2009
U N I V E R S A L C O R P O R A T I O N
A N N U A L R E P O R T
A B O U T T H E C O M P A N Y
Universal Corporation, headquartered in Richmond, Virginia, was founded in 1918. Universal,
through its subsidiaries and affi liates, is the world’s leading leaf tobacco merchant and processor.
The largest portion of the company’s business involves the procurement, processing, packing,
and supply of fl ue-cured and burley leaf tobacco to manufacturers of consumer tobacco products.
Universal conducts its business in more than 30 countries and employs over 24,000 permanent and
seasonal workers.
F I N A N C I A L H I G H L I G H T S
in thousands, except per share data
Fiscal Year Ended
Fiscal Year Ended
Fiscal Year Ended
March 31, 2009
March 31, 2008
March 31, 2007
O P E R A T I O N S
Sales and other operating revenues
$ 2,554,659
$ 2,145,822
$ 2,007,272
Operating income
Income from continuing operations
Net income
P E R C O M M O N S H A R E
209,932
131,739
131,739
191,513
119,301
119,156
163,591
80,411
44,352
Income from continuing operations—diluted
$ 4.32
$ 3.71
$ 2.52
Net income—diluted
Dividends declared
Indicated 12-month dividend rate
Market price at year-end
A T Y E A R E N D
Working capital
Shareholders’ equity
4.32
1.82
1.84
29.92
3.70
1.78
1.80
65.53
1.13
1.74
1.76
61.35
$ 954,044
$ 1,028,732
$ 852,391
1,029,473
1,115,631
1,030,733
Income (Loss) From Continuing
Operations Per Diluted Share
Return on Beginning
Common Equity
Market Price of Common Stock
in dollars
percent
in dollars at end of fi scal year
09
08
07
06
05
4.32
3.71
09
08
07
06
05
3.8
1.0
13.0
12.8
12.6
09
08
07
06
05
(0.12)
2.52
2.66
29.92
65.53
61.35
36.77
45.77
1
20 09 ANNUAL REPOR T
B O A R D O F D I R E C T O R S
C H A I R M A N E M E R I T U S
B O A R D O F D I R E C T O R S U N I V E R S A L C O R P O R A T I O N
Henry H. Harrell
Allen B. King
Executive Committee Universal Leaf Tobacco
Company, Inc. pictured from left to right.
W. Keith Brewer, Karen M. L. Whelan,
James A. Huffman, George C. Freeman, III,
William J. Coronado, Theodore G. Broome,
Ray M. Paul, Jr., David C. Moore.
George C. Freeman, III 1 * 3
Chairman, President, and
Chief Executive Offi cer
Universal Corporation
John B. Adams, Jr. 3 4
President and Chief Executive
Offi cer Bowman Companies
Chester A. Crocker 2 3
Professor of Strategic Studies
Walsh School of Foreign
Service Georgetown University
Joseph C. Farrell 1 2 5
Retired Chairman, President,
and Chief Executive Offi cer
The Pittston Company, now
known as The Brink’s Company
Charles H. Foster, Jr. 1 3 * 5
Retired Chairman and
Chief Executive Offi cer
LandAmerica Financial
Group, Inc.
Thomas H. Johnson 2 4
Retired Chairman and
Chief Executive Offi cer
Chesapeake Corporation
Eddie N. Moore, Jr. 2 4
President
Virginia State University
Jeremiah J. Sheehan 1 4 5*
Retired Chairman and
Chief Executive Offi cer
Reynolds Metals Company
Hubert R. Stallard 1 2 * 5
Retired President and Chief
Executive Offi cer Bell-Atlantic
Virginia, Inc. now known as
Verizon Virginia, Inc.
Walter A. Stosch 3 4 *
Retired Partner
Deloitte & Touche, LLP
Dr. Eugene P. Trani 2 4
President
Virginia Commonwealth
University
1 Executive Committee
2 Pension Investment Committee
3 Finance Committee
4 Audit Committee
5
Executive Compensation, Nominating,
and Corporate Governance Committee
* Committee Chairman
2
UNIV ERSAL C ORP ORATION
D I R E C T O R S U N I V E R S A L L E A F T O B A C C O C O M P A N Y, I N C .
George C. Freeman, III
Chairman, President, and
Chief Executive Offi cer
Theodore G. Broome
Senior Vice President,
Sales Director
Orlando Astuti
Managing Director,
Europe Region
Charles A. M. Graham
Managing Director,
Africa Region
W. Keith Brewer
Executive Vice President
and Chief Operating Offi cer
William J. Coronado
Senior Vice President,
Operations
Friedrich G. Bossert (cid:2)
Managing Director,
Dark Air-Cured Region
Robert E. Jones
Managing Director,
South America Region
David C. Moore
Executive Vice President
and Chief Financial Offi cer
James A. Huffman
Senior Vice President,
Information & Planning
Barry Dillehay
Managing Director,
Asia Region
Claude G. Martin, Jr. (cid:3)
Managing Director,
Dark Air-Cured Region
Ray M. Paul, Jr.
Executive Vice President
Karen M. L. Whelan
Senior Vice President
and Treasurer
Clay G. Frazier
Managing Director,
North America Region
Jonathan Wertheimer
President,
Socotab, L.L.C.
O F F I C E R S U N I V E R S A L C O R P O R A T I O N
George C. Freeman, III
Chairman, President, and
Chief Executive Offi cer
David C. Moore
Senior Vice President and
Chief Financial Offi cer
W. Keith Brewer
Executive Vice President
and Chief Operating Offi cer
Karen M. L. Whelan
Vice President and
Treasurer
Preston D. Wigner
Vice President,
General Counsel,
Secretary, and Chief
Compliance Offi cer
Robert M. Peebles
Controller
William J. Coronado
Vice President
(cid:3) Retired March 31, 2009
(cid:2) Elected April 1, 2009
Joseph W. Hearington, Jr.
Corporate Director,
Internal Auditing
Pamela J. Kepple
Corporate Director, Taxes
Catherine H. Claiborne
Assistant Secretary
3
20 09 ANNUAL REPOR T
T O O U R S H A R E H O L D E R S
I am pleased with our performance in fi scal year 2009. We achieved our goals of growing earnings
per share and generating economic profi t. More importantly, we had good results from virtually all of our
regional operations. This is not only essential to our long-term success, but symbolic of our commitment to
teamwork. We have been working hard over the last few years to create better connections and dialogue
among our associates around the world. We believe that these results are tangible proof of our progress
and proof that working together toward a common goal can be a powerful force. We saw that force at
work with the return of our African region to historical levels of profi tability, with increased dialogue with
our customers on sustainable quality production, and with our move to new corporate offi ce facilities in
Richmond after 40 years in our old headquarters building.
Our African management team has really come together over the last three years following our decision
to exit large scale fl ue-cured growing projects there. As they began that work, they were confronted
with a severe shortage of fi ller burley in the region. That shortage increased our costs and reduced our
volumes, delaying recovery. The group has pulled together all of its talents and, in coordination with
corporate management and colleagues in other regions, has leveraged the skills of each to produce solid
results this year. Congratulations to Charles A.M. Graham, our leader in Africa, who was named Tobacco
Man of the Year by the Tobacco International, and well done to everyone else involved in restoring Africa
to its proper position within our organization. Thank you all. We see the result of this effort as a prime
example of the power of a global team.
Our customers and farmers also play key roles in our team. We never forget that we would not
exist without either of them. We wake up every morning remembering that we must constantly earn
our customers’ business. They choose to do business with us. We work closely with them to understand
their needs and strategies for sustainability of supply of quality leaf tobacco that will meet their needs in
the years to come. By combining our knowledge of leaf tobacco, our understanding of our customers’
needs, and the skills and experience of farmers throughout the world, we bring important benefi ts to each
member of the team.
The relocation of our headquarters offi ces, while perhaps not momentous to the total organization,
was an exciting event for all of us here in Richmond. I cannot begin to name all of the people whose
efforts made this successful, but we saw the power of individual excellence dedicated to the success of
the group, and it was inspiring.
4
UNIV ERSAL C ORP ORATION
Last year I told you some of our objectives and our progress toward them. I will do the same this year.
•
Improve earnings per share
We did it, earning $4.32 per diluted share, compared to $3.71 last year. As I mentioned in the opening
paragraph, we did it on the strength of our team. Our North America segment had an outstanding
year, with higher volumes compared to last year in both its core business and trading activities. The
Other Regions segment as a whole fell slightly as currency remeasurement losses, primarily in Brazil,
offset the outstanding underlying operating performance. Our Other Tobacco Operations segment
was able to show improvement in operating income this year despite the reduction in our just-in-time
inventory service business.
•
Generate economic profi t
We believe that it is fundamental that we generate economic profi t by producing returns from our
business that exceed our cost of capital. In fi scal year 2009, we generated economic profi t, although the
amount was lower than last year because both average working capital and average cost of capital were
higher this year. In addition, last year economic profi t benefi ted from several one-time items such as the
sale of surplus timber land in Brazil and the acceleration of shipments as we wound down a portion of
our special services business.
•
Return funds to shareholders
We continued to return funds to shareholders. We increased our common dividend for the 38th consecutive
year. We paid $61 million in dividends and repurchased 2.2 million shares of common stock for $111 million
during the year. As we have said before, our underlying philosophy is to invest in our business where we
see good opportunities and to return funds not required in the business to our shareholders. At the end
of the fi scal year, we still had $22 million left in our share repurchase program.
•
Maintain our strong fi nancial position
This remains a key to our continued success, and during the last year we were especially pleased that
we were able to weather the effects of the global fi nancial crisis without any major issues. Granted, the
rapid change in developing market currencies increased our costs in fi scal year 2009, but the overall
impact on our solid balance sheet did not create signifi cant concerns. Our debt levels continue to be
well within our target range of 35% – 45%.
5
20 09 ANNUAL REPOR T
•
Improve results of marginal origins
Over the last several years, we have focused attention on several small operations that were not
meeting our goals. We are pleased to report that each one of them has either met the goals this year
or has a solid improvement plan to do so over the next 2 to 3 years.
•
Control growth in overhead
We remain keenly focused on overhead and effi ciency. We also strive to ensure that we do not make
the mistake of cutting something that will hurt us in the long term. The relocation of corporate
headquarters to smaller, more effi cient facilities is just one example of our recent efforts. We continue
to expand our use of video conferencing and voice-over-IP as we invest in technology, which, among
other benefi ts, mitigates the high cost of international travel. Managing overhead, rightsizing, and
the elimination of unproductive assets will remain among our objectives.
•
Maintain or improve results in all of our regions
We also had a goal to maintain and improve results in all our operating regions. While South America
did not match last year’s performance, largely due to currency effects, we achieved this goal in our
other regions. As I noted earlier in this letter, we are especially proud of what the African region
achieved in restoring its performance to historical levels of profi tability in 2009.
Our goals for fi scal year 2010 are consistent with those of last year. We want to increase earnings per
share, generate economic profi t, and maintain our strong fi nancial position. We also intend to better
manage our remeasurement and other currency-related risks in fi scal year 2010 to reduce the effects that
we experienced last year. So far in fi scal year 2010, we have seen continued volatility in exchange rates.
I congratulate our worldwide team on a job well done in fi scal year 2009, and look forward to meeting the
challenges of fi scal year 2010. We will have to meet those challenges, however, without the guidance of
two of our trusted Board members who will retire from the Board this year - Joseph C. Farrell and Walter
A. Stosch.
Joe is a member of our Executive Committee; Executive Compensation, Nominating, and Corporate
Governance Committee; and Pension Investment Committee. He has served on our Board since August
1996. We will miss his keen insights born of his long business and military experience. Joe has always
challenged us, but he has always been fair.
6
UNIV ERSAL C ORP ORATION
Walter is the chairman of our Audit Committee and our designated fi nancial expert under the rules of
the New York Stock Exchange and the Securities and Exchange Commission. Walter also serves on the
Finance Committee. He has served on our Board since February 2000. We appreciate his professional
and balanced approach to the chairmanship of the Audit Committee as that role has expanded. His
experience as a certifi ed public accountant and leader in the Virginia General Assembly served us well.
These two men are truly gentlemen in the highest sense; we will really miss their insight and their
company. With the approval of our shareholders, we look forward to welcoming Robert C. Sledd to our
Board of Directors. Robert is Managing Partner of Pinnacle Ventures, LLC, a venture capital fi rm, and
Sledd Properties, LLC, an investment company. He served as Chairman of Performance Food Group Co.
(“PFG”), a food service distribution company, from 1995 until June 2008. He served as Chief Executive
Offi cer of PFG from 1987 to 2001 and from 2004 to 2006. He also serves on the board of directors of
Owens & Minor, Inc. and SCP Pool Corporation.
We have also seen the retirement of a key member of the global management team. Claude G. Martin,
Jr., who ran our Dark Tobacco operation for many years, retired this spring. We will miss Claude’s common
sense and extraordinary wit, and we look forward to working with his replacement, Fritz Bossert, who
brings a unique viewpoint and many years of experience in those special markets.
George C. Freeman, III
Chairman, President and Chief Executive Offi cer
7
20 09 ANNUAL REPOR T
P E R F O R M A N C E G R A P H
Comparison of Five-Year Cumulative Total Return
Universal Corporation
S&P Midcap 400
Peer Group
$180
$160
$140
$120
$100
$80
$60
$40
$20
$0
3/04
3/05
3/06
3/07
3/08
3/09
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 Midcap 400 Stock Index and the peer group index. The
peer group represents Alliance One International, Inc. and its predecessors, which include DIMON
Incorporated. The information set forth in the table is based on DIMON Incorporated’s historical
performance prior to May 13, 2005. The graph assumes that $100 was invested in Universal
Corporation common stock at the end of the Company’s 2004 fi scal year, and in each of the
comparative indices, in each case with dividends reinvested.
C U M U L A T I V E T O T A L R E T U R N O N
U N I V E R S A L C O R P O R A T I O N C O M M O N S T O C K
2004
2005
2006
2007
2008
2009
At March 31
Universal Corporation
$ 100.00
$ 93.08
$ 77.78
$ 135.62
$ 149.40
$
S & P Midcap 400
Peer Group
100.00
100.00
110.43
92.39
134.30
73.24
145.65
139.10
135.49
91.03
71.18
86.59
57.87
8
UNIV ERSAL C ORP ORATION
2009
U N I V E R S A L C O R P O R A T I O N
1 0 - K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2009.
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 [x] 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 [x]
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 [x] 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, or a smaller
reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-
2 of the Exchange Act. (Check one):
Large accelerated filer [x] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [x]
The aggregate market value of the registrant’s voting and non-voting common equity held by non-affiliates was approximately
$1.1 billion at September 30, 2008.
As of May 22, 2009, the total number of shares of common stock outstanding was 24,999,127.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information contained in the 2009 Proxy Statement for the Annual Meeting of Shareholders of the registrant is
incorporated by reference into Part III hereof.
UNIVERSAL CORPORATION
FORM 10-K
TABLE OF CONTENTS
Item No.
Page
PART I
Business…………………………………………………….............………………………………………………………...
Risk Factors………………………………………………………………………………………….............………………
Unresolved Staff Comments…………………………………………………………………………………………………
Properties……………………………………………………………………………………...………………………………
Legal Proceedings…………………………………………………………………...………………………………………
Submission of Matters to a Vote of Security Holders…………………………………………………………………
Market for Registrant's Common Equity, Related Stockholder Matters
PART II
and Issuer Purchases of Equity Securities………………………………………………………….............…………
Selected Financial Data………………………………………………………………………………………………………
Management's Discussion and Analysis of Financial Condition and
Results of Operations……………………………………………………………………………………………………
Quantitative and Qualitative Disclosures About Market Risk…………………………………………………………
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…………….……………………………………………………………….……
1.
1A.
1B.
2.
3.
4.
5.
6.
7.
7A.
8.
9.
9A.
9B.
10.
11.
12.
13.
14.
15.
Exhibits, Financial Statement Schedules…………………………..…………..............…………………………………
PART IV
Signatures…………………………………………….………………………………..…………………………..…………
3
7
11
12
13
14
15
16
18
33
35
85
85
85
86
86
87
87
87
88
90
2
General
This 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. 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 from time to time
make written or oral forward-looking statements, including statements contained in other filings with the Securities and
Exchange Commission 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: 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; changes in exchange rates; 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.
PART I
Item 1. Business
A.
The Company
Overview
We are the world’s leading leaf tobacco merchant and processor. The largest portion of our business involves the
procurement, processing, packing, and supply of flue-cured and burley leaf tobacco to manufacturers of consumer tobacco
products. The 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-related services. We generated approximately $2.6 billion in consolidated
revenues and earned approximately $230 million in total segment operating income in fiscal year 2009. 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. Previously, we also owned lumber and building products and agri-
products operations; however, we sold those operations in fiscal years 2007 and 2008. We report the assets, liabilities,
revenues, and expenses of the lumber and building products and agri-products businesses as discontinued operations for all
applicable periods in the accompanying financial statements. Our continuing operations now consist solely of our worldwide
tobacco business, which has been our principal focus since our founding in 1918.
Key Operating Principles
We believe that by following several key operating principles we will continue to produce good financial returns
from our business and enhance shareholder value. These key operating principles are:
(cid:2) Strategic alliances. We foster strategic alliances with our major customers to the benefit of all parties. These
relationships with major manufacturers are, in our opinion, especially appropriate to the leaf tobacco industry
where volume at an appropriate price is a key factor in long-term profitability. We work to secure adequate
factory volumes in all markets where we operate, but we balance that objective with the cost of sourcing
incremental volumes in markets where we provide financing to farmers. Alliances permit the optimization of
3
our inventory levels to reduce risk during market downturns by enabling us to target our tobacco purchases
against customer purchase indications.
(cid:2) Strong local management. We operate with strong local management in major leaf tobacco markets. We
believe that by having strong local management we can better identify and adjust to changes in market
conditions. We believe this is a key factor in our ability to continue to deliver the high quality, competitively
priced products our customers expect.
(cid:2) Diversified sources. We strive to maintain diversified sources of leaf tobacco to minimize reliance on any one
growing or sourcing area so long as customers are willing to support such diversity. Although proportions vary
with relative crop sizes, historically, South America has provided between 25% and 35% of the aggregate
volume of flue-cured and burley tobacco that we handle, and North America and Africa each have provided
between 20% and 30% of that aggregate volume.
(cid:2) Low-cost quality producer. Our goal is to be the low-cost producer of quality products and services for our
customers. We focus on producing a quality product in a cost-effective manner. We sponsor farmer programs in
good agricultural practices, the reduction of non-tobacco related materials, and social responsibility, among
others.
(cid:2) Financial strength. We believe that our financial strength is important, because it enables us to fund our
business efficiently, make investments in our business when an appropriate opportunity is identified, and affords
us financial flexibility in meeting the needs of our customers. We continually work to improve our
creditworthiness.
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 Securities and Exchange Commission. These filings
include annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, Section 16 reports on
Forms 3, 4, and 5, and any amendments to those reports filed with or furnished to the Securities and Exchange Commission.
All such filings on our website are available free of charge. We also post our press releases on our website. Information on
our website is not deemed to be incorporated by reference into this Form 10-K.
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.
B. Description of Business
General
Our business involves buying, processing, packing, storing, shipping, and financing leaf tobacco for sale to, or for
the account of, manufacturers of consumer tobacco products throughout the world. Buying leaf tobacco involves contracting
with and financing farmers in many origins. We do not manufacture cigarettes or other consumer tobacco products. Through
various operating subsidiaries and unconsolidated affiliates located in tobacco-growing countries around the world, we
process and sell flue-cured and burley tobaccos, dark air-cured tobaccos, and oriental tobaccos. We also provide value-added
services to our customers, including blending, chemical and physical testing of tobacco, just-in-time inventory management,
and manufacturing reconstituted sheet tobacco. 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. We generate our revenues from product sales, processing fees, and fees for other services. Over
80% of our volume is derived from sales to customers with major market positions and with whom we have long-standing
relationships. Our sales consist primarily of flue-cured and burley tobaccos. For the fiscal year ended March 31, 2009, our
flue-cured and burley operations accounted for 89% of our revenues and 82% of our segment operating income.
Because unprocessed, or green tobacco, is a perishable product, processing of leaf tobacco is an essential service to
our customers. Our processing of leaf tobacco includes grading in the factories, blending, quality picking, separation of leaf
lamina from the stems, drying, and packing to precise moisture targets for proper aging. Accomplishing these tasks generally
requires investment in plants and machinery in areas where the tobacco is grown. Processed tobacco that has been properly
4
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. We estimate that we usually purchase between 20% and 30% of the annual production of such tobaccos in Brazil
and between 35% and 45% in Africa. These percentages can change from year to year based on the size, price, and quality of
the crops. We also have a major processing facility in the United States, which normally handles between 35% and 45% of
U.S. flue-cured and burley tobacco production. In the United States, we sell processed U.S. tobacco to cigarette
manufacturers, and we process U.S. flue-cured and burley tobacco on a fee basis, which we also refer to as “toll processing.”
We participate in the procurement, processing, and sale of oriental tobacco through ownership of a 49% equity interest in
what we believe to be the largest oriental leaf tobacco merchant in the world, Socotab, L.L.C. In addition, we maintain a
presence, and in certain cases, a leading presence, in virtually all other major tobacco growing regions in the world. We
believe that our leading position in the leaf tobacco industry is based on our operations in all of the major sourcing areas, our
development of processing equipment and technologies, our financial position, our ability to meet customer style, volume,
and quality requirements, and our long-standing relationships with customers.
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. Major producing countries for dark tobacco include the
United States, the Dominican Republic, Ecuador, 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 lesser degree, through the use of commissioned agents. Most customers
are long-established tobacco product manufacturers.
We conduct our business in varying degrees in a number of countries, including Argentina, Bangladesh, Brazil,
Canada, the Dominican Republic, France, Germany, Guatemala, Hungary, India, Indonesia, Italy, Malawi, Mexico,
Mozambique, the Netherlands, Nicaragua, Paraguay, the People’s Republic of China, the Philippines, Poland, Singapore,
South Africa, Spain, Switzerland, Tanzania, Uganda, the United States, Zambia, and Zimbabwe. In addition, Socotab, L.L.C.
has oriental tobacco operations in Bulgaria, Greece, Macedonia, and Turkey.
In the majority of the countries where we operate, including Argentina, Brazil, Guatemala, Hungary, Indonesia,
Italy, Mexico, Mozambique, the Philippines, Poland, Tanzania, the United States, Zambia, and Zimbabwe, we contract
directly with tobacco farmers or tobacco farmer cooperatives, in most cases before harvest, and thereby take the risk that the
delivered quality and quantity may not meet market requirements. Outside the United States, we also provide agronomy
services and crop advances of, or for, seed, fertilizer, and other supplies. Tobacco in India, and to a certain extent, Malawi,
Zambia, and Zimbabwe, is purchased under an auction system.
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
purchase of tobacco. The majority of these seasonal advances and loan guarantees mature or terminate in one year or less
following 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 further information
about our foreign currency exchange risk.
For a discussion of recent developments and trends in, and 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 late fall.
Farmers begin to sell U.S. flue-cured tobacco in late July and the marketing season lasts for approximately four months. U.S.
burley tobacco farmers deliver their crop from mid-November through mid-February. These overlapping marketing periods
tend to mitigate the overall effects of seasonality on our financial performance in most fiscal years.
We normally operate our processing plants for seven to nine months of the year. During this period, inventories of
green tobacco, inventories of processed tobacco, and trade accounts receivable normally reach peak levels in succession. We
5
normally finance this expansion of current assets with cash and current liabilities, particularly short-term notes payable to
banks and customer advances, and these funding sources normally reach their peak usage during this processing period. Our
balance sheet at our fiscal year end normally reflects seasonal expansions in working capital in South America, Central
America, and Western Europe.
Customers
A material part of our business is dependent upon a few customers. For the year ended March 31, 2009, each of
Philip Morris International, Inc., Japan Tobacco Inc., and Imperial Tobacco Group, PLC, including its respective affiliates,
accounted for more than 10% of our revenues. The loss of, or substantial reduction in business from, either of these
customers or any other significant customer would have a material adverse effect on our results. We have long-standing
relationships with these customers.
We had orders from customers for approximately $462 million of the tobacco in our inventories at March 31, 2009.
Based upon historical experience, we expect that at least 90% of such orders will be delivered during the following twelve
months. Most of our product requires shipment via oceangoing vessel to reach customer destinations. Delays in the delivery
of orders can result from such factors as container availability and port access, or changing customer requirements for
shipment.
As more fully described in Note 1 to the consolidated financial statements in Item 8, we recognize sales revenue at
the time that title to the tobacco and risk of loss passes 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, principally the United States, we process tobacco that is owned by our customers, and we
recognize the revenue for that service when the processing is completed.
Competition
The leaf tobacco industry is highly competitive. Competition among leaf tobacco merchants is based on the ability
to meet customer specifications in the buying, processing, and financing of tobacco, and on the price 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 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 believe that
we hold the larger worldwide market share based on volume handled by our subsidiaries and affiliates. However, based on
our estimates, we do not believe that the market shares differ substantially between the two companies. British American
Tobacco PLC, a multinational tobacco product manufacturer, has subsidiaries that also compete with us in some 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 that are necessary for our customers and
make our products highly competitive.
Reportable Segments
We evaluate the performance of our 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. Dark Air-Cured supplies dark air-cured tobacco principally to
manufacturers of cigars, pipe tobacco, and smokeless tobacco products, and Oriental 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 provides just-in-time inventory services for certain
customers and laboratory services including physical and chemical product testing for customers.
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 do not require significant working capital investments for crop
financing and inventory and because toll processing is an important source of its operating income. The Dark Air-Cured,
6
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 16% and 73% of our revenues and 21% and 61% of our segment operating income, respectively, in
fiscal year 2009. Our Other Tobacco Operations reportable segment accounted for 11% of our revenues and 18% of our
segment operating income in fiscal year 2009. 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,
2009, 2008, and 2007, are set forth in Note 16 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 16 to the consolidated financial statements.
C.
Employees
We employed over 24,000 employees throughout the world during the fiscal year ended March 31, 2009. This
figure is estimated because the majority of our personnel are seasonal employees.
D. Research and Development
No material amounts were expended for research and development during the fiscal years ended March 31, 2009,
2008, or 2007.
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.
Item 1A. Risk Factors
Operating Factors
The leaf tobacco industry is highly competitive, and we are heavily reliant on a few large customers.
We are one of two major independent global competitors in the highly competitive 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 merchants is based on the ability to
meet customer specifications 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’ specifications and charge competitive prices. Because we rely
upon a few significant customers, the consolidation or failure of any of these large or significant customers could contribute
to a significant decrease in our sales of products and services.
We have seen an increase in competition from small competitors in some of the markets where we conduct business.
Some of these competitors have grown to operate in more than one country. These small competitors typically have lower
overhead requirements. They provide little or no support to farmers. Due to their lower cost structures, they often can offer a
price on products that is lower than our price. If our customers shift significant purchases to these smaller competitors, our
financial results could be negatively impacted.
7
Our financial results can be significantly affected by changes in the balance of supply and demand for leaf tobacco.
Because we are a leaf tobacco merchant, our financial results can be significantly affected by changes in the overall
balance of worldwide supply and demand for leaf tobacco. The demand for tobacco, which is based upon customers’
expectations of their future requirements, can change from time to time depending upon internal and external factors
affecting the demand for their products. Our customers’ expectations, and thus their demand for leaf tobacco, are influenced
by a number of factors, including:
(cid:2)
(cid:2)
(cid:2)
trends in the global consumption of cigarettes,
trends in sales of cigars and other tobacco products, and
levels of competition among our customers.
The world supply of leaf tobacco at any given time is a function of current tobacco production, inventories held by
manufacturers, and the volumes of uncommitted stocks of processed tobacco held by leaf tobacco merchants from prior
years’ production. Production of tobacco in a given year may be significantly affected by such factors as:
(cid:2) weather and natural disasters,
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
crop infestation and disease,
volume of annual tobacco plantings and yields realized by farmers,
farmers electing to grow crops other than tobacco,
elimination of government subsidies to farmers, and
demographic shifts reducing the number of farmers or the amount of land available to grow tobacco.
Any significant change in these factors could cause a material imbalance in the supply and demand for tobacco,
which would affect our results of operations.
Our financial results will vary according to growing conditions, customer requirements, and other factors. These factors
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.
Further, the timing and unpredictability of customer orders and shipments may require us to keep tobacco in
inventory, increase our risk, and result in variations in quarterly and annual financial results. We base sales recognition on
the passage of ownership, usually with shipment of product. Since individual shipments may represent significant amounts
of revenue, our quarterly and annual financial results may vary significantly depending on the 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 for different periods or for the same periods in
different years.
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.
8
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 meet all of our customers’
orders, and such failure would have an adverse effect on profitability and results of operations. Because in a contract market
we buy all of the farmers’ production, which encompasses many styles, we also have a risk that not all of that production will
be readily marketable. 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.
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 products required by our
customers. In addition, other factors can affect the marketability of tobacco, including, among other things, the presence of:
(cid:2)
(cid:2)
(cid:2)
excess residues of pesticides, fungicides, and herbicides,
foreign matter, and
genetically modified organisms.
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.
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.
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:
(cid:2)
(cid:2)
(cid:2)
(cid:2)
restrictions on the use of tobacco products in public places and places of employment,
proposed legislation authorizing the U.S. Food and Drug Administration to regulate the manufacturing and
marketing of 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. The United States represents only 11% of the world market for cigarette production outside of the People’s Republic
of China.
A number of foreign governments and global non-government organizations also have taken or proposed steps to
restrict or prohibit tobacco product advertising and promotion, to increase taxes on tobacco products, and to discourage
tobacco product consumption. A number of such measures 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 to 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 our products and services
and could have a material adverse effect on our results of operations.
9
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, has created a formal study group to identify and assess crop diversification initiatives
and alternatives to leaf tobacco growing in countries whose economies depend upon tobacco production. The study group
began its work in February 2007. 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.
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 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.
For example, in the past, we have experienced significant year-to-year fluctuations in earnings due to changes in the Brazilian
government’s economic policies, and government actions in Zimbabwe have reduced the tobacco crop there, causing us to
shift sourcing of tobacco to other countries. We have substantial capital investments in South America and Africa, and the
performance of our operations in those regions can materially affect our 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 results of operations would suffer.
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 routinely 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 farmers to repay extensions of credit could materially impact our results of operations.
We extend credit to both farmers 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
15 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. 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 certain tobacco markets that are primarily domestic, we use the
local currency as the functional currency. Examples of these markets are Hungary, Poland, and the Philippines. In other
markets, such as Western Europe, where export sales have been denominated primarily in local currencies, we also use the
local currency as the functional currency. 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.
10
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. During fiscal year
2009, we recorded remeasurement losses of more than $40 million related to a significant devaluation of the Brazilian
currency. However, our purchases of the 2009 Brazilian crop, which will be marketed primarily in our fiscal year 2010, are
expected to be at a lower cost in U.S. dollar terms due to the devaluation.
We have used currency hedging strategies to reduce our foreign currency exchange rate risks in some markets. In
addition, where there are no active forward foreign exchange markets in countries where we source tobacco, 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, we may
have currency remeasurement gains or losses that will affect our results of operations.
Changes in interest rates may affect our results of operations.
In our business, customers usually either pre-finance purchases or pay market rates of interest for inventory
purchased on order. From time to time, we borrow long-term debt at fixed rates. Through hedging agreements, we may
swap the interest rates on our existing fixed-rate debt to floating market interest rates to better match the interest rates that we
charge our customers. To the extent we are unable to match these interest rates, a decrease in short-term interest rates could
increase our net financing costs. In addition, at times we may have significant amounts of cash invested. Decreases in short-
term interest rates reduce the income we derive from those investments.
Low investment performance by our defined benefit pension plan assets 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 a domestic defined benefit pension plan that covers certain eligible employees. Our pension expense
and required contributions to our pension plan are directly affected by the value of plan assets, the projected rate of return on
plan assets, the actual rate of return on plan assets, and the actuarial assumptions we use to measure the defined benefit
pension plan obligations.
Due to the significant market downturn that began in 2008, plan asset values declined significantly. If plan assets
continue to perform below the assumed rate of return used to determine pension expense, future pension expense will
increase. Further, as a result of the global economic instability, our pension plan investment portfolio has recently incurred
greater volatility.
We establish the discount rate used to determine the present value of the projected and accumulated benefit
obligations at the end of each fiscal year based upon the available market rates for high quality, fixed income investments.
We match the projected cash flows of our pension and other postretirement benefit plans against those generated by high-
quality corporate bonds. The yield of the resulting bond portfolio provides a basis for the selected discount rate. An increase
in the discount rate would reduce the future pension and other postretirement benefit expense and, conversely, a decrease in
the discount rate would increase that expense.
In addition, the proportion of pension assets to liabilities, which is called the funded status, determines the level of
contribution to the plan that is required by law. In recent years, we have funded the plan in amounts in excess of that
requirement, but changes in the plan’s funded status related to the value of assets or liabilities could increase the amount
required to be funded. In fiscal year 2009, we contributed $15.7 million to our domestic plan, and based on current
guidelines, assumptions and estimates, we anticipate that we will make a cash contribution of approximately $2.7 million to
our domestic ERISA pension plan in fiscal year 2010. Changes in the current assumptions and estimates could result in a
greater contribution in fiscal years beyond 2010. We cannot predict whether changing market or economic conditions,
regulatory changes or other factors will further increase our pension and other postretirement expense or funding obligations,
diverting funds we would otherwise apply to other uses.
Item 1B. Unresolved Staff Comments
None
11
Item 2. Properties
Except as noted, we own the following significant properties (greater than 500,000 square feet):
Location
Principal Use
Flue-Cured and Burley Leaf Tobacco Operations:
North America:
United States
Nash County, North Carolina………………………………………….…… Factory and storages
Canada
Simcoe, Ontario……………………………………………………………
Factory and storages
Other Regions:
Brazil
Santa Cruz…………………………..........………………………………..
Joinville(1)…………………………..........………………………………..
Venancio Aires………………….....................……..……………..………
Factory and storages
Factory and storages
Storages
Area
(Square Feet)
1,284,000
569,000
2,492,000
1,097,000
860,000
Malawi
Lilongwe…………………………………................……….………………
Factory and storages
1,194,000
Mozambique
Tete…………………………………………………………………………
Factory and storages
Tanzania
Morogoro…………………………………............……….………………
Factory and storages
Zimbabwe
Harare(2)……………………………………...............…….………………
Factory and storages
737,000
798,000
1,342,000
Other Tobacco Operations:
United States
Lancaster, Pennsylvania………………………………………….…………
Factory and storages
636,000
(1) Leased from a third party.
(2) Owned by an unconsolidated subsidiary.
We lease office space of about 45,000 square feet at 9201 Forest Hill Avenue in Richmond, Virginia, where we are
headquartered, and which is adequate for our needs. We also own the land and building located at 1501 North Hamilton
Street in Richmond, Virginia, which contains approximately 83,000 square feet of floor space. That property was used as our
headquarters until March 2009 and is currently for sale.
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, Hungary, Italy, the Netherlands, the Philippines, Poland, and the United States. In addition, we have ownership
interests in processing plants in Guatemala and Mexico and have access to processing facilities in other areas, such as
Argentina, India, the People’s Republic of China, South Africa, Uganda, and Zambia. Socotab L.L.C., an oriental tobacco
joint venture in which we own a minority interest, owns tobacco processing plants in Turkey, Macedonia, Greece, and
Bulgaria.
12
Except for the Lancaster, Pennsylvania facility, the facilities described above are engaged primarily in processing
tobacco used by manufacturers in the production of cigarettes. The Lancaster facility and another facility in Virginia, as well
as facilities in Brazil, the Dominican Republic, Indonesia, and Paraguay, process tobacco used in making cigar, pipe, and
smokeless products, as well as components of certain “roll-your-own” products. At the end of fiscal year 2010, processing
for this type of tobacco at the Virginia facility will be consolidated into the Lancaster facility.
Item 3. Legal Proceedings
European Commission Fines in Spain
In October 2004, the European Commission (the “Commission”) imposed fines on “five companies active in the raw
Spanish tobacco processing market” totaling €20 million for “colluding on the prices paid to, and the quantities bought from,
the tobacco growers in Spain.” Two of our subsidiaries, Tabacos Espanoles S.A. (“TAES”), a purchaser and processor of
raw tobacco in Spain, and Deltafina, S.p.A. (“Deltafina”), an Italian subsidiary, were among the five companies assessed
fines. In its decision, the Commission imposed a fine of €108,000 on TAES, and a fine of €11.88 million on Deltafina.
Deltafina did not and does not purchase or process raw tobacco in the Spanish market, but was and is a significant buyer of
tobacco from some of the Spanish processors. We recorded a charge of about €12 million (approximately $14.9 million at
the September 2004 exchange rate) in the second quarter of fiscal year 2005 to accrue the full amount of the fines assessed
against our subsidiaries.
In January 2005, Deltafina filed an appeal in the Court of First Instance of the European Communities. The main
ground of appeal is that the Commission erred in imposing liability on Deltafina as a cartel participant, particularly as the
cartel leader, when Deltafina was not an actual party to the agreement and was incapable of acting in the relevant market. In
addition, Deltafina argues that (i) the Commission failed to allege that Deltafina was a member of the cartel and cartel leader
prior to issuing its decision, thereby impairing Deltafina’s right to defend itself, and (ii) that the Commission failed to try to
prove that the practices affected trade between Member States of the European Community. The appeal also argues that the
Commission incorrectly calculated the amount of the Deltafina fine. The outcome of the appeal is uncertain, and an ultimate
resolution to the matter could take several years. Deltafina has deposited funds in an escrow account with the Commission in
the amount of the fine in order to stay execution during the appeal process. This deposit is classified as a non-current asset.
European Commission Fines in Italy
In 2002, we reported that we were aware that the Commission was investigating certain aspects of the tobacco leaf
markets in Italy. Deltafina buys and processes tobacco in Italy. We reported that we did not believe that the Commission
investigation in Italy would result in penalties being assessed against us or our subsidiaries that would be material to our
earnings. The reason we held this belief was that we had received conditional immunity from the Commission because
Deltafina had voluntarily informed the Commission of the activities that were the basis of the investigation.
On December 28, 2004, we received a preliminary indication that the Commission intended to revoke Deltafina’s
immunity for disclosing in April 2002 that it had applied for immunity. Neither the Commission’s Leniency Notice of
February 19, 2002, nor Deltafina’s letter of provisional immunity contains a specific requirement of confidentiality. The
potential for such disclosure was discussed with the Commission in March 2002, and the Commission never told Deltafina
that the disclosure would affect Deltafina’s immunity. On November 15, 2005, we received notification that the Commission
had imposed fines totaling €30 million (about $40 million at the March 31, 2009 exchange rate) on Deltafina and Universal
Corporation jointly for infringing European Union antitrust law in connection with the purchase and processing of tobacco in
the Italian raw tobacco market.
We do not believe that the decision can be reconciled with the Commission’s Statement of Objections and facts.
Both Deltafina and Universal Corporation have appealed the decision to the Court of First Instance of the European
Communities. Based on consultation with outside legal counsel, we believe it is probable that we will prevail in the appeals
process, and we have not accrued a charge for the fine. Deltafina has provided a bank guarantee to the Commission in the
amount of the fine in order to stay execution during the appeals process.
U.S. Foreign Corrupt Practices Act
As a result of a posting to our Ethics Complaint hotline alleging improper activities that involved or related to
certain of our tobacco subsidiaries, the Audit Committee of our Board of Directors engaged an outside law firm to conduct an
investigation of the alleged activities. That investigation revealed that there have been payments that may have violated the
U.S. Foreign Corrupt Practices Act. At this time, the payments involved appear to have approximated $2 million over a
seven-year period. In addition, the investigation revealed activities in foreign jurisdictions that may have violated the
13
competition laws of such jurisdictions, but we believe those activities did not violate U.S. antitrust laws. We voluntarily
reported these activities to the appropriate U.S. authorities in March 2006. On June 6, 2006, the Securities and Exchange
Commission notified us that a formal order of investigation had been issued.
If the U.S. authorities determine that there have been violations of the Foreign Corrupt Practices Act, or if the U.S.
authorities or the authorities in foreign jurisdictions determine there have been violations of other laws, they may seek to
impose sanctions on us or our subsidiaries that may include injunctive relief, disgorgement, fines, penalties, and
modifications to business practices. It is not possible to predict at this time what sanctions they might seek to impose. It is
also not possible to predict how the government's investigation or any resulting sanctions may impact our business, financial
condition, results of operations, or financial performance, although such sanctions, if imposed, could be material to our
results of operations in any quarter. We will continue to cooperate with the authorities in these matters.
Other Legal Matters
In addition to the above-mentioned matters, some of our subsidiaries are involved in other 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 claims and do not currently expect that any of them will have a material adverse effect on our
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. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the quarter ended March 31, 2009.
14
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
PART II
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.
2009
Cash dividends declared…………………………………
Market price range…………………..……………………
2008
Cash dividends declared…………………………………
Market price range………………..………………………
2007
Cash dividends declared…………………………………
Market price range…………………..……………………
High
Low
High
Low
High
Low
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$ 0.45
$ 0.45
$ 0.46
$ 0.46
64.96
45.00
55.63
44.24
52.03
29.83
35.17
25.82
$ 0.44
$ 0.44
$ 0.45
$ 0.45
66.60
59.66
62.55
44.48
54.08
44.85
67.08
45.69
$ 0.43
$ 0.43
$ 0.44
$ 0.44
38.41
36.02
38.63
35.02
50.05
36.14
61.35
46.70
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 the terms of the Series B 6.75% Convertible
Perpetual Preferred Stock (the “Preferred Stock”), we may not declare or pay dividends on our common stock unless
dividends on the Preferred Stock for the four most recent consecutive dividend periods have been declared and paid. The
Preferred Stock contains provisions that prohibit the payment of cash dividends if certain income and shareholders’ equity
levels are not met. Under certain of our credit facilities, we must meet financial covenants relating to minimum tangible net
worth and maximum levels of long-term 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, 2009. At May 22, 2009,
there were 1,590 holders of record of our common stock. See Notes 7 and 13 to the consolidated financial statements in Item
8 for more information on debt covenants and equity securities.
Purchases of Equity Securities
Neither we nor any affiliated purchasers made any purchases of our equity securities during the three months ended
March 31, 2009.
15
$
$
$
$
$
$
$
$
$
$
68,556
27,457
96,013
96,013
12.6 %
2.68
1.08
3.76
2.66
1.07
3.73
Item 6. Selected Financial Data
Summary of Operations
Sales and other operating revenues……........... $
Income (loss) from continuing
Fiscal Years Ended March 31,
2009
2008
2007
2006
2005
(in thousands, except per share data, ratios and number of shareholders)
2,554,659
$
2,145,822
$
2,007,272
$
1,781,312
$
1,667,193
operations…………………………………… $
131,739
$
119,301
$
80,411
$
(2,973)
Income (loss) from discontinued
operations…………………………………… $
Net income…………………………..............… $
Earnings available to common
—
131,739
$
$
(145)
119,156
$
$
(36,059)
44,352
$
$
10,913
7,940
shareholders………………………………... $
116,889
$
104,306
$
29,667
$
7,940
Return on beginning common
shareholders’ equity…………………………
13.0 %
12.8 %
3.8 %
1.0 %
Earnings (loss) per common share:
Basic:
From continuing operations……………… $
From discontinued operations…………… $
Net income……………………………… $
Diluted:
From continuing operations……………… $
From discontinued operations…………… $
Net income……………………………… $
4.57
—
4.57
4.32
—
4.32
Financial Position at Year End
Current ratio…..........………………...…………
Total assets…………............………………… $
Long-term obligations………………………… $
Working capital………………………………… $
Shareholders’ equity……...…………………… $
2.74
2,138,176
331,808
954,044
1,029,473
$
$
$
$
$
$
$
$
$
$
General
Ratio of earnings to fixed charges………………
Ratio of earnings to combined fixed
charges and preference dividends……………
Number of common shareholders………………
Weighted average common
shares outstanding:
5.54
3.55
1,597
Basic…………………………………….
Diluted……………………………………
25,570
30,466
Dividends per share of convertible
$
$
$
$
$
$
$
$
$
$
3.83
(0.01)
3.82
3.71
(0.01)
3.70
3.33
2,186,761
402,942
1,028,732
1,115,631
4.66
3.16
1,708
27,263
32,186
$
$
$
$
$
$
$
$
$
$
2.53
(1.39)
1.14
2.52
(1.39)
1.13
2.23
2,328,822
398,952
852,391
1,030,733
3.16
2.29
1,807
25,935
26,051
(0.12)
0.43
0.31
(0.12)
0.43
0.31
1.32
1.32
1,951
25,707
25,707
perpetual preferred stock (annual)…………… $
67.50
$
67.50
$
67.50
$
—
Dividends per share of common stock
(annual)……………………………………… $
Book value per common share…………...…… $
1.82
32.66
$
$
1.78
33.23
$
$
1.74
30.34
$
$
1.70
29.96
$
$
$
1.94
2,892,664
762,201
877,051
964,871
1.84
2,885,324
838,687
819,047
822,388
$
$
$
$
3.58
3.58
2,042
25,553
25,717
—
1.62
32.04
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 reporting period, and preference dividends represent the pre-tax equivalent of dividends on preferred stock.
16
Significant items included in the operating results in the above table are as follows:
(cid:2) Fiscal Year 2009 -- $50.6 million in losses from currency remeasurement and exchange, primarily caused by the
effect of the rapid devaluation of the Brazilian currency between June and December 2008. The effect of these
losses was a reduction in net income of $32.9 million, or $1.08 per diluted share.
(cid:2) Fiscal Year 2008 -- $29.3 million in gains from currency remeasurement and exchange, reflecting the general
strengthening of world currencies against the U.S. dollar and mark-to-market gains realized on forward contracts
to hedge tobacco purchases in Brazil. We also recorded $12.9 million in restructuring costs, consisting partly of
$7.9 million in severance and voluntary termination benefits associated with the downsizing of our operations in
Canada, the release of farm managers and workers employed in flue-cured tobacco growing projects that we
exited in Zambia and Malawi, a workforce reduction in our operations in Malawi, a decision to close and
consolidate a sales and logistics office in Europe, and other cost reduction initiatives at several smaller locations.
In addition, restructuring costs included $5 million of curtailment losses associated with actions taken to
terminate a small defined benefit pension plan and freeze another small plan. We also recorded a separate
charge of $7.8 million to accrue an obligation established by Malawi court rulings that require employers there
to provide severance benefits in addition to company-sponsored pension benefits in employee retirement or
termination situations. Those rulings also expanded the qualified compensation on which the severance benefit
is based. In addition to these costs, our results for the fiscal year included a gain of $6.5 million on the sale of
surplus timberland in Brazil. On a combined basis, the net effect of these items increased income before
minority interest and income taxes by $15.1 million, and increased income from continuing operations and net
income by $10.3 million, or $0.32 per diluted share.
(cid:2) Fiscal Year 2007 -- $30.9 million in impairment charges, primarily related to our exit from flue-cured growing
projects in Africa at the end of the 2006-07 crop year. After minority interest and income tax effects, the charges
reduced income from continuing operations and net income by $24.2 million, or $0.93 per diluted share. In
addition, we recorded provisions for uncollectible farmer advances in Brazil and in several African countries
totaling $31.9 million. Over half of those provisions related to the growing projects that we exited. The results
also included lower-of-cost-or-market inventory provisions of $12.8 million related to tobacco produced in those
African growing projects. After minority interest and income tax effects, the provisions reduced income from
continuing operations and net income by $27.5 million, or $1.06 per diluted share. We also recorded a net loss
on the sale of a significant portion of our non-tobacco operations and an impairment charge on the remaining
non-tobacco operations held for sale. We completed the sale of those operations in fiscal year 2008. On a
combined basis, those items created a loss from discontinued operations and reduced net income by $44.5
million before income taxes, $45.0 million after tax, or $1.74 per diluted share.
(cid:2) Fiscal Year 2006 – $57.5 million in restructuring and impairment charges related to our investment in our
Zimbabwe operations, the closure of our Danville, Virginia processing facility, and other cost reduction
initiatives, which reduced income from continuing operations and net income by $46.3 million, or $1.80 per
diluted share. Results also included significantly higher provisions for losses on uncollectible farmer advances
in several African countries, Brazil, and the Philippines that reduced pretax earnings by $26.2 million and lower-
of-cost-or-market inventory charges of $10.2 million related to African leaf growing projects that we decided to
exit in fiscal year 2007. The total of these charges and provisions reduced income from continuing operations
and net income by $19.2 million, or $0.75 per diluted share. In addition, significant market price declines in two
commodities handled by our agri-products operations (almonds and sunflower seeds) resulted in $17.2 million in
inventory valuation and purchase commitment losses that reduced income from discontinued operations and net
income by $10.9 million, or $0.42 per diluted share.
(cid:2) Fiscal Year 2005 – a $14.9 million charge to recognize fines assessed by the European Commission against two
of the Company’s subsidiaries related to tobacco buying practices in Spain. The charge reduced income from
continuing operations and net income by $14.9 million, or $0.58 per diluted share.
17
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 world’s leading independent leaf tobacco merchant and processor. 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 sold our lumber and building products operations and agri-products operations during fiscal years
2007 and 2008 and report them as discontinued operations in this Form 10-K.
Early in fiscal year 2007, leaf tobacco markets were in oversupply. The oversupply was primarily concentrated in
flue-cured leaf grown in Brazil, where subnormal tobacco quality in prior years, combined with a stronger currency, made
that growth less attractive to manufacturers. At the same time, a 16% increase in burley crops, primarily in Malawi and
Brazil, resulted in an oversupply of that type of tobacco as well. Crop sizes moderated and by the end of fiscal year 2007,
markets were in better balance. In fiscal year 2008, available burley leaf moved to all time lows because of weather reduced
crops in Mozambique and Malawi, and inventories of flue-cured tobacco available for sale were trending down as well.
Fiscal year 2009 saw dramatic increases in burley crops in Africa, which significantly reduced the burley shortage.
During the last three years, we have taken a number of major steps to better align our operations with markets and
improve our financial strength. In fiscal year 2007, we ended our direct involvement in the production of flue-cured tobacco
in Africa. We took several restructuring and impairment charges related to reducing our crop sizes and discontinuing our
growing projects. We also concentrated on selling uncommitted inventory and improving operating margins. With the sale of
most of our non-tobacco operations and the completion of certain tobacco capital projects, heavy demands for capital
diminished. We reduced our debt levels and improved our cash flow significantly.
In fiscal year 2008, tight market supply and increased costs due to higher farmer leaf production costs and the
weaker U.S. dollar created additional challenges. We continued to pare our operations to match market supply, streamlining
our operations in Canada, Malawi, and Zambia during the year, and we reduced our uncommitted inventory levels.
In fiscal year 2009, green tobacco costs were very high during most of the purchasing season, and farmer costs for
fertilizer and other input materials for crops that will be marketed in fiscal year 2010 were high as well. Green tobacco prices
increased in U.S. dollar terms as the dollar weakened against most currencies early in the year, and those prices also
increased in local currency terms to protect supply against competition from commodity crops, which were in great demand.
By the end of the year, economic conditions had changed the environment and reduced the pressure on costs for the coming
year. The U.S. dollar had strengthened as well, also reducing the pressure on costs.
Looking ahead, we have several observations and initiatives. In our major origins, we project somewhat smaller
crops to be marketed in Brazil in fiscal year 2010, which should keep flue-cured markets in relative balance. However, filler
grades of burley now face oversupply after the fiscal year 2008 shortages. The crops that were marketed in fiscal year 2009
did much to alleviate those shortages, and the current crops are extremely large, especially in Malawi, where production
exceeds demand. It is likely that there will be a considerable amount of excess filler style burley tobacco in fiscal year 2010.
The global economic situation continues to be unpredictable with volatility continuing in oil prices, currency rates, and
capital availability. In light of that volatility, we will continue to manage our financial resources conservatively. We also
recognize the need to continually improve our operations. We plan to work to create new efficiencies, including the
consolidation of our U.S. dark tobacco processing in Pennsylvania and the upgrade of our facility there. We will continue to
work with our farmers and our customers toward security of supply for our customers and stability of markets for our
farmers. Our management team is agile and focused firmly on our business – the business of providing our customers with
quality leaf tobacco that meets their needs.
18
DISCONTINUED OPERATIONS
As noted above, we previously had operations in lumber and building products and in agri-products. We sold the
lumber and building products businesses, along with a portion of the agri-products operations during fiscal year 2007, and we
sold the remaining agri-products operations during fiscal year 2008. The lumber and building products operations and agri-
products operations are reported as discontinued operations for all periods in the consolidated financial statements,
Management’s Discussion and Analysis of Financial Condition and Results of Operations, and other sections of this Form
10-K.
Fiscal Year Ended March 31, 2009, Compared to the Fiscal Year Ended March 31, 2008
RESULTS OF OPERATIONS
Diluted earnings per share were $4.32, up nearly 17% from last year’s $3.70 per diluted share, reflecting volume
increases and improved margins in most regions, along with share repurchases. The benefits of those factors were partially
offset by significant foreign currency-related losses. Net income for fiscal year 2009 was $131.7 million, compared to
$119.2 million last year. Performance for the prior fiscal year was reduced by restructuring charges of $12.9 million ($0.25
per diluted share after taxes) from employee separation costs related to rationalizing operations in or associated with Africa
and Canada, as well as pension curtailment charges related to benefit plan design. Revenues for the latest fiscal year were
$2.6 billion, which represented a 19% increase compared to last year. The increase in revenues was primarily caused by
increased leaf prices, as higher costs related to both farmer prices and the then weak U.S. dollar were included in product
pricing. Volumes shipped also increased, as African burley crops recovered from the weather reduced levels of fiscal year
2008. In addition, trading volumes improved in North America and Asia.
The leaf cost increases seen in most regions during fiscal year 2009 were related to increased farmer pricing earlier
in the year when crops were purchased and reflected competition from commodity crops and higher prices for fertilizer and
other agronomic input materials. Those cost increases contributed to higher customer pricing. We also experienced
significant remeasurement losses related to the rapid strengthening of the U.S. dollar compared to most currencies in tobacco
sourcing markets, especially in Brazil. At certain points in our crop financing cycle we have larger net monetary asset
exposures, and most of the currency rate changes took place during that time. For fiscal year 2009, currency related losses
totaled $50 million, while fiscal year 2008 included currency related gains of $30 million. The $80 million unfavorable year-
to-year currency-related charge, most of which was in Brazil, is reflected in selling, general, and administrative expenses and
caused the large increase in that line item.
Interest income for the year decreased by $14.9 million to $2.3 million on lower average balances invested,
combined with significantly lower interest rates. Interest expense declined by $6.3 million to $35.6 million due to the full
year impact of debt reduction completed in fiscal year 2008.
The consolidated effective income tax rate for the twelve months ended March 31, 2009, was approximately 33%.
The rate was lower than the 35% U.S. marginal corporate tax rate primarily because we reversed our remaining valuation
allowance on foreign tax credit carryforwards when the outlook for utilizing those credits changed.
Flue-cured and Burley Leaf Tobacco Operations
For the fiscal year ended March 31, 2009, segment operating income for the flue-cured and burley operations was up
6% compared to last year, to nearly $190 million, which is the highest level this group has reported in the last five years. The
increase was primarily related to improved volumes and margins. Revenues for those operations increased by over $440
million to $2.3 billion. The North American segment reported operating income of $48 million, up nearly 40% from the prior
year. The increase was caused primarily by increased sales volumes from both core operations and sales of old crop tobacco
as well as improved margins. Those two factors caused a 24% increase in revenues. Cost of sales for this segment increased
with increased sales volumes. Selling, general, and administrative costs increased due to higher provisions for losses on
farmer advances. Revenues for the Other Regions segment also grew by 24% to $1.8 billion. The increase was entirely
related to higher prices as volumes shipped decreased in several regions due to customer demand during last year’s shortages
that caused increased shipments from inventories. However, operating income fell by 2%, as significant improvements in
African operations were offset by the effects of the currency losses, primarily in South America. After experiencing
extremely short burley crops in fiscal year 2008, African operations improved as volumes grew, and customer pricing
increased, covering the effects of higher farm prices. Those two factors caused margins to return to more normal levels.
Comparative performance in Africa also benefited from reduced provisions and write downs related to farmer receivables, as
well as last year’s $8 million one-time charge in Malawi. Although South American volumes were down, performance was
relatively flat before recognition of about $40 million in exchange and remeasurement losses related to the rapid
19
strengthening of the U.S. dollar. Those losses, compared to gains in fiscal year 2008, were responsible for a $60 million
decline in South American earnings. Results for Europe improved on higher volumes, due to shipment timing and to
increased demand for tobacco sheet. Results for Asia were slightly lower, reflecting reduced availability of trading volumes.
In the Other Regions segment, cost of sales was significantly higher this year reflecting higher cost leaf and the weaker U.S.
dollar during the purchasing season. That cost was offset by revenue increases. Selling, general, and administrative expenses
were also much higher as the segment absorbed $50 million in currency related costs compared to $26 million in gains last
year. There were no other significant changes in that expense category.
Other Tobacco Operations
In the Other Tobacco Operations segment, fiscal year 2009 operating income was $42 million, an increase of 5%
over last year on an 11% reduction in revenues. Earnings improved on higher volumes from early shipments of dark tobacco
in anticipation of the enactment of U.S. excise tax increases, some price increases related to higher costs, and higher volumes
in the oriental tobacco joint venture. Those factors also benefited revenues but were offset by last year’s winding down of
some just-in-time customer service business that was absorbed by the various regional operations. Overall shipments in the
segment were down as the reduction in volumes from the just-in-time customer service business more than offset increases in
dark tobacco volumes. As we also saw in the Other Regions segment, cost of sales increased because of higher leaf costs,
and selling general and administrative costs increased because of unfavorable currency related costs, which increased this
expense by $5 million compared to last year.
Fiscal Year Ended March 31, 2008, Compared to the Fiscal Year Ended March 31, 2007
For the fiscal year ended March 31, 2008, results from continuing operations showed a marked improvement over
the fiscal year ended March 31, 2007, reflecting better results in most reportable segments, reduced net interest cost, and a
lower effective tax rate. Income from continuing operations was $119.3 million, or $3.71 per diluted share, including the
effect of $12.9 million ($0.25 per diluted share) in restructuring costs recognized throughout fiscal year 2008. Those charges
included employee separation costs related to rationalizing operations in or related to Africa and Canada, as well as pension
curtailment losses on certain defined benefit plans. For fiscal year 2007, we reported income from continuing operations of
$80.4 million, or $2.52 per diluted share, including restructuring and impairment charges of $31 million ($0.93 per diluted
share) primarily related to the value of farming operations in Africa that we managed and other long-lived assets. Revenues
for fiscal year 2008 increased by 7%, to $2.1 billion. Net income for fiscal year 2008, which includes results from
discontinued operations, was $119.2 million, or $3.70 per diluted share, compared to $44.4 million, or $1.13 per diluted
share, for fiscal year 2007.
Selling, general, and administrative expense for fiscal year 2008 fell by about $24 million compared to fiscal year
2007. This expense is included in segment income and has been discussed in the context of each segment. The specific
factors that caused the decrease in this line item are higher currency remeasurement and transaction gains, which are related
primarily to the process of purchasing tobacco, the gain on the sale of surplus timberland, the reduction of the Brazilian
provision against VAT tax recovery, and lower provisions for farmer receivables, offset by the accrual for statutory
termination benefits in Malawi, increased incentive compensation accruals, and higher stock-based compensation.
Interest income for fiscal year 2008 increased by $6.3 million to $17 million on larger average balances invested,
which more than offset the effect of falling interest rates. Interest expense fell by nearly $12 million to $42 million due to the
full year impact of debt reduction completed in fiscal year 2007 and lower interest rates.
The consolidated effective income tax rate for continuing operations for the fiscal year ended March 31, 2008, was
approximately 35%, which is equivalent to the U.S. marginal corporate tax rate. This rate was lower than historical rates for
several reasons. Due to a prolonged period of strengthening of the local currency and sales of old crop inventories, the
effective tax rate of our Brazilian operation was very low in fiscal year 2008. In addition, we have higher levels of income
in the United States. Fiscal year 2007’s rate was much higher than the statutory rate at 45%. The higher rate was primarily
due to an increase in the valuation allowance related to deferred tax assets from undistributed earnings and foreign tax credit
carryforwards and to high state income taxes due to improved earnings in the United States.
The loss from discontinued operations in fiscal year 2008 was inconsequential. For the fiscal year ended March 31,
2007, the loss from discontinued operations was $36 million, or $1.39 per diluted share. Results from discontinued
operations reflect the operating results and estimated effects of selling the Company’s non-tobacco businesses, the largest
part of which occurred in the second fiscal quarter of fiscal year 2007. The Company’s financial statements now report the
results and financial position of those businesses as discontinued operations for all periods.
20
Flue-cured and Burley Leaf Tobacco Operations
Flue-cured and burley operations earned $178 million, up $6 million from fiscal year 2007. Results of the North
America segment declined by $6 million, reflecting the absence of fiscal year 2007’s sales of old crop burley and gains on
asset sales. The effect of those one-time items was partially offset by higher volumes and margins from normal operations in
fiscal year 2008. North America revenues decreased by $13 million, or 4%, primarily due to fiscal year 2007’s U.S. old crop
burley sales. Normal operating volumes in the United States increased over the fiscal year ended March 31, 2007. The
operating income of the Other Regions segment increased by $12 million, primarily due to increased volumes shipped from
Europe and Asia, as well as the recognition of previously deferred income on volumes supplied to our Special Services
group. However, in Africa, smaller crops in Malawi and Mozambique not only reduced volumes, but also increased
purchasing and processing unit costs in that region, outweighing the benefits of lower charges for farmer bad debts and
inventory valuation in fiscal year 2008. We also recorded about $8 million in charges to accrue an obligation established by
Malawi court rulings that require employers to provide statutory severance benefits in addition to company-sponsored
pension benefits in employment termination situations. Finally, South America results continued to be strong as currency
transaction and remeasurement gains reduced the impact of the higher green tobacco and operating costs caused by the weak
U.S. dollar. During fiscal year 2008, a gain on the sale of surplus timberland of approximately $6 million and a benefit from
the reduction of the valuation allowance against recoverable Brazilian VAT taxes of approximately $8 million provided
positive comparisons in the region. However, $8 million in additional bad debt provisions against farmer receivables in fiscal
year 2008 and the absence of fiscal year 2007’s $8.5 million benefit from the resolution of a revenue tax case more than
offset those items. Total provisions for farmer bad debts for Africa and South America in fiscal year 2007 were $32 million
and inventory valuation adjustments were $13 million. Fiscal year 2008 amounts were $22 million and $3 million,
respectively. Revenues of the Other Regions segment for fiscal year 2008 increased by 7%, primarily due to higher sales
prices in South America and Europe, where we experienced increased farmer prices and strong local currencies, and higher
volumes in Europe and Asia. Cost of sales increased on higher volumes and higher costs related to the weak U.S. dollar.
Selling, general, and administrative expenses of this segment fell because the gains on currency and asset sales were recorded
there, as were provisions for loss on farmer receivables.
Other Tobacco Operations
The Other Tobacco Operations segment also showed substantial improvement in fiscal year 2008. This
improvement was due to the acceleration of shipments by the Special Services group to wind down most of its business that
was being absorbed by regional operations. The comparison of dark tobacco operations for fiscal year 2008 was affected by
higher volumes in fiscal year 2007 due to shipment timing and very strong Indonesian wrapper sales. Results for our oriental
tobacco joint venture declined for fiscal year 2008, primarily due to significant currency remeasurement losses related to
assets denominated in Turkish lira and U.S. dollars. The venture’s functional currency is the euro, and both currencies
weakened against the euro in fiscal year 2008. Revenues for this segment increased by $59 million in fiscal year 2008.
Accounting Pronouncements
Effective March 31, 2009, we adopted the measurement timing provisions of Financial Accounting Standards Board
(“FASB”) Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and
Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106, and 132(R)” (“SFAS 158”). These
provisions require that the funded status of defined benefit plans be measured as of the balance sheet date, thereby
eliminating the option allowed under the prior guidance, and previously used by us, to measure funded status at a date up to
three months before the balance sheet date. To adopt the measurement timing provisions, we measured our pension and other
postretirement benefit plans at March 31, 2009, and recorded a direct adjustment to reduce retained earnings by $1.5 million
($2.3 million before income taxes), reflecting the expense attributable to the intervening three-month transition period. As
required by the guidance, changes in the fair value of plan assets and benefit obligations for the full fifteen-month period
between the fiscal year 2008 and 2009 measurement dates were recognized in other comprehensive income for fiscal year
2009.
Also effective March 31, 2009, we adopted FASB Statement of Financial Accounting Standards No. 161,
“Disclosures about Derivative Instruments and Hedging Activities” (“SFAS 161”). SFAS 161 amends FASB Statement of
Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” and several other
accounting pronouncements to require enhanced disclosures about derivatives and hedging activities that are aimed at
improving the transparency and understanding of those activities for financial statement users. It requires additional
disclosures explaining the objectives and strategies for using derivative instruments, how those instruments and the related
hedged items are accounted for, and how they affect our financial position, results of operations, and cash flows. The
disclosures required by SFAS 161 are provided in Note 10 to the consolidated financial statements in Item 8.
21
Effective April 1, 2008, we adopted FASB Statement of Financial Accounting Standards No. 157, “Fair Value
Measurements” (“SFAS 157”) as it applies to financial assets and financial liabilities. SFAS 157 defines fair value,
establishes a framework for measuring fair value under generally accepted accounting principles, and expands disclosures
about fair value measurements. As originally issued, SFAS 157 also applied to nonfinancial assets and nonfinancial
liabilities; however, the FASB subsequently issued additional guidance that delayed the effective date for those items until
fiscal years beginning after November 15, 2008, except where they are currently required to be recognized or disclosed at fair
value in the financial statements on at least an annual basis. We do not have any nonfinancial assets or nonfinancial
liabilities that are required to be recognized or disclosed at fair value on at least an annual basis. The FASB also issued
subsequent guidance to exclude fair value measurements related to leases from the scope of SFAS 157, except where they
relate to leases assumed in a business combination. The adoption of SFAS 157 with respect to our financial assets and
liabilities did not have a material effect on our operating results or financial position. Disclosures about fair value
measurements are provided in Note 11 to the consolidated financial statements in Item 8. We will adopt SFAS 157 for our
nonfinancial assets and liabilities, which primarily includes assessments of goodwill and long-lived-assets for potential
impairment, effective April 1, 2009. The application of SFAS 157 to those assets and liabilities is not expected to have a
material effect on our financial statements.
Effective April 1, 2008, we also adopted FASB Statement of Financial Accounting Standards No. 159, “The Fair
Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115” (“SFAS
159”). SFAS 159 gives companies the option to report certain financial instruments and other items at fair value on an item-
by-item basis (the fair value option) with changes in fair value reported in earnings. We did not elect the fair value option for
any financial assets or liabilities that were not already being measured and reported at fair value; therefore, the adoption of
SFAS 159 had no impact on our financial statements.
We adopted FASB Interpretation 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), effective April 1,
2007. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance
with FASB Statement No. 109, “Accounting for Income Taxes.” It requires that positions taken or expected to be taken in
tax returns meet a “more-likely-than-not” threshold based solely on their technical merit in order to be recognized in the
financial statements. It also provides guidance on measuring the amount of a tax position that meets the “more-likely-than-
not” criterion. As a result of adopting FIN 48, we recognized a net increase of approximately $10.9 million in our liability
related to uncertain tax positions, which was accounted for as a decrease in the April 1, 2007, balance of retained earnings.
Additional disclosures related to the adoption and application of FIN 48 are provided in Note 6 to the consolidated financial
statements in Item 8.
In addition to the above accounting pronouncements adopted through March 31, 2009, the following
pronouncements have been issued and will become effective in fiscal year 2010.
(cid:2) FASB Statement of Financial Accounting Standards No. 141R, “Business Combinations” (“SFAS 141R”),
which requires that companies record assets acquired, liabilities assumed, and noncontrolling interests in
business combinations at fair value, separately from goodwill, as of the acquisition date. This approach differs
from the cost allocation approach provided under previous accounting guidance and can result in recognition of
a gain at acquisition date if the cost to acquire a business is less than the net fair value of the assets acquired,
liabilities assumed, and noncontrolling interests. SFAS 141R also provides new guidance on recording assets
and liabilities that arise from contingencies in a business combination, and it requires that transaction costs
associated with business combinations be charged to expense instead of being recorded as part of the cost of the
acquired business. It is effective for fiscal years beginning after December 15, 2008, which means that we will
apply the guidance to any business combinations occurring on or after April 1, 2009.
(cid:2) FASB Statement of Financial Accounting Standards No. 160, “Noncontrolling Interests in Consolidated
Financial Statements – an amendment of ARB No. 51” (“SFAS 160”). SFAS 160 requires that noncontrolling
interests in subsidiaries that are included in a company’s consolidated financial statements, commonly referred
to as “minority interests,” be reported as a component of shareholders’ equity in the balance sheet. It also
requires that a company’s consolidated net income and comprehensive income include the amounts attributable
to both the company’s interest and the noncontrolling interest in the subsidiary, identified separately in the
financial statements. Finally, the new guidance requires certain disclosures about noncontrolling interests in the
consolidated financial statements. SFAS 160 is effective for fiscal years beginning after December 15, 2008.
We have various subsidiaries with noncontrolling interests and will begin applying the new guidance in fiscal
year 2010. Adoption of SFAS 160 is not expected to have a material impact on our financial statements.
22
Overview
LIQUIDITY AND CAPITAL RESOURCES
Our operating cash flow improved during fiscal year 2009, despite continued working capital demands. We
continued our conservative financial policies, maintained our discipline on capital spending and use of free cash flow, and
were able to return $172 million to shareholders through dividends and share repurchase.
Our liquidity and capital resource requirements are predominantly short-term in nature and primarily relate to
working capital required for seasonal 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 size, prices paid to farmers, and currency fluctuations affect requirements each year. The
marketing of the crop in each geographic area is heavily influenced by weather conditions and follows the cycle of buying,
processing, and shipping of the tobacco crop. The timing of individual customer shipping requirements may change the level
or the duration of crop financing. Despite a predominance of short-term needs, we intend to maintain a relatively large
portion of our total debt as long-term to avoid liquidity risk.
We believe that our financial resources are adequate to support our capital needs. Our seasonal working capital
requirements typically increase from March to September by as much as $200 million. That funding requirement is primarily
related to our Other Regions segment. The amount can vary significantly depending upon such factors as crop sizes, the
price of leaf, the relative strength of the U.S. dollar, and shipment timing differences. We deal with this uncertainty by
maintaining substantial credit lines and cash balances. In addition to our operating requirements for working capital,
medium-term notes totaling $79.5 million in long-term debt mature in September 2009, we plan to spend approximately $12
million to expand and upgrade a facility, and we expect to provide around $12 million in additional funding to our pension
plans. Available capital resources from our cash balances, committed credit facilities and uncommitted credit lines exceed
those anticipated needs, but we may explore issuing additional long-term debt to provide an additional source of funds. We
believe that the cost of that debt would be substantially higher than our current outstanding debt and that the increased
interest expense would impact our future results. If we refinanced our maturing debt today, we believe our interest expense
would increase by approximately $2 million per year. Our revolving credit facility has been available throughout the
economic turmoil of the last year. None of the lenders in that facility have indicated that they will not be able to continue to
provide funding. Any excess cash flow from operations after dividends, capital expenditures, and any increased funding
costs will be available to fund expansion, purchase our stock, or otherwise enhance shareholder value.
Cash Flow
During fiscal year 2009, we generated $99 million in cash flow from our operations, and liquidated net short-term
investments of $59 million, which provided additional cash. We spent $36 million on capital projects, returned $61 million
to shareholders in the form of dividends, and spent $111 million on repurchases of our common stock. At March 31, 2009,
cash balances totaled $213 million.
Our share repurchase program was approved by the Board of Directors in November 2007. The program extends
through November 2009 and authorizes purchases of up to $150 million of our common stock. Under the authorization, we
will purchase shares from time to time in the open market or in privately negotiated transactions at prices not exceeding
prevailing market rates. In determining our level of common share purchase activity, our intent is to use only cash available
after meeting our capital investment, dividend, and anticipated working capital requirements. As a result, our execution of
the repurchase program may vary as we realize changes in cash flow generation and availability. In fiscal year 2009, we
purchased 2,227,700 shares, bringing total purchases to date to 2,552,995 at a total cost in fiscal year 2008 and 2009 of about
$128 million.
Working Capital
Working capital at March 31, 2009, was $954 million, down $75 million from last year’s level of $1,029 million.
The largest factor contributing to the reduction was the $79.5 million increase in the current portion of long-term obligations
due to a debt maturity scheduled for September 2009. The operating items in working capital were reasonably stable,
although current deferred taxes increased by about $46 million, primarily associated with the recognition of a deferred tax
benefit on local tax losses related to U.S. dollar export financing. Accounts receivable increased by about $32 million due to
higher shipments in the fourth quarter of fiscal year 2009. Advances to suppliers remained at relatively high levels, due to the
lingering effect of higher farm input costs last year when the advances were made. Accounts receivable – unconsolidated
affiliates decreased by $23 million due to earlier completion of seasonal transactions. Tobacco inventories were lower at
March 31, 2009, in large part due to strong demand for African burley tobacco. We generally do not purchase material
23
quantities of tobacco on a speculative basis. Our uncommitted tobacco inventories increased by approximately $35 million to
$124 million, or about 21% of tobacco inventory primarily due to higher balances in South America related to the timing of
the crop. Uncommitted inventories at March 31, 2008, were $89 million, which represented 15% of tobacco inventory.
Capital Spending
Our capital expenditures are generally limited to those that add value for the customer, replace or maintain
equipment, increase efficiency, or position us for future growth. Our capital expenditures were approximately $36 million in
fiscal year 2009, $28 million in fiscal year 2008, and $25 million in fiscal year 2007. Our intent is to limit routine capital
spending to a level below depreciation expense in order to maintain strong cash flow. However, we plan to spend
approximately $12 million in fiscal year 2010 on an expansion of our processing facility in Lancaster, Pennsylvania, to
accommodate the consolidation of our U.S. dark tobacco processing into that facility, and from time to time we may
undertake additional projects pursuant to customer contracts.
Outstanding Debt and Other Financing Arrangements
We consider the sum of notes payable and overdrafts, long-term debt (including 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 minority interests and shareholders’ equity to be our total capitalization. Net debt increased
by $76 million to $381 million during the twelve months ended March 31, 2009. The increase reflects the use of part of last
year’s cash balances for share repurchases. Net debt as a percentage of capitalization was approximately 27% at March 31,
2009, up from 21% at March 31, 2008.
As of March 31, 2009, we, together with our consolidated affiliates, had approximately $690 million in
uncommitted lines of credit, of which approximately $518 million were unused and available to support seasonal working
capital needs. We also had approximately $213 million in cash and cash equivalents, and we have a five-year committed
revolving credit facility totaling $400 million. We entered into the facility in August 2007, and it will mature on August 31,
2012. In March 2009, we entered into a $50 million committed credit facility. The facility expires in December 2009, and
loans made under the facility may be used to provide working capital or for general corporate purposes. As of March 31,
2009, we had no borrowings under either facility. Under the terms of our bank agreements, we must maintain certain levels
of tangible net worth and observe restrictions on debt levels. We were in compliance with all such covenants at March 31,
2009. Our long-term credit ratings are Ba1 with Moody’s Investors Service and BBB- with Standard & Poor’s.
Derivatives
From time to time, we use interest rate swap agreements to manage our exposure to changes in interest rates. These
agreements typically adjust interest rates on designated long-term obligations from fixed to variable. The swaps are
accounted for as fair value hedges. At March 31, 2009, the value of our outstanding interest rate swap agreements was $11.8
million.
We also enter forward contracts from time to time to hedge certain foreign currency exposures, primarily related to
forecast purchases of tobacco in Brazil and our net monetary asset exposure in the local currency there. We account for our
hedges of forecast tobacco purchases as cash flow hedges. At March 31, 2009, the fair value of our open contracts was a net
liability of approximately $7.6 million; and we had approximately $22 million in losses on both open and closed contracts
recorded in accumulated other comprehensive loss. We also had other forward contracts outstanding that were not
designated as hedges, and the fair value of those contracts was a net liability of approximately $0.7 million. For additional
information, see Note 10 to the consolidated financial statements in Item 8.
24
Pension Funding
Funds supporting our ERISA-regulated U.S. defined benefit pension plans decreased by $47.1 million to $119.2
million because of losses in the investment portfolio during the fiscal year. By April 30, 2009, the market value of the fund
was about $126 million. The accumulated benefit obligation (“ABO”) and the projected benefit obligation (“PBO”) were
approximately $139 million and $152 million, respectively, as of March 31, 2009. The ABO and PBO are calculated on the
basis of certain assumptions that are outlined in Note 12 to the consolidated financial statements in Item 8. We expect to
make contributions of $2.7 million to our ERISA-regulated plans during the next year. It is our policy to 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, 2009, were as follows:
(in thousands of dollars)
Total
2010
2011-2012
2013-2014
Thereafter
Notes payable and long-term debt(1).......................... $
Operating lease obligations.......................................
638,921
$
271,499
$
140,345
$
227,077
$
51,497
15,824
19,754
7,562
Inventory purchase obligations:
Tobacco.................................................................
Agricultural materials............................................
Other purchase obligations........................................
Total
$
656,233
22,131
5,514
1,374,296
$
520,538
22,131
5,046
835,038
$
54,278
—
288
214,665
$
54,278
—
180
289,097
$
—
8,357
27,139
—
—
35,496
(1) Includes interest payments. Interest payments on $169 million of variable rate debt were estimated on the basis of March 31, 2009 rates.
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. More than half of our crop year contracts to purchase tobacco are with
farmers in Brazil. Tobacco purchase obligations have been partially funded by advances to farmers and other suppliers,
which totaled approximately $214 million as of March 31, 2009. The Company’s $104 million contingent liability and
related $35 million accrual for guarantees of farmer third-party bank loans in Brazil are also related to this obligation. As
tobacco is purchased and the related bank loans are repaid, the contingent liability is reduced.
25
CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS
In preparing the financial statements in accordance with generally accepted accounting principles in the United
States (“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, risk, and financial condition. We believe, given current facts and circumstances, 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, changing
customer needs, 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 2009, 2008, and 2007 were $3.5 million, $2.2 million, and $17.6 million, respectively.
Advances to Suppliers and Guarantees of Bank Loans to Suppliers
We provide 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. Primarily in Brazil, we have
also made long-term advances to tobacco farmers to finance curing barns and other farm infrastructure. In Brazil, we also
guarantee both short-term and long-term loans made to farmers for the same purposes. 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 that case,
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.
Goodwill
We review the carrying value of goodwill as necessary, and at least annually, utilizing discounted cash flow models.
The use of these models requires significant management judgment with respect to operating earnings growth rates and the
selection of an appropriate discount rate. Neither a one-percentage-point increase in the discount rate assumption nor a one-
percentage-point decline in the cash flow growth rate assumption would result in an impairment charge. However, significant
changes in estimates of future cash flows, such as those caused by unforeseen events or changes in market conditions, could
result in an impairment charge.
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 in Brazil.
SFAS 157 provides guidance on determining the fair values of these financial assets and liabilities. Quoted market prices
(Level 1 of the fair value hierarchy in SFAS 157) are used in most cases to determine the fair values of available-for-sale
securities and 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 $35.2 million
at March 31, 2009, 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, 2009, a 1% increase in the
expected loss percentage for all guaranteed farmer loans would have increased the fair value of the guarantee obligation by
approximately $1.2 million. A 1% change in the risk-adjusted interest rate would not have had a material effect on the fair
26
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, 2009.
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. The effective tax rate is applied to quarterly operating
results. 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.
Our accounting for uncertain tax positions under FIN 48, which was adopted effective April 1, 2007, 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 the tax return at different times 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 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. At the beginning of fiscal
year 2009, we had approximately $9.3 million of foreign tax credit carryforwards that were available to reduce our
obligations to pay U.S. federal income taxes on our earnings in future years, and we had recorded a valuation allowance on
those carryforwards of approximately $3.0 million, reflecting our best estimate of our ability to utilize those carryforwards
before they expired. During fiscal year 2009, changes in our overall tax position, including higher domestic earnings,
changed our projections for the use of the foreign tax credit carryforwards. We currently expect that, upon filing our 2009
consolidated U.S. tax return, we will utilize all or substantially all of our foreign tax credit carryforwards. We have net
operating loss (“NOL”) carryforwards in several foreign jurisdictions totaling $3.8 million at March 31, 2009, approximately
$2.4 million of which will expire at dates ranging from three to five years in the future, and the remainder of which have
unlimited carryforward periods. Based on future estimates of taxable income and/or available tax planning strategies in those
jurisdictions, we expect to fully realize those NOL carryforwards; however, any significant reduction in future taxable
income or changes in tax laws in the jurisdictions that have limited carryforward periods could impact their ultimate
realization.
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. We consider such changes when evaluating the level of our valuation allowances for
deferred tax assets.
For additional disclosures on income taxes, see Notes 1 and 6 to the consolidated financial statements in Item 8.
27
Pension and Other Postretirement Benefit Plans
The measurement of our pension and postretirement obligations and costs are dependent on a variety of assumptions
determined by management and used by our actuaries. These assumptions include estimating the present value of projected
future pension payments to all plan participants, taking into consideration the likelihood of potential future events such as
salary increases and demographic experience. The assumptions we have made may have an effect on the amount and timing
of future contributions. The plan trustee conducts an independent valuation of the fair value of pension plan assets. The
significant assumptions used in the calculation of pension and postretirement obligations are:
(cid:2) Discount rate – The discount rate is based on investment yields on a hypothetical portfolio of long-term
corporate bonds rated AA that align with the cash flows for our benefit obligations.
(cid:2) Salary scale – The salary scale assumption is based on our long-term actual experience for salary increases, the
near-term outlook, and expected inflation.
(cid:2) 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.
(cid:2) 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
group annuity (RP-2000) mortality tables.
(cid:2) 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.
The effects of actual results differing from our assumptions are accumulated and amortized over future periods and,
therefore, generally affect our recognized expense in such future periods.
28
Sensitivity Analysis. The effect of the indicated decrease or increase in the selected assumptions is shown below,
assuming no change in benefit levels:
(in thousands of dollars)
Changes in Assumptions for Pension Benefits
Discount Rate:
Effect on
2009 Projected
Effect on
Benefit Obligation
Annual Expense
Increase
(Decrease)
Increase
(Decrease)
1% increase………………………………………………………………………………………………………… $
1% decrease…………………………………………………………………………………………………………
(18,281)
$
21,733
Salary Scale:
1% increase…………………………………………………………………………………………………………
1% decrease………………………………………………………………………………………………………..
Long-Term Rate of Return on 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……………………..…………...…………..................……………………………………...............
5,417
(5,518)
N/A
N/A
(2,876)
3,357
821
(732)
(566)
1,848
(1,783)
1,781
1,648
(1,553)
(286)
333
68
(60)
See Note 12 to the consolidated financial statements in Item 8 for additional information on pension and
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, advances to suppliers, and certain value-added tax credits,
as well as the determination of 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, to secure the
tobacco volumes and quality desired by our customers, and to maintain efficient operations. We continually monitor issues
that may impact supply and demand of leaf tobacco. During the last several years, supply factors have been especially
important to our results, and we believe those issues will continue.
Supply
Production
Worldwide flue-cured tobacco production in fiscal year 2009 increased by 7.9% to 4.2 billion kilos. The total
includes China, an extremely large market that is primarily domestic. Because very little of that tobacco is available to trade,
we generally consider worldwide production excluding the Chinese crops. Excluding China, worldwide flue-cured tobacco
production in fiscal year 2009 declined by about 2%, to 1.9 billion kilos. Burley crops marketed in fiscal year 2009
recovered significantly following three years of declining production. Burley crops increased by about 18% in fiscal year
2009. All of the increase occurred in Africa where Malawi and Mozambique produced record crops. We estimate that
industry uncommitted flue-cured and burley inventories totaled about 38 million kilos, excluding inventories of Asian
government-owned monopolies, at March 31, 2009. That amount is up over 30% from the level one year earlier due to the
rise in burley stocks, but uncommitted inventories are still at historically low levels.
Flue-cured production (excluding China) is expected to increase by about 3% in fiscal year 2010 to 1.9 billion kilos,
despite forecast decreases in Brazil. Burley production is forecast to increase by 14% to about 838 million kilos in fiscal year
2010. We expect the overall supply of flue-cured tobacco to remain fairly balanced, but certain types and styles of burley are
likely to move to an oversupply position. Supplies of oriental tobacco available for trading are expected to be lower due to
decreasing unsold stocks, especially those held by former governmental entities.
Pricing
Factors that affect green tobacco prices include competition from other crops, production costs, market conditions,
and global supply and demand. We work with farmers to maintain tobacco production and to secure product at price levels
that are attractive to our customers. Tobacco competes with agricultural commodity products for farmer production. As
prices for soybeans, wheat, rice, and seed oils rise, green tobacco prices may have to rise to maintain tobacco production.
This factor could provide momentum to efforts of the World Health Organization to shift farmer production from leaf
tobacco to other crops. After reductions through early 2009, crop production costs are again rising, as the cost of energy,
particularly oil, is increasing. Any current growth in farm input costs would affect crops sold in fiscal year 2011. In the
recent past, market shortages have also led to green tobacco price increases. In fiscal year 2009 in Brazil, competition for
leaf drove up green tobacco prices and the extremely strong Brazilian currency caused an additional increase in U.S. dollar
terms.
Change in E.U. Subsidy Program
An additional supply risk has arisen in recent years as the European Union (“E.U.”) has taken action toward
modifying the system of granting subsidies to tobacco farmers. Over 200 million kilos of good quality flue-cured and burley
tobacco are produced in Europe each year. The E.U. subsidy makes up well over half of the revenue that a European farmer
receives on a tobacco crop. Through the 2009 crop, which will be largely processed and sold during fiscal year 2011, 40% of
the subsidy has been “decoupled” from production. The “decoupling” essentially means that a farmer can receive the subsidy
granted even if the farmer does not plant tobacco, so long as he keeps the land associated with that subsidy in good
agricultural and environmental condition. The 60% balance of the subsidy remains subject to actual production of tobacco.
This means, in practical terms, that the total aid to tobacco farmers has remained unchanged for those who continue;
however, the incentive to grow tobacco has changed and some growers have decided to discontinue production. In the
subsidy system applicable to the interim period (crops 2006-2009), the E.U. tobacco budget allocated to each producing
country for payment of the “coupled” portion remains unchanged, even if total production drops within certain limits. The
farmers who continue to produce tobacco in countries where tobacco production has declined during the interim period have
received a larger portion of the “coupled” subsidy than they would have if the E.U. budget had not been fixed for the interim
period.
Individual member states may elect to increase the decoupled portion of the subsidy up to 100%. Three of the main
tobacco producing countries where we operate, directly or indirectly, Italy, Spain, and France, have decided not to decouple
30
more than the minimum 40% of the subsidy. The 2008 and 2009 crop contracts between farmers and processors indicate a
stabilization, and in some cases an increase, in production compared to the two previous crops. This comes after reductions
between 20% and 30% in production compared to the volumes produced before decoupling was introduced. Most of these
reductions were in less desirable tobacco varieties and production areas, which has improved the average quality of the crop.
In Greece, where our joint venture, Socotab L.L.C., has oriental tobacco operations, the government opted to decouple 100%
of the E.U. subsidy from the growing of tobacco. Flue-cured and burley volumes have been virtually eliminated there, and
oriental volumes have been reduced significantly. We have operations in two countries, Poland and Hungary, who joined the
E.U. on May 1, 2004, and our oriental tobacco joint venture, Socotab L.L.C., has operations in Bulgaria which joind the E.U.
on January 1, 2007. In those countries, tobacco farmers have received subsidies mainly financed from the domestic budgets.
Despite support for the extension of the tobacco subsidies from tobacco producing countries and votes in May and
November 2008 by the E.U. Parliament in favor of extending those subsidies, the E.U. Commission and the E.U. Council of
Ministers did not address an extension in their November 2008 meeting.
There is still a possibility of re-opening the discussion on tobacco subsidies at the E.U. level, as a consequence of
the new E.U. Parliament elections in June 2009, the appointment of a new Commission in the months thereafter, and the new
balance of powers that may result from the ratification of the Treaty of Lisbon (which will extend to agricultural matters the
co-decision process, by which the E.U. Parliament opinion becomes binding). In order to address the immediate issue of the
2010 crop, the national governments of the main tobacco producing countries in the E.U. are working to find operative
solutions to the problem, because of the importance of tobacco production to local economies.
We believe that customers continue to value European tobacco. No significant unsold inventory is at present held
by the trade, and commercial prices have followed world market trends.
While the new support system is being structured, most likely on a country by country basis, a major influence on
the farmers’ decisions to produce tobacco will be the level of commercial prices for green tobacco. Higher farm income will
depend on leaf quality and on cost reduction, at the farm level, as well as through the whole supply chain. In addition,
confirmed support from European tobacco product manufacturers will be crucial to the long-term viability of tobacco
production in Europe. Our operations in the E.U. seem well positioned to play an important role, as in the past decades and
more recently, during the transition period, because of their well established relationships with the farmer base and with the
major customers, and because of state-of-the-art, efficient factories.
We believe that if farmer commercial income does not increase, as the level of support available to farmers
decreases, the volume of tobacco produced in Europe will decline over time, which could disrupt supply. In this case, our
results of operations could be negatively affected. The recorded value of our equity interests in long-lived assets, including
both consolidated and unconsolidated operations, that could be affected by these changes was approximately $31 million at
March 31, 2009. In addition, we had unrealized foreign currency translation losses of $17 million before income taxes at
March 31, 2009, related to our subsidiary in Hungary, which is one of the operations that could be affected by these changes.
Demand
We expect that near-term demand for leaf tobacco will be flat or decline slightly, primarily due to the flattening
trend in world cigarette consumption and more efficient leaf utilization by cigarette manufacturers. The efficiencies in leaf
utilization by manufacturers may mean that demand for cigarette leaf tobacco will not grow at the same pace as worldwide
consumption and may have peaked. On a year-to-year basis, we are susceptible to fluctuations in leaf supply due to crop size
and leaf demand as manufacturers adjust inventories or respond to changes in the cigarette market.
Our sales consist primarily of flue-cured and burley tobaccos. Those types of tobacco, along with oriental tobaccos,
are the major ingredients in American-blend cigarettes. Industry data shows that consumption of American-blend cigarettes
has declined at a compound annual rate of 1.0% for the ten years that ended in 2008. Over the ten years, industry data also
shows that total world consumption of cigarettes grew at the compound annual rate of 0.9%, including annual growth of
about 3% in China, with higher increases during the second half of the period. These patterns indicate a shift in demand,
reducing the need for burley and oriental tobaccos used in American-blend cigarettes and increasing the need for flue-cured
tobacco that is used in English-blend cigarettes, which are predominant in China.
In 2008, cigar consumption in the United States increased by 7%, while consumption within the main European
Union markets has declined about 5%. It is too early to assess the effects of recent increases in U.S. federal excise taxes on
tobacco products, which could include a migration between cigar product categories. Within the smokeless segment of the
dark tobacco business, 2008 U.S. consumption of loose-leaf chewing tobacco declined by 7%, while the consumption of
31
moist snuff products grew by about 7%. We believe that supplies of dark tobacco worldwide are generally tight. These
supplies are likely to be affected by changes in the E.U. farm subsidy program.
Competition
We have experienced an increase in competition from small tobacco processors in some of the markets where we
conduct business. These small competitors typically have lower overhead requirements and provide little or no support to
farmers. Due to their lower cost structures, they often can offer a price for products that is lower than our price. We believe
that the quality controls and farm programs we provide are necessary for our customers and make our products highly
competitive. For example, we have established worldwide farm programs designed to prevent non-tobacco related materials
from being introduced into the green tobacco delivered to our factories. In addition, we have established programs for good
agricultural practices and have been active in social responsibility endeavors in many of the developing countries in which
we do business. We believe that our major customers value these services and that our programs increase the quality of the
products and services we offer. We also believe that our customers value the steady supply that we are able to provide due to
our relationship with our farmer base. However, if our customers shift significant purchases to these smaller competitors, our
financial results could be negatively impacted.
Regulation
Decreased social acceptance of smoking and increased pressure from anti-smoking groups have had an ongoing
adverse effect on sales of tobacco products, particularly in the United States and Western Europe. Also, a number of 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, which was negotiated under the auspices of the World Health
Organization. In some cases, such restrictions are more onerous than those proposed or in effect in the United States. 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 brought about by existing or future
governmental laws and regulations would reduce demand for our products and services and could have a material adverse
effect on our results of operations.
Most recently, the U.S. Congress has introduced legislation in both the Senate and the House of Representatives
that would give the U.S. Food and Drug Administration (the “FDA”) the authority to regulate the manufacturing and
marketing of tobacco products. The proposed laws have not yet been enacted, and thus no regulations have been
promulgated by the FDA. The requirements of such regulation could have an impact on our operations, but at this time it is
not possible to assess the impact possible FDA regulation will have on our operations or the tobacco industry.
Product Taxation
A number of governments in countries where we operate, 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. Any future increase in excise or similar taxes on tobacco products could lead to reduced consumption for these
products, thereby reducing our customers’ demand for our products. In the United States, increases in Federal excise taxes
to fund the expansion of the State Children’s Health Insurance Program (“SCHIP”) are expected to reduce consumption. The
Congressional Budget Office estimates that smoking by underage tobacco users and by adult users will decline by 11% and
2%, respectively, by 2019. The tax increases from the SCHIP legislation are especially steep for roll-your-own products.
Industry Consolidation
An important trend in the tobacco industry has been consolidation among manufacturers of tobacco products. For
example, in the last several years, Imperial Tobacco Group PLC acquired Altadis S.A.; Japan Tobacco Inc. acquired Gallaher
Group PLC; and British American Tobacco PLC acquired the cigarette assets of Tekel. This activity is expected to continue,
particularly as further privatization of state monopolies occurs, providing opportunities for acquisitions by international
manufacturers, and as multinational manufacturers expand their product offerings by acquisition. This concentration trend
could provide additional opportunities for us and also increase the importance of each individual customer to our results. A
key success factor for leaf dealers is the ability to provide customers with the quality of leaf and the level of service they
desire on a global basis at the lowest cost possible. In addition, the international leaf dealers have larger historical market
shares with some customers than with others. Consequently, our potential growth will be affected by the growth of our major
customers, and consolidation of customers may have at least a short-term favorable or unfavorable impact on our business.
32
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Interest Rates
After inventory is purchased, interest rate risk is limited in our business because customers usually pre-finance
purchases or pay market rates of interest for inventory purchased for their accounts.
Our customers pay interest on tobacco purchased for their order. That interest is paid at rates based on current
markets for variable rate debt. When we fund our committed tobacco inventory with fixed-rate debt, we might not be able to
recover interest at that fixed rate if current market interest rates were to fall. As of March 31, 2009, tobacco inventory of
$586 million included $462 million in inventory that was committed for sale to customers and $124 million that was not
committed. Committed inventory, after deducting about $14 million in customer deposits, represents our net exposure of
about $448 million. We normally maintain a substantial portion of our debt at variable interest rates in order to substantially
mitigate interest rate risk related to carrying fixed-rate debt. However, we have large cash balances that we plan to use to
fund seasonal purchases of tobacco, and thus, debt carried at variable interest rates was lower than normal at $339 million at
March 31, 2009. Although a hypothetical 1% change in short-term interest rates would result in a change in annual interest
expense of approximately $3.4 million, that amount would be mitigated by changes in charges to customers. Our policy is to
work toward a level of floating-rate liabilities, including customer deposits, that reflects of our average committed inventory
levels over time.
Significant portions of our cash and cash equivalents, which totaled $213 million at March 31, 2009, are invested at
variable rates. Based on balances at March 31, 2009, a hypothetical 1% change in interest rates would change annual interest
income by $2.1 million.
In addition, changes in interest rates affect the calculation of liabilities of our pension plan. As rates increase, the
liability for present value of amounts expected to be paid under the plans decreases. Rate changes also affect expense. As of
the March 31, 2009 remeasurement date, a 1% increase in the discount rate would have reduced the projected benefit
obligation (“PBO”) for pensions by $18.3 million and decreased annual pension expense by $0.6 million. Conversely, a 1%
decrease in the discount rate would have increased the PBO by $21.7 million and increased annual pension expense by $1.8
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 decreases or increases 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 gains and losses to the extent that monetary assets
and liabilities denominated in local currency do not offset each other. We recognized $46.0 million in net remeasurement
losses in fiscal year 2009, compared to $17.2 million in net remeasurement gains in fiscal year 2008, and $1.4 million in net
remeasurement gains in fiscal year 2007. We recognized $4.6 million in net foreign currency transaction losses in fiscal year
2009, compared to net transaction gains of $12.1 million in fiscal year 2008, and net transaction gains of $4.5 million in
fiscal year 2007. 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. For example, when we purchased the Brazilian crop
in the beginning of fiscal year 2009, the local currency had appreciated significantly against the U.S. dollar. Thus, the cost of
the crop increased over that of the prior year, in U.S. dollar terms. During fiscal year 2009, we entered forward currency
exchange contracts to hedge against the effects of currency movements on purchases of tobacco to reduce the volatility of
costs, primarily pursuant to customer contracts. In addition, we entered some forward contracts to hedge balance sheet
exposures during fiscal year 2009. See Note 10 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 Hungary, Poland, and the Philippines. In other markets, such as Western Europe, where
export sales have been 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.
33
Derivatives Policies
Hedging interest rate exposure using swaps and hedging foreign exchange 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. Counterparty risk is limited to institutions with
long-term debt ratings of A or better.
34
Item 8. Financial Statements and Supplementary Data
UNIVERSAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(in thousands of dollars, except per share data)
Fiscal Year Ended March 31,
2009
2008
2007
Sales and other operating revenues………………….……………..............……………………… $
2,554,659
$
2,145,822
$
2,007,272
Costs and expenses
Cost of goods sold……………………………………………..……………………………
Selling, general and administrative expenses…………………..…………………………
Restructuring and impairment costs…………………………………………………..……
Operating income……………………………………………………..……………………………
Equity in pretax earnings of unconsolidated affiliates……...………………………………
Interest income……...………………………………………………………………………
Interest expense………………………………………………………………..……………
Income before income taxes and other items………………………….……………………………
Income taxes………………………………………………………...………………………
Minority interests, net of income taxes…………………………………………………....
2,035,318
309,409
—
209,932
20,543
2,305
35,631
197,149
64,588
822
1,715,724
225,670
12,915
191,513
13,500
17,178
41,908
180,283
63,799
(2,817)
1,563,522
249,269
30,890
163,591
14,235
10,845
53,794
134,877
61,126
(6,660)
Income from continuing operations……………………………………………….………………
131,739
119,301
80,411
Loss from discontinued operations, net of income taxes………………………….………………
—
(145)
(36,059)
Net income…………………………………………...……………………………………………
131,739
119,156
44,352
Dividends on convertible perpetual preferred stock………………………….……………………
(14,850)
(14,850)
(14,685)
Earnings available to common shareholders……………………………………………….……… $
116,889
$
104,306
$
29,667
Earnings (loss) per common share:
Basic:
From continuing operations……………………………………………………….…… $
From discontinued operations……………………………………………………….…
Net income………………………………………………………………….…………… $
Diluted:
From continuing operations……………………………………………………….…… $
From discontinued operations……………………………………………………….…
Net income………………………………………………………………….…………… $
4.57
$
—
4.57
$
4.32
$
—
4.32
$
3.83
$
(0.01)
3.82
$
3.71
$
(0.01)
3.70
$
2.53
(1.39)
1.14
2.52
(1.39)
1.13
See accompanying notes.
35
UNIVERSAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars)
Current assets
ASSETS
March 31,
2009
2008
Cash and cash equivalents…………………………………………………….......................……………..……… $
Short-term investments…………………………………………………….......................……………..………..
Accounts receivable, net……………………………………………………………………………………………
Advances to suppliers, net…………………………………………………………………………………………
Accounts receivable—unconsolidated affiliates…………………….........................................……………..…..
Inventories—at lower of cost or market:
Tobacco………………………………………………………………………………………...................
Other…………………………………………………………………………………..……….................
Prepaid income taxes………………………………………………………….……………………………………
Deferred income taxes…………………………………………………….………………………………………
Other current assets………………………………………………….……….......................……………..………
Total current assets………………………………………………………….......................……………..
212,626
$
—
263,383
214,282
20,371
586,136
60,712
13,181
68,264
64,964
186,070
58,889
231,107
202,025
43,718
602,945
42,562
17,696
22,737
61,960
1,503,919
1,469,709
Property, plant and equipment
Land……………………………………………………………………...………………………..….……………
Buildings…………………………………………………………………………….......................……………..
Machinery and equipment…………………………………………………………….......................……………
Less accumulated depreciation…………………………………………………….……….....................…
Other assets
Goodwill and other intangibles…………………………….………………………………………………………
Investments in unconsolidated affiliates……………………………..……………………………………………
Deferred income taxes………………………………………………………………….……….…………………
Other noncurrent assets……………………………………………………..………………………………………
15,773
251,875
492,214
759,862
(447,575)
312,287
106,097
103,987
17,376
94,510
321,970
16,460
254,737
519,695
790,892
(456,059)
334,833
106,647
116,185
49,632
109,755
382,219
Total assets………………………………………..…………………………...…………………………… $
2,138,176
$
2,186,761
36
UNIVERSAL CORPORATION
CONSOLIDATED BALANCE SHEETS—(Continued)
(in thousands of dollars)
Current liabilities
LIABILITIES AND SHAREHOLDERS’ EQUITY
Notes payable and overdrafts…………………………………………………..……………………................
Accounts payable and accrued expenses………………………………………………………………………
Accounts payable—unconsolidated affiliates…………………………………………………………………
Customer advances and deposits………………………………………………………………………............
Accrued compensation……………………………………………………..……………………………………
Income taxes payable…………………………………………………………………...………..………………
Current portion of long-term obligations……………………………………………….……………...............
Total current liabilities…………………………………………………………………………………
Long-term obligations………………...…………………………………………………………….……………………
Pensions and other postretirement benefits…………………………………………………...………………..............
Other long-term liabilities……………………………...……………………………………………...…………………
Deferred income taxes…………………………………………………..……………………………………………..…
Total liabilities………………...............….....................……………………………...........................
March 31,
2009
2008
$
168,608
$
236,837
19,191
14,162
24,710
6,867
79,500
549,875
331,808
91,248
79,159
52,842
126,229
249,005
10,343
21,030
25,484
8,886
—
440,977
402,942
88,278
98,956
36,795
1,104,932
1,067,948
Minority interests……………………………………………………………………………………………...…………
3,771
3,182
Shareholders’ equity
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, 5,000,000
shares authorized, 219,999 shares issued and outstanding (219,999 at March 31, 2008)………………
Common stock, no par value, 100,000,000 shares authorized, 24,999,127 shares issued and
outstanding (27,162,150 at March 31, 2008)………………………………………………………..…….
Retained earnings………………………………………………………………………………………………………
Accumulated other comprehensive loss…………………………………………………………………………..……
Total shareholders' equity…………………………………………………..........................................
—
—
213,023
213,023
194,037
686,960
(64,547)
206,436
711,655
(15,483)
1,029,473
1,115,631
Total liabilities and shareholders' equity………………………………………………………………
$
2,138,176
$
2,186,761
See accompanying notes.
37
UNIVERSAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
Cash Flows From Operating Activities of Continuing Operations:
Net income………………………………………………………………………………... $
Adjustments to reconcile net income to net cash provided by
operating activities of continuing operations:
Fiscal Year Ended March 31,
2008
2009
2007
131,739
$
119,156
$
44,352
Net loss from discontinued operations…………………………………………………
Depreciation…………………………………………………………………………….
Amortization……………………………………………………………………………
Provision for losses on advances and guaranteed loans to suppliers……………………
Currency remeasurement (gain) loss, net………………………………………………
Deferred income taxes……………………………………………………………………
Minority interests………………………………………………………………………
Equity in net income of unconsolidated affiliates, net of dividends……………………
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 of continuing operations……………………
Cash Flows From Investing Activities of Continuing Operations:
Purchase of property, plant and equipment…………………………………………………
Purchases of short-term investments………………………………………………………
Maturities and sales of short-term investments……………………………………………
Proceeds from sale of businesses, less cash of businesses sold……………………………
Proceeds from sale of property, plant and equipment……………………..………………
Other, net……………………………………………………………………………..……
Net cash provided (used) by investing activities of continuing operations……………
Cash Flows From Financing Activities of Continuing Operations:
Issuance (repayment) of short-term debt, net………………………………………………
Repayment of long-term debt…………………………………………………………….
Dividends paid to minority shareholders…………………………………………………
Issuance of convertible perpetual preferred stock, net of issuance costs…………………
Issuance of common stock…………………………………………………………………
Repurchase of common stock………………………………………………………………
Dividends paid on convertible perpetual preferred stock…………………………………
Dividends paid on common stock…………………………………………………………
Other……………………………………………………………………………................
Net cash used by financing activities of continuing operations…………………………
—
40,761
1,029
26,908
45,987
20,480
822
(6,579)
—
8,173
(78,958)
(16,870)
2,029
(70,367)
(6,088)
99,066
(35,656)
(9,658)
68,848
—
15,084
3,500
42,118
59,934
—
(104)
—
37
(111,073)
(14,850)
(45,938)
—
(111,994)
145
41,383
1,857
22,323
(15,168)
19,713
(2,816)
607
12,915
5,257
(25,980)
39,934
(13,148)
(3,028)
(112,578)
90,572
(27,704)
(58,889)
—
26,556
23,206
12,846
(23,985)
(19,957)
(164,000)
—
—
24,372
(16,700)
(14,850)
(48,602)
(981)
36,059
46,423
1,882
31,822
(1,416)
(654)
(6,660)
(653)
30,890
7,837
(81,254)
97,115
6,474
(1,141)
34,858
245,934
(25,178)
—
—
385,545
7,302
—
367,669
(140,406)
(208,530)
(1,893)
19,478
50,958
—
(14,685)
(45,423)
826
(240,718)
(339,675)
38
UNIVERSAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS—(Continued)
Cash Flows From Discontinued Operations:
Net cash provided by operating activities of discontinued operations…………………… $
Net cash used by investing activities of discontinued operations…………………………
Net cash used by financing activities of discontinued operations……...…………………
Net cash provided by discontinued operations………………………..…………………
Effect of exchange rate changes on cash……………………………………………………………
Net increase (decrease) in cash and cash equivalents…………………...…………………………
Cash and cash equivalents of continuing operations at beginning of year…………………………
Cash and cash equivalents of discontinued operations at beginning of year………………………
Less: Cash and cash equivalents of discontinued operations at end of year………………………
Cash and Cash Equivalents at End of Year…………………………………………………… $
Fiscal Year Ended March 31,
2009
2008
2007
—
—
—
—
(2,634)
26,556
186,070
—
—
$
6,495
$
(17)
(4,957)
1,521
205
(172,405)
358,236
239
—
50,477
(9,589)
(23,068)
17,820
95
291,843
62,486
4,146
239
212,626
$
186,070
$
358,236
Supplemental information—cash paid from continuing operations:
Interest……………………………………………………….............………………… $
Income taxes, net of refunds…………………………………………………………… $
35,457
40,180
$
$
43,606
48,832
$
$
58,064
54,855
Significant non-cash items from investing activities of continuing operations for the fiscal year ended March 31, 2007, included the buyer's assumption of
$153,560 of notes payable and overdrafts with the sale of businesses.
See accompanying notes.
39
UNIVERSAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(in thousands of dollars)
Preferred Stock:
Series B 6.75% Convertible Perpetual Preferred Stock:
Balance at beginning of year…………………….………………… $
Issuance of convertible perpetual preferred
stock, net of issuance costs…………...…………………………
Repurchase of convertible perpetual preferred stock………………
Balance at end of year………………………………………………
Common Stock:
Balance at beginning of year……………………….………………
Issuance of common stock and exercise of stock options…………
Accrual of stock-based compensation…………………………….…
Withholding of shares for grantee income taxes on SAR
exercises and RSU distributions…………………………………
Dividend equivalents on RSUs…………………………………..…
Repurchase of common stock………………………………………
Balance at end of year…………………………………..…………
Retained Earnings:
Balance at beginning of year………………………………………
Net income…………………………………………………………
Cash dividends declared:
Series B 6.75% convertible perpetual preferred stock
($67.50 per share in 2009, 2008, and 2007)…………………
Common stock ($1.82 per share in 2009; $1.78 per
share in 2008; $1.74 per share in 2007)………………………
Dividend equivalents on RSUs………………………………………
Repurchase of common stock……………………………….………
Adoption of measurement timing provisions of FASB
Statement No. 158 for pensions and other postretirement
benefits as of March 31, 2009, net of income taxes………………
Adoption of FASB Interpretation 48 for uncertain
tax positions as of April 1, 2007……………………………...…
Balance at end of year………..…………………………………...…
Accumulated Other Comprehensive Income (Loss):
Balance at beginning of year………………………………..………
From continuing operations:
Translation adjustments, net of income taxes……………………
Foreign currency hedge adjustment, net of income taxes………
Minimum pension liability, net of income taxes…………………
Funded status of pension and other postretirement
2009
Fiscal Year Ended March 31,
2008
2007
213,023
—
—
213,023
206,436
65
4,870
(1,464)
920
(16,790)
194,037
711,655
131,739
(14,850)
(45,938)
(920)
(93,203)
(1,523)
—
686,960
(15,483)
(19,639)
(15,803)
—
$
131,739
(19,639)
(15,803)
—
$
213,024
$
193,546
—
(1)
213,023
176,453
24,373
7,980
—
—
(2,370)
206,436
682,232
119,156
(14,850)
(48,602)
—
(15,411)
—
(10,870)
711,655
(40,976)
18,854
(494)
—
$
119,156
18,854
(494)
—
19,478
—
213,024
120,618
51,593
4,242
—
—
—
176,453
697,987
44,352
(14,685)
(45,422)
—
—
—
—
682,232
(47,280)
8,858
1,615
16,140
$
44,352
8,858
1,615
16,140
benefit plans, net of income taxes…………………………...…
(13,622)
(13,622)
7,133
7,133
—
—
Adjustment for the adoption of balance sheet
recognition provisions of FASB Statement No. 158
for pension and other postretirement benefit plans,
net of income taxes………………………………………..……
From discontinued operations:
Translation adjustments, net of income taxes……………………
Foreign currency hedge adjustment, net of income taxes……...
Minimum pension liability, net of income taxes…………………
Total comprehensive income...………………………………………
Balance at end of year……………………………………….………
Shareholders’ Equity at End of Year………………….………… $
—
—
—
—
—
—
—
82,675
$
—
—
—
—
—
—
—
144,649
$
(28,551)
(4,254)
4,195
8,301
(4,254)
4,195
8,301
79,207
$
(64,547)
1,029,473
(15,483)
1,115,631
$
(40,976)
1,030,733
$
40
UNIVERSAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY—(Continued)
Fiscal Year Ended March 31,
2009
2008
2007
Preferred Shares Outstanding:
Series B 6.75% Convertible Perpetual Preferred Stock:
(in thousands of shares)
Balance at beginning of year…………………………………
Issuance of convertible perpetual preferred stock……………
Repurchase of convertible perpetual preferred stock…..…...
Balance at end of year…………………………………………
220
—
—
220
Common Shares Outstanding:
(in thousands of shares)
Balance at beginning of year……………………….…………
27,162
Issuance of common stock and exercise of
stock options and SARs……………………………………
Repurchase of common stock…………………….………..
Balance at end of year…………………………………………
65
(2,228)
24,999
See accompanying notes.
220
—
—
220
26,949
538
(325)
27,162
200
20
—
220
25,748
1,201
—
26,949
41
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 world’s leading leaf tobacco merchant and processor. The Company conducts business in more than 30 countries,
primarily in major tobacco-growing regions of the world.
Universal previously owned operations in lumber and building products and in agri-products. The lumber and
building products businesses, along with a portion of the agri-products operations, were sold during the fiscal year ended
March 31, 2007. The remaining agri-products operations were sold during the fiscal year ended March 31, 2008. The
lumber and building products operations and the agri-products operations are reported as discontinued operations for all
applicable periods in the accompanying financial statements. Note 2 provides additional discussion of these discontinued
operations.
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. 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 received
dividends totaling $8.7 million in fiscal year 2009, $9.2 million in fiscal year 2008, and $7.7 million in fiscal year 2007, from
companies accounted for under the equity method.
One of Universal’s operating subsidiaries has an ownership interest in a joint venture formed for the purpose of
buying and processing tobacco in one of its primary markets. The venture is classified as a variable interest entity and is
included in the Company’s consolidated financial statements because the subsidiary is the primary beneficiary of the venture.
The venture is not material to the Company’s consolidated results of operations or financial position, and the Company had
no other investments that were considered variable interest entities for any period in the accompanying financial statements.
The Company has 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, and
is accounting for the investment using the cost method, as required under accounting guidance. The investment is reported in
investments in unconsolidated affiliates. The investment in Zimbabwe operations was approximately $1.8 million at March
31, 2009 and $3.8 million at March 31, 2008. This investment is included in segment assets for flue-cured and burley leaf
tobacco operations – Other Regions in Note 16. In addition to the investment, the Company has a net foreign currency
translation loss associated with 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.
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
test 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 uses discounted cash flow
42
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
models. 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 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 proportionate share of 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 income tax expense.
The following table provides a reconciliation of equity in the pretax earnings of unconsolidated affiliates, as reported
in the consolidated statements of income to 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, 2009, 2008 and 2007:
Unconsolidated Affiliates
Fiscal Year Ended March 31,
2009
2008
2007
Equity in pretax earnings reported in the consolidated statements of income…………………… $
Equity in income taxes……………………………………………………………………………
Equity in net income………………………………………………………………………………
Less: Dividends received on investments(a)………………………………………………………
Equity in net income, net of dividends, reported in the consolidated statements
of cash flows……………………………………………………………………………………… $
20,543
$
13,500
$
5,284
15,259
(8,680)
2,943
10,557
(11,164)
14,235
2,275
11,960
(11,307)
6,579
$
(607)
$
653
(a) In accordance with FASB Statement No. 95, 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 from continuing operations based on earnings available to
common shareholders after payment of dividends on the Company’s Series B 6.75% Convertible Perpetual Preferred Stock.
The calculation uses the weighted average number of common shares outstanding during each period. Diluted earnings per
share from continuing operations is computed in a similar manner using the weighted average number of common shares and
dilutive potential common shares outstanding. Dilutive potential common shares are outstanding dilutive stock options and
stock appreciation rights that are assumed to be exercised, unvested restricted share units and performance share awards that
are assumed to be fully vested and paid out in shares of common stock, and shares of convertible perpetual preferred stock
that are assumed to be converted when the effect is dilutive. In periods when the effect of the convertible perpetual preferred
stock is dilutive and these shares are assumed to be converted into common stock, dividends paid on the preferred stock are
excluded from the calculation of diluted earnings per share from continuing operations.
In periods when the results from discontinued operations reflect a loss, the effect of dilutive potential common
shares is antidilutive to the per-share amount of that loss. Under the applicable financial reporting guidance, that antidilutive
effect is shown if the effect on earnings per share from continuing operations for the period is dilutive.
The calculations of earnings per share for the fiscal years ended March 31, 2009, 2008, and 2007, are provided in
Note 5.
43
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Cash, Cash Equivalents, and Short-Term Investments
All highly liquid investments with a maturity of three months or less at the time of purchase are classified as cash
equivalents. Short-term investments represent securities with a maturity exceeding three months at the time of purchase. The
market value of all short-term investments held at March 31, 2008, approximated cost and consisted primarily of commercial
paper and certificates of deposit.
Advances to Suppliers
In some regions where it operates, the Company 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 sheet. Primarily in Brazil, the Company has made long-term
advances to tobacco farmers to finance curing barns and other farm infrastructure. In addition, due to low crop yields and
other factors, in some years 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 the following crop year. The long-term portion of
advances is included in other noncurrent assets in the consolidated balance sheet. 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. Total allowances were $28.2 million at March 31, 2009, and $21.6 million at March 31, 2008, and
were estimated based on the Company’s historical loss information and crop projections. The allowances were increased by
provisions for estimated uncollectible amounts of approximately $26.9 million in fiscal year 2009, $22.3 million in fiscal
year 2008, and $31.8 million in fiscal year 2007. These provisions are included in selling, general, and administrative
expenses in the consolidated statements of income. Interest on advances is recognized as earned; however, interest accrual is
discontinued when an advance is not expected to be fully collected. Advances on which interest accrual had been
discontinued totaled approximately $51.6 million at March 31, 2009, and $54.6 million at March 31, 2008.
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.
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 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, 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 2009, 2008, or 2007.
Goodwill and Other Intangibles
Goodwill and other intangibles include principally the excess of the purchase price of acquired companies over the
net assets. Goodwill is carried at the lower of cost or fair value. The Company uses discounted cash flow models to estimate
the fair value of goodwill. The use of these models 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, which could increase or
decrease any impairment charge related to goodwill.
44
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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. Based on applicable accounting guidance, the Company reallocated goodwill to revised reporting units
during fiscal year 2007 in conjunction with redefining its operating segments. Following the reallocation, a $1.7 million
pretax charge was recorded to write off goodwill that was impaired. No charges for goodwill impairment were recorded in
fiscal years 2009 or 2008.
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 to the discounted value of the estimated future cash flows.
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 not permanently reinvested,
restructuring and impairment costs, and valuation allowances on farmer advances and ICMS tax credits. At March 31, 2009,
the cumulative amount of permanently reinvested earnings of foreign subsidiaries, on which no provision for U.S. income
taxes had been made, was approximately $52 million.
Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) is reported in the consolidated balance sheets and the consolidated
statements of changes in shareholders’ equity and consists of:
2009
March 31,
2008
2007
Translation adjustments
Before income taxes……………………….………….………………………………....……… $
Allocated income taxes…………………………..…………….………………………………
(17,784)
$
12,421
$
2,473
(8,093)
(16,585)
2,059
Foreign currency hedge adjustment
Before income taxes………………………………………………....…………………………
Allocated income taxes…………………………………………….....…….…………………
Funded status of pension and other postretirement benefit plans
Before income taxes………………………………………………….....………………..……
Allocated income taxes……………………………………..………………………………….
(21,330)
7,465
(54,238)
18,867
2,982
(1,044)
3,741
(1,309)
(33,406)
11,657
(44,662)
15,780
Total accumulated other comprehensive loss………………………………………………..…… $
(64,547)
$
(15,483)
$
(40,976)
All of the amounts for fiscal years 2009, 2008, and 2007 in the above table relate to the Company’s continuing
operations. During the fiscal year ended March 31, 2007, in recording the loss on the sale of most of its non-tobacco
operations, the Company recognized in loss from discontinued operations and in net income the following amounts
previously recorded in accumulated other comprehensive loss: foreign currency translation adjustment gains of $13.3
million, less $4.1 million in allocated income taxes; minimum pension liability charges of $12.8 million, less $4.5 million in
allocated income taxes; and foreign currency hedge adjustment losses of $7.2 million, less $2.5 million in allocated income
taxes.
45
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Fair Values of Financial Instruments
The fair values of the Company’s long-term obligations, disclosed in Note 8, have been 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 carrying amount of all other assets and liabilities that qualify as
financial instruments approximates fair value.
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 reduce interest rate 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 is not 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 10.
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 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 $46.0 million in the fiscal year 2009 and net
remeasurement gains of $17.2 million in fiscal year 2008, and $1.4 million in fiscal year 2007.
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 $4.6 in fiscal year 2009, and net transaction
gains of $12.1 million in fiscal year 2008, and $4.5 million in fiscal year 2007.
The Company’s policy is to use the U.S. dollar as the functional currency for its consolidated subsidiaries located in
countries with highly inflationary economies and to remeasure any transactions of those subsidiaries that are denominated in
the local currency. The Company currently operates in only one country, Zimbabwe, whose economy is classified as highly
inflationary under applicable accounting guidance. As discussed above, the operations in Zimbabwe have been
deconsolidated and are accounted for using the cost method.
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. In most cases, customers
request shipment within a relatively short period of time after the tobacco is processed and packed. The customers also
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
46
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
they account for less than 5% of total revenue. 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 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 stock options, stock appreciation rights, restricted shares, restricted share
units and performance share awards, 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 14.
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
Recent Pronouncements Adopted Through March 31, 2009
Effective March 31, 2009, Universal adopted the measurement timing provisions of Financial Accounting Standards
Board (“FASB”) Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit
Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106, and 132(R)” (“SFAS 158”).
These provisions require that the funded status of defined benefit plans be measured as of the balance sheet date, thereby
eliminating the option allowed under the prior guidance, and previously used by the Company, to measure funded status at a
date up to three months before the balance sheet date. To adopt the measurement timing provisions, the Company measured
its pension and other postretirement benefit plans at March 31, 2009, and recorded a direct adjustment to reduce retained
earnings by $1.5 million ($2.3 million before income taxes), reflecting the expense attributable to the intervening three-
month transition period. As required by the guidance, changes in the fair value of plan assets and benefit obligations for the
full fifteen-month period between the fiscal year 2008 and 2009 measurement dates were recognized in other comprehensive
income for fiscal year 2009.
Also effective March 31, 2009, the Company adopted FASB Statement of Financial Accounting Standards No. 161,
“Disclosures about Derivative Instruments and Hedging Activities” (“SFAS 161”). SFAS 161 amends FASB Statement of
Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” and several other
accounting pronouncements to require enhanced disclosures about derivatives and hedging activities that are aimed at
improving the transparency and understanding of those activities for financial statement users. It requires additional
disclosures explaining the objectives and strategies for using derivative instruments, how those instruments and the related
hedged items are accounted for, and how they affect the Company’s financial position, results of operations, and cash flows.
The disclosures required by SFAS 161 are provided in Note 10.
Effective April 1, 2008, Universal adopted FASB Statement of Financial Accounting Standards No. 157, “Fair
Value Measurements” (“SFAS 157”) as it applies to financial assets and financial liabilities. SFAS 157 defines fair value,
establishes a framework for measuring fair value under generally accepted accounting principles, and expands disclosures
about fair value measurements. As originally issued, SFAS 157 also applied to nonfinancial assets and nonfinancial
liabilities; however, the FASB subsequently issued additional guidance that delayed the effective date for those items until
fiscal years beginning after November 15, 2008, except where they are currently required to be recognized or disclosed at fair
value in the financial statements on at least an annual basis. Universal does not have any nonfinancial assets or nonfinancial
liabilities that are required to be recognized or disclosed at fair value on at least an annual basis. The FASB also issued
subsequent guidance to exclude fair value measurements related to leases from the scope of SFAS 157, except where they
relate to leases assumed in a business combination. The adoption of SFAS 157 with respect to the Company’s financial
assets and liabilities did not have a material effect on operating results or financial position. Disclosures about fair value
measurements are provided in Note 11. The Company will adopt SFAS 157 for its nonfinancial assets and liabilities, which
primarily includes assessments of goodwill and long-lived assets for potential impairment, effective April 1, 2009. The
47
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
application of SFAS 157 to those assets and liabilities is not expected to have a material impact on the Company’s financial
statements.
Effective April 1, 2008, the Company also adopted FASB Statement of Financial Accounting Standards No. 159,
“The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No.
115” (“SFAS 159”). SFAS 159 gives companies the option to report certain financial instruments and other items at fair
value on an item-by-item basis (the fair value option) with changes in fair value reported in earnings. The Company did not
elect the fair value option for any financial assets or liabilities that were not already being measured and reported at fair
value; therefore, the adoption of SFAS 159 had no impact on its financial statements.
Universal adopted FASB Interpretation 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), effective
April 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in the financial statements in
accordance with FASB Statement No. 109, “Accounting for Income Taxes.” It requires that positions taken or expected to be
taken in tax returns meet a “more-likely-than-not” threshold based solely on their technical merit in order to be recognized in
the financial statements. It also provides guidance on measuring the amount of a tax position that meets the “more-likely-
than-not” criterion. As a result of adopting FIN 48, the Company recognized a net increase of approximately $10.9 million in
its liability related to uncertain tax positions, which was accounted for as a decrease in the April 1, 2007, balance of retained
earnings. Additional disclosures related to the adoption and application of FIN 48 are provided in Note 6.
Pronouncements to be Adopted in Future Periods
In addition to the above accounting pronouncements adopted through March 31, 2009, the following
pronouncements have been issued and will become effective in fiscal year 2010.
(cid:2) FASB Statement of Financial Accounting Standards No. 141R, “Business Combinations” (“SFAS 141R”),
which requires that companies record assets acquired, liabilities assumed, and noncontrolling interests in
business combinations at fair value, separately from goodwill, as of the acquisition date. This approach differs
from the cost allocation approach provided under previous accounting guidance and can result in recognition of
a gain at acquisition date if the cost to acquire a business is less than the net fair value of the assets acquired,
liabilities assumed, and noncontrolling interests. SFAS 141R also provides new guidance on recording assets
and liabilities that arise from contingencies in a business combination, and it requires that transaction costs
associated with business combinations be charged to expense instead of being recorded as part of the cost of the
acquired business. It is effective for fiscal years beginning after December 15, 2008, which means that
Universal will apply the guidance to any business combinations occurring on or after April 1, 2009.
(cid:2) FASB Statement of Financial Accounting Standards No. 160, “Noncontrolling Interests in Consolidated
Financial Statements – an amendment of ARB No. 51” (“SFAS 160”). SFAS 160 requires that noncontrolling
interests in subsidiaries that are included in a company’s consolidated financial statements, commonly referred
to as “minority interests,” be reported as a component of shareholders’ equity in the balance sheet. It also
requires that a company’s consolidated net income and comprehensive income include the amounts attributable
to both the company’s interest and the noncontrolling interest in the subsidiary, identified separately in the
financial statements. Finally, the new guidance requires certain disclosures about noncontrolling interests in the
consolidated financial statements. SFAS 160 is effective for fiscal years beginning after December 15, 2008.
Universal has various subsidiaries with noncontrolling interests and will begin applying the new guidance in
fiscal year 2010. Adoption of SFAS 160 is not expected to have a material impact on the Company’s financial
statements.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year’s presentation.
48
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE 2. DISCONTINUED OPERATIONS
During fiscal years 2007 and 2008, Universal implemented the following actions to divest all of its non-tobacco
operations:
(cid:2)
(cid:2)
In the quarter ended September 30, 2006, the sale of the Company’s lumber and building products segment and
a portion of its agri-products segment (the “Deli Operations”) was approved, contractually agreed to with the
buyer, and completed.
In December 2006, a plan to sell the remaining businesses in the agri-products segment was approved, and the
businesses were classified as “held for sale.” The sale of one of the agri-products businesses was completed in
January 2007, the sale of another was completed in May 2007, and the assets of the remaining business were
sold in October 2007.
Following these transactions, the Company’s continuing operations consist solely of its worldwide leaf tobacco
business. The operating results of the non-tobacco businesses are reported as discontinued operations for all periods prior to
their divestiture in the accompanying consolidated financial statements.
Sale of Deli Operations
On September 1, 2006, Universal completed the sale of the non-tobacco businesses managed by its wholly-owned
subsidiary, Deli Universal, Inc. (“Deli”). As discussed above, those businesses comprised the Company’s entire lumber and
building products segment and a portion of its agri-products segment. The total value of the transaction was approximately
$565 million. After selling and other expenses, Universal realized a net value of $551 million, consisting of net cash
proceeds of $397 million and the buyer’s assumption of $154 million of debt with the acquired businesses. The Company
recorded a net loss on the sale of $35.0 million.
Sale of Remaining Agri-Products Operations
In December 2006, Universal approved a plan to sell the remaining non-tobacco agri-products businesses that were
not part of the sale of the Deli Operations. A pretax impairment charge of $11.1 million was recorded in the quarter ended
December 31, 2006, to reduce the Company’s aggregate net investment in two of these businesses to estimated fair value less
costs to sell. Based on its consolidated income tax position, the Company did not realize a tax benefit on the loss on the sale
of these businesses and did not record an income tax benefit on the impairment charge. As noted above, the sale of one agri-
products business was completed in January 2007 at a small gain that was not material to the results of operations or financial
condition of the Company. In May 2007 and October 2007, the sales of the other agri-products businesses were completed at
prices approximating their net book values after the impairments recorded in prior periods.
Amounts Reported as Discontinued Operations in the Accompanying Financial Statements
The consolidated statements of income reflect the following income (loss) from discontinued operations, net of
income taxes, for the fiscal years ended March 31, 2008 and 2007:
Fiscal Year Ended March 31,
2008
2007
Operating results of discontinued operations, net of income taxes………………………..……………………………… $ (191) $ 8,987
Net gain (loss) on sale of businesses, net of income taxes (a)………………………………………………………….…
(33,924)
Impairment charge on businesses held for sale, net of income taxes (b)……………………………………………….…
Loss from discontinued operations, net of income taxes…………………………..…………………………………….. $
(a) The loss on the sale of businesses during fiscal year 2007 primarily reflects the sale of the Deli Operations. The gain on sale of businesses during fiscal
year 2008 reflects the completion of the sales of certain of the Company's other agri-products businesses, final agreement on sales price adjustments for
those transactions, and final payment of selling expenses.
(11,122)
(36,059)
(317)
(145)
363
$
(b) The impairment charges on businesses held for sale during fiscal years 2007 and 2008 represent adjustments necessary to reduce the Company's net
investment in the non-tobacco businesses that were not part of the Deli Operations to estimated fair value less costs to sell.
49
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The operating results for the Company’s discontinued non-tobacco operations for the fiscal years ended March 31,
2008 and 2007, were as follows:
Fiscal Year Ended March 31,
2008 (a)
2007 (a)
Sales and other operating revenues…………………..………….……………………………….......…………………… $
Costs and expenses…………………..………….……………………………….......……………………….........………
Income (loss) before income taxes and other items…………………………..……………………………………........…
Income taxes………………………………………..…..………….……………………………….......…………………
Minority interests, net of income taxes…………………..………….……………………………….......………………
Operating results of discontinued operations, net of income taxes…………………………..…………………………… $
40,351
$
929,835
40,472
(121)
907,656
22,179
—
70
(191)
$
12,346
846
8,987
(a)
Deli Operations were sold in September 2006, and businesses (or the assets thereof) that compose the remaining agri-products operations were sold in
January 2007, May 2007, and October 2007. Results for fiscal year 2008 reflect the agri-product businesses sold in May 2007 for two months and
October 2007 for six months. Results for fiscal year 2007 reflect the Deli Operations for five months, one of the other two agri-products businesses for
ten months, and the remaining agri-products businesses for the full year.
As required under the applicable accounting guidance, the results shown above do not reflect depreciation expense
after July 6, 2006, for the Deli Operations and December 12, 2006, for the other agri-products operations, which are the
respective dates they were classified as “held for sale.” This increased the earnings of the discontinued operations for the
fiscal year ended March 31, 2007, by approximately $3.4 million before taxes and $2.3 million after taxes, but the effect for
the fiscal year ended March 31, 2008 was immaterial. In addition, as permitted under the accounting standards, the Company
allocated interest expense to the discontinued operations for all periods based on the ratio of the net assets of those operations
to consolidated net assets. Total interest allocated in addition to direct third-party interest incurred was $0.3 million and $6.9
million, respectively, for the portions of fiscal years 2008 and 2007 before the businesses were sold.
NOTE 3. RESTRUCTURING AND IMPAIRMENT COSTS
During the fiscal years ended March 31, 2008 and 2007, Universal recorded restructuring and impairment costs
related to several different activities and components of its business operations.
Restructuring Costs Recorded During the Fiscal Year Ended March 31, 2008
During the fiscal year ended March 31, 2008, the Company recorded restructuring costs totaling approximately
$12.9 million before tax and minority interest, $8.1 million after tax and minority interest, or $0.25 per diluted share. These
costs included one-time and special employee termination benefits and pension curtailment losses. The one-time and special
termination benefits were associated with actions taken in several areas of the Company's worldwide operations, as follows:
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
a restructuring and downsizing of operations in Canada in response to declining tobacco production in that country,
affecting ten management and operations employees (approximately $1.1 million before tax);
the release of farm managers and workers employed in flue-cured tobacco growing projects in Zambia and Malawi
that the Company exited at the end of the 2006-2007 crop year (approximately $1.7 million before tax and minority
interest). The costs included termination benefits paid to 28 management and administrative employees, plus small
remuneration payments to approximately 10,500 seasonal workers;
a cost reduction initiative implemented in the Company's operations in Malawi that eliminated 237 positions
(approximately $1 million before tax and minority interest);
a decision to close a sales and logistics office in Belgium and consolidate those operations with other functions
located in Switzerland (approximately $3.2 million before tax); and
reorganizations and cost reduction initiatives at several smaller locations (approximately $0.9 million before tax).
The pension curtailment losses, which totaled $5 million, were associated with actions taken to terminate one
defined benefit pension plan and to freeze another plan, as discussed further in Note 12.
50
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Impairment Costs Recorded During the Fiscal Year Ended March 31, 2007
The Company recorded impairment costs during the fiscal year ended March 31, 2007, totaling approximately $30.9
million before tax, $24.2 million after minority interests and related tax effects, or $0.93 per share, related to flue-cured
tobacco growing projects in Zambia and Malawi, as well as certain equipment and goodwill.
Impairment Charges on Flue-Cured Tobacco Growing Projects in Zambia and Malawi
Beginning in fiscal year 2002, Universal invested in various tobacco growing projects in several African countries.
Some of these projects involved the establishment and operational start-up of medium or large-scale farms. The primary
objective of the projects was to replace a portion of the volumes lost from the significant decline in production of flue-cured
tobacco in Zimbabwe since fiscal year 2000, and thus continue to meet customer demand for African-origin flue-cured
tobacco. Normally, several crop years are required to assess whether a growing project will be able to consistently meet
planned production levels.
During fiscal year 2007, progress toward completion of the latest crop cycle allowed the Company to begin
evaluating those African flue-cured growing projects having sufficient history to make a reliable assessment of longer-term
production potential. In connection with that review, the Company reduced its estimates of expected longer-term crop yields
and related future cash flows for certain growing projects in Zambia, based on actual yields achieved since inception of the
projects and other operational factors. Carrying values of the assets were also reviewed for potential impairment using
undiscounted cash flow estimates. Based on its review, the Company determined that those growing project investments
were impaired and recorded a charge of $12.3 million in the first quarter to reduce the carrying values of the related long-
lived assets to estimated fair value based on the discounted cash flows. Based on the Company’s outlook on its overall tax
position, no income tax benefit was recorded on the charge, and therefore, it reduced the Company’s net income by $12.3
million, or $0.47 per share. Also as a result of this review, the Company recorded a valuation allowance for deferred tax
assets related to prior year operating losses in Zambia that reduced net income by an additional $4.9 million, or $0.19 per
share.
Also as a result of the review of African flue-cured growing projects, the Company decided during the fourth quarter
of fiscal year 2007 to discontinue crop production on a large flue-cured growing project in Malawi and pursue the sale of the
leasehold interest in the land, as well as the related farm improvements, infrastructure, and equipment, to one or more third-
party farmers who would be expected to continue growing tobacco on all or a portion of the land. Based on discussions with
interested and qualified buyers, the Company recorded an impairment charge in that quarter to adjust the carrying value of
the growing project assets to estimated fair value less cost to sell. Together with some small asset impairments in Zambia
related to actions taken to exit flue-cured growing projects there, the charge totaled approximately $12.9 million before tax.
After minority interests and income tax effects, the charge totaled approximately $3.3 million, or $0.13 per share.
The Company completed substantially all activities necessary to exit the flue-cured growing projects in Zambia and
Malawi during fiscal year 2008. Prior to their disposal, the impaired assets of those projects were included in segment assets
for flue-cured and burley leaf tobacco operations – Other Regions in Note 16. Zambia, Malawi, and other African countries
remain important sources of tobacco, and Universal continues to procure tobacco grown by farmers in those origins.
Impairment of Equipment and Goodwill
In the third and fourth quarters of fiscal year 2007, the Company recorded charges for the impairment of certain
equipment and goodwill. In the third quarter, a charge of $1.8 million was recorded for the impairment of leaf tobacco
processing equipment previously used at the Company’s Danville, Virginia processing facility, which was closed in
December 2005. Plans to redeploy that equipment at another Universal processing facility changed, and it was sold. Also in
the third quarter, in conjunction with redefining its operating segments to reflect the continuing operations in the leaf tobacco
business, the Company reallocated its goodwill to revised reporting units based on applicable accounting guidance.
Following the reallocation, a $1.7 million charge was recorded to write off goodwill that was impaired. In the fourth quarter,
a charge of $2.2 million was recorded for the impairment of an aircraft being marketed for sale. On a combined basis, these
charges totaled $5.7 million before tax, $3.7 million after tax, or $0.14 per diluted share.
51
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Restructuring Liability
In addition to the initiatives and actions discussed above, the Company had certain liabilities related to previous
restructuring activities at the beginning of fiscal year 2007. The payment of those liabilities is now substantially complete.
The following is a reconciliation of the Company’s liability for restructuring costs from April 1, 2006 through March 31,
2009:
One-Time
and Special
Termination
Benefits
Other Costs
Total
Balance at April 1, 2006……………………………………………….….……………………… $
4,611
$
Payments during fiscal year 2007………………………………………………………………...…
Balance at March 31, 2007…………..………………………………………………...……………
Costs and payments during fiscal year 2008:
Costs charged to expense............................................................................................................
Payments…………………………………………………………………………..……………
Balance at March 31, 2008…………………………………………………………..……………
Payments during fiscal year 2009……………………………………………………………...
Balance at March 31, 2009……………………………………………………………………..
$
(3,280)
1,331
6,717
(4,962)
3,086
(1,437)
1,649
$
435
$
(245)
190
—
(190)
—
—
—
$
5,046
(3,525)
1,521
6,717
(5,152)
3,086
(1,437)
1,649
The payments for termination benefits were made to 36 employees during fiscal year 2007, approximately 300 full-
time employees and 10,500 seasonal employees during fiscal year 2008, and 23 employees during fiscal year 2009.
Substantially all of the restructuring liability remaining at March 31, 2009, will be paid during fiscal year 2010.
NOTE 4. EUROPEAN COMMISSION FINES AND OTHER LEGAL AND TAX MATTERS
European Commission Fines in Spain
In October 2004, the European Commission (the “Commission”) imposed fines on “five companies active in the raw
Spanish tobacco processing market” totaling €20 million for “colluding on the prices paid to, and the quantities bought from,
the tobacco growers in Spain.” Two of the Company’s subsidiaries, Tabacos Espanoles S.A. (“TAES”), a purchaser and
processor of raw tobacco in Spain, and Deltafina, S.p.A. (“Deltafina”), an Italian subsidiary, were among the five companies
assessed fines. In its decision, the Commission imposed a fine of €108,000 on TAES, and a fine of €11.88 million on
Deltafina. Deltafina did not and does not purchase or process raw tobacco in the Spanish market, but was and is a significant
buyer of tobacco from some of the Spanish processors. The Company recorded a charge of €11.88 million (approximately
$14.9 million at the September 2004 exchange rate) in the second quarter of fiscal year 2005 to accrue the full amount of the
fines assessed against the Company’s subsidiaries.
In January 2005, Deltafina filed an appeal in the Court of First Instance of the European Communities. The
outcome of the appeal is uncertain, and an ultimate resolution to the matter could take several years. The Company has
deposited funds in an escrow account with the Commission in the amount of the fine in order to stay execution during the
appeal process. This deposit is accounted for as a non-current asset.
European Commission Fines in Italy
In 2002, the Company reported that it was aware that the Commission was investigating certain aspects of the leaf
tobacco markets in Italy. Deltafina buys and processes tobacco in Italy. The Company reported that it did not believe that
the Commission investigation in Italy would result in penalties being assessed against it or its subsidiaries that would be
material to the Company’s earnings. The reason the Company held this belief was that it had received conditional immunity
from the Commission because Deltafina had voluntarily informed the Commission of the activities that were the basis of the
investigation.
52
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
On December 28, 2004, the Company received a preliminary indication that the Commission intended to revoke
Deltafina’s immunity for disclosing in April 2002 that it had applied for immunity. Neither the Commission’s Leniency
Notice of February 19, 2002, nor Deltafina’s letter of provisional immunity, contains a specific requirement of
confidentiality. The potential for such disclosure was discussed with the Commission in March 2002, and the Commission
never told Deltafina that disclosure would affect Deltafina’s immunity. On November 15, 2005, the Company received
notification from the Commission that the Commission had imposed fines totaling €30 million (about $40 million at the
March 31, 2009 exchange rate) on Deltafina and the Company jointly for infringing European Union antitrust law in
connection with the purchase and processing of tobacco in the Italian raw tobacco market.
The Company does not believe that the decision can be reconciled with the Commission’s Statement of Objections
and the facts. The Company and Deltafina each have appealed the decision to the Court of First Instance of the European
Communities. Based on consultation with outside legal counsel, the Company believes it is probable that it will prevail in the
appeals process and has not accrued a charge for the fine. Deltafina has provided a bank guarantee to the Commission in the
amount of the fine in order to stay execution during the appeal process.
U.S. Foreign Corrupt Practices Act
As a result of a posting to the Company's Ethics Complaint hotline alleging improper activities that involved or
related to certain of the Company's tobacco subsidiaries, the Audit Committee of the Company's Board of Directors engaged
an outside law firm to conduct an investigation of the alleged activities. That investigation revealed that there have been
payments that may have violated the U.S. Foreign Corrupt Practices Act. These payments approximated $2 million over a
seven-year period. In addition, the investigation revealed activities in foreign jurisdictions that may have violated the
competition laws of such jurisdictions, but the Company believes those activities did not violate U.S. antitrust laws. The
Company voluntarily reported these activities to the appropriate U.S. authorities in March 2006. On June 6, 2006, the
Securities and Exchange Commission notified the Company that a formal order of investigation had been issued.
If the U.S. authorities determine that there have been violations of the Foreign Corrupt Practices Act, or if the U.S.
authorities or the authorities in foreign jurisdictions determine there have been violations of other laws, they may seek to
impose sanctions on the Company or its subsidiaries that may include injunctive relief, disgorgement, fines, penalties, and
modifications to business practices. It is not possible to predict at this time what sanctions the U.S. authorities may seek to
impose. It is also not possible to predict how the government's investigation or any resulting sanctions may impact the
Company's business, financial condition, results of operations, or financial performance, although such sanctions, if imposed,
could be material to its results of operations in any quarter. The Company will continue to cooperate with the authorities in
this matter.
Other Legal and Tax Matters
In addition to the above-mentioned matters, various subsidiaries of the Company are involved in other litigation and
tax examinations incidental to their business activities. While the outcome of these matters cannot be predicted with
certainty, management is vigorously defending the claims and does not currently expect that any of them will have a material
adverse effect on the Company’s 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.
53
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE 5. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share:
Fiscal Year Ended March 31,
2009
2008
2007
Basic Earnings (Loss) Per Share
Numerator for basic earnings (loss) per share
From continuing operations:
Income from continuing operations………………………………………………...…………… $
131,739 $
119,301 $
Less: Dividends on convertible perpetual preferred stock………………………………………
Earnings available to common shareholders from continuing operations……………………
(14,850)
116,889
(14,850)
104,451
80,411
(14,685)
65,726
From discontinued operations:
Loss available to common shareholders from discontinued operations………………………
—
(145)
(36,059)
Net income available to common shareholders………………………………...……..………… $
116,889 $
104,306 $
29,667
Denominator for basic earnings (loss) per share
Weighted average shares outstanding……………..……………………………………………
25,570
27,263
25,935
Basic earnings (loss) per share:
From continuing operations……………………………………………………………………… $
4.57 $
From discontinued operations……………………………………………………………….……
—
Net income per share……………..……………………………………………………………… $
4.57 $
3.83 $
(0.01)
3.82 $
2.53
(1.39)
1.14
Diluted Earnings (Loss) Per Share
Numerator for diluted earnings (loss) per share
From continuing operations:
Earnings available to common shareholders from continuing operations……………………… $
116,889 $
104,451 $
Add: Dividends on convertible perpetual preferred stock (if conversion assumed)……………
14,850
14,850
65,726
—
Earnings available to common shareholders from continuing operations
for calculation of diluted earnings per share…………………………………..………………
131,739
119,301
65,726
From discontinued operations:
Loss available to common shareholders from discontinued operations………..……………
—
(145)
Net income available to common shareholders……………..…………………………………… $
131,739 $
119,156 $
(36,059)
29,667
Denominator for diluted earnings (loss) per share:
Weighted average shares outstanding………….…………………………………………..……
25,570
27,263
25,935
Effect of dilutive securities (if conversion or exercise assumed)
Convertible perpetual preferred stock……..……………………………………………………
Employee share-based awards………...………………………………………………………
Denominator for diluted earnings (loss) per share………………………………………………
4,718
178
30,466
Diluted earnings (loss) per share:
From continuing operations……………….……………………………………………………… $
4.32 $
From discontinued operations……………….……………………………………………………
—
Net income per share……………..……………………………………………………………… $
4.32 $
4,711
212
32,186
3.71 $
(0.01)
3.70 $
—
116
26,051
2.52
(1.39)
1.13
For the fiscal year ended March 31, 2007, conversion of the Company’s outstanding Series B 6.75% Convertible
Perpetual Preferred Stock (“Preferred Stock”) was not assumed since the effect was antidilutive to earnings per share from
continuing operations. In addition, for the fiscal year ended March 31, 2007, the effect of employee share-based awards was
antidilutive to the per-share effect of the loss from discontinued operations. Under the applicable financial reporting
guidelines, this antidilutive effect is shown since these securities are dilutive to earnings per share from continuing operations
for that period.
54
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the fiscal years ended March 31, 2009 and 2008, certain stock appreciation rights and certain stock options
outstanding were not included in the computation of diluted earnings per share because their effect would have been
antidilutive. These shares totaled 507,801 at a weighted-average exercise price of $56.52 for the fiscal year ended March 31,
2009, and 272,800 at a weighted-average exercise price of $62.66 for the fiscal year ended March 31, 2008. No stock options
or stock appreciation rights were antidilutive for the fiscal year ended March 31, 2007.
NOTE 6. INCOME TAXES
Continuing Operations
Income taxes on income from continuing operations consisted of the following:
Fiscal Year Ended March 31,
2008
2007
2009
Current
United States…………………………………………..………………………………….… $
19,622
$
State and local……………………………….……………………….……………………
Foreign……………………………………………………………….………………...….
Deferred
United States………………………………………...………………………………………
State and local……………………………...……………………….………………………
Foreign…………………………………………………..……………………….…………
Total…………………………………………………..……………….……………… $
4,178
20,308
44,108
17,066
123
3,291
20,480
64,588
$
9,449
2,744
31,893
44,086
71
48
19,594
19,713
63,799
$
$
670
1,693
59,417
61,780
(2,453)
1,157
642
(654)
61,126
Foreign taxes include U.S. tax expense on earnings of foreign subsidiaries.
A reconciliation of the statutory U.S. federal rate to the effective income tax rate is as follows:
Fiscal Year Ended March 31,
2008
2007
2009
Statutory tax rate……………….......………………....…………....………………....…………
35.0
%
35.0
%
35.0
%
State income taxes, net of federal benefit……………….......……....………………....…………
Impact of permanently reinvested earnings……………….......………………....…………......
Change in valuation allowance on deferred tax assets……………….......…………………....…
Other, including changes in liabilities recorded for uncertain tax positions……………………
Effective income tax rate……………….......………………....……………....………………..
1.4
0.4
(1.5)
(2.5)
32.8
%
1.0
0.4
(2.4)
1.4
35.4
%
1.3
1.3
4.6
3.1
45.3
%
The U.S. and foreign components of income from continuing operations before income taxes and other items were
as follows:
United States……………….......…………………...….……….....…………………………… $
Foreign……………….......………………….…….………...…………………………………
Total……………….......………………......................................………………………… $
103,791
$
93,358
197,149
$
42,733
$
137,550
180,283
$
(4,235)
139,112
134,877
Fiscal Year Ended March 31,
2008
2007
2009
55
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Significant components of deferred tax liabilities and assets were as follows:
March 31,
2009
2008
Liabilities
Foreign withholding taxes………………………………...……….....………………....………………………………… $
22,910
$
Undistributed earnings......................................................................................................................................................
Foreign currency translation.............................................................................................................................................
Goodwill……………….......……………………...............………………………………………………………………
All other……………….......…………………….......…………...…………………………………………………………
42,887
—
29,805
33,881
Total deferred tax liabilities……………………….......………….…………....…………………………………… $
129,483
$
Assets
Employee benefit plans……………….......…...…………...………....…………………………………………………… $
45,276
$
Foreign currency losses……………….......……….…………..……....……………………………………………………
Book over tax depreciation...............................................................................................................................................
Foreign currency translation………………...............……….……………....……………………………………………
Deferred compensation……………….................………………..……....………………………………………………
Tax credits……………….......…………………..…………...……………………………………………………………
Impairment charges…………………………………………...……………………………………………..…………...…
Valuation allowances on Brazilian farmer advances and ICMS tax credits……………….................………………..…
Net operating loss carryforwards……………….......…………………..…………...………………………………………
All other……………….......………………....……….…….………………………………………………………………
Total deferred tax assets………………..................…………..……....………………………………………………
Valuation allowance……………….......………………..………….....……………………………………………………
29,953
2,478
2,425
4,031
11,703
466
20,498
3,750
44,798
165,378
(3,980)
Net deferred tax assets………………..................…………..……....……………………………………………… $
161,398
$
21,820
16,462
8,140
29,140
20,145
95,707
50,237
—
3,592
—
2,010
31,867
286
13,354
13,537
28,517
143,400
(14,485)
128,915
The Company’s valuation allowance on foreign tax credit carryforwards of $3.0 million at March 31, 2008, was
reversed during fiscal year 2009 based on changes in the expected utilization of those carryforwards. The Company
estimates that it will utilize all of those foreign tax credit carryforwards in its 2009 consolidated tax return. The tax credits
shown above at March 31, 2009, represent $11.7 million of alternative minimum tax credit carryforwards which have an
indefinite life. The net operating loss carryforwards of $3.8 million at March 31, 2009, relate to several foreign jurisdictions.
Approximately $2.4 million of those carryforwards will expire in three to five years, and the remainder have unlimited
carryforward periods.
Combined Income Tax Expense (Benefit)
The combined income tax expense (benefit) allocable to continuing operations, discontinued operations, other
comprehensive income (loss), and direct adjustments to shareholders' equity was as follows:
Fiscal Year Ended March 31,
2008
2007
2009
Continuing operations...............................................................................................................
$
64,588
$
63,799
$
Discontinued operations............................................................................................................
Other comprehensive income (loss)..........................................................................................
Direct adjustments to shareholders' equity……………………………………………….........
Total……………….......………………......................................………………………………
$
—
(26,285)
(848)
37,455 $
—
14,010
(4,316)
73,493 $
61,126
15,275
3,118
—
79,519
56
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Uncertain Tax Positions
Universal adopted Financial Accounting Standards Board Interpretation 48, "Accounting for Uncertainty in Income
Taxes" (FIN 48), effective April 1, 2007, and recorded a cumulative effect adjustment of $10.9 million, increasing its liability
for tax benefits, interest, and penalties related to uncertain tax positions and reducing the balance of retained earnings. A
reconciliation of the beginning and ending balance of the gross liability for uncertain tax positions for the fiscal years ended
March 31, 2009 and 2008, is as follows:
Fiscal Year Ended March 31,
2009
2008
Liability for uncertain tax positions, beginning of year.................................................................................................
$
25,801
$
25,278
Additions:
Related to tax positions for the current year..............................................................................................................
Related to tax positions for prior years......................................................................................................................
Reductions:
Related to tax positions for prior years......................................................................................................................
Due to settlements with tax jurisdictions...................................................................................................................
Due to lapses of statutes of limitations......................................................................................................................
Effect of currency rate movement……………………………………………………………………………………
Liability for uncertain tax positions, end of year........................................................................................................... $
3,277
1,873
—
—
(5,032)
(3,179)
22,740
$
1,027
1,581
(1,252)
(466)
(631)
264
25,801
Of the total liability for uncertain tax positions at March 31, 2009, approximately $16 million could have an effect
on the consolidated effective tax rate if the tax benefits are recognized. The liability for uncertain tax positions includes $4.1
million related to tax positions for which it is reasonably possible that the amounts could change significantly before March
31, 2010. 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. The consolidated statements of income include net expense for interest and
penalties of $3.6 million in fiscal year 2009, $0.2 million in fiscal year 2008, and $0.5 million in fiscal year 2007. The net
expense in fiscal year 2008 included a benefit of approximately $1.2 million of accrued interest due to the favorable
resolution of an uncertain tax position in one of the Company's foreign tax jurisdictions. That accrued interest and the related
amounts accrued for income taxes were recorded prior to the adoption of FIN 48. At March 31, 2009 and 2008, $7.5 million
and $6.0 million, respectively, were accrued for interest and penalties.
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, 2009, the Company's earliest open tax year for U.S. federal
income tax purposes was its fiscal year ended March 31, 2006. Open tax years in state and foreign jurisdictions generally
range from three to six years.
NOTE 7. CREDIT FACILITIES
Five-Year Revolving Bank Credit Facility
In August 2007, the Company entered into a five-year revolving bank credit agreement that provides for a credit
facility of $400 million, maturing in August 2012. Borrowings under the credit facility bear interest at variable rates, based
on either 1) LIBOR plus a negotiated spread (0.8% at March 31, 2009) or 2) the higher of the federal funds rate plus 0.5% or
Prime rate, each plus a negotiated spread (no spread at March 31, 2009). The Company pays a facility fee. Loans made
under the facility may be used to provide general working capital, or for general corporate purposes. At March 31, 2009 and
2008, there were no borrowings outstanding under the revolving credit agreement.
Certain covenants in the revolving credit agreement require the Company to maintain a minimum level of tangible
net worth and observe limits on debt levels. The Company was in compliance with all debt covenants at March 31, 2009.
57
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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, 2009 and 2008, approximately $169 million and $126 million, respectively, were outstanding
under these uncommitted lines of credit. At March 31, 2009, the Company and its consolidated affiliates had unused
uncommitted lines of credit totaling approximately $518 million. The weighted average interest rates on short-term
borrowings outstanding as of March 31, 2009 and 2008, were approximately 4.9% and 4.7%, respectively.
In March 2009, the Company entered into a $50 million committed credit facility in the United States, primarily to
supplement existing credit arrangements during the period when seasonal working capital requirements increase. The facility
expires in December 2009, and borrowings bear interest at variable rates, based on either 1) LIBOR plus a negotiated spread
(3.83% at March 31, 2009) or 2) the higher of the federal funds rate plus 0.5%, Prime rate, or LIBOR plus 1%, each plus a
negotiated spread (2.83% at March 31, 2009). At March 31, 2009, there were no borrowings under the facility.
NOTE 8. LONG-TERM OBLIGATIONS
Long-term obligations consisted of the following:
Medium-term notes due from 2009 to 2013 at various rates………................................................................................. $
Less current portion…………………………………………….................................……..........................................……
Long-term obligations……………………………………………….............................................……………………… $
March 31,
2009
2008
411,308 $
(79,500)
331,808 $
402,942
—
402,942
Notes
The Company had $411 million in medium-term notes outstanding at March 31, 2009. These notes mature at
various dates from September 2009 to October 2013 and were all issued with fixed interest rates. Interest rates on the notes
range from 5.00% to 8.00%. In November 2008, the Company filed a shelf registration statement with the 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.
Other Information
The fair value of the Company’s long-term obligations, including the current portion, was approximately $380
million at March 31, 2009, and $405 million at March 31, 2008.
From time to time, the Company uses interest rate swap agreements to manage its exposure to changes in interest
rates. These agreements typically adjust interest rates on designated long-term obligations from fixed to variable. The swaps
are accounted for as fair value hedges. At March 31, 2009 and 2008, the Company had interest rate swap agreements in place
on $170 million and $95 million, respectively, of long-term debt. The fair value of those swap agreements was an asset of
$11.8 million at March 31, 2009, and $3.4 million at March 31, 2008. Additional disclosures related to the Company’s
interest rate swap agreements are provided in Note 10.
Maturities of long-term debt outstanding at March 31, 2009, by fiscal year, were as follows: 2010 - $79.5 million;
2011 - $15 million; 2012 - $95 million; 2013 - $10 million; and 2014 - $200 million. All long-term debt outstanding at
March 31, 2009, is scheduled to be repaid by the end of fiscal year 2014.
NOTE 9. 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 $19.3
million in fiscal year 2009, $17.0 million in fiscal year 2008, and $12.3 million in fiscal year 2007. Future minimum
58
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
payments under non-cancelable operating leases total $15.8 million in 2010, $11.9 million in 2011, $7.9 million in 2012, $4.2
million in 2013, $3.3 million in 2014, and $8.4 million after 2014.
NOTE 10. DERIVATIVES AND HEDGING ACTIVITIES
As discussed in Note 1, Universal adopted SFAS No. 161, “Disclosures about Derivative Instruments and Hedging
Activities,” effective March 31, 2009. SFAS No. 161 requires enhanced disclosures about derivatives and hedging activities.
The Company 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 permits other instruments and in
some cases exposures are managed using local borrowings. 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 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.
Fair Value Hedging Strategy for Interest Rate Risk
Universal has entered into interest rate swap agreements to manage its exposure to interest rate risk. The
Company’s strategy is to maintain a level of floating rate debt that approximates the interest rate exposure on its committed
inventories. The strategy is implemented by converting a portion of its fixed-rate debt to floating rates. The interest rate
swap agreements allow the Company to receive amounts equal to the fixed interest payments it is obligated to make on the
underlying debt instruments in exchange for making floating-rate interest payments that adjust semi-annually based on
changes in the benchmark interest rate.
The Company’s interest rate swap agreements are designated and qualify as hedges of the exposure to changes in the
fair value of the underlying debt instruments created by fluctuations in prevailing market interest rates. In all cases, the
critical terms of each interest rate swap agreement match the terms of the underlying debt instrument, and there is no hedge
ineffectiveness. At March 31, 2009, the total notional amount of the Company’s receive-fixed/pay-floating interest rate
swaps was $170 million.
Cash Flow Hedging Strategy for Foreign Currency Exchange Rate Risk Related to Forecast Purchases of Tobacco
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 and therefore can adversely impact the gross profit earned on the sale of that tobacco. Since the
Company is able to reasonably forecast the volume, timing, and local currency cost of its tobacco purchases, it has routinely
entered 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 those purchases. This strategy contemplates the Company’s pricing arrangements with key customers
and substantially eliminates the variability of future U.S. dollar cash flows for tobacco purchases for the foreign currency
notional amount hedged. The Company employed this hedging strategy during the fiscal years ended March 31, 2008 and
2009, for tobacco purchases in Brazil, where the large crops and the terms of sale to customers make it particularly desirable
to manage the related foreign exchange rate risk. To date, the strategy has been limited to tobacco purchases in Brazil,
although it could be used with operations in other countries for which forward currency markets exist. The strategy can also
be used for local currency denominated processing costs in addition to tobacco purchases.
The Company did not designate the forward contracts it entered for the 2007-2008 crop year as hedges, and
therefore it recognized all related gains and losses in earnings on a mark-to-market basis each reporting period. For the 2008-
2009 crop cycle, all contracts were designated and qualify as hedges of the future cash flows associated with forecast
purchases of tobacco. As a result, except for insignificant amounts related to any ineffective portion of the hedging strategy,
gains and losses on the forward contracts are recognized in comprehensive income as they occur, but are not recognized in
earnings until the related tobacco is sold to third-party customers.
59
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
During fiscal year 2009, the Company hedged approximately $190 million U.S. dollar notional amount related to
2008-2009 crop tobacco purchases in Brazil, primarily related to customer contractual requirements. As noted above, all of
the related forward contracts were designated and accounted for as cash flow hedges. Purchases of the 2008-2009 crop are
expected to be completed in July 2009, and all forward contracts that were open at March 31, 2009, will mature and be
settled by that time. For all hedge gains and losses recorded in accumulated other comprehensive loss at March 31, 2009, the
Company expects to complete the sale of the tobacco and recognize the amounts in earnings during fiscal year 2010. At
March 31, 2009, 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.
During fiscal year 2008, the Company hedged approximately $240 million U.S. dollar notional amount related to the
2007-2008 crop in Brazil, but they were not designated and accounted for as hedges, so gains and losses on those contracts
were recorded in earnings as they occurred.
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 which 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 at most times of the year, 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. Due to the size of its operations and
the fact that it provides significant financing to farmers for crop production, the Company’s subsidiary in Brazil has
significant exposure to currency remeasurement gains and losses due to fluctuations in exchange rates at certain times of the
year. During fiscal year 2009, the Brazilian currency weakened dramatically from September through December 2008,
generating approximately $41 million in remeasurement losses on net monetary assets held during that period. To manage a
portion of its exposure to currency remeasurement gains and losses in Brazil during fiscal year 2009, the Company entered
into forward contracts to sell the Brazilian currency and buy U.S. dollars 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 for the notional amount hedged in the consolidated
statements of income. Accordingly, the Company did not designate these contracts as hedges for accounting purposes. The
notional amount of these contracts totaled approximately $36 million in U.S. dollars, and all of the contracts matured and
were settled before March 31, 2009. To further mitigate currency remeasurement exposure, the Company’s foreign
subsidiaries may also obtain short-term local currency financing during periods of the year when net monetary assets are at
peak levels. This strategy, while not involving the use of derivative instruments, finances a portion of the local currency
monetary assets with local currency monetary liabilities and hedges a portion of the overall position. During fiscal year
2009, the Company used this strategy for local borrowings that approximated $26 million in U.S. dollars.
The Company has several foreign subsidiaries that 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 the related trade account receivable is outstanding with the customer. The
contracts are not designated as hedges for accounting purposes.
60
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, 2009, 2008, and 2007.
Fair Value Hedges - Interest Rate Swap Agreements
Derivative
Gain (loss) recognized in earnings
Location of gain (loss) recognized in earnings
Hedged Item
Description of hedged item
Gain (loss) recognized in earnings
Location of gain (loss) recognized in earnings
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
Location of gain (loss) reclassified from accumulated other
comprehensive loss into earnings
Ineffective Portion and Early De-designation of Hedges
Gain (loss) recognized in earnings
Location of gain (loss) recognized in earnings
Hedged Item
Description of hedged item
Derivatives Not Designated as Hedges--
Forward Foreign Currency Exchange Contracts
Contracts related to forecast purchases of tobacco in Brazil
Gain (loss) recognized in earnings
Location of gain (loss) recognized in earnings
Contracts related to net local currency monetary assets and
liabilities of subsidiary in Brazil
Gain (loss) recognized in earnings
Location of gain (loss) recognized in earnings
Contracts related to accounts receivable of non-U.S. dollar subsidiaries
Gain (loss) recognized in earnings
Location of gain (loss) recognized in earnings
Total gain (loss) recognized in earnings for forward foreign currency
exchange contracts not designated as hedges
Fiscal Year Ended March 31,
2009
2008
2007
8,366
$
3,990
$
(850)
Interest expense
Fixed rate long-term debt
(8,366)
$
(3,990)
$
850
Interest expense
(22,006)
—
$
$
—
—
$
$
—
—
Cost of goods sold
102
$
—
$
—
Selling, general and administrative expenses
Forecast purchases of tobacco in Brazil
1,583
$
6,864
$
—
Selling, general and administrative expenses
(355)
$
—
$
—
Selling, general and administrative expenses
2,613
$
(298)
$
(1,117)
Selling, general and administrative expenses
3,841
$
6,566
$
(1,117)
$
$
$
$
$
$
$
$
$
For the interest rate swap agreements designated as fair value hedges, since the hedges have no ineffectiveness, the
gain or loss recognized in earnings on the derivative is offset by a corresponding loss or gain on the underlying hedged debt.
61
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the forward foreign currency exchange contracts designated as cash flow hedges of tobacco purchases in Brazil,
the $22 million recorded in accumulated other comprehensive loss during fiscal year 2009 reflects contracts that matured and
were settled through March 31, 2009, as well as contracts that remained open at that date. Assuming continued hedge
effectiveness after year-end, the open contracts could increase or decrease the amount recorded in accumulated other
comprehensive loss. Those amounts are expected to be recognized in earnings as a component of cost of goods sold in fiscal
year 2010 when the related tobacco is expected to be sold to customers. Based on the hedging strategy, as the loss or gain is
recognized in earnings, it is expected to be offset by a change in the direct cost for the tobacco or by a change in sales prices
if the strategy has been mandated by the customer. Generally, margins on the sale of the tobacco will not be significantly
affected.
Effect of Derivative Financial Instruments on the Consolidated Balance Sheets
The table below outlines the effects of the Company’s derivative financial instruments on the consolidated balance
sheets at March 31, 2009 and 2008:
Derivatives in a Fair Value Asset Position
Derivatives in a Fair Value Liability Position
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
Balance
Sheet
Location
Other non-
current assets
Other current
assets
Other current
assets
Fair Value as of March 31,
2009
2008
Balance
Sheet
Location
Long-term
obligations
Fair Value as of March 31,
2009
2008
$
11,808
$
3,442
$
—
$
—
2,397
$
14,205
$
—
3,442
Accounts
payable and
accrued
expenses
Accounts
payable and
accrued
expenses
$
$
$
10,026
10,026
712
712
$
$
$
—
—
1
1
Total
$
$
45
45
$
$
507
507
62
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE 11. FAIR VALUE MEASUREMENTS
As discussed in Note 1, Universal adopted SFAS 157, “Fair Value Measurements,” and SFAS 159, “The Fair Value
Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115,” effective April
1, 2008.
SFAS 157 and Related Disclosures
SFAS 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting
principles, and expands disclosures about fair value measurements. Through March 31, 2009, the application of SFAS 157
was generally limited to financial assets and liabilities because application to most nonfinancial assets and liabilities was
deferred one year by subsequent guidance issued by the FASB. The adoption of SFAS 157 resulted in an increase of
approximately $1.3 million in the fair value liability associated with the Company’s guarantees of bank loans to tobacco
growers in Brazil (see Note 15). SFAS 157 will be adopted for nonfinancial assets and liabilities effective April 1, 2009.
The application of SFAS 157 to those items, which primarily includes assessments of goodwill and long-lived assets for
potential impairment, is not expected to have a material effect on the Company’s financial statements.
Under SFAS 157, 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 under the guidance is based on a fair value hierarchy that distinguishes between observable inputs (i.e., inputs that are
based on market data obtained from independent sources) and unobservable inputs (i.e., inputs that require the Company to
make its own assumptions about market participant assumptions because little or no market data exists). There are three
levels within the fair value hierarchy:
Level
1
2
3
value.
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;
unobservable inputs for the asset or liability.
In measuring the fair value of liabilities, the Company considers the risk of non-performance in determining fair
63
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
At March 31, 2009, 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 table below and are
classified based on how their values were determined under the fair value hierarchy:
Level 1
Level 2
Level 3
Total
156,164
$
—
$
—
$
156,164
Assets:
Money market funds………………………………………..…………… $
Trading securities associated with deferred
compensation plans……………………………………………………
Interest rate swaps…………………………………………………………
Forward foreign currency exchange contracts……………………………
15,468
—
—
Total assets……………….…………………………………………… $
171,632
Liabilities:
Guarantees of bank loans to tobacco growers…………………………… $
Forward foreign currency exchange contracts……………………………
Total liabilities……………….………………………………………… $
—
—
—
—
11,808
2,442
14,250
$
—
10,738
10,738
$
$
—
—
—
—
35,154
—
35,154
$
$
$
15,468
11,808
2,442
185,882
35,154
10,738
45,892
$
$
$
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 quoted market prices (Level 1). The fair values of these investments approximate cost due to the short-
term maturities and the high credit quality of the issuers of the underlying securities.
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 and their underlying securities.
Interest rate swaps
The fair values of interest rate swap contracts 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 fair values of the Company’s guarantees of bank loans to tobacco growers are determined by using internally-
tracked historical loss data for such loans to develop an estimate of future losses under the guarantees outstanding at the
measurement date. The present value of the cash flows associated with those estimated losses is then calculated at a risk-
adjusted interest rate. This approach is sometimes referred to as the “contingent claims valuation method”. Although
historical loss data is an observable input, significant judgment 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. The guarantees of bank
loans to tobacco growers are therefore classified within Level 3 of the fair value hierarchy.
64
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
A reconciliation of the change in the balance of the financial liability for guarantees of bank loans to tobacco
growers (Level 3) for the fiscal year ended March 31, 2009, is as follows:
Balance at April 1, 2008……………………….……………………………….………………………….………………………….………………
$
36,493
Favorable experience in collection of 2007-08 crop year loans…………………………………...…………………………………………………
(3,737)
Change in aggregate guaranteed loan balance due to removal of 2007-08 crop year
loans from the portfolio and addition of 2008-09 crop year loans…………………………………..…………..………………….………………
Change in discount rate and estimated collection period…………………………………..…………………….……………………………………
Currency remeasurement……………………….……………………………………………………...………….………………………….………
5,748
3,465
(6,815)
Balance at March 31, 2009……….………………………………………..…………………….………………………….…………………………
$
35,154
SFAS 159
SFAS 159 gives companies the option to report at fair value certain financial instruments and other items not
otherwise required to be reported at fair value under current accounting guidance. Under SFAS 159, this reporting choice
(the “fair value option”) is made on an item-by-item basis, and changes in fair value following initial application are reported
in earnings. Universal did not elect the fair value option for any financial instruments or other items; therefore, the adoption
of SFAS 159 had no impact on the Company’s financial statements.
NOTE 12. 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 investments and fixed income securities.
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. The health benefits are funded by the Company as
the costs of those benefits are incurred, and the plan design includes cost-sharing features such as deductibles and
coinsurance. The Company funds the life insurance benefits with deposits to a reserve account held by an insurance
company.
During the fourth quarter of fiscal year 2008, the Company took actions to restructure certain employee benefit
arrangements, including terminating a small defined benefit plan and freezing another small plan and replacing it for future
service with a defined contribution plan. These actions resulted in a curtailment loss of approximately $5 million during the
period, as unrecognized prior service costs were recognized as expense. The curtailment loss was reported as a component of
restructuring costs in the consolidated statement of income. The actions affected only two of the Company’s smaller plans,
and it has other defined benefit plans under which employees continue to earn active service benefits. The Company has the
right to amend or discontinue its pension and other postretirement benefit plans at any time.
Universal adopted the recognition and disclosure provisions of SFAS 158, effective March 31, 2007, which changed
the manner in which the funded status of the Company's defined benefit plans is reported in the consolidated balance sheet.
Under SFAS 158, actuarial gains and losses and prior service costs continue to be deferred and recognized in expense ratably
over appropriate future periods, but the overfunded or underfunded status of the defined benefit plans is measured as the
difference between the fair value of plan assets and the projected benefit obligation ("PBO"). This difference is recorded as
an asset (if overfunded) or a liability (if underfunded), with a corresponding adjustment to accumulated other comprehensive
loss, net of tax. To reflect the funded status of its plans in the consolidated balance sheet upon adopting SFAS 158, the
Company recorded an adjustment to increase its liability for pension and other postretirement benefits by $43.5 million,
decrease intangible pension assets by $0.7 million, and increase accumulated other comprehensive loss by $28.6 million, net
of tax. Following adoption, as the net unrecognized actuarial loss and unrecognized prior service costs are recognized in net
periodic benefit cost in the consolidated statements of income, those amounts are reclassified from accumulated other
comprehensive loss.
65
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Effective March 31, 2009, the Company adopted the measurement timing provisions of SFAS 158, which require
that the funded status of defined benefit plans be measured as of the balance sheet date. Previously, companies were allowed
to measure funded status up to three months before the balance sheet date. As a result of adopting the new measurement
timing provisions, the Company changed its annual measurement date from December 31 to March 31. As required by SFAS
158, the benefit expense related to the intervening three-month transition period, which totaled $2.3 million before income
taxes and $1.5 million after tax, was recorded as a direct adjustment to retained earnings.
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 were
as follows:
Discount rates:
Pension Benefits
2008
2009
2007
Other Postretirement Benefits
2008
2007
2009
Benefit cost for plan year...........................................
Benefit obligation at end of plan year……................
6.00 %
7.75 %
5.75 %
6.00 %
Expected long-term return on plan assets:
Benefit cost for plan year...........................................
Benefit obligation at end of plan year…....................
Salary scale........................................................................
Healthcare cost trend rate..................................................
7.75 %
7.75 %
5.00 %
N/A
7.75 %
7.75 %
5.00 %
N/A
5.50 %
5.75 %
7.75 %
7.75 %
5.00 %
N/A
6.00 %
7.75 %
5.75 %
6.00 %
4.30 %
4.30 %
5.00 %
8.50 %
4.30 %
4.30 %
5.00 %
8.50 %
5.50 %
5.75 %
4.30 %
4.30 %
5.00 %
9.50 %
The discount rate used to calculate the benefit obligation at March 31, 2009 increased significantly from the
previous year, reflecting higher yields on corporate bonds used to derive the rate. Those higher bond yields primarily reflect
an expansion of credit spreads in the financial markets. The healthcare cost trend rate used by the Company was revised as of
March 31, 2009 to reflect an updated study of medical cost inflation rates. The revised trend assumption of 8.50% in 2009
declines gradually to 4.50% in 2028.
66
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Benefit Obligations, Plan Assets, and Funded Status
The following table reflects the changes in benefit obligations and plan assets in 2009 and 2008, and the funded
status of the plans at March 31, 2009 and 2008:
Pension Benefits
March 31,
Other Postretirement Benefits
March 31,
2009
2008
2009
2008
Actuarial present value of benefit obligation:
Accumulated benefit obligation...…………………….......……….............. $
Projected benefit obligation...…..…………………….......………..............
$
176,992
199,907
$
210,977
244,689
Change in projected benefit obligation:
Projected benefit obligation, beginning of year measurement date………… $
Service cost……………………….……........………..................................
Interest cost………………………….............………..................................
Measurement date change……………………………………………….
Effect of discount rate change……………….……….......………...............
Foreign currency exchange rate changes……………….……………………
Settlements……………………….....……………….................................…
Other…………………...………….……….................................................
Benefit payments………………………….................…….......……….......
Projected benefit obligation, end of year measurement date........................ $
Change in plan assets:
Plan assets at fair value, beginning of year measurement date……………… $
Actual return on plan assets……………………….......……………………
Employer contributions…………………...…….......………………………
Settlements…………………...……………………………….……..........…
Foreign currency exchange rate changes…………………………………..
Benefit payments…………………….….…...….......……….......................
Plan assets at fair value, end of year measurement date............................... $
Funded status:
244,689
4,724
13,594
1,496
(29,988)
(5,424)
(6,064)
3,070
(26,190)
199,907
183,286
(52,178)
37,533
(6,064)
(4,307)
(26,190)
132,080
$
$
$
$
239,494
5,731
13,139
—
(7,008)
5,373
(3,149)
9,231
(18,122)
244,689
165,416
9,975
25,862
(3,149)
3,304
(18,122)
183,286
$
$
$
$
—
38,420
48,659
787
2,790
846
(5,033)
—
—
(4,900)
(4,729)
38,420
3,801
216
4,399
—
—
(4,729)
3,687
Funded status of the plans, end of year measurement date........................... $
Contributions after measurement date…………………...…………………
Funded status of the plans, end of fiscal year……………………………… $
(67,827)
—
(67,827)
$
$
(61,403)
1,862
(59,541)
$
$
(34,733)
—
(34,733)
$
$
$
$
$
$
$
—
48,659
55,203
961
3,021
—
(1,024)
—
—
(5,412)
(4,090)
48,659
3,942
187
3,762
—
—
(4,090)
3,801
(44,858)
761
(44,097)
67
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Based on the guidance in SFAS 158, the funded status of the plans at the end of fiscal years 2009 and 2008 was
reported in the consolidated balance sheets as follows:
Pension Benefits
March 31,
Other Postretirement Benefits
March 31,
2009
2008
2009
2008
Current liability (included in accounts payable and accrued
expenses)………………………………………………………………… $
(7,738)
$
(11,212)
$
(3,808)
$
(4,148)
Non-current liability (reported as pensions and other
postretirement benefits)……………………………………………………
Amounts recognized in the consolidated balance sheets…………...……… $
(60,089)
(67,827)
$
(48,329)
(59,541)
$
(30,925)
(34,733)
$
(39,949)
(44,097)
Additional information on the funded status of the Company’s plans as of the respective measurement dates for the
fiscal years ended March 31, 2009 and 2008, is as follows:
Pension Benefits
March 31,
Other Postretirement Benefits
March 31,
2009
2008
2009
2008
For plans with a projected benefit obligation in excess of
plan assets:
Aggregate projected benefit obligation………………..…………..……… $
197,847
$
239,868
$
38,420
$
Aggregate fair value of plan assets……………..………………..…………
129,664
178,243
3,687
For plans with an accumulated benefit obligation in
excess of plan assets:
Aggregate accumulated benefit obligation…………...…………..………
Aggregate fair value of plan assets……………………………………..…
171,825
126,279
42,032
4,660
N/A
N/A
48,659
3,801
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
2009
2008
2007
2009
2008
2007
Components of net periodic
benefit cost:
Service cost………………………………… $
4,724
$
5,731
$
5,848
$
787 $
961 $
Interest cost……………………………….
Expected return on plan assets…………..…
Curtailment loss……………………………
Settlement cost……………………………
Net amortization and deferral………………
Net periodic benefit cost…………………… $
13,594
(13,380)
13,139
(12,397)
800
5,449
2,245
13,432
$
4,952
634
3,276
15,335
12,806
(10,894)
—
1,345
3,559
2,790
(157)
—
—
3,021
(162)
—
—
(48)
(48)
$
12,664
$
3,372
$
3,772
$
1,068
3,113
(172)
—
—
58
4,067
A one-percentage-point increase in the assumed healthcare cost trend rate would increase the March 31, 2009,
accumulated postretirement benefit obligation by approximately $0.8 million, while a one-percentage-point decrease would
reduce the accumulated benefit obligation by approximately $0.7 million. The aggregate service and interest cost
components of the net periodic postretirement benefit expense for fiscal year 2010 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.
68
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Amounts Included in Accumulated Other Comprehensive Loss
The amounts recognized in other comprehensive income (loss) for fiscal years 2009 and 2008 and the amounts
included in accumulated other comprehensive loss at the end of those fiscal years are shown below. With the change in
benefit plan measurement dates as of March 31, 2009, the changes in net actuarial loss and prior service cost recorded in
other comprehensive income (loss) for fiscal year 2009 reflect the 15-month period from December 31, 2007 to March 31,
2009. Reclassification adjustments represent amounts included in accumulated other comprehensive loss at the beginning of
the year that were recognized in net periodic benefit cost during the year. All amounts shown are before allocated income
taxes.
Pension Benefits
March 31,
Other Postretirement Benefits
March 31,
2009
2008
2009
2008
Change in net actuarial loss:
Net actuarial loss, beginning of year measurement date………………..… $
35,452
$
37,589
$
(3,335)
$
Losses (gains) arising during the year……………..………………..……
Reclassification adjustments during the year…………...…………..……
Net actuarial loss, end of year measurement date…………………………
Change in prior service cost (benefit):
Prior service cost (benefit), beginning of year measurement date…………
Prior service cost (benefit) arising during the year……………..…………
Reclassification adjustments during the year…………...…………..……
Prior service cost (benefit), end of year measurement date………………
37,900
(2,440)
70,912
1,385
(3,619)
(1,166)
(3,400)
943
(3,080)
35,452
3,762
3,229
(5,606)
1,385
(10,330)
—
(13,665)
(95)
—
57
(38)
3,455
(6,790)
—
(3,335)
(144)
—
49
(95)
Total amounts in accumulated other comprehensive loss at end
of year measurement date, before income taxes…………………………… $
67,512
$
36,837
$
(13,703)
$
(3,430)
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
adjustments related to ownership interests in unconsolidated affiliates. The Company expects to recognize approximately
$2.4 million of the net actuarial loss and $0.3 million of the prior service benefit at March 31, 2009, in net periodic benefit
cost during fiscal year 2010.
Allocation of Pension Plan Assets
The Pension Investment Committee of the Board of Directors (the “Committee”) oversees the investment of funds
for the Company’s U.S. defined benefit pension plan which represents 91% of total plan assets and 76% of total PBO. The
Committee has established, and periodically adjusts, target asset allocations for those investments to reflect a balance of the
needs for 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. During fiscal year 2009, the Committee waived the investment allocation policy pending
the results of a current study to determine a new policy. The Company provided additional contributions of $10 million to
the plan in fiscal year 2009 and has added an asset class, high yield securities, to the fixed income category that represents
approximately 10% of plan assets. Although the new policy will be determined later in fiscal year 2010, with the addition of
the new class, and assuming that it replaces equity and fixed income investments in equal amounts, the target allocation
would be: domestic equity securities – 50%, international equity securities – 15%, fixed income securities – 25%, and fixed
income-high yield securities – 10%.
69
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Using the Company’s investment allocation policy prior to the Committee waiver noted above, the weighted–
average target pension asset allocation and target ranges at the March 31, 2009, measurement date and the actual asset
allocations at the March 31, 2009 and December 31, 2007, measurement dates by asset category were as follows:
Asset Category(1)
Target
Allocation
Actual Allocation
March 31,
December 31,
Range
2009
2007
Domestic equity securities…………………...………...........……………...…......
55.0%
49% - 61%
International equity securities…………………...…........……………………...…
Fixed income securities(2)…………………...……….............…………...…........…
Total……………………………………………………………………………
15.0%
13% - 17%
30.0%
100.0%
25% - 35%
39.3%
10.6%
50.1%
100.0%
53.3%
16.5%
30.2%
100.0%
(1) The plan holds no real estate assets.
(2) Actual amounts include high yield securities and cash balances held for the payment of benefits.
With the assistance of a consultant, the Committee selects investment managers to invest the funds within its
guidelines. To provide for diversification, equity fund managers are limited in the level of investment in any single security,
and limits are placed on the minimum size of the issuer of the security. Fixed income managers must invest in U.S. dollar-
denominated bonds, with limitations on the amounts that may be invested in any single issuer. The minimum credit rating of
issuers is BBB, and limits are placed on the amount that can be invested in issuers rated at that level. In addition, certain
speculative transactions are prohibited in either equity or fixed income management, as appropriate. These prohibitions
include margin buying, short selling, and transactions in lettered or restricted stock, puts, and straddles. Managers are
evaluated based on their adherence to the policies, and their ability to exceed certain standards for returns while limiting the
amount of risk over three to five years.
Universal makes regular contributions to its pension and other postretirement benefit plans. As previously noted, for
postretirement health benefits, contributions are in the form of funding those benefits as they are incurred. Due primarily to
the dramatic market declines that significantly reduced the values of equity securities held by the Company’s U.S. pension
plans, additional contributions totaling approximately $10 million were made to the plans during the fourth quarter of fiscal
year 2009. With these additional contributions and regular contributions to be made in future periods, the Company believes
that it is in full compliance with all funding requirements of the Pension Protection Act of 2006. The Company expects to
make contributions of approximately $12 million to its pension plans in fiscal year 2010.
Estimated future benefit payments to be made from the Company’s plans are as follows:
Fiscal Year:
Pension
Benefits
Other
Postretirement
Benefits
2010……………………………………………………………………………………………………………………… $
18,652
$
2011………………………………………………………………………………………………………………………
2012………………………………………………………………………………………………………………………
2013………………………………………………………………………………………………………………………
2014………………………………………………………………………………………………………………………
2015-2019…………………………………………………………………………………………………………………
13,162
14,856
14,487
15,174
92,878
3,809
3,954
3,965
3,916
3,878
18,986
Other Benefit Plans
Universal and several U.S. subsidiaries offer an employer-matched defined contribution savings plan. This plan
replaced an existing employer-matched stock purchase plan during fiscal year 2007 and provides substantially the same
benefits as that plan. Amounts charged to expense for these plans were approximately $1.4 million for fiscal year 2009, $1.5
million for fiscal year 2008, and $1.3 million for fiscal year 2007.
70
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE 13. COMMON AND PREFERRED STOCK
Common Stock
At March 31, 2009, the Company’s shareholders had authorized 100,000,000 shares of its common stock, and
24,999,127 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 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. If
dividends on the Series B 6.75% Convertible Perpetual Preferred Stock (the “Preferred Stock” or “Preferred Shares”) are not
declared and paid for any dividend period, then dividends on the common stock may not be paid until the dividends on the
Preferred Stock have been paid for a period of four consecutive quarters.
On November 7, 2007, Universal’s Board of Directors authorized a program to repurchase up to $150 million of the
Company’s outstanding common shares. The program extends through November 2009. 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 prices. Through March 31, 2009, the Company had repurchased 2,552,995 shares of common
stock at a total cost of approximately $127.8 million, representing a weighted-average price of $50.05 per share.
Convertible Perpetual Preferred Stock
The Company is also authorized to issue up to 5,000,000 shares of preferred stock. In March and April 2006,
220,000 shares of Series B 6.75% Convertible Perpetual Preferred Stock (the “Preferred Stock” or “Preferred Shares”) were
issued under this authorization, and 219,999 shares were issued and outstanding at March 31, 2009. The Preferred Stock has
a liquidation preference of $1,000 per share. Holders of the Preferred Shares are entitled to receive quarterly dividends at the
rate of 6.75% per annum on the liquidation preference when, as, and if declared by the Company’s Board of Directors.
Dividends are not cumulative in the event the Board does not declare a dividend for one or more quarterly periods. Under the
terms of the Preferred Stock offering, the Board is prohibited from declaring regular dividends on the Preferred Shares in any
period in which the Company fails to meet specified levels of shareholders’ equity and net income; however, in that situation,
the Board may instead declare such dividends payable in shares of the Company’s common stock or from net proceeds of
common stock issued during the ninety-day period prior to the dividend declaration. The Preferred Shares have no voting
rights, except in the event the Company fails to pay dividends for four consecutive or non-consecutive quarterly dividend
periods or fails to pay the redemption price on any date that the Preferred Shares are called for redemption, in which case the
holders of Preferred Shares will be entitled to elect two additional directors to the Company’s Board to serve until dividends
on the Preferred Stock have been fully paid for four consecutive quarters.
The Preferred Shares are convertible, at the option of the holder, at any time into shares of the Company’s common
stock at a conversion rate that is adjusted each time the Company pays a dividend on its common stock that exceeds $0.43
per share. The conversion rate at March 31, 2009 was 21.4699 shares of common stock per preferred share, which represents
a conversion price of approximately $46.58 per common share. Upon conversion, the Company may, at its option, satisfy all
or part of the conversion value in cash.
During the period from March 15, 2013 to March 15, 2018, the Company may, at its option, convert the Preferred
Shares into shares of common stock at the prevailing conversion rate if the closing price of the common stock during a
specified period exceeds 135% of the prevailing conversion price. Upon this mandatory conversion, the Company may, at its
option, satisfy all or part of the conversion value in cash. On or after March 15, 2018, the Company may, at its option,
redeem all or part of the outstanding Preferred Shares for cash at the $1,000 per share liquidation preference.
71
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE 14. 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 and its subsidiaries 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 under both the 2002 Executive Stock Plan and the 2007 Stock Incentive Plan are limited to
500,000 shares.
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. Since fiscal year 2006, grants have included restricted stock, RSUs, PSAs,
and stock-settled SARs. Prior to 2006, non-qualified stock options were the primary form of stock-based compensation
awarded, and some of those options remained outstanding at March 31, 2009. Outside directors automatically receive shares
of restricted stock following each annual meeting of shareholders.
Non-qualified stock options and SARs granted under the Plans have an exercise price equal to the market price of a
share of common stock on the date of grant. All stock options currently outstanding under the Plans are fully vested and
exercisable, and they expire ten years after the grant date. SARs granted under the Plans vest in equal one-third tranches one,
two, and three years after the grant date, and expire ten years after the grant date, except that SARs granted after fiscal year
2007 expire on the earlier of three years after the grantee’s retirement date or ten years after the grant date. RSUs awarded
under the Plans vest five 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 three 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. Shares of restricted stock granted to outside directors vest
upon the individual’s retirement from service as a director.
72
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Stock Options and SARs
The following tables summarize the Company’s stock option and SAR activity and related information for fiscal
years 2007 through 2009:
Fiscal Year Ended March 31, 2007:
Outstanding at beginning of year…………………………………………
Granted…………………………………………………………………....
Exercised………………………………………….………………………
Cancelled/expired…………………………………………………………
Forfeited……………………………………………………………………
Outstanding at end of year…………………………………………………
Shares
2,011,782
$
265,500
(1,232,967)
(17,000)
(69,500)
957,815
Fiscal Year Ended March 31, 2008:
Granted………………………………………………………………........
Exercised……………………………………………….............…………
Outstanding at end of year…………………………………………………
272,800
(632,725)
597,890
Fiscal Year Ended March 31, 2009:
Granted……………………………………………………………...........
Exercised………………………………………….………………………
Outstanding at end of year…………………………………………………
Exercisable at end of year…………………………………………………
Expected to vest in future periods…………………………………………
132,000
(10,333)
719,557
432,483
287,074
$
$
$
Weighted-
Average
Exercise
Price
Weighted-
Average
Contractual
Term
(in years)
Aggregate
Intrinsic
Value
43.34
36.03
43.81
38.94
38.21
41.16
62.66
42.10
49.97
51.32
36.14
50.41
48.29
53.61
7.37 $
65
6.67 $
65
8.42 $
—
Fiscal Year Ended March 31,
2008
2007
2009
Total intrinsic value of stock options and/or SARs exercised...................................................... $
Total fair value of stock options and/or SARs vested…………………………………………… $
143
2,283
$
$
12,850
2,026
$
$
10,698
—
Intrinsic value and aggregate intrinsic value in the tables above are based on the difference between the market price
of the underlying shares at the exercise date or balance sheet date, as applicable, and the exercise prices of the stock options
and SARs. The closing market prices used to determine the aggregate intrinsic value at the end of each fiscal year were as
follows: $29.92 at March 31, 2009, $65.53 at March 31, 2008, and $61.35 at March 31, 2007.
73
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 2007
through 2009:
RSUs
Restricted Stock
PSAs
Shares
Fiscal Year Ended March 31, 2007:
Unvested at beginning of year……………
Granted……………………………………
Vested ……………………………………
Forfeited…………………………………
Unvested at end of year…………………
$
67,915
71,909
(7,503)
(8,530)
123,791
Fiscal Year Ended March 31, 2008:
Granted……………………………………
Vested ……………………………………
Unvested at end of year…………………
74,149
(60,163)
137,777
Fiscal Year Ended March 31, 2009:
Granted……………………………………
Vested ……………………………………
Forfeited…………………………………
Unvested at end of year…………………
44,590
(32,203)
(1,034)
149,130
$
Stock-Based Compensation Expense
Weighted-
Average
Grant Date
Fair Value
46.21
36.57
46.00
41.19
40.96
61.87
47.22
49.48
50.28
48.93
48.26
49.84
Weighted-
Average
Grant Date
Fair Value
38.16
35.26
—
—
36.98
49.78
—
39.41
48.01
—
—
41.08
Shares
28,900
20,000
$
—
—
48,900
11,500
—
60,400
14,500
—
—
74,900
$
Weighted-
Average
Grant Date
Fair Value
—
—
—
—
—
—
—
—
51.32
—
—
51.32
$
Shares
—
—
—
—
—
—
—
—
31,600
—
—
31,600
$
Determination of the Grant Date Fair Value of Stock-Based Compensation
As noted above, the Company granted SARs, RSUs, restricted stock, and PSAs during fiscal years 2007 through
2009. The fair value of the RSUs, restricted stock, and PSAs was based on the market price of the common stock on the
grant date. The fair values of the SARs were estimated using the Black-Scholes pricing model and the following
assumptions:
Assumptions:
Expected term…………………………………………………………………………………
5.0 years
5.0 years
6.0 years
Expected volatility……………………………………………………………………………
Expected dividend yield...……………………………………………………………………
Risk-free interest rate...……………………….........…………………………………………
31.3%
3.50%
3.32%
26.1%
2.81%
5.00%
31.6%
4.77%
4.67%
Fiscal Year Ended March 31,
2009
2008
2007
Resulting fair value of SARs and stock options granted…………………………………………… $
11.65
$
14.64
$
8.11
The expected term was based on the Company’s historical stock option exercise data for instruments with
comparable features and economic characteristics. The expected volatility was estimated based on historical volatility of the
Company’s common stock using weekly closing prices. The expected dividend yield was based on the annualized quarterly
dividend rate and the market price of the common stock at grant date. The risk-free interest rate was based on the U.S.
Treasury yield curve in effect at the grant date for securities with a remaining term equal to the expected term of the SARs or
stock options. Since all SAR grants were awarded on the same date in each of the three fiscal years 2007 through 2009, the
fair values shown in the above table represent the weighted-average grant date fair values for those years.
74
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Recognition and Pro Forma Disclosure of 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, 2009, 2008, and 2007, total stock-based compensation
expense and the related income tax benefit recognized were as follows:
Fiscal Year Ended March 31,
2008
2007
2009
Total stock-based compensation expense………………………………………………………… $
Income tax benefit recorded on stock-based compensation expense…………………………… $
4,870
1,704
$
$
7,980
2,793
$
$
4,242
1,485
At March 31, 2009, the Company had $4.9 million of unrecognized compensation expense related to stock-based
awards, which will be recognized over a weighted-average period of approximately 1.3 years. During the fiscal years ended
March 31, 2009, 2008, and 2007, the Company received cash proceeds of $65 thousand, $24.4 million, and $51 million,
respectively, from the exercise of stock options, and realized income tax benefits totaling $28 thousand, $4.3 million, and
$3.6 million, respectively, from those transactions.
NOTE 15. COMMITMENTS AND OTHER MATTERS
Commitments
The Company enters into contracts to purchase tobacco from farmers in a number of the countries in which it
operates. The majority of these contracts are with farmers in Brazil and several African countries. Most contracts cover one
annual growing season, but some contracts with commercial farmers in Africa cover multiple years. Primarily with the
farmer contracts in Brazil, the Company provides seasonal financing to support the farmers’ production of their crops or
guarantees their financing from third-party banks. At March 31, 2009, the Company had contracts to purchase approximately
$656 million of tobacco, $520 million of which represented volumes to be delivered during the coming fiscal year. 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, which totaled approximately $214 million at March 31, 2009. The Company withholds payments due to farmers on
delivery of the tobacco to satisfy repayment of the seasonal or long-term financing it provided to the farmers. As discussed
in more detail below, the Company also has arrangements to guarantee bank loans to farmers, primarily 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 has commitments related to approved capital expenditures and various other
requirements that approximated $28 million at March 31, 2009.
Guarantees and Other Contingent Liabilities
Guarantees of bank loans to growers for crop financing and construction of curing barns or other tobacco producing
assets are industry practice in Brazil and support the farmers’ production of tobacco there. At March 31, 2009, the
Company’s total exposure under guarantees issued by its operating subsidiary in Brazil for banking facilities of farmers in
that country was approximately $104 million, net of the accrual recorded for the fair value of the guarantees. About 60% of
these guarantees expire within one year, and all of the remainder expire within five years. As noted above, the subsidiary
withholds payments due to the farmers on delivery of tobacco and forwards those payments to third-party banks. Failure of
farmers to deliver sufficient quantities of tobacco to the subsidiary to cover their obligations to third-party banks could result
in a liability for the subsidiary under the related guarantee; 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 as
of March 31, 2009, was the face amount, $104 million, including unpaid accrued interest ($165 million as of March 31,
2008). The accrual recorded for the value of the guarantees was approximately $35.2 million and $36.5 million at March 31,
2009 and 2008, respectively. In addition to these guarantees, the Company has other contingent liabilities totaling
approximately $53 million, primarily related to a bank guarantee that bonds an appeal of a 2006 fine in the European Union
(see Note 4).
75
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Major Customers
A material part of the Company’s business is dependent upon a few customers. For the fiscal years ended March 31,
2009, 2008 and 2007, revenue from Philip Morris International, Inc. was approximately $700 million, $500 million, and $500
million, respectively. For the same periods, Japan Tobacco, Inc. accounted for revenue of approximately $550 million, $440
million, and $400 million, respectively, and Imperial Tobacco Group, PLC accounted for revenue of approximately $280
million, $210 million, and $180 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 would 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
$3.5 million and $5.4 million at March 31, 2009 and 2008, respectively. At March 31, 2009 and 2008, accounts receivable
by reportable operating segment were as follows:
March 31,
2009
2008
Flue-cured and burley leaf tobacco operations:
North America………………………………………………...……………………………………………..........…… $
Other Regions…………………….………………………………………………………………….......…….…………
Subtotal………………………………………...…………………………………………........….............…………
Other tobacco operations………………………………………...…………………………………………........…..........
Consolidated accounts receivable……………………………………...…………………………………………........…. $
54,157
$
170,697
224,854
38,529
263,383
$
40,593
158,552
199,145
31,962
231,107
ICMS Tax Credits in Brazil
In recent years, the Company’s operating subsidiary in Brazil paid significant amounts of ICMS (“Imposto Sobre
Circulacao de Mercadorias e Servicos”) tax. ICMS is a value-added tax on the transfer of goods and services between states
in Brazil and is paid when tobacco purchased from farmers outside the state of Rio Grande do Sul is brought into that state
for processing. Payment of the ICMS tax generates tax credits that may be used to offset ICMS tax obligations generated on
domestic sales of processed tobacco and agricultural materials, or they may be sold or transferred to third parties. Since
domestic sales compose only about one-fifth of total sales, the subsidiary has historically generated excess ICMS tax credits
that are offered and sold to other companies, generally at a discount, upon approval from state tax authorities. During fiscal
year 2005, changes in the ICMS tax regulations were implemented to limit the ability of companies to use purchased ICMS
tax credits and to impose new restrictions, including consent from local governmental authorities, on the sale or transfer of
those credits to third parties. As a result of these changes, management determined that it was unlikely to realize, through
use, sale, or transfer, a substantial amount of the unused ICMS tax credits. Based on management's expectations about future
realization, the Brazilian operating subsidiary has recorded a valuation allowance on the ICMS tax credits. At March 31,
2009, the subsidiary held total ICMS tax credits of approximately $24 million, and the related valuation allowance was
approximately $8 million. At March 31, 2008, ICMS tax credits totaled approximately $37 million, and the related valuation
allowance was approximately $3 million. The allowance on ICMS tax credits may be adjusted in future periods based on
market conditions and the subsidiary’s ability to use the excess tax credits or sell or transfer them to third parties.
76
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Statutory Severance Obligation in Malawi
The Malawi Employment Act of 2000 (“the Act”) established a legal obligation for companies operating in Malawi
to pay a statutory severance benefit based on qualified compensation and years of service to employees upon termination of
employment by retirement, death, mutual agreement, or involuntary action by the company. Interpretation of the Act and
actual practice since its original passage have extended this severance benefit to employees if they were not entitled to a
company-sponsored pension benefit or otherwise only to the extent that it exceeded the company-sponsored pension benefit.
The statutory severance benefit has been the subject of court cases in Malawi, and rulings issued by the courts during fiscal
year 2008 interpreted the severance benefit as being fully payable in addition to company-sponsored pensions. Those rulings
also expanded the qualifying compensation on which the severance benefit is based. The Company’s operating subsidiary in
Malawi engaged outside actuaries to calculate its statutory severance obligation based on the court interpretations, and an
additional $7.8 million in severance costs were accrued in the fourth quarter of fiscal year 2008 to increase the total recorded
obligation for statutory severance benefits to $8.8 million. After minority interest and income taxes, the $7.8 million accrual
reduced income from continuing operations and net income by $4.9 million, or $0.15 per diluted share. During fiscal year
2009, the subsidiary continued to accrue statutory severance costs based on actuarial calculations, and the total severance
obligation at March 31, 2009 was approximately $9.4 million. Various groups in Malawi advocate restoring the severance
requirements to their original interpretation because of the adverse effect the court rulings have on businesses and the
possibility that these businesses will terminate their company-sponsored pension benefits. Legislative amendments to the Act
that would change or clarify the law to make eligibility for the benefit consistent with the original practice and interpretation
may be proposed. Should such amendments be considered and become law, a portion of the severance obligation recorded at
March 31, 2009 could be reversed.
Investment in Socotab L.L.C.
Universal has a 49% ownership interest in Socotab L.L.C., a leading processor and leaf merchant of oriental
tobaccos with operations located principally in Europe. Summarized financial information for Socotab L.L.C. for its fiscal
years ended March 31, 2009, 2008, and 2007, is as follows:
Income Statement Information:
Sales…………………..………….……………………………….......…………………… $
Gross profit…………………………..………………………........………………………
Net income…………………………..……………………………………........…………
398,196
$
329,112
$
84,318
33,033
75,475
20,470
307,390
77,234
27,039
Fiscal Years Ended March 31,
2009
2008
2007
Balance Sheet Information:
Current assets………………………………………………....…………………………… $
Property, plant and equipment and other assets……………………………………………
Current liabilities………………………………………………...…………………………
Long-term obligations and other liabilities……………………………………………….
Minority interests………………………………………………..…………………………
293,695
$
68,303
199,517
9,739
338
356,746
78,073
258,370
8,169
484
March 31,
2009
2008
77
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE 16. OPERATING SEGMENTS
Universal’s operations involve selecting, buying, 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 performance of the Company’s tobacco business 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, Special Services, and Oriental. 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. 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.
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 because they also have similar economic
characteristics. North America is reported as an individual operating segment because its economic characteristics are
dissimilar to the other regions, as its operations do not require significant working capital investments for crop financing and
inventory, and toll processing is an important source of its operating income. The Dark Air-Cured, Special Services and
Oriental segments, which have dissimilar characteristics in some of the categories mentioned above, are reported as “other
tobacco operations” because each is below the measurement threshold for separate reporting.
Universal incurs overhead expenses related to senior management, 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 (excluding significant non-recurring charges or credits), plus equity in
the pretax earnings of unconsolidated affiliates.
78
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Reportable segment data as of or for the fiscal years ended March 31, 2009, 2008 and 2007, is as follows:
Sales and Other Operating Revenues
Operating Income
Fiscal Year Ended March 31,
Fiscal Year Ended March 31,
2009
2008
2007
2009
2008
2007
416,899
$
336,170
$
348,926
$
48,010
$
34,379
$
1,848,430
2,265,329
289,330
2,554,659
1,485,304
1,821,474
324,348
2,145,822
1,393,223
1,742,149
265,123
2,007,272
140,476
188,486
41,989
230,475
143,589
177,968
39,960
217,928
40,276
131,841
172,117
36,599
208,716
20,543
13,500
14,235
2,554,659
$
2,145,822
$
2,007,272
$
209,932
$
191,513
$
—
12,915
Segment Assets
March 31,
2008
2009
2007
2009
Goodwill
March 31,
2008
30,890
163,591
2007
Flue-cured and burley leaf
tobacco operations:
North America………………………… $
Other Regions (1)………………………
Subtotal………………………………
Other Tobacco Operations (2)…………….…
Segment total…………………………………
Less:
Equity in pretax earnings of
unconsolidated affiliates (3)……………
Restructuring and
impairment costs (4)……………………
Consolidated total…………………………… $
Flue-cured and burley leaf
tobacco operations:
North America………………………… $
Other Regions (1)………………………
Subtotal………………………………
Other Tobacco Operations (2)…………….…
Segment total…………………………………
Assets of discontinued operations……………
295,908 $
298,015 $
315,852
$
1,534,021
1,829,929
308,247
2,138,176
—
1,589,179
1,887,194
299,567
2,186,761
—
1,675,725
1,991,577
294,808
2,286,385
42,437
— $
100,747
100,747
3,428
104,175
—
— $
101,738
101,738
2,787
104,525
—
—
101,163
101,163
3,014
104,177
—
Consolidated total…………………………… $
2,138,176
$
2,186,761
$
2,328,822
$
104,175
$
104,525
$
104,177
Depreciation and Amortization
Fiscal Year Ended March 31,
Capital Expenditures
Fiscal Year Ended March 31,
2009
2008
2007
2009
2008
2007
Flue-cured and burley leaf
tobacco operations:
North America………………………… $
Other Regions (1)………………………
Subtotal………………………………
Other Tobacco Operations (2)…………….…
Segment and consolidated total……………… $
10,926 $
27,866
38,792
2,998
41,790
$
11,423 $
28,924
40,347
2,893
43,240
$
13,495
$
30,657
44,152
4,153
48,305
$
3,215 $
25,595
28,810
6,846
35,656
$
5,296 $
18,354
23,650
4,054
27,704
$
3,043
17,780
20,823
4,355
25,178
(1)
(2)
(3)
(4)
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 inter-company eliminations. Oriental does not contribute significantly to the
reported amounts for sales and other operating revenues, goodwill, depreciation and amortization, or capital expenditures because its financial
results consist principally of equity in the pretax earnings of an unconsolidated affiliate. The investment in the unconsolidated affiliate is
included in segment assets and was approximately $98.8 million, $106.6 million, and $93.5 million at March 31, 2009, 2008, and 2007,
respectively.
Item is included in segment operating income, but is not included in consolidated operating income.
Item is not included in segment operating income, but is included in consolidated operating income.
79
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Geographic data as of or for the fiscal years ended March 31, 2009, 2008, and 2007, is presented below. Sales and
other operating revenues are attributed to individual countries based on the final destination of the shipment. Long-lived
assets consist of net property, plant, and equipment, goodwill, other intangibles, and certain other non-current assets.
Geographic Data
Sales and Other Operating Revenues
Fiscal Year Ended March 31,
2009
2008
2007
United States………………………………………………………………………………………………… $
370,182
$
358,198
$
Belgium………………………………………………………………………………………………………
Germany……………………………………………………………………………………………………
527,807
187,957
416,148
204,573
364,217
347,576
219,250
All other countries……………………………………………………………………………………………
1,468,713
1,166,903
1,076,229
Consolidated total…………………………………………………………………………………………… $
2,554,659
$
2,145,822
$
2,007,272
United States………………………………………………………………………………………………… $
96,667
$
101,600
$
Brazil…………………………………………………………………………………………………………
Mozambique…………………………………………………………………………………………………
All other countries……………………………………………………………………………………………
158,591
48,679
115,067
165,180
50,686
124,896
Consolidated total…………………………………………………………………………………………… $
419,004
$
442,362
$
113,427
170,388
51,233
135,202
470,250
Long-Lived Assets
Fiscal Year Ended March 31,
2009
2008
2007
80
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE 17. UNAUDITED QUARTERLY FINANCIAL DATA
Unaudited quarterly financial data for the fiscal years ended March 31, 2009 and 2008 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.
Fiscal Year Ended March 31, 2009
Sales and other operating revenues…………….………………………… $
Gross profit……………………………..………....……………..............
Income from continuing operations and net income…………...………..
Earnings available to common shareholders after
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$
506,287
103,034
21,111
$
785,590
155,143
41,782
$
699,144
165,968
53,084
563,638
95,196
15,762
dividends on convertible perpetual preferred stock…………………..…
17,399
38,069
49,372
12,049
Earnings per common share:
Basic…………………………………………………………………...
Diluted………………………………………………………………....
Cash dividends declared per share of convertible perpetual
preferred stock......................................................................................
Cash dividends declared per share of common stock………….….………
Market price range of common stock:
High…………………..………...…………….........................…………
Low…………………..………...…………….........................…………
Fiscal Year Ended March 31, 2008
Sales and other operating revenues…………….………………………… $
Gross profit……………………………..………....……………..............
Income (loss) from:
Continuing operations…………………..………...……………...........
Discontinued operations…………………..………...…………….......
Net income......…………………..………...…………….........................…
Earnings available to common shareholders after
dividends on convertible perpetual preferred stock…………………..…
Earnings (loss) per common share:
Basic:
Continuing operations…………………..………...…………….......
Discontinued operations…………………..………...……………...
Net income......…………………..………...……………..................
Diluted:
Continuing operations…………………..………...…………….......
Discontinued operations…………………..………...……………...
Net income......…………………..………...……………..................
Cash dividends declared per share of convertible perpetual
preferred stock......................................................................................
Cash dividends declared per share of common stock……………………
Market price range of common stock:
High…………………..………...…………….........................…………
Low…………………..………...…………….........................…………
0.65
0.64
16.88
0.45
64.96
45.00
1.50
1.38
16.87
0.45
55.63
44.24
1.98
1.78
16.88
0.46
52.03
29.83
0.48
0.48
16.87
0.46
35.17
25.82
$
450,217
84,168
$
655,330
142,716
$
573,094
127,005
467,181
76,209
18,178
530
18,708
14,995
0.53
0.02
0.55
0.52
0.02
0.54
16.88
0.44
66.60
59.66
40,473
(675)
39,798
50,752
—
50,752
36,086
47,040
1.34
(0.02)
1.32
1.25
(0.02)
1.23
16.87
0.44
62.55
44.48
1.72
—
1.72
1.56
—
1.56
16.88
0.45
54.08
44.85
9,898
—
9,898
6,185
0.23
—
0.23
0.23
—
0.23
16.87
0.45
67.08
45.69
Note: Earnings (loss) 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.
81
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Significant items included in the quarterly results were as follows:
(cid:2) Second Quarter 2009 -- $25.4 million in currency remeasurement losses in Brazil caused by a 19% devaluation
of the local currency against the U.S. dollar during the quarter. The remeasurement losses were recorded on net
monetary assets denominated in the local currency, including trade receivables and payables, advances to
farmers, value-added tax credits, and net deferred income tax assets. The remeasurement losses reduced net
income by $16.5 million, and diluted earnings per share by $0.54.
(cid:2) Third Quarter 2009 – $19.7 million in additional currency remeasurement losses in Brazil caused by a 22%
devaluation of the local currency against the U.S. dollar during the quarter. Like the second quarter, the
remeasurement losses related to net monetary assets denominated in the local currency. They reduced net
income for the third quarter by $12.8 million, and diluted earnings per share by $0.43.
(cid:2) First Quarter 2008 -- $3.3 million in restructuring costs, consisting of severance and voluntary termination
benefits associated with the downsizing of the Company’s operations in Canada, the release of farm managers
and workers employed in flue-cured tobacco growing projects in Zambia and Malawi that the Company exited at
the end of the 2006-2007 crop year, and cost reduction initiatives at several smaller locations. After minority
interest and income taxes, these costs reduced income from continuing operations and net income by $2.3
million, or $0.08 per diluted share.
(cid:2) Fourth Quarter 2008 -- $9.6 million in restructuring costs, consisting of severance costs primarily associated with
a workforce reduction in the Company’s operations in Malawi and a decision to close and consolidate a sales and
logistics office in Europe, as well as curtailment losses associated with actions taken to terminate a small defined
benefit pension plan and freeze another small plan. After minority interests and income taxes, these costs
reduced income from continuing operations and net income by $5.8 million, or $0.21 per diluted share. The
Company’s subsidiary in Malawi also recorded a separate charge of $7.8 million to accrue an obligation
established by recent court rulings that entitle employees to certain statutory severance benefits as discussed in
Note 13. After minority interest and income taxes, this charge reduced income from continuing operations and
net income by $4.9 million, or $0.18 per diluted share. Partially offsetting the above costs was a gain of $6.5
million on the sale of surplus timberland in Brazil that increased income from continuing operations and net
income by $4.3 million, or $0.16 per diluted share.
82
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Universal Corporation
We have audited the accompanying consolidated balance sheets of Universal Corporation (the “Company”) as of March 31,
2009 and 2008, and the related consolidated statements of income, changes in shareholders’ equity, and cash flows for each
of the three years in the period ended March 31, 2009. Our audits also included the financial statement schedule listed in the
Index at Item 15. 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, 2009 and 2008, and the consolidated results of its operations and its cash
flows for each of the three years in the period ended March 31, 2009, 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.
As discussed in Note 1 to the consolidated financial statements, at March 31, 2007 and during fiscal year 2009, the Company
adopted the liability provisions, and measurement date provisions, respectively, of Statement of Financial Accounting
Standards No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans. On April 1, 2007,
the Company adopted Financial Accounting Standard Board Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, an interpretation of SFAS No. 109, Accounting for Income Taxes (FIN 48). In 2007, the Company adopted Statement
of Financial Accounting Standard No. 123(R), Share Based Payment.
We have also 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, 2009, based on criteria established in
Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated May 28, 2009 expressed an unqualified opinion thereon.
Richmond, Virginia
May 28, 2009
/s/ ERNST & YOUNG LLP
83
Report of 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, 2009, based on criteria
established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (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, 2009, 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, 2009 and 2008, and the related consolidated
statements of income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended
March 31, 2009 and our report dated May 28, 2009 expressed an unqualified opinion thereon.
Richmond, Virginia
May 28, 2009
/s/ ERNST & YOUNG LLP
84
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
For the three years ended March 31, 2009, 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 Securities Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported within the time periods specified in the Securities and Exchange Commission’s 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 on Form 10-K. Based on this evaluation, the Company’s
management 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 Securities Exchange Act of 1934. 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, 2009. 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 (“the COSO criteria”).
Based on its assessment, the Company’s management concluded that the Company’s internal control over financial reporting
was effective as of March 31, 2009.
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, 2009. Their report on this audit appears on page 84 of this Annual
Report on Form 10-K.
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.
85
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 2009 Proxy Statement.
The following are executive officers of the Company as of May 29, 2009.
Name
G. C. Freeman, III
W. K. Brewer
D. C. Moore
K. M. L. Whelan
P. D. Wigner
R. M. Peebles
Position
Chairman, President and Chief Executive Officer
Executive Vice President and Chief Operating Officer
Senior Vice President and Chief Financial Officer
Vice President and Treasurer
Vice President, General Counsel, Secretary & Chief Compliance Officer
Controller
Age
46
50
53
62
40
51
There are no family relationships between any of the above officers.
K.M.L. Whelan and R.M. Peebles have been employed by the Company in their listed capacities during the last five
years. G.C. Freeman, III served as General Counsel and Secretary from February 1, 2001, until November 2005, and was
elected Vice President in November 2005, President in December 2006, and Chief Executive Officer effective April 1, 2008.
W.K. Brewer served as President of Universal Leaf North America U.S., Inc. from January 1, 2002 until March 2006 and
was elected Executive Vice President of Universal Leaf Tobacco Company, Incorporated (“Universal Leaf”) in March 2006,
and Vice President of Universal Corporation in August 2007. D.C. Moore was elected Senior Vice President and Chief
Financial Officer effective September 1, 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. P.D. Wigner was elected
Chief Compliance Officer in November 2007, Vice President in August 2007, and General Counsel and Secretary in
November 2005. Mr. Wigner served as Senior Counsel of Universal Leaf from November 2004 until November 2005.
The Company has a Code of Conduct that includes the New York Stock Exchange’s requirements for a “Code of
Business Conduct and Ethics” and the Securities and Exchange Commission’s 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
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 to the extent required by the Securities and Exchange Commission or the New York Stock Exchange.
the “Investor/Corporate Governance” section of
is available
through
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—Executive Compensation, Nominating, and Corporate
Governance Committee,” “Corporate Governance and Committees—Committees of the Board—Audit Committee” of the
Company’s 2009 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 2009 Proxy
Statement, which information is incorporated herein by reference.
86
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Shares of the Company’s common stock are authorized for issuance with respect to the Company’s compensation
plans. The following table sets forth information as of March 31, 2009, with respect to compensation plans under which
shares of the Company’s common stock are authorized for issuance.
Plan Category
Equity compensation plans approved
by shareholders:
1994 Amended and Restated Stock
Option Plan for Non-Employee Directors………….……………
1997 Executive Stock Plan….....…………………...……………
2002 Executive Stock Plan…….…………………………………
2007 Stock Incentive Plan…….…………………………………
Equity compensation plans not
approved by shareholders(4)………….……………………………...
Total…………………………………………...........…………………
Number of Securities to Be
Weighted-Average
Remaining Available
Issued upon Exercise of
Exercise Price of
for Future Issuance
Outstanding Options,
Outstanding Options,
Warrants and Rights
Warrants and Rights
Under Equity
Compensation Plans(1)
Number of Securities
23,000
14,667
678,004
197,720
—
913,391
$
35.59
29.24
51.01
51.26
—
51.62
$
—
—
295,155 (2)
1,785,378 (3)
2,080,533
(1)
(2)
(3)
(4)
Amounts exclude any securities to be issued upon exercise of outstanding options, warrants, and rights.
The 2002 Executive Stock Plan permits grants of stock options and stock appreciation rights, and awards of common stock, restricted stock, and
phantom stock/restricted stock units. All of the 255,200 shares of common stock remaining available for future issuance under that plan are available for
awards of common stock or restricted stock.
The 2007 Stock Incentive Plan permits grants of stock options and stock appreciation rights, and awards of common stock, restricted stock, and phantom
stock/restricted stock units. Of the 1,785,378 shares of common stock remaining available for future issuance under that plan, 417,400 shares are
available for awards of common stock, restricted stock units, or restricted stock.
All of the Company’s equity compensation plans have been approved by shareholders.
Refer also to the caption “Stock Ownership” in the Company’s 2009 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 2009 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 2009 Proxy Statement and such
information is incorporated by reference herein.
Item 14. Principal Accounting Fees and Services
Refer to the caption “Audit Information – Fees of Independent Auditors” and “Audit Information – Pre-Approval
Policies and Procedures” in the Company’s 2009 Proxy Statement, which information is incorporated herein by reference.
87
PART IV
Item 15. Exhibits, Financial Statement Schedules
(a)
The following are filed as part of this Form 10-K:
1. Financial Statements.
Consolidated Statements of Income for the Fiscal Years Ended March 31, 2009, 2008, and 2007
Consolidated Balance Sheets at March 31, 2009 and 2008
Consolidated Statements of Cash Flows for the Fiscal Years Ended March 31, 2009, 2008, and 2007
Consolidated Statements of Changes in Shareholders’ Equity for the Fiscal Years Ended March 31, 2009,
2008, and 2007
Notes to Consolidated Financial Statements of the Fiscal Years Ended March 31, 2009, 2008, and 2007
Report of Independent Registered Accounting Firm
Report of Independent Registered 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 Form
10-K.
(b)
Exhibits
The response to this portion of Item 15 is submitted as a separate section to this Form 10-K.
(c)
Financial Statement Schedules
Schedule II – Valuation and Qualifying Accounts appears on the following page of this Form 10-K. All other
schedules are not required under the related instructions or are not applicable and therefore have been omitted.
88
Schedule II - Valuation and Qualifying Accounts
Universal Corporation
Fiscal Years Ended March 31, 2009, 2008, and 2007
Balance at
Beginning of
Period
Net Additions
(Reversals)
Charged
to Expense
Additions
Charged to
Other
Accounts
Deductions (a)
Balance at
End of
Period
Description
(in thousands of dollars)
Fiscal Year Ended March 31, 2007
Allowance for doubtful accounts
(deducted from accounts receivable
and other noncurrent assets)
$
4,712
$
1,124
$ —
$
(753)
$
5,083
Allowance for supplier accounts
(deducted from advances to suppliers
and other noncurrent assets)
Allowance for recoverable taxes
(deducted from other current assets
and other noncurrent assets)
Fiscal Year Ended March 31, 2008
Allowance for doubtful accounts
(deducted from accounts receivable
28,960
31,822
—
(13,063)
47,719
16,359
—
—
(2,434)
13,925
and other noncurrent assets)
$
5,083
$
3,456
$ —
$
(619)
$
7,920
Allowance for supplier accounts
(deducted from advances to suppliers
and other noncurrent assets)
Allowance for recoverable taxes
(deducted from other current assets
and other noncurrent assets)
Fiscal Year Ended March 31, 2009
Allowance for doubtful accounts
(deducted from accounts receivable)
47,719
22,323
—
(48,457)
21,585
13,925
(9,277)
—
—
4,648
and other noncurrent assets)
$
7,920
$
(913)
$ —
$
(970)
$
6,037
Allowance for supplier accounts
(deducted from advances to suppliers
and other noncurrent assets)
Allowance for recoverable taxes
(deducted from other current assets
and other noncurrent assets)
21,585
26,908
—
(20,329)
28,164
4,648
8,871
—
(1,262)
12,257
(a) Includes direct write-offs of assets and currency remeasurement.
89
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 29, 2009
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.
Signature
Title
Date
/s/ GEORGE C. FREEMAN, III
Chairman, President, Chief Executive Officer, and Director
May 29, 2009
George C. Freeman, III
(Principal Executive Officer)
/s/ DAVID C. MOORE
David C. Moore
Senior Vice President and Chief Financial Officer
May 29, 2009
(Principal Financial Officer)
/s/ ROBERT M. PEEBLES
Robert M. Peebles
Controller
(Principal Accounting Officer)
/s/ JOHN B. ADAMS, JR.
Director
John B. Adams, Jr.
/s/ CHESTER A. CROCKER
Director
Chester A. Crocker
/s/ JOSEPH C. FARRELL
Director
Joseph C. Farrell
/s/ CHARLES H. FOSTER, JR.
Director
Charles H. Foster, Jr.
/s/ THOMAS H. JOHNSON
Director
Thomas H. Johnson
/s/ EDDIE N. MOORE, JR.
Director
Eddie N. Moore, Jr.
90
May 29, 2009
May 29, 2009
May 29, 2009
May 29, 2009
May 29, 2009
May 29, 2009
May 29, 2009
Signature
Title
Date
/s/ JEREMIAH J. SHEEHAN
Director
May 29, 2009
Jeremiah J. Sheehan
/s/ HUBERT R. STALLARD
Director
May 29, 2009
Hubert R. Stallard
/s/ WALTER A. STOSCH
Director
May 29, 2009
Walter A. Stosch
/s/ DR. EUGENE P. TRANI
Director
May 29, 2009
Dr. Eugene P. Trani
91
Exhibit
Number Document
3.1
3.2
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
4.12
10.1
10.2
EXHIBIT INDEX
Amended and Restated Articles of Incorporation, effective August 30, 2007 (incorporated herein by reference to the
Registrant’s Current Report on Form 8-K Registration Statement filed September 6, 2007, File No. 1-652).
Amended and Restated Bylaws (as of March 10, 2006) (incorporated herein by reference to the Registrant’s Annual
Report on Form 10-K for the period ended March 31, 2006, File No. 1-652).
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. 1-652).
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. 1-652).
Distribution Agreement dated September 6, 2000 (including forms of Terms Agreement, Pricing Supplement, Fixed
Rate Note and Floating Rate Note) (incorporated herein by reference to Registrant’s Current Report on Report 8-K
dated September 6, 2000, File No. 1-652).
Form of Fixed Rate Note due December 15, 2010 (incorporated herein by reference to the Registrant’s Current
Report on Form 8-K dated December 15, 2000, File No. 1-652).
Form of Fixed Rate Note due September 15, 2009 (incorporated herein by reference to the Registrant’s Current
Report on Form 8-K dated September 3, 2002, File No. 1-652).
Form of Fixed Rate Note due September 15, 2009 (incorporated herein by reference to the Registrant’s Current
Report on Form 8-K dated September 12, 2002, File No. 1-652).
Form of Fixed Rate Note due September 15, 2009 (incorporated herein by reference to the Registrant’s Current
Report on Form 8-K dated September 24, 2002, File No. 1-652).
Form of Fixed Rate Note due September 26, 2012 (incorporated herein by reference to the Registrant’s Current
Report on Form 8-K dated September 26, 2002, File No. 1-652).
Form of Fixed Rate Note due September 15, 2009 (incorporated herein by reference to the Registrant’s Current
Report on Form 8-K dated October 31, 2002, File No. 1-652).
Form of Fixed Rate Note due September 15, 2009 (incorporated herein by reference to the Registrant’s Current
Report on Form 8-K dated November 4, 2002, File No. 1-652).
Form of Fixed Rate Note due September 15, 2009 (incorporated herein by reference to the Registrant’s Current
Report on Form 8-K dated November 7, 2002, File No. 1-652).
Form of Fixed Rate Note due September 15, 2009 (incorporated herein by reference to the Registrant’s Current
Report on Form 8-K dated November 8, 2002, File No. 1-652).
The Registrant, by signing this Report on Form 10-K, agrees to furnish the Securities and Exchange Commission,
upon its request, a copy of any instrument which defines the rights of holders of long-term debt of the Registrant and
its consolidated subsidiaries, and for any unconsolidated subsidiaries for which financial statements are required to
be filed, and that authorizes a total amount of securities not in excess of 10% of the total assets of the Registrant and
its subsidiaries on a consolidated basis.
Universal Corporation Restricted Stock Plan for Non-Employee Directors (incorporated herein by reference to the
Registrant’s Annual Report on Form 10-K for the fiscal year ended June 30, 1991, File No. 1-652).
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. 1-
652).
1
Exhibit
Number Document
10.3
10.4
10.5
10.6
10.7
10.8
Universal Leaf Tobacco Company, Incorporated Deferred Income Plan (incorporated herein by reference to the
Registrant’s Report on Form 8, dated February 8, 1991, File No. 1-652).
Universal Leaf Tobacco Company, Incorporated Benefit Replacement Plan (incorporated herein by reference to the
Registrant’s Report on Form 8, dated February 8, 1991, File No. 1-652).
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. 1-652).
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, 1998, File No. 1-652).
Universal Leaf Tobacco Company, Incorporated Benefit Restoration Plan Trust, dated June 25, 1997, among
Universal Leaf Tobacco Company, Incorporated, Universal Corporation and Wachovia Bank, N.A., as trustee
(incorporated herein by reference to the Registrant’s Annual Report on Form 10-K for the fiscal year ended June 30,
1997, File No. 1-652).
First Amendment to the Universal Leaf Tobacco Company, Incorporated Benefit Restoration Trust, dated January
12, 1999, between Universal Leaf Tobacco Company, Incorporated and Wachovia Bank, N.A., as trustee
(incorporated herein by reference to Registrant’s Quarterly Report on Form 10-Q for the quarter ended December
31, 1998, File No. 1-652).
10.9
Universal Corporation 1991 Stock Option and Equity Accumulation Agreement (incorporated herein by reference to
the Registrant’s Quarterly Report on Form 10-Q for the quarter ended December 31, 1991, File No. 1-652).
10.10 Amendment to Universal Corporation 1991 Stock Option and Equity Accumulation Agreement (incorporated herein
by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 1992, File No. 1-
652).
10.11 Form of Universal Corporation 1994 Stock Option and Equity Accumulation Agreement (incorporated herein by
reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended December 31, 1994, File No. 1-
652).
10.12 Universal Corporation 1994 Amended and Restated Stock Option Plan for Non-Employee Directors dated October
27, 2003 (incorporated herein by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended
September 30, 2003, File No. 1-652).
10.13 Form of Universal Corporation Non-Employee Director Non-Qualified Stock Option Agreement (incorporated
herein by reference to the Registrant’s Annual Report on Form 10-K for the fiscal year ended June 30, 2000, File
No. 1-652).
10.14 Form of Universal Corporation 1997 Stock Option and Equity Accumulation Agreement, with Schedule of Grants to
named executive officers (incorporated herein by reference to the Registrant’s Quarterly Report on Form 10-Q for
the quarter ended December 31, 1997, File No. 1-652).
10.15 Form of Universal Corporation 1999 Stock Option and Equity Accumulation Agreement, with Schedule of Grants to
Executive Officers (incorporated herein by reference to the Registrant’s Annual Report on Form 10-K for the fiscal
year ended June 30, 2001, File No. 1-652).
10.16 Form of Amendment to Stock Option and Equity Accumulation Agreements dated December 31, 1999 (incorporated
herein by reference to the Registrant’s Annual Report on Form 10-K for the fiscal year ended June 30, 2001, File
No. 1-652).
10.17 Form of Universal Corporation 2000 Special Non-Qualified Stock Option Agreement, with Schedule of Grants and
Exercise Loans to named executive officers (incorporated herein by reference to the Registrant’s Annual Report on
Form 10-K for the fiscal year ended June 30, 2000, File No. 1-652).
2
Exhibit
Number Document
10.18 Form of Amendment to Stock Option and Equity Accumulation Agreements dated March 15, 1999 (incorporated
herein by reference to the Registrant’s Annual Report on Form 10-K for the fiscal year ended June 30, 2001, File
No. 1-652).
10.19 Form of Amendment to Stock Option and Equity Accumulation Agreements dated December 8, 2000 (incorporated
herein by reference to the Registrant’s Annual Report on Form 10-K for the fiscal year ended June 30, 2001, File
No. 1-652).
10.20 Form of Amendment to Stock Option and Equity Accumulation Agreements dated June 11, 2001 (incorporated
herein by reference to the Registrant’s Annual Report on Form 10-K for the fiscal year ended June 30, 2001, File
No. 1-652).
10.21 Form of Amendment to Non-Qualified Stock Option Agreements dated June 11, 2001 (incorporated herein by
reference to the Registrant’s Annual Report on Form 10-K for the fiscal year ended June 30, 2001, File No. 1-652).
10.22 Form of Amendment to 2000 Special Non-Qualified Stock Option Agreements dated June 15, 2001 (incorporated
herein by reference to the Registrant’s Annual Report on Form 10-K for the fiscal year ended June 30, 2001, File
No. 1-652).
10.23 Form of 2001 Non-Qualified Stock Option Agreement, with Schedule of Grants to Executive Officers (incorporated
herein by reference to the Registrant’s Annual Report on Form 10-K for the fiscal year ended June 30, 2002, File
No. 1-652).
10.24 Form of 2002 Stock Option and Equity Accumulation Agreement, with Schedule of Grants to Executive Officers
(incorporated herein by reference to the Registrant’s Annual Report on Form 10-K for the fiscal year ended June 30,
2003, File No. 1-652).
10.25 Form of 2002 Non-Qualified Stock Option Agreement, with Schedule of Grants to Executive Officers (incorporated
herein by reference to the Registrant’s Annual Report on Form 10-K for the fiscal year ended June 30, 2003, File
No. 1-652).
10.26 Form of 2005 Non-Qualified Stock Option Agreement (incorporated herein by reference to the Registrant’s Current
Report on Form 8-K filed June 9, 2005, File No. 1-652).
10.27 Universal Leaf Tobacco Company, Incorporated 1994 Deferred Income Plan, amended and restated as of September
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. 1-652).
10.28 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.
1-652).
10.29 Form of Universal Corporation 1997 Restricted Stock Agreement with Schedule of Awards to named executive
officers (incorporated herein by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended
December 31, 1997, File No. 1-652).
10.30 Form of Universal Corporation Non-Employee Director Restricted Stock Agreement (incorporated herein by
reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended December 31, 1998, File No. 1-
652).
10.31 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. 1-652).
10.32 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. 1-652).
10.33 Universal Corporation 1997 Executive Stock Plan, as amended on August 7, 2003 (incorporated herein by reference
to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2003, File No. 1-652).
3
Exhibit
Number Document
10.34 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. 1-652).
10.35 Credit Agreement dated as of August 31, 2007, among the Registrant, or Borrower; certain domestic subsidiaries of
the Borrower as may from time to time become a party thereto, as Guarantors; the banks named therein and other
financial institutions as may become a party thereto, as Lenders; and Wachovia Bank, National Association, as
Administrative Agent (incorporated herein by reference to the Registrant’s Current Report on Form 8-K filed
September 3, 2007, File No. 1-652).
10.36 Form of Restricted Stock Units Award Agreement (incorporated herein by reference to the Registrant’s Current
Report on Form 8-K filed June 1, 2006, File No. 1-652).
10.37 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. 1-652).
10.38 Form of Stock Appreciation Rights Agreement (incorporated herein by reference to the Registrant’s Current Report
on Form 8-K filed June 1, 2006, File No. 1-652).
10.39 Form Stock Appreciation Rights Agreement (incorporated herein by reference to the Registrant’s Current Report on
Form 8-K filed May 28, 2008, File No. 1-652).
10.40 Form Performance Share Award Agreement (incorporated herein by reference to the Registrant’s Current Report on
Form 8-K filed June 3, 2008, File No. 1-652).
10.41 Form Restricted Stock Unit Award Agreement (incorporated herein by reference to the Registrant’s Current Report
on Form 8-K filed June 3, 2008, File No. 1-652).
10.42 Form Stock Appreciation Rights Agreement (incorporated herein by reference to the Registrant’s Current Report on
Form 8-K filed June 3, 2008, File No. 1-652).
10.43 Form Performance Share Award Agreement (incorporated herein by reference to the Registrant’s Current Report on
Form 8-K filed March 23, 2009, File No. 1-652).
10.44 Purchase and Sale Agreement, dated July 6, 2006, by and between the Registrant, Deli Universal, Inc., NVDU
Acquisition B.V., and N.V. Deli Universal (incorporated herein by reference to the Registrant’s Current Report on
Form 8-K filed July 11, 2006, File No. 1-652).
10.45 Form of Amended Employee Grantor Trust Enrollment Agreement dated December 29, 2006, between Universal
Leaf Tobacco Company, Incorporated and named executive officers (Allen B. King, George C. Freeman, III, and
Hartwell H. Roper) (incorporated herein by reference to the Registrant’s Current Report on Form 8-K filed January
5, 2007, File No. 1-652).
10.46 Universal Corporation 2007 Stock Incentive Plan dated August 7, 2007 (incorporated herein by reference to the
Registrant’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2007, File No. 1-652).
12
21
23
Ratio of Earnings to Fixed Charges and Ratio of Earnings to Combined Fixed Charges and Preference Dividends.*
Subsidiaries of the Registrant.*
Consent of 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.*
4
Exhibit
Number Document
Statement of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350.*
32.2
______
* Filed herewith.
5
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S H A R E H O L D E R I N F O R M A T I O N
A N N U A L M E E T I N G
The Annual Meeting of Shareholders
will be held at the offi ces of the Company,
9201 Forest Hill Avenue, Richmond, Virginia,
on Tuesday, August 4, 2009. A proxy
statement and request for proxies are
included in this mailing to shareholders.
I N D E P E N D E N T A U D I T O R S
Ernst & Young LLP
P.O. Box 680
Richmond, Virginia 23218-0680
I N V E S T O R R E L A T I O N S
Contact:
Karen M. L. Whelan
Vice President and Treasurer
(804) 359-9311
Information Requests:
(804) 254-1813 or
investor@universalleaf.com
D I V I D E N D P A Y M E N T S
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.
S E C F O R M 1 0 - 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.
S T O C K L I S T E D
New York Stock Exchange
S T O C K S Y M B O L
UVV
D I V I D E N D R E I N V E S T M E N T P L A N
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.
T R A N S F E R A G E N T A N D
R E G I S T R A R A N D D I V I D E N D
R E I N V E S T M E N T P L A N A G E N T
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
C E R T I F I C A T I O N S
The Company’s Chief Executive Offi cer
and Chief Financial Offi cer fi led the
certifi cations required by Section 302 of the
Sarbanes-Oxley Act of 2002 with the Securities
and Exchange Commission as exhibits to the
Annual Report on Form 10-K. In addition, the
Company’s Chief Executive Offi cer annually
fi les with the New York Stock Exchange the
corporate governance certifi cation required by
Listing Standard 303A.12. The certifi cation was
submitted, without qualifi cation, as required
after the Company’s 2008 Annual Meeting of
Shareholders.
P.O. Box 25099
Richmond, VA 23260
www.universalcorp.com