The Mata Atlântica has a biodiversity very similar to the
Amazon jungle and was almost destroyed, starting in the 16th century, by Brazilian settlers. Due to the
importance of protecting the remaining Mata Atlântica forest, Brazilian laws forbid the deforestation of
this region. Government agencies and trade organizations for both tobacco companies and farmers have
worked together to identify and implement actions to avoid the use of native trees in tobacco production.
Our Brazilian subsidiary, Universal Leaf Tabacos Ltda (ULTL) supports preservation of the native trees
and reforestation by fi nancing the production of tree seedlings by commercial nurseries and distributing
them to our contracted farmers. Between 2001 and 2016, ULTL supplied over 80 million tree seedlings in
Brazil. ULTL also requires that its contracted farmers prove the origin of wood used for tobacco curing.
For farmers who do not own land or whose farms are too small to set aside an area for woodlots, ULTL
supplies wood or provides fi nancing so that the farmers can purchase sustainable wood from other
farmers or from reforestation companies. On average, ULTL contracted farmers are 110% self-suffi cient in
their wood requirements, which allows their excess sustainable wood to be sold to other farmers.
6
OVER
300,000,000
tree seedlings planted globally
since 2006
7
PERFORMANCE GRAPH
Comparison of 5 Year Cumulative Total Return*
$250
$200
$150
$100
$50
$0
3/12
3/13
3/14
3/15
3/16
3/17
Universal Corporation
S&P Smallcap 600
Peer Group
*$100 invested on 3/31/12 in stock or index, including reinvestment of dividends. Fiscal year ending March 31.
Copyright© 2017 S&P, a division of McGraw Hill Financial. All rights reserved.
The performance graph compares the cumulative total shareholder return on Universal Corporation
common stock for the last fi ve fi scal years with the cumulative total return for the same period of the
Standard & Poor’s Smallcap 600 Stock Index and the peer group index. The peer group represents Alliance
One International, Inc. The graph assumes that $100 was invested in Universal Corporation common stock
at the end of the Company’s 2012 fi scal year, and in each of the comparative indices, in each case with
dividends reinvested.
CUMULATIVE TOTAL RETURN ON UNIVERSAL CORPORATION COMMON STOCK
2012
2013
2014
2015
2016
2017
At March 31
Universal Corporation
$ 100.00
$ 125.16
$ 129.53
$ 114.21
$ 143.20
$ 184.96
S&P Smallcap 600
Peer Group
100.00
100.00
116.14
103.18
148.44
77.45
161.39
29.18
156.22
46.58
194.63
34.08
8
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 2017
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________TO_______________
Commission File Number: 001-00652
UNIVERSAL CORPORATION
(Exact name of registrant as specified in its charter)
Virginia
(State or other jurisdiction of
incorporation or organization)
9201 Forest Hill Avenue,
Richmond, Virginia
(Address of principal executive offices)
54-0414210
(I.R.S. Employer
Identification Number)
23235
(Zip Code)
Registrant's telephone number, including area code: 804-359-9311
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, no par value
Name of each exchange on
which registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 (d) of the Act.
Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company,
or a emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth
company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with
any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
No
The aggregate market value of the registrant's voting and non-voting common equity held by non-affiliates, based upon the closing sales price on the
New York Stock Exchange of the registrant's common stock on September 30, 2016, the last day of the registrant's most recently completed second
fiscal quarter, was approximately $1.3 billion.
As of May 19, 2017, the total number of shares of common stock outstanding was 25,274,506.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information contained in the 2017 Proxy Statement for the Annual Meeting of Shareholders of the registrant is incorporated
by reference into Part III hereof.
2017
UNIVERSAL CORPORATION
FORM 10-K
TABLE OF CONTENTS
Item No.
Page
PART I
1.
1A.
1B.
2.
3.
4.
5.
6.
7.
Business ....................................................................................................................................................
Risk Factors...............................................................................................................................................
Unresolved Staff Comments .....................................................................................................................
Properties ..................................................................................................................................................
Legal Proceedings .....................................................................................................................................
Mine Safety Disclosures ...........................................................................................................................
PART II
Market for Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities.................................................................................................
Selected Financial Data.............................................................................................................................
Management's Discussion and Analysis of Financial Condition and Results of Operations....................
7A.
Quantitative and Qualitative Disclosures About Market Risk ..................................................................
8.
9.
9A.
9B.
10.
11.
12.
13.
14.
15.
16.
Financial Statements and Supplementary Data.........................................................................................
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure...................
Controls and Procedures ...........................................................................................................................
Other Information .....................................................................................................................................
PART III
Directors, Executive Officers, and Corporate Governance.......................................................................
Executive Compensation...........................................................................................................................
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Certain Relationships and Related Transactions, and Director Independence..........................................
Principal Accounting Fees and Services ...................................................................................................
PART IV
Exhibits, Financial Statement Schedules ..................................................................................................
Form 10-K Summary ................................................................................................................................
Signatures..................................................................................................................................................
3
9
13
14
15
15
16
17
19
34
35
83
83
83
84
85
85
85
85
86
86
88
2
General
This Annual Report on Form 10-K, which we refer to herein as our Annual Report, contains “forward-looking statements”
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended
(the “Exchange Act”). Among other things, these statements relate to Universal Corporation’s financial condition, results of operations
and future business plans, operations, opportunities, and prospects. In addition, Universal Corporation and its representatives may
make written or oral forward-looking statements from time to time, including statements contained in other filings with the Securities
and Exchange Commission (the “SEC”) and in reports to shareholders. These forward-looking statements are generally identified
by the use of words such as we “expect,” “believe,” “anticipate,” “could,” “should,” “may,” “plan,” “will,” “predict,” “estimate,”
and similar expressions or words of similar import. These forward-looking statements are based upon management’s current
knowledge and assumptions about future events and involve risks and uncertainties that could cause actual results, performance, or
achievements to be materially different from any anticipated results, prospects, performance, or achievements expressed or implied
by such forward-looking statements. Such risks and uncertainties include, but are not limited to: anticipated levels of demand for
and supply of our products and services; costs incurred in providing these products and services; timing of shipments to customers;
changes in market structure; government regulation; product taxation; industry consolidation and evolution; changes in exchange
rates and interest rates; impacts of regulation and litigation on our customers; and general economic, political, market, and weather
conditions. For a description of factors that may cause actual results to differ materially from such forward-looking statements, see
Item 1A, “Risk Factors.” We caution investors not to place undue reliance on any forward-looking statements as these statements
speak only as of the date when made, and we undertake no obligation to update any forward-looking statements made in this report.
In addition, the discussion of the impact of current trends on our business in “Management’s Discussion and Analysis of Financial
Condition and Results of Operations – Other Information Regarding Trends and Management’s Actions” in Item 7 should be read
carefully in connection with evaluating our business and the forward-looking statements contained in this Annual Report.
This Annual Report uses the terms “Universal,” “the Company,” “we,” “us,” and “our” to refer to Universal Corporation
and its subsidiaries when it is not necessary to distinguish among Universal Corporation and its various operating subsidiaries or
when any distinction is clear from the context in which it is used.
See the “Results of Operations” section in “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” in Item 7 for a discussion of segment operating income, a non-GAAP financial measure that we refer to in this Annual
Report on Form 10-K and consider useful in understanding our business results and trends.
PART I
Item 1. Business
A.
The Company
Overview
We are the leading global leaf tobacco supplier. We operate in over 30 countries on five continents and procure, finance,
process, pack, store and ship leaf tobacco and other agri-products. Tobacco has been our principal focus since our founding in
1918. The largest portion of our business involves procuring and processing flue-cured and burley leaf tobacco for manufacturers
of consumer tobacco products. We do not manufacture any consumer products. Rather, we support consumer product manufacturers
by selling them processed raw products and performing related services for them. Our reportable segments for our flue-cured and
burley tobacco operations are North America and Other Regions. We also have a third reportable segment, Other Tobacco Operations,
which comprises our dark tobacco business, our oriental tobacco joint venture, and certain tobacco- and non-tobacco-related services.
We generated approximately $2.1 billion in consolidated revenues and earned $188.5 million in total segment operating income in
fiscal year 2017. Universal Corporation is a holding company that operates through numerous directly and indirectly owned
subsidiaries. Universal Corporation’s primary subsidiary is Universal Leaf Tobacco Company, Incorporated. See Exhibit 21,
“Subsidiaries of the Registrant,” for additional subsidiary information.
3
Key Operating Principles
We believe that by following several key operating principles we can continue to produce good financial returns from our
business and enhance shareholder value. These key operating principles are:
•
•
Strategic market position. We work closely with both our customers and suppliers to ensure that we deliver a product
that meets our customers' needs while cultivating a strong, sustainable supplier base. We balance purchases of leaf
tobacco against indicated customer demand and maintain global procurement and production operations to maximize
supply chain efficiencies.
Strong local management. Having strong local management in all of our key supply origins allows us to identify
and react to constantly shifting market conditions. Empowered and experienced local management, coupled with
global coordination, affords us the flexibility and knowledge necessary to adapt quickly in order to continually deliver
high quality, competitively-priced products and services.
• Compliant products. Customers expect a sustainable supply of compliant, traceable, competitively-priced product,
and we believe that we lead in delivering these products. Among other initiatives, we invest in training farmers in
good agricultural practices that encompass crop quality, environmental stewardship and agricultural labor standards.
• Diversified sources. We operate in over 30 countries on five continents and maintain a presence in all major flue-
cured, burley, oriental, and dark air-cured tobacco origin markets. This global presence allows us to meet our customers'
diverse leaf requirements while minimizing the effects of adverse crop conditions and other localized supply
disruptions.
• Financial strength. Financial strength is critical and enables us to fund our global operations efficiently and to
facilitate investment when suitable opportunities arise. Management of liquidity, interest expense and capital costs
provides us with a competitive advantage and affords us flexibility when responding to customer requirements and
market changes.
Additional Information
Our website address is www.universalcorp.com. We post regulatory filings on this website as soon as reasonably practicable
after they are electronically filed with or furnished to the SEC. These filings include annual reports on Form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K, proxy statements, Section 16 reports on Forms 3, 4, and 5, and any amendments to
those reports filed with or furnished to the SEC. Access to these filings on our website is available free of charge. Copies are also
available, without charge, from Universal Corporation Investor Relations, 9201 Forest Hill Avenue, Richmond, VA 23235. Reports
filed with the SEC may be viewed at www.sec.gov or obtained at the SEC Public Reference Room at 100 F Street, NE, Washington,
D.C. 20549. Information regarding the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-
SEC-0330. We also post our press releases on our website. Information on our website is not deemed to be incorporated by reference
into this Annual Report.
In addition, our Corporate Governance Guidelines, Code of Conduct, and charters for the Audit Committee, the Executive
Committee, the Executive Compensation, Nominating and Corporate Governance Committee, the Pension Investment Committee,
and the Finance Committee are available free of charge to shareholders and the public through the “Corporate Governance” section
of our website. Printed copies of the foregoing are available to any shareholder upon written request to our Treasurer at the address
set forth on the cover of this Annual Report or may be requested through our website, www.universalcorp.com.
4
B.
Description of Business
General
Our primary business is procuring, financing, processing, packing, storing, and shipping leaf tobacco for sale to
manufacturers of consumer tobacco products. Procuring leaf tobacco involves contracting with, providing agronomy support to,
and financing farmers in many origins. We do not manufacture cigarettes or other consumer tobacco products. Rather, we support
consumer product manufacturers by selling them processed leaf tobacco and performing related services for them. Through various
operating subsidiaries and unconsolidated affiliates located in tobacco-growing origins around the world, we contract, purchase,
process, and sell flue-cured and burley tobaccos, as well as dark air-cured 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, smokeless, and pipe tobacco products. We also provide value-added services to our customers, including blending, chemical
and physical testing of tobacco, service cutting for select manufacturers, manufacturing reconstituted leaf tobacco, and managing
just-in-time inventory.
Several important operating factors characterize our company and our primary business, leaf tobacco:
• Experience dealing with large numbers of farmers,
• Expertise in delivering a sustainable supply of compliant, traceable, competitively-priced leaf tobacco,
• Capability to meet unique customer requirements for style, volume and quality,
• Longstanding customer relationships,
•
•
Presence in all major leaf tobacco sourcing areas, and
Financial strength and flexibility.
In addition to our leaf tobacco business, we are involved in other smaller-scale agribusiness opportunities. We participate
in a joint venture that supplies liquid nicotine, manufactured in the United States, to the vapor products industry. We also have
businesses that test and analyze tobacco products, produce high-quality dehydrated and juiced fruit and vegetable products, and
recycle waste materials from tobacco production. When looking at new opportunities, we seek prospects where we believe we can
earn an adequate return, leverage our assets and expertise, and enhance our farmer base.
With respect to our leaf tobacco business, we generate our revenues from product sales of processed, packed tobacco that
we source, from processing fees for tobacco owned by third parties, and from fees for other services. Sales to our six largest
customers, with whom we have longstanding relationships, have accounted for more than two-thirds of our consolidated revenues
for each of the past three fiscal years. Our sales consist primarily of flue-cured and burley tobaccos. For the fiscal year ended
March 31, 2017, our flue-cured and burley operations accounted for 89% of our revenues and 95% of our segment operating income.
We conduct our business in varying degrees in a number of countries, including Bangladesh, Brazil, the Dominican
Republic, Germany, Guatemala, Hungary, India, Indonesia, Italy, Malawi, Mexico, Mozambique, the Netherlands, Nicaragua,
Paraguay, the People’s Republic of China, the Philippines, Poland, Russia, Singapore, South Africa, Spain, Switzerland, Tanzania,
the United Arab Emirates, the United States, and Zimbabwe. In addition, our oriental tobacco joint venture, Socotab, L.L.C. has
operations in Bulgaria, Greece, Macedonia, and Turkey.
Because unprocessed, or “green,” leaf tobacco is a perishable product, timely processing is an essential service to our
customers. Our processing of leaf tobacco includes grading in the factories, blending, removal of non-tobacco material, separation
of leaf from the stems, drying, packing to precise moisture targets for proper aging, as well as temporary storage. Accomplishing
these tasks generally requires investments in factories and machinery in areas where the tobacco is grown. Processed tobacco that
has been properly packed can be stored by customers for a number of years prior to use, but most processed tobacco is used within
two to three years.
We are a major purchaser and processor in the chief exporting regions for flue-cured and burley tobacco throughout the
world. Africa, Brazil, and the United States produce approximately two-thirds of the flue-cured and burley tobacco grown outside
of China. We estimate that we have historically handled, through leaf sales or processing, between 30% and 40% of the annual
production of such tobaccos in both Africa and the United States and between 15% and 25% in Brazil. These percentages can
change from year to year based on the size, price, and quality of the crops. We participate in the procurement, processing, storage,
and sale of oriental tobacco through ownership of a 49% equity interest in Socotab, L.L.C., a leading supplier of oriental tobaccos.
In addition, we maintain a presence, and in certain cases, a leading presence, in all other major tobacco growing regions in the
world. We believe that our leading position in the leaf tobacco industry is based on our operating presence in all of the major
sourcing areas, our ability to meet customer style, volume, and quality requirements, our expertise in dealing with large numbers
of farmers, our long-standing relationships with customers, our development of processing equipment and technologies, and our
financial position. The efficiencies that we offer our customers, due to our established network of operational expertise and
infrastructure on the ground and our ability to market most styles and grades of leaf to a diverse customer base, are also key to our
success.
We also have a leading position in worldwide dark tobacco markets. Our dark tobacco operations are located in most of
the major producing countries and in other smaller markets. We operate in major dark tobacco producing countries, including the
5
United States, the Dominican Republic, Indonesia, Paraguay, the Philippines, Nicaragua, and Brazil. Dark tobaccos are typically
used in the manufacture of cigars, pipe tobacco, and smokeless tobacco products, and as components of certain “roll-your-own”
cigarette products.
Sales are made by our sales force and, to a much smaller degree, through the use of commissioned agents. Most customers
are long-established tobacco product manufacturers. Customer contract arrangements vary around the world and include negotiated
pricing as well as cost plus arrangements. Discussions of a customer’s longer-term needs may begin as early as one to two years
in advance of a particular crop purchase. These discussions are key to our future crop production planning. Prior to planting each
year, we use early customer indications for type, style, processing, and volume requirements for the upcoming season’s crop to help
us determine our farmer contracting and grower input needs in our origins. We work with our farmers and customers continually
throughout the crop season. As crops progress through the growing season, customers will inspect the crop, and a customer’s early
indications may be refined based upon emerging crop qualities and quantities and market pricing expectations. Ultimately, purchase
agreements specifying quantity, quality, grade and price are executed, leading to inventory allocations of harvested green or processed
leaf that we have acquired.
In the majority of the countries where we operate, we contract directly with tobacco farmers or tobacco farmer cooperatives.
In most countries outside the United States, we advance seed or seedlings, fertilizer, and other agricultural inputs to farmers. These
advances are repaid by farmers with the tobacco they produce. We are dedicated to promoting a sustainable farmer base and provide
our farmers with agronomy support. Our Good Agricultural Practices programs educate farmers in such matters as the reduction
of non-tobacco related materials, product traceability, environmental sustainability, agricultural labor standards, and social
responsibility. In Malawi and Zimbabwe, we also purchase some tobacco under auction systems.
Our foreign operations are subject to international business risks, including unsettled political conditions, expropriation,
import and export restrictions, exchange controls, and currency fluctuations. During the tobacco season in many of the countries
listed above, we advance funds, guarantee local loans, or do both, each in substantial amounts, for the eventual purchase of tobacco.
The majority of these seasonal advances and loan guarantees mature in one year or less upon the farmers’ delivery of contracted
tobaccos. Most advances to farmers are denominated in local currency, which is a source of foreign currency exchange rate risk.
Most tobacco sales are denominated in U.S. dollars, which reduces our foreign currency exchange risk after the tobacco has been
purchased. See Item 1A, “Risk Factors” for more information about our foreign currency exchange and other risks.
For a discussion of recent developments and trends in our business, along with factors that may affect our business, see
Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Item 1A, “Risk Factors.”
Seasonality
Our operations are seasonal in nature. Tobacco in Brazil is usually purchased from January through July, while buying in
Malawi, Mozambique, and other African countries typically begins around April and continues through November. Farmers begin
to sell U.S. flue-cured tobacco in late July, and the marketing season lasts for approximately four months.
We normally operate each of our processing plants for seven to nine months of the year. During this period for each region,
inventories of green tobacco, inventories of processed tobacco, and trade accounts receivable normally reach peak levels in
succession. We normally finance this expansion of current assets with cash, short-term borrowings from banks, and customer
advances, and these funding sources normally reach their peak usage in each region during its respective purchasing or processing
period. Our balance sheet at our fiscal year end reflects seasonal expansions in working capital in South America and Central
America. Our financial performance is also impacted by the seasonality of our business. Due to global tobacco growing cycles,
as well as customer shipment preferences, we typically ship a larger portion of our volumes in the second half of our fiscal year.
Changes in customer shipment schedules or changes in crop timing in a season can shift recognition of revenue in a given fiscal
year or between fiscal years.
Customers
A material part of our business is dependent upon a few customers. Our six largest customers are Altria Group Inc., British
American Tobacco plc, China Tobacco International, Inc., Imperial Brands plc, Japan Tobacco, Inc., and Philip Morris International,
Inc. In the aggregate, these customers have accounted for more than two-thirds of our consolidated revenues for each of the past
three fiscal years. For the fiscal year ended March 31, 2017, each of British American Tobacco plc, Imperial Brands plc, and Philip
Morris International, Inc., including their respective affiliates, accounted for 10% or more of our revenues. The loss of, or substantial
reduction in business from, any of these customers could have a material adverse effect on our results. We have longstanding
relationships with all of these customers.
We had commitments from customers for approximately $450 million of the tobacco in our inventories at March 31, 2017.
Based upon historical experience, we expect that at least 90% of such orders will be delivered during fiscal year 2018. Most of our
product requires shipment via trucks and oceangoing vessels to reach customer destinations. Delays in the delivery of orders can
result from such factors as truck and container availability, port access and capacity, vessel scheduling, and changing customer
requirements for shipment.
6
As more fully described in Note 1 to the consolidated financial statements in Item 8 of this Annual Report, we recognize
revenue from the sale of tobacco when title and risk of loss is transferred to our customer. Individual shipments may be large, and
since the customer typically specifies shipping dates, our financial results may vary significantly between reporting periods due to
timing of sales. In some markets, including the United States, Italy, Tanzania, Poland, and Brazil, we process tobacco that is owned
by our customers, and we recognize the revenue for that service when the processing is completed.
Competition
Competition among leaf tobacco suppliers is based on the ability to meet customer specifications in the growing, buying,
processing, and financing of tobacco, and on the prices charged for products and services. Competition varies depending on the
market or country involved. The number of competitors varies from country to country, but there is competition in most areas to
buy and sell the available tobacco. Our principal competitor is Alliance One International, Inc. (“Alliance One”). Alliance One
operates in many of the countries where we operate. We consider ourselves and Alliance One to be the only global leaf suppliers
based on our worldwide scope of operations. Most of our major customers are partially vertically integrated, and thus also compete
with us for the purchase of leaf tobacco in several of the major markets.
In most major markets, smaller competitors are very active. These competitors typically have lower overhead requirements
and provide less support to customers and farmers. Due to their lower cost structures, they can often offer a price on products that
is lower than our price. However, we believe that we provide quality controls and farm programs that add value for our customers
in an increasingly regulated world and make our products highly desirable. Our Good Agricultural Practices support an approach
to farming that is focused on sustainability, employing sound field production and labor management practices that meet our
customers’ needs, promote farmer profitability, and reflect environmental sensitivity. We provide comprehensive training, technical
support in the field, and crop analytics through ongoing research and development. We believe that our major customers increasingly
require these services and that our programs increase the quality and value of the products and services we offer. We also believe
that our customers value the security of supply that we are able to provide due to our strong relationships with our farmer base and
our global footprint.
Reportable Segments
We evaluate the performance of our leaf tobacco business by geographic region, although the dark air-cured and oriental
tobacco businesses are each evaluated on the basis of their worldwide operations. Performance of the oriental tobacco operations
is evaluated based on our equity in the pretax earnings of our affiliate. Under this structure, we have the following primary operating
segments: North America, South America, Africa, Europe, Asia, Dark Air-Cured, Oriental, and Special Services. North America,
South America, Africa, Europe, and Asia are primarily involved in flue-cured and burley leaf tobacco operations for supply to
cigarette manufacturers. Our Dark Air-Cured group supplies dark air-cured tobacco principally to manufacturers of cigars, pipe
tobacco, and smokeless tobacco products, and our Oriental business supplies oriental tobacco to cigarette manufacturers. Our
Special Services group provides laboratory services, including physical and chemical product testing, electronic nicotine delivery
system and e-liquid testing, and smoke testing for customers. Our liquid nicotine joint venture and our fruit and vegetable ingredients
business are also included in the Special Services group.
The five regional operating segments serving our cigarette manufacturer customers share similar characteristics in the
nature of their products and services, production processes, class of customer, product distribution methods, and regulatory
environment. Based on the applicable accounting guidance, four of the regions – South America, Africa, Europe, and Asia – are
aggregated into a single reporting segment, Other Regions, because they also have similar economic characteristics. North America
is reported as an individual operating segment, because its economic characteristics differ from the other regions, generally because
its operations require lower working capital investments for crop financing and inventory. The Dark Air-Cured, Oriental, and
Special Services segments, which have differing characteristics in some of the categories mentioned above, are reported together
as Other Tobacco Operations, because each is below the measurement threshold for separate reporting.
Financial Information about Segments
Our North America and Other Regions reportable segments, which represent our flue-cured and burley tobacco operations,
accounted for 20% and 69% of our revenues and 19% and 76% of our segment operating income, respectively, in fiscal year 2017.
Our Other Tobacco Operations reportable segment accounted for 11% of our revenues and 5% of our segment operating income in
fiscal year 2017. Sales and other operating revenues and operating income attributable to our reportable segments for each of the
last three fiscal years, along with segment assets for each reportable segment at March 31, 2017, 2016, and 2015, are set forth in
Note 14 to the consolidated financial statements, which are included in Item 8 of this Annual Report. Information with respect to
the geographic distribution of our revenues and long-lived assets is also set forth in Note 14 to the consolidated financial statements.
C.
Employees
We employed over 24,000 employees throughout the world during the fiscal year ended March 31, 2017. We estimated
this figure because the majority of our personnel are seasonal employees.
7
D.
Research and Development
We did not expend material amounts for research and development during the fiscal years ended March 31, 2017, 2016,
or 2015.
E.
Patents, etc.
We hold no material patents, licenses, franchises, or concessions.
F.
Government Regulation, Environmental Matters, and Other Matters
Our business is subject to general governmental regulation in the United States and in foreign jurisdictions where we
conduct business. Such regulation includes, but is not limited to, matters relating to environmental protection. To date, governmental
provisions regulating the discharge of material into the environment have not had a material effect upon our capital expenditures,
earnings, or competitive position. See Item 1A, “Risk Factors” for a discussion of government regulations and other factors that
may affect our business.
8
Item 1A. Risk Factors
Operating Factors
In areas where we purchase leaf tobacco directly from farmers, we bear the risk that the tobacco we receive will not meet quality
and quantity requirements.
When we contract directly with tobacco farmers or tobacco farmer cooperatives, which is the method we use to purchase
tobacco in most countries, we bear the risk that the tobacco delivered may not meet customer quality and quantity requirements. If
the tobacco does not meet such market requirements, we may not be able to fill all of our customers’ orders, and such failure would
have an adverse effect on profitability and results of operations. In a contract market our obligation is to purchase the entire tobacco
plant, which encompasses many leaf styles, therefore, we also have a risk that not all of that production will be readily marketable
at prices that support acceptable margins. In addition, in many foreign countries where we purchase tobacco directly from farmers,
we provide them with financing. Unless we receive marketable tobacco that meets the quality and quantity specifications of our
customers, we bear the risk that we will not be able to fully recover our crop advances or recover them in a reasonable period of
time.
The leaf tobacco industry is competitive, and we are heavily reliant on a few large customers.
We are one of two major independent global competitors in the leaf tobacco industry, both of whom are reliant upon a few
large customers. The loss of one of those large customers or a significant decrease in their demand for our products or services could
significantly decrease our sales of products or services, which would have a material adverse effect on our results of operations. The
competition among leaf tobacco suppliers and dealers is based on the ability to meet customer requirements in the buying, processing,
and financing of tobacco, and on the price charged for products and services. We believe that we consistently meet our customers’
requirements and charge competitive prices. Since we rely upon a few significant customers, the consolidation or failure of any of
these large customers, or a significant increase in their vertical integration, could contribute to a significant decrease in our sales of
products and services.
We compete for both the purchase and sale of leaf with smaller leaf tobacco suppliers in some of the markets where we
conduct business. Some of these smaller leaf tobacco suppliers operate in more than one country. Since they typically provide little
or no support to farmers, these leaf tobacco suppliers typically have lower overhead requirements than we do. Due to their lower
cost structures, they often can offer prices on products and services that are lower than our prices. Our customers also directly source
leaf tobacco from farmers to meet some of their raw material needs. Direct sourcing provides our customers with some qualities
and quantities of leaf tobacco that they prefer not to use in their existing blends and that may be offered for sale. This competition
for both the sale and purchase of leaf could reduce the volume of the leaf we handle and could negatively impact our financial results.
Our financial results can be significantly affected by changes in the balance of supply and demand for leaf tobacco.
As a leaf tobacco supplier, our financial results can be significantly affected by changes in the overall balance of worldwide
supply and demand for leaf tobacco. The demand for leaf tobacco, which is based upon customers’ expectations of their future
requirements, can change from time to time depending upon factors affecting the demand for their products. Our customers’
expectations and their demand for leaf tobacco are influenced by a number of factors, including:
•
•
•
•
•
trends in the global consumption of cigarettes,
trends in consumption of cigars and other tobacco products,
trends in consumption of alternative tobacco products, such as electronic nicotine delivery systems and non-
combustible products,
levels of competition among our customers, and
regulatory and governmental factors.
The world supply of leaf tobacco at any given time is a function of current tobacco production, inventories held by
manufacturers, and the stocks of leaf tobacco held by leaf tobacco suppliers. Production of tobacco in a given year may be significantly
affected by such factors as:
•
•
•
•
demographic shifts that change the number of farmers or the amount of land available to grow tobacco,
decisions by farmers to grow crops other than leaf tobacco,
volume of annual tobacco plantings and yields realized by farmers,
availability of crop inputs,
• weather and natural disasters, including any adverse weather conditions that may result from climate change, and
•
crop infestation and disease.
Any significant change in these factors could cause a material imbalance in the supply of and demand for tobacco, which
would affect our results of operations.
9
Our financial results will vary according to tobacco growing conditions, customer requirements, and other factors. These factors
may also limit the ability to accurately forecast our future performance and increase the risk of an investment in our common stock
or other securities.
Our financial results, particularly our year-over-year quarterly comparisons, may be significantly affected by variations in
tobacco growing seasons and fluctuations in crop sizes. The timing of the cultivation and delivery of tobacco is dependent upon a
number of factors, including weather and other natural events, and our processing schedules and results of operations can be
significantly altered by these factors. In addition, the potential impact of climate change is uncertain and may vary by geographic
region. The possible effects, as described in various public accounts, could include changes in rainfall patterns, water shortages,
changing storm patterns and intensities, and changing temperature levels that could adversely impact our costs and business operations
and the supply and demand for leaf tobacco. Our operations also rely on dependable and efficient transportation services. A disruption
in transportation services, as a result of climate change or otherwise, may also significantly impact our results of operations.
Further, the timing and unpredictability of customer orders and shipments may require us to keep tobacco in inventory and
may also result in variations in quarterly and annual financial results. We base sales recognition on the passage of ownership. Since
individual shipments may represent significant amounts of revenue, our quarterly and annual financial results may vary significantly
depending on the timing of needs and shipping instructions of our customers and the availability of transportation services. These
fluctuations result in varying volumes and sales in given periods, which also reduce the comparability of financial results.
Major shifts in customer requirements for tobacco supply may significantly affect our operating results.
If our customers significantly alter their requirements for tobacco volumes from certain regions, we may have to change
our production facilities and alter our fixed asset base in certain origins. Permanent or long-term reduction in demand for tobacco
from origins where we have operations may trigger restructuring and impairment charges. We may also need to make significant
capital investments in other regions to develop the needed infrastructure to meet customer supply requirements.
Weather and other conditions can affect the marketability of our products.
Tobacco crops are subject to vagaries of weather and the environment that can, in some cases, change the quality or size of
the crops. If a weather event is particularly severe, such as a major drought or hurricane, the affected crop could be destroyed or
damaged to an extent that it would be less desirable to manufacturers, which would result in a reduction in revenues. If such an
event is also widespread, it could affect our ability to acquire the quantity of tobacco required by our customers. In addition, other
factors can affect the marketability of tobacco, including, among other things, the presence of excess residues of crop protection
agents or non-tobacco related materials. A significant event impacting the condition or quality of a large amount of any of the crops
that we buy could make it difficult for us to sell these products or to fill customers’ orders.
Our food ingredient business is subject to industry-specific risks which could adversely affect our operating results.
Our food ingredients business is subject to risks posed by food spoilage or food contamination; shifting consumer preferences;
federal, state, and local food processing regulations; product tampering; and product liability claims. If one or more of these risks
were to materialize, our revenues and operating results could be adversely affected, and our Company’s reputation might be damaged.
We may be adversely impacted if our information technology systems fail to perform adequately, including with respect to cybersecurity
issues.
The efficient operation of our business depends on our information technology systems. We rely on our information
technology systems to effectively manage our business data, communications, supply chain, order entry and fulfillment, and other
business processes. The failure of our information technology systems (including those provided to us by third parties) to perform
as we anticipate could disrupt our business and affect our results of operations.
In addition, our information technology systems may be vulnerable to damage or interruption from circumstances beyond
our control, including fire, natural disasters, systems failures, security breaches or intrusions (including theft of confidential data),
and viruses. If we are unable to prevent physical and electronic break-ins, cyber-attacks and other information security breaches, we
may suffer financial and reputational damage, be subject to litigation, or incur remediation costs or penalties because of the
unauthorized disclosure of confidential information belonging to us or to our partners, customers, suppliers or employees.
10
Regulatory and Governmental Factors
Government efforts to regulate the production and consumption of tobacco products could have a significant impact on the businesses
of our customers, which would, in turn, affect our results of operations.
About 5% of cigarettes manufactured worldwide are consumed in the United States. Nationally, the U.S. federal government
and certain state and local governments have taken or proposed actions that may have the effect of reducing U.S. consumption of
tobacco products and indirectly reducing demand for our products and services. These activities have included:
•
•
•
•
restrictions on the use of tobacco products in public places and places of employment,
legislation authorizing the U.S. Food and Drug Administration (the “FDA”) to regulate the manufacturing and marketing
of all tobacco products,
increases in the federal, state, and local excise taxes on cigarettes and other tobacco products, and
the policy of the U.S. government to link certain federal grants to the enforcement of state laws restricting the sale of
tobacco products.
Numerous other legislative and regulatory anti-smoking measures have been proposed at the federal, state, and local levels.
Globally, a number of foreign governments and non-government organizations also have taken or proposed steps to restrict
or prohibit tobacco product advertising and promotion, to increase taxes on tobacco products, to indirectly limit the use of certain
types of tobacco, and to discourage tobacco product consumption. A number of such measures, including plain packaging, are
included in the Framework Convention on Tobacco Control (“FCTC”), which was negotiated and promoted globally under the
auspices of the World Health Organization (“WHO”). We cannot predict the extent or speed at which the efforts of governments or
non-governmental agencies to reduce tobacco consumption might affect the business of our primary customers. However, a significant
decrease in worldwide tobacco consumption brought about by existing or future governmental laws and regulations would reduce
demand for tobacco products and services and could have a material adverse effect on our results of operations.
Government actions can have a significant effect on the sourcing of tobacco. If some of the current efforts are successful, we could
have difficulty obtaining sufficient tobacco to meet our customers’ requirements, which could have an adverse effect on our
performance and results of operations.
The WHO, through the FCTC, created a formal study group in 2007 to identify and assess crop diversification initiatives
and alternatives to growing leaf tobacco in countries whose economies depend upon tobacco production. If certain countries were
to partner with the FCTC study group and seek to eliminate or significantly reduce leaf tobacco production, we could encounter
difficulty in sourcing leaf tobacco to fill customer requirements, which could have an adverse effect on our results of operations.
Certain recommendations by the WHO, through the FCTC, may cause shifts in customer usage of certain styles of tobacco.
As seen in countries like Canada and Brazil and in the European Union, efforts have been taken to eliminate ingredients from the
manufacturing process for tobacco products. Recently, the FCTC and the FDA have discussed formulating a nicotine strategy
(limitations on the level of nicotine allowed in tobacco and tobacco smoke). Such decisions could cause a change in requirements
for certain styles of tobacco in particular countries. Shifts in customer demand from one type of tobacco to another could create
sourcing challenges as requirements move from one origin to another.
Trade proposals have included provisions that could effectively allow governments to regulate tobacco products differently
than other products. These “carve outs” could negatively impact the industry and reduce requirements for leaf tobacco.
In addition, continued government and public emphasis on environmental issues, including climate change, conservation,
and natural resource management, could result in new or more stringent forms of regulatory oversight of industry activities, which
may lead to increased levels of expenditures for environmental controls, land use restrictions affecting us or our suppliers, and other
conditions that could have a material adverse effect on our business, financial condition, and results of operations. For example,
certain aspects of our business generate carbon emissions. Regulatory restrictions on greenhouse gas emissions have been proposed.
These may include limitations on such emissions, taxes or emission allowance fees on such emissions, various restrictions on industrial
operations, and other measures that could affect land-use decisions, the cost of agricultural production, and the cost and means of
processing and transporting our products. These actions could adversely affect our business, financial condition, and results of
operations.
Because we conduct a significant portion of our operations internationally, political and economic uncertainties in certain countries
could have an adverse effect on our performance and results of operations.
Our international operations are subject to uncertainties and risks relating to the political stability of certain foreign
governments, principally in developing countries and emerging markets, and also to the effects of changes in the trade policies and
economic regulations of foreign governments. These uncertainties and risks, which include undeveloped or antiquated commercial
law, the expropriation, indigenization, or nationalization of assets, and the authority to revoke or refuse to renew business licenses
and work permits, may adversely impact our ability to effectively manage our operations in those countries. We have substantial
capital investments in South America and Africa, and the performance of our operations in those regions can materially affect our
11
earnings. If the political situation in any of the countries where we conduct business were to deteriorate significantly, our ability to
recover assets located there could be impaired. To the extent that we do not replace any lost volumes of tobacco with tobacco from
other sources, or we incur increased costs related to such replacement, our financial condition or results of operations, or both, would
suffer.
In addition, there have been recent public announcements by members of the U.S. Congress and President Trump and his
administration regarding their plans to make substantial changes in the taxation of U.S. companies and their foreign operations,
including the possible implementation of a border tax, tariff or increase in customs duties on products manufactured outside of, and
imported into, the United States, as well as the renegotiation of U.S. trade agreements, including the North American Free Trade
Agreement. In the event such taxes, tariffs, increased customs duties or other measures are implemented, they could have a materially
adverse effect on our business, financial condition and results of operations. Due to broad uncertainty regarding the timing, content
and extent of any regulatory changes in the United States or abroad, we cannot predict the impact, if any, that these changes could
have to our business, financial condition and results of operations.
Changes in tax laws in the countries where we do business may adversely affect our results of operations.
Through our subsidiaries, we are subject to the tax laws of many jurisdictions. Changes in tax laws or the interpretation of
tax laws can affect our earnings, as can the resolution of various pending and contested tax issues. In most jurisdictions, we regularly
have audits and examinations by the designated tax authorities, and additional tax assessments are common. We believe that we
comply with applicable tax laws in the jurisdictions where we operate, and we vigorously contest all significant tax assessments
where we believe we are in compliance with the tax laws.
Financial Factors
Failure of our customers or suppliers to repay extensions of credit could materially impact our results of operations.
We extend credit to both suppliers and customers. A significant bad debt provision related to amounts due could adversely
affect our results of operations. In addition, crop advances to farmers are generally secured by the farmers’ agreement to deliver
green tobacco. In the event of crop failure, delivery failure, or permanent reductions in crop sizes, full recovery of advances may
never be realized, or otherwise could be delayed until future crops are delivered. See Notes 1 and 13 to the consolidated financial
statements in Item 8 for more information on these extensions of credit.
Fluctuations in foreign currency exchange rates may affect our results of operations.
We account for most of our tobacco operations using the U.S. dollar as the functional currency. The international tobacco
trade generally is conducted in U.S. dollars, and we finance most of our tobacco operations in U.S. dollars. Although this generally
limits foreign exchange risk to the economic risk that is related to leaf purchase and production costs, overhead, and income taxes
in the source country, significant currency movements could materially impact our results of operations. Changes in exchange rates
can make a particular crop more or less expensive in U.S. dollar terms. If a particular crop is viewed as expensive in U.S. dollar
terms, it may be less attractive in the world market. This could negatively affect the profitability of that crop and our results of
operations. In tobacco markets that are primarily domestic, such as Eastern Europe and the Philippines, the local currency is the
functional currency. In addition, the local currency is the functional currency in other markets, such as Western Europe, where export
sales have been denominated primarily in local currencies. In these markets, reported earnings are affected by the translation of the
local currency into the U.S. dollar. See Item 7A, “Qualitative and Quantitative Disclosure About Market Risk” for additional discussion
related to foreign currency exchange risk.
Our purchases of tobacco are generally made in local currency, and we also provide farmer advances that are denominated
in the local currency. We account for currency remeasurement gains or losses on those advances as period costs, and they are usually
accompanied by offsetting increases or decreases in the purchase cost of tobacco, which is priced in the local currency. The effect
of differences in the cost of tobacco is generally not realized in our earnings until the tobacco is sold, which often occurs in a quarter
or fiscal year subsequent to the recognition of the related remeasurement gains or losses. The difference in timing could affect our
profitability in a given quarter or fiscal year.
We have used currency hedging strategies to reduce our foreign currency exchange rate risks in some markets. In addition,
where we source tobacco in countries with illiquid or nonexistent forward foreign exchange markets, we often manage our foreign
exchange risk by matching funding for inventory purchases with the currency of sale and by minimizing our net investment in these
countries. To the extent that we have net monetary assets or liabilities in local currency, and those balances are not hedged, we may
have currency remeasurement gains or losses that will affect our results of operations.
12
Changes in interest rates may affect our results of operations.
We generally use both fixed and floating interest rate debt to finance our operations. Changes in market interest rates expose
us to changes in cash flows for floating rate instruments and to changes in fair value for fixed-rate instruments. We normally maintain
a proportion of our debt in both variable and fixed interest rates to manage this exposure, and from time to time we may enter hedge
agreements to swap the interest rates. In addition, our customers may pay market rates of interest for inventory purchased on order,
which could mitigate a portion of the floating interest rate exposure on short-term borrowings. To the extent we are unable to match
these interest rates, a decrease in interest rates could increase our net financing costs. We also periodically have large cash balances
and may receive deposits from customers, both of which we use to fund seasonal purchases of tobacco, reducing our financing needs.
Decreases in short-term interest rates could reduce the income we derive from those investments. Changes in interest rates also
affect expense related to our defined benefit pension plan, as described below.
Low investment performance by our defined benefit pension plan assets and changes in pension plan valuation assumptions may
increase our pension expense and may require us to fund a larger portion of our pension obligations, thus diverting funds from other
potential uses.
We sponsor domestic defined benefit pension plans that cover certain eligible employees. Our results of operations may
be positively or negatively affected by the amount of expense we record for these plans. U.S. generally accepted accounting principles
(“GAAP”) require that we calculate expense for the plans using actuarial valuations. These valuations reflect assumptions about
financial market and other economic conditions that may change based on changes in key economic indicators. The most significant
year-end assumptions we used to estimate pension expense for fiscal year 2017 were the discount rate, the expected long-term rate
of return on plan assets, and the mortality rates. In addition, we are required to make an annual measurement of plan assets and
liabilities, which may result in a significant change to shareholders’ equity through a reduction or increase to the “Pension and other
postretirement benefit plans” component of Accumulated Other Comprehensive Loss. At the end of fiscal year 2017, the projected
benefit obligation of our qualified U.S. pension plan was $223 million and plan assets were $207 million. For a discussion regarding
how our financial statements can be affected by pension plan valuation assumptions, see “Critical Accounting Estimates – Pension
and Other Postretirement Benefit Plans” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
in Item 7 and in Note 10 to the consolidated financial statements in Item 8. Although GAAP expense and pension funding contributions
are not directly related, key economic factors that affect GAAP expense can also affect the amount of cash we are required to contribute
to our pension plans under requirements of the Employee Retirement Income Security Act (“ERISA”). Failure to achieve expected
returns on plan assets could also result in an increase to the amount of cash we would be required to contribute to our pension plans.
In order to maintain or improve the funded status of our plans, we may also choose to contribute more cash to our plans than required
by ERISA regulations.
Item 1B. Unresolved Staff Comments
None
13
Item 2. Properties
We own the following significant properties (greater than 500,000 square feet):
Location
Flue-Cured and Burley Leaf Tobacco Operations:
North America:
United States
Principal Use
Building Area
(Square Feet)
Nash County, North Carolina .......................................................................... Factory and storages
1,323,000
Other Regions:
Brazil
Santa Cruz ....................................................................................................... Factory and storages
2,386,000
Malawi
Lilongwe.......................................................................................................... Factory and storages
942,000
Mozambique
Tete .................................................................................................................. Factory and storages
770,000
Philippines
Agoo, La Union ............................................................................................... Factory and storages
770,000
Tanzania
Morogoro......................................................................................................... Factory and storages
895,000
Zimbabwe
Harare (1) .......................................................................................................... Factory and storages
1,445,000
Other Tobacco Operations:
United States
Lancaster, Pennsylvania .................................................................................. Factory and storages
793,000
(1)
Owned by an unconsolidated subsidiary.
We lease headquarters office space of about 50,000 square feet at 9201 Forest Hill Avenue in Richmond, Virginia, which
we believe is adequate for our current needs.
Our business involves, among other things, storing and processing green tobacco and storing processed tobacco. We operate
processing facilities in major tobacco growing areas. In addition, we require tobacco storage facilities that are in close proximity to
the processing facilities. We own most of the tobacco storage facilities, but we lease additional space as needs arise, and expenses
related to such leases are not material. We believe that the properties currently utilized in our tobacco operations are maintained in
good operating condition and are suitable and adequate for our purposes at our current volumes.
In addition to our significant properties listed above, we own other processing facilities in the following countries: Germany,
Guatemala, Italy, the Netherlands, Poland, and the United States. In addition, we have an ownership interest in a processing plant in
Mexico and have access to processing facilities in other areas, such as India, the People’s Republic of China, and South Africa.
Socotab L.L.C., an oriental tobacco joint venture in which we own a noncontrolling interest, owns tobacco processing plants in
Turkey, Macedonia, and Bulgaria.
Except for the Lancaster, Pennsylvania facility, the facilities described above are engaged primarily in processing tobaccos
used by manufacturers in the production of cigarettes. The Lancaster facility, as well as facilities in Brazil, the Dominican Republic,
Indonesia, and Paraguay, process tobaccos used in making cigar, pipe, and smokeless products, as well as components of certain
“roll-your-own” products.
14
Item 3. Legal Proceedings
Some of our subsidiaries are involved in litigation or legal matters incidental to their business activities. While the outcome
of these matters cannot be predicted with certainty, we are vigorously defending the matters and do not currently expect that any of
them will have a material adverse effect on our business or financial position. However, should one or more of these matters be
resolved in a manner adverse to our current expectation, the effect on our results of operations for a particular fiscal reporting period
could be material.
Item 4. Mine Safety Disclosures
Not applicable.
15
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Common Equity
Our common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol “UVV.” The following table
sets forth the high and low sales prices per share of the common stock on the NYSE Composite Tape, based upon published financial
sources, and the dividends declared on each share of common stock for the quarter indicated.
Fiscal Year Ended March 31, 2017
Cash dividends declared ...................................................................................
$
0.53 $
0.53 $
0.54 $
0.54
First Quarter
Second Quarter Third Quarter
Fourth Quarter
Market price range:
High................................................................................................................
Low ................................................................................................................
57.75
52.26
61.69
55.29
64.20
52.40
83.35
63.30
Fiscal Year Ended March 31, 2016
Cash dividends declared ...................................................................................
$
0.52 $
0.52 $
0.53 $
0.53
Market price range:
High................................................................................................................
Low ................................................................................................................
57.76
46.80
58.41
46.98
57.72
49.70
57.27
51.49
Our current dividend policy anticipates the payment of quarterly dividends in the future. However, the declaration and
payment of dividends to holders of common stock is at the discretion of the Board of Directors and will be dependent upon our
future earnings, financial condition, and capital requirements. Under certain of our credit facilities, we must meet financial covenants
relating to minimum tangible net worth and maximum levels of debt. If we were not in compliance with them, these financial
covenants could restrict our ability to pay dividends. We were in compliance with all such covenants at March 31, 2017. At May
19, 2017, there were 1,126 holders of record of our common stock. See Notes 5 and 11 to the consolidated financial statements in
Item 8 for more information on debt covenants and equity securities.
Purchases of Equity Securities
As indicated in the following table, we did not repurchase shares of our common stock or our Series B 6.75% Convertible
Perpetual Preferred Stock during the three-month period ended March 31, 2017.
Common Stock
Series B 6.75% Convertible Perpetual
Preferred Stock (4)
Period (1)
Total Number
of Shares
Repurchased
Average
Price Paid
Per Share (2)
Total Number
of Shares
Repurchased
as Part of
Publicly
Announced
Plans or
Programs (3)
Total Number
of Shares
Repurchased
Average
Price Paid
Per Share (2)
Total Number
of Shares
Repurchased
as Part of
Publicly
Announced
Plans or
Programs (3)
Dollar Value of
Shares that
May Yet Be
Purchased
Under the
Plans or
Programs (3)
January 1-31, 2017 ..................
— $
February 1-28, 2017 ................
March 1-31, 2017 ....................
—
—
Total.........................................
— $
—
—
—
—
—
—
—
—
— $
—
—
— $
—
—
—
—
— $
100,000,000
—
—
100,000,000
100,000,000
— $
100,000,000
(1)
(2)
(3)
(4)
Repurchases are based on the date the shares were traded. This presentation differs from the consolidated statement of cash flows, where the cost of share
repurchases is based on the date the transactions were settled.
Amounts listed for average price paid per share include broker commissions paid in the transactions.
A stock repurchase plan, which was authorized by our Board of Directors, became effective and was publicly announced on November 5, 2015. This stock
repurchase plan authorizes the purchase of up to $100 million in common and/or preferred stock in open market or privately negotiated transactions, subject
to market conditions and other factors, and will expire on the earlier of November 15, 2017, or when we have exhausted the funds authorized for the program.
The conversion of the remaining shares of our Series B 6.75% Convertible Perpetual Preferred Stock did not affect our stock repurchase plan.
On January 9, 2017, the Company announced a mandatory conversion of all 107,418 remaining outstanding shares of the preferred stock after meeting the
requirements to initiate the mandatory conversion under the original terms of the preferred shares. The Company chose to satisfy the full conversion obligation
for the mandatory conversion in cash, paying approximately $178.4 million for those preferred shares on January 31, 2017 to complete the conversion.
16
Item 6. Selected Financial Data
Fiscal Year Ended March 31,
2017
2016
2015
2014
2013
(in thousands, except share and per share data, ratios, and
number of shareholders)
Summary of Operations
Sales and other operating revenues................................................................... $ 2,071,218
$ 2,120,373
$ 2,271,801
$ 2,542,115
$ 2,461,699
Operating income.............................................................................................. $
(1) .......................................................................... $
Segment operating income
Net income ........................................................................................................ $
(2) ...................................... $
Net income attributable to Universal Corporation
178,351
188,484
112,506
106,304
Earnings available to Universal Corporation common shareholders................ $
20,890
$
$
$
$
$
181,647
186,068
118,148
109,016
94,268
$
$
$
$
$
167,874
167,225
120,461
114,608
99,748
$
$
$
$
$
246,151
175,175
155,155
149,009
134,159
Return on beginning common shareholders’ equity .........................................
1.7%
8.2%
8.6%
12.8%
Earnings per share attributable to
Universal Corporation common shareholders:
Basic............................................................................................................ $
Diluted......................................................................................................... $
0.89
0.88
$
$
4.16
3.92
$
$
4.33
4.06
$
$
5.77
5.25
$
$
$
$
$
$
$
223,009
232,757
140,919
132,750
117,900
12.1%
5.05
4.66
Financial Position at Year End
Current ratio ......................................................................................................
5.83
6.65
5.96
3.66
2.77
Total assets........................................................................................................ $ 2,123,405
$ 2,231,177
$ 2,186,476
$ 2,264,401
$ 2,285,987
Long-term debt.................................................................................................. $
368,733
$
368,380
$
368,027
$
239,508
$
180,060
Working capital................................................................................................. $ 1,293,403
$ 1,392,276
$ 1,329,770
$ 1,200,023
$ 1,094,764
Total Universal Corporation shareholders’ equity............................................ $ 1,286,489
$ 1,414,222
$ 1,378,230
$ 1,378,230
$ 1,258,571
General
Ratio of earnings to fixed charges ....................................................................
Ratio of earnings to combined fixed charges and preference dividends...........
Number of common shareholders.....................................................................
10.25
5.30
1,131
10.22
4.59
1,182
8.46
4.05
1,225
10.73
5.49
1,295
8.87
4.69
1,354
Weighted average common shares outstanding:
Basic...............................................................................................................
23,433,860
22,683,290
23,035,920
23,238,978
23,354,793
Diluted............................................................................................................
23,770,088
27,825,491
28,221,264
28,392,033
28,478,058
Dividends per share of convertible perpetual preferred stock (annual)............ $
50.63
Dividends per share of common stock (annual) ............................................... $
2.14
Book value per common share.......................................................................... $
50.90
$
$
$
67.50
2.10
52.94
$
$
$
67.50
2.06
50.95
$
$
$
67.50
2.02
50.19
$
$
$
67.50
1.98
44.79
(1)
The Company evaluates the performance of its segments based on operating income after allocated overhead expenses (excluding significant charges or credits),
plus equity in the pretax earnings of unconsolidated affiliates. See Note 14 to the consolidated financial statements in Item 8 of this Annual Report.
(2)
We hold less than a 100% financial interest in certain consolidated subsidiaries, and a portion of net income is attributable to the noncontrolling interests in
those subsidiaries.
17
The calculations of the ratio of earnings to fixed charges and the ratio of earnings to combined fixed charges and preference
dividends are shown in Exhibit 12. Fixed charges primarily represent interest expense we incurred during the designated fiscal
year, and preference dividends represent the pretax equivalent of dividends on preferred stock.
Significant items included in the operating results in the above table are as follows:
•
•
•
•
Fiscal Year 2017 – $4.4 million restructuring and impairment costs, primarily related to our decision to close our
tobacco processing facility in Hungary. We are now processing tobaccos sourced from Hungary in our facilities in
Italy. The restructuring and impairment costs reduced net income by $2.8 million, or $0.10 per diluted share. In
addition, all 218,490 outstanding shares of our Series B 6.75% Convertible Perpetual Preferred Stock were converted
during the third and fourth quarters. Of the total shares converted, 107,418 shares were converted for cash, resulting
in a reduction of retained earnings of approximately $74.4 million for the excess of the conversion cost over the
carrying value of the shares. The reduction in retained earnings resulted in a corresponding one-time reduction of
earnings available to common shareholders for purposes of determining the amounts reported for basic and diluted
earnings per share for the year. The reduction in earnings available to common shareholders decreased diluted earnings
per share by $2.99.
Fiscal Year 2016 – a $3.4 million pretax gain arising from the acquisition of a joint venture partner's 50% ownership
interest in a tobacco processing entity in Guatemala. The transaction increased our ownership interest in the entity to
100%, requiring us to consolidate the financial statements of the entity and to remeasure our original 50% ownership
interest to fair value, resulting in the gain. In addition, we recorded restructuring and impairment costs of $2.4 million
related to a decision to significantly scale back our operations in Zambia. The net effect of the gain and the restructuring
and impairment costs increased pretax income by $1 million and net income by $0.7 million, or $0.02 per diluted
share.
Fiscal Year 2015 – a $12.7 million benefit to pretax earnings from the reversal of a valuation allowance on the remaining
unused balance of the excise tax credits realized from the favorable outcome of litigation by our subsidiary in Brazil
in fiscal year 2014. In addition, we recorded a consolidated income tax benefit of $8.0 million arising from the ability
of our subsidiary, Deltafina S.p.A. ("Deltafina"), to pay a significant portion of the European Commission fine and
related interest charges settled during the first quarter following the unsuccessful appeal of the case related to tobacco
buying practices in Italy. The effect of those items was partially offset by restructuring costs of $4.9 million, primarily
related to downsizing certain functions at our operations in Brazil and the decision to suspend our operations in
Argentina. On a combined basis, the net effect of these items increased pretax income by $7.8 million and net income
by $13.1 million, or $0.46 per diluted share.
Fiscal Year 2014 – an $81.6 million pretax gain resulting from the favorable outcome of litigation by our operating
subsidiary in Brazil related to previous years’ excise tax credits. In addition to the gain, we recorded restructuring
costs of $6.7 million, primarily related to the closure of a tobacco processing facility in Brazil and the consolidation
of these operations into our main processing facility there. The net effect of the gain and the restructuring costs
increased pretax income by $74.9 million and net income by $48.7 million, or $1.72 per diluted share.
•
Fiscal Year 2013 – $4.1 million in restructuring costs, primarily related to workforce reductions in Africa. The effect
of those charges was a reduction in net income of $1.8 million, or $0.06 per diluted share.
18
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of financial condition and results of operations is provided to enhance the understanding of,
and should be read in conjunction with, Part I, Item 1, “Business” and Item 8, “Financial Statements and Supplementary Data.”
For information on risks and uncertainties related to our business that may make past performance not indicative of future results,
or cause actual results to differ materially from any forward-looking statements, see “General,” and Part I, Item 1A, “Risk Factors.”
OVERVIEW
We are the leading global leaf tobacco supplier. We derive most of our revenues from sales of processed tobacco to
manufacturers of tobacco products throughout the world and from fees and commissions for specific services. We hold a strategic
position in the world leaf markets where we work closely with both our customers and farmers to ensure that we deliver a compliant
product that meets our customers' needs while promoting a strong supplier base. We adapt to meet changes in customer requirements
as well as broader changes in the leaf markets, while continuing to provide the stability of supply and high level of service that
distinguishes us in the marketplace. We believe that we have successfully met the needs of both our customers and suppliers while
adapting to changes in leaf markets. Over the last three fiscal years, we have generated over $660 million in net cash flow from
operations, invested over $145 million in our businesses, settled the mandatory conversion of our Series B 6.75% Convertible
Perpetual Preferred Stock ("Series B Preferred Stock") for about $178 million in cash, and returned over $210 million to our
shareholders through a combination of dividends and share repurchases.
We have also faced challenging market conditions over the last three fiscal years. In fiscal year 2015, declines in some of
our customers’ sales volumes in the U.S. and Western European markets, partially due to weak economic conditions, reduced demand
for leaf tobacco. At the same time, crops sold in fiscal year 2015 were larger than those sold in fiscal year 2014. Given fiscal year
2015’s oversupplied market conditions, we were pleased with the results we achieved. We ended the year with strong fourth quarter
results, which helped to bring our segment operating earnings for the fiscal year in line with our expectations. We also realized higher
margins and maintained our solid financial position. We believe that our performance that year demonstrated our ability to execute
well on our objective of delivering a compliant product in an efficient manner to our customers, under challenging circumstances.
We achieved improved results in fiscal year 2016, after managing through a second year of oversupplied market conditions.
As anticipated, we ended the year with strong fourth quarter volumes, primarily driven by later timing of customer shipping orders
in Brazil and Asia, and the positive change in leaf supply arrangements in our North America segment. We also achieved modest
growth in overall volumes for the full fiscal year and improved our margins, and our selling, general, and administrative costs were
lower. Our inventories continued to be well-managed, and uncommitted stocks declined from fiscal year 2015’s level, in line with
our target.
We delivered solid results again in fiscal year 2017 despite supply headwinds, most notably from the weather-reduced crop
sizes in Brazil and ongoing challenging market conditions in Tanzania. Although we had anticipated ending the year with slightly
lower volumes, earlier shipment timing as well as attractive green prices in some origins resulting in some additional purchases by
our customers boosted shipments later in our fiscal year, allowing us to improve our market share and achieve lamina sales volumes
that were slightly above those of the prior fiscal year.
Our segment operating income for the 2017 fiscal year was also improved, primarily attributable to a reduction in selling,
general, and administrative costs and earlier receipt of distributions from unconsolidated subsidiaries. We believe that our success
reflects our continuing efforts to bring efficiencies to the leaf tobacco supply chain. Through the hard work of our dedicated employees
around the world, we have been able to expand services that we provide our customers and, despite continuing slow decline in
demand for consumer tobacco products, maintain our volumes handled.
We also maintained our strong balance sheet in fiscal year 2017, and our lower working capital requirements from smaller
crops and prudent buying programs helped us to retain the necessary cash reserves to support our working capital needs in fiscal
year 2018. In addition, in fiscal year 2017, we continued our focus on providing returns to our shareholders through completion of
the conversion of our preferred stock, increasing the common dividend rate, and returning more than $60 million in dividends.
As we move into fiscal year 2018, we are forecasting that global flue-cured tobacco production outside of China will increase
by about 9%, largely from the recovery of the Brazilian crop due to better weather conditions there, and that burley tobacco production
will decrease by approximately 8%, primarily due to reductions in Africa. Although it is too early to determine whether the additional
purchases by customers in fiscal year 2017 may impact their requirements in fiscal year 2018, we continue to strive to be our
customers’ supplier of choice, providing them compliant products and quality services at a competitive price.
19
RESULTS OF OPERATIONS
Amounts described as net income and earnings per diluted share in the following discussion are attributable to Universal
Corporation and exclude earnings related to non-controlling interests in subsidiaries. The total for segment operating income
referred to in the discussion below is a non-GAAP financial measure. This measure is not a financial measure calculated in
accordance with GAAP and should not be considered as a substitute for net income, operating income, cash flows from operating
activities or any other operating performance measure calculated in accordance with GAAP, and it may not be comparable to
similarly titled measures reported by other companies. We have provided a reconciliation of the total for segment operating income
to consolidated operating income in Note 14. "Operating Segments" to the consolidated financial statements in Item 8. We evaluate
our segment performance excluding certain significant charges or credits. We believe this measure, which excludes these items
that we believe are not indicative of our core operating results, provides investors with important information that is useful in
understanding our business results and trends.
Fiscal Year Ended March 31, 2017, Compared to the Fiscal Year Ended March 31, 2016
Net income for the fiscal year ended March 31, 2017, was $106.3 million, or $0.88 per diluted share, compared with fiscal
year 2016’s net income of $109.0 million, or $3.92 per diluted share. The fiscal year 2017 results included a one-time reduction
of earnings available to common shareholders of $74.4 million, or $2.99 per diluted share, for purposes of determining the amounts
reported for basic and diluted earnings per share, from the conversion for cash of the remaining outstanding shares of our Series B
6.75% Convertible Perpetual Preferred Stock under the mandatory conversion in January 2017. That one-time reduction and certain
other non-recurring items are detailed in Other Items below. Excluding those items, diluted earnings per share for the fiscal year of
$3.97 increased $0.07 compared to the same period last year. Operating income of $178.4 million for the fiscal year ended March
31, 2017, was down $3.3 million compared to the fiscal year ended March 31, 2016. Segment operating income, which excludes
non-recurring items, was $188.5 million for fiscal year 2017, an increase of $2.4 million from the prior year, primarily attributable
to improved results for the North America segment, partly offset by a decline for the Other Tobacco Operations segment. Revenues
of $2.1 billion for fiscal year 2017 were relatively flat compared with the previous year, as the slightly higher volumes and a benefit
from earlier receipt of distributions from unconsolidated subsidiaries were offset by lower green leaf costs and lower processing
revenues.
Flue-cured and Burley Leaf Tobacco Operations
Other Regions
Operating income for the Other Regions segment for the fiscal year ended March 31, 2017, of $143.3 million, was nearly
flat, down only $0.3 million compared to $143.6 million in the previous fiscal year. Total volumes for the segment declined, but
overall margins improved, benefitting from lower selling, general, and administrative expenses and timing of receipt of distributions
from unconsolidated subsidiaries. Africa volumes were slightly lower, reflecting challenging market conditions in Tanzania which
offset volume improvements in other origins. South America’s results were down, continuing the trend noted throughout the fiscal
year from lower volumes and higher factory unit costs as a result of the reduced buying program and lower third-party processing
volumes there this year. Selling, general, and administrative expenses for the segment were down significantly for the fiscal year
on several items, including the favorable comparison to costs incurred in fiscal year 2016 to settle challenges regarding property
rights and valuation of forestry land in South America, the reversal of value-added tax reserves, lower net foreign currency and
exchange remeasurement losses, and a reduction in provisions for supplier advances compared to the previous fiscal year. Revenues
for the segment were down about $116.0 million to $1.4 billion, on the lower sales volumes at lower average green leaf prices and
lower processing revenues, offset in part by increased distributions from unconsolidated subsidiaries.
North America
Operating income for the North America segment was $35.2 million for the fiscal year ended March 31, 2017, up $4.0
million compared with the previous year. Earnings improvements were driven mainly by higher sales volumes, partially due to
earlier timing of current crop shipments in fiscal 2017. However, margins for the year were lower from a less favorable product
mix, as well as reduced factory yields on weather affected U.S. crops. Fiscal year 2017 revenues for the segment increased by $54.6
million to $416.4 million compared to the previous fiscal year, on those higher sales volumes, at lower green leaf prices, and a less
favorable product mix.
Other Tobacco Operations
For the fiscal year ended March 31, 2017, the Other Tobacco Operations segment operating income decreased by $1.3
million to $10.0 million compared with the same period last year. Earnings improved modestly for the dark tobacco operations as
higher domestic volumes were largely offset by a less favorable sales mix and higher inventory write-downs this year. Results
from the oriental joint venture also improved for the period mainly on favorable comparisons due to tax accruals in the prior year.
Those improvements were outweighed by higher losses in the special services group, primarily for the new food ingredients business.
Higher selling, general, and administrative costs for the segment also contributed to the declines. Revenues for the segment were
up by $12.2 million to $231.8 million for the year ended March 31, 2017, mostly due to increased volumes from the timing of
shipments of oriental tobaccos into the United States compared to the previous year.
20
Other Items
Cost of goods sold decreased by about 2% to $1.7 billion for the fiscal year ended March 31, 2017. The decline was
consistent with a comparable percentage decline in revenues, mostly as a result of lower green leaf prices. Selling, general, and
administrative costs decreased by $14.7 million, or 6%, for the fiscal year ended March 31, 2017, compared with the prior fiscal
year. The decline in fiscal year 2017 was mainly due to the favorable comparison to costs incurred in fiscal year 2016 to settle
challenges regarding property rights and valuation of forestry land in South America, the reversal of value-added tax reserves, and
lower net foreign currency and exchange remeasurement losses compared to the previous fiscal year.
The consolidated effective income tax rates were approximately 34% and 32% for the fiscal years ended March 31, 2017
and 2016, respectively. Income taxes in both fiscal years were lower than the 35% federal statutory rate on a combination of lower
net effective tax rates on income from certain foreign subsidiaries, and effects of changes in local currency exchange rates on deferred
income tax balances, mainly in Brazil.
In December 2016, 111,072 shares of the Series B 6.75% Convertible Perpetual Preferred Stock were converted into
approximately 2.5 million shares of our common stock. In January 2017, we announced a mandatory conversion of all 107,418
remaining outstanding shares of the preferred stock after meeting the requirements to initiate the mandatory conversion under the
original terms of the preferred shares. We chose to satisfy the conversion obligation for the mandatory conversion in cash. Although
the conversions of the preferred stock into common stock or for cash did not impact net income, the shares converted for cash under
the mandatory conversion in January 2017 resulted in a one-time reduction of retained earnings of approximately $74.4 million
during the quarter ended March 31, 2017, representing the excess of the conversion cost over the carrying value of those shares.
The reduction in retained earnings resulted in a corresponding one-time reduction of earnings available to common shareholders
for the fiscal year ending March 31, 2017 for purposes of determining the amounts reported for basic and diluted earnings per share.
The effect of the mandatory conversion on diluted earnings per share for the fiscal year ended March 31, 2017, was ($2.99).
Results for the year ended March 31, 2017, also included restructuring and impairment costs of $4.4 million ($0.10 per
diluted share). Results for the year ended March 31, 2016, included restructuring and impairment costs of $2.4 million ($0.06 per
diluted share) and a gain of $3.4 million ($0.08 per diluted share) on remeasuring our interest in a tobacco processing joint venture
to fair value upon acquiring our partner’s 50% ownership in the third fiscal quarter.
Fiscal Year Ended March 31, 2016, Compared to the Fiscal Year Ended March 31, 2015
Net income for the fiscal year ended March 31, 2016, was $109.0 million, or $3.92 per diluted share, compared with net
income for the fiscal year ended March 31, 2015, of $114.6 million, or $4.06 per diluted share. Those results included certain non-
recurring items, detailed in Other Items below, which increased diluted earnings per share by $0.02 and $0.46 for the years ended
March 31, 2016 and 2015, respectively. Excluding those items in both years, net income for fiscal year 2016 increased $6.8 million
($0.30 per diluted share) compared to the same period in fiscal year 2015. Segment operating income, which excludes those items,
was $186.1 million for fiscal year 2016, an increase of $18.8 million, or 11%, from fiscal year 2015. That improvement was primarily
attributable to a reduction in selling, general, and administrative costs, as well as improved gross margins on fiscal year 2016’s
modestly higher sales volumes. Revenues of $2.1 billion for fiscal year 2016 declined 7% compared with fiscal year 2015, driven
mainly by lower green leaf costs and lower processing revenues, partly mitigated by the increase in volumes.
Flue-cured and Burley Leaf Tobacco Operations
Other Regions
Operating income for the Other Regions segment for the fiscal year ended March 31, 2016, was $143.6 million, up 14%
compared to $125.8 million for the fiscal year ended March 31, 2015. Better margins, fewer inventory write-downs, and lower
selling, general, and administrative expenses drove the earnings improvement. These positive factors outweighed lower margins in
Europe and the currency translation effects of a stronger U.S. dollar which negatively impacted results from that region. Strong
volumes in most regions were offset by declines in Africa on smaller crop sizes in some origins compared to fiscal year 2015.
Selling, general, and administrative expenses for the segment were down significantly for the fiscal year ended March 31, 2016,
largely on reductions in local currency-denominated expenses from devaluation of foreign currencies, mainly in South America and
Africa, and lower incentive compensation costs. Revenues for the segment were down about 12% to $1.5 billion, driven mostly by
lower average green leaf prices and the modestly reduced volumes.
21
North America
Operating income for the North America segment for the fiscal year ended March 31, 2016, of $31.1 million was flat
compared with the fiscal year ended March 31, 2015. Earnings improvements from sales volume increases, due in part to old crop
sales in the first fiscal quarter of fiscal year 2016, and the previously announced change in business with Philip Morris International,
Inc. in the United States from a toll processing model to sales of processed tobacco, were offset by lower margins and lower earnings
from Guatemala and Mexico. In addition, processing volumes declined significantly compared with fiscal year 2015 as a result of
that change in business, and a portion of crop volumes sold under this new arrangement carried over as shipments in fiscal year
2017. Fiscal year 2016 revenues for the segment increased by 19% to $361.8 million compared to fiscal year 2015, on higher sales
volumes at lower green leaf prices, a less favorable product mix, and lower processing revenues.
Other Tobacco Operations
For the fiscal year ended March 31, 2016, the Other Tobacco Operations segment operating income increased by $1.0
million to $11.3 million compared with the fiscal year ended March 31, 2015. Earnings were up significantly for the dark tobacco
operations on higher volumes, better margins, and lower selling, general, and administrative costs. That improvement was partly
offset by lower results from the oriental joint venture as benefits from improved margins and lower overhead costs were outweighed
by higher currency remeasurement losses and tax accruals. The special services group incurred losses for fiscal year 2016, mainly
from startup and production testing costs for the new food ingredients business. Revenues for the segment were down by $7.4
million to $219.6 million for the fiscal year ended March 31, 2016, as the higher volumes for the dark tobacco operations were
more than offset by reduced volumes at lower prices from the timing of shipments of oriental tobaccos into the United States
compared to the fiscal year ended March 31, 2015.
Other Items
Cost of goods sold decreased by about 8% to $1.7 billion for the fiscal year ended March 31, 2016, primarily due to lower
green leaf prices and the effects of local-currency devaluations on factory costs compared with the fiscal year ended March 31,
2015. Selling, general, and administrative costs decreased by $23.5 million for the fiscal year ended March 31, 2016, compared
with the fiscal year ended March 31, 2015. The decline for fiscal year 2016 was mainly driven by reductions in local currency-
denominated expenses from devaluation of foreign currencies in South America and Africa, and lower incentive compensation
costs, reduced in part by higher net currency and exchange losses in Asia, as well as costs to settle challenges regarding property
rights and valuation in South America.
Interest expense of $15.7 million for the fiscal year ended March 31, 2016, declined by about 8% compared to the fiscal
year ended March 31, 2015. The reduction was mostly due to lower average short-term borrowings for seasonal working capital,
offset in part by higher effective interest rates on long-term bank loans from fixed interest rate swaps entered on those loans in the
fourth quarter of fiscal 2015. The consolidated effective tax rate for the fiscal year ended March 31, 2016, was approximately 32%
compared to about 24% for the fiscal year ended March 31, 2015. Income taxes for fiscal year 2015 were reduced by a non-
recurring benefit of $8.0 million arising from the partial payment of the European Commission fine by our Italian subsidiary in
June 2014. In both fiscal year 2016 and 2015, the decrease from the 35% U.S. statutory rate was also influenced by lower net
effective tax rates on income from certain foreign subsidiaries, as well as the effects of changes in local currency exchange rates
on deferred income tax balances.
Results for the year ended March 31, 2016, included restructuring and impairment costs of $2.4 million ($0.06 per diluted
share) and a gain of $3.4 million ($0.08 per diluted share) on remeasuring our interest in a tobacco processing joint venture to fair
value upon acquiring our partner’s 50% ownership in the third fiscal quarter. Results for the year ended March 31, 2015, included
an income tax benefit of $8.0 million ($0.28 per diluted share) arising from a subsidiary’s payment of a portion of a fine, restructuring
costs of $4.9 million ($0.11 per diluted share), and a gain of $12.7 million ($0.29 per diluted share), from updated projections related
to the favorable outcome in fiscal year 2014 of litigation in Brazil regarding previous years’ excise tax credits.
Accounting Pronouncements
See "Accounting Pronouncements" in Note 1 to the consolidated financial statements in Item 8 of this Annual Report for
a discussion of recent accounting pronouncements issued by the Financial Accounting Standards Board ("FASB") that will become
effective and be adopted by the Company in future reporting periods.
22
Overview
LIQUIDITY AND CAPITAL RESOURCES
Our working capital requirements in fiscal year 2017 were lower than those in fiscal year 2016 due in part to reduced
purchase volumes in Brazil. Our buying program in Brazil was reduced in fiscal year 2017 due to the smaller size of the Brazilian
crop, largely from El Nino weather patterns, and unsustainable green leaf prices. Similar to last year, our shipments were heavily
weighted to the second half of the fiscal year. In fiscal year 2017, we generated $250.3 million in cash flows from our operating
activities, and our liquidity was sufficient to meet our needs, including the $178.4 million cash settlement of the mandatory conversion
of the remainder of our Series B 6.75% Convertible Perpetual Preferred Stock ("Series B Preferred Stock") in the fourth fiscal quarter.
We also continued our conservative financial policies, maintained our discipline on using our free cash flow, and returned funds to
shareholders.
Our liquidity and capital resource requirements are predominately short-term in nature and primarily relate to working
capital required for tobacco crop purchases. Working capital needs are seasonal within each geographic region. The geographic
dispersion and the timing of working capital needs permit us to predict our general level of cash requirements, although crop sizes,
prices paid to farmers, shipment and delivery timing, and currency fluctuations affect requirements each year. Peak working capital
requirements are generally reached during the first and second fiscal quarters. Each geographic area follows a cycle of buying,
processing, and shipping tobacco, and in many regions we also provide agricultural materials to farmers during the growing season.
The timing of the elements of each cycle is influenced by such factors as local weather conditions and individual customer shipping
requirements, which may change the level or the duration of crop financing. Despite a predominance of short-term needs, we maintain
a portion of our total debt as long-term to reduce liquidity risk. We also periodically have large cash balances that we utilize to meet
our working capital requirements.
We believe that our financial resources are adequate to support our capital needs for at least the next twelve months. Our
seasonal borrowing requirements primarily relate to purchasing crops in South America and Africa and can increase from March to
September by more than $300 million. The funding required can vary significantly depending upon such factors as crop sizes, the
price of leaf, the relative strength of the U.S. dollar, and the timing of shipments and customer payments. We deal with this uncertainty
by maintaining substantial credit lines and cash balances. In addition to our operating requirements for working capital, we expect
to spend around $35 to $45 million during fiscal year 2018 for capital expenditures to maintain our facilities and invest in opportunities
to grow and improve our businesses. We also expect to provide about $8 million in funding to our pension plans. We have no long-
term debt maturing before fiscal year 2020. After balancing our capital structure, any excess cash flow from operations after dividends
and capital expenditures will be available to fund expansion, purchase our stock, or otherwise enhance shareholder value.
Cash Flow
Our operations generated about $250.3 million in operating cash flows in fiscal year 2017. That amount was about $63.8
million higher than the $186.5 million we generated in fiscal year 2016, largely due to lower working capital requirements in fiscal
year 2017 on the reduced purchase volumes in Brazil, as well as earlier shipment timing in North America and increased trade
payables and accrued expenses in Brazil and Africa. During the fiscal year ended March 31, 2017, we spent $35.6 million on capital
projects, settled the mandatory conversion of our Series B Preferred Stock for $178.4 million in cash, and returned $60.9 million to
shareholders in the form of dividends. At March 31, 2017, cash balances totaled $284.0 million.
Working Capital
Working capital at March 31, 2017, was about $1.3 billion, down $98.9 million from last year's level of about $1.4 billion,
largely due to reduced purchase volumes in Brazil, earlier shipment timing in North America, and increased trade payables and
accrued expenses in Brazil and Africa in fiscal year 2017 compared to fiscal year 2016. Tobacco inventories of $565.9 million at
March 31, 2017, were down $71.2 million compared to inventory levels at the end of the prior fiscal year, largely on the lower
purchase volumes and earlier shipments. We usually finance inventory with a mix of cash, notes payable, and customer deposits,
depending on our borrowing capabilities, interest rates, and exchange rates, as well as those of our customers. We generally do not
purchase material quantities of tobacco on a speculative basis. However, when we contract directly with farmers, we are often
obligated to buy all stalk positions, which may contain less marketable leaf styles. Our uncommitted tobacco inventories decreased
by approximately $4.6 million to $116.2 million, or about 21% of tobacco inventory, at March 31, 2017. Uncommitted inventories
at March 31, 2016, were $120.8 million, which represented 19% of tobacco inventory. The level of these uncommitted inventories
is influenced by timing of farmer deliveries of new crops, as well as the receipt of customer orders.
23
Share Activity
During December 2016, holders of 111,072 shares of our Series B Preferred Stock voluntarily exercised their conversion
rights. These shares were converted into 2,487,118 shares of our common stock. In January 2017, we exercised our option to
mandatorily convert all remaining outstanding shares of our Series B Preferred Stock and elected to settle our conversion obligation
in cash. Holders of the Series B Preferred Stock received the product of the conversion rate, 22.4306, and the average volume
weighted average price of Universal’s common stock during the cash settlement averaging period for each share of Series B Preferred
Stock converted. The cash settlement occurred on January 31, 2017, and totaled approximately $178.4 million on the 107,418 shares
of Series B Preferred Stock converted. We used cash on hand for the settlement. All rights of the holders with respect to the Series
B Preferred Stock terminated upon conversion. The Series B Preferred Stock dividends, totaling approximately $15 million per
annum, are no longer paid.
Our Board of Directors approved our current share repurchase program in November 2015. The program expires in November
2017, authorizes the purchase of up to $100 million of our common and preferred stock. Under the current authorization, we may
purchase shares from time to time on the open market or in privately negotiated transactions at prices not exceeding prevailing market
rates. In determining our level of common share repurchase activity, our intent is to use only cash available after meeting our
anticipated capital investment, dividend, and working capital requirements. Repurchases of shares under the repurchase program
may vary based on management discretion, as well as changes in cash flow generation and availability. During fiscal year 2017, we
did not purchase any shares of our common or preferred stock under this program. At March 31, 2017, our available authorization
under our current share repurchase program was $100 million, and approximately 25.3 million common shares were outstanding.
Capital Spending
Our capital expenditures are generally limited to those that add value, replace or maintain equipment, increase efficiency,
or position us for future growth. In deciding where to invest capital resources, we look for opportunities where we believe we can
earn an adequate return, leverage our assets and expertise, and enhance our farmer base. During fiscal years 2017 and 2016, we
invested $35.6 million and $47.2 million, respectively, in our property, plant, and equipment. Depreciation expense was approximately
$35.9 million and $36.8 million, respectively, in fiscal years 2017 and 2016. Generally, our capital spending on maintenance projects
is at a level below depreciation expense in order to maintain strong cash flow. In addition, from time to time, we undertake projects
that require capital expenditures when we identify opportunities to improve efficiencies, add value for our customers, and position
ourselves for future growth. We currently plan to spend approximately $35 to $45 million in fiscal year 2018 on capital projects for
maintenance of our facilities and other investments to grow and improve our businesses.
Outstanding Debt and Other Financing Arrangements
We consider the sum of notes payable and overdrafts, long-term debt (including any current portion), and customer advances
and deposits, less cash, cash equivalents, and short-term investments on our balance sheet to be our net debt. We also consider our
net debt plus shareholders' equity to be our net capitalization. Net debt increased by $23.3 million to $154.9 million during the fiscal
year ended March 31, 2017. The increase primarily reflects lower cash balances due mainly to the cash settlement of our Series B
Preferred Stock mandatory conversion in the fourth fiscal quarter. Net debt as a percentage of net capitalization was approximately
11% at March 31, 2017, up from 9% at March 31, 2016, and it remains lower than our target limit for peak borrowings of 30% to
40% of net capitalization.
As of March 31, 2017, we had $430 million available under a committed revolving credit facility that will mature in December
2019, and we, together with our consolidated affiliates, had approximately $307 million in uncommitted lines of credit, of which
approximately $248 million were unused and available to support seasonal working capital needs. The financial covenants under
our committed revolving credit facility require us to maintain certain levels of tangible net worth and observe restrictions on debt
levels. As of March 31, 2017, we were in compliance with all covenants of our debt agreements. We also have an active, undenominated
universal shelf registration filed with the SEC in November 2014 that provides for future issuance of additional debt or equity
securities. We have no long-term debt maturing in fiscal year 2018.
Derivatives
From time to time, we use interest rate swap agreements to manage our exposure to changes in interest rates. Currently,
we have interest rate swap agreements that convert the variable benchmark LIBOR rate on our two outstanding term loans to fixed
rates. With the swap agreements in place, the effective interest rates on our $150 million five-year term loan and $220 million seven-
year term loan were 2.94% and 3.48%, respectively, as of March 31, 2017. These agreements were entered into to eliminate the
variability of cash flows in the interest payments on our variable rate five- and seven-year term loans and are accounted for as cash
flow hedges. Under the swap agreements, we receive variable rate interest and pay fixed rate interest. At March 31, 2017, the fair
value of our open interest rate hedge swaps was a net asset of approximately $2 million.
We also enter forward contracts from time to time to hedge certain foreign currency exposures, primarily related to forecast
purchases of tobacco and related processing costs in Brazil, as well as our net monetary asset exposure in local currency there. We
generally account for our hedges of forecast tobacco purchases as cash flow hedges. At March 31, 2017, the fair value of those open
contracts was an immaterial net asset. We also had other forward contracts outstanding that were not designated as hedges, and the
24
fair value of those contracts was a net asset of approximately $0.8 million at March 31, 2017. For additional information, see Note
8 to the consolidated financial statements in Item 8.
Pension Funding
Funds supporting our ERISA-regulated U.S. defined benefit pension plan increased by $10 million during fiscal year 2016
to $207 million, as contributions and asset returns exceeded benefit payments. The accumulated benefit obligation (“ABO”) and
the projected benefit obligation (“PBO”) were both approximately $223 million as of March 31, 2017. The ABO and PBO are
calculated on the basis of certain assumptions that are outlined in Note 10 to the consolidated financial statements in Item 8. We
expect to make contributions of about $8 million to our pension plans, including $6 million to our ERISA-regulated plan, during the
next year. It is our policy to regularly monitor the performance of the funds and to review the adequacy of our funding and plan
contributions.
Contractual Obligations
Our contractual obligations as of March 31, 2017, were as follows:
(in thousands of dollars)
Total
2018
2019-2020
2021-2022
After 2022
Notes payable and long-term debt
(1) ........................................................................
$
479,404
$
73,007
$
173,012
$
233,385
$
—
Operating lease obligations ........................................................................................
50,774
11,512
15,706
9,859
13,697
Inventory purchase obligations:
Tobacco ....................................................................................................................
690,111
622,408
67,703
Agricultural materials...............................................................................................
Other purchase obligations.........................................................................................
43,103
5,314
43,103
5,314
—
—
—
—
—
—
—
—
Total..........................................................................................................................
$ 1,268,706
$
755,344
$
256,421
$
243,244
$
13,697
(1)
Includes interest payments. Interest payments on $429.1 million of variable rate debt were estimated based on rates as of March 31, 2017. The Company has
entered into interest rate swaps that effectively convert the interest payments on the $370.0 million outstanding balance of its two bank term loans from variable
to fixed. The fixed rate has been used to determine the contractual interest payments for all periods.
In addition to principal and interest payments on notes payable and long-term debt, our contractual obligations include
operating lease payments, inventory purchase commitments, and capital expenditure commitments. Operating lease obligations
represent minimum payments due under leases for various production, storage, distribution, and other facilities, as well as vehicles
and equipment. Tobacco inventory purchase obligations primarily represent contracts to purchase tobacco from farmers. The amounts
shown above are estimates since actual quantities purchased will depend on crop yield, and prices will depend on the quality of the
tobacco delivered. About 43% of our crop year contracts to purchase tobacco are with farmers in Brazil. We have partially funded
our tobacco purchases in Brazil and in other regions with advances to farmers and other suppliers, which totaled approximately $104
million, net of allowances, at March 31, 2017. In addition, we have guaranteed bank loans to farmers in Brazil that relate to a portion
of our tobacco purchase obligations there. At March 31, 2017, we were contingently liable under those guarantees for outstanding
balances of approximately $17 million (including accrued interest), and we had recorded a liability of approximately $1 million for
the fair value of those guarantees. As tobacco is purchased and the related bank loans are repaid, our contingent liability is reduced.
25
CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS
In preparing the financial statements in accordance with GAAP, we are required to make estimates and assumptions that
have an impact on the assets, liabilities, revenue, and expense amounts reported. These estimates can also affect our supplemental
information disclosures, including information about contingencies, risks, and financial condition. We believe, given current facts
and circumstances, that our estimates and assumptions are reasonable, adhere to GAAP, and are consistently applied. However,
changes in the assumptions used could result in a material adjustment to the financial statements. Our critical accounting estimates
and assumptions are in the following areas:
Inventories
Inventories of tobacco are valued at the lower of cost or market with cost determined under the specific cost method. Raw
materials are clearly identified at the time of purchase. We track the costs associated with raw materials in the final product lots,
and maintain this identification through the time of sale. We also capitalize direct and indirect costs related to processing raw
materials. This method of cost accounting is referred to as the specific cost or specific identification method. We write down
inventory for changes in market value based upon assumptions related to future demand and market conditions if the indicated
market value is below cost. Future demand assumptions can be impacted by changes in customer sales, changes in customers’
inventory positions and policies, competitors’ pricing policies and inventory positions, and varying crop sizes and qualities. Market
conditions that differ significantly from those assumed by management could result in additional write-downs. We experience
inventory write-downs routinely. Inventory write-downs in fiscal years 2017, 2016, and 2015 were $10.9 million, $11.9 million,
and $18.6 million, respectively. The Company incurred a higher level of inventory write-downs in fiscal year 2015 primarily due
to the effects of oversupply conditions in the global leaf tobacco markets.
Advances to Suppliers and Guarantees of Bank Loans to Suppliers
In many sourcing origins, we provide tobacco growers with agronomy services and seasonal crop advances of, or for, seed,
fertilizer, and other supplies. These advances are short term in nature and are customarily repaid upon delivery of tobacco to us.
In several origins, we have also made long-term advances to tobacco farmers to finance curing barns and other farm infrastructure.
In Brazil, we also guarantee bank loans made to farmers for seasonal crop financing. In some years, due to low crop yields and
other factors, individual farmers may not deliver sufficient volumes of tobacco to repay maturing advances. In those cases, we may
extend repayment of the advances into the following crop year or satisfy the guarantee by acquiring the loan from the bank. In
either situation, we will incur losses whenever we are unable to recover the full amount of the loans and advances. At each reporting
period, we must make estimates and assumptions in determining the valuation allowance for advances to farmers and the liability
to accrue for our obligations under bank loan guarantees. At March 31, 2017, the gross balance of advances to suppliers totaled
approximately $134 million, and the related valuation allowance totaled approximately $27 million. The fair value of the loan
guarantees for farmers in Brazil was a liability of approximately $1 million at March 31, 2017.
Recoverable Value-Added Tax Credits
In many foreign countries, we 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 we sell tobacco to customers in the country of origin, we generally collect VAT on those sales.
We are normally permitted to offset our VAT payments against those 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 our tobacco sales are
predominately for export markets, we often do not generate enough VAT collections on downstream sales to fully offset our VAT
payments. In those situations, we can accumulate unused VAT credits. 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, in some countries we can accumulate
significant balances of VAT credits over time. We review these balances on a regular basis, and we record valuation allowances on
the credits to reflect amounts that we do not expect to recover, as well as discounts anticipated on credits we expect to sell or transfer.
In determining the appropriate valuation allowance to record in a given jurisdiction, we must make various estimates and assumptions
about factors affecting the ultimate recovery of the VAT credits. At March 31, 2017, the gross balance of recoverable tax credits
(primarily VAT) totaled approximately $45 million, and the related valuation allowance totaled approximately $13 million.
26
Goodwill
We review the carrying value of goodwill for potential impairment on an annual basis and at any time that events or business
conditions indicate that it may be impaired. As permitted under Accounting Standards Codification Topic 350 (“ASC 350”), at
March 31, 2017 and 2016, we elected to base our initial assessment of potential impairment on qualitative factors. Those factors
did not indicate any impairment of our recorded goodwill. In fiscal years prior to basing our initial assessment on qualitative factors,
we followed the quantitative approach in ASC 350 in assessing the fair value of our goodwill, which involved the use of discounted
cash flow models (Level 3 of the fair value hierarchy under GAAP). Under our current qualitative assessment, we would also use
those discounted cash flow models to measure any expected impairment indicated by the assessment. The calculations in these
models are not based on observable market data from independent sources and therefore require significant management judgment
with respect to operating earnings growth rates and the selection of an appropriate discount rate. Significant adverse changes in
our operations or our estimates of future cash flows for a reporting unit with recorded goodwill, such as those caused by unforeseen
events or changes in market conditions, could result in an impairment charge. Over 90% of our goodwill balance relates to our
reporting unit in Brazil.
Fair Value Measurements
We hold various financial assets and financial liabilities that are required to be measured and reported at fair value in our
financial statements, including money market funds, trading securities associated with deferred compensation plans, interest rate
swaps, forward foreign currency exchange contracts, and guarantees of bank loans to tobacco growers. We follow the relevant
accounting guidance in determining the fair values of these financial assets and liabilities. Money market funds are valued based
on net asset value (“NAV”), which is used as a practical expedient to measure the fair value of those funds (not classified within
the fair value hierarchy). Quoted market prices (Level 1 of the fair value hierarchy) are used in most cases to determine the fair
values of trading securities. Interest rate swaps and forward foreign currency exchange contracts are valued based on dealer quotes
using discounted cash flow models matched to the contractual terms of each instrument (Level 2 of the fair value hierarchy). The
fair value of the guarantees of bank loans to tobacco growers, which was approximately $1 million at March 31, 2017, is derived
using an internally-developed discounted cash flow model. The model requires various inputs, including historical loss percentages
for comparable loans and a risk-adjusted interest rate. Because significant management judgment is required in determining and
applying these inputs to the valuation model, our process for determining the fair value of these guarantees is classified as Level 3
of the fair value hierarchy. At March 31, 2017, a 1% increase in the expected loss percentage for all guaranteed farmer loans would
not have had a material effect on the fair value of the guarantee obligation. In addition, a 1% change in the risk-adjusted interest
rate would not have had a material effect on the fair value of the guarantee obligation. We incorporate credit risk in determining
the fair values of our financial assets and financial liabilities, but that risk did not materially affect the fair values of any of those
assets or liabilities at March 31, 2017.
Income Taxes
Our consolidated effective income tax rate is based on our expected taxable income, tax laws and statutory tax rates, and
tax planning opportunities in the various jurisdictions in which we operate. Significant judgment is required in determining the
effective tax rate and evaluating our tax position. We are subject to the tax laws of many jurisdictions, and could be subject to a
tax audit in each of these jurisdictions, which could result in adjustments to tax expense in future periods. In the event that there
is a significant, unusual, or one-time item recognized in our results, the tax attributed to that discrete item would be recorded at the
same time as the item.
We have no undistributed earnings of consolidated foreign subsidiaries that are classified as permanently or indefinitely
reinvested. We assume that all undistributed earnings of our foreign subsidiaries will be repatriated back to their parent entities in
the United States where the funds are best placed to meet our cash flow requirements. In addition, we strive to mitigate economic,
political, and currency risk by following a disciplined annual approach to the distribution of excess capital back to the U.S. Based
on these assumptions, in our income tax expense for each reporting period we fully provide for all additional U.S. income taxes
that are expected to be due on these distributions.
Our accounting for uncertain tax positions requires that we review all significant tax positions taken, or expected to be
taken, in income tax returns for all jurisdictions in which we operate. In this review, we must assume that all tax positions will
ultimately be audited, and either accepted or rejected based on the applicable tax regulations by the tax authorities for those
jurisdictions. We must recognize in our financial statements only the tax benefits associated with tax positions that are “more likely
than not” to be accepted upon audit, at the greatest amount that is considered “more likely than not” to be accepted. These
determinations require significant management judgment, and changes in any given quarterly or annual reporting period could affect
our consolidated income tax rate.
Tax regulations require items to be included in taxable income in the tax return at different times, and in some cases in
different amounts, than the items are reflected in the financial statements. As a result, our effective tax rate reflected in the financial
statements is different than that reported in our tax returns. Some of these differences are permanent, such as expenses that are not
tax deductible, while others are related to timing issues, such as differences in depreciation methods. Timing differences create
deferred tax assets and liabilities. Deferred tax liabilities generally represent tax expense recognized in our financial statements for
27
which payment has been deferred or income taxes related to expenses that have not yet been recognized in the financial statements,
but have been deducted in our tax return. Deferred tax assets generally represent items that can be used as a tax deduction or credit
in future tax returns for which we have already recorded the tax benefit in our financial statements. We record valuation allowances
for deferred tax assets when the amount of estimated future taxable income is not likely to support the use of the deduction or credit.
Determining the amount of such valuation allowances requires significant management judgment, including estimates of future
taxable income in multiple tax jurisdictions where we operate. Based on our periodic earnings forecasts, we project the upcoming
year’s taxable income to help us evaluate our ability to realize deferred tax assets.
The functional currency in most of our significant foreign operations is the U.S. dollar, as export tobacco sales are generally
made in dollars. Purchasing and processing costs are usually incurred in local currency. When the U.S. dollar is weakening relative
to the local currency, purchasing and processing costs increase in dollar terms, resulting in higher cost inventory. The sale of that
inventory in dollars generates less taxable income in local currency, which results in lower income taxes owed when translated into
U.S. dollars. This causes the effective income tax rate on dollar income to be lower than the statutory rate in the local country. The
reverse can occur when the local currency is weakening relative to the U.S. dollar, thereby causing the effective income tax rate on
dollar earnings to be above the statutory rate. This impact on our effective income tax rate in a country can be significant during a
normal crop cycle. A prolonged period of strengthening or weakening over more than one crop may increase the impact if we sell
material quantities of old crop inventories. Lower-taxed foreign source income increases our ability to use foreign tax credits.
Higher-taxed foreign source income has the reverse effect. When these changes occur in our larger operations, such as our operations
in Brazil, they can have a material impact on our overall tax position.
For additional disclosures on income taxes, see Notes 1 and 4 to the consolidated financial statements in Item 8.
Pension and Other Postretirement Benefit Plans
The measurement of our pension and other postretirement benefit obligations and costs at the end of each fiscal year
requires that we make various assumptions that are used by our actuaries in estimating the present value of projected future benefit
payments to all plan participants. Those assumptions take into consideration the likelihood of potential future events such as salary
increases and demographic experience. The assumptions we use may have an effect on the amount and timing of future contributions
to our plans. The plan trustee conducts an independent valuation of the fair value of pension plan assets. The significant assumptions
used in the calculation of our pension and other postretirement benefit obligations are:
• Discount rate – The discount rate is based on investment yields on a hypothetical portfolio of actual long-term corporate
bonds rated AA that align with the cash flows for our benefit obligations.
•
Salary scale – The salary scale assumption is based on our long-term actual experience for salary increases, the near-
term outlook, and expected inflation.
• Expected long-term return on plan assets – The expected long-term return on plan assets reflects asset allocations and
investment strategy adopted by the Pension Investment Committee of the Board of Directors.
• Retirement and mortality rates – Retirement rates are based on actual plan experience along with our near-term outlook.
Early retirement assumptions are based on our actual experience. Mortality rates are based on standard industry group
annuity mortality tables which are updated to reflect projected improvements in life expectancy.
• Healthcare cost trend rates – For postretirement medical plan obligations and costs, we make assumptions on future
inflationary increases in medical costs. These assumptions are based on our actual experience, along with third-party
forecasts of long-term medical cost trends.
From one fiscal year to the next, the rates we use for each of the above assumptions may change based on market
developments and other factors. The discount rate reflects prevailing market interest rates at the end of the fiscal year when the
benefit obligations are actuarially measured and will increase or decrease based on market patterns. The expected long-term return
on plan assets may change based on changes in investment strategy for plan assets or changes in indicated longer-term yields on
specific classes of plan assets. Based on the high percentage of retired and inactive participants in our ERISA-regulated domestic
defined benefit pension plan (approximately 75% of total participants), as well as the high funded status of the plan, the Pension
Investment Committee adopted changes to the underlying plan assets to move toward a liability-driven investment strategy. We
reduced our expected long-term return on assets assumption for the actuarial valuations in both fiscal years 2015 and 2016, primarily
to reflect those changes. We also adopted revised mortality tables in fiscal year 2015 based on updated actuarial studies reflecting
improvements in life expectancy. In addition to the changes in actuarial assumptions from year to year, actual plan experience
affecting our net benefit obligations, such as actual returns on plan assets and actual mortality experience, will differ from the
assumptions used to measure the obligations. The effects of these changes and differences increase or decrease the obligation we
record for our pension and other postretirement benefit plans, and they also create gains and losses that are accumulated and amortized
over future periods, thus affecting the expense we recognize for these plans over those periods. Changes in the discount rate from
year to year generally have the largest impact on our projected benefit obligation and annual expense, and the effects may be
significant, particularly over successive years where the discount rate moves in the same direction.
28
As of March 31, 2017, the effect of the indicated increase or decrease in the selected pension and other postretirement
benefit valuation assumptions is shown below. The effect assumes no change in benefit levels.
(in thousands of dollars)
Changes in Assumptions for Pension Benefits
Discount Rate:
Effect on
2017
Projected
Benefit
Obligation
Increase
(Decrease)
Effect on
2018 Annual
Expense
Increase
(Decrease)
1% increase ...............................................................................................................................................................................
$
(26,653) $
1% decrease ..............................................................................................................................................................................
32,337
Expected Long-Term Return on Plan Assets:
1% increase ...............................................................................................................................................................................
1% decrease ..............................................................................................................................................................................
Changes in Assumptions for Other Postretirement Benefits
Discount Rate:
1% increase ...............................................................................................................................................................................
1% decrease ..............................................................................................................................................................................
Healthcare Cost Trend Rate:
1% increase ...............................................................................................................................................................................
1% decrease ..............................................................................................................................................................................
—
—
(3,055)
3,603
769
(688)
(2,597)
2,872
(2,264)
2,264
(347)
165
38
(37)
A 1% increase or decrease in the salary scale assumption would not have a material effect on the projected benefit obligation
or on annual expense for the Company's pension benefits. See Note 10 to the consolidated financial statements in Item 8 for
additional information on pension and other postretirement benefit plans.
Other Estimates and Assumptions
Other management estimates and assumptions are routinely required in preparing our financial statements, including the
determination of valuation allowances on accounts receivable and the fair value of long-lived assets. Changes in market and
economic conditions, local tax laws, and other related factors are considered each reporting period, and adjustments to the accounts
are made based on management’s best judgment.
29
OTHER INFORMATION REGARDING TRENDS
AND MANAGEMENT’S ACTIONS
Our financial performance depends on our ability to obtain an appropriate price for our products and services, to secure
the tobacco volumes and quality desired by our customers, and to maintain efficient, competitive operations. We continually monitor
issues and opportunities that may impact the supply of and demand for leaf tobacco, the volumes of leaf tobacco that we handle,
and the services we provide.
Supply
Global flue-cured and burley tobacco production decreased in our fiscal year 2017, largely due to smaller crops in Brazil
following adverse weather conditions there. This was the second fiscal year of declines in crop sizes following oversupplied tobacco
markets in fiscal year 2015. Crop sizes for flue-cured tobaccos available for export are expected to increase modestly in fiscal year
2018, primarily on the recovery of the Brazilian tobacco crops due to better weather conditions, while burley crops sizes are expected
to decrease. Though we believe that flue-cured tobacco is in a slight oversupply position and burley tobacco production levels are
largely in balance with anticipated demand, imbalances in certain leaf styles or types may remain through fiscal year 2018.
Production
Worldwide flue-cured tobacco production outside of China decreased by about 13% in fiscal year 2017 to 1.8 billion kilos,
including an approximately 19% reduction in Brazil following El Nino weather patterns there. Worldwide burley crops decreased
by about 9% in fiscal year 2017. We estimate that at March 31, 2017, industry uncommitted flue-cured and burley inventories,
excluding China, totaled about 83 million kilos, a decrease of about 28% from March 31, 2016 levels.
In the near term, flue-cured tobacco production is expected to increase driven by the recovery of the Brazilian crop, partially
offset by smaller crops in many other flue-cured tobacco growing origins. We expect that flue-cured production (excluding China)
will increase by about 9%, to about 1.9 billion kilos, in fiscal year 2018, including about a 35% increase in the size of the Brazilian
flue-cured crop. Worldwide burley production is forecast to decrease by about 8%. We also forecast that oriental tobacco and dark
air-cured production will decline by 5% and 15%, respectively, in fiscal year 2018. Over the long term, we believe that global
tobacco production will continue a slight decline in line with slightly declining total demand. South America, Asia, Africa, and
North America will remain key sourcing regions for flue-cured and burley tobaccos.
China
China is a significant cigarette market. However, most of the cigarettes consumed in China and the leaf tobacco used in
those cigarettes are produced domestically. Therefore, we normally view the Chinese market independently when evaluating
worldwide leaf tobacco supply and demand. Recently, the Chinese domestic cigarette consumption level has decreased. We believe
that China’s domestic leaf production now exceeds their domestic needs for the local cigarette market, and we have seen a build-
up of domestic leaf inventory there. China is currently demonstrating efforts to re-align their domestic leaf production and inventories
to balance their needs, and these efforts could influence global supply/demand in the short term.
Pricing
Factors that affect green tobacco prices include global supply and demand, market conditions, production costs, foreign
exchange rates, and competition from other crops. We work with farmers to maintain tobacco production and to secure product at
price levels that are attractive to both the farmers and our customers. Our objective is to secure compliant tobacco that is produced
in a cost-effective manner under a sustainable business model with the desired quality for our customers. In some areas, tobacco
competes with agricultural commodity products for farmer production. If prices for soybeans, wheat, rice, and seed oils rise in
certain origins, green tobacco prices may have to rise to maintain tobacco production levels. In the past, leaf shortages in specific
markets or on a worldwide basis have also led to green tobacco price increases.
30
Demand
Industry data shows that over the past ten years, total world consumption of cigarettes fell at the compound annual rate of
0.8%. We believe that growth in world consumption of cigarettes peaked several years ago and is declining. As a result, we expect
that near term global demand for leaf tobacco will continue to slowly decline in line with declining cigarette consumption.
Our sales consist primarily of flue-cured and burley tobaccos. Those types of tobacco, along with oriental tobaccos, are
used in American-blend cigarettes which are primarily smoked in Western Europe and the United States. English-blend cigarettes
which use flue-cured tobacco are mainly smoked in the United Kingdom and Asia and other emerging markets. Industry data shows
that consumption of American-blend cigarettes has declined at a compound annual rate of 2.6% for the ten years ended in 2016.
As cigarette consumption declines in developed markets and increases in the emerging markets, there may be less demand for burley
and oriental tobaccos and more demand for flue-cured tobacco. However, demand is affected by many factors, including regulation,
product taxation, illicit trade, alternative tobacco products, and Chinese imports. To the extent that domestic leaf production and
inventory durations in China do not meet requirements for Chinese cigarette blends, that tobacco could be sourced from other origins
where we have major market positions. On a year-to-year basis, we are also susceptible to fluctuations in leaf supply due to crop
sizes and leaf demand as manufacturers adjust inventories or respond to changes in cigarette markets. With higher projected crop
year 2017 leaf tobacco production, we currently expect supply for flue-cured tobacco to be in a slight oversupply position and burley
tobacco to be largely in line with anticipated demand. However, inventories held by our customers may affect their near-term
demand for leaf tobacco. We also sell oriental tobacco, which is used in American-blend cigarettes, and dark tobacco, which is
used in cigars and other smokeless products. While we expect demand for oriental tobacco and dark tobacco used in cigar filler to
be generally in line with supply, we are seeing an undersupply of dark tobacco used for cigar wrappers.
Regulation and Product Taxation
Decreased social acceptance of smoking and increased pressure from anti-smoking groups have had an ongoing adverse
effect on the percentage of the population using tobacco products, particularly in the United States and Western Europe. Also, many
foreign governments have taken or proposed steps to restrict or prohibit cigarette advertising and promotion, to increase taxes on
cigarettes, to prohibit smoking in public areas, and to discourage cigarette consumption. A number of such measures are included
in the Framework Convention on Tobacco Control (“FCTC”), which was negotiated under the auspices of the WHO and offers
guidelines for discouraging or controlling tobacco use. Countries that are parties to the FCTC may choose the level of implementation
of the guidelines that is most suitable with their approach to tobacco control. For example, recently China imposed a ban on smoking
in public places, and in the United Kingdom and Australia, laws have been passed mandating plain packaging, the removal of
branding on cigarette packages. We cannot predict the extent to which government efforts to reduce tobacco consumption might
affect the business of our primary customers. However, a significant decrease in worldwide tobacco consumption, as well as shifts
to modified risk tobacco products brought about by existing or future governmental laws and regulations, could reduce demand for
leaf tobacco and services and could have a material adverse effect on our results of operations.
In addition, certain recommendations by the WHO, through the FCTC, may cause shifts in customer usage of certain types
and styles of tobacco. As seen in Canada, Brazil, and the European Union, efforts have been taken to eliminate flavorings from
tobacco products. Such decisions could cause a change in requirements for certain tobaccos in particular countries. Shifts in
customer demand from one type of tobacco to another could create sourcing issues as requirements move from one origin to another.
Furthermore, instruction at the farm level may be required to produce the changing styles of tobacco needed by tobacco product
manufacturers. Given our established and well-developed programs at the farm level worldwide, we are particularly well positioned
to meet manufacturer requirements.
In 2009, the U.S. Congress passed the Family Smoking Prevention and Tobacco Control Act (“the Act”). This legislation
authorizes the FDA to regulate the manufacturing and marketing of all tobacco products. The FDA has banned flavored cigarettes,
restricted youth access to tobacco products, banned advertising claims regarding certain tobacco products, established new smokeless
tobacco warnings, and issued new cigarette health warnings. In addition, the FDA established the Center for Tobacco Products
(“CTP”). The CTP has focused on establishing the scientific foundation and regulatory framework for regulating tobacco products
in the United States. On May 10, 2016, the FDA released “deeming” regulations that extend FDA oversight to all tobacco products
including electronic nicotine delivery systems, cigars, hookah tobacco, pipe tobacco, dissolvables, and “novel and future products.”
The regulations require that tobacco product manufacturers register tobacco products that existed on February 15, 2007, and to seek
FDA authorization to sell any products modified or introduced after such date. All such submissions require manufacturers to list
ingredients in their products. Regulations impacting our customer base that change the requirements for leaf tobacco or restrict
their ability to sell their products will inherently impact our business. As discussed, we have established programs that begin at the
farm level to assist our customers with raw material information to support leaf traceability and customer testing requirements.
Additionally, given our global presence, we also have the ability to source different types and styles of tobacco for our customers
should their needs change due to regulation.
31
A number of governments, particularly federal and local governments in the United States and the European Union, impose
excise or similar taxes on tobacco products. There has been, and will likely continue to be, new legislation proposing new or
increased taxes on tobacco products. In some cases, proposed legislation seeks to significantly increase existing taxes on tobacco
products, or impose new taxes on products that to date have not been subject to tax. Increases in product taxation may reduce the
affordability of cigarettes and influence the level of illicit trade, which will affect the global leaf markets.
Illicit Trade
Illicit trade is another factor which influences demand for leaf tobacco. Industry estimates of the illegal, unregulated black
market for cigarettes are approximately 10% to 12% of global stick consumption, representing $40 to $50 billion in lost tax revenue
globally. We support industry efforts to eradicate illicit trade.
Alternative Tobacco Products
Many of the major tobacco product manufacturers have been developing next generation and modified risk products. These
include electronic nicotine delivery systems, liquid vaporizers, and non-combustible products. Electronic nicotine delivery systems
and liquid vaporizers use liquid nicotine, which is predominately derived from leaf tobacco, and non-combustible products use leaf
tobacco. At this time it is unclear how these new products will affect demand for leaf tobacco. However, as our customers develop
these products, we continue to work with them to make sure we are well-positioned to meet their needs for both their traditional
and new products. Currently, regulation of these products as well as consumer acceptance and their influence on smoking trends
are unclear, and we continue to monitor industry developments. Electronic nicotine delivery systems, non-combustible products,
and other next generation products are now primarily consumed in Western Europe, Japan, and the United States, and it is unclear
what effect the consumption of these new products may have on global demand for leaf tobacco in the future.
Current Industry Dynamics
Leaf tobacco is sourced directly by product manufacturers, by global leaf suppliers such as ourselves, and by other smaller,
mostly regional or local, leaf suppliers. We estimate that, of the flue-cured and burley tobacco grown outside of China, approximately
one-third is purchased directly by major manufacturers, slightly over one-third is handled by the global leaf suppliers, and the
remainder is sourced by the smaller regional or local suppliers. Although we operate in a mature industry, where demand for the
end products is declining at a slow rate, we continually look for ways to grow our business. In recent years, we believe that we
have been able to maintain relatively steady tobacco volumes handled, despite declines in demand for leaf tobacco from product
manufacturers, by increasing our market share. We also believe that there are several longer term trends in the industry that could
provide additional opportunities for us to maintain or increase our market share and to offer additional services to our customers.
Manufacturers naturally seek to mitigate raw materials cost increases, and they are placing increased emphasis on cost
containment as they address declining demand. While this is not a new trend, it continues to offer opportunities to us as we bring
supply chain efficiencies to the leaf markets. We believe that global leaf suppliers add efficiencies to the markets through economies
of scale, as well as through the vital role played in finding buyers for all styles and qualities of leaf tobacco, which achieves overall
cost reductions. To understand our business, it is important to note that tobacco is not a commodity product. Flavor and smoking
characteristics of tobacco vary based on the type of tobacco and the region where the tobacco is grown. In addition, characteristics
of tobacco leaves vary by their position on the stalk of the plant, which means that many different styles and grades of tobacco may
be produced in a single tobacco crop. A particular manufacturer, in seeking tobacco for its proprietary blend, may only want and
have use for certain leaves of a plant. The leaf tobacco supplier plays a vital role in the industry by finding buyers for all of the leaf
grades and styles of tobacco produced in a farmer’s crop. This role helps to eliminate excess tobacco being produced, which improves
leaf utilization.
In addition to leaf utilization, we bring operational efficiencies to the industry, which in turn help reduce costs. These
efficiencies include economical utilization of processing capacity in our facilities, an established and scalable global network of
agronomists and technicians helping maintain a stable, productive, and sustainable farmer base, and agronomic and production
improvements to optimize leaf yields and qualities. In addition, we are able to offer manufacturers a complete range of services
from the field to the delivery of the packed product that benefit from our efficiencies. These services include such things as buying
station optimization, processing to specific customer specifications or needs, storage of green or packed leaf tobacco, and logistical
services. In recent years, we have seen an increase in the level of direct purchasing and other supply chain services that we provide
our customers, notably in the United States, Mexico, Brazil, Poland, Guatemala, and the Dominican Republic. We believe these
moves acknowledge the efficiencies and services that global leaf suppliers bring to the entire supply chain.
We have also seen some reductions in sourcing from lower-volume tobacco growing regions by both global leaf suppliers
and major manufacturers. Flue-cured tobacco is produced in over 70 countries around the world, and burley tobacco is grown in
over 45 countries. However, over 80% of the flue-cured tobacco grown outside of China and over 85% of the worldwide burley
tobacco production is sourced from the top ten growing areas for each type of tobacco. We believe that these moves to reduce
sourcing areas are another way for the industry to increase efficiency and to reduce costs. We maintain a strong presence in all of
the major tobacco sourcing areas and believe that any growth in these areas would favor global leaf suppliers such as ourselves. In
32
the future, we expect that increased regulations requiring stringent monitoring and testing of leaf chemistry and compliant sourcing
documentation could place greater emphasis on major sourcing areas.
As we have said for a number of years, the production of compliant leaf for the tobacco industry continues to grow in
importance. To be considered compliant, leaf tobacco must be grown utilizing Good Agricultural Practices. We have long invested
significant resources in the programs and infrastructure needed to work with growers to produce compliant leaf and continue to
enhance our ability to monitor and demonstrate this compliance for customers. Our Good Agricultural Practices support an approach
to farming that is focused on sustainability, employing sound field production and labor management practices that meet our
customers’ needs, promote farmer profitability and reflect environmental sensitivity. To assist them, Universal provides
comprehensive training, technical support in the field, and crop analytics through ongoing research and development. We believe
that compliant leaf will continue to be important to our customers and should favor global suppliers who are able to deliver this
product.
We also believe that a key factor in our ability to perform successfully in this industry is our ability to provide customers
with the quality of leaf and the level of service they desire on a global basis at competitive prices, while maintaining a stability of
supply. As the leading global leaf tobacco supplier, we add significant value to the supply chain, providing expertise in dealing with
large numbers of farmers, efficiently selling various qualities of leaf produced in each crop to a broad global customer base, and
delivering products that meet stringent quality and regulatory specifications. We also help stabilize the tobacco markets and influence
crop development at the farm level. Our key objective is to continually adapt our business model to meet our customers' evolving
needs while continuing to provide stability of supply and the quality that distinguishes our products and services. In addition, we
monitor new product developments in the industry to identify areas where we can provide additional value to our customers.
33
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Interest Rates
We generally use both fixed and floating interest rate debt to finance our operations. Changes in market interest rates
expose us to changes in cash flows for floating rate instruments and to changes in fair value for fixed-rate instruments. We normally
maintain a proportion of our debt in both variable and fixed interest rates to manage this exposure, and from time to time we may
enter hedge agreements to swap the interest rates. In addition, our customers may pay market rates of interest for inventory purchased
on order, which could mitigate a portion of the floating interest rate exposure. We also periodically have large cash balances and
may receive deposits from customers, both of which we use to fund seasonal purchases of tobacco, reducing our financing needs.
Excluding our bank term loans, which have been converted to fixed-rate borrowings with interest rate swaps, debt carried at variable
interest rates was approximately $59 million at March 31, 2017. Although a hypothetical 1% change in short-term interest rates
would result in a change in annual interest expense of approximately $0.6 million, that amount would be at least partially mitigated
by changes in charges to customers.
In addition, changes in interest rates affect the calculation of our pension plan liabilities. As rates decrease, the liability
for the present value of amounts expected to be paid under the plans increases. Rate changes also affect expense. As of the March 31,
2017 measurement date, a 1% decrease in the discount rate would have increased the projected benefit obligation (“PBO”) for
pensions by $32 million and increased annual pension expense by $3 million. Conversely, a 1% increase in the discount rate would
have reduced the PBO by $27 million and reduced annual pension expense by $3 million.
Currency
The international leaf tobacco trade generally is conducted in U.S. dollars, thereby limiting foreign exchange risk to that
which is related to leaf purchase and production costs, overhead, and income taxes in the source country. We also provide farmer
advances that are directly related to leaf purchases and are denominated in the local currency. Any currency gains or losses on those
advances are usually offset by increases or decreases in the cost of tobacco, which is priced in the local currency. However, the
effect of the offset may not occur until a subsequent quarter or fiscal year. Most of our tobacco operations are accounted for using
the U.S. dollar as the functional currency. Because there are no forward foreign exchange markets in many of our major countries
of tobacco origin, we often manage our foreign exchange risk by matching funding for inventory purchases with the currency of
sale, which is usually the U.S. dollar, and by minimizing our net local currency monetary position in individual countries. We are
vulnerable to currency remeasurement gains and losses to the extent that monetary assets and liabilities denominated in local currency
do not offset each other. We recognized $9.3 million in net remeasurement losses in fiscal year 2017, compared to $22.5 million
in net remeasurement losses in fiscal year 2016, and $28.8 million in net remeasurement gains in fiscal year 2015. We recognized
$1.3 million in net foreign currency transaction gains in fiscal year 2017, compared to net transaction gains of $8.0 million in fiscal
year 2016, and net transaction losses of $17.7 million in fiscal year 2015. In addition to foreign exchange gains and losses, we are
exposed to changes in the cost of tobacco due to changes in the value of the local currency in relation to the U.S. dollar. We have
entered forward currency exchange contracts to hedge against the effects of currency movements on purchases of tobacco to reduce
the volatility of costs. In addition, we periodically enter into forward contracts to hedge balance sheet exposures. See Note 8 to
the consolidated financial statements in Item 8 for additional information about our hedging activities.
In certain tobacco markets that are primarily domestic, we use the local currency as the functional currency. Examples of
these markets are Poland and the Philippines. In other markets, such as Western Europe, where export sales are primarily in local
currencies, we also use the local currency as the functional currency. In each case, reported earnings are affected by the translation
of the local currency into the U.S. dollar.
Derivatives Policies
Hedging interest rate exposure using swaps and hedging foreign currency exchange rate exposure using forward contracts
are specifically contemplated to manage risk in keeping with management's policies. We may use derivative instruments, such as
swaps, forwards, or futures, which are based directly or indirectly upon interest rates and currencies to manage and reduce the risks
inherent in interest rate and currency fluctuations. When we use foreign currency derivatives to mitigate our exposure to exchange
rate fluctuations, we may choose not to designate them as hedges for accounting purposes, which may result in the effects of the
derivatives being recognized in our earnings in periods different from the items that created the exposure.
We do not utilize derivatives for speculative purposes, and we do not enter into market risk-sensitive instruments for trading
purposes. Derivatives are transaction-specific so that a specific debt instrument, forecast purchase, contract, or invoice determines
the amount, maturity, and other specifics of the hedge. We routinely review counterparty risk as part of our derivative program.
34
Item 8. Financial Statements and Supplementary Data
UNIVERSAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(in thousands of dollars, except share and per share data)
2017
2016
2015
Sales and other operating revenues .......................................................................................................... $
2,071,218
$
2,120,373
$
2,271,801
Fiscal Year Ended March 31,
Costs and expenses
Cost of goods sold .................................................................................................................................
1,676,539
1,713,042
1,861,527
Selling, general and administrative expenses........................................................................................
211,969
226,685
Other income .........................................................................................................................................
Restructuring and impairment costs ......................................................................................................
—
4,359
(3,390)
2,389
250,186
(12,676)
4,890
Operating income .....................................................................................................................................
178,351
181,647
167,874
Equity in pretax earnings of unconsolidated affiliates ..........................................................................
Interest income ......................................................................................................................................
Interest expense .....................................................................................................................................
Income before income taxes.....................................................................................................................
Income taxes..........................................................................................................................................
Net income ...............................................................................................................................................
Less: net income attributable to noncontrolling interests in subsidiaries................................................
Net income attributable to Universal Corporation ...................................................................................
Dividends on Universal Corporation convertible perpetual preferred stock............................................
Cost in excess of carrying value on conversion or repurchase of convertible perpetual preferred stock
5,774
1,397
16,284
169,238
56,732
112,506
(6,202)
106,304
(11,061)
(74,353)
5,422
1,178
15,669
172,578
54,430
118,148
(9,132)
109,016
(14,748)
—
7,137
576
17,120
158,467
38,006
120,461
(5,853)
114,608
(14,824)
(36)
Earnings available to Universal Corporation common shareholders ....................................................... $
20,890
$
94,268
$
99,748
Earnings per share attributable to Universal Corporation common shareholders:
Basic ...................................................................................................................................................... $
Diluted ................................................................................................................................................... $
0.89
0.88
$
$
4.16
3.92
$
$
4.33
4.06
Weighted average common shares outstanding:
Basic ......................................................................................................................................................
23,433,860
22,683,290
23,035,920
Diluted ...................................................................................................................................................
23,770,088
27,825,491
28,221,264
See accompanying notes.
35
UNIVERSAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands of dollars)
Fiscal Year Ended March 31,
2017
2016
2015
Net income ............................................................................................................................................. $
112,506
$
118,148
$
120,461
Other comprehensive income (loss):
Foreign currency translation, net of income taxes ..............................................................................
Foreign currency hedge, net of income taxes .....................................................................................
Interest rate hedge, net of income taxes..............................................................................................
Pension and other postretirement benefit plans, net of income taxes .................................................
Total other comprehensive income (loss), net of income taxes....................................................
Total comprehensive income ........................................................................................................
Less: comprehensive income attributable to noncontrolling interests...................................................
(6,899)
(933)
8,395
1,475
2,038
114,544
(5,449)
3,934
2,509
(5,015)
1,004
2,432
120,580
(8,920)
(22,625)
(2,603)
(1,374)
(14,023)
(40,625)
79,836
(5,890)
Comprehensive income attributable to Universal Corporation ............................................................. $
109,095
$
111,660
$
73,946
See accompanying notes.
36
UNIVERSAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars)
Current assets
ASSETS
March 31,
2017
2016
Cash and cash equivalents.................................................................................................................................................... $
283,993 $
Accounts receivable, net.......................................................................................................................................................
Advances to suppliers, net....................................................................................................................................................
Accounts receivable—unconsolidated affiliates ..................................................................................................................
439,288
103,750
2,373
319,447
428,659
101,890
2,316
Inventories—at lower of cost or market:
Tobacco..............................................................................................................................................................................
565,943
637,132
Other..................................................................................................................................................................................
Prepaid income taxes............................................................................................................................................................
Other current assets ..............................................................................................................................................................
68,087
16,713
81,252
60,888
17,814
70,400
Total current assets............................................................................................................................................................
1,561,399
1,638,546
Property, plant and equipment
Land......................................................................................................................................................................................
Buildings ..............................................................................................................................................................................
Machinery and equipment ....................................................................................................................................................
22,852
266,802
597,213
886,867
22,987
264,838
591,327
879,152
Less accumulated depreciation..........................................................................................................................................
(569,527)
(553,265)
Other assets
Goodwill and other intangibles ............................................................................................................................................
Investments in unconsolidated affiliates ..............................................................................................................................
Deferred income taxes..........................................................................................................................................................
Other noncurrent assets ........................................................................................................................................................
317,340
325,887
98,888
78,457
25,422
41,899
99,071
82,441
23,853
61,379
244,666
266,744
Total assets......................................................................................................................................................................... $
2,123,405 $
2,231,177
37
UNIVERSAL CORPORATION
CONSOLIDATED BALANCE SHEETS—(Continued)
(in thousands of dollars)
Current liabilities
LIABILITIES AND SHAREHOLDERS’ EQUITY
March 31,
2017
2016
Notes payable and overdrafts............................................................................................................................................... $
59,133
$
Accounts payable and accrued expenses .............................................................................................................................
153,515
Accounts payable—unconsolidated affiliates......................................................................................................................
Customer advances and deposits .........................................................................................................................................
Accrued compensation.........................................................................................................................................................
Income taxes payable...........................................................................................................................................................
Current portion of long-term debt........................................................................................................................................
7,231
11,007
32,007
5,103
—
66,179
120,527
8,343
16,438
27,593
7,190
—
Total current liabilities................................................................................................................................................
267,996
246,270
Long-term debt........................................................................................................................................................................
368,733
368,380
Pensions and other postretirement benefits.............................................................................................................................
Other long-term liabilities.......................................................................................................................................................
Deferred income taxes ............................................................................................................................................................
80,689
31,424
47,985
92,177
41,794
29,494
Total liabilities ............................................................................................................................................................
796,827
778,115
Shareholders’ equity
Universal Corporation:
Preferred stock:
Series A Junior Participating Preferred Stock, no par value, 500,000 shares authorized,
none issued or outstanding ........................................................................................................................................
Series B 6.75% Convertible Perpetual Preferred Stock, no par value, 220,000 shares authorized,
no shares outstanding (218,490 shares issued and outstanding at March 31, 2016) .................................................
—
—
Common stock, no par value, 100,000,000 shares authorized, 25,274,506 shares issued
and outstanding (22,717,735 at March 31, 2016)...........................................................................................................
321,207
—
211,562
208,946
Retained earnings..............................................................................................................................................................
1,034,841
1,066,064
Accumulated other comprehensive loss............................................................................................................................
(69,559)
(72,350)
Total Universal Corporation shareholders' equity.......................................................................................................
1,286,489
1,414,222
Noncontrolling interests in subsidiaries..................................................................................................................................
40,089
38,840
Total shareholders' equity ...........................................................................................................................................
1,326,578
1,453,062
Total liabilities and shareholders' equity..................................................................................................................... $
2,123,405 $
2,231,177
See accompanying notes.
38
UNIVERSAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
Cash Flows From Operating Activities:
Fiscal Year Ended March 31,
2017
2016
2015
Net income ............................................................................................................................................ $
112,506
$
118,148
$
120,461
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation .......................................................................................................................................
Provision for losses (recoveries) on advances and guaranteed loans to suppliers .............................
Inventory write-downs .......................................................................................................................
Stock-based compensation expense ...................................................................................................
Foreign currency remeasurement loss (gain), net ..............................................................................
Deferred income taxes........................................................................................................................
Equity in net income of unconsolidated affiliates, net of dividends ..................................................
Gain on favorable outcome of excise tax case in Brazil ....................................................................
Fair value gain upon acquisition of partner's interest in joint venture ...............................................
Restructuring and impairment costs ...................................................................................................
Other, net ............................................................................................................................................
Changes in operating assets and liabilities, net:
Accounts and notes receivable ........................................................................................................
Inventories and other assets.............................................................................................................
Income taxes....................................................................................................................................
Accounts payable and other accrued liabilities ...............................................................................
Customer advances and deposits.....................................................................................................
Net cash provided by operating activities .....................................................................................
35,911
(857)
10,866
6,475
9,269
16,626
396
—
—
4,359
(4,463)
(14,346)
52,139
(1,719)
28,643
(5,490)
250,315
Cash Flows From Investing Activities:
Purchase of property, plant and equipment ........................................................................................
(35,630)
Purchase of partner's interest in joint venture, net of cash held by the business................................
Proceeds from sale of property, plant and equipment ........................................................................
Other, net ............................................................................................................................................
—
2,174
(398)
Net cash used by investing activities.............................................................................................
(33,854)
Cash Flows From Financing Activities:
Issuance (repayment) of short-term debt, net .....................................................................................
(5,349)
Issuance of long-term debt .................................................................................................................
Repayment of long-term debt.............................................................................................................
Dividends paid to noncontrolling interests.........................................................................................
Issuance of common stock .................................................................................................................
—
—
(4,200)
—
Conversion/repurchase of convertible perpetual preferred stock.......................................................
(178,365)
Repurchase of common stock.............................................................................................................
Dividends paid on convertible perpetual preferred stock...................................................................
Dividends paid on common stock ......................................................................................................
Debt issuance costs and other.............................................................................................................
—
(11,061)
(49,828)
(2,441)
Net cash used by financing activities ............................................................................................
(251,244)
Effect of exchange rate changes on cash...............................................................................................
Net (decrease) increase in cash and cash equivalents ...........................................................................
Cash and cash equivalents at beginning of year....................................................................................
(671)
(35,454)
319,447
36,754
815
11,899
5,206
22,517
15,046
156
—
(3,390)
2,389
13,204
(2,806)
(7,370)
1,437
(13,678)
(13,796)
186,531
(47,153)
(5,964)
2,982
(796)
(50,931)
4,880
—
—
(4,449)
—
—
—
(14,748)
(47,389)
(2,940)
(64,646)
(290)
70,664
248,783
Cash and Cash Equivalents at End of Year...................................................................................... $
283,993
$
319,447
$
35,394
3,734
18,612
6,230
28,836
(13,662)
(1,075)
(12,676)
—
4,890
(7,342)
49,414
37,751
5,680
(63,257)
14,397
227,387
(58,385)
—
4,522
(141)
(54,004)
2,618
370,000
(356,250)
(4,183)
187
(1,497)
(31,227)
(14,824)
(47,337)
(4,511)
(87,024)
(1,108)
85,251
163,532
248,783
Supplemental information—cash paid for:
Interest ................................................................................................................................................ $
Income taxes, net of refunds............................................................................................................... $
16,284
37,294
$
$
15,704
38,732
$
$
19,184
46,044
Non-cash Financing Transaction - The consolidated financial statements for the fiscal year ended March 31, 2017 include a non-cash reclassification
of $107.6 million from preferred stock to common stock to reflect the conversion of 111,072 shares of the Company's outstanding Series B 6.75%
Convertible Perpetual Preferred Stock into common stock. See Note 11 for additional information.
See accompanying notes.
39
UNIVERSAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(in thousands of dollars)
Fiscal Year Ended March 31, 2017
Universal Corporation Shareholders
Series B
6.75%
Convertible
Perpetual
Preferred
Stock
Common
Stock
Retained
Earnings
Accumulated
Other
Comprehensive
Income
(Loss)
Non-
controlling
Interests
Total
Shareholders'
Equity
Balance at beginning of year ..........................................................
$
211,562
$ 208,946
$ 1,066,064
$
(72,350) $
38,840
$
1,453,062
Changes in preferred and common stock
Conversion of Series B 6.75% convertible perpetual
preferred stock for common stock ....................................
(107,550)
107,550
Conversion of Series B 6.75% convertible perpetual
preferred stock for cash.....................................................
(104,012)
Accrual of stock-based compensation ...................................
Withholding of shares from stock-based compensation for
grantee income taxes.........................................................
Dividend equivalents on restricted stock units (RSUs).........
Changes in retained earnings
Net income ............................................................................
Cash dividends declared
Series B 6.75% convertible perpetual preferred stock
($50.63 per share) ........................................................
Common stock ($2.14 per share) .....................................
Conversion of Series B 6.75% convertible perpetual
preferred stock for cash.....................................................
Dividend equivalents on restricted stock units (RSUs).........
Other comprehensive income (loss)
Foreign currency translation, net of income taxes ................
Foreign currency hedge, net of income taxes........................
Interest rate hedge, net of income taxes ................................
Pension and other postretirement benefit plans, net of
income taxes......................................................................
Other changes in noncontrolling interests
Dividends paid to noncontrolling shareholders.....................
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
6,475
(2,440)
676
—
106,304
—
—
—
—
—
—
—
—
—
(11,061)
(51,437)
(74,353)
(676)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(104,012)
6,475
(2,440)
676
6,202
112,506
—
—
—
—
(11,061)
(51,437)
(74,353)
(676)
(6,899)
(933)
8,395
1,475
(6,146)
(753)
(933)
8,395
1,475
—
—
—
—
(4,200)
(4,200)
Balance at end of year ....................................................................
$
— $ 321,207
$ 1,034,841
$
(69,559) $
40,089
$
1,326,578
40
UNIVERSAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY—(Continued)
(in thousands of dollars)
Fiscal Year Ended March 31, 2016
Universal Corporation Shareholders
Series B
6.75%
Convertible
Perpetual
Preferred
Stock
Common
Stock
Retained
Earnings
Accumulated
Other
Comprehensive
Income
(Loss)
Non-
controlling
Interests
Total
Shareholders'
Equity
Balance at beginning of year............................................................
$
211,562
$ 206,002
$ 1,020,155
$
(74,994) $
34,369
$
1,397,094
Changes in preferred and common stock
Accrual of stock-based compensation ....................................
Withholding of shares from stock-based compensation for
grantee income taxes ..........................................................
Dividend equivalents on restricted stock units (RSUs) ..........
Changes in retained earnings
Net income ..............................................................................
Cash dividends declared
Series B 6.75% convertible perpetual preferred stock
($67.50 per share)..........................................................
Common stock ($2.10 per share).......................................
Dividend equivalents on restricted stock units (RSUs) ..........
Other comprehensive income (loss)
Foreign currency translation, net of income taxes ..................
Foreign currency hedge, net of income taxes .........................
Interest rate hedge, net of income taxes..................................
Pension and other postretirement benefit plans, net of
income taxes .......................................................................
Other changes in noncontrolling interests
Dividends paid to noncontrolling shareholders ......................
—
—
—
—
—
—
—
—
—
—
—
—
5,206
(2,940)
678
—
—
—
—
109,016
—
—
—
—
—
—
—
—
(14,748)
(47,681)
(678)
—
—
—
—
—
—
—
—
—
—
—
—
4,146
2,509
(5,015)
1,004
—
—
—
5,206
(2,940)
678
9,132
118,148
—
—
—
(212)
—
—
—
(14,748)
(47,681)
(678)
3,934
2,509
(5,015)
1,004
—
(4,449)
(4,449)
Balance at end of year......................................................................
$
211,562
$ 208,946
$ 1,066,064
$
(72,350) $
38,840
$
1,453,062
41
UNIVERSAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY—(Continued)
(in thousands of dollars)
Fiscal Year Ended March 31, 2015
Universal Corporation Shareholders
Series B
6.75%
Convertible
Perpetual
Preferred
Stock
Common
Stock
Retained
Earnings
Accumulated
Other
Comprehensive
Income
(Loss)
Non-
controlling
Interests
Total
Shareholders'
Equity
Balance at beginning of year............................................................
$
213,023
$ 206,446
$
993,093
$
(34,332) $
32,662
$
1,410,892
Changes in preferred and common stock
Repurchase of Series B 6.75% convertible perpetual
preferred stock ....................................................................
(1,461)
Issuance of common stock ......................................................
Repurchase of common stock .................................................
Accrual of stock-based compensation ....................................
Withholding of shares from stock-based compensation for
grantee income taxes ..........................................................
Dividend equivalents on restricted stock units (RSUs) ..........
Changes in retained earnings
Net income ..............................................................................
Cash dividends declared
Series B 6.75% convertible perpetual preferred stock
($67.50 per share)..........................................................
Common stock ($2.06 per share).......................................
Repurchase of Series B 6.75% convertible perpetual
preferred stock ....................................................................
Repurchase of common stock .................................................
Dividend equivalents on restricted stock units (RSUs) ..........
Other comprehensive income (loss)
Foreign currency translation, net of income taxes ..................
Foreign currency hedge, net of income taxes .........................
Interest rate hedge, net of income taxes..................................
Pension and other postretirement benefit plans, net of
income taxes .......................................................................
Other changes in noncontrolling interests
Dividends paid to noncontrolling shareholders ......................
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
187
(6,439)
6,230
(1,076)
654
—
—
—
—
—
—
—
114,608
—
—
—
—
—
—
—
—
—
—
(14,824)
(47,244)
(36)
(24,788)
(654)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(22,662)
(2,603)
(1,374)
(14,023)
—
—
—
—
—
—
(1,461)
187
(6,439)
6,230
(1,076)
654
5,853
120,461
—
—
—
—
—
37
—
—
—
(14,824)
(47,244)
(36)
(24,788)
(654)
(22,625)
(2,603)
(1,374)
(14,023)
—
(4,183)
(4,183)
Balance at end of year......................................................................
$
211,562
$ 206,002
$ 1,020,155
$
(74,994) $
34,369
$
1,397,094
42
UNIVERSAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY—(Continued)
Fiscal Year Ended March 31,
2017
2016
2015
Preferred Shares Outstanding:
Series B 6.75% Convertible Perpetual Preferred Stock:
Balance at beginning of year.................................................................................................................
Conversion of convertible perpetual preferred stock for common stock..............................................
Conversion of convertible perpetual preferred stock for cash ..............................................................
Repurchase of convertible perpetual preferred stock............................................................................
Balance at end of year...........................................................................................................................
218,490
(111,072)
(107,418)
—
—
218,490
219,999
—
—
—
218,490
—
—
(1,509)
218,490
Common Shares Outstanding:
Balance at beginning of year.................................................................................................................
22,717,735
22,593,266
23,216,312
Issuance of common stock ....................................................................................................................
69,653
124,469
Conversion of convertible perpetual preferred stock for common stock..............................................
2,487,118
Repurchase of common stock ...............................................................................................................
—
—
—
96,947
—
(719,993)
Balance at end of year...........................................................................................................................
25,274,506
22,717,735
22,593,266
See accompanying notes.
43
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 the
leading global leaf tobacco supplier. The Company conducts business in over 30 countries, primarily in major tobacco-producing
regions of the world.
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 $5.1 million in fiscal year 2017, $3.4 million in
fiscal year 2016, and $5.2 million in fiscal year 2015, from companies accounted for under the equity method. Investments where
Universal has a voting interest of less than 20% are not significant and are accounted for under the cost method. Under the cost
method, the Company recognizes earnings upon its receipt of dividends to the extent they represent a distribution of retained earnings.
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. As discussed
further below, the Company reviews the carrying value of its investments in unconsolidated affiliates on a regular basis and considers
whether any factors exist that might indicate an impairment in value that is other than temporary. At March 31, 2017, the Company
determined that no such factors existed with respect to the investment in Socotab. The Company, together with Socotab management,
regularly evaluates the outlook for the business, and an impairment charge could be recorded in a future period if it is determined
that the fair value of the investment is less than the carrying value and the decline in value is not temporary.
In fiscal year 2006, the Company deconsolidated its operations in Zimbabwe under accounting requirements that apply
under certain conditions to foreign subsidiaries that are subject to foreign exchange controls and other government restrictions. Since
that time, the investment has been accounted for using the cost method, as required under the accounting guidance. The investment
in the Zimbabwe operations was zero at March 31, 2017 and 2016. 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.
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.
During fiscal years 2017, 2016, and 2015, there were no changes in the Company’s ownership percentage in any of these subsidiaries.
44
UNIVERSAL CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Investments in Unconsolidated Affiliates
The Company’s equity method investments and its cost method investments, 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 equity
or cost method investments, the Company follows the applicable accounting guidance in determining the fair value of the investments.
In most cases, this involves the use of discounted cash flow models (Level 3 of the fair value hierarchy under the accounting guidance).
If the fair value of an equity or cost method 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 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, 2017, 2016, and 2015:
Fiscal Year Ended March 31,
2017
2016
2015
Equity in pretax earnings reported in the consolidated statements of income..................... $
5,774
$
5,422
$
Less: Equity in income taxes...............................................................................................
Equity in net income ............................................................................................................
Less: Dividends received on investments (1) ......................................................................
Equity in net income, net of dividends, reported in the consolidated statements of cash
(1,092)
4,682
(5,078)
(2,156)
3,266
(3,422)
7,137
(834)
6,303
(5,228)
flows................................................................................................................................. $
(396) $
(156) $
1,075
(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 after payment of
dividends on the Company’s Series B 6.75% Convertible Perpetual Preferred Stock prior to its conversion in fiscal year 2017 (see
Note 11). 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 awards that are
assumed to be fully vested and paid out in shares of common stock, dilutive stock options and stock appreciation rights that were
assumed to be exercised, and shares of convertible perpetual preferred stock that were assumed to be converted when the effect was
dilutive. In periods when the effect of the convertible perpetual preferred stock was dilutive and these shares were assumed to be
converted into common stock, dividends paid on the preferred stock were excluded from the calculation of diluted earnings per share.
Calculations of earnings per share for the fiscal years ended March 31, 2017, 2016, and 2015, are provided in Note 3.
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.
45
UNIVERSAL CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Advances to 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 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 approximately $134 million at both March 31, 2017 and 2016. The related valuation allowances totaled $27 million at
March 31, 2017, and $29 million at March 31, 2016, and were estimated based on the Company’s historical loss information and
crop projections. The allowances were reduced by net recoveries of approximately $0.9 million in fiscal year 2017, but increased
by net provisions for estimated uncollectible amounts of approximately $0.8 million in fiscal year 2016 and $3.7 million in fiscal
year 2015. These 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. Advances
on which interest accrual had been discontinued totaled approximately $11 million at both March 31, 2017 and 2016.
Inventories
Tobacco inventories are valued at the lower of cost or market. 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 seed, fertilizer, packing materials, and other supplies, and are valued
principally at the lower of average cost or market.
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, 2017
and 2016, the aggregate balances of recoverable tax credits held by the Company’s subsidiaries totaled approximately $45 million
and $52 million, respectively, and the related valuation allowances totaled approximately $13 million and $19 million, respectively.
The net balances are reported in other current assets and other noncurrent assets in the consolidated balance sheets.
Property, Plant and Equipment
Depreciation of 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 tobacco 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 10 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 2017, 2016, or 2015.
46
UNIVERSAL CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Goodwill and Other Intangibles
Goodwill and other intangibles principally consist 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. 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, 2017 and 2016. Those factors did not indicate any potential impairment of the Company's
recorded goodwill.
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. Significant adverse changes in the operations or
estimated future cash flows for a reporting unit with recorded goodwill could result in an impairment charge. No charges for goodwill
impairment were recorded in fiscal years 2017, 2016, or 2015.
Impairment of 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. 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). In fiscal year 2017, the Company incurred impairment charges of $2.3 million on factory and equipment assets as a result
of the Company's decision to close its tobacco processing facility in Hungary (see Note 2). No significant charges for the impairment
of long-lived assets were recorded during fiscal years 2016 or 2015.
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.
Fair Values of Financial Instruments
The fair value of the Company’s long-term debt, disclosed in Note 6, 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,
2017. In periods when fixed-rate obligations are outstanding, fair values are estimated using market prices where they are available
and 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 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 8.
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 expense. The Company recognized net remeasurement losses of $9.3 million in fiscal year 2017, $22.5
million in fiscal year 2016, and $28.8 million in fiscal year 2015.
47
UNIVERSAL CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 $1.3 million in fiscal year 2017, net transaction gains of $8.0 million in fiscal
year 2016, and net transaction gains of $17.7 million in fiscal year 2015.
Revenue Recognition
Revenue from the sale of tobacco is recognized when title and risk of loss is transferred to the customer and the earnings
process is complete. Substantially all sales revenue is recorded based on the physical transfer of products to customers. 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 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 consists of 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. These arrangements
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, 2017. 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 processing is completed, and the Company’s operating history indicates that customer
requirements for processed tobacco are consistently met upon completion of processing.
Stock-Based Compensation
Share-based payments, such as grants of restricted stock units, performance share awards, 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 12.
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 Recently Adopted
In April 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2015-03,
“Simplifying the Presentation of Debt Issuance Costs” (“ASU 2015-03”). ASU 2015-03 requires that debt issuance costs related to
a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability,
consistent with debt discounts. ASU 2015-03 was effective for fiscal years beginning after December 31, 2015. The Company adopted
ASU 2015-03 effective for the quarter ending June 30, 2016, which was the first quarter of the fiscal year ending March 31, 2017.
The implementation of ASU 2015-03, which required retrospective application, resulted in a $1.6 million reclassification of
unamortized debt issuance costs from other noncurrent assets to long-term debt for the comparative prior year ended March 31, 2016.
In April 2015, the FASB issued Accounting Standards Update 2015-05, “Intangibles - Goodwill and Other - Internal-Use
Software - Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement” (“ASU 2015-05”). ASU 2015-05 requires
customers who enter into a cloud computing arrangement that includes a software license to account for the arrangement as an
intangible asset. If the cloud computing arrangement does not include a software license, the arrangement is accounted for as a service
contract. The guidance was effective for fiscal years beginning after December 31, 2015, and allows for retrospective or prospective
adoption. The Company prospectively adopted ASU 2015-05 effective as of April 1, 2016, the beginning of fiscal year 2017. The
Company’s adoption of ASU 2015-05 did not have a material impact on its consolidated financial statements.
48
UNIVERSAL CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
In May 2015, the FASB issued Accounting Standards Update No. 2015-07, "Fair Value Measurement, Disclosures for
Investments in Certain Entities that Calculate Net Asset Value per Share or its Equivalent" ("ASU 2015-07"). ASU 2015-07 removes
the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset
value per share practical expedient and eliminates certain disclosures for investments that are eligible to be measured at fair value
using the net asset value per share practical expedient. The Company adopted ASU 2015-07 effective as of April 1, 2016, the beginning
of fiscal year 2017. Disclosures for all periods presented in Note 9 - Fair Value Measurements were adjusted accordingly.
In March 2016, the FASB issued Accounting Standards Update No. 2016-09, "Compensation - Stock Compensation (Topic
718)" ("ASU 2016-09"). ASU 2016-09 provides simplification for the accounting for employee stock-based payment transactions,
including the related income tax consequences, the classification of awards as either equity or liabilities, and the classification of
transactions in the statement of cash flows. The guidance is effective for fiscal years beginning after December 15, 2017, with early
adoption permitted. The Company elected to early-adopt ASU 2016-09 effective April 1, 2016, which was the beginning of its fiscal
year ending March 31, 2017. As required by the guidance, employee tax withholding payments and excess tax benefits resulting
from stock-based compensation have been classified as financing activities and operating activities, respectively, in the consolidated
statements of cash flows for all periods presented.
Pronouncements to be Adopted in Future Periods
In May 2014, the FASB issued Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers” (“ASU
2014-09”), which supersedes substantially all of the current revenue recognition guidance under U.S. generally accepted accounting
principles (“U.S. GAAP”). ASU 2014-09 was developed under a joint project with the International Accounting Standards Board
(“IASB”) to improve and converge the existing revenue recognition accounting guidance in U.S. GAAP and International Accounting
Standards. Under ASU 2014-09, the central underlying principle is to recognize revenues when promised goods or services are
transferred to customers at an amount determined by the consideration a company expects to receive for those goods or services.
The guidance outlines a five-step process for determining the amount and timing of revenue to be recognized from those arrangements.
It is more principles-based than the existing guidance under U.S. GAAP, and therefore is expected to require more management
judgment and involve more estimates than the current guidance. ASU 2014-09 is effective for annual periods beginning after
December 15, 2017, including all interim periods within the year of adoption. Companies are allowed to select between two transition
methods: (1) a full retrospective transition method with the application of the new guidance to each prior reporting period presented,
or (2) a modified retrospective transition method that recognizes the cumulative effect on prior periods at the date of adoption together
with additional footnote disclosures. Since the issuance of ASU 2014-09, the FASB has issued several amendments to provide
additional supplemental guidance on certain aspects of the original pronouncement. Universal expects to adopt ASU 2014-09 and
the related supplemental amendments effective April 1, 2018, which is the beginning of its fiscal year ending March 31, 2019. The
Company formed a cross-functional project team to review its current revenue accounting policies and control processes, to complete
a comprehensive analysis of the new guidance, and to determine the effect it will have on revenue recognition and financial statement
disclosures for all customer contracts. The team has classified its customer contracts into primary revenue streams and is currently
in the process of completing individual contract reviews and making final determinations with respect to provisions in the new
guidance that may impact the timing of revenue recognition for certain customer arrangements. As these activities remain underway
at this time, the Company is not currently able to conclude on the impact that ASU 2014-09 will have on its consolidated financial
statements. Although a final determination has not been made, it is likely that the Company will select the modified retrospective
transition method as its method of adoption.
In July 2015, the FASB issued Accounting Standards Update No. 2015-11, “Simplifying the Measurement of
Inventory” (“ASU 2015-11”). ASU 2015-11 requires that most inventory be measured at the lower of cost or net realizable value.
ASU 2015-11 defines net realizable value as the "estimated selling price in the ordinary course of business, less reasonable predictable
costs of completion, disposal, and transportation." ASU 2015-11 is effective for fiscal years beginning after December 31, 2016,
and will be adopted effective April 1, 2017, which is the beginning of its fiscal year ending March 31, 2018. ASU 2015-11 will be
applied prospectively after the date of adoption, as required by the guidance, and will not have a material impact on the Company's
consolidated financial statements.
In January 2016, the FASB issued Accounting Standards Update No. 2016-01 “Financial Instruments-Recognition and
Measurement of Financial Assets and Financial Liabilities” ("ASU 2016-01"). ASU 2016-01 requires all equity investments to be
measured at fair value with changes in the fair value recognized through net income (other than those accounted for under the equity
method of accounting or those that result in consolidation of the investee). This guidance is effective for fiscal years beginning after
December 15, 2017. The Company is currently evaluating the impact that the adoption of ASU 2016-01 will have on its consolidated
financial statements.
49
UNIVERSAL CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”).
ASU 2016-02 requires a lessee to recognize lease payment obligations as a lease liability and the corresponding right-of-use asset
as a leased asset in the balance sheet for the term of the lease. This guidance supersedes Topic 840 “Leases” and is effective for
fiscal years beginning after December 15, 2018. The Company will be required to adopt ASU 2016-02 effective April 1, 2019, which
is the beginning of its fiscal year ending March 31, 2020, and is currently evaluating the impact that the updated guidance will have
on its consolidated financial statements.
In January 2017, the FASB issued Accounting Standards Update No. 2017-04, "Intangibles - Goodwill and Other (Topic
350)" ("ASU 2017-04"). ASU 2017-04 eliminated Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment
loss by comparing the implied fair value of the reporting unit's goodwill with the carrying amount of the goodwill. The guidance is
effective for fiscal years beginning after December 15, 2019. The Company will be required to adopt ASU 2017-04 effective April
1, 2020, which is the beginning of its fiscal year ending March 31, 2021, and is currently evaluating the impact that the updated
guidance will have on its consolidated financial statements.
In March 2017, the FASB issued Accounting Standards Update No. 2017-07, "Compensation - Retirement Benefits (Topic
715)" ("ASU 2017-07"). ASU 2017-07 requires that an employer report the service cost component of pension or other postretirement
benefits expense in the same line item or items as other compensation costs arising from services rendered by the pertinent employees
during the period. The other components of net benefit cost are required to be presented in the income statement separately from
the service cost component and outside a subtotal of income from operations, if one is presented. If a separate line item or items
are used to present the other components of net benefit cost, the line item or items must be appropriately described. If a separate line
item or items are not used, the line item or items used in the income statement to present the other components of net benefit cost
must be disclosed. The guidance is effective for fiscal years beginning after December 15, 2016. The Company will be required to
adopt ASU 2017-07 effective April 1, 2017, which is the beginning of its fiscal year ending March 31, 2018. The line item classification
changes required by the new guidance will not impact the Company's pretax earnings or net income; however, operating income and
interest expense will increase by offsetting amounts that are not expected to be material to the Company's consolidated financial
statements.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year’s presentation.
NOTE 2. RESTRUCTURING AND IMPAIRMENT COSTS
During the three fiscal years ended March 31, 2017, 2016, and 2015, Universal recorded restructuring and impairment costs
related to various initiatives to adjust certain operations and reduce costs. For all three fiscal years, the restructuring and impairment
costs incurred primarily related to operations that are part of the Other Regions reportable segment of the Company's flue-cured and
burley leaf tobacco operations.
Fiscal Year Ended March 31, 2017
In fiscal year 2017, the Company recorded restructuring and impairment costs totaling $4.4 million, primarily related to
the Company's decision to close its tobacco processing facility in Hungary. The Company is now processing tobaccos sourced from
Hungary in its factories in Italy. The costs incurred for the change in operations in Hungary included statutory employee termination
benefits and impairment charges related to certain property and equipment. Restructuring costs were also incurred in connection
with downsizing efforts at several other locations around the Company.
Fiscal Year Ended March 31, 2016
In fiscal year 2016, the Company recorded restructuring and impairment costs totaling $2.4 million, related to a decision
to significantly scale back its operations in Zambia. Those costs primarily included statutory employee termination benefits,
impairment charges related to outstanding balances on loans to farmers whose contracts were terminated as a result of the decision,
and impairment charges on certain property and equipment.
Fiscal Year Ended March 31, 2015
In fiscal year 2015, the Company recorded restructuring costs totaling $4.9 million, primarily related to downsizing certain
functions at its operations in Brazil and a decision to suspend its operations in Argentina. The costs in Argentina included employee
termination benefits, as well as costs to exit the Company's business arrangements with a supplier. Restructuring costs were also
incurred in connection with downsizing efforts at several other locations around the Company.
50
UNIVERSAL CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
A summary of the restructuring and impairment costs incurred during the fiscal years ended March 31, 2017, 2016, and
2015, is as follows:
Restructuring Costs:
Fiscal Years Ended March 31,
2017
2016
2015
Employee termination benefits ...........................................................................................
$
2,083
$
1,629
$
Other restructuring costs .....................................................................................................
Impairment Costs:
Property and equipment and farmer loans ..........................................................................
—
2,083
2,276
96
1,725
664
Total restructuring and impairment costs..........................................................................
$
4,359
$
2,389
$
4,354
536
4,890
—
4,890
A reconciliation of the Company’s liability for employee termination benefits and other restructuring costs for fiscal years
2015 through 2017 is as follows:
Employee
Termination
Benefits
Other Costs
Total
Balance at April 1, 2014........................................................................................................
$
2,026
$
160
$
2,186
Fiscal Year 2015 Activity:
Costs charged to expense...................................................................................................
Payments............................................................................................................................
Balance at March 31, 2015....................................................................................................
Fiscal Year 2016 Activity:
Costs charged to expense...................................................................................................
Payments............................................................................................................................
Balance at March 31, 2016....................................................................................................
Fiscal Year 2017 Activity:
Costs charged to expense...................................................................................................
Payments............................................................................................................................
4,354
(5,684)
696
1,629
(2,246)
79
2,083
(1,861)
536
(498)
198
96
(92)
202
—
(159)
Balance at March 31, 2017....................................................................................................
$
301
$
43
$
4,890
(6,182)
894
1,725
(2,338)
281
2,083
(2,020)
344
The majority of the restructuring liability at March 31, 2017 will be paid in the early part of fiscal year 2018. 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.
51
UNIVERSAL CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE 3. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share:
(in thousands, except share and per share data)
Basic Earnings Per Share
Numerator for basic earnings per share
Fiscal Year Ended March 31,
2017
2016
2015
Net income attributable to Universal Corporation ........................................................................... $
106,304
$
109,016
$
114,608
Less: Dividends on convertible perpetual preferred stock ...............................................................
(11,061)
(14,748)
(14,824)
Less: Cost in excess of carrying value on conversion or repurchase of convertible perpetual
preferred stock ..............................................................................................................................
(74,353)
—
(36)
Earnings available to Universal Corporation common shareholders for
calculation of basic earnings per share .........................................................................................
20,890
94,268
99,748
Denominator for basic earnings per share
Weighted average shares outstanding...............................................................................................
23,433,860
22,683,290
23,035,920
Basic earnings per share ................................................................................................................... $
0.89
$
4.16
$
4.33
Diluted Earnings Per Share
Numerator for diluted earnings per share
Earnings available to Universal Corporation common shareholders ............................................... $
20,890
$
94,268
$
99,748
Add: Dividends on convertible perpetual preferred stock (if conversion assumed) ........................
Add: Cost in excess of carrying value on conversion or repurchase of convertible perpetual
preferred stock (if dilutive)...........................................................................................................
—
—
14,748
14,824
—
36
Earnings available to Universal Corporation common shareholders for
calculation of diluted earnings per share ......................................................................................
20,890
109,016
114,608
Denominator for diluted earnings per share
Weighted average shares outstanding...............................................................................................
23,433,860
22,683,290
23,035,920
Effect of dilutive securities (if conversion or exercise assumed)
Convertible perpetual preferred stock............................................................................................
—
4,853,268
4,843,309
Employee share-based awards .......................................................................................................
336,228
288,933
342,035
Denominator for diluted earnings per share .....................................................................................
23,770,088
27,825,491
28,221,264
Diluted earnings per share................................................................................................................ $
0.88
$
3.92
$
4.06
In December 2016, 111,072 shares of the Company’s Series B 6.75% Convertible Perpetual Preferred Stock were converted
into approximately 2.5 million shares of the Company's common stock. In January 2017, the Company announced a mandatory
conversion of all 107,418 remaining outstanding shares of the preferred stock after meeting the requirements to initiate the mandatory
conversion under the original terms of the preferred shares. The Company chose to satisfy the conversion obligation for the mandatory
conversion in cash. Although the conversions of the preferred stock into common stock or for cash did not impact the Company’s
net income, the shares converted for cash under the mandatory conversion in January 2017 resulted in a one-time reduction of retained
earnings of approximately $74.4 million during the fourth quarter ending March 31, 2017, representing the excess of the conversion
cost over the carrying value of those shares. The reduction in retained earnings resulted in a corresponding one-time reduction of
earnings available to common shareholders for the fiscal year ending March 31, 2017 for purposes of determining the amounts
reported for basic and diluted earnings per share. The effects of the conversions on the computation of basic and diluted earnings
per share for the fiscal year ended March 31, 2017, are included in the table above. See Note 11 for additional information.
52
UNIVERSAL CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the fiscal years ended March 31, 2017, 2016, and 2015, the Company had the following potentially dilutive securities
(stock appreciation rights) outstanding that were not included in the computation of diluted earnings per share because their effect
would have been antidilutive:
Fiscal Year Ended March 31,
2017
2016
2015
Potentially dilutive securities...............................................................................................
Weighted-average exercise price......................................................................................... $
—
— $
133,600
62.66
$
156,200
61.83
NOTE 4. 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, the effect of exchange rate changes on deferred taxes, and the Company’s ability to utilize foreign tax credits.
Income Tax Expense
Income taxes for the fiscal years ended March 31, 2017, 2016, and 2015 consisted of the following:
Fiscal Year Ended March 31,
2017
2016
2015
Current
United States ..................................................................................................................... $
3,422
$
5,371
$
State and local ...................................................................................................................
Foreign ..............................................................................................................................
Deferred
United States .....................................................................................................................
State and local ...................................................................................................................
Foreign ..............................................................................................................................
147
36,537
40,106
5,434
561
10,631
16,626
1,116
32,897
39,384
5,780
(445)
9,711
15,046
4,126
657
46,885
51,668
3,352
159
(17,173)
(13,662)
Total................................................................................................................................ $
56,732
$
54,430
$
38,006
Foreign taxes include U.S. tax expense on earnings of foreign subsidiaries. The Company has no undistributed earnings
of consolidated foreign subsidiaries that are classified as permanently reinvested.
Consolidated Effective Income Tax Rate
A reconciliation of the statutory U.S. federal rate to the Company’s effective income tax rate is as follows:
Fiscal Year Ended March 31,
2017
2016
2015
Statutory tax rate ...................................................................................................................
State income taxes, net of federal benefit .............................................................................
Dividends received from deconsolidated operations ............................................................
Effect of exchange rate changes on deferred income taxes ..................................................
Tax benefit arising from payment of a portion of a fine by a subsidiary..............................
Other, including changes in liabilities recorded for uncertain tax positions.........................
35.0%
0.3
(2.3)
0.4
—
0.1
35.0%
35.0%
0.3
(1.5)
(1.6)
—
(0.7)
0.3
(1.3)
(4.9)
(5.0)
(0.1)
Effective income tax rate ......................................................................................................
33.5%
31.5%
24.0%
53
UNIVERSAL CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
During the first quarter of fiscal year 2015, the Company recorded a consolidated income tax benefit of $8 million arising
from the ability of its subsidiary, Deltafina S.p.A., to pay a significant portion of a fine and related interest charges in Italy that were
settled during that quarter following the unsuccessful appeal of a case involving anti-competitive activities in the Italian tobacco
market. Deltafina and Universal Corporation were jointly liable for the fine and interest charges. The Company’s initial accrual of
the amounts imposed in September 2011 assumed that the entire obligation would be paid by Universal Corporation due to uncertainty
with respect to Deltafina’s financial capacity to bear any significant portion of the cost upon the eventual settlement and to uncertainty
as to when the payment would be made. Deltafina ultimately was able to assume responsibility for approximately $30 million of
the total $53 million obligation for the fine and interest when those amounts were paid. Although the portion of the fine paid by
Deltafina was not deductible for income tax purposes in Italy, it reduced the subsidiary’s cumulative undistributed earnings and the
associated consolidated tax liability, resulting in the $8 million benefit in the Company's consolidated income tax provision. This
discrete item reduced the effective income tax rate for fiscal year 2015 by 5.0%.
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,
2017
2016
2015
United States ........................................................................................................................ $
31,468 $
37,877 $
27,181
Foreign .................................................................................................................................
137,770
134,701
131,286
Total................................................................................................................................... $
169,238 $
172,578 $
158,467
Deferred Income Tax Liabilities and Assets
Significant components of deferred tax liabilities and assets were as follows:
March 31,
2017
2016
Liabilities
Foreign withholding taxes................................................................................................................................. $
44,702 $
Undistributed earnings ......................................................................................................................................
Goodwill ...........................................................................................................................................................
All other ............................................................................................................................................................
24,629
30,851
11,015
39,770
19,553
30,851
10,424
Total deferred tax liabilities......................................................................................................................... $
111,197
$
100,598
Assets
Employee benefit plans..................................................................................................................................... $
38,804 $
Reserves and accruals .......................................................................................................................................
Deferred income................................................................................................................................................
11,756
4,672
Currency translation losses of foreign subsidiaries...........................................................................................
13,244
Local currency exchange losses of foreign subsidiaries ...................................................................................
Foreign tax credit carryforward ........................................................................................................................
3,669
2,799
All other ............................................................................................................................................................
14,327
Total deferred tax assets...............................................................................................................................
Valuation allowance..........................................................................................................................................
89,271
(636)
43,362
12,911
3,938
9,939
3,597
4,664
16,546
94,957
—
Net deferred tax assets ................................................................................................................................. $
88,635 $
94,957
At March 31, 2017, the Company had no material net operating loss carryforwards in either its domestic or foreign operations.
54
UNIVERSAL CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Combined Income Tax Expense (Benefit)
The combined income tax expense (benefit) allocable to continuing operations, other comprehensive income, and direct
adjustments to shareholders' equity was as follows:
Fiscal Year Ended March 31,
2017
2016
2015
Continuing operations........................................................................................................... $
56,732
$
54,430
$
38,006
Other comprehensive income ...............................................................................................
1,503
Direct adjustments to shareholders' equity ...........................................................................
—
1,423
(805)
(21,900)
(932)
Total................................................................................................................................ $
58,235 $
55,048 $
15,174
Uncertain Tax Positions
A reconciliation of the beginning and ending balance of the gross liability for uncertain tax positions for the fiscal years
ended March 31, 2017, 2016 and 2015, is as follows:
Fiscal Year Ended March 31,
2017
2016
2015
Liability for uncertain tax positions, beginning of year ....................................................... $
2,407
$
2,894
$
3,809
Additions:
Related to tax positions for the current year ......................................................................
Related to tax positions for prior years ..............................................................................
Reductions:
Due to lapses of statutes of limitations ..............................................................................
Related to tax positions for prior years ..............................................................................
Effect of currency rate movement......................................................................................
94
—
(112)
(3)
40
98
—
(215)
—
(370)
272
—
(478)
(143)
(566)
Liability for uncertain tax positions, end of year.................................................................. $
2,426
$
2,407
$
2,894
Of the total liability for uncertain tax positions at March 31, 2017, approximately $1.8 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, 2018. 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.
The Company recognizes accrued interest related to uncertain tax positions as interest expense, and it recognizes penalties
as a component of income tax expense. Amounts accrued or reversed for interest and penalties were not material for any of the fiscal
years 2015 through 2017, and liabilities recorded for interest and penalties at March 31, 2017 and 2016 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, 2017, the Company's earliest open tax year for U.S. federal income tax purposes
was its fiscal year ended 2014. Open tax years in state and foreign jurisdictions generally range from 3 to 6 years.
55
UNIVERSAL CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE 5. CREDIT FACILITIES
Bank Credit Agreements
In December 2014, the Company entered into a senior unsecured bank credit agreement that replaced its previous short-
term and long-term borrowing facilities, consolidating and extending the maturities of those facilities. The agreement established a
$430 million five-year revolving credit facility, along with a $150 million five-year term loan and a $220 million seven-year term
loan. 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, 2017. The credit agreement provides for an expansion of the facility
under certain conditions to allow additional borrowings of up to $100 million. Additional information related to the term loans is
provided in Note 6. The credit agreement includes financial covenants that require the Company to maintain a minimum level of
tangible net worth and observe limits on debt levels. The Company was in compliance with those covenants at March 31, 2017.
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,
2017 and 2016, approximately $59 million and $66 million, respectively, were outstanding under these uncommitted lines of credit.
The weighted-average interest rates on short-term borrowings outstanding as of March 31, 2017 and 2016, were approximately 3.1%
and 2.2%, respectively. At March 31, 2017, the Company and its consolidated affiliates had unused uncommitted lines of credit
totaling approximately $248 million.
NOTE 6. LONG-TERM DEBT
The Company's long-term debt at March 31, 2017 and 2016 consisted of the following:
March 31,
2017
2016
Senior bank term loans ...................................................................................................................................... $
370,000 $
370,000
Total outstanding ...........................................................................................................................................
370,000
370,000
Less: current portion..........................................................................................................................................
—
—
Less: unamortized debt issuance costs ..............................................................................................................
(1,267)
(1,620)
Long-term debt .............................................................................................................................................. $
368,733 $
368,380
As discussed in Note 5, the Company entered into a bank credit agreement in December 2014 that established a $150 million
five-year term loan and a $220 million seven-year term loan. Both term loans were fully funded at closing, and the Company
concurrently repaid approximately $250 million aggregate principal amount on term loans outstanding under two previous bank
credit facilities and reduced its revolving credit borrowings by approximately $120 million. The term loans 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. However, following closing on the term loans, the Company entered into receive-
floating / pay-fixed interest rate swap agreements that convert the variable benchmark rate on both loans to a fixed rate over their
full terms to maturity. With the swap agreements in place, the effective interest rate on the $150 million five-year loan and the $220
million seven-year loan were 2.94% and 3.48%, respectively, at March 31, 2017 and 2016. The effective rates will change only if
a change in the Company's credit measures results in adjustments to the applicable credit spreads specified in the underlying loan
agreement. The $150 million five-year term loan matures in fiscal year 2020, and the $220 million seven-year term loan matures in
fiscal year 2022.
In November 2014, the Company filed an undenominated 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.
Disclosures about the fair value of long-term debt are provided in Note 9.
56
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE 7. LEASES
The Company’s subsidiaries lease various production, storage, distribution, and other facilities, as well as vehicles and
equipment used in their operations. Some of the leases have options to extend the lease term at market rates. These arrangements
are classified as operating leases for accounting purposes. Rent expense on operating leases totaled $15.3 million in fiscal year 2017,
$14.7 million in fiscal year 2016, and $15.8 million in fiscal year 2015. Future minimum payments under non-cancelable operating
leases total $11.5 million in 2018, $8.5 million in 2019, $7.2 million in 2020, $5.8 million in 2021, $4.1 million in 2022, and $13.7
million after 2022.
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 foreign
currency exchange contracts. However, the Company’s policy also permits other types of derivative instruments. In addition, foreign
currency exchange rate risk is also managed through strategies that do not involve derivative instruments, such as using local
borrowings and other approaches to minimize net monetary positions in non-functional currencies. The disclosures below provide
additional information about the Company’s hedging strategies, the derivative instruments used, and the effects of these activities
on the consolidated statements of income and comprehensive income and the consolidated balance sheets. In the consolidated
statements of cash flows, the cash flows associated with all of these activities are reported in net cash provided by operating activities.
Cash Flow Hedging Strategy for Interest Rate Risk
In January 2015, the Company entered into receive-floating/pay-fixed interest rate swap agreements that were designated
and qualified as hedges of the exposure to changes in interest payment cash flows created by fluctuations in variable interest rates
on its two outstanding non-amortizing bank term loans (see Notes 5 and 6). 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, 2017, the total
notional amount of the interest rate swaps was $370 million, which corresponded with the aggregate outstanding balance of the term
loans.
Cash Flow Hedging Strategy for Foreign Currency Exchange Rate Risk Related to 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, 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 cost of the processed tobacco.
From time to time, the Company enters into forward 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. This strategy offsets the variability of
future U.S. dollar cash flows for tobacco purchases and processing costs for the foreign currency notional amount hedged. This
hedging strategy has been used mainly for tobacco purchases and processing costs in Brazil. The aggregate U.S. dollar notional
amount of forward contracts entered for these purposes during fiscal years 2017, 2016, and 2015 was as follows:
(in millions)
Fiscal Year Ended March 31,
2017
2016
2015
Tobacco purchases ...............................................................................................................
$
70.7
$
43.1
$
Processing costs ...................................................................................................................
24.0
13.2
Total..................................................................................................................................
$
94.7
$
56.3
$
105.6
22.9
128.5
The reduced U.S. dollar notional amounts for tobacco purchases and processing costs hedged during fiscal year 2016 reflected
the reduced size of the 2016 Brazilian crop and a variation in the timing of fixed-price orders from customers for their purchases
from that crop year. All contracts related to tobacco purchases were designated and qualified as hedges of the future cash flows
associated with the forecast purchases of tobacco. As a result, except for amounts related to any ineffective portion of the hedging
strategy or any early de-designation of the hedge arrangement, 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 mark-to-market basis.
57
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For substantially all hedge gains and losses recorded in accumulated other comprehensive loss at March 31, 2017, the
Company expects to complete the sale of the tobacco and recognize the amounts in earnings during fiscal year 2018. At March 31,
2017, all hedged forecast purchases of tobacco 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 2017 Brazilian crop are expected to be completed
by July 2017, 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, 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 or liability 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. During the
fiscal years ended March 31, 2017, 2016, and 2015, the Company used forward currency contracts to manage its exposure to currency
remeasurement risk in Brazil. The total notional amounts of contracts outstanding at March 31, 2017 and 2015 were approximately
$33.0 million and $80.4 million, respectively. At March 31, 2016 , the net local monetary asset position in Brazil was not significant,
and there were no foreign currency contracts outstanding. 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 and 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.
58
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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, 2017, 2016, and 2015.
Fiscal Year Ended March 31,
2017
2016
2015
Cash Flow Hedges - Interest Rate Swap Agreements
Derivative
Effective Portion of Hedge
Gain (loss) recorded in accumulated other comprehensive loss............................................
Gain (loss) reclassified from accumulated other comprehensive loss into earnings .............
$
$
8,999
$
(12,824) $
(3,916) $
(5,108) $
(4,044)
(1,929)
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............................................
Gain (loss) reclassified from accumulated other comprehensive
loss into earnings................................................................................................................
$
$
454
945
$
$
1,774
993
$
$
1,410
3,099
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.........................................................................................
$
246
$
685
$
257
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 -
Forward Foreign Currency Exchange Contracts
Gain (loss) recognized in earnings.........................................................................................
$
(2,591) $
5,973
$
13,178
Location of gain (loss) recognized in earnings ......................................................................
Selling, general and administrative expenses
For the interest rate swap agreements, the effective portion of the gain or loss on the derivative is recorded in accumulated
other comprehensive loss and any ineffective portion is recorded in selling, general and administrative expenses. For the forward
foreign currency exchange contracts designated as cash flow hedges of tobacco purchases in Brazil, an immaterial net hedge gain,
representing unrealized gains on contracts related to the 2017 crop, remained in accumulated other comprehensive loss at March 31,
2017. No hedge gain or loss had been reclassified to earnings at March 31, 2017 since shipments of those tobaccos had not yet
started. The majority of the balance in accumulated other comprehensive loss will be recognized in earnings as a component of cost
of goods sold in fiscal year 2018 as the 2017 Brazilian crop tobacco is 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.
59
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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, 2017 and 2016:
Derivatives Designated as Hedging
Instruments
Interest rate swap agreements
Forward foreign currency exchange contracts
Total
Derivatives Not Designated as Hedging
Instruments
Forward foreign currency exchange contracts
Total
Derivatives in a Fair Value
Asset Position
Derivatives in a Fair Value
Liability Position
Balance
Sheet
Location
Fair Value as of March 31,
2017
2016
Other
non-current
assets
Other
current
assets
Other
current
assets
$
2,149
$
—
56
$
2,205
$
475
475
$
$
917
917
$
$
297
297
Balance
Sheet
Location
Other
long-term
liabilities
Accounts
payable and
accrued
expenses
Accounts
payable and
accrued
expenses
Fair Value as of March 31,
2017
2016
$
$
$
$
— $
10,766
55
55
—
$
10,766
120
120
$
$
5
5
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.
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, 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
1
2
3
Description
quoted prices in active markets for identical assets or liabilities that the Company has the ability to access as of the
reporting date;
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
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. As discussed in Note 1, under updated accounting guidance adopted effective
60
UNIVERSAL CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
April 1, 2016, the fair values for those funds are no longer categorized within the fair value hierarchy and 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.
At March 31, 2017 and 2016, 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, 2017
Fair Value Hierarchy
NAV
Level 1
Level 2
Level 3
Total
Assets
Money market funds.............................................................................................
$ 137,145
$
— $
— $
— $ 137,145
Trading securities associated with deferred compensation plans.........................
Interest rate swap agreements...............................................................................
Forward foreign currency exchange contracts......................................................
—
—
—
17,726
—
—
—
2,149
973
—
—
—
17,726
2,149
973
Total financial assets measured and reported at fair value ................................
$ 137,145
$ 17,726
$
3,122
$
— $ 157,993
Liabilities
Guarantees of bank loans to tobacco growers ......................................................
$
— $
— $
— $
1,177
$
1,177
Forward foreign currency exchange contracts......................................................
—
—
175
—
175
Total financial liabilities measured and reported at fair value...........................
$
— $
— $
175
$
1,177
$
1,352
March 31, 2016
Fair Value Hierarchy
NAV
Level 1
Level 2
Level 3
Total
Assets
Money market funds ..............................................................................................
$ 116,618
$
— $
— $
— $ 116,618
Trading securities associated with deferred compensation plans ..........................
Forward foreign currency exchange contracts.......................................................
—
—
17,817
—
—
772
—
—
17,817
772
Total financial assets measured and reported at fair value................................
$ 116,618
$ 17,817
$
772
$
— $ 135,207
Liabilities
Guarantees of bank loans to tobacco growers........................................................
$
— $
— $
— $
1,628
$
1,628
Interest rate swap agreements ................................................................................
Forward foreign currency exchange contracts.......................................................
—
—
—
—
10,766
5
—
—
10,766
5
Total financial liabilities measured and reported at fair value..........................
$
— $
— $ 10,771
$
1,628
$ 12,399
61
UNIVERSAL CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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.
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.
Guarantees of bank loans to tobacco growers
The Company guarantees bank loans to tobacco growers in Brazil for crop financing. In the event that the farmers default
on their payments to the banks, the Company would be required to perform under the guarantees. The Company regularly evaluates
the likelihood of farmer defaults based on an expected loss analysis and records the fair value of its guarantees as an obligation in
its consolidated financial statements. The fair value of the guarantees is determined using the expected loss data for all loans
outstanding at each measurement date. The present value of the cash flows associated with the estimated losses is then calculated
at a risk-adjusted interest rate that is aligned with the expected duration of the liability and includes an adjustment for nonperformance
risk. This approach is sometimes referred to as the “contingent claims valuation method.” Although historical loss data is an
observable input, significant judgment is required in applying this information to the portfolio of guaranteed loans outstanding at
each measurement date and in selecting a risk-adjusted interest rate. Significant increases or decreases in the risk-adjusted interest
rate may result in a significantly higher or lower fair value measurement. The guarantees of bank loans to tobacco growers are
therefore classified within Level 3 of the fair value hierarchy.
A reconciliation of the change in the balance of the financial liability for guarantees of bank loans to tobacco growers (Level
3) for the fiscal years ended March 31, 2017 and 2016 is provided below.
Balance at beginning of year ..............................................................................................................................
Payments under the guarantees and transfers to allowance for loss on direct loans to farmers (removal of
prior crop year loans from the portfolio) ........................................................................................................
Provision for loss or transfers from allowance for loss on direct loans to farmers (addition of current crop
year loans).......................................................................................................................................................
Change in discount rate and estimated collection period ...................................................................................
Currency remeasurement ....................................................................................................................................
Fiscal Year Ended March 31,
2017
2016
$
1,628
$
1,674
(2,550)
(1,826)
1,854
59
186
1,834
106
(160)
Balance at end of year.........................................................................................................................................
$
1,177
$
1,628
Long-term Debt
The fair value of the Company’s long-term debt was approximately $370 million at each of the balance sheet dates March 31,
2017 and 2016. 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.
62
UNIVERSAL CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE 10. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
Defined Benefit Plans
Description of Plans
The Company sponsors several defined benefit pension plans covering 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.
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 who have attained specific age and service levels,
although postretirement life insurance benefits were discontinued for active employees during fiscal year 2015. 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
2017
2016
2015
2017
2016
2015
Discount rates:
Benefit cost for plan year..........................
Benefit obligation at end of plan year ......
4.10%
4.10%
3.80%
4.10%
4.50%
3.80%
3.80%
3.90%
3.70%
3.80%
4.30%
3.70%
Expected long-term return on plan assets:
Benefit cost for plan year..........................
7.00%
7.25%
7.75%
3.00%
3.00%
4.30%
Salary scale:
Benefit cost for plan year..........................
Benefit obligation at end of plan year ......
4.00%
4.00%
4.50%
4.00%
Healthcare cost trend rate............................
N/A
N/A
4.50%
4.50%
N/A
4.00%
4.00%
4.50%
4.00%
6.70%
7.00%
4.50%
4.50%
7.20%
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 reduction in the expected long-term return on plan assets assumption from
fiscal year 2015 to fiscal year 2016 is primarily due to changes in the underlying plan assets. These changes reflect a move toward
a liability-driven investment strategy in the Company's ERISA-regulated U.S. defined benefit pension plan due to the high percentage
of retired and inactive participants in the plan and the high funded status of the plan. The healthcare cost trend rate used by the
Company is based on a study of medical cost inflation rates that is reviewed annually for continued applicability. The revised trend
assumption of 6.70% in 2017 declines gradually to 4.50% in 2037.
63
UNIVERSAL CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Benefit Obligations, Plan Assets, and Funded Status
The following table reflects the changes in benefit obligations and plan assets in 2017 and 2016, as well as the funded
status of the plans at March 31, 2017 and 2016:
Pension
Benefits
March 31,
Other Postretirement
Benefits
March 31,
2017
2016
2017
2016
Actuarial present value of benefit obligation:
Accumulated benefit obligation .................................................................... $
266,764 $
273,479
Projected benefit obligation...........................................................................
269,250
275,505
$
36,786
$
37,225
Change in projected benefit obligation:
Projected benefit obligation, beginning of year ............................................ $
275,505
$
288,908
$
37,225
$
40,863
Service cost....................................................................................................
Interest cost....................................................................................................
Effect of discount rate change .......................................................................
Foreign currency exchange rate changes.......................................................
Settlements ....................................................................................................
Other ..............................................................................................................
5,382
10,441
489
(1,111)
(10,955)
4,108
5,953
10,037
(10,036)
330
—
(486)
247
1,535
(191)
286
—
766
Benefit payments ...........................................................................................
(14,609)
(19,201)
(3,082)
286
1,539
(402)
(215)
—
(1,104)
(3,742)
Projected benefit obligation, end of year....................................................... $
269,250
$
275,505
$
36,786
$
37,225
Change in plan assets:
Plan assets at fair value, beginning of year ................................................... $
217,859
$
224,553
$
1,565
$
2,115
Actual return on plan assets...........................................................................
Employer contributions .................................................................................
16,450
10,676
Settlements ....................................................................................................
(10,322)
Foreign currency exchange rate changes.......................................................
97
61
12,504
—
(58)
71
4,500
—
—
69
3,123
—
—
Benefit payments ...........................................................................................
(14,609)
(19,201)
(3,082)
(3,742)
Plan assets at fair value, end of year.............................................................. $
220,151
$
217,859
$
3,054
$
1,565
Funded status:
Funded status of the plans, end of year ......................................................... $
(49,099) $
(57,646) $
(33,732) $
(35,660)
The settlements for pension benefits in fiscal year 2017 were attributable to the termination of a foreign pension plan
during the year and the transfer of assets in settlement of the participants' benefit obligations to defined contribution plans. 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. Those plans account for approximately 71% of the $49.1 million unfunded
pension obligation and approximately 85% of the $33.7 million unfunded postretirement benefit obligation shown on the funded
status line in the above table at March 31, 2017.
64
UNIVERSAL CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The funded status of the Company’s plans at the end of fiscal years 2017 and 2016 was reported in the consolidated balance
sheets as follows:
Pension
Benefits
March 31,
Other Postretirement
Benefits
March 31,
2017
2016
2017
2016
Non-current asset (included in other noncurrent assets)................................... $
1,710
$
2,044
$
— $
—
Current liability (included in accounts payable and accrued expenses) ...........
(1,106)
(630)
Non-current liability (reported as pensions and other postretirement benefits)
(49,703)
(59,060)
(2,746)
(30,986)
(2,543)
(33,117)
Amounts recognized in the consolidated balance sheets .................................. $
(49,099) $
(57,646) $
(33,732) $
(35,660)
Additional information on the funded status of the Company’s plans as of the respective measurement dates for the fiscal
years ended March 31, 2017 and 2016, is as follows:
Pension
Benefits
March 31,
Other Postretirement
Benefits
March 31,
2017
2016
2017
2016
For plans with a projected benefit obligation in excess of plan assets:
Aggregate projected benefit obligation (PBO)............................................... $
260,826
$
270,058
$
36,786
$
37,225
Aggregate fair value of plan assets.................................................................
210,017
210,368
3,054
1,565
For plans with an accumulated benefit obligation in excess of plan
assets:
Aggregate accumulated benefit obligation (ABO).........................................
Aggregate fair value of plan assets.................................................................
258,424
210,017
268,087
210,368
N/A
N/A
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,
2017
2016
2015
2017
2016
2015
Components of net periodic benefit cost:
Service cost................................................ $
5,382
$
5,953
$
5,099
$
247
$
286
$
Interest cost................................................
10,441
10,037
11,215
1,535
1,539
Expected return on plan assets ..................
(15,154)
(15,110)
(15,493)
Curtailment gain ........................................
Settlement gain ..........................................
Net amortization and deferral....................
—
(912)
4,576
—
—
—
—
4,394
6,169
(42)
—
—
(394)
(58)
—
—
(431)
Net periodic benefit cost............................ $
4,333
$
5,274
$
6,990
$
1,346
$
1,336
$
347
1,699
(102)
(1,465)
—
(671)
(192)
The curtailment gain for other postretirement benefits in fiscal year 2015 was attributable to the discontinuation of
postretirement life insurance benefits for active U.S. employees. A one-percentage-point increase in the assumed healthcare cost
trend rate would increase the March 31, 2017 accumulated postretirement benefit obligation by approximately $800 thousand, while
a one-percentage-point decrease would reduce the benefit obligation by approximately $700 thousand. The aggregate service and
interest cost components of the net periodic postretirement benefit expense for fiscal year 2018 would not change by a significant
amount as a result of a one-percentage-point increase or decrease in the assumed healthcare cost trend rate.
65
UNIVERSAL CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 2017 and
2016 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
March 31,
Other Postretirement
Benefits
March 31,
2017
2016
2017
2016
Change in net actuarial loss (gain):
Net actuarial loss (gain), beginning of year ................................................... $
79,299
$
81,544
$
(7,234) $
Losses (gains) arising during the year ...........................................................
Amortization included in net periodic benefit cost during the year...............
Net actuarial loss (gain), end of year .............................................................
2,313
(7,567)
74,045
4,787
(7,032)
79,299
Change in prior service cost (benefit):
Prior service cost (benefit), beginning of year...............................................
(15,061)
(17,630)
Prior service cost (benefit) arising during the year........................................
Amortization included in net periodic benefit cost during the year...............
—
2,991
111
2,458
Prior service cost (benefit), end of year .........................................................
(12,070)
(15,061)
554
394
(6,286)
(108)
(4)
—
(112)
(6,402)
(1,263)
431
(7,234)
—
(108)
—
(108)
Total amounts in accumulated other comprehensive loss
at end of year, before income taxes............................................................ $
61,975
$
64,238
$
(6,398) $
(7,342)
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 $5.2 million of the March 31, 2017 net actuarial loss and $2.4 million
of the March 31, 2017 prior service benefit in net periodic benefit cost during fiscal year 2018.
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 94% of consolidated plan assets and 83% of consolidated PBO at March 31,
2017, 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.
66
UNIVERSAL CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The weighted–average target pension asset allocation and target ranges at the March 31, 2017 measurement date and the
actual asset allocations at the March 31, 2017 and 2016 measurement dates by major asset category were as follows:
Major Asset Category
Target
Allocation
Actual Allocation
March 31,
Range
2017
2016
Fixed income securities
Equity securities......................................................................................
(1) .....................................................................
Alternative investments ..........................................................................
26.0% 16% - 36%
69.0% 59% - 79%
5.0% 0% - 10%
31.9%
61.7%
6.4%
22.4%
71.5%
6.1%
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 $7.8 million to its defined benefit pension plans in fiscal year 2018, including $6.0 million to its
ERISA-regulated U.S. plan and $1.8 million to its non-ERISA regulated and other plans.
Estimated future benefit payments to be made from the Company’s plans are as follows:
Fiscal Year
Pension
Benefits
Other
Postretirement
Benefits
2018 .................................................................................................................................................................... $
15,031
$
2019 ....................................................................................................................................................................
2020 ....................................................................................................................................................................
2021 ....................................................................................................................................................................
2022 ....................................................................................................................................................................
2023 - 2027.........................................................................................................................................................
22,040
20,162
16,727
17,019
88,929
3,142
3,129
3,015
2,930
2,797
12,554
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.
67
UNIVERSAL CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
• 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.
Fair values of the assets of the Company’s pension plans as of March 31, 2017 and 2016, classified based on how their
values were determined under the fair value hierarchy are as follows:
March 31, 2017
Level 1
Level 2
Level 3
Total
Equity securities ......................................................................................... $
Fixed income securities (1) .........................................................................
Alternative investments..............................................................................
65,637
$
— $
— $
65,637
128,215
—
10,134
—
3,072
13,094
141,421
13,094
Total investments .................................................................................. $
193,852
$
10,134
$
16,166
$
220,152
March 31, 2016
Level 1
Level 2
Level 3
Total
Equity securities.......................................................................................... $
Fixed income securities (1) ..........................................................................
Alternative investments ..............................................................................
43,807
$
— $
— $
43,807
141,218
—
7,491
—
13,382
11,961
162,091
11,961
Total investments................................................................................... $
185,025
$
7,491
$
25,343
$
217,859
(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 $2.6 million for fiscal year 2017, $2.4 million for fiscal year 2016, and $1.5 million for fiscal year
2015.
NOTE 11. COMMON AND PREFERRED STOCK
Common Stock
At March 31, 2017, the Company’s shareholders had authorized 100,000,000 shares of its common stock, and 25,274,506
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
Authorized and Outstanding Shares
The Company is also authorized to issue up to 5,000,000 shares of preferred stock, 500,000 shares of which are reserved
for Series A Junior Participating Preferred Stock and 220,000 of which were reserved for Series B 6.75% Convertible Perpetual
Preferred Stock. No Series A Junior Participating Preferred Stock has been issued. In 2006, 220,000 shares of Series B 6.75%
Convertible Perpetual Preferred Stock were issued under this authorization. As discussed below, all of those shares were converted
during fiscal year 2017, and none were outstanding at March 31, 2017.
Conversion of Series B 6.75% Convertible Perpetual Preferred Stock
In December 2016, holders of 111,072 shares of the Series B 6.75% Convertible Perpetual Preferred Stock voluntarily
exercised their conversion rights under the original issuance terms of the preferred shares. The Company chose to satisfy the full
conversion obligation for those preferred shares with shares of its common stock, issuing 2,487,118 common shares at the applicable
conversion rate in exchange for the preferred shares tendered. The consolidated balance sheet at March 31, 2017 reflects a non-cash
reclassification of $107.6 million from preferred stock to common stock to reflect the conversion of those preferred shares.
68
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
On January 9, 2017, the Company announced a mandatory conversion of all 107,418 remaining outstanding shares of the
preferred stock after meeting the requirements to initiate the mandatory conversion under the original terms of the preferred shares.
The Company chose to satisfy the conversion obligation for the mandatory conversion in cash, paying approximately $178.4 million
for those preferred shares on January 31, 2017 to complete the conversion.
With the completion of the mandatory conversion in January 2017, the Company’s outstanding equity securities consist
only of its common stock. Dividend payments on the preferred shares, which previously totaled approximately $15 million annually,
have been discontinued. Although the conversions of the preferred stock into common stock or for cash did not impact the Company’s
net income, the shares converted for cash under the mandatory conversion in January 2017 resulted in a one-time reduction of retained
earnings of approximately $74.4 million during the fourth quarter ended March 31, 2017, representing the excess of the conversion
cost over the carrying value of those shares. The reduction in retained earnings resulted in a corresponding one-time reduction of
earnings available to common shareholders for the fiscal year ended March 31, 2017 for purposes of determining the amounts reported
for basic and diluted earnings per share.
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 2015 through 2017. The current program, which replaced an expiring
program, was authorized and became effective on November 5, 2015. It authorizes the purchase of up to $100 million of the
Company's outstanding common stock and expires on the earlier of November 15, 2017, or when the funds authorized for the
program have been exhausted. At March 31, 2017, the full $100 million authorization remained available for share repurchases
under the current program.
Share repurchases under the programs for the fiscal years ended March 31, 2017, 2016, and 2015 were as follows:
Common Stock
Number of shares repurchased...............................................................................................
Cost of shares repurchased (in thousands of dollars)............................................................. $
Weighted-average cost per share............................................................................................ $
Series B 6.75% Convertible Perpetual Preferred Stock
Number of shares repurchased...............................................................................................
Cost of shares repurchased (in thousands of dollars)............................................................. $
Weighted-average cost per share............................................................................................ $
Fiscal Year Ended March 31,
2017
2016
2015
—
— $
— $
—
— $
— $
—
— $
— $
—
— $
— $
719,993
31,227
43.37
1,509
1.497
992.27
NOTE 12. 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
awards (“PSAs”), 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, and the 2007 Stock Incentive Plan. Together,
these plans are referred to in this disclosure as the “Plans.” Up to 2 million shares of the Company’s common stock may be issued
under each of the Plans; however, direct awards of common stock, restricted stock, or RSUs are limited to 500,000 shares under the
2002 Executive Stock Plan and 1,350,000 shares under the 2007 Stock Incentive Plan.
The Company’s practice is to award grants of stock-based compensation to officers at the first regularly-scheduled meeting
of the Executive Compensation, Nominating, and Corporate Governance 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 PSAs, and all stock options and SARs granted in previous years
were either exercised or had expired by the end of fiscal year 2017. Outside directors automatically receive restricted stock units
following each annual meeting of shareholders.
69
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Non-qualified stock options and SARs previously granted under the Plans had an exercise price equal to the market price
of a share of common stock on the date of grant. SARs granted under the Plans vested in equal one-third tranches one, two, and
three years after the grant date and expired 10 years after the grant date, except that SARs granted after fiscal year 2007 expired on
the earlier of 3 years after the grantee’s retirement date or 10 years after the grant date. 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 PSAs 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 PSA 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 vest 3 years after the grant date, and restricted stock vests upon the individual’s retirement from service
as a director.
Stock Options and SARs
The following tables summarize the Company’s stock option and SAR activity and related information for fiscal years 2015
through 2017:
Weighted-
Average
Exercise
Price
Shares
Fiscal Year Ended March 31, 2015:
Outstanding at beginning of year .........................................................................................................................
257,340
$
Exercised ..............................................................................................................................................................
Cancelled/expired.................................................................................................................................................
(63,539)
(24,200)
Outstanding at end of year ...................................................................................................................................
169,601
Fiscal Year Ended March 31, 2016:
Exercised ..............................................................................................................................................................
Cancelled/expired.................................................................................................................................................
(6,200)
(11,200)
Outstanding at end of year ...................................................................................................................................
152,201
Fiscal Year Ended March 31, 2017:
Exercised ..............................................................................................................................................................
(135,334)
Cancelled/expired.................................................................................................................................................
(16,867)
Outstanding at end of year ...................................................................................................................................
— $
54.83
38.50
62.66
59.82
51.32
62.66
59.96
61.72
45.82
—
As indicated in the table, with the exercise and/or expiration of all remaining SARs during fiscal year 2017, there were no
SARs or stock options outstanding at March 31, 2017.
Total intrinsic value of stock options and SARs exercised .................................................... $
Total fair value of SARs vested.............................................................................................. $
555
$
— $
26
$
— $
1,091
375
Intrinsic value in the above table is based on the difference between the market price of the underlying shares at the exercise
date and the exercise price of the SARs or stock options.
Fiscal Year Ended March 31,
2017
2016
2015
70
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
RSUs, Restricted Stock, and PSAs
The following table summarizes the Company’s RSU, restricted stock, and PSA activity for fiscal years 2015 through 2017:
RSUs
Restricted Stock
PSAs
Weighted-
Average
Grant Date
Fair Value
Weighted-
Average
Grant Date
Fair Value
Shares
Weighted-
Average
Grant Date
Fair Value
Shares
Shares
Fiscal Year Ended March 31, 2015:
Unvested at beginning of year ..................
293,180
$
Granted......................................................
94,539
Vested........................................................
(123,322)
Forfeited....................................................
—
Unvested at end of year.............................
264,397
Fiscal Year Ended March 31, 2016:
Granted......................................................
Vested........................................................
Unvested at end of year.............................
Fiscal Year Ended March 31, 2017:
Granted......................................................
Vested........................................................
Forfeited....................................................
80,932
(42,384)
302,945
74,776
(51,544)
(539)
Unvested at end of year.............................
325,638
$
44.33
51.86
42.02
—
48.10
51.62
41.64
49.95
55.27
44.57
55.63
52.01
48,100
$
42.33
149,387
$
—
—
—
—
—
—
48,100
42.33
—
—
—
—
48,100
42.33
57,580
(50,092)
(3,400)
153,475
86,212
(85,387)
154,300
—
(17,900)
—
30,200
$
—
42.26
—
42.37
58,805
(52,230)
(525)
160,350
$
41.76
46.41
31.95
53.56
45.58
45.06
38.14
48.13
49.17
53.56
49.17
46.86
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 PSAs. Shares forfeited or canceled include any reductions from the base PSA grant under
those same performance provisions. The fair values of RSUs, restricted stock, and PSAs 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, 2017, 2016, and 2015, total stock-based compensation expense and the related income tax
benefit recognized were as follows:
Fiscal Year Ended March 31,
2017
2016
2015
Total stock-based compensation expense ............................................................................... $
Income tax benefit recorded on stock-based compensation expense ..................................... $
6,475
2,266
$
$
5,206
1,822
$
$
6,230
2,181
At March 31, 2017, the Company had $6.0 million of unrecognized compensation expense related to stock-based awards,
which will be recognized over a weighted-average period of approximately 1.1 years. All stock options were exercised, cancelled,
or expired before the end of fiscal year 2015, and cash proceeds from the exercise of stock options were not material for that fiscal
year.
71
UNIVERSAL CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE 13. 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, 2017, the Company had contracts to purchase approximately $622
million of tobacco to be delivered during the coming fiscal year and $68 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 advances to farmers
and other suppliers, which totaled approximately $104 million, net of allowances, at March 31, 2017. 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 $48 million at March 31, 2017.
Guarantees and Other Contingent Liabilities
Guarantees of Bank Loans and Other Contingent Liabilities
Guarantees of bank loans to growers for crop financing have long been industry practice in Brazil and support the farmers’
production of tobacco there. The Company's operating subsidiary in Brazil had guarantees outstanding at March 31, 2017, all of
which expire within one year. As noted above, the subsidiary withholds payments due to the farmers on delivery of tobacco and
forwards those payments to the third-party banks. Failure of farmers to deliver sufficient quantities of tobacco to the subsidiary to
cover their obligations to the third-party banks could result in a liability for the subsidiary under the related guarantees; however, in
that case, the subsidiary would have recourse against the farmers. The maximum potential amount of future payments that the
Company’s subsidiary could be required to make at March 31, 2017, was the face amount, $17 million including unpaid accrued
interest ($13 million as of March 31, 2016). The fair value of the guarantees was a liability of approximately $1 million at March 31,
2017 ($2 million at March 31, 2016). In addition to these guarantees, the Company has other contingent liabilities totaling
approximately $2 million at March 31, 2017, 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 $15 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 $18
million. These amounts are based on the exchange rate for the Brazilian currency at March 31, 2017. 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, 2017, 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 $15 million at the March 31, 2017
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 $15 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, 2017.
With respect to the Parana assessment, management of the subsidiary and outside counsel challenged the full amount of
the claim. A significant portion of the Parana assessment was based on positions taken by the tax authorities that management and
outside counsel believe deviate significantly from the underlying statutes and relevant case law. In addition, under the law, the
subsidiary's tax filings for certain periods covered in the assessment were no longer open to any challenge by the tax authorities. In
December 2015, the Parana tax authorities withdrew the initial claim and subsequently issued a new assessment covering the same
tax periods. The new assessment totaled approximately $6 million at the March 31, 2017 exchange rate, reflecting a substantial
reduction from the original $18 million assessment. Notwithstanding the reduction, management and outside counsel continue to
72
UNIVERSAL CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
believe that the new assessment is not supported by the underlying statutes and relevant case law and have taken the necessary steps
to challenge the full amount of the claim. The range of reasonably possible loss is considered to be zero up to the full $6 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, 2017.
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 Contingent Liabilities
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.
Major Customers
A material part of the Company’s business is dependent upon a few customers. The Company's six largest customers are
Altria Group, Inc, British American Tobacco plc, China Tobacco International, Inc., Imperial Brands plc, Japan Tobacco, Inc., and
Philip Morris International, Inc. In the aggregate, these customers have accounted for more than 65% of consolidated revenue for
each of the past three fiscal years. For the fiscal years ended March 31, 2017, 2016, and 2015, revenue from Philip Morris International,
Inc. was approximately $590 million, $640 million, and $580 million, respectively. For the same periods, British American Tobacco
plc accounted for revenue of approximately $220 million, $230 million, and $220 million, respectively, and Imperial Brands plc
accounted for revenue of approximately $230 million, $210 million, and $280 million, respectively. These customers primarily do
business with various affiliates in the Company’s flue-cured and burley leaf tobacco operations. The loss of, or substantial reduction
in business from, any of these customers could have a material adverse effect on the Company.
Accounts Receivable
The Company’s operating subsidiaries perform credit evaluations of customers’ financial condition prior to the extension
of credit. Generally, accounts receivable are unsecured and are due within 30 days. When collection terms are extended for longer
periods, interest and carrying costs are usually recovered. Credit losses are provided for in the financial statements, and historically
such amounts have not been material. The allowance for doubtful accounts was approximately $4 million and $9 million at March 31,
2017 and 2016, respectively. At March 31, 2017 and 2016, net accounts receivable by reportable operating segment were as follows:
March 31,
2017
2016
Flue-Cured and Burley Leaf Tobacco Operations:
North America................................................................................................................................................. $
111,520
$
85,985
Other Regions .................................................................................................................................................
Subtotal .......................................................................................................................................................
Other Tobacco Operations ..................................................................................................................................
294,799
406,319
32,969
303,932
389,917
38,742
Consolidated accounts receivable, net ................................................................................................................ $
439,288
$
428,659
Acquisition of Partner's Interest in Tobacco Processing Joint Venture
For a number of years, the Company held a 50% joint venture ownership interest in Procesadora Unitab, S.A., a tobacco
processing entity in Guatemala. In December 2015, the Company acquired the 50% interest held by its joint venture partner for $6
million in cash. In accordance with Accounting Standards Codification Topic 805, "Business Combinations" (“ASC 805”), the
transaction was accounted for using the acquisition method of accounting, which required the Company to record all underlying
assets and liabilities of the entity at their fair values as of the transaction date and to consolidate the financial statements of the entity.
Based on those fair values, the Company recorded a pretax gain of $3.4 million on the transaction during the third quarter of fiscal
year 2016. The gain is reported in Other Income in the consolidated statements of income. The purchase price of the newly-acquired
50% interest approximated fair value, and the gain resulted from remeasuring the Company’s original 50% ownership interest in the
entity to fair value. No goodwill or identifiable intangible assets were recorded as part of the transaction, and acquisition-related
costs were not significant.
73
UNIVERSAL CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The allocation of the fair values to the net assets acquired was complete at the time the transaction was recorded. Based
on the nature of its operations, the net assets of the acquired entity are comprised primarily of property, plant, and equipment, and
the fair values recorded for those assets totaled approximately $12 million based primarily on a third-party appraisal. The acquired
entity is included in the Company’s North America operating segment.
Reversal of Valuation Allowance on IPI Tax Credits in Brazil
During fiscal year 2014, a longstanding lawsuit filed by the Company’s operating subsidiary in Brazil related to certain
excise tax credits (IPI tax credits) was concluded following a decision in the subsidiary’s favor in the Brazilian federal courts and
the expiration of the time period for the government to appeal the decision. IPI tax credits were established under Brazilian tax laws
to allow recovery of a portion of the excise taxes paid on manufactured products when those products are sold in export markets;
however, the Brazilian tax authorities subsequently issued certain regulations that prevented the subsidiary from claiming those
credits. The lawsuit filed by the subsidiary challenged the denial of the tax credits based on the law.
The final court decision entitled the subsidiary to approximately $104 million of IPI tax credits (based on the exchange rate
at the date of the decision), which were eligible to be used to offset other Brazilian federal tax payments for a period of up to five
years from the date the subsidiary’s right to claim the credits was confirmed. The subsidiary recorded a gain on the favorable outcome
of the case in fiscal year 2014, which was net of a valuation allowance based on estimates of the tax credits that were not probable
of being realized prior to their expiration. In the fourth quarter of fiscal year 2015, based on actual realization of the tax credits to
date, as well as updated tax payment projections for future periods, revised estimates indicated that all remaining IPI tax credits
would be fully utilized prior to their expiration. On that basis, the subsidiary reversed the full valuation allowance on the credits of
$12.7 million (based on the then current exchange rate) during that quarter. That reversal was reported in Other Income in the
consolidated statement of income.
NOTE 14. OPERATING SEGMENTS
Universal’s operations 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. A substantial portion of the Company’s revenues are
derived from sales to a limited number of large, multinational cigarette manufacturers.
The principal approach used by management to evaluate the Company’s performance is by geographic region, although the
dark air-cured and oriental tobacco businesses are each evaluated on the basis of their worldwide operations. Oriental tobacco
operations consist principally of a 49% interest in an affiliate, and the performance of those operations is evaluated based on the
Company’s equity in the pretax earnings of that affiliate. Under this structure, the Company has the following primary operating
segments: North America, South America, Africa, Europe, Asia, Dark Air-Cured, Oriental, and Special Services. North America,
South America, Africa, Europe, and Asia are primarily involved in flue-cured and/or burley leaf tobacco operations for supply to
cigarette manufacturers. The Dark Air-Cured group supplies dark air-cured tobacco principally to manufacturers of cigars, pipe
tobacco, and smokeless tobacco products, and the Oriental business supplies oriental tobacco to cigarette manufacturers. From time
to time, the segments may trade in tobaccos that differ from their main varieties, but those activities are not significant to their overall
results. Special Services includes the Company's laboratory services business, which provides physical and chemical product testing
and smoke testing for customers, its food ingredients business, as well as its liquid nicotine joint venture.
The five regional operating segments serving the Company’s cigarette manufacturer customer base share similar
characteristics in the nature of their products and services, production processes, class of customer, product distribution methods,
and regulatory environment. Based on the applicable accounting guidance, four of the regions – South America, Africa, Europe,
and Asia – are aggregated into a single reporting segment, “Other Regions”, because they also have similar economic characteristics.
North America is reported as an individual operating segment because its economic characteristics differ from the other regions,
generally because its operations require lower working capital investments for crop financing and inventory. The Dark Air-Cured,
Oriental and Special Services segments, which have dissimilar characteristics in some of the categories mentioned above, are reported
together as “Other Tobacco Operations” because each is below the measurement threshold for separate reporting.
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 allocated to the various operating segments, generally on the basis of tobacco volumes planned to be
purchased and/or processed. Management believes this method of allocation is representative of the value of the related services
provided to the operating segments. The Company evaluates the performance of its segments based on operating income after
allocated overhead expenses, plus equity in the pretax earnings of unconsolidated affiliates.
74
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Reportable segment data as of, or for, the fiscal years ended March 31, 2017, 2016, and 2015, is as follows:
Flue-Cured and Burley Leaf Tobacco Operations:
North America......................................................... $
Other Regions (1) .....................................................
Subtotal ...............................................................
Other Tobacco Operations (2) ......................................
Segment total ...............................................................
affiliates
Deduct: Equity in pretax earnings of unconsolidated
(3) ................................................
Restructuring and impairment costs (4) ..........
Add: Other income (5) .............................................
Sales and Other Operating Revenues
Operating Income
Fiscal Year Ended March 31,
Fiscal Year Ended March 31,
2017
2016
2015
2017
2016
2015
416,438
$
361,827
$
305,028
$
35,151
$
31,147
$
31,060
1,422,991
1,538,971
1,739,781
1,839,429
1,900,798
2,044,809
231,789
2,071,218
219,575
2,120,373
226,992
2,271,801
143,349
178,500
9,984
188,484
(5,774)
(4,359)
—
143,596
174,743
11,325
186,068
(5,422)
(2,389)
3,390
125,839
156,899
10,326
167,225
(7,137)
(4,890)
12,676
Consolidated total ........................................................ $
2,071,218
$
2,120,373
$
2,271,801
$
178,351
$
181,647
$
167,874
Segment Assets
March 31,
Goodwill
March 31,
2017
2016
2015
2017
2016
2015
Flue-Cured and Burley Leaf Tobacco Operations:
North America......................................................... $
Other Regions (1) .....................................................
Subtotal ...............................................................
Other Tobacco Operations (2) ......................................
357,406
$
364,003
$
281,449
$
— $
— $
1,465,109
1,548,517
1,607,846
1,822,515
1,912,520
1,889,295
300,890
318,657
297,180
97,159
97,159
1,644
97,318
97,318
1,713
—
97,372
97,372
1,713
Segment and consolidated totals.................................. $
2,123,405
$
2,231,177
$
2,186,475
$
98,803
$
99,031
$
99,085
Flue-Cured and Burley Leaf Tobacco Operations:
North America......................................................... $
Other Regions (1) .....................................................
Subtotal ...............................................................
(2) ......................................
Other Tobacco Operations
Depreciation and Amortization
Capital Expenditures
Fiscal Year Ended March 31,
Fiscal Year Ended March 31,
2017
2016
2015
2017
2016
2015
4,626
$
4,314
$
4,284
$
4,202
$
2,282
$
5,814
26,106
30,732
5,238
29,187
33,501
4,143
28,827
33,111
4,213
21,619
25,821
9,809
25,122
27,404
19,749
39,303
45,117
13,268
58,385
Segment and consolidated totals.................................. $
35,970
$
37,644
$
37,324
$
35,630
$
47,153
$
(1)
(2)
(3)
(4)
(5)
Includes South America, Africa, Europe, and Asia regions, as well as inter-region eliminations.
Includes Dark Air-Cured, Oriental, and Special Services, as well as intercompany eliminations. Sales and other operating revenues, goodwill, depreciation and
amortization, and capital expenditures include limited amounts or no amounts for Oriental because the business is accounted for on the equity method and its
financial results consist principally of equity in the pretax earnings of the unconsolidated affiliate. The investment in the unconsolidated affiliate is included
in segment assets and was approximately $78.1 million, $81.8 million, and $74.9 million, at March 31, 2017, 2016, and 2015, respectively.
Equity in pretax earnings of unconsolidated affiliates is included in segment operating income (Other Tobacco Operations segment), but is reported below
consolidated operating income and excluded from that total in the consolidated statements of income.
Restructuring and impairment costs are excluded from segment operating income, but are included in consolidated operating income in the consolidated
statements of income (see Note 2).
Other income in fiscal year 2016 represents a gain from remeasuring to fair value the Company's original 50% ownership in Procesadora Unitab, S.A., a tobacco
processing joint venture in Guatemala, upon acquiring the 50% interest held by the Company's joint venture partner (See Note 13). Other income in fiscal year
2015 represents the reversal of a valuation allowance on IPI excise tax credits in Brazil (See Note 13).
75
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Geographic data as of, or for, the fiscal years ended March 31, 2017, 2016, and 2015, 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,
2017
2016
2015
Belgium .................................................................................................................................................... $
320,735
$
371,580
$
336,396
United States.............................................................................................................................................
Germany ...................................................................................................................................................
China ........................................................................................................................................................
Netherlands...............................................................................................................................................
Russia .......................................................................................................................................................
320,731
123,649
137,855
91,266
84,784
All other countries ....................................................................................................................................
992,198
275,147
155,180
135,032
121,767
109,559
952,108
290,950
170,338
174,872
113,297
126,652
1,059,296
Consolidated total..................................................................................................................................... $
2,071,218
$
2,120,373
$
2,271,801
Long-Lived Assets
March 31,
2017
2016
2015
United States............................................................................................................................................. $
85,145
$
84,072
$
70,929
Brazil ........................................................................................................................................................
Mozambique.............................................................................................................................................
All other countries ....................................................................................................................................
134,074
50,311
146,698
133,727
53,069
154,090
135,980
55,733
141,893
Consolidated total..................................................................................................................................... $
416,228
$
424,958
$
404,535
76
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE 15. 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, 2017, 2016, and 2015:
(in thousands of dollars)
Foreign currency translation:
Fiscal Year Ended March 31,
2017
2016
2015
Balance at beginning of year............................................................................................................
$ (26,992) $ (31,138) $
(8,476)
Other comprehensive income (loss) attributable to Universal Corporation:
Net gain (loss) on foreign currency translation (net of tax (expense) benefit of $3,715,
$(2,119), and $12,181) ..............................................................................................................
(6,899)
Less: Net loss (gain) on foreign currency translation attributable to noncontrolling interests .....
753
3,934
212
(22,625)
(37)
Other comprehensive income (loss) attributable to Universal Corporation, net of income taxes.
(6,146)
4,146
(22,662)
Balance at end of year ......................................................................................................................
$ (33,138) $ (26,992) $ (31,138)
Foreign currency hedge:
Balance at beginning of year............................................................................................................
$
675
$
(1,834) $
769
Other comprehensive income (loss) attributable to Universal Corporation:
Net gain (loss) on derivative instruments (net of tax (expense) benefit of $991, $(1,060), and
$2,304).......................................................................................................................................
Reclassification of net loss to earnings (net of tax benefit of $(489), $(291), and $(903)) (1) .......
(1,841)
908
1,969
540
(4,280)
1,677
Other comprehensive income (loss) attributable to Universal Corporation, net of income taxes.
(933)
2,509
(2,603)
Balance at end of year ......................................................................................................................
$
(258) $
675
$
(1,834)
Interest rate hedge:
Balance at beginning of year............................................................................................................
$
(6,997) $
(1,982) $
(608)
Other comprehensive income (loss) attributable to Universal Corporation:
Net gain (loss) on derivative instruments (net of tax (expense) benefit of $(3,150), $4,489, and
$1,416)...........................................................................................................................................
5,849
(8,335)
(2,628)
Reclassification of net loss to earnings (net of tax benefit of $(1,370), $(1,788), and $(675))
(2)
2,546
3,320
1,254
Other comprehensive income (loss) attributable to Universal Corporation, net of income taxes.
8,395
(5,015)
(1,374)
Balance at end of year ......................................................................................................................
$
1,398
$
(6,997) $
(1,982)
Pension and other postretirement benefit plans:
Balance at beginning of year............................................................................................................
$ (39,036) $ (40,040) $ (26,017)
Other comprehensive income (loss) attributable to Universal Corporation:
Net losses arising during the year (net of tax benefit of $751, $1,035, and $9,719)
Amortization included in earnings (net of tax benefit of $(1,546), $(1,576), and $(2,163))
(3) ...................
(4) ....
(1,395)
(1,921)
(18,049)
2,870
2,925
4,026
Other comprehensive income (loss) attributable to Universal Corporation, net of income taxes.
1,475
1,004
(14,023)
Balance at end of year ......................................................................................................................
$ (37,561) $ (39,036) $ (40,040)
Total accumulated other comprehensive income (loss) at end of year...............................................
$ (69,559) $ (72,350) $ (74,994)
77
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(1)
Gain (loss) on foreign currency cash flow hedges related to forecast purchases of tobacco 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 debt or upon termination of the interest rate swap agreements prior to their scheduled maturity
dates. See Note 8 for additional information.
(3)
These items arise from the remeasurement of the assets and liabilities of the Company's defined benefit pension plans. Those remeasurements
are made on an annual basis at the end of the fiscal year. See Note 10 for additional information.
(4)
This accumulated other comprehensive income (loss) component is included in the computation of net periodic benefit cost. See Note 10
for additional information.
78
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE 16. UNAUDITED QUARTERLY FINANCIAL DATA
Unaudited quarterly financial data for the fiscal years ended March 31, 2017 and 2016 is provided in the table below. Due
to the seasonal nature of the Company's business, management believes it is generally more meaningful to focus on cumulative rather
than quarterly results.
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Fiscal Year Ended March 31, 2017
Operating Results:
Sales and other operating revenues ...................................................................... $
295,475
$
456,942
$
668,771
$
650,030
Gross profit...........................................................................................................
Net income (loss)..................................................................................................
Net income (loss) attributable to Universal Corporation .....................................
Earnings (loss) available to Universal Corporation common shareholders after
dividends on convertible perpetual preferred stock .........................................
Earnings (loss) per share attributable to Universal Corporation common
shareholders:
Basic.................................................................................................................
Diluted..............................................................................................................
Cash Dividends Declared:
Per share of convertible perpetual preferred stock ...............................................
Per share of common stock ..................................................................................
Market Price Range of Common Stock:
High ......................................................................................................................
Low.......................................................................................................................
52,197
(7,504)
(5,476)
87,844
26,498
25,264
135,453
57,062
53,647
119,185
36,450
32,869
(9,163)
21,577
49,960
(41,484)
(0.40)
(0.40)
16.88
0.53
57.75
52.26
0.95
0.90
16.87
0.53
61.69
55.29
2.17
1.92
16.88
0.54
64.20
52.40
(1.64)
(1.64)
—
0.54
83.35
63.30
Fiscal Year Ended March 31, 2016
Operating Results:
Sales and other operating revenues ...................................................................... $
275,419
$
456,382
$
584,592
$
803,980
Gross profit...........................................................................................................
Net income (loss)..................................................................................................
Net income (loss) attributable to Universal Corporation .....................................
Earnings (loss) available to Universal Corporation common shareholders after
dividends on convertible perpetual preferred stock .........................................
Earnings (loss) per share attributable to Universal Corporation common
shareholders:
Basic.................................................................................................................
Diluted..............................................................................................................
Cash Dividends Declared:
Per share of convertible perpetual preferred stock ...............................................
Per share of common stock ..................................................................................
Market Price Range of Common Stock:
High ......................................................................................................................
Low.......................................................................................................................
48,389
(6,125)
(5,947)
98,094
25,064
22,465
119,906
140,942
46,615
44,534
52,594
47,964
(9,634)
18,778
40,847
44,277
(0.43)
(0.43)
16.88
0.52
57.76
46.80
0.83
0.81
16.87
0.52
58.41
46.98
1.80
1.60
16.88
0.53
57.72
49.70
1.95
1.72
16.87
0.53
57.27
51.49
79
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note: Earnings per share amounts for each fiscal year may not equal the total of the four quarterly amounts due to differences in
weighted-average outstanding shares for the respective periods and to the fact that the Company’s convertible perpetual
preferred stock may be antidilutive for some periods.
Significant items included in the quarterly results were as follows:
Fiscal Year Ended March 31, 2017
•
•
Second Quarter – Restructuring and impairment costs totaling $3.7 million, primarily related to the Company's decision to close
its tobacco processing facility in Hungary. The Company is now processing tobaccos sourced from Hungary in its factories in
Italy. The costs incurred for the change in operations in Hungary included statutory employee termination benefits and impairment
charges related to certain property and equipment. Those costs reduced net income attributable to Universal Corporation by $2.4
million and diluted earnings per share by $0.09.
Fourth Quarter – The conversion of 107,418 shares of the Company's Series B 6.75% Convertible Perpetual Preferred Stock for
cash resulted in a one-time reduction of retained earnings of approximately $74.4 million during the quarter ending March 31,
2017, representing the excess of the conversion cost over the carrying value of those preferred shares. The reduction in retained
earnings resulted in a corresponding one-time reduction of earnings available to common shareholders for purposes of determining
the amounts reported for basic and diluted earnings per share for those periods. The reduction in earnings available to common
shareholders decreased diluted earnings per share for the quarter by $2.90.
Fiscal Year Ended March 31, 2016
•
First Quarter – Restructuring and impairment costs totaling $2.4 million, related to a decision to significantly scale back the
Company's operations in Zambia. The costs included statutory employee termination benefits, impairment charges related to
outstanding balances on loans to farmers whose contracts were terminated as a result of the decision, and impairment charges
on certain property and equipment. The restructuring and impairment costs reduced net income attributable to Universal
Corporation by $1.6 million and diluted earnings per share by $0.06.
• Third Quarter – A $3.4 million pretax gain arising from the acquisition of a joint venture partner's 50% ownership interest in a
tobacco processing entity in Guatemala. The transaction increased the Company's ownership interest in the entity to 100%,
requiring consolidation of the financial statements of the entity and remeasurement of the Company's original 50% ownership
interest to fair value, resulting in the gain. The gain increased net income attributable to Universal Corporation by $2.2 million
and diluted earnings per share by $0.08.
80
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of
Universal Corporation
We have audited the accompanying consolidated balance sheets of Universal Corporation as of March 31, 2017 and 2016, and the
related consolidated statements of income, comprehensive income, changes in shareholders' equity, and cash flows for each of the
three years in the period ended March 31, 2017. Our audits also included the financial statement schedule listed in the Index at Item
15(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position
of Universal Corporation at March 31, 2017 and 2016, and the consolidated results of its operations and its cash flows for each of
the three years in the period ended March 31, 2017, in conformity with U.S. generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Universal
Corporation’s internal control over financial reporting as of March 31, 2017, 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 26, 2017 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Richmond, Virginia
May 26, 2017
81
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm,
on Internal Control Over Financial Reporting
The Board of Directors and Shareholders of
Universal Corporation
We have audited Universal Corporation’s internal control over financial reporting as of March 31, 2017, 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). Universal Corporation’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 in Item 9A. Our responsibility is to express an opinion on the
company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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.
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.
In our opinion, Universal Corporation maintained, in all material respects, effective internal control over financial reporting as of
March 31, 2017, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Universal Corporation as of March 31, 2017 and 2016, and the related consolidated statements of
income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended
March 31, 2017 and our report dated May 26, 2017 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Richmond, Virginia
May 26, 2017
82
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
For the three years ended March 31, 2017, 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.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be
disclosed in reports filed by the Company under the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SEC rules and forms and that such information is accumulated and communicated to the Company’s
management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding
required disclosure. The Company’s Chief Executive Officer and Chief Financial Officer evaluated, with the participation of the
Company’s management, the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rule
13a-15(e)), as of the end of the period covered by this Annual Report. Based on this evaluation, the Company’s management, including
its Chief Executive Officer and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were
effective.
Management’s Report on Internal Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining effective internal control over financial
reporting as defined in Rule 13a-15(f) under the Exchange Act. The Company’s internal control over financial reporting is designed
to provide reasonable assurance to management and the Board of Directors regarding the preparation and fair presentation of the
consolidated financial statements. Due to inherent limitations, internal control over financial reporting may not prevent or detect all
errors or misstatements in the financial statements, and even control procedures that are determined to be effective can provide only
reasonable assurance with respect to financial statement preparation and presentation. 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.
As required by Exchange Act Rule 13a-15(c), the Company’s Chief Executive Officer and Chief Financial Officer, with
the participation of other members of management, assessed the effectiveness of the Company’s internal control over financial
reporting as of March 31, 2017. The evaluation was based on the criteria set forth in “Internal Control – Integrated Framework”
issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (“the COSO criteria”). Based
on this assessment, the Company’s management concluded that the Company’s internal control over financial reporting was effective
as of March 31, 2017.
The Company’s independent registered public accounting firm, Ernst & Young LLP, has audited the Company’s internal
control over financial reporting as of March 31, 2017. Their report on this audit appears on page 82 of this Annual Report.
Changes in Internal Control Over Financial Reporting
There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s last
fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial
reporting.
Item 9B. Other Information
None.
83
Item 10. Directors, Executive Officers, and Corporate Governance
PART III
Except as to the matters set forth below, information required by this Item is incorporated herein by reference to the Company’s
2017 Proxy Statement.
The following are executive officers of the Company as of May 26, 2017:
Name and Age
G. C. Freeman, III (53) Chairman, President, and
Position
Chief Executive Officer
A. L. Hentschke (47)
Senior Vice President and
Chief Operating Officer
D. C. Moore (61)
Senior Vice President and
Chief Financial Officer
T. G. Broome (63)
Executive Vice President and
Sales Director, Universal
Leaf Tobacco Company, Inc.
P. D. Wigner (48)
Vice President, General
Counsel and Secretary
J. A. Huffman (55)
Senior Vice President,
Information and Planning,
Universal Leaf Tobacco
Company, Inc.
Business Experience During Past The Five Years
Mr. Freeman was elected Chairman of the Board in August 2008, Chief
Executive Officer effective April 2008, President in December 2006,
and Vice President in November 2005. Mr. Freeman served as General
Counsel and Secretary from February 2001 until November 2005 and
has been employed with the Company since 1997.
Mr. Hentschke was elected Senior Vice President and Chief Operating
Officer in April 2015. From January 2013 to April 2015, he served as
Executive Vice President of Universal Leaf. Tobacco Company,
Incorporated ("Universal Leaf"). From November 2009 to January
2013, Mr. Hentschke served as President and Chief Executive Officer
of Universal Leaf Tabacos, Limitada, the Company's operating
subsidiary in Brazil. He has been employed with the Company and its
affiliates since 1991.
Mr. Moore was elected Senior Vice President and Chief Financial
Officer effective September 2008. Mr. Moore served as Vice President
and Chief Administrative Officer from April 2006 until September
2008, as Senior Vice President of Universal Leaf from September 2005
until April 2006, and as Managing Director of Universal Leaf
International SA from April 2002 until September 2005. He has been
employed with the Company since 1978.
Mr. Broome was elected Executive Vice President and Sales Director,
Universal Leaf, in October 2012. From April 2011 through October
2012, Mr. Broome served as Executive Vice President. From September
1998 through March 2011, Mr. Broome served as Senior Vice President-
Sales. He has been employed with the Company since 1994.
Mr. Wigner was elected Vice President in August 2007, and General
Counsel and Secretary in November 2005 and also served as Chief
Compliance Officer from November 2007 until September 2012. Mr.
Wigner served as Senior Counsel of Universal Leaf from November
2004 until November 2005. He has been employed with the Company
since 2003.
Mr. Huffman was elected Senior Vice President, Information and
Planning, Universal Leaf, in August 2007. From September 2003 to
August 2007, Mr. Huffman served as Senior Vice President. From
September 2002 to September 2003, Mr. Huffman served as Vice
President and Controller. He has been employed with the Company
since 1996.
C. C. Formacek (57)
R. M. Peebles (59)
Vice President and Treasurer Ms. Formacek was elected Vice President and Treasurer effective April
2012. Ms. Formacek served as Treasurer of Universal Leaf from April
2011 through March 2012. She joined the Company in September 2009
and served as Assistant Treasurer of Universal Leaf from that time
through March 2011.
Vice President and Controller Mr. Peebles was elected Vice President and Controller in April 2011.
Mr. Peebles joined the Company in September 2003 and served as
Controller from that time through March 2011.
There are no family relationships between any of the above officers.
84
The Company has a Code of Conduct that includes the NYSE requirements for a “Code of Business Conduct and Ethics”
and the SEC requirements for a “Code of Ethics for Senior Financial Officers.” The Code of Conduct is applicable to all officers,
employees, and outside directors of the Company, including the principal executive officer, principal financial officer, and principal
accounting officer. A copy of the Code of Conduct is available through the “Corporate Governance-Overview” section of the
Company’s website at www.universalcorp.com. If the Company amends a provision of the Code of Conduct, or grants a waiver
from any such provision to a director or executive officer, the Company will disclose such amendments and the details of such
waivers on the Company’s website www.universalcorp.com to the extent required by the SEC or the NYSE.
The information required by Items 407(c)(3), (d)(4) and (d)(5) of Regulation S-K is contained under the captions “Corporate
Governance and Committees—Committees of the Board—Compensation Committee,” “Corporate Governance and Committees—
Committees of the Board—Audit Committee” of the Company’s 2017 Proxy Statement and such information is incorporated by
reference herein.
Item 11. Executive Compensation
Refer to the captions “Executive Compensation” and “Directors’ Compensation” in the Company’s 2017 Proxy Statement,
which information is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Refer to the caption “Stock Ownership” in the Company’s 2017 Proxy Statement, which information is incorporated herein
by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Refer to the caption “Certain Transactions” in the Company’s 2017 Proxy Statement, which information is incorporated
herein by reference. The information required by Item 407(a) of Regulation S-K is contained under the caption “Corporate Governance
and Committees—Director Independence” of the Company’s 2017 Proxy Statement and such information is incorporated by reference
herein.
Item 14. Principal Accounting Fees and Services
Refer to the captions “Audit Information – Fees of Independent Auditors” and “Audit Information – Pre-Approval Policies
and Procedures” in the Company’s 2017 Proxy Statement, which information is incorporated herein by reference.
85
Item 15. Exhibits, Financial Statement Schedules
(a)
The following are filed as part of this Annual Report:
1. Financial Statements.
PART IV
Consolidated Statements of Income for the Fiscal Years Ended March 31, 2017, 2016, and 2015
Consolidated Statements of Comprehensive Income for the Fiscal Years Ended March 31, 2017, 2016, and 2015
Consolidated Balance Sheets at March 31, 2017 and 2016
Consolidated Statements of Cash Flows for the Fiscal Years Ended March 31, 2017, 2016, and 2015
Consolidated Statements of Changes in Shareholders’ Equity for the Fiscal Years Ended March 31, 2017, 2016,
and 2015
Notes to Consolidated Financial Statements for the Fiscal Years Ended March 31, 2017, 2016, and 2015
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm, on Internal Control Over Financial
Reporting
2. Financial Statement Schedules.
Schedule II – Valuation and Qualifying Accounts
3. Exhibits. The exhibits are listed in the Exhibit Index immediately following the signature pages to this Annual Report.
(b)
Exhibits
The response to this portion of Item 15 is submitted as a separate section to this Annual Report.
(c)
Financial Statement Schedules
Schedule II – Valuation and Qualifying Accounts appears on the following page of this Annual Report. All other
schedules are not required under the related instructions or are not applicable and therefore have been omitted.
Item 16. Form 10-K Summary
None.
86
Schedule II - Valuation and Qualifying Accounts
Universal Corporation
Fiscal Years Ended March 31, 2017, 2016, and 2015
Description
(in thousands of dollars)
Fiscal Year Ended March 31, 2015:
Allowance for doubtful accounts (deducted from accounts
receivable) ..........................................................................
$
Balance at
Beginning
of Year
Net
Additions
(Reversals)
Charged
to Expense
Additions
Charged
to Other
Accounts
Deductions (1)
Balance
at End
of Year
6,536
$
1,341
$
— $
(2,395) $
5,482
Allowance for supplier accounts (deducted from advances
to suppliers and other noncurrent assets) ...........................
46,078
3,734
Allowance for recoverable taxes (deducted from other
current assets and other noncurrent assets) ........................
29,504
1,855
—
—
(15,139)
34,673
(8,141)
23,218
Fiscal Year Ended March 31, 2016:
Allowance for doubtful accounts (deducted from accounts
receivable) ..........................................................................
$
5,482
$
6,970
$
— $
(3,353) $
9,099
Allowance for supplier accounts (deducted from advances
to suppliers and other noncurrent assets) ...........................
34,673
815
Allowance for recoverable taxes (deducted from other
current assets and other noncurrent assets) ........................
23,218
1,755
—
—
(6,623)
28,865
(6,221)
18,752
Fiscal Year Ended March 31, 2017:
Allowance for doubtful accounts (deducted from accounts
receivable) ..........................................................................
$
9,099
$
(5,071) $
— $
(81) $
3,947
Allowance for supplier accounts (deducted from advances
to suppliers and other noncurrent assets) ...........................
28,865
(857)
Allowance for recoverable taxes (deducted from other
current assets and other noncurrent assets) ........................
18,752
(3,392)
—
—
(934)
27,074
(2,808)
12,552
(1)
Includes direct write-offs of assets and currency remeasurement.
87
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
May 26, 2017
UNIVERSAL CORPORATION
By:
/s/ GEORGE C. FREEMAN, III
George C. Freeman, III
Chairman, President, and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Date
May 26, 2017
May 26, 2017
May 26, 2017
May 26, 2017
May 26, 2017
May 26, 2017
May 26, 2017
May 26, 2017
May 26, 2017
May 26, 2017
Signature
/s/ GEORGE C. FREEMAN, III
George C. Freeman, III
Title
Chairman, President, Chief Executive Officer, and Director
(Principal Executive Officer)
/s/ DAVID C. MOORE
David C. Moore
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
/s/ ROBERT M. PEEBLES
Robert M. Peebles
Vice President and Controller
(Principal Accounting Officer)
/s/ JOHN B. ADAMS, JR.
John B. Adams, Jr.
/s/ DIANA F. CANTOR
Diana F. Cantor
/s/ LENNART R. FREEMAN
Lennart R. Freeman
/s/ THOMAS H. JOHNSON
Thomas H. Johnson
/s/ MICHAEL T. LAWTON
Michael T. Lawton
/s/ EDDIE N. MOORE, JR.
Eddie N. Moore, Jr.
/s/ ROBERT C. SLEDD
Robert C. Sledd
Director
Director
Director
Director
Director
Director
Director
88
EXHIBIT INDEX
3.1 Amended and Restated Articles of Incorporation, effective August 9, 2011 (incorporated herein by reference to the
Registrant’s Current Report on Form 8-K Registration Statement filed August 9, 2011, File No. 001-00652).
3.2 Amended and Restated Bylaws (as of August 3, 2010) (incorporated herein by reference to the Registrant’s Current
Report on Form 8-K dated August 3, 2010, File No. 001-00652).
4.1
Indenture between the Registrant and Chemical Bank, as trustee (incorporated herein by reference to the Registrant’s
Current Report on Form 8-K dated February 25, 1991, File No. 001-00652).
4.2 Specimen Common Stock Certificate (incorporated herein by reference to the Registrant’s Amendment No. 1 to
Registrant’s Form 8-A Registration Statement, dated May 7, 1999, File No. 001-00652).
10.1 Form of Universal Leaf Tobacco Company, Incorporated Executive Life Insurance Agreement (incorporated herein by
reference to the Registrant’s Annual Report on Form 10-K for the fiscal year ended June 30, 1994, File No. 001-00652).
10.2 Universal Leaf Tobacco Company, Incorporated Deferred Income Plan (incorporated herein by reference to the
Registrant’s Report on Form 8-K, dated February 8, 1991, File No. 001-00652).
10.3 Universal Leaf Tobacco Company, Incorporated Benefit Replacement Plan (incorporated herein by reference to the
Registrant’s Report on Form 8-K, dated February 8, 1991, File No. 001-00652).
10.4 Universal Leaf Tobacco Company, Incorporated 1994 Benefit Replacement Plan (incorporated herein by reference to
the Registrant’s Annual Report on Form 10-K for the fiscal year ended June 30, 1994, File No. 001-00652).
10.5 Universal Leaf Tobacco Company, Incorporated 1996 Benefit Restoration Plan (incorporated herein by reference to
the Registrant’s Annual Report on Form 10-K for the fiscal year ended June 30, 1996, File No. 001-00652).
10.6 Universal Leaf Tobacco Company, Incorporated 1994 Deferred Income Plan, amended and restated as of July 1, 1998
(incorporated herein by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September
30, 1998, File No. 001-00652).
10.7 Universal Corporation Outside Directors’ Deferred Income Plan, restated as of October 1, 1998 (incorporated herein
by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, File No.
001-00652).
10.8 Revised Form of Universal Corporation Non-Employee Director Restricted Stock Agreement (incorporated herein by
reference to the Registrant’s Current Report on Form 8-K dated June 9, 2010, File No. 001-00652).
10.9 Form Change of Control Agreement (incorporated herein by reference to the Registrant’s Current Report on Form 8-
K filed November 10, 2008, File No. 001-00652).
10.10 Universal Corporation Director’s Charitable Award Program (incorporated herein by reference to the Registrant’s
Annual Report on Form 10-K for the fiscal year ended June 30, 1998, File No. 001-00652).
10.11 Universal Corporation 1997 Executive Stock Plan, as amended on August 7, 2003 (incorporated herein by reference
to the Registrant’s Annual Report on Form 10-K for the fiscal year ended June 30, 2003, File No. 001-00652).
10.12 Universal Corporation 2002 Executive Stock Plan, as amended on August 7, 2003 (incorporated herein by reference
to the Registrant’s Annual Report on Form 10-K for the fiscal year ended June 30, 2003, File No. 001-00652).
10.13 Form of Restricted Stock Units Award Agreement (incorporated herein by reference to the Registrant’s Current Report
on Form 8-K filed November 10, 2008, File No. 001-00652).
10.14 Universal Corporation 2007 Amended and Restated Stock Incentive Plan effective August 7, 2012 (incorporated herein
by reference to Exhibit A to the Registrant’s definitive proxy statement filed June 28, 2012, File No. 001-00652).
89
10.15 Universal Corporation Executive Officer Annual Incentive Plan, as amended (incorporated herein by reference to the
Registrant's definitive proxy statement filed June 25, 2014, File No. 001-00652).
10.16 Form of Universal Corporation 2010 Restricted Stock Units Agreement with Schedule of Awards to named executive
officers (incorporated herein by reference to the Registrant’s Annual Report on Form 10-K for the fiscal year ended
March 31, 2010, File No. 001-00652).
10.17 Universal Leaf Tobacco Company, Incorporated Deferred Income Plan III, amended and restated as of December 31,
2008 (incorporated herein by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended March
31, 2010, File No. 001-00652).
10.18 Universal Corporation Outside Directors' Deferred Income Plan III, amended and restated as of December 31, 2008,
and amended as of February 1, 2010 (incorporated herein by reference to the Registrant's Annual Report on Form 10-
K for the fiscal year ended March 31, 2010, File No. 001-00652).
10.19 Form of Universal Corporation 2011 Restricted Stock Units Agreement (incorporated herein by reference to the
Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 2011, File No. 001-00652).
10.20 Form of Universal Corporation Performance Share Award Agreement (incorporated herein by reference to the
Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 2011, File No. 001-00652).
10.21 Credit Agreement dated December 30, 2014 among the Company, JPMorgan Chase Bank, N.A., as Administrative
Agent, SunTrust Bank and AgFirst Farm Credit Bank, as Co-Syndication Agents and Keybank National Association
and Capital One, National Association, as Co-Documentation Agents (incorporated herein by reference to the
Registrant’s Current Report on Form 8-K dated December 30, 2014 (December 23, 2014), File No. 001-00652).
12 Ratio of Earnings to Fixed Charges and Ratio of Earnings to Combined Fixed Charges and Preference Dividends.*
21 Subsidiaries of the Registrant.*
23 Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm.*
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
32.1 Statement of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350.*
32.2 Statement of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350.*
101
Interactive Data File (Annual Report on Form 10-K for the fiscal year ended March 31, 2017, furnished in XBRL
(eXtensible Business Reporting Language)).*
Attached as Exhibit 101 to this report are the following documents formatted in XBRL: (i) the Consolidated Statements
of Income for each of the three years ended March 31, 2017, 2016 and 2015, (ii) the Consolidated Statements of
Comprehensive Income for each of the three years ended March 31, 2017, 2016 and 2015, (iii) the Consolidated Balance
Sheets at March 31, 2017 and 2016, (iv) the Consolidated Statement of Cash Flows for each of the three years ended
March 31, 2017, 2016 and 2015, (v) the Consolidated Statement of Shareholders’ Equity for each of the three years
ended March 31, 2017, 2016 and 2015, (vi) the Notes to Consolidated Financial Statements, (vii) Schedule II - Valuation
and Qualifying Accounts.
_________
* Filed herewith.
90
SHAREHOLDER INFORMATION
ANNUAL MEETING
STOCK LISTED
The Annual Meeting of Shareholders will be held at
New York Stock Exchange
STOCK SYMBOL
UVV
DIVIDEND REINVESTMENT PLAN
The Company offers to its common shareholders an
automatic dividend reinvestment and cash payment plan
to purchase additional shares. The Company bears all
brokerage and service fees. Booklets describing the plan
in detail are available upon request.
TRANSFER AGENT AND REGISTRAR AND
DIVIDEND REINVESTMENT PLAN AGENT
Wells Fargo Bank, N.A.
Shareowner Services
P.O. Box 64854
St. Paul, Minnesota 55164-0854
(800) 468-9716
or
Universal Corporation
Shareholder Services
(804) 359-9311
the offi ces of the Company, 9201 Forest Hill Avenue,
Richmond, Virginia, on Thursday, August 3, 2017. A
proxy statement and request for proxies are included
in this mailing to shareholders.
INDEPENDENT AUDITORS
Ernst & Young LLP
The Edgeworth Building
Suite 201, 2100 East Cary Street
Richmond, Virginia 23223
INVESTOR RELATIONS
Contact:
Candace C. Formacek
Vice President and Treasurer
Jennifer S. Rowe
Assistant Vice President, Capital Markets
(804) 359-9311
Information Requests:
(804) 254-3789 or investor@universalleaf.com
DIVIDEND PAYMENTS
Dividend declarations are subject to approval by
the Company’s Board of Directors. Dividends on the
Company’s common stock have traditionally been paid
quarterly in February, May, August, and November to
shareholders of record on the second Monday of the
previous month.
SEC FORM 10-K
Shareholders may obtain additional copies of the
Company’s annual report to the Securities and Exchange
Commission on its website or by writing to the Treasurer
of the Company.
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P.O. Box 25099
Richmond, VA. 23260
www.universalcorp.com