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Derivatives And Hedging Activities | 9 Months Ended
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Dec. 31, 2023
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivatives And Hedging Activities | DERIVATIVES AND HEDGING ACTIVITIES Universal is exposed to various risks in its worldwide operations and uses derivative financial instruments to manage two specific types of risks – interest rate risk and foreign currency exchange rate risk. Interest rate risk has been managed by entering into interest rate swap agreements, and foreign currency exchange rate risk has been managed by entering into forward and option foreign currency exchange contracts. However, the Company’s policy also permits other types of derivative instruments. In addition, foreign currency exchange rate risk is also managed through strategies that do not involve derivative instruments, such as using local borrowings and other approaches to minimize net monetary positions in non-functional currencies. The disclosures below provide additional information about the Company’s hedging strategies, the derivative instruments used, and the effects of these activities on the consolidated statements of income and comprehensive income and the consolidated balance sheets. In the consolidated statements of cash flows, the cash flows associated with all of these activities are reported in net cash provided by operating activities. Cash Flow Hedging Strategy for Interest Rate Risk In December 2022, the Company entered into receive-floating/pay-fixed interest rate swap agreements that were designated and qualify as hedges of the exposure to changes in interest payment cash flows created by fluctuations in variable interest rates on two outstanding non-amortizing bank term loans that were funded as part of a new bank credit facility in December 2022. Although no significant ineffectiveness is expected with this hedging strategy, the effectiveness of the interest rate swaps is evaluated on a quarterly basis. At December 31, 2023, the total notional amount of the interest rate swaps was $310 million, which corresponded to a portion of the aggregate outstanding balance of the term loans. Previously, the Company had receive-floating/pay-fixed interest rate swap agreements that were designated and qualified as cash flow hedges for two non-amortizing bank loans that were repaid concurrent with closing on the new bank credit facility in December 2022. Those swap agreements, which had an aggregate notional amount of $370 million corresponding to a portion of the principal balance on the repaid loans, were terminated concurrent with the inception of the new swap agreements. The fair value of the previous swap agreements, approximately $11.8 million, was received from the counterparties in December 2022 upon termination and is being amortized from accumulated other comprehensive loss into earnings as a reduction of interest expense through the original maturity dates of those agreements. Cash Flow Hedging Strategy for Foreign Currency Exchange Rate Risk Related to Sales of Crop Inputs, Forecast Purchases of Tobacco, and Related Processing Costs The majority of the tobacco production in most countries outside the United States where Universal operates is sold in export markets at prices denominated in U.S. dollars. However, sales of crop inputs (such as seeds and fertilizers) to farmers, purchases of tobacco from farmers, and most processing costs (such as labor and energy) in those countries are usually denominated in the local currency. Changes in exchange rates between the U.S. dollar and the local currencies where tobacco is grown and processed affect the ultimate U.S. dollar sales of crop inputs and cost of processed tobacco. From time to time, the Company enters into forward and option contracts to buy U.S. dollars and sell the local currency at future dates that coincide with the sale of crop inputs to farmers. In the case of forecast purchases of tobacco and the related processing costs, the Company enters into forward and option contracts to sell U.S. dollars and buy the local currency at future dates that coincide with the expected timing of a portion of the tobacco purchases and processing costs. These strategies offset the variability of future U.S. dollar cash flows for sales of crop inputs, tobacco purchases, and processing costs for the foreign currency notional amount hedged. These hedging strategies have been used mainly for tobacco purchases, processing costs, and sales of crop inputs in Brazil, although the Company periodically enters into hedges for a portion of tobacco purchases in Africa. The aggregate U.S. dollar notional amount of forward and option contracts entered into for these purposes during the nine-month periods in fiscal years 2024 and 2023 was as follows:
|  | Nine Months Ended December 31,
(in millions of dollars) |  | 2023 |  | 2022
Tobacco purchases |  | $ | 30.3 |  |  | $ | 47.1 |
Processing costs |  | 4.9 |  |  | 7.9 |
Total |  | $ | 35.2 |  |  | $ | 55.0 |
Fluctuations in exchange rates and in the amount and timing of fixed-price orders from customers for their purchases from individual crop years routinely cause variations in the U.S. dollar notional amount of forward contracts entered into from one year to the next. All contracts related to tobacco purchases and crop input sales were initially designated and qualified as hedges of the future cash flows associated with the forecast purchases of tobacco. As a result, changes in fair values of the forward contracts have been recognized in comprehensive income as they occurred, but only recognized in earnings as a component of cost of goods sold upon sale of the related tobacco to third-party customers. The Company de-designates ineffective tobacco purchases and crop input sales hedges to selling, general, and administrative expense when the forecasted tobacco purchases or crop input sales are no longer expected to occur. The table below presents the expected timing of when the remaining accumulated other comprehensive gains and losses as of December 31, 2023 for cash flows hedges of tobacco purchases and crop input sales are expected to be recognized in earnings.
Hedging Program | Crop Year | Geographic Location(s) | Fiscal Year Earnings
Tobacco purchases | 2022 | Brazil | 2024
Tobacco purchases | 2023 | Brazil | 2024
Crop input sales | 2023 | Brazil | 2024
Crop input sales | 2024 | Brazil | 2025
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. Hedging Strategy for Foreign Currency Exchange Rate Risk Related to Net Local Currency Monetary Assets and Liabilities of Foreign Subsidiaries Most of the Company’s foreign subsidiaries transact the majority of their sales in U.S. dollars and finance the majority of their operating requirements with U.S. dollar borrowings, and therefore use the U.S. dollar as their functional currency. These subsidiaries normally have certain monetary assets and liabilities on their balance sheets that are denominated in the local currency. Those assets and liabilities can include cash and cash equivalents, accounts receivable and accounts payable, advances to farmers and suppliers, deferred income tax assets and liabilities, recoverable value-added taxes, operating lease liabilities, and other items. Net monetary assets and liabilities denominated in the local currency are remeasured into U.S. dollars each reporting period, generating gains and losses that the Company records in earnings as a component of selling, general, and administrative expenses. The level of net monetary assets or liabilities denominated in the local currency normally fluctuates throughout the year based on the operating cycle, but it is most common for monetary assets to exceed monetary liabilities, sometimes by a significant amount. When this situation exists and the local currency weakens against the U.S. dollar, remeasurement losses are generated. Conversely, remeasurement gains are generated on a net monetary asset position when the local currency strengthens against the U.S. dollar. To manage a portion of its exposure to currency remeasurement gains and losses, the Company enters into forward contracts to buy or sell the local currency at future dates coinciding with expected changes in the overall net local currency monetary asset position of the subsidiary. Gains and losses on the forward contracts are recorded in earnings as a component of selling, general, and administrative expenses for each reporting period as they occur, and thus directly offset the related remeasurement losses or gains in the consolidated statements of income for the notional amount hedged. The Company does not designate these contracts as hedges for accounting purposes. The contracts are generally arranged to hedge the subsidiary's projected exposure to currency remeasurement risk for specified periods of time, and new contracts are entered as necessary throughout the year to replace previous contracts as they mature. The Company is currently using forward currency contracts to manage its exposure to currency remeasurement risk in Brazil. The total notional amounts of contracts outstanding at December 31, 2023 and 2022, and March 31, 2023, were approximately $97.2 million, $91.8 million, and $42.8 million, respectively. To further mitigate currency remeasurement exposure, the Company’s foreign subsidiaries may utilize short-term local currency financing during certain periods. This strategy, while not involving the use of derivative instruments, is intended to minimize the subsidiary’s net monetary position by financing a portion of the local currency monetary assets with local currency monetary liabilities, thus hedging a portion of the overall position. Several of the Company’s foreign subsidiaries transact the majority of their sales and finance the majority of their operating requirements in their local currency, and therefore use their respective local currencies as the functional currency for reporting purposes. From time to time, these subsidiaries sell tobacco to customers in transactions that are not denominated in the functional currency. In those situations, the subsidiaries routinely enter into forward exchange contracts to offset currency risk for the period of time that a fixed-price order and the related trade account receivable are outstanding with the customer. The contracts are not designated as hedges for accounting purposes. Effect of Derivative Financial Instruments on the Consolidated Statements of Income The table below outlines the effects of the Company’s use of derivative financial instruments on the consolidated statements of income:
|  | Three Months Ended December 31, |  | Nine Months Ended December 31,
(in thousands of dollars) |  | 2023 |  | 2022 |  | 2023 |  | 2022
Cash Flow Hedges - Interest Rate Swap Agreements |  |  |  |  |  |  |  |
Derivative |  |  |  |  |  |  |  |
Effective Portion of Hedge |  |  |  |  |  |  |  |
Gain (loss) recorded in accumulated other comprehensive loss |  | $ | (10,249) |  |  | $ | 1,006 |  |  | $ | 7,815 |  |  | $ | 14,255 |
Gain (loss) reclassified from accumulated other comprehensive loss into earnings |  | $ | 1,479 |  |  | $ | (1,031) |  |  | $ | 4,105 |  |  | $ | (2,902) |
Gain on terminated interest rate swaps amortized from accumulated other comprehensive loss into earnings |  | $ | 1,570 |  |  | $ | — |  |  | $ | 4,709 |  |  | $ | — |
Location of gain (loss) reclassified from accumulated other comprehensive loss into earnings |  | Interest expense
Ineffective Portion of Hedge |  |  |  |  |  |  |  |
Gain (loss) recognized in earnings |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Location of gain (loss) recognized in earnings |  | Selling, general and administrative expenses
Hedged Item |  |  |  |  |  |  |  |
Description of hedged item |  | Floating rate interest payments on term loans
Cash Flow Hedges - Foreign Currency Exchange Contracts |  |  |  |  |  |  |  |
Derivative |  |  |  |  |  |  |  |
Effective Portion of Hedge |  |  |  |  |  |  |  |
Gain (loss) recorded in accumulated other comprehensive loss |  | $ | — |  |  | $ | 2,454 |  |  | $ | 2,019 |  |  | $ | 2,450 |
Gain (loss) reclassified from accumulated other comprehensive loss into earnings |  | $ | 2,190 |  |  | $ | 1,790 |  |  | $ | 6,330 |  |  | $ | 4,831 |
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 |  | $ | — |  |  | $ | — |  |  | $ | 1,138 |  |  | $ | (520) |
Location of gain (loss) recognized in earnings |  | Selling, general and administrative expenses
Hedged Item |  |  |  |  |  |  |  |
Description of hedged item |  | Forecast purchases of tobacco in Brazil and Africa
Derivatives Not Designated as Hedges - Foreign Currency Exchange Contracts |  |  |  |  |  |  |  |
Gain (loss) recognized in earnings |  | $ | (3,241) |  |  | $ | (1,949) |  |  | $ | (4,010) |  |  | $ | (4,266) |
Location of gain (loss) recognized in earnings |  | Selling, general and administrative expenses
For the interest rate swap agreements, the effective portion of the gain or loss on the derivative is recorded in accumulated other comprehensive loss and any ineffective portion is recorded in selling, general and administrative expenses. For the forward foreign currency exchange contracts designated as cash flow hedges of tobacco purchases and the crop input sales in Brazil, a net hedge gain of approximately $1.5 million remained in accumulated other comprehensive loss at December 31, 2023. That balance reflects gains and losses on contracts related to the 2023 and 2022 Brazil crops, and the 2024 and 2023 Brazil crop input sales, less the amounts reclassified to earnings related to tobacco sold through December 31, 2023. Based on the hedging strategy, as the gain or loss is recognized in earnings, it is expected to be offset by a change in the direct cost for the tobacco or by a change in sales prices if the strategy has been mandated by the customer. Generally, margins on the sale of the tobacco will not be significantly affected. Effect of Derivative Financial Instruments on the Consolidated Balance Sheets The table below outlines the effects of the Company’s derivative financial instruments on the consolidated balance sheets at December 31, 2023 and 2022, and March 31, 2023:
|  | Derivatives in a Fair Value Asset Position |  | Derivatives in a Fair Value Liability Position
|  | Balance Sheet Location |  | Fair Value as of |  | Balance Sheet Location |  | Fair Value as of
(in thousands of dollars) |  |  | December 31, 2023 |  | December 31, 2022 |  | March 31, 2023 |  |  | December 31, 2023 |  | December 31, 2022 |  | March 31, 2023
Derivatives Designated as Hedging Instruments |  |  |  |  |  |  |  |  |  |
Interest rate swap agreements |  | Other non-current assets |  | $ | 633 |  |  | $ | 3,179 |  |  | $ | — |  |  | Other long-term liabilities |  | $ | — |  |  | $ | — |  |  | $ | 3,077 |
Foreign currency exchange contracts |  | Other current assets |  | — |  |  | 3,389 |  |  | 7,102 |  |  | Accounts payable and accrued expenses |  | — |  |  | — |  |  | 890 |
Total |  |  |  | $ | 633 |  |  | $ | 6,568 |  |  | $ | 7,102 |  |  |  |  | $ | — |  |  | $ | — |  |  | $ | 3,967 |
Derivatives Not Designated as Hedging Instruments |  |  |  |  |  |  |  |  |  |
Foreign currency exchange contracts |  | Other current assets |  | $ | 183 |  |  | $ | 1,152 |  |  | $ | 1,320 |  |  | Accounts payable and accrued expenses |  | $ | 1,377 |  |  | $ | 1,194 |  |  | $ | 435 |
Total |  |  |  | $ | 183 |  |  | $ | 1,152 |  |  | $ | 1,320 |  |  |  |  | $ | 1,377 |  |  | $ | 1,194 |  |  | $ | 435 |
Substantially all of the Company's foreign exchange derivative instruments are subject to master netting arrangements whereby the right to offset occurs in the event of default by a participating party. The Company has elected to present these contracts on a gross basis in the consolidated balance sheets.

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- Definition The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Topic 815 -SubTopic 40 -Name Accounting Standards Codification -Section 50 -Paragraph 5 -Subparagraph (f) -Publisher FASB -URI https://asc.fasb.org//1943274/2147480237/815-40-50-5 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Topic 815 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 5C -Subparagraph (b) -Publisher FASB -URI https://asc.fasb.org//1943274/2147480434/815-10-50-5C Reference 3: http://fasb.org/us-gaap/role/ref/legacyRef -Topic 815 -Name Accounting Standards Codification -Publisher FASB -URI https://asc.fasb.org//815/tableOfContent + Details
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