2010
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 28,000
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
O P E R A T I O N S
Fiscal Year Ended
March 31, 2010
Fiscal Year Ended
March 31, 2009
Fiscal Year Ended
March 31, 2008
Sales and other operating revenues
$ 2,491,738
$ 2,554,659
$ 2,145,822
Operating income
Income from continuing operations
Net income *
P E R C O M M O N S H A R E
257,209
170,345
168,397
209,932
132,561
131,739
191,513
116,484
119,156
Income from continuing operations—diluted *
$ 5.68
$ 4.32
$ 3.71
Net income—diluted *
Dividends declared
Indicated 12-month dividend rate
Market price at year end
5.68
1.86
1.88
52.69
4.32
1.82
1.84
29.92
3.70
1.78
1.80
65.53
A T Y E A R E N D
Working capital
Shareholders’ equity *
8
6
.
5
2
3
.
4
1
7
.
3
2
5
.
2
$ 1,078,077
$ 954,044
$ 1,028,732
1,122,570
1,029,473
1,115,631
8
.
8
1
0
.
3
1
8
.
2
1
3
5
.
5
6
5
3
.
1
6
7
7
.
6
3
9
6
.
2
5
2
9
.
9
2
)
2
1
.
0
(
8
.
3
0
.
1
0
1
9
0
8
0
7
0
6
0
0
1
9
0
8
0
7
0
6
0
0
1
9
0
8
0
7
0
6
0
Income (Loss) From Continuing
Operations Per Diluted Share *
in dollars
Return on Beginning
Common Equity *
percent
Market Price of
Common Stock
in dollars at end of fi scal year
* Attributable to Universal Corporation after deducting amounts attributable to noncontrolling interests in consolidated subsidiaries.
2 0 1 0 A N N U A L R E P O R T
1
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
C H A I R M E N
E M E R I T U S
Henry H. Harrell
Allen B. King
George C. Freeman, III 1 * 3
Chairman, President, and
Chief Executive Offi cer
Universal Corporation
Jeremiah J. Sheehan 1 4 5 *
Retired Chairman and
Chief Executive Offi cer
Reynolds Metals Company
John B. Adams, Jr. 3 4
President and
Chief Executive Offi cer
Bowman Companies
Hubert R. Stallard 1 2 * 5
Retired President and
Chief Executive Offi cer
Bell-Atlantic Virginia, Inc.,
now known as Verizon Virginia, Inc.
Chester A. Crocker 2 3
Professor of Strategic Studies
Walsh School of Foreign Service
Georgetown University
Robert C. Sledd 2 4
Managing Partner
Pinnacle Ventures, LLC
Charles H. Foster, Jr. 1 3 * 5
Retired Chairman and
Chief Executive Offi cer
LandAmerica Financial
Group, Inc.
Thomas H. Johnson 1 5
Chief Executive Offi cer
The Taffrail Group
Eddie N. Moore, Jr. 2 3 4 *
President
Virginia State University
Dr. Eugene P. Trani 2 4
President Emeritus and University
Distinguished Professor
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
U N I V E R S A L C O R P O R A T I O N
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
W. Keith Brewer
Executive Vice President
and Chief Operating Offi cer
William J. Coronado
Senior Vice President,
Operations
David C. Moore
Executive Vice President
and Chief Financial Offi cer
James A. Huffman
Senior Vice President,
Information & Planning
Ray M. Paul, Jr.
Executive Vice President
Karen M. L. Whelan
Senior Vice President
and Treasurer
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
Karen M. L. Whelan
Vice President and
Treasurer
W. Keith Brewer
Executive Vice President and
Chief Operating Offi cer
William J. Coronado
Vice President
David C. Moore
Senior Vice President and
Chief Financial Offi cer
Preston D. Wigner
Vice President,
General Counsel,
Secretary, and
Chief Compliance Offi cer
Preston D. Wigner
Senior Vice President,
General Counsel,
Assistant Secretary, and
Chief Compliance Offi cer
Orlando Astuti
Managing Director,
Europe Region
Friedrich G. Bossert
Managing Director,
Dark Air-Cured Region
Barry F. Dillehay
Managing Director,
Asia Region
Clay G. Frazier
Managing Director,
North America Region
Charles A. M. Graham
Managing Director,
Africa Region
Airton Hentschke
Managing Director,
South America Region
Jonathan Wertheimer
President,
Socotab, L.L.C.
Robert M. Peebles
Controller
Catherine H. Claiborne
Assistant Secretary
Joseph W. Hearington, Jr.
Corporate Director,
Internal Auditing
Pamela J. Kepple
Corporate Director, Taxes
2 0 1 0 A N N U A L R E P O R T
3
T O O U R S H A R E H O L D E R S
Fiscal year 2010, like 2009, was an excellent year for the Company. We achieved
record earnings of $168 million, up 28% from the $132 million we earned in fi scal year 2009.
Operations in fi scal year 2009 were strong, but our performance was overshadowed by the
recognition of currency-related costs due to the rapid strengthening of the U.S. dollar during
the period. In November 2009, we raised our dividend for the 39th consecutive year, and
during the last two fi scal years, we repurchased common shares worth over $140 million.
In fi scal year 2010, we achieved our goals of increasing earnings per share,
generating economic profi t, maintaining our strong fi nancial position, and effectively
managing our remeasurement and other currency-related risks. The strong performance of
each of our regional operations enabled us to meet those goals. It is truly remarkable for all
regions to do well in a single year given the unpredictable nature of the many factors that
can affect short-term performance, such as weather conditions, customer shipment timing,
supplier delivery timing, and logistics in many regions. Delays in shipments from Africa and
North America this year had a signifi cant effect on earnings and revenues through the fi rst
three quarters of the year. As expected, we experienced a signifi cant catch up in shipments
in the fourth quarter although some remain to be completed in fi scal year 2011. Our Asian
trading business also posted gains on volume increases this year. Our dark tobacco business
had tough comparisons. As we told you last year, we saw increased shipments in the United
States in fi scal year 2009 in anticipation of the CHIP excise tax. In addition, our factory
in Lancaster, Pennsylvania, was shut down for a portion of the year for its expansion and
upgrade. That factory is now back in service and running well. The reduction in U.S. interest
rates helped lower our interest costs by $11 million for the fi scal year.
4
U N I V E R S A L C O R P O R A T I O N
The industry environment over the last several years has become more complex with
continued focus on potential regulation driving quality requirements, perhaps most notably
by the FDA in the United States. In addition, green tobacco costs in the developing world
have escalated rapidly, while our customers continue to face intense global competition
as well as decreasing consumption in some markets. We will focus on fundamentals in
fi scal year 2011 so that we can help our customers prepare for increased regulation while
addressing their cost control requirements.
As we have reported to you, we see a recurrent theme of some manufacturers
wanting to get closer to tobacco farmers for many stated reasons, including political
considerations and potential regulatory compliance. In response, we are working to achieve
effective changes in our business model that are likely to include more structured dealings
with the manufacturers, customized to meet their needs. We welcome those changes
and continue to dedicate our efforts to providing workable business models for all of our
customers.
We have also seen an increased customer focus on costs. For example, we expect
that the contracts for our toll processing business in the United States will be renewed at
lower volumes and under different terms when they expire in May 2011. We will work hard
to replace that volume with business that aligns profi tability with risk, and we will take the
necessary steps to remain competitive in the market. Our goal is to deliver our products
and services at the lowest reasonable cost to our customers, consistent with high quality
standards. But we also believe our prices must provide a fair return on the capital required
to sustain the business and be equitable across the market.
2 0 1 0 A N N U A L R E P O R T
5
We take our customers’ requirements for quality and security of supply very seriously.
Sustainability is critical to our customers, and we believe that we are in the best position
in the industry to reliably provide high quality products at a reasonable cost. We intend to
continue to meet our customers’ needs and deliver adequate returns to our shareholders,
and we believe that we will be successful for several key reasons:
•
We add value for our customers by providing a clearinghouse for the
various grades of tobacco found in every crop. Most of our customers do
not utilize the entire run of the crop, so we provide them with a selection
•
•
•
of the qualities they need for their blends.
We are experts in both sourcing and processing tobacco and are
committed to good agricultural practices.
We believe that we are the low cost producer of high quality products,
and we plan to remain in that position.
Through our professional dealings with farmers, our processing
standards, and our global reach, we provide stability of supply and
quality assurances to our customers.
•
We are accountable to our shareholders and expect to make a
reasonable return on our business investments commensurate with the
degree of risk involved.
•
•
We recognize that, to be successful, we must constantly improve and
adapt our business model.
We are fi nancially strong and are well positioned to succeed in today’s
challenging environment.
6
U N I V E R S A L C O R P O R A T I O N
Our company is nearly 100 years old and has faced many challenges over its
lifetime. I am proud to say that we have successfully met those challenges with integrity
and with loyalty and respect for our customers and our suppliers. Our valued employees
have always provided creative solutions to challenges. Our deep knowledge of the industry
and the breadth of our global operations allow us to create solutions that are effective
and sustainable. Meeting our goals for fi scal year 2011 will take a lot of hard work, but we
welcome the opportunities that the current market environment has created.
Thank you for your continued support of our Company. My colleagues and I will
continue to work hard to deliver strong performance. I would like to thank our customers
and our suppliers for their support and thank every one of our employees for their efforts in
making this a truly great year.
George C. Freeman, III
Chairman, President and Chief Executive Offi cer
2 0 1 0 A N N U A L R E P O R T
7
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
3/05
3/06
3/07
3/08
3/09
3/10
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 2005 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
2005
2006
2007
2008
2009
2010
At March 31
Universal Corporation
$ 100.00
$ 83.57
$ 145.70
$ 160.51
$
76.48
$ 141.32
S & P Midcap 400
Peer Group
100.00
100.00
121.62
79.27
131.89
150.55
122.70
98.52
78.41
62.64
128.65
83.02
8
U N I V E R S A L C O R P O R A T I O N
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, 2010
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:
(cid:3)
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
(cid:3)
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 $885 million at September 30, 2009.
As of May 24, 2010, the total number of shares of common stock outstanding was 24,165,178.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information contained in the 2010 Proxy Statement for the Annual Meeting of Shareholders of the registrant is
incorporated by reference into Part III hereof.
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
[THIS PAGE INTENTIONALLY LEFT BLANK]
UNIVERSAL CORPORATION
FORM 10-K
TABLE OF CONTENTS
PART I
Business...................................................................................................................................................................
Risk Factors.............................................................................................................................................................
Unresolved Staff Comments....................................................................................................................................
Properties.................................................................................................................................................................
Legal Proceedings....................................................................................................................................................
(Removed and Reserved).........................................................................................................................................
PART II
Market for Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities...........................................................................................................
Selected Financial Data...........................................................................................................................................
Management's Discussion and Analysis of Financial Condition and
Results of Operations..........................................................................................................................................
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..................................................................................................................
PART IV
Page
3
8
13
14
15
16
17
19
21
38
40
93
93
93
94
95
95
95
95
Item No.
1.
1A.
1B.
2.
3.
4.
5.
6.
7.
7A.
8.
9.
9A.
9B.
10.
11.
12.
13.
14.
15.
Exhibits, Financial Statement Schedules.................................................................................................................
96
Signatures................................................................................................................................................................
98
2
General
This Annual Report on Form 10-K, which we refer to herein as our Annual Report, contains “forward-looking
statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934, as amended (the “Exchange Act”). Among other things, these statements relate to Universal Corporation’s financial
condition, results of operations and future business plans, operations, opportunities, and prospects. In addition, Universal
Corporation and its representatives may from time to time make written or oral forward-looking statements, including
statements contained in other filings with the Securities and Exchange Commission (the “SEC”) and in reports to
shareholders. These forward-looking statements are generally identified by the use of words such as we “expect,” “believe,”
“anticipate,” “could,” “should,” “may,” “plan,” “will,” “predict,” “estimate,” and similar expressions or words of similar
import. These forward-looking statements are based upon management’s current knowledge and assumptions about future
events and involve risks and uncertainties that could cause actual results, performance, or achievements to be materially
different from any anticipated results, prospects, performance, or achievements expressed or implied by such forward-looking
statements. Such risks and uncertainties include: 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. Tobacco has been our principal focus since our
founding in 1918. 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 $2.5 billion in consolidated revenues and earned approximately $280 million
in total segment operating income in fiscal year 2010. 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.
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:120) 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
our inventory levels to reduce risk during market downturns by enabling us to target our tobacco purchases
against customer purchase indications. Our challenge is to adapt our business model continuously to meet our
customers’ evolving needs while continuing to provide stability of supply and the quality that distinguishes our
product.
3
(cid:120) 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:120) 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. However, industry changes may affect the relative quantities
that we handle. These changes are described elsewhere in Item 7 under “Other Information Regarding Trends
and Management Actions.”
(cid:120) 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:120) Financial strength. We believe that our financial strength is important, because it enables us to fund our
business efficiently and make investments in our business when an appropriate opportunity is identified. It also
affords us financial flexibility in dealing with customer requirements and market changes. 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 SEC. 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 SEC. Access to these filings on our website is 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 Annual Report.
In addition, our Corporate Governance Guidelines, Code of Conduct, and charters for the Audit Committee, the
Executive Committee, the Executive Compensation, Nominating, and Corporate Governance Committee, the Pension
Investment Committee, and the Finance Committee are available free of charge to shareholders and the public through the
“Corporate Governance” section of our website. Printed copies of the foregoing are available to any shareholder upon
written request to our Treasurer at the address set forth on the cover of this Annual Report or may be requested through our
website, www.universalcorp.com.
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, managing just-in-time inventory, 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, 2010, our flue-cured and
burley operations accounted for 90% of our revenues and 86% of our segment operating income.
(cid:3)
4
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 investments in plants and machinery in areas where the tobacco is grown. Processed tobacco that has been properly
packed can be stored by customers for a number of years prior to use, but most processed tobacco is used within two to three
years.
We are a major purchaser and processor in the chief exporting regions for flue-cured and burley tobacco throughout
the world. We estimate that we have historically purchased 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 has historically handled 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 operating presence 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, our expertise in dealing with large numbers of farmers, 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. In many countries outside the United States, we also
provide agronomy services and crop advances of, or for, seed, fertilizer, and other supplies. In Malawi, Zambia, and
Zimbabwe, we also purchase tobacco under auction systems.
Our foreign operations are subject to international business risks, including unsettled political conditions,
expropriation, import and export restrictions, exchange controls, and currency fluctuations. During the tobacco season in
many of the countries listed above, we advance funds, guarantee local loans, or do both, each in substantial amounts, for the
purchase of tobacco. The majority of these seasonal advances and loan guarantees mature in one year or less upon the
farmers’ delivery of contracted tobaccos. Most advances to farmers are denominated in local currency, which is a source of
foreign currency exchange rate risk. Most tobacco sales are denominated in U.S. dollars, which reduces our foreign currency
exchange risk after the tobacco has been purchased. See Item 1A, “Risk Factors” for 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.”
5
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 each of our processing plants for seven to nine months of the year. During this period for each
region, inventories of green tobacco, inventories of processed tobacco, and trade accounts receivable normally reach peak
levels in succession. We normally finance this expansion of current assets with cash, short-term notes payable to banks, and
customer advances, and these funding sources normally reach their peak usage in each region during its respective processing
period. Our balance sheet at our fiscal year end 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, 2010, each of
Philip Morris International, Inc., Japan Tobacco Inc., and Imperial Tobacco Group, PLC, including its respective affiliates,
accounted for 10% or more of our revenues. The loss of, or substantial reduction in business from, any of these customers
would have a material adverse effect on our results. We have long-standing relationships with these customers. For
information on possible changes in the industry, see “Management’s Discussion and Analysis of Financial Condition and
Results of Operations – Overview” and “Management’s Discussion and Analysis of Financial Condition and Results of
Operations – Other Information Regarding Management’s Actions and Trends”.
We had orders from customers for approximately $651 million of the tobacco in our inventories at March 31, 2010.
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 to this Annual Report, 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. Some of our major
customers are partially vertically integrated, and thus, also compete with us for the purchase of leaf tobacco in many of the
major markets.
In most major markets, smaller competitors are very active. These competitors typically have lower overhead
requirements and provide less support to customers and farmers. Due to their lower cost structures, they can often offer a
price on products that is lower than our price. However, we believe that we provide quality controls that are necessary for
our customers and make our products highly competitive.
6
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 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,
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 14% and 76% of our revenues and 21% and 65% of our segment operating income, respectively, in
fiscal year 2010. Our Other Tobacco Operations reportable segment accounted for 10% of our revenues and 14% of our
segment operating income in fiscal year 2010. 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,
2010, 2009, and 2008, 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 28,000 employees throughout the world during the fiscal year ended March 31, 2010. 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, 2010,
2009, or 2008.
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.
(cid:3)
7
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, significant vertical integration, 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 expanded 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. We have also seen an increase in our customers directly sourcing leaf tobacco
from farmers to meet some of their raw material needs. If our customers shift significant purchases to these smaller
competitors or source significant quantities themselves, our financial results could be negatively impacted.
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 their demand for leaf tobacco are influenced by a
number of factors, including:
(cid:120)
(cid:120)
(cid:120)
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:120) weather and natural disasters, including any adverse weather conditions that may result from climate change,
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
crop infestation and disease,
availability of crop inputs,
volume of annual tobacco plantings and yields realized by farmers,
farmer elections to grow crops other than tobacco,
elimination of government subsidies to farmers, and
demographic shifts that change 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.
(cid:3)
8
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. In addition, the potential impact of climate change is uncertain and
may vary by geographic region. The possible effects, as described in various public accounts, could include changes in
rainfall patterns, water shortages, changing sea levels, changing storm patterns and intensities, and changing temperature
levels that could adversely impact our costs and business operations and the supply and demand for leaf tobacco. Our
operations also rely on dependable and efficient transportation services. A disruption in transportation services, as a result of
climate change or otherwise, may also significantly impact our results of operations.
Further, the timing and unpredictability of customer orders and shipments may require us to keep tobacco in
inventory or otherwise 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.
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:120)
(cid:120)
(cid:120)
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.
(cid:3)
9
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:120)
(cid:120)
(cid:120)
(cid:120)
restrictions on the use of tobacco products in public places and places of employment,
legislation authorizing the U.S. Food and Drug Administration (the “FDA”) to regulate the manufacturing and
marketing of 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 9% 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, to indirectly limit the
use of certain types of tobacco, 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.
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.
In addition, continued government and public emphasis on environmental issues, including climate change,
conservation, and natural resource management, could result in new or more stringent forms of regulatory oversight of
industry activities, which may lead to increased levels of expenditures for environmental controls, land use restrictions
affecting us or our suppliers, and other conditions that could have a material adverse effect on our business, financial
condition, and results of operations. For example, certain aspects of our business generate carbon emissions. Regulatory
restrictions on greenhouse gas emissions have been proposed. These may include limitations on such emissions, taxes or
emission allowance fees on such emissions, various restrictions on industrial operations, and other measures that could affect
land-use decisions, the cost of agricultural production, and the cost and means of processing and transporting our products.
These actions could adversely affect our business, financial condition, and results of operations.
(cid:3)
10
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 financial condition, results of operations, or both 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.
(cid:3)
11
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. Although
this generally limits foreign exchange risk to the economic risk that is related to leaf purchase and production costs,
overhead, and income taxes in the source country, significant currency movements could materially impact our results of
operations. Changes in exchange rates can make a particular crop more or less expensive in U.S. dollar terms. If a particular
crop is viewed as expensive in U.S. dollar terms, it may be less attractive in the world market. This could negatively affect
the profitability of that crop and our results of operations. In 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.
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. For example, during
fiscal year 2009, we recorded remeasurement losses of more than $40 million related to a significant devaluation of the
Brazilian currency.
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. Changes in interest rates also affect expense related
to our defined benefit pension plan, as described elsewhere in these “Risk Factors.”
(cid:3)
12
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 results of operations
may be positively or negatively affected by the amount of income or expense we record for this plan. U.S. generally accepted
accounting principles (GAAP) require that we calculate income or expense for the plans using actuarial valuations. These
valuations reflect assumptions about financial market and other economic conditions, which may change based on changes in
key economic indicators. The most significant year-end assumptions we used to estimate pension income or expense for 2010
are the discount rate and the expected long-term rate of return on plan assets. In addition, we are required to make an annual
measurement of plan assets and liabilities, which may result in a significant change to shareholders’ equity through a
reduction or increase to “Funded status of pension and other postretirement benefits.” At the end of fiscal year 2010, the
projected benefit obligation of our U.S. principal pension plan was $191 million and assets were $164 million. For a
discussion regarding how our financial statements can be affected by pension plan accounting policies, see “Critical
Accounting Estimates – Pension and Other Postretirement Benefit Plans” in “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” in Item 7 and in Note 12 to the consolidated financial statements in Item 8.
Although GAAP expense and pension funding contributions are not directly related, key economic factors that affect GAAP
expense would also likely affect the amount of cash we would contribute to pension plans under requirements of the
Employee Retirement Income Security Act (ERISA). Failure to achieve expected returns on plan assets could also result in
an increase to the amount of cash we would be required to contribute to pension plans.
Item 1B. Unresolved Staff Comments
None
(cid:3)
13
Item 2. Properties
Except as noted, we own the following significant properties (greater than 500,000 square feet):
Location
Principal Use
Area
(Square Feet)
Flue-Cured and Burley Leaf Tobacco Operations:
North America:
United States
Nash County, North Carolina..................................................................... Factory and storages
1,284,000
Canada
Simcoe, Ontario.......................................................................................... Factory and storages
569,000
Other Regions:
Brazil
Santa Cruz.................................................................................................. Factory and storages
Joinville (1) ...............................................................................................
Factory and storages
Venancio Aires........................................................................................... Storages
2,492,000
1,097,000
860,000
Malawi
Lilongwe..................................................................................................... Factory and storages
1,194,000
Mozambique
Tete............................................................................................................. Factory and storages
737,000
Tanzania
Morogoro...................................................................................................
Factory and storages
798,000
Zimbabwe
Harare (2)................................................................................................... Factory and storages
1,342,000
Other Tobacco Operations:
United States
Lancaster, Pennsylvania.............................................................................
Factory and storages
735,000
(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 we believe is adequate for our current 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 noncontrolling interest, owns tobacco processing plants in Turkey, Macedonia, and Bulgaria
and warehousing complexes in Greece.
14
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, 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.
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 General Court of the European Union. 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. Although a hearing on the matter was held in June 2009, 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 $41 million at the March 31, 2010 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 filed appeals in the General Court of the European Union. Based on consultation
with outside legal counsel, we believe it is probable that we will prevail in the appeals process, and therefore we have not
accrued a charge or interest for the fine. If both Deltafina and Universal Corporation were ultimately found liable for the full
amount of the fine, then accumulated interest on the fine would also be due and payable. Accumulated interest totaled
approximately €4.5 million (about $6 million) at March 31, 2010. Deltafina has provided a bank guarantee to the
Commission in the amount of the fine plus accumulated interest in order to stay execution during the appeals process.
(cid:3)
15
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. The 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
we believe those activities did not violate U.S. antitrust laws. We voluntarily reported these activities to the Department of
Justice (“DOJ”) and the SEC in March 2006. On June 6, 2006, the SEC notified us that a formal order of investigation had
been issued.
Since voluntarily reporting, we have cooperated with and assisted the DOJ and SEC in their investigations, and for
the past year we have engaged in settlement discussions with both authorities to resolve the matter. Those negotiations have
resulted in agreements in principle being reached with representatives of the DOJ and the staff of the SEC. The final
resolution of this matter remains subject to the completion of definitive agreements and the approval and execution of those
agreements by the DOJ and the SEC. In addition, each settlement is subject to the approval of a federal district court with
jurisdiction over the matter. We have been given no assurance that the settlements will be approved by the DOJ, SEC, or
federal district courts. Based on the agreements in principle that have been reached to date, the resolution of this matter with
the DOJ and the SEC is expected to include injunctive relief, disgorgement and prejudgment interest, fines, penalties, and the
retention of an independent compliance monitor. Based in part on the progress of the matter and consultation with outside
counsel, we have recorded accruals from time to time since the matter arose that are adequate to satisfy the estimated
financial settlement we expect with the resolution of the matter. The financial settlement is not expected to have a material
effect on our financial condition or results of operations.
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 matters 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. (Removed and Reserved)
16
(cid:3)(cid:3)
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
PART II
Securities
(cid:3)
Common Equity
(cid:3)
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.
(cid:3)
First
Q uarte r
Se cond
Q uarte r
Third
Q uarte r
Fourth
Q uarte r
2010
Cash dividends declared.......................................................
Market price range.............................................................. High
Low
$
0.46
$
0.46
$
0.47
$
0.47
38.29
29.27
44.02
33.46
49.48
41.27
55.19
45.36
2009
Cash dividends declared.......................................................
Market price range.............................................................. High
Low
$
0.45
$
0.45
$
0.46
$
0.46
64.96
45.00
55.63
44.24
52.03
29.83
35.17
25.82
2008
Cash dividends declared.......................................................
Market price range.............................................................. High
Low
$
0.44
$
0.44
$
0.45
$
0.45
66.60
59.66
62.55
44.48
54.08
44.85
67.08
45.69
(cid:3)
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, 2010. At May 24, 2010,
there were 1,507 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.
(cid:3)
17
Purchases of Equity Securities
The following table summarizes our repurchases of our common stock for the three-month period ended March 31,
2010:
Period (1)
Total Number of
Shares
Repurchased
Average Price Paid
Per
Share (2)
Total Number of Shares
Repurchased as Part of
Publicly Announced
Plan or Program (3)
Dollar Value of Shares
that May Yet Be
Purchased Under the
Plans or Programs (3)
January 1, 2010 to January 31, 2010.............................
February 1, 2010 to February 28, 2010.........................
March 1, 2010 to March 31, 2010.................................
123,400
102,300
104,497
$
47.96
50.21
54.11
Total..............................................................................
330,197
$
50.60
123,400
102,300
104,497
330,197
$
140,996,918
135,860,077
130,206,210
$
130,206,210
(1) Repurchases are based on the date the shares were traded. This presentation differs from the consolidated statement of cash flows, where the cost of
share repurchases is based on the date the transactions were settled.
(2) Amounts listed for average price paid per share include broker commissions paid in the transactions.
(3) A stock repurchase plan, which was authorized by our Board of Directors, became effective and was publicly announced on November 5, 2009. It
authorizes the purchase of up to $150 million in common stock in open market or privately negotiated transactions, subject to market conditions and
other factors. The stock repurchase program will expire on the earlier of November 5, 2012, or when we have exhausted the funds authorized for the
program.
18
Item 6. Selected Financial Data
Fiscal Years Ended March 31,
2010
2009
2008
2007
2006
(in thousands, except per share data, ratios and number of shareholders)
Summary of Operations
Sales and other operating revenues..............................................
$
2,491,738
$
2,554,659
$
2,145,822
$
2,007,272
$
1,781,312
Income (loss) from continuing operations....................................
$
170,345
$
132,561
$
116,484
$
73,751
$
(7,260)
Income (loss) from discontinued operations................................
$
—
$
—
$
(145)
$
(36,059)
$
10,913
Net income...................................................................................
$
170,345
$
132,561
$
116,339
$
37,692
$
3,653
Net income attributable to Universal Corporation (1)..................
$
168,397
$
131,739
$
119,156
$
44,352
$
7,940
Earnings available to Universal Corporation
common shareholders...............................................................
$
153,547
$
116,889
$
104,306
$
29,667
$
7,940
Return on beginning common shareholders’ equity.....................
18.8%
13.0%
12.8%
3.8%
1.0%
Earnings (loss) per share attributable to Universal
Corporation common shareholders:
Basic:
From continuing operations..................................................
$
6.21
$
4.57
$
3.83
$
2.53
$
(0.12)
From discontinued operations...............................................
$
—
$
—
$
(0.01)
$
(1.39)
$
0.43
Net income............................................................................
$
6.21
$
4.57
$
3.82
$
1.14
$
0.31
Diluted:
From continuing operations..................................................
$
5.68
$
4.32
$
3.71
$
2.52
$
(0.12)
From discontinued operations...............................................
$
—
$
—
$
(0.01)
$
(1.39)
$
0.43
Net income............................................................................
$
5.68
$
4.32
$
3.70
$
1.13
$
0.31
Financial Position at Year End
Current ratio.................................................................................
2.75
2.74
3.33
2.23
1.94
Total assets..................................................................................
$
2,371,040
$
2,138,176
$
2,186,761
$
2,328,822
$
2,892,664
Long-term obligations..................................................................
$
414,764
$
331,808
$
402,942
$
398,952
$
762,201
Working capital...........................................................................
$
1,078,077
$
954,044
$
1,028,732
$
852,391
$
877,051
Total Universal Corporation shareholders’ equity.......................
$
1,122,570
$
1,029,473
$
1,115,631
$
1,030,733
$
964,871
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:
Basic.....................................................................................
Diluted..................................................................................
Dividends per share of convertible
perpetual preferred stock (annual)............................................
9.43
5.29
1,518
24,732
29,662
5.54
3.55
1,597
25,570
30,466
4.66
3.16
1,708
27,263
32,186
3.16
2.29
1,807
25,935
26,051
1.32
1.32
1,951
25,707
25,707
$
67.50
$
67.50
$
67.50
$
67.50
$
—
Dividends per share of common stock (annual)...........................
$
1.86
$
1.82
$
1.78
$
1.74
$
1.70
Book value per common share.....................................................
$
37.39
$
32.66
$
33.23
$
30.34
$
29.96
(1) We hold less than a 100% financial interest in certain consolidated subsidiaries, and a portion of net income is attributable to the noncontrolling interests
in those subsidiaries.
Since the early part of fiscal year 2008, our operations have consisted solely of our worldwide tobacco business.
Prior to that time, we also owned lumber and building products and agri-products operations. The assets, liabilities, revenues,
and expenses of the lumber and building products and agri-products businesses are reflected as discontinued operations for
all applicable periods in the above table.
19
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.
Significant items included in the operating results in the above table are described below. In these descriptions, net
income refers to net income attributable to Universal Corporation.
(cid:120) 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:120) 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 income
taxes by $15.1 million, and increased net income by $10.3 million, or $0.32 per diluted share.
(cid:120) 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, that reduced 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. The provisions reduced 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 $45.0 million, or $1.74 per diluted share.
(cid:120) 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.
20
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(cid:3)(cid:3)
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.
Although leaf supply and demand were in balance as of March 31, 2010, inventories of uncommitted leaf have
remained very low since poor weather conditions reduced burley crops in Africa in fiscal year 2008. In that year, inventories
of flue-cured tobacco available for sale trended down as well. Fiscal year 2009 saw dramatic increases in burley crops in
Africa, which significantly reduced the burley shortage, and in fiscal year 2010, African burley crops remained very large.
Through the end of fiscal year 2010, much of the additional tobacco grown has been absorbed by the industry, and although
uncommitted inventories increased, they remained at historically low levels.
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. During the period, we have seen dramatic reductions in supply followed by record crops in
some areas. Costs have been volatile as currency rates and competition with commodity crops caused significant increases in
green leaf pricing early in the period. Overall, our uncommitted inventories have decreased substantially over the three years.
Each of the fiscal years in the period is described in the following information:
In fiscal year 2008, tight market supply and increased costs due to higher farmer leaf production costs and
the weaker U.S. dollar created challenges. We continued the efforts that began in the prior year to
rationalize our operations to match the market by streamlining our operations in Canada, Malawi, and
Zambia, and our uncommitted inventory levels fell.
In fiscal year 2009, green tobacco costs were very high during most of the purchasing season, and farmers’
costs for fertilizer and other input materials to produce crops for the following year were high as well.
Green tobacco prices increased in U.S. dollar terms as the dollar weakened against most currencies early in
the year. 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 heading into fiscal year 2010. The U.S. dollar had
strengthened as well, also reducing the pressure on costs.
In fiscal year 2010, the market was in balance with no significant amounts of uncommitted inventory in the
hands of the dealer group. Large African burley crops that had threatened to create some excess were
absorbed by the market. Although we began to see increased customer concern about costs, the higher cost
of leaf was passed through in selling prices. One of our customers, Japan Tobacco, Inc., responded to the
recent higher crop costs and leaf supply concerns by announcing that they were preparing to source some of
their leaf directly in the United States, Brazil, and Malawi. That announcement is more fully described
elsewhere herein under “Other Information on Trends and Management’s Actions.”
We delivered outstanding operating and financial performance in fiscal year 2010. Each of our regional operations
produced strong results based on careful attention to costs and close cooperation with our customers. We created new
efficiencies in our dark tobacco operations, completing our Lancaster, Pennsylvania, factory upgrade and expansion. The
project was completed on time and within budget, and the factory is performing above our expectations. We are continuing to
benefit from cost controls and global coordination, and we are very pleased with our performance for the fiscal year.
Looking ahead, we have several observations about the economy and our industry. The global economic situation
continues to be unpredictable, with financial market volatility affecting currency rates in all regions and possibly reducing
capital availability. In light of that volatility, we will continue to manage our financial resources conservatively.
(cid:3)
21
Although the crop quality is good, flue-cured crops in Brazil to be sold in fiscal year 2011 have decreased because
of excess rains there, and dry conditions have reduced the African burley crops to some extent. Although crops there remain
large, burley production in other regions also declined. Overall burley production will be down by nearly 8% for fiscal year
2011, and flue-cured production in export markets outside China should increase by about 2%. While there have been no
significant increases in leaf production available to the trade, and worldwide uncommitted dealer inventories remain near
seasonal lows, lower consumption patterns outside of Asia are likely to reduce demand for leaf.
We have been working closely with our customers this year to respond to their changing requirements. In recent
months, we have seen an increasing customer focus on costs. In the intermediate term, because of those cost reduction
efforts, we expect that U.S. contracts for processing tobacco will be renewed at lower volume levels, under different terms
and conditions, or both, at expiration in May 2011. That change will reduce margins and volumes handled in fiscal year 2012.
If that business is not replaced at similar margins, the change could represent as much as half of the operating income of our
North America segment. It could also result in a decision to reduce our processing capacity in the United States. The North
Carolina factory is state of the art, and we will use this opportunity to continue to expand our business with existing and new
customers there. In addition, U.S. flue-cured leaf is becoming more competitive in the world market.
Recent customer efforts to procure leaf directly from farmers may change parts of our business. As we reported last
summer, Japan Tobacco announced steps to enhance their direct leaf procurement capabilities by acquiring and entering joint
ventures with smaller leaf merchants. They enumerated several factors that prompted their moves, including the desire to
enhance internal expertise in leaf procurement, actively manage the leaf supply chain, and work more directly with tobacco
growers. That effort will reduce volumes in our North America segment and in Malawi and Brazil in our Other Regions
segment. We have been working to replace those volumes, and although we are encouraged by results so far, some regions
will be affected in fiscal year 2011.
The Japan Tobacco activities are consistent with a recurrent theme of manufacturers wanting to get closer to tobacco
farmers for many stated reasons, including political considerations and potential regulatory compliance. Several of our
customers made a similar move in the United States nearly 10 years ago. Our challenge continues to be to adapt our way of
doing business to meet customer needs, and we have been working with some of our customers to examine our arrangements
in certain markets. That process is ongoing and is likely to produce some changes in the near term. Any changes or new
arrangements are likely to entail more structured dealings than we have had in the past and to include long-term supply or
service agreements. Some customers may purchase green tobacco from us or from farmers in markets they deem to be
strategic, and through long-term agreements, rely on us for individual services, such as agronomy, logistics, and processing.
Most of our customers do not utilize the entire run of the crop, so these new arrangements are likely to be supplemented by
traditional purchases of processed leaf tobacco from us or other dealers.
We believe that these customer efforts are likely to strengthen our relationships over the long term because we
believe that independent leaf dealers add significant value to the system, providing expertise in dealing with large numbers of
farmers and providing a clearinghouse for various qualities of leaf produced in each crop. Our key challenge in the coming
year is to adapt our business model to meet our customers’ evolving needs while continuing to provide stability of supply and
the quality that distinguishes our products and services.
(cid:3)
22
Fiscal Year Ended March 31, 2010, Compared to the Fiscal Year Ended March 31, 2009
RESULTS OF OPERATIONS
Diluted earnings per share for the year ended March 31, 2010, were $5.68, up 31% from last year’s results of $4.32
per diluted share. Net income improved by 28% to a record $168 million. Results for fiscal year 2009 had been
overshadowed by large currency losses in South America. Those losses were not repeated in fiscal year 2010, accounting for
a large portion of the change. Revenues were down by about 2%, reflecting lower volumes in several areas, offset by
improved sales mix as lower priced by-products constituted a smaller proportion of total sales. Lower volumes were
primarily attributable to shipment delays this year in some regions, lower trading volumes in North America, and last year’s
accelerated shipments of dark tobacco.
Cost of sales was 4% lower primarily because of lower volumes in some segments, and lower costs in areas where
currency changes lowered inventory costs. Selling, general, and administrative expenses decreased by about $24 million, or
8%, compared to last year. The primary factor in the reduced expense for the year was lower currency remeasurement and
exchange losses, which were down $45 million. That change more than offset the effect of other items, including higher
incentive compensation expense, higher legal and professional costs, and lower gains on the sale of property and equipment.
Compared to last year, interest expense was about $11 million lower, largely due to the reduction in short-term
borrowing rates during the year. About 70% of our debt is based on variable interest rates. The rate reduction also reduced
interest income during the year.
Income tax expense increased by $22 million as a slightly higher effective tax rate was applied to higher income
before taxes. Although the rate is higher than last year’s, it remained below the U.S. statutory rate in fiscal year 2010,
primarily because of the reversal of liabilities previously recorded for uncertain tax positions based on the expiration of
statutes of limitations for the related tax years and other factors. Those adjustments more than offset an accrual to record U.S.
income taxes on earnings that were previously considered to be permanently reinvested offshore, as well as other smaller
adjustments.
Flue-cured and Burley Leaf Tobacco Operations
(cid:3)
Fiscal year 2010 operating income for our flue-cured and burley operations was up 27%, to $240 million, which is a
record for the group. The $51 million increase was primarily related to lower currency costs, but the year also saw much
higher Asian trading volumes and the benefits of management’s focus on improving the profitability of smaller operations
that had been marginal performers in past years. Revenue for this group was off slightly as lower volumes in most regions
were largely offset by the Asian increases.
In the North America segment, the effects of lower U.S. trading volumes, lower sales of carryover crops, and a
smaller Canadian crop were more than offset by improvements in smaller operations, which included better experience with
farmer receivables and improved pricing. The segment’s operating income increased 19%, to $57 million. The volume
reductions were primarily in sales of lamina rather than by-products, and the combination of lower volumes and sales mix
caused revenues to decline by 14%, and caused a decrease in cost of sales as well. Selling, general, and administrative
expenses were also down in this segment, mainly reflecting lower provisions against farmer receivables.
Results for the Other Regions segment improved by 30%, to $183 million, largely on the strength of lower currency
costs in fiscal year 2010. The reduction in currency costs primarily benefited South American operations where the rapid
strengthening of the U.S. dollar in fiscal year 2009 caused a loss in value of local currency balances, primarily related to
farmer receivables. The U.S. dollar remained relatively strong through the following spring and reduced the cost of the crop
sold in fiscal year 2010. Asian trading volumes increased for the second consecutive year. African results were down slightly
as delayed shipments related to logistical issues hampered performance, despite significant catch-up shipments late in the
year. In Europe, higher green leaf costs proved difficult to recover in sales prices, although improvement in smaller
operations benefited the region. Revenues for the Other Regions segment increased based primarily on the higher Asian
trading volumes. Cost of sales declined as the stronger U.S. dollar near the beginning of the year reduced costs despite higher
local pricing in many areas. Selling, general, and administrative expenses were down substantially for the group on lower
currency related costs for fiscal year 2010.
23
Other Tobacco Operations
Results for the Other Tobacco Operations segment were down by 5%, or about $1.9 million, compared to last year,
mainly due to lower earnings from the dark tobacco group. Near the end of fiscal year 2009, the dark tobacco operations
experienced a surge in sales as customers accelerated purchases in anticipation of the enactment of U.S. excise tax increases.
The dark tobacco group also incurred costs to consolidate their U.S. processing operations in fiscal year 2010. Results for the
oriental tobacco joint venture benefited from a decrease in interest expense.
Segment revenues were lower for the fiscal year. Dark tobacco revenues declined on reduced volumes compared to
last year’s accelerated shipments. Although the oriental tobacco joint venture is not a consolidated operation, it sells some
leaf to a consolidated Universal subsidiary for import to customers in the United States. The revenue from those sales is
included in revenues for Other Tobacco Operations. Some of those sales have been carried over into fiscal year 2011 and
reduced revenues for fiscal year 2010. Segment volume reductions also reduced cost of sales. Selling, general, and
administrative expenses for the segment decreased, primarily reflecting currency benefits in fiscal year 2010.
Fiscal Year Ended March 31, 2009, Compared to the Fiscal Year Ended March 31, 2008
For the fiscal year ended March 31, 2009, diluted earnings per share were $4.32, up nearly 17% from $3.70 per
diluted share in the fiscal year ended March 31, 2008, 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 in fiscal year 2008. Performance for fiscal
year 2008 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 fiscal year 2009 were $2.6 billion, which represented a 19% increase
compared to fiscal year 2008. 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 change, most of which was in Brazil, was reflected in selling, general, and administrative expenses
and caused the large increase in that line item.
Interest income for fiscal year 2009 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.
24
Flue-cured and Burley Leaf Tobacco Operations
(cid:3)
For the fiscal year ended March 31, 2009, segment operating income for the flue-cured and burley operations was up
6% compared to fiscal year 2008, to nearly $190 million. 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 fiscal year 2008. That segment 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 fiscal year 2008’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 fiscal year 2008’s $8 million one-time
statutory severance 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 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 in fiscal year 2009 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 in fiscal year 2008. There were no
other significant changes in that expense category.
(cid:3)
Other Tobacco Operations
(cid:3)
In the Other Tobacco Operations segment, fiscal year 2009 operating income was $42 million, an increase of 5%
over fiscal year 2008 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 the winding down of
some just-in-time customer service business that was absorbed by the various regional operations in fiscal year 2008. 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 fiscal year 2008.
Discontinued Operations
We previously had operations in lumber and building products and in agri-products. We sold most of those
businesses in fiscal year 2007, and we sold the remaining agri-products operations during fiscal year 2008. The operations
that we sold are reported as discontinued operations for all periods in the consolidated financial statements in Item 8,
“Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and other sections of this
Annual Report.
Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting
Standards No. 168, “The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting
Principles – a replacement of FASB Statement No. 162” (“SFAS 168”). This Statement established the newly-developed
FASB Accounting Standards Codification™ (“Codification”) as the single source of authoritative U.S. generally accepted
accounting principles (“GAAP”) for all nongovernmental entities. All guidance in the Codification carries the same level of
authority, and all changes or additions to U.S. generally accepted accounting principles are now issued as Accounting
Standards Updates. In addition to the Codification, rules and interpretive releases of the SEC under federal securities laws
remain sources of authoritative GAAP for SEC registrants. We were required to adopt SFAS 168 effective September 30,
2009. SFAS 168 did not make any changes to existing accounting guidance that impact our accounting and financial
reporting.
25
During the fiscal years ended March 31, 2010, 2009, and 2008, we adopted the following key accounting
pronouncements, all of which were issued prior to the initial effective date of the Codification:
(cid:120) FASB Staff Position No. 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets” (“FSP 132(R)-
1”), adopted effective March 31, 2010. This pronouncement, which is now a part of Topic 715 of the Codification,
requires expanded disclosures about plan assets of defined benefit pension or other postretirement benefit plans. The
new disclosures include information about investment allocation decisions, categories of plan assets, the inputs and
valuation techniques used to measure the fair value of those assets, and significant concentrations of credit risk. The
disclosures required by FSP 132(R)-1 are included in Note 12 and did not have a material effect on our financial
statements.
(cid:120) FASB Statement of Financial Accounting Standards No. 165, “Subsequent Events” (“SFAS 165”), adopted effective
June 30, 2009. SFAS 165, which is now set forth under Topic 855 of the Codification, establishes standards for
accounting and disclosure for events occurring after the balance sheet date but before financial statements are issued. It
defines the period after the balance sheet date during which events or transactions should be evaluated for potential
recognition or disclosure, and it provides guidance on recognition and disclosure of actual transactions or events
occurring after the balance sheet date. The adoption of SFAS 165 did not have a material effect on our financial
statements.
(cid:120) FASB Statement of Financial Accounting Standards No. 160, “Noncontrolling Interests in Consolidated Financial
Statements – an amendment of ARB No. 51” (“SFAS 160”), adopted effective April 1, 2009. SFAS 160, which is now
set forth in Topic 810 of the Codification, 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. Adoption of this guidance did not have a material
impact on our financial statements.
(cid:120) FASB Statement of Financial Accounting Standards No. 141(R), “Business Combinations” (“SFAS 141(R)”), adopted
effective April 1, 2009. SFAS 141(R) 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 141(R), which is now set forth under Topic 805 of the
Codification, 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. We will apply the guidance to all future business
combinations.
(cid:120) The measurement timing provisions of 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”), now part of the guidance in Codification Topic 715. These provisions require that
the funded status of defined benefit plans be measured as of the balance sheet date, which eliminated 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 provisions, we began measuring our pension and other postretirement benefit plans as
of the balance sheet date effective March 31, 2009. At that date, we 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, we recognized 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 in other
comprehensive income for fiscal year 2009.
(cid:120) FASB Statement of Financial Accounting Standards No. 161, “Disclosures about Derivative Instruments and Hedging
Activities” (“SFAS 161”), adopted effective March 31, 2009. SFAS 161, which is now part of the guidance set forth in
Topic 815 of the Codification, amended several prior accounting pronouncements to require enhanced disclosures about
derivatives and hedging activities 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 a company’s
financial position, results of operations, and cash flows. We have provided the disclosures required by SFAS 161 in
Note 10 to the consolidated financial statements.
26
(cid:120) FASB Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157,
which is now set forth in Topic 820 of the Codification, defines fair value, establishes a framework for measuring fair
value under generally accepted accounting principles, and expands disclosures about fair value measurements. We
adopted SFAS 157 as it applies to financial assets and liabilities effective April 1, 2008, and as it applies to nonfinancial
assets and liabilities (primarily assessments of goodwill and other long-lived assets for potential impairment) effective
April 1, 2009. The adoption of SFAS 157 did not have a material impact on our financial statements. We have provided
the disclosures about fair value measurements for our financial assets and liabilities in Note 11 to the consolidated
financial statements.
(cid:120) 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”), adopted effective April 1, 2008.
SFAS 159, which is now part of the guidance in Topic 825 of the Codification, 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.
(cid:120) FASB Interpretation 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), adopted effective April 1, 2007.
FIN 48, which is now included in the guidance in Topic 740 of the Codification, 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. We have provided
the required disclosures about uncertain tax positions in Note 6 to the consolidated financial statements.
In addition to the above accounting pronouncements adopted through March 31, 2010, the following
pronouncements have been issued and will become effective in future periods:
(cid:120) FASB Accounting Standards Update 2009-13, “Multiple-Deliverable Revenue Arrangements” (“ASU 2009-13”), which
was issued by the FASB in October 2009. ASU 2009-13 establishes a selling price hierarchy for determining the selling
price of a deliverable in a multiple-deliverable arrangement. It also requires additional disclosures about the methods and
assumptions used to evaluate multiple-deliverable arrangements and to identify the significant deliverables within those
arrangements. ASU 2009-13 is effective prospectively for revenue arrangements entered into or materially modified in
fiscal years beginning on or after June 15, 2010, which means that we will be required to adopt the guidance effective
April 1, 2011, the beginning of our fiscal year 2012. We are evaluating the potential impact of ASU 2009-13, but we
currently do not expect it to have a material effect on our financial statements.
(cid:120) FASB Accounting Standards Update 2010-06, “Improving Disclosures about Fair Value Measurements” (“ASU 2010-
06”), which was issued by the FASB in January 2010 and is effective for interim and an annual financial statements for
fiscal years beginning after December 15, 2010. ASU 2010-06 expands and clarifies the disclosure requirements related
to fair value measurements. It requires companies to disclose separately the amounts of significant transfers in and out of
Level 1 and Level 2 of the fair value hierarchy and describe the reasons for the transfers. In addition, information about
purchases, sales, issuances, and settlements on a gross basis is required in the reconciliation of Level 3 fair-value
measurements. ASU 2010-06 also clarifies existing fair value measurement disclosure guidance related to level of
disaggregation, fair value inputs, and valuation techniques. We will be required to apply most provisions of the new
guidance effective April 1, 2010, the beginning of our fiscal year 2011. We are evaluating the effect of ASU 2010-06,
but currently do not expect that it will have a material effect on our financial statements.
27
Overview
LIQUIDITY AND CAPITAL RESOURCES
Our operating cash flow improved by $63 million during fiscal year 2010. We continued our conservative financial
policies, maintained our discipline on using our free cash flow, and were able to return $93 million to shareholders through
dividends and share repurchases.
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 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 and includes purchasing crops in South America and Africa. 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
and customer payment timing differences. We deal with this uncertainty by maintaining substantial credit lines and cash
balances. In addition to our operating requirements for working capital, we have $15 million in medium-term notes maturing
in December 2010, we plan to spend approximately $50 million on capital projects, and we expect to provide around $8
million in funding to our pension plans. Available capital resources from our cash balances, a committed credit facility, and
uncommitted credit lines exceed those anticipated needs. After balancing our capital structure, any excess cash flow from
operations after dividends and capital expenditures will be available to fund expansion, purchase our stock, or otherwise
enhance shareholder value.
Cash Flow
During fiscal year 2010, we generated $162 million in cash flow from our operations. We spent $58 million on
capital projects, returned $61 million to shareholders in the form of dividends, and spent $32 million on repurchases of our
common stock. At March 31, 2010, cash balances totaled $246 million.
We repurchased shares of our common stock during fiscal year 2010. In November 2009, the Board of Directors
approved a new share repurchase program, which superseded an expiring program. Under the expiring program, which was
approved by our Board of Directors in November 2007, we repurchased $141 million of common stock. The new program
expires November 5, 2012 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 repurchase activity, our intent is to use only cash available
after meeting our capital investment, dividend, and 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 2010, we purchased 743,876
shares of our common stock at a total cost of about $33 million, based on trading dates. At March 31, 2010, our available
authorization under our current share repurchase program was $130 million, and approximately 24.3 million common shares
were outstanding.
(cid:3)
28
Working Capital
Working capital at March 31, 2010, was nearly $1.1 billion, up $124 million from last year’s level of $954 million.
The largest factor contributing to the increase was the $226 million increase in tobacco inventory. Higher green tobacco
prices, foreign currency appreciation, later shipments from some regions, and purchases of old crop tobacco in the United
States all contributed to the inventory increase. Inventory is usually financed with a mix of cash, notes payable, and
customer deposits, depending on our borrowing capabilities, interest rates, and exchange rates, as well as those of our
customers. We generally do not purchase material quantities of tobacco on a speculative basis. Our uncommitted tobacco
inventories increased by approximately $37 million to $161 million, or about 20% of tobacco inventory, primarily due to
higher balances in South America caused by higher green leaf costs compared to last year. Uncommitted inventories at March
31, 2009, were $124 million, which represented 21% of tobacco inventory.
Advances to suppliers decreased by $46.9 million compared to prior year’s levels, which had been relatively high
because of higher farm input costs when those advances were made and because of later deliveries in some regions. Earlier
shipments in Asia and recognition of $18.5 million in provisions for estimated uncollectible amounts contributed to the
decline. Customer advances and deposits increased $94 million compared to prior year levels, as some customer
prepayments for tobacco purchases were made earlier in the crop cycle. These deposits also contributed to the higher cash
balances on hand at March 31, 2010.
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 $58 million in
fiscal year 2010, $36 million in fiscal year 2009, and $28 million in fiscal year 2008. Depreciation expense was
approximately $41 million in each of fiscal years 2010, 2009, and 2008. Our intent is to limit routine capital spending to a
level below depreciation expense in order to maintain strong cash flow. However, from time to time we may undertake
additional projects pursuant to customer contracts. Our capital expenditures in fiscal year 2010 included investments to
expand and upgrade our facility in Lancaster, Pennsylvania, to accommodate the consolidation of our U.S. dark tobacco
processing operations. That facility resumed operations in December 2009 and is operating well. We have several other
customer-driven opportunities that will require about $26 million of capital investment in the aggregate. We spent
approximately $15 million on those projects in fiscal year 2010, and we expect to spend the remaining $11 million in fiscal
year 2011.
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 shareholders’ equity to be our total capitalization. Net debt increased by $88 million to $469
million during the twelve months ended March 31, 2010. The increase primarily reflects higher customer deposits and
advances offset by higher cash balances this year. Net debt as a percentage of capitalization was approximately 29% at March
31, 2010, up from 27% at March 31, 2009, and was lower than our target range of 35% to 45% of total capitalization. We
repaid $79.5 million in long-term debt that matured in September 2009. In November 2009, we issued $100 million in 6.25%
senior, unsecured notes due December 1, 2014. The proceeds were used to repay debt obligations, including notes payable
and overdrafts incurred to repay the September 2009 long-term debt maturity, and for general corporate purposes. We also
have an active, undenominated shelf registration filed with the SEC, which provides for future issuance of additional debt or
equity securities.
As of March 31, 2010, we, together with our consolidated affiliates, had approximately $752 million in
uncommitted lines of credit, of which approximately $575 million were unused and available to support seasonal working
capital needs. We also had approximately $246 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. As of March 31, 2010, we had no borrowings under the facility. Under the terms of our bank agreement, 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, 2010. Our long-term credit ratings are Ba1 with Moody’s Investors Service and BBB- with Standard
& Poor’s.
(cid:3)
29
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, 2010, the fair value of our outstanding interest rate swap agreements was
$9.8 million, and the notional amount swapped was $245 million. In fiscal year 2010, active swaps reduced interest expense
by $6 million.
We also enter forward contracts from time to time to hedge certain foreign currency exposures, primarily related to
forecast purchases of tobacco and related processing costs in Brazil, as well as our net monetary asset exposure in the local
currency there. We generally account for our hedges of forecast tobacco purchases as cash flow hedges. At March 31, 2010,
the fair value of our open contracts was not material. We also had other forward contracts outstanding that were not
designated as hedges, and the fair value of those contracts was also not material at March 31, 2010. For additional
information, see Note 10 to the consolidated financial statements in Item 8.
Pension Funding
Funds supporting our ERISA-regulated U.S. defined benefit pension plans increased by $44 million to $164 million
because of gains in the investment portfolio during the fiscal year. By April 30, 2010, the market value of the fund was about
$168 million. The accumulated benefit obligation (“ABO”) and the projected benefit obligation (“PBO”) were approximately
$171 million and $191 million, respectively, as of March 31, 2010. 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 $7.8 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, 2010, were as follows:
(in thousands of dollars)
Total
2011
2012-2013
2014-2015
Afte r 2015
Notes payable and long-term debt (1)...................
$
780,300
$
218,060
$
141,590
$
316,483
$
104,167
Operating lease obligations...................................
55,207
19,074
22,232
6,779
7,122
Inventory purchase obligations:
T obacco............................................................
Agricultural materials.........................................
Other purchase obligations....................................
810,361
40,329
17,335
565,986
40,329
17,011
97,750
—
288
97,750
—
36
48,875
—
—
T otal................................................................
$
1,703,532
$
860,460
$
261,860
$
421,048
$
160,164
(1) Includes interest payments. Interest payments on $177 million of variable rate debt were estimated on the basis of March 31, 2010 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. About half of our crop year contracts to purchase tobacco are with
farmers in Brazil. We have partially funded our tobacco purchases in Brazil and in other regions with advances to farmers
and other suppliers, which totaled approximately $167 million at March 31, 2010. In addition, we have guaranteed bank loans
to farmers in Brazil that relate to a portion of our tobacco purchase obligations there. At March 31, 2010, we were
contingently liable under those guarantees for outstanding balances of approximately $112 million (including accrued
interest), and we had recorded a liability of approximately $26 million for the fair value of those guarantees. As tobacco is
purchased and the related bank loans are repaid, our contingent liability is reduced.
30
CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS
In preparing the financial statements in accordance with GAAP, we are required to make estimates and assumptions
that have an impact on the assets, liabilities, revenue, and expense amounts reported. These estimates can also affect our
supplemental information disclosures, including information about contingencies, 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:
(cid:3)(cid:3)
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 2010, 2009, and 2008 were $1.3 million, $3.5 million, and $2.2 million, respectively.
(cid:3)
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 for potential impairment on an annual basis and at any time that events or
business conditions indicate that it may be impaired. We follow applicable accounting guidance in determining the fair value
of goodwill, which normally involves the use of discounted cash flow models (Level 3 of the fair value hierarchy under
GAAP). The calculations in these models are normally not based on observable market data from independent sources and
therefore require significant management judgment with respect to operating earnings growth rates and the selection of an
appropriate discount rate. 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.
We follow the relevant accounting guidance in determining the fair values of these financial assets and liabilities. Quoted
market prices (Level 1 of the fair value hierarchy) are used in most cases to determine the fair values of trading securities.
Interest rate swaps and forward foreign currency exchange contracts are valued based on dealer quotes using discounted cash
flow models matched to the contractual terms of each instrument (Level 2 of the fair value hierarchy). The fair value of the
guarantees of bank loans to tobacco growers, which was approximately $26 million at March 31, 2010, 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, 2010, a 1% increase in the expected loss percentage for all guaranteed
31
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 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, 2010.
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 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. We had small net operating
loss (“NOL”) carryforwards in several foreign jurisdictions at March 31, 2010. Based on future estimates of taxable income
and/or available tax planning strategies in those jurisdictions, we expect to fully realize those NOL carryforwards.
At the beginning of fiscal year 2010, we had approximately $52 million of undistributed earnings of foreign
subsidiaries on which no provision for U.S. income taxes had been recorded because those earnings were designated as
permanently reinvested. Effective March 31, 2010, we changed the classification of those earnings to reflect a change in our
intent to repatriate the earnings consistent with appropriate tax planning and good business practice in the respective foreign
countries. As a result of this change, approximately $3.5 million of additional income tax expense was recognized to record
the applicable U.S. tax liability. After this change, we no longer have any undistributed earnings of foreign subsidiaries that
are classified as permanently reinvested.
(cid:3)
The functional currency in most of our significant foreign operations is the U.S. dollar, as export tobacco sales are
generally made in dollars. Purchasing and processing costs are usually incurred in local currency. When the U.S. dollar is
weakening relative to the local currency, purchasing and processing costs increase in dollar terms, resulting in higher cost
inventory. The sale of that inventory in dollars generates less taxable income in local currency, which results in lower
income taxes owed when translated into U.S. dollars. This causes the effective income tax rate on dollar income to be lower
than the statutory rate in the local country. The reverse can occur when the local currency is weakening relative to the U.S.
dollar, thereby causing the effective income tax rate on dollar earnings to be above the statutory rate. This impact on our
effective income tax rate in a country can be significant during a normal crop cycle. A prolonged period of strengthening or
weakening over more than one crop may increase the impact if we sell material quantities of old crop inventories. Lower-
taxed foreign source income increases our ability to use foreign tax credits. Higher-taxed foreign source income has the
reverse effect. When these changes occur in our larger operations, such as our operations in Brazil, they can have a material
impact on our overall tax position.
For additional disclosures on income taxes, see Notes 1 and 6 to the consolidated financial statements in Item 8.
(cid:3)
32
Pension and Other Postretirement Benefit Plans
(cid:3)(cid:3)
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:120) 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:120) 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:120) 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:120) 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:120) 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.
(cid:3)
(cid:3)
33
Sensitivity Analysis. The effect of the indicated decrease or increase in the selected assumptions is shown below,
assuming no change in benefit levels:
(cid:3)
(in thousands of dollars)
Change s in Assumptions for Pe nsion Be ne fits
Discount Rate:
Effe ct on
2010 Proje cte d
Be ne fit
O bligation
Incre ase
(De cre ase )
Effe ct on
2011 Annual
Expe nse
Incre ase
(De cre ase )
1% increase...............................................................................................................................
$
(25,344)
$
(2,754)
1% decrease..............................................................................................................................
30,605
3,154
Salary Scale:
1% increase...............................................................................................................................
1% decrease..............................................................................................................................
Long-T erm Rate of Return on Assets:
1% increase...............................................................................................................................
1% decrease..............................................................................................................................
Change s in Assumptions for O the r Postre tire me nt Be ne fits
Discount Rate:
1% increase...............................................................................................................................
1% decrease..............................................................................................................................
Healthcare Cost T rend Rate:
1% increase...............................................................................................................................
1% decrease..............................................................................................................................
7,120
(6,442)
N/A
N/A
(3,780)
4,497
1,266
(1,109)
1,713
(1,539)
(2,097)
2,099
(382)
268
62
(55)
(cid:3)
See Note 12 to the consolidated financial statements in Item 8 for additional information on pension and
postretirement benefit plans.
Other Estimates and Assumptions
(cid:3)(cid:3)
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.
(cid:3)
(cid:3)
34
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, but now, demand and pricing are becoming more important.
Supply
Production
Worldwide flue-cured tobacco production in fiscal year 2010 increased by 3.5% to 4.32 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 2010 increased by about 5.2%, to 1.97 billion kilos. After three years of declining production, burley
crops marketed in fiscal year 2009 recovered significantly, and increased again in fiscal year 2010, by about 14%. Most of
the increase occurred in Africa, where Malawi and Mozambique again produced record crops. We estimate that industry
uncommitted flue-cured and burley inventories totaled about 50 million kilos, excluding inventories of Asian government-
owned monopolies, at March 31, 2010. That amount is over 30% higher than the level one year earlier due to the rise in flue-
cured stocks in the hands of smaller regional dealers. Nonetheless, uncommitted inventories in the hands of dealers remain at
very low levels.
Flue-cured production (excluding China) is expected to continue at about 2.0 billion kilos, an increase of less than
1% in fiscal year 2011, despite weather related decreases in Brazil. Burley production is forecast to decline by about 7%
from its very high levels to about 778 million kilos in fiscal year 2011. Supplies of oriental tobacco available for trading have
continued to decline as the former monopoly inventories have been reduced.
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 levels.
This factor could provide momentum to efforts of the WHO to shift farmer production from leaf tobacco to other crops. After
reductions through early 2009, commodity prices and crop production costs are again rising, albeit at a much slower pace
than in 2008. Any current growth in farm input costs would affect crops sold in fiscal year 2012. In the recent past, market
shortages have also led to green tobacco price increases. Recent customer efforts to procure leaf directly would increase
competition for available leaf and could disrupt markets and further increase green tobacco prices, at least in the short term.
Recent excise tax increases and related reductions in consumption of tobacco products are likely to increase cost
sensitivity of customers. In recent months, we have seen an increasing customer focus on costs. In the intermediate term,
because of those cost reduction efforts, we expect that U.S. contracts for processing tobacco will be renewed at lower volume
levels, under different terms and conditions, or both, at expiration in May 2011. That change will reduce margins and
volumes handled in fiscal year 2012. If that business is not replaced at similar margins, the change could represent as much
as half of the operating income of our North America segment. It could also result in a decision to reduce our processing
capacity in the United States. The North Carolina factory is state of the art, and we will use this opportunity to continue to
expand our business with existing and new customers there. In addition, U.S. flue-cured leaf is becoming more competitive
in the world market.
Change in E.U. Subsidy Program
The European Union’s (E.U.) recent modification of their system of granting subsidies to tobacco farmers has
created an additional supply risk. Following the implementation of the first step of the reform in 2006, crops were reduced,
but around 200 million kilos of good quality flue-cured and burley tobacco have been produced in Europe each year since
then. Current projections are for another decline of between 10% and 15% in production, as the effects of the staged
reduction in the subsidy are felt, beginning with the crop that is currently being transplanted and will be sold in fiscal year
2012. As in 2006, it is likely that these reductions will be in less desirable varieties and production areas, which will improve
the average quality of the European tobaccos. We believe that customers continue to value European tobacco. At present, no
significant unsold inventory is held by the trade, and commercial prices have followed world market trends.
35
In order to address the issue of the current and future crops, the national governments of the main tobacco producing
countries in the E.U. have been working to find solutions to the problem because of the importance of tobacco production to
local economies. While the new support system is being structured, 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 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 during the transition period, as they have
in the past and more recently, because of their well-established relationships with the farmer base and with major customers
and because of our state-of-the-art, efficient factories.
In the intermediate term, we believe that the possibility for sustainable tobacco production in the E.U. exists. Within
the general discussion on the future of the E.U. Common Agricultural Policy, it looks probable that a major driving factor
will be the support of employment in the rural areas, in which framework tobacco production could reasonably be considered
eligible for adequate support.
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 and require changes
in sourcing. 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 $28 million at March 31, 2010. In addition, we had unrealized foreign currency translation losses of
approximately $14 million before income taxes at March 31, 2010, 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. We are beginning to see
evidence of softer market conditions in some markets that may have been caused by purchasing patterns during the last few
years or by consumption declines over the same period. If that is the case, then demand for leaf from dealers could fall further
in the near term, and crops would have to be reduced.
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 1.2% for the ten years that ended in 2009. 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 3.4% in China, which experienced higher increases during the second half of the period. Outside China, consumption
fell by 0.3% during the ten years. These patterns indicate declining demand for premium products. They also 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 2009, total cigar consumption in the United States increased by about 2%, while consumption within the main
E.U. markets has declined by 2% to 3%. The recent increases in U.S. federal excise taxes on tobacco products caused a
migration from small cigars to large cigars. Within the smokeless segment of the dark tobacco business, 2009 U.S.
consumption of loose-leaf chewing tobacco declined by 9%, while the consumption of moist snuff products grew by about
1%. We believe that supplies of dark filler tobacco worldwide are generally in line with demand; however, these supplies are
likely to be affected by changes in the E.U. tobacco subsidy program with the 2010 crop. Wrapper tobacco continues to be
in tight supply.
(cid:3)
36
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.
In addition, we will face an increased number of competitors for available leaf during the next year in the United
States, Brazil, and Africa because of increased customer interest in procuring tobacco directly.
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 WHO. 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. Given recent growth in Asia, it seems unlikely that world consumption of tobacco products will decrease sharply
in the next few years.
Most recently, the U.S. Congress passed the Family Smoking Prevention and Tobacco Control Act (“FSPTCA”).
This legislation authorizes the FDA to regulate the manufacturing and marketing of tobacco products. At this time it is not
possible to assess the impact FDA regulation will have on our operations or the tobacco industry.
Product Taxation
A number of governments, particularly federal and local governments in the United States and the E.U., 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. For example, in the United States, increases in federal excise taxes to fund the expansion of the
Children’s Health Insurance Program (“CHIP”) are expected to reduce consumption.
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, consistent with stability of supply. 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.
(cid:3)
37
Industry Evolution
Recent customer efforts to procure leaf directly from farmers may change parts of our business. As we reported last
summer, Japan Tobacco announced steps to enhance their direct leaf procurement capabilities by acquiring and entering joint
ventures with smaller leaf merchants. They enumerated several factors that prompted their moves, including the desire to
enhance internal expertise in leaf procurement, actively manage the leaf supply chain, and work more directly with tobacco
growers. That effort will reduce volumes in our North America segment and in Malawi and Brazil in our Other Regions
segment. We have been working to replace those volumes, and although we are encouraged by results so far, some regions
will be affected in fiscal year 2011.
The Japan Tobacco activities are consistent with a recurrent theme of manufacturers wanting to get closer to tobacco
farmers for many stated reasons, including political considerations and potential regulatory compliance. Several of our
customers made a similar move in the United States nearly 10 years ago. Our challenge continues to be to adapt our way of
doing business to meet customer needs, and we have been working with some of our customers to examine our arrangements
in certain markets. That process is ongoing and is likely to produce some changes in the near term. Any changes or new
arrangements are likely to entail more structured dealings than we have had in the past and to include long-term supply or
service agreements. Some customers may purchase green tobacco from us or from farmers in markets they deem to be
strategic, and through long-term agreements, rely on us for individual services, such as agronomy, logistics, and processing.
Most of our customers do not utilize the entire run of the crop, so these new arrangements are likely to be supplemented by
traditional purchases of processed leaf tobacco from us or other dealers.
We believe that these customer efforts are likely to strengthen our relationships over the long term because we
believe that independent leaf dealers add significant value to the system, providing expertise in dealing with large numbers of
farmers and providing a clearinghouse for various qualities of leaf produced in each crop. Our key challenge in the coming
year is to adapt our business model to meet our customers’ evolving needs while continuing to provide stability of supply and
the quality that distinguishes our products and services.
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, 2010, tobacco inventory of $812
million included $651 million in inventory that was committed for sale to customers and $161 million that was not
committed. Committed inventory, after deducting about $108 million in customer deposits, represents our net exposure of
about $543 million. We normally maintain a substantial portion of our debt at variable interest rates in order to mitigate
substantially 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 $422 million at
March 31, 2010. Although a hypothetical 1% change in short-term interest rates would result in a change in annual interest
expense of approximately $4.2 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 $246 million at March 31, 2010, are invested at
variable rates. Based on balances at March 31, 2010, a hypothetical 1% change in interest rates would change annual interest
income by $2.5 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, 2010 measurement date, a 1% increase in the discount rate would have reduced the projected benefit obligation
(“PBO”) for pensions by $25.3 million and decreased annual pension expense by $2.8 million. Conversely, a 1% decrease in
the discount rate would have increased the PBO by $30.6 million and increased annual pension expense by $3.2 million.
(cid:3)
38
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 $9.3 million in net remeasurement
losses in fiscal year 2010, compared to $46.0 million in net remeasurement losses in fiscal year 2009, and $17.2 million in
net remeasurement gains in fiscal year 2008. We recognized $4.0 million in net foreign currency transaction gains in fiscal
year 2010, compared to net transaction losses of $4.6 million in fiscal year 2009, and net transaction gains of $12.1 million in
fiscal year 2008. 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. We have entered forward currency exchange contracts to
hedge against the effects of currency movements on purchases of tobacco to reduce the volatility of costs, primarily pursuant
to customer contracts. In addition, we have entered some forward contracts to hedge balance sheet exposures. 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.
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.
(cid:3)
39
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,
2010
2009
2008
Sales and other operating revenues..........................................................................................................
$
2,491,738
$
2,554,659
$
2,145,822
Costs and expenses
Cost of goods sold.........................................................................................................................
Selling, general and administrative expenses................................................................................
Restructuring costs........................................................................................................................
Operating income......................................................................................................................................
Equity in pretax earnings of unconsolidated affiliates..................................................................
Interest income...............................................................................................................................
Interest expense.............................................................................................................................
Income before income taxes.....................................................................................................................
Income taxes..................................................................................................................................
1,949,473
285,056
—
257,209
22,376
1,253
24,210
256,628
86,283
2,035,318
309,409
—
209,932
20,543
2,305
35,631
197,149
64,588
1,715,724
225,670
12,915
191,513
13,500
17,178
41,908
180,283
63,799
Income from continuing operations..........................................................................................................
170,345
132,561
116,484
Loss from discontinued operations, net of income taxes.........................................................................
—
—
(145)
Net income................................................................................................................................................
Less: net (income) loss attributable to noncontrolling interests in subsidiaries.....................................
Net income attributable to Universal Corporation...................................................................................
170,345
(1,948)
168,397
132,561
(822)
131,739
116,339
2,817
119,156
Dividends on Universal Corporation convertible perpetual preferred stock...........................................
(14,850)
(14,850)
(14,850)
Earnings available to Universal Corporation common shareholders.......................................................
$
153,547
$
116,889
$
104,306
Basic earnings (loss) per share attributable to Universal Corporation common shareholders:
From continuing operations.......................................................................................................
$
6.21
$
4.57
$
3.83
From discontinued operations....................................................................................................
—
—
(0.01)
Net income.................................................................................................................................
$
6.21
$
4.57
$
3.82
Diluted earnings (loss) per share attributable to Universal Corporation common shareholders:
From continuing operations.......................................................................................................
$
5.68
$
4.32
$
3.71
From discontinued operations....................................................................................................
—
—
(0.01)
Net income.................................................................................................................................
$
5.68
$
4.32
$
3.70
See accompanying notes.
(cid:3)
40
UNIVERSAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars)
Current assets
ASSETS
March 31,
2010
2009
Cash and cash equivalents................................................................................................................................................
$
245,953
$
212,626
Accounts receivable, net...................................................................................................................................................
Advances to suppliers, net................................................................................................................................................
Accounts receivable—unconsolidated affiliates..............................................................................................................
Inventories—at lower of cost or market:
266,960
167,400
11,670
Tobacco..................................................................................................................................................................
812,186
Other......................................................................................................................................................................
Prepaid income taxes........................................................................................................................................................
Deferred income taxes......................................................................................................................................................
Other current assets...........................................................................................................................................................
52,952
13,514
47,074
75,367
263,383
214,282
20,371
586,136
60,712
13,181
68,264
64,964
Total current assets................................................................................................................................................
1,693,076
1,503,919
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....................................................................................................................................................
16,036
266,350
532,824
815,210
(485,723)
329,487
105,561
106,336
30,073
106,507
348,477
15,773
251,875
492,214
759,862
(447,575)
312,287
106,097
103,987
17,376
94,510
321,970
Total assets............................................................................................................................................................
$
2,371,040
$
2,138,176
41
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.................................................................................................................................................................
March 31,
2010
2009
177,013
259,576
6,464
107,858
30,097
18,991
15,000
614,999
414,764
96,888
69,886
46,128
$
168,608
236,837
19,191
14,162
24,710
6,867
79,500
549,875
331,808
91,248
79,159
52,842
Total liabilities......................................................................................................................................................
1,242,665
1,104,932
Shareholders’ equity
Universal Corporation:
Preferred stock:
Series A Junior Participating Preferred Stock, no par value, 500,000 shares
authorized, none issued or outstanding.................................................................................................................
—
—
Series B 6.75% Convertible Perpetual Preferred Stock, no par value, 5,000,000
shares authorized, 219,999 shares issued and outstanding (219,999 at March 31, 2009)...................................
213,023
213,023
Common stock, no par value, 100,000,000 shares authorized, 24,325,228 shares issued and
outstanding (24,999,127 at March 31, 2009)........................................................................................................
Retained earnings.............................................................................................................................................................
Accumulated other comprehensive loss...........................................................................................................................
195,001
767,213
(52,667)
Total Universal Corporation shareholders' equity................................................................................................
1,122,570
Noncontrolling interests in subsidiaries..................................................................................................................................
Total shareholders' equity.....................................................................................................................................
5,805
1,128,375
194,037
686,960
(64,547)
1,029,473
3,771
1,033,244
Total liabilities and shareholders' equity..............................................................................................................
$
2,371,040
$
2,138,176
See accompanying notes.
42
UNIVERSAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
Cash Flows From Operating Activities of Continuing Operations:
Fiscal Year Ended March 31,
2010
2009
2008
Net income......................................................................................................................................
$
170,345
$
132,561
$
116,339
Adjustments to reconcile net income to net cash provided by
operating activities of continuing operations:
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................................................................................................................
Equity in net income of unconsolidated affiliates, net of dividends..........................................
Restructuring 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..........................................
—
41,288
2,208
18,514
9,309
13,755
(3,037)
—
5,536
11,096
(215,865)
2,142
14,679
92,264
162,234
Cash Flows From Investing Activities of Continuing Operations:
Purchase of property, plant and equipment....................................................................................
(57,577)
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........................................................................................................................................
—
—
—
5,019
536
Net cash provided (used) by investing activities of continuing operations...............................
(52,022)
Cash Flows From Financing Activities of Continuing Operations:
Issuance (repayment) of short-term debt, net.................................................................................
Issuance of long-term debt.............................................................................................................
Repayment of long-term debt.........................................................................................................
Dividends paid to noncontrolling interests....................................................................................
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.................................................
Net cash provided (used) by continuing operations...............................................................
(5,250)
99,208
(79,500)
(104)
729
(32,194)
(14,850)
(45,882)
(1,193)
(79,036)
31,176
—
40,761
1,029
26,908
45,987
20,480
(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)
29,190
145
41,383
1,857
22,323
(15,168)
19,713
607
12,915
5,257
(25,980)
39,934
(13,148)
(3,028)
(112,578)
90,571
(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)
(240,718)
(174,132)
43
UNIVERSAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS—(Continued)
Fiscal Year Ended March 31,
2010
2009
2008
Cash Flows From Discontinued Operations:
Net cash provided by operating activities of discontinued operations..........................................
$
—
$
—
$
6,495
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...........................................
—
—
—
2,151
33,327
212,626
—
—
—
—
—
(2,634)
26,556
186,070
—
—
(17)
(4,957)
1,521
205
(172,406)
358,236
239
—
Cash and Cash Equivalents at End of Year..........................................................................................
$
245,953
$
212,626
$
186,070
Supplemental information—cash paid from continuing operations:
Interest.........................................................................................................................................
$
24,961
$
35,457
$
43,606
Income taxes, net of refunds.......................................................................................................
$
82,934
$
40,180
$
48,832
See accompanying notes.(cid:3)
44
UNIVERSAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Universal Corporation Shareholders
Series B
6.75%
Convertible
Perpetual
Preferred
Stock
Accumulated
Other
Comprehensive
Income
(Loss)
Common
Stock
Retained
Earnings
Non-
controlling
Interests
Total
Shareholders'
Equity
Comprehensive
Income
(Loss)
(in thousands of dollars)
Fiscal Year Ended March 31, 2010
Balance at beginning of year....................................
$
213,023
$
194,037
$
686,960
$
(64,547)
$
3,771
$
1,033,244
Changes in preferred and common stock
Issuance of common stock................................
Repurchase of common stock...........................
Accrual of stock-based compensation...............
Withholding of shares for grantee
income taxes (SARs and RSUs)....................
Dividend equivalents on RSUs.........................
Changes in retained earnings
Net income.........................................................
Cash dividends declared
Series B 6.75% convertible perpetual
preferred stock ($67.50 per share)................
Common stock ($1.86 per share)
Repurchase of common stock...........................
Dividend equivalents on RSUs.........................
Other comprehensive income (loss)
Translation adjustments, net of
income taxes..................................................
Foreign currency hedge adjustment,
net of income taxes........................................
Funded status of pension and other
postretirement benefit plans,
net of income taxes........................................
Other changes in noncontrolling interests
Dividends paid to noncontrolling
shareholders...................................................
1,183
(5,853)
6,133
(888)
389
1,183
(5,853)
6,133
(888)
389
168,397
1,948
170,345
$
170,345
(14,850)
(45,815)
(27,090)
(389)
(14,850)
(45,815)
(27,090)
(389)
4,511
190
4,701
4,701
13,386
(6,017)
13,386
13,386
(6,017)
(6,017)
(104)
(104)
Balance at end of year
$
213,023
$
195,001
$
767,213
$
(52,667)
$
5,805
$
1,128,375
Total comprehensive income................................................................................................................................................................................................................
182,415
Less: comprehensive income attributable to noncontrolling interests.................................................................................................................................................
(2,138)
Comprehensive income attributable to Universal Corporation............................................................................................................................................................
$
180,277
(cid:3)
45
UNIVERSAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY—(Continued)
Universal Corporation Shareholders
Series B
6.75%
Convertible
Perpetual
Preferred
Stock
Accumulated
Other
Comprehensive
Income
(Loss)
Common
Stock
Retained
Earnings
Non-
controlling
Interests
Total
Shareholders'
Equity
Comprehensive
Income
(Loss)
(in thousands of dollars)
Fiscal Year Ended March 31, 2009
Balance at beginning of year....................................
$
213,023
$
206,436
$
711,655
$
(15,483)
$
3,182
$
1,118,813
Changes in preferred and common stock
Issuance of common stock................................
Repurchase of common stock...........................
Accrual of stock-based compensation...............
Withholding of shares for grantee
income taxes (SARs and RSUs)....................
Dividend equivalents on RSUs.........................
Changes in retained earnings
Net income.........................................................
Cash dividends declared
Series B 6.75% convertible perpetual
preferred stock ($67.50 per share)................
Common stock ($1.82 per share)
Repurchase of common stock...........................
Dividend equivalents on RSUs.........................
Adoption of measurement timing
provisions of FASB Statement
No. 158 for pensions and other
65
(16,790)
4,870
(1,464)
920
131,739
(14,850)
(45,938)
(93,203)
(920)
postretirement benefits .................................
(1,523)
Other comprehensive income (loss)
Translation adjustments, net of
income taxes..................................................
Foreign currency hedge adjustment,
net of income taxes........................................
Funded status of pension and other
postretirement benefit plans,
net of income taxes........................................
Other changes in noncontrolling interests
Dividends paid to noncontrolling
shareholders...................................................
65
(16,790)
4,870
(1,464)
920
822
132,561
$
132,561
(14,850)
(45,938)
(93,203)
(920)
(1,523)
(19,639)
(129)
(19,768)
(19,768)
(15,803)
(15,803)
(15,803)
(13,622)
(13,622)
(13,622)
(104)
(104)
Balance at end of year
$
213,023
$
194,037
$
686,960
$
(64,547)
$
3,771
$
1,033,244
Total comprehensive income...............................................................................................................................................................................................................
Less: comprehensive income attributable to noncontrolling interests................................................................................................................................................
83,368
(693)
Comprehensive income attributable to Universal Corporation...........................................................................................................................................................
$
82,675
(cid:3)
46
UNIVERSAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY—(Continued)
Universal Corporation Shareholders
Series B
6.75%
Convertible
Perpetual
Preferred
Stock
Accumulated
Other
Comprehensive
Income
(Loss)
Common
Stock
Retained
Earnings
Non-
controlling
Interests
Total
Shareholders'
Equity
Comprehensive
Income
(Loss)
(in thousands of dollars)
Fiscal Year Ended March 31, 2008
Balance at beginning of year....................................
$
213,023
$
176,453
$
682,232
$
(40,976)
$
5,822
$
1,036,555
Changes in preferred and common stock
Repurchase of convertible perpetual
preferred stock...............................................
Issuance of common stock................................
Repurchase of common stock...........................
Accrual of stock-based compensation...............
Changes in retained earnings
Net income.........................................................
Cash dividends declared
Series B 6.75% convertible perpetual
preferred stock ($67.50 per share)................
Common stock ($1.78 per share)
Repurchase of common stock...........................
Adoption of FASB Interpretation
48 for uncertain tax positions........................
Other comprehensive income (loss)
Translation adjustments, net of
income taxes..................................................
Foreign currency hedge adjustment,
net of income taxes........................................
Funded status of pension and other
postretirement benefit plans,
net of income taxes........................................
Other changes in noncontrolling interests
Dividends paid to noncontrolling
shareholders...................................................
Other..................................................................
(1)
24,373
(2,370)
7,980
(1)
24,373
(2,370)
7,980
119,156
(2,817)
116,339
$
116,339
(14,850)
(48,602)
(15,411)
(10,870)
(14,850)
(48,602)
(15,411)
(10,870)
18,854
180
19,034
19,034
(494)
7,133
(494)
(494)
7,133
7,133
(129)
126
(129)
126
Balance at end of year
$
213,022
$
206,436
$
711,655
$
(15,483)
$
3,182
$
1,118,813
Total comprehensive income...............................................................................................................................................................................................................
142,012
Less: comprehensive loss attributable to noncontrolling interests.....................................................................................................................................................
2,637
Comprehensive income attributable to Universal Corporation...........................................................................................................................................................
$
144,649
(cid:3)
47
UNIVERSAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY—(Continued)
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...............................................................................................................................
Common Shares Outstanding:
(in thousands of shares)
Balance at beginning of year.....................................................................................................................
Issuance of common stock and exercise of
stock options and SARs..........................................................................................................................
Repurchase of common stock....................................................................................................................
Balance at end of year...............................................................................................................................
See accompanying notes.
Fiscal Year Ended March 31,
2010
2009
2008
220
—
—
220
220
—
—
220
220
—
—
220
24,999
27,162
26,949
70
(744)
24,325
65
(2,228)
24,999
538
(325)
27,162
48
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.
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 $12.0 million in fiscal year 2010, $8.7 million in fiscal year 2009, and $9.2 million in fiscal year 2008,
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.
In fiscal year 2006, the Company deconsolidated its operations in Zimbabwe under accounting requirements that
apply under certain conditions to foreign subsidiaries that are subject to foreign exchange controls and other government
restrictions. Since that time, the investment has been accounted for using the cost method, as required under the accounting
guidance. The investment is reported in investments in unconsolidated affiliates in the consolidated balance sheets. The
investment in Zimbabwe operations was approximately $1.3 million at March 31, 2010, and $1.8 million at March 31, 2009.
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.
The Company holds less than a 100% financial interest in certain consolidated subsidiaries. The net income and
shareholders’ equity attributable to the noncontrolling interests in these subsidiaries are reported on the face of the
consolidated financial statements. During fiscal years 2008, 2009, and 2010, there were no changes in the Company’s
ownership percentage in any of these subsidiaries.
(cid:3)
49
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Investments in Unconsolidated Affiliates
The Company’s equity method investments and its cost method investments, which include its Zimbabwe
operations, are non-marketable securities. Universal reviews such investments for impairment whenever events or changes in
circumstances indicate that the carrying amount of an investment may not be recovered. For example, the Company would
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 follows the applicable
accounting guidance in determining the fair value of the investments. In most cases, this involves the use of discounted cash
flow models (Level 3 of the fair value hierarchy under the accounting guidance). If the fair value of an equity or cost method
investee is determined to be lower than its carrying value, an impairment loss is recognized. The determination of fair value
using discounted cash flow models is normally not based on observable market data from independent sources and therefore
requires significant management judgment with respect to estimates of future operating earnings and the selection of an
appropriate discount rate. The use of different assumptions could increase or decrease estimated future operating cash flows,
and the discounted value of those cash flows, and therefore could increase or decrease any impairment charge related to these
investments.
In its consolidated statements of income, the Company reports its 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 (1) equity in the pretax earnings of unconsolidated affiliates, as
reported in the consolidated statements of income to (2) equity in the net income of unconsolidated affiliates, net of
dividends, as reported in the consolidated statements of cash flows for the fiscal years ended March 31, 2010, 2009 and 2008:
Unconsolidated Affiliates
Fiscal Year Ended March 31,
2010
2009
2008
Equity in pretax earnings reported in the consolidated statements of income..................
Equity in income taxes....................................................................................................
Equity in net income.......................................................................................................
Less: Dividends received on investments (1)..................................................................
$
22,376
$
20,543
$
13,500
7,356
15,020
(11,983)
5,284
15,259
(8,680)
2,943
10,557
(11,164)
Equity in net income, net of dividends, reported in the consolidated statements
of cash flows.................................................................................................................
$
3,037
$
6,579
$
(607)
(1) In accordance with the applicable accounting guidance, dividends received from unconsolidated affiliates accounted for on the equity method that
represent a return on capital (i.e., a return of earnings on a cumulative basis) are presented as operating cash flows in the consolidated statements of cash
flows.
50
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Earnings per Share
The Company calculates basic earnings per share based on earnings available to common shareholders after
payment of dividends on the Company’s Series B 6.75% Convertible Perpetual Preferred Stock. The calculation uses the
weighted average number of common shares outstanding during each period. Diluted earnings per share is computed in a
similar manner using the weighted average number of common shares and dilutive potential common shares outstanding.
Dilutive potential common shares 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.
The calculations of earnings per share for the fiscal years ended March 31, 2010, 2009, and 2008, are provided in
Note 5.
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
Company did not hold any short-term investments at March 31, 2010 or 2009.
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 $56.2 million at March 31, 2010, and $28.2 million at March 31, 2009, 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 $18.5 million in fiscal year 2010, $26.9 million in fiscal
year 2009, and $22.3 million in fiscal year 2008. These provisions are included in selling, general, and administrative
expenses in the consolidated statements of income. Interest on advances is recognized in earnings upon the farmers’ delivery
of tobacco in payment of principal and interest. Recognition of interest is discontinued when an advance is not expected to be
fully collected. Advances on which interest accrual had been discontinued totaled approximately $64.2 million at March 31,
2010, and $51.6 million at March 31, 2009.
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.
(cid:3)
51
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 2010, 2009, or 2008.
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 follows the applicable fair value accounting
guidance in determining the fair value of goodwill. This primarily involves the use of discounted cash flow models (Level 3
of the fair value hierarchy in the accounting guidance). The calculations in these models are normally not based on
observable market data from independent sources and therefore require 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.
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. No charges for goodwill impairment were recorded in fiscal years 2010, 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 of the asset to its fair value determined in accordance with the accounting guidance. In many cases, this
involves the use of discounted cash flow models that are not based on observable market data from independent sources
(Level 3 of the fair value hierarchy under the accounting guidance). The Company did not record any significant charges for
the impairment of long-lived assets during fiscal years 2010, 2009, or 2008.
Income Taxes
The Company provides deferred income taxes on temporary differences between the book and tax basis of its assets
and liabilities. Those differences arise principally from employee benefit accruals, depreciation, deferred compensation,
undistributed earnings of unconsolidated affiliates, undistributed earnings of foreign subsidiaries, goodwill, and valuation
allowances on farmer advances and value-added tax credits. As discussed in Note 6, during fiscal year 2010, the Company
changed the classification of undistributed earnings of certain foreign subsidiaries that had previously been designated as
permanently reinvested. Approximately $3.5 million in deferred U.S. income taxes were recorded on those earnings effective
with this change. At March 31, 2010, the Company had no undistributed earnings of foreign subsidiaries classified as
permanently reinvested.
(cid:3)
52
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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:
2010
March 31,
2009
2008
T ranslation adjustments
Before income taxes....................................................................................................
$
(10,854)
$
(17,784)
$
12,421
Allocated income taxes................................................................................................
54
2,473
(8,093)
Foreign currency hedge adjustment
Before income taxes....................................................................................................
Allocated income taxes................................................................................................
(736)
258
(21,330)
7,465
2,982
(1,044)
Funded status of pension and other postretirement benefit plans
Before income taxes....................................................................................................
Allocated income taxes................................................................................................
(63,362)
21,973
(54,238)
18,867
(33,406)
11,657
T otal accumulated other comprehensive loss..................................................................
$
(52,667)
$
(64,547)
$
(15,483)
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 $9.3 million in fiscal year 2010, net
remeasurement losses of $46.0 million in fiscal year 2009, and net remeasurement gains of $15.2 million in fiscal year 2008.
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 gains of $4.0 million in fiscal year 2010, net transaction
losses of $4.6 million in fiscal year 2009, and net transaction gains of $12.1 million in fiscal year 2008.
53
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 were deconsolidated
during fiscal year 2006 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
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 U.S. generally accepted accounting principles 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.
(cid:3)
54
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Accounting Pronouncements
Recent Pronouncements Adopted Through March 31, 2010
In June 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting
Standards No. 168, “The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting
Principles – a replacement of FASB Statement No. 162” (“SFAS 168”). This Statement established the newly-developed
FASB Accounting Standards Codification™ (“Codification”) as the single source of authoritative U.S. generally accepted
accounting principles (“GAAP”) for all nongovernmental entities. All guidance in the Codification carries the same level of
authority, and all changes or additions to U.S. generally accepted accounting principles are now issued as Accounting
Standards Updates. In addition to the Codification, rules and interpretive releases of the U.S. Securities and Exchange
Commission (“SEC”) under federal securities laws remain sources of authoritative GAAP for SEC registrants. Universal
was required to adopt SFAS 168 effective September 30, 2009. SFAS 168 did not make any changes to existing accounting
guidance that impact the Company’s accounting and financial reporting.
During the fiscal years ended March 31, 2010, 2009, and 2008, Universal adopted the following key accounting
pronouncements, all of which were issued prior to the initial effective date of the Codification:
(cid:120) FASB Staff Position No. 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets” (“FSP
132(R)-1”), adopted effective March 31, 2010. This pronouncement, which is now a part of Topic 715 of the
Codification, requires expanded disclosures about plan assets of defined benefit pension or other postretirement
benefit plans. The new disclosures include information about investment allocation decisions, categories of plan
assets, the inputs and valuation techniques used to measure the fair value of those assets, and significant
concentrations of credit risk. The disclosures required by FSP 132(R)-1 are included in Note 12 and did not have a
material effect on the Company’s financial statements.
(cid:120) FASB Statement of Financial Accounting Standards No. 165, “Subsequent Events” (“SFAS 165”), adopted effective
June 30, 2009. SFAS 165, which is now set forth under Topic 855 of the Codification, establishes standards for
accounting and disclosure for events occurring after the balance sheet date but before financial statements are issued.
It defines the period after the balance sheet date during which events or transactions should be evaluated for
potential recognition or disclosure, and it provides guidance on recognition and disclosure of actual transactions or
events occurring after the balance sheet date. The adoption of SFAS 165 did not have a material effect on the
Company’s financial statements.
(cid:120) FASB Statement of Financial Accounting Standards No. 160, “Noncontrolling Interests in Consolidated Financial
Statements – an amendment of ARB No. 51” (“SFAS 160”), adopted effective April 1, 2009. SFAS 160, which is
now set forth in Topic 810 of the Codification, 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. Adoption of this guidance did
not have a material impact on the Company’s financial statements.
(cid:120) FASB Statement of Financial Accounting Standards No. 141(R), “Business Combinations” (“SFAS 141(R)”),
adopted effective April 1, 2009. SFAS 141(R) 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 141(R), which is now set forth under Topic
805 of the Codification, 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. Universal will apply the guidance to
all future business combinations.
(cid:3)
55
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(cid:120) The measurement timing provisions of 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”), now part of the guidance in Codification Topic 715. These provisions
require that the funded status of defined benefit plans be measured as of the balance sheet date, which eliminated 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 provisions, the Company began measuring its pension
and other postretirement benefit plans as of the balance sheet date effective March 31, 2009. At that date, the
Company 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.
(cid:120) FASB Statement of Financial Accounting Standards No. 161, “Disclosures about Derivative Instruments and
Hedging Activities” (“SFAS 161”), adopted effective March 31, 2009. SFAS 161, which is now part of the
guidance set forth in Topic 815 of the Codification, amended several prior accounting pronouncements to require
enhanced disclosures about derivatives and hedging activities 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 a company’s financial position, results of operations, and cash flows. The
disclosures required by SFAS 161 are provided in Note 10.
(cid:120) FASB Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS
157, which is now set forth in Topic 820 of the Codification, defines fair value, establishes a framework for
measuring fair value under generally accepted accounting principles, and expands disclosures about fair value
measurements. Universal adopted SFAS 157 as it applies to financial assets and liabilities effective April 1, 2008,
and as it applies to nonfinancial assets and liabilities (primarily assessments of goodwill and other long-lived assets
for potential impairment) effective April 1, 2009. The adoption of SFAS 157 did not have a material impact on the
Company’s financial statements. Disclosures about fair value measurements for financial assets and liabilities are
provided in Note 11.
(cid:120) 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”), adopted effective April
1, 2008. SFAS 159, which is now part of the guidance in Topic 825 of the Codification, 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.
(cid:120) FASB Interpretation 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), adopted effective April 1, 2007.
FIN 48, which is now included in the guidance in Topic 740 of the Codification, 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. Disclosures about uncertain tax positions are provided in Note 6.
(cid:3)
56
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Pronouncements to be Adopted in Future Periods
In addition to the above accounting pronouncements adopted through March 31, 2010, the following
pronouncements have been issued and will become effective in future periods:
(cid:120) FASB Accounting Standards Update 2009-13, “Multiple-Deliverable Revenue Arrangements” (“ASU 2009-13”),
which was issued by the FASB in October 2009. ASU 2009-13 establishes a selling price hierarchy for determining
the selling price of a deliverable in a multiple-deliverable arrangement. It also requires additional disclosures about
the methods and assumptions used to evaluate multiple-deliverable arrangements and to identify the significant
deliverables within those arrangements. ASU 2009-13 is effective prospectively for revenue arrangements entered
into or materially modified in fiscal years beginning on or after June 15, 2010, which means that Universal will be
required to adopt the guidance effective April 1, 2011, the beginning of its fiscal year 2012. The Company is
evaluating the potential impact of ASU 2009-13, but does not currently expect that it will have a material effect on
its financial statements.
(cid:120) FASB Accounting Standards Update 2010-06, “Improving Disclosures about Fair Value Measurements” (“ASU
2010-06”), which was issued by the FASB in January 2010 and is effective for interim and an annual financial
statements for fiscal years beginning after December 15, 2010. ASU 2010-06 expands and clarifies the disclosure
requirements related to fair value measurements. It requires companies to disclose separately the amounts of
significant transfers in and out of Level 1 and Level 2 of the fair value hierarchy and describe the reasons for the
transfers. In addition, information about purchases, sales, issuances, and settlements on a gross basis is required in
the reconciliation of Level 3 fair-value measurements. ASU 2010-06 also clarifies existing fair value measurement
disclosure guidance related to level of disaggregation, fair value inputs, and valuation techniques. Universal will be
required to apply most provisions of the new guidance effective April 1, 2010, the beginning of its fiscal year 2011.
The Company is evaluating the effect of ASU 2010-06, but does not currently expect that it will have a material
effect on its financial statements.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year’s presentation.
57
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE 2. DISCONTINUED OPERATIONS
During fiscal years 2007 and 2008, Universal divested its non-tobacco operations, which included the businesses
comprising its lumber and building products segment and its agri-products segment. These businesses were sold in multiple
transactions, the last of which was completed in the third quarter of fiscal year 2008. The results of operating and divesting
the non-tobacco businesses that were not sold prior to fiscal year 2008 are reported as discontinued operations in the
accompanying consolidated financial statements and were not material to the Company’s overall results of operations or
financial position for that year.
NOTE 3. RESTRUCTURING COSTS
During the fiscal year ended March 31, 2008, Universal recorded restructuring costs totaling approximately $12.9
million before tax and noncontrolling interest, $8.1 million after tax and noncontrolling 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:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
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.
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 2008. The payment of those liabilities was substantially completed
during fiscal year 2009. The following is a reconciliation of the Company’s liability for restructuring costs from April 1,
2007 through March 31, 2010:
One-Time and
Special
Termination
Benefits
Other Costs
Total
Balance at April 1, 2007..........................................................................................................................
$
1,331
$
190
$
1,521
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......................................................................................................................
Payments during fiscal year 2010............................................................................................................
6,717
(4,962)
3,086
(1,437)
1,649
(1,649)
—
(190)
—
—
—
—
6,717
(5,152)
3,086
(1,437)
1,649
(1,649)
Balance at March 31, 2010......................................................................................................................
$
—
$
—
$
—
The payments for termination benefits were made to approximately 300 full-time employees and 10,500 seasonal
employees during fiscal year 2008, 23 employees during fiscal year 2009, and 12 employees during fiscal year 2010. (cid:3)
(cid:3)
58
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 General Court of the European Union. Although a hearing on the
matter was held in June 2009, 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.
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 $41 million at the
March 31, 2010 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 filed appeals in the General Court of the European Union. Based on
consultation with outside legal counsel, the Company believes it is probable that it will prevail in the appeals process and
therefore has not accrued a charge or interest for the fine. If the Company and Deltafina were ultimately found liable for the
full amount of the fine, then accumulated interest on the fine would also be due and payable. Accumulated interest totaled
approximately €4.5 million (about $6 million) at March 31, 2010. Deltafina has provided a bank guarantee to the
Commission in the amount of the fine plus accumulated interest in order to stay execution during the appeals process.
(cid:3)
59
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
U.S. Foreign Corrupt Practices Act
(cid:3)
As a result of a posting to the Company’s Ethics Complaint hotline alleging improper activities that involved or
related to certain of its 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. The payments involved 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 Department of Justice (“DOJ”) and SEC in March 2006. On June 6, 2006, the SEC
notified the Company that a formal order of investigation had been issued.
Since voluntarily reporting, the Company has cooperated with and assisted the DOJ and SEC in their
investigations, and for the past year the Company has engaged in settlement discussions with both authorities to resolve the
matter. Those negotiations have resulted in agreements in principle being reached with representatives of the DOJ and the
staff of the SEC. The final resolution of this matter remains subject to the completion of definitive agreements and the
approval and execution of those agreements by the DOJ and the SEC. In addition, each settlement is subject to the approval
of a federal district court with jurisdiction over the matter. The Company has been given no assurance that the settlements
will be approved by the DOJ, SEC, or federal district courts. Based on the agreements in principle that have been reached to
date, the resolution of this matter with the DOJ and the SEC is expected to include injunctive relief, disgorgement and
prejudgment interest, fines, penalties, and the retention of an independent compliance monitor. Based in part on the progress
of the matter and consultation with outside counsel, the Company has recorded accruals from time to time since the matter
arose that are adequate to satisfy the estimated financial settlement the Company expects with the resolution of the matter.
The financial settlement is not expected to have a material effect on the Company’s financial condition or results of
operations.
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 matters 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.
(cid:3)
60
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,
2010
2009
2008
Basic Earnings (Loss) Per Share
Numerator for basic earnings (loss) per share
From continuing operations:
Income attributable to Universal Corporation from continuing operations.....................................
$
168,397
$
131,739
$
119,301
Less: Dividends on convertible perpetual preferred stock..............................................................
(14,850)
(14,850)
(14,850)
Earnings available to Universal Corporation common shareholders from
continuing operations..............................................................................................................
153,547
116,889
104,451
From discontinued operations:
Loss available to Universal Corporation common shareholders from
discontinued operations...............................................................................................................
—
—
(145)
Net income available to Universal Corporation common shareholders...............................................
$
153,547
$
116,889
$
104,306
Denominator for basic earnings (loss) per share
Weighted average shares outstanding.................................................................................................
24,732
25,570
27,263
Basic earnings (loss) per share attributable to Universal Corporation
common shareholders:
From continuing operations................................................................................................................
$
6.21
$
4.57
$
3.83
From discontinued operations.............................................................................................................
—
—
(0.01)
Net income per share..........................................................................................................................
$
6.21
$
4.57
$
3.82
Diluted Earnings (Loss) Per Share
Numerator for diluted earnings (loss) per share
From continuing operations:
Earnings available to Universal Corporation common shareholders from
continuing operations..................................................................................................................
$
153,547
$
116,889
$
104,451
Add: Dividends on convertible perpetual preferred stock (if conversion assumed).......................
14,850
14,850
14,850
Earnings available to Universal Corporation common shareholders from continuing
operations for calculation of diluted earnings per share..............................................................
168,397
131,739
119,301
From discontinued operations:
Loss available to Universal Corporation common shareholders from discontinued
operations....................................................................................................................................
—
—
(145)
Net income available to Universal Corporation common shareholders...............................................
$
168,397
$
131,739
$
119,156
Denominator for diluted earnings (loss) per share:
Weighted average shares outstanding.................................................................................................
Effect of dilutive securities (if conversion or exercise assumed)
Convertible perpetual preferred stock.............................................................................................
Employee share-based awards.........................................................................................................
Denominator for diluted earnings (loss) per share..............................................................................
24,732
4,733
197
29,662
25,570
4,718
178
30,466
27,263
4,711
212
32,186
Diluted earnings (loss) per share attributable to Universal Corporation
common shareholders:
From continuing operations................................................................................................................
$
5.68
$
4.32
$
3.71
From discontinued operations.............................................................................................................
—
—
(0.01)
Net income per share..........................................................................................................................
$
5.68
$
4.32
$
3.70
For the fiscal years ended March 31, 2010, 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 404,800 at a weighted-average exercise price of $58.96 for the fiscal year ended March 31,
2010, 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.
61
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE 6. INCOME TAXES
Income taxes consisted of the following:
Fiscal Ye ar Ende d March 31,
2010
2009
2008
Current
United States............................................................................................................
$
12,246
$
19,622
$
9,449
State and local..........................................................................................................
Foreign.....................................................................................................................
Deferred
United States............................................................................................................
State and local..........................................................................................................
Foreign.....................................................................................................................
3,357
56,925
72,528
4,134
247
9,374
13,755
4,178
20,308
44,108
17,066
123
3,291
20,480
2,744
31,893
44,086
71
48
19,594
19,713
T otal.....................................................................................................................
$
86,283
$
64,588
$
63,799
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,
2010
2009
2008
Statutory tax rate.....................................................................................................................................
State income taxes, net of federal benefit...............................................................................................
Impact of permanently reinvested earnings............................................................................................
Change in classification 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........................................................................................................................
35.0%
0.9
—
1.4
—
(3.7)
33.6%
35.0%
1.4
0.4
—
(1.5)
(2.5)
32.8%
35.0%
1.0
0.4
—
(2.4)
1.4
35.4%
At the beginning of fiscal year 2010, Universal had approximately $52 million of undistributed earnings of foreign
subsidiaries on which no provision for U.S. income taxes had been recorded because those earnings were designated as
permanently reinvested. Effective March 31, 2010, the Company changed the classification of those earnings to reflect a
change in management’s intent to repatriate the earnings consistent with appropriate tax planning and good business practice
in the respective foreign countries. As a result of this change, approximately $3.5 million of additional income tax expense
was recognized to record the applicable U.S. income tax liability. After this change, the Company no longer has any
undistributed earnings of foreign subsidiaries that were classified as permanently reinvested.
The U.S. and foreign components of income before income taxes and other items were as follows:
Fiscal Ye ar Ende d March 31,
2010
2009
2008
United States..................................................................................................................
Foreign..........................................................................................................................
$
48,675
$
103,791
$
42,733
207,953
93,358
137,550
T otal.......................................................................................................................
$
256,628
$
197,149
$
180,283
62
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Significant components of deferred tax liabilities and assets were as follows:
March 31,
2010
2009
Liabilities
Foreign withholding taxes.........................................................................................................................................................
Undistributed earnings..............................................................................................................................................................
Goodwill....................................................................................................................................................................................
All other....................................................................................................................................................................................
$
16,438
$
22,910
23,937
34,973
27,320
42,887
29,805
33,881
Total deferred tax liabilities...............................................................................................................................................
$
102,668
$
129,483
Assets
Employee benefit plans.............................................................................................................................................................
$
48,392
$
45,276
Foreign currency losses.............................................................................................................................................................
Book over tax depreciation........................................................................................................................................................
Foreign currency translation......................................................................................................................................................
Deferred compensation..............................................................................................................................................................
Tax credits.................................................................................................................................................................................
Valuation allowances on Brazilian farmer advances and value-added tax credits.....................................................................
Net operating loss carryforwards...............................................................................................................................................
All other....................................................................................................................................................................................
Total deferred tax assets.....................................................................................................................................................
Valuation allowance..................................................................................................................................................................
643
504
1,306
4,082
592
30,920
1,010
37,100
124,549
(4,082)
29,953
2,478
2,425
4,031
11,703
20,498
3,750
45,264
165,378
(3,980)
Net deferred tax assets.......................................................................................................................................................
$
120,467
$
161,398
(cid:3)
During fiscal year 2009, the Company reversed its remaining $3.0 million valuation allowance on foreign tax credit
carryforwards based on changes in the expected utilization of those carryforwards. At March 31, 2009, the Company had
$11.7 million of alternative minimum tax credit carryforwards that were fully utilized during fiscal year 2010. The net
operating loss carryforwards of $1.0 million at March 31, 2010, relate to several foreign jurisdictions. Approximately $0.7
million of those carryforwards will expire in three years, and the remainder have unlimited carryforward periods.
Combined Income Tax Expense (Benefit)
The combined income tax expense (benefit) allocable to continuing operations, other comprehensive income (loss),
and direct adjustments to shareholders' equity was as follows:
(cid:3)
Fiscal Ye ar Ende d March 31,
2010
2009
2008
Continuing operations....................................................................................................
$
86,283
$
64,588
$
63,799
Other comprehensive income (loss)...............................................................................
Direct adjustments to shareholders' equity......................................................................
6,520
(454)
(26,285)
(848)
14,010
(4,316)
T otal..............................................................................................................................
$
92,349
$
37,455
$
73,493
(cid:3)
(cid:3)
(cid:3)
63
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Uncertain Tax Positions(cid:3)
(cid:3)
(cid:3)
years ended March 31, 2010 and 2009, is as follows:
(cid:3)
A reconciliation of the beginning and ending balance of the gross liability for uncertain tax positions for the fiscal
Fiscal Ye ar Ende d March 31,
2010
2009
Liability for uncertain tax positions, beginning of year................................................................................
$
22,740
$
25,801
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.....................................................................................................
Other reductions.......................................................................................................................................
Effect of currency rate movement............................................................................................................
9,609
574
(1,674)
(1,552)
(4,802)
(4,041)
1,330
3,277
1,873
—
—
(5,032)
—
(3,179)
Liability for uncertain tax positions, end of year.........................................................................................
$
22,184
$
22,740
(cid:3)
Of the total liability for uncertain tax positions at March 31, 2010, approximately $14.5 million could have an effect
on the consolidated effective tax rate if the tax benefits are recognized. The liability for uncertain tax positions includes $4.6
million related to tax positions for which it is reasonably possible that the amounts could change significantly before March
31, 2011. 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 a net reversal of interest and
penalties of $2.6 million in fiscal year 2010, and net expense for interest and penalties of $3.6 million in fiscal year 2009, and
$0.2 million in fiscal year 2008. At March 31, 2010 and 2009, $6.5 million and $7.5 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, 2010, the Company's earliest open tax year for U.S. federal
income tax purposes was its fiscal year ended March 31, 2007. Open tax years in state and foreign jurisdictions generally
range from three to six years.
(cid:3)
64
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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, 2010) 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, 2010). 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, 2010 and
2009, 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, 2010.
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, 2010 and 2009, approximately $177 million and $169 million, respectively, were outstanding
under these uncommitted lines of credit. At March 31, 2010, the Company and its consolidated affiliates had unused
uncommitted lines of credit totaling approximately $575 million. The weighted average interest rates on short-term
borrowings outstanding as of March 31, 2010 and 2009, were approximately 4.1% and 4.9%, respectively.
NOTE 8. LONG-TERM OBLIGATIONS
Long-term obligations consisted of the following:
March 31,
2010
2009
Medium-term notes due from 2010 to 2014 at various rates........................................................................
$
429,764
$
411,308
Less current portion....................................................................................................................................
(15,000)
(79,500)
Long-term obligations.................................................................................................................................
$
414,764
$
331,808
Notes
The Company had $420 million principal amount of medium-term notes outstanding at March 31, 2010. These
notes, which have a carrying amount of $429.8 million after fair value adjustments for related interest rate swap agreements,
mature at various dates from December 2010 to December 2014 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 SEC 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.
(cid:3)
65
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Other Information
The fair value of the Company’s long-term obligations, including the current portion, was approximately $421
million at March 31, 2010, and $380 million at March 31, 2009.
As indicated above, 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, 2010 and 2009, the Company had interest rate
swap agreements in place on $245 million and $170 million, respectively, of long-term debt. The fair value of those swap
agreements was an asset of $9.8 million at March 31, 2010, and $11.8 million at March 31, 2009. 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, 2010, by fiscal year, were as follows: 2011 - $15 million;
2012 - $95 million; 2013 - $10 million; 2014 - $200 million; and 2015 - $100 million. All long-term debt outstanding at
March 31, 2010, is scheduled to be repaid by the end of fiscal year 2015.
NOTE 9. LEASES(cid:3)
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 $20.8
million in fiscal year 2010, $19.3 million in fiscal year 2009, and $17.0 million in fiscal year 2008. Future minimum
payments under non-cancelable operating leases total $19.1 million in 2011, $13.2 million in 2012, $9.0 million in 2013, $3.5
million in 2014, $3.2 million in 2015, and $7.1 million after 2015.
NOTE 10. DERIVATIVES AND HEDGING ACTIVITIES
Universal is exposed to various risks in its worldwide operations and uses derivative financial instruments to
manage two specific types of risks – interest rate risk and foreign currency exchange rate risk. Interest rate risk has been
managed by entering into interest rate swap agreements, and foreign currency exchange rate risk has been managed by
entering into forward foreign currency exchange contracts. However, the Company’s policy permits other instruments. In
addition, management works to manage foreign currency exchange rate risk by minimizing net monetary positions in non-
functional currencies, which may include 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, with a strategy
of maintaining a level of floating rate debt that is related to the interest rate exposure on its committed inventories. The
strategy is implemented by borrowing at floating interest rates, and by converting a portion of the Company’s 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 change 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. The total notional amount of the Company’s receive-fixed/pay-floating interest rate swaps was $245
million at March 31, 2010, and $170 million at March 31, 2009.
(cid:3)
66
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Cash Flow Hedging Strategy for Foreign Currency Exchange Rate Risk Related to Forecast Purchases of Tobacco and
Related Processing Costs
The majority of the tobacco production in most countries outside the United States where Universal operates is sold
in export markets at prices denominated in U.S. dollars. However, purchases of tobacco from farmers and most processing
costs (such as labor and energy) in those countries are usually denominated in the local currency. Changes in exchange rates
between the U.S. dollar and the local currencies where tobacco is grown and processed affect the ultimate U.S. dollar cost of
the processed tobacco 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 and processing
costs, 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 and costs. 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 and processing costs for the foreign currency notional amount hedged. The hedging strategy has been
used mainly for tobacco purchases and processing costs in Brazil, where the large crops, the terms of sale to customers, and
the availability of derivative markets make it particularly desirable to manage the related foreign exchange rate risk.
Prior to the 2008-2009 crop year, the Company did not designate the forward contracts it entered for Brazilian
tobacco purchases 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 and the 2009-2010 crop cycles, all contracts related to tobacco purchases in Brazil
were designated and qualified as hedges of the future cash flows associated with the forecast purchases of tobacco. As a
result, except for insignificant amounts related to any ineffective portion of the hedging strategy, changes in fair values of the
forward contracts have been recognized in comprehensive income as they occurred, but only recognized in earnings upon
sale of the related tobacco to third-party customers. Forward contracts related to processing costs have not been designated
as hedges, and gains and losses on those contracts have been recognized in earnings on a mark-to-market basis.
Through March 2010, the Company hedged approximately $50 million U.S. dollar notional amount related to 2009-
2010 crop tobacco purchases in Brazil. Additional forward contracts totaling approximately $41 million U.S. dollar notional
amount were entered to mitigate currency exposure on processing costs related to that crop. Purchases of the 2009-2010 crop
are expected to be completed in July 2010, and all forward contracts to hedge those purchases will mature and be settled by
that time. For all hedge gains and losses recorded in accumulated other comprehensive loss at March 31, 2010, the Company
expects to complete the sale of the tobacco and recognize the amounts in earnings during fiscal year 2011. At March 31,
2010, 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. As noted above, changes in the fair values of
forward contracts related to processing costs are being recognized in earnings each quarter on a mark-to-market basis.
From September 2008 through July 2009, the Company hedged approximately $241 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 were completed in July 2009, and all forward contracts related to that crop matured and were settled by that
time. Sales of the 2008-2009 crop began during the first quarter of fiscal year 2010. By the end of fiscal year 2010, all hedge
gains and losses previously recorded in accumulated other comprehensive income related to the 2008-2009 crop were
reclassified to cost of goods sold upon sale of the tobacco.
From October 2007 through July 2008, the Company hedged approximately $240 million U.S. dollar notional
amount related to the 2007-2008 crop in Brazil; however, those forward contracts were not designated and accounted for as
hedges, so the related gains and losses were recorded in earnings during fiscal years 2008 and 2009 as they occurred.
(cid:3)
67
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Hedging Strategy for Foreign Currency Exchange Rate Risk Related to Net Local Currency Monetary Assets and Liabilities
of Foreign Subsidiaries
Most of the Company’s foreign subsidiaries transact the majority of their sales in U.S. dollars and finance the
majority of their operating requirements with U.S. dollar borrowings, and therefore use the U.S. dollar as their functional
currency. These subsidiaries normally have certain monetary assets and liabilities on their balance sheets that are
denominated in the local currency. Those assets and liabilities can include cash and cash equivalents, accounts receivable
and accounts payable, advances to farmers and suppliers, deferred income tax assets and liabilities, recoverable value-added
taxes, and other items. Net monetary assets and liabilities denominated in the local currency are remeasured into U.S. dollars
each reporting period, generating gains and losses that the Company records in earnings as a component of selling, general,
and administrative expenses. The level of net monetary assets or liabilities denominated in the local currency normally
fluctuates throughout the year based on the operating cycle, but it is common for monetary assets to exceed monetary
liabilities, sometimes by a significant amount. When this situation exists and the local currency weakens against the U.S.
dollar, remeasurement losses are generated. Conversely, remeasurement gains are generated on a net monetary asset position
when the local currency strengthens against the U.S. dollar. 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 were recorded in earnings as a
component of selling, general, and administrative expenses for each reporting period as they occurred, and thus directly offset
the related remeasurement losses or gains in the consolidated statements of income for the notional amount hedged.
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. No forward contracts were entered for this purpose in fiscal year 2010. To further mitigate currency
remeasurement exposure, the Company’s foreign subsidiaries have obtained short-term local currency financing during
certain periods. This strategy, while not involving the use of derivative instruments, is intended to minimize the subsidiary’s
net monetary position by financing a portion of the local currency monetary assets with local currency monetary liabilities
and thus hedging a portion of the overall position.
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 that a fixed price order and the related trade account receivable are outstanding
with the customer. The contracts are not designated as hedges for accounting purposes.
68
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, 2010, 2009, and 2008.
(in thousands of dollars)
Fair Value Hedges - Interest Rate Swap Agreements
Derivative
Fiscal Year Ended March 31,
2010
2009
2008
Gain (loss) recognized in earnings.................................................................................................
$
(2,043)
$
8,366
$
3,990
Location of gain (loss) recognized in earnings...............................................................................
Interest expense
Hedged Item
Description of hedged item............................................................................................................
Fixed rate long-term debt
Gain (loss) recognized in earnings ................................................................................................
$
2,043
$
(8,366)
$
(3,990)
Location of gain (loss) recognized in earnings...............................................................................
Interest expense
Cash Flow Hedges - Forward Foreign Currency Exchange Contracts
Derivative
Effective Portion of Hedge
Gain (loss) recorded in accumulated other comprehensive loss.................................................
$
7,174
$
(22,006)
$
—
Gain (loss) reclassified from accumulated other comprehensive
loss into earnings..................................................................................................................
$
(14,844)
$
—
$
—
Location of gain (loss) reclassified from accumulated other
comprehensive loss into earnings..........................................................................................
Cost of goods sold
Ineffective Portion and Early De-designation of Hedges
Gain (loss) recognized in earnings.............................................................................................
$
1,442
$
102
$
—
Location of gain (loss) recognized in earnings..........................................................................
Selling, general and administrative expenses
Hedged Item
Description of hedged item............................................................................................................
Forecast purchases of tobacco in Brazil
Derivatives Not Designated as Hedges--
Forward Foreign Currency Exchange Contracts
Contracts related to forecast processing costs and forecast purchases of tobacco,
primarily in Brazil
Gain (loss) recognized in earnings.............................................................................................
$
(26)
$
1,583
$
6,864
Location of gain (loss) recognized in earnings..........................................................................
Selling, general and administrative expenses
Contracts related to net local currency monetary assets and
liabilities of subsidiary in Brazil
Gain (loss) recognized in earnings.............................................................................................
$
—
$
(355)
$
—
Location of gain (loss) recognized in earnings..........................................................................
Selling, general and administrative expenses
Contracts related to fixed-price orders and accounts receivable of non-U.S.
dollar subsidiaries
Gain (loss) recognized in earnings.............................................................................................
$
1,301
$
(2,613)
$
298
Location of gain (loss) recognized in earnings..........................................................................
Selling, general and administrative expenses
Total gain (loss) recognized in earnings for forward foreign
currency exchange contracts not designated as hedges........................................................
$
1,275
$
(1,385)
$
7,162
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.
69
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,
an immaterial gain related to the 2009-2010 crop purchases is recorded in accumulated other comprehensive loss at March
31, 2010. Assuming continued hedge effectiveness, changes in the fair value of all outstanding and new contracts will
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 2011 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, 2010 and 2009:
(cid:3)
De rivative s in a Fair Value Asse t Position
De rivative s in a Fair Value Liability Position
(in thousands of dollars)
De rivative s De signate d
as He dging Instrume nts
Interest rate swap agreements
Forward foreign currency
exchange contracts
Balance
She e t
Location
Other
non-current
assets
Other
current
assets
Fair Value as of March 31,
2010
2009
Balance
She e t
Location
Long-term
obligations
Fair Value as of March 31,
2010
2009
$
10,358
$
11,808
$
593
$
—
Accounts
payable and
accrued
expenses
84
2,397
73
10,026
T otal
$
10,442
$
14,205
$
666
$
10,026
De rivative s Not De signate d
as He dging Instrume nts
Forward foreign currency
exchange contracts
Other
current
assets
T otal
$
740
$
45
$
740
$
45
Accounts
payable and
accrued
expenses
$
512
$
712
$
512
$
712
70
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE 11. FAIR VALUE MEASUREMENTS
Universal adopted the current accounting guidance for fair value measurements effective April 1, 2008, for financial
assets and liabilities, and effective April 1, 2009, for nonfinancial assets and liabilities. The financial assets and liabilities
measured at fair value include money market funds, trading securities associated with deferred compensation plans, interest
rate swap agreements, forward foreign currency exchange contracts, and guarantees of bank loans to tobacco growers. The
application of the fair value guidance to nonfinancial assets and liabilities primarily includes assessments of goodwill and
long-lived assets for potential impairment. The adoption of the accounting guidance did not have a material effect on the
Company’s financial statements.
Under the accounting guidance, fair value is defined as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at the measurement date. The framework for
measuring fair value 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
Description
quoted prices in active markets for identical assets or liabilities that the Company has the ability to access as
of the reporting date;
quoted prices in active markets for similar assets or liabilities, or quoted prices for identical or similar assets
or liabilities, in markets that are not active, or inputs other than quoted prices that are observable for the
asset or liability; and
unobservable inputs for the asset or liability.
In measuring the fair value of liabilities, the Company considers the risk of non-performance in determining fair
value.
71
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
At March 31, 2010, 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:
Le ve l 1
Le ve l 2
Le ve l 3
Total
Assets:
Money market funds.......................................................................
$
211,552
$
—
$
—
$
211,552
T rading securities associated with deferred compensation plans.......
Interest rate swaps..........................................................................
Forward foreign currency exchange contracts.................................
19,539
—
—
—
10,358
824
—
—
—
19,539
10,358
824
T otal assets.................................................................................
$
231,091
$
11,182
$
—
$
242,273
Liabilities:
Guarantees of bank loans to tobacco growers..................................
$
—
$
—
$
25,997
$
25,997
Interest rate swaps..........................................................................
Forward foreign currency exchange contracts.................................
—
—
593
585
—
—
593
585
T otal liabilities............................................................................
$
—
$
1,178
$
25,997
$
27,175
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.
72
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, 2010, is as follows:
Balance at April 1, 2009..........................................................................................................................................................
T ransfer to allowance for loss on direct loans to farmers (removal of prior crop year loans from portfolio and addition of
$
35,154
current crop year loans).........................................................................................................................................................
(17,908)
Change in discount rate and estimated collection period...........................................................................................................
Currency remeasurement..........................................................................................................................................................
1,752
6,999
Balance at March 31, 2010......................................................................................................................................................
$
25,997
Universal has not elected to report at fair value any financial instruments or any other assets or liabilities that are not
required to be reported at fair value under current accounting guidance.
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.
Effective March 31, 2009, the Company adopted the measurement timing provisions of SFAS 158 (now part of
Topic 715 of the FASB Accounting Standards Codification), 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 the accounting guidance, 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.
(cid:3)
73
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Actuarial Assumptions
Assumptions used for financial reporting purposes to compute net periodic benefit cost and benefit obligations were
as follows:
Discount rates:
Pe nsion Be ne fits
O the r Postre tire me nt Be ne fits
2010
2009
2008
2010
2009
2008
Benefit cost for plan year...........................
Benefit obligation at end of plan year.........
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%
6.00%
7.75%
8.00%
5.00%
N/A
6.00%
7.75%
7.75%
7.75%
5.00%
N/A
5.75%
6.00%
7.75%
7.75%
5.00%
N/A
7.75%
6.00%
4.30%
4.30%
5.00%
8.30%
6.00%
7.75%
4.30%
4.30%
5.00%
8.50%
5.75%
6.00%
4.30%
4.30%
5.00%
8.50%
The discount rate used to calculate the benefit obligation at March 31, 2009, increased significantly from the
previous year, reflecting volatility in the yields on corporate bonds used to derive the rate. Those higher bond yields
primarily reflected a temporary expansion of credit spreads in the financial markets that returned to normal levels before the
March 31, 2010 measurement date. The increase in the expected long-term return on plan assets at March 31, 2010, reflects
changes made to the Company’s investment allocation during fiscal year 2010. 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 8.30% in 2010 declines gradually to 4.50% in 2028. (cid:3)
(cid:3)
74
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 2010 and 2009, and the funded
status of the plans at March 31, 2010 and 2009:
Pension Benefits
March 31,
Other Postretirement Benefits
March 31,
2010
2009
2010
2009
Actuarial present value of benefit obligation:
Accumulated benefit obligation........................................................................
$
213,646
$
176,992
$
—
$
—
Projected benefit obligation..............................................................................
243,760
199,907
43,429
38,420
Change in projected benefit obligation:
Projected benefit obligation, beginning of year measurement date...................
$
199,907
$
244,689
$
38,420
$
48,659
Service cost.......................................................................................................
Interest cost ......................................................................................................
Measurement date change.................................................................................
Effect of discount rate change...........................................................................
Foreign currency exchange rate changes...........................................................
Settlements........................................................................................................
Other.................................................................................................................
Benefit payments..............................................................................................
3,815
14,899
—
48,324
2,983
(2,498)
(6,718)
(16,952)
4,724
13,594
1,496
(29,988)
(5,424)
(6,064)
3,070
(26,190)
581
2,789
—
7,870
—
—
(2,271)
(3,960)
787
2,790
846
(5,033)
—
—
(4,900)
(4,729)
Projected benefit obligation, end of year measurement date.............................
$
243,760
$
199,907
$
43,429
$
38,420
Change in plan assets:
Plan assets at fair value, beginning of year measurement date..........................
$
132,080
$
183,286
$
3,687
$
3,801
Actual return on plan assets..............................................................................
Employer contributions.....................................................................................
Settlements........................................................................................................
Foreign currency exchange rate changes...........................................................
Benefit payments..............................................................................................
47,553
20,674
(2,498)
1,935
(16,952)
(52,178)
37,533
(6,064)
(4,307)
(26,190)
197
3,575
—
—
(3,960)
216
4,399
—
—
(4,729)
Plan assets at fair value, end of year measurement date....................................
$
182,792
$
132,080
$
3,499
$
3,687
Funded status:
Funded status of the plans, end of year measurement date................................
$
(60,968)
$
(67,827)
$
(39,930)
$
(34,733)
(cid:3)
75
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The funded status of the Company’s plans at the end of fiscal years 2010 and 2009 was reported in the consolidated
balance sheets as follows:
Pension Benefits
March 31,
Other Postretirement Benefits
March 31,
2010
2009
2010
2009
Non-current asset (reported in other noncurrent assets)..........................................
$
1,444
$
458
$
—
$
—
Current liability (included in accounts payable and accrued expenses)...................
Non-current liability (reported as pensions and other postretirement
(2,023)
(7,738)
(3,457)
(3,808)
benefits) ...............................................................................................................
(60,389)
(60,547)
(36,473)
(30,925)
Amounts recognized in the consolidated balance sheets.........................................
$
(60,968)
$
(67,827)
$
(39,930)
$
(34,733)
Additional information on the funded status of the Company’s plans as of the respective measurement dates for the
fiscal years ended March 31, 2010 and 2009, is as follows:
(cid:3)
Pension Benefits
O ther Postretirement Benefits
March 31,
March 31,
2010
2009
2010
2009
For plans with a projected benefit obligation in excess
of plan assets:
Aggregate projected benefit obligation...............................................
$
240,741
$
197,847
$
43,429
$
38,420
Aggregate fair value of plan assets.....................................................
178,329
129,664
3,499
3,687
For plans with an accumulated benefit obligation
in excess of plan assets:
Aggregate accumulated benefit obligation..........................................
Aggregate fair value of plan assets.....................................................
207,507
174,192
171,825
126,279
N/A
N/A
N/A
N/A (cid:3)
Net Periodic Benefit Cost(cid:3)
The components of the Company’s net periodic benefit cost were as follows:
Pe nsion Be ne fits
O the r Postre tire me nt Be ne fits
2010
2009
2008
2010
2009
2008
Compone nts of ne t pe riodic
Service cost..............................
$
3,815
$
4,724
$
5,731
$
581
$
787
$
961
Interest cost.............................
14,899
13,594
Expected return on plan assets..
(13,687)
(13,380)
Curtailment loss........................
Settlement cost.........................
Net amortization and deferral...
—
4,640
1,387
800
5,449
2,245
13,139
(12,397)
4,952
634
3,276
2,789
(152)
—
—
2,790
(157)
—
—
(1,083)
(48)
3,021
(162)
—
—
(48)
Net periodic benefit cost...........
$
11,054
$
13,432
$
15,335
$
2,135
$
3,372
$
3,772
A one-percentage-point increase in the assumed healthcare cost trend rate would increase the March 31, 2010,
accumulated postretirement benefit obligation by approximately $1.3 million, while a one-percentage-point decrease would
reduce the accumulated benefit obligation by approximately $1.1 million. The aggregate service and interest cost
components of the net periodic postretirement benefit expense for fiscal year 2011 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.
76
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Amounts Included in Accumulated Other Comprehensive Loss
The amounts recognized in other comprehensive income or loss for fiscal years 2010 and 2009 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 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.
Pe nsion Be ne fits
O the r Postre tire me nt Be ne fits
March 31,
March 31,
2010
2009
2010
2009
Change in ne t actuarial loss:
Net actuarial loss, beginning of year measurement date...................
$
70,912
$
35,452
$
(13,665)
$
(3,335)
Losses (gains) arising during the year..............................................
Reclassification adjustments during the year...................................
Net actuarial loss, end of year measurement date............................
Change in prior se rvice cost (be ne fit):
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.............
T otal amounts in accumulated other comprehensive loss at end of
3,890
(1,501)
73,301
(3,400)
—
255
(3,145)
37,900
(2,440)
70,912
1,385
(3,619)
(1,166)
(3,400)
5,169
1,044
(7,452)
(38)
—
38
—
(10,330)
—
(13,665)
(95)
—
57
(38)
of year measurement date, before income taxes..............................
$
70,156
$
67,512
$
(7,452)
$
(13,703)
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
$4.5 million of the net actuarial loss and $0.3 million of the prior service benefit at March 31, 2010, in net periodic benefit
cost during fiscal year 2011.
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 plans, which represents 90% of total plan assets and 78% 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.
The Committee with the help of a consultant reviews the expected long-term returns of the asset allocation each year
to help determine whether changes are needed. The return is evaluated on a weighted average basis in relation to inflation.
The assumed long-term rate of return used to calculate annual benefit expense is based on the asset allocation and expected
market returns for those asset classes.
(cid:3)
77
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The weighted–average target pension asset allocation and target ranges at the March 31, 2010, measurement date
and the actual asset allocations at the March 31, 2010 and March 31, 2009, measurement dates by major asset category were
as follows:
Major Asset Category (1)
Target
Allocation
Range
Actual Allocation
March 31,
2010
March 31,
2009 (3)
Domestic equity securities...............................................................
52.0%
46% - 58%
International equity securities.........................................................
15.0%
13% - 17%
Fixed income securities (2).............................................................
33.0%
26% - 40%
T otal........................................................................................
100.0%
53.7%
14.5%
31.8%
100.0%
39.3%
10.6%
50.1%
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.
(3) During fiscal year 2009, the Committee waived the investment allocation policy pending the results of a study to determine a new policy. The new
policy, determined in fiscal year 2010, is reflected in the target allocation.
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. There is no allocation to Universal Corporation
equity. Fixed income managers must invest in U.S. dollar-denominated bonds, excluding U.S. Treasury 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-
year periods.
Universal makes regular contributions to its pension and other postretirement benefit plans. As previously noted, for
postretirement health benefits, contributions reflect funding of those benefits as they are incurred. The Company provided
additional contributions to its U.S. pension plans in fiscal years 2008, 2009, and 2010. With the regular and additional
contributions and an increase in plan asset values during fiscal year 2010, 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 $7.8 million to its pension plans in fiscal year 2011.
Estimated future benefit payments to be made from the Company’s plans are as follows:
Fiscal Year:
Pension
Benefits
O ther
Postretirement
Benefits
2011...............................................................................................................................................
$
15,303
$
3,457
2012...............................................................................................................................................
2013...............................................................................................................................................
2014...............................................................................................................................................
2015...............................................................................................................................................
2016 - 2020....................................................................................................................................
15,220
14,993
15,642
16,581
92,761
3,530
3,599
3,581
3,541
17,328
(cid:3)
78
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Fair Values of Pension Plan Assets
The following is a description of the valuation methodologies used for pension assets measured at fair value:
Domestic and international equity asset categories include several types of assets:
Common stock: Shares held by the plan are valued at the unadjusted official closing price as defined by the
most active market or at the most recent trade price of the security at the close of the active market. Secondary
pricing sources are used when a primary source is not available. Such instances are also reviewed for evidence
of inactive, delisted, bankrupt, or suspended equities.
Commingled funds and common collective trusts: These assets are valued at the net asset value of shares held
by the plan at the valuation date, based on the quoted market prices of the underlying assets of the funds or
trusts. The investments are valued using the Net Asset Value of the fund or trust as a practical expedient for
fair market value. These vehicles hold equity securities and cash.
Fixed income securities are valued at an estimated price that a dealer would pay for a similar security on the valuation date
using observable market inputs. These measures may include yield curves for similarly rated securities. Small amounts of
cash are held in common collective trusts.
Fair values of the Company’s domestic pension plan assets as of March 31, 2010, are as follows:
Domestic equity securities.....................................................................................................
$
29,368
$
57,647
$
87,015
International equity securities................................................................................................
Fixed income securities (1)....................................................................................................
23,452
13,410
14,748
44,167
38,200
57,577
Total investments...............................................................................................................
$
66,230
$
116,562
$
182,792
Level 1
Level 2
Total
(1) Includes high yield securities and cash and cash equivalent balances.
Other Benefit Plans
Universal and several U.S. subsidiaries offer an employer-matched defined contribution savings plan. Amounts
charged to expense for these plans were approximately $1.4 million for fiscal year 2010, $1.4 million for fiscal year 2009,
and $1.5 million for fiscal year 2008.
(cid:3)
NOTE 13. COMMON AND PREFERRED STOCK
Common Stock
At March 31, 2010, the Company’s shareholders had authorized 100,000,000 shares of its common stock, and
24,325,228 shares were issued and outstanding. Holders of the common stock are entitled to one vote for each share held on
all matters requiring a vote. Holders of the common stock are also entitled to receive dividends when, as, and if declared by
the Company’s Board of Directors. The Board of Directors customarily declares and pays regular quarterly dividends on the
outstanding common shares; however, such dividends are at the Board of Director’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.
In November 2007, Universal’s Board of Directors authorized a program to repurchase up to $150 million of the
Company’s outstanding common shares. The Company completed purchases of shares under this program in October 2009,
and it expired in November 2009. A total of 2,900,486 shares of common stock were repurchased under the 2007 program at
a total cost of approximately $140.9 million, representing a weighted-average purchase price of $48.59.
(cid:3)
79
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
On November 5, 2009, the Board of Directors authorized a new program to repurchase up to $150 million of the
Company’s outstanding common shares, which the Company refers to as the “2009 program.” The new program extends
through November 2012. 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, 2010,
396,385 shares of common stock had been repurchased under the 2009 program at a total cost of approximately $19.8
million, representing a weighted-average price of $49.94 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, 2010. 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 of Directors does not declare a dividend for one or more quarterly
periods. Under the terms of the Preferred Stock, the Board of Directors 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 of Directors 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 any time at the option of the holder, 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, 2010, was 21.5413 shares of common stock per preferred share, which
represents a conversion price of approximately $46.42 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, cause the Preferred
Shares to be automatically converted into shares of common stock that are issuable at the prevailing conversion rate, only if
the closing price of the common stock during a specified period exceeds 135% of the then prevailing conversion price. With
this conversion, the Company may, at its option, in lieu of delivering shares 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.
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, 2010. Outside directors automatically receive shares
of restricted stock following each annual meeting of shareholders.
80
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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.
Stock Options and SARs
The following tables summarize the Company’s stock option and SAR activity and related information for fiscal
years 2008 through 2010:
Fiscal Year Ended March 31, 2008:
Outstanding at beginning of year..........................................................................
Granted ................................................................................................................
Exercised..............................................................................................................
Outstanding at end of year....................................................................................
Fiscal Year Ended March 31, 2009:
Granted.................................................................................................................
Exercised..............................................................................................................
Outstanding at end of year....................................................................................
Fiscal Year Ended March 31, 2010:
Granted.................................................................................................................
Exercised..............................................................................................................
Cancelled/expired.................................................................................................
Shares
957,815
272,800
(632,725)
597,890
132,000
(10,333)
719,557
253,800
(132,892)
(8,667)
Weighted-
Average
Exercise
Price
Weighted-
Average
Contractual
Term
(in years)
Aggregate
Intrinsic
Value
$
41.16
62.66
42.10
49.97
51.32
36.14
50.41
35.30
36.09
24.69
Outstanding at end of year....................................................................................
831,798
$
48.36
7.41
$
6,323
Exercisable at end of year.....................................................................................
446,995
$
53.47
Expected to vest in future periods.........................................................................
384,803
$
42.21
6.31
8.67
$
1,807
$
4,516
Fiscal Year Ended March 31,
2010
2009
2008
Total intrinsic value of stock options and SARs exercised.....................................................................
$
2,238
$
143
$
12,850
Total fair value of SARs vested...............................................................................................................
$
1,611
$
2,283
$
2,026
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: $52.69 at March 31, 2010, $29.92 at March 31, 2009, and $65.53 at March 31, 2008.
81
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
RSUs, Restricted Stock, and PSAs(cid:3)
The following table summarizes the Company’s RSU, restricted stock, and PSA activity for fiscal years 2008
through 2010:
RSUs
Re stricte d Stock
PSAs
We ighte d-
Ave rage
Grant Date
Fair Value
Share s
Share s
Fiscal Ye ar Ende d March 31, 2008:
Unvested at beginning of year............
123,791
$
40.96
Granted..............................................
Vested................................................
Unvested at end of year......................
74,149
(60,163)
137,777
Fiscal Ye ar Ende d March 31, 2009:
Granted..............................................
Vested................................................
Forfeited............................................
44,590
(32,203)
(1,034)
Unvested at end of year......................
149,130
Fiscal Ye ar Ende d March 31, 2010:
Granted..............................................
Vested................................................
Forfeited............................................
73,589
(14,955)
—
61.87
47.22
49.48
50.28
48.93
48.26
49.84
35.93
47.21
—
48,900
11,500
—
60,400
14,500
—
—
74,900
17,550
(7,700)
—
We ighte d-
Ave rage
Grant Date
Fair Value
$
36.98
49.78
—
39.41
48.01
—
—
41.08
39.76
40.41
—
We ighte d-
Ave rage
Grant Date
Fair Value
$
—
—
—
—
45.96
—
45.96
45.96
29.67
—
45.96
Share s
—
—
—
—
31,600
—
(1,132)
30,468
63,450
—
(1,003)
Unvested at end of year......................
207,764
$
32.50
84,750
$
40.87
92,915
$
35.01
Stock-Based Compensation Expense
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 2008 through
2010. 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:
Fiscal Ye ar Ende d March 31,
2010
2009
2008
Assumptions:
Expected term...............................................................................................................
5.0 years
5.0 years
5.0 years
Expected volatility........................................................................................................
Expected dividend yield..................................................................................................
Risk-free interest rate....................................................................................................
39.0%
5.21%
2.51%
31.3%
3.50%
3.32%
26.1%
2.81%
5.00%
Resulting fair value of SARs granted...................................................................................
$
7.85
$
11.65
$
14.64
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.
Since all SAR grants were awarded on the same date in each of the three fiscal years 2008 through 2010, the fair values
shown in the above table represent the weighted-average grant date fair values for those years.
(cid:3)
82
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, 2010, 2009, and 2008, total stock-based compensation
expense and the related income tax benefit recognized were as follows:
Fiscal Year Ended March 31,
2010
2009
2008
T otal stock-based compensation expense.......................................................................
$
6,133
$
4,870
$
7,980
Income tax benefit recorded on stock-based compensation expense...............................
$
2,147
$
1,704
$
2,793
At March 31, 2010, the Company had $6.7 million of unrecognized compensation expense related to stock-based
awards, which will be recognized over a weighted-average period of approximately 1.2 years. During the fiscal years ended
March 31, 2010, 2009, and 2008, the Company received cash proceeds of $1.2 million, $65 thousand, and $24.4 million,
respectively, from the exercise of stock options, and realized income tax benefits totaling $980 thousand, $1.2 million, and
$4.5 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, 2010, the Company had contracts to purchase approximately
$810 million of tobacco, $566 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 and other suppliers, which totaled approximately $167 million at March 31, 2010. 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 $58 million at March 31, 2010.
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, 2010, the
Company’s total exposure under guarantees issued by its operating subsidiary in Brazil for banking facilities of farmers in
that country was approximately $86 million, net of the accrual recorded for the fair value of the guarantees. About 75% 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 guarantees; however, in that case, the subsidiary would have recourse against
the farmers. The maximum potential amount of future payments that the Company’s subsidiary could be required to make at
March 31, 2010, was the face amount, $112 million including unpaid accrued interest ($104 million as of March 31, 2009).
The fair value of the guarantees was a liability of approximately $26 million at March 31, 2010, and $35 million at March 31,
2009. In addition to these guarantees, the Company has other contingent liabilities totaling approximately $57 million,
primarily related to a bank guarantee that bonds an appeal of a 2006 fine in the European Union (see Note 4).
(cid:3)
83
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,
2010, 2009 and 2008, revenue from Philip Morris International, Inc. was approximately $700 million, $700 million, and $500
million, respectively. For the same periods, Japan Tobacco, Inc. accounted for revenue of approximately $575 million, $550
million, and $440 million, respectively, and Imperial Tobacco Group, PLC accounted for revenue of approximately $250
million, $280 million, and $210 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
$4.3 million and $3.5 million at March 31, 2010 and 2009, respectively. At March 31, 2010 and 2009, accounts receivable
by reportable operating segment were as follows:
March 31,
2010
2009
Flue-cured and burley leaf tobacco operations:
North America.........................................................................................................................................
$
39,820
$
54,157
Other Regions..........................................................................................................................................
Subtotal.................................................................................................................................................
Other T obacco Operations..........................................................................................................................
188,014
227,834
39,126
170,697
224,854
38,529
Consolidated accounts receivable.................................................................................................................
$
266,960
$
263,383
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,
2010, the subsidiary held total ICMS tax credits of approximately $23 million, and the related valuation allowance was
approximately $10 million. At March 31, 2009, ICMS tax credits totaled approximately $24 million, and the related
valuation allowance was approximately $8 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.
84
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 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 consistent with those interpretations. After noncontrolling interest and income
taxes, the $7.8 million accrual reduced net income attributable to Universal Corporation by $4.9 million, or $0.15 per diluted
share. During fiscal years 2009 and 2010, the subsidiary continued to accrue statutory severance costs based on actuarial
calculations, and the total severance obligation at March 31, 2010 was approximately $9 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. A
Malawi High Court decision in April 2010 ruled that the statutory severance benefits were not payable upon normal
retirement, but that decision is now under appeal in the Malawi Supreme Court. In addition, legislative amendments to the
Act that would change or clarify the law to make eligibility for the benefit more consistent with the original practice and
interpretation have been drafted for Parliamentary review. A portion of the severance obligation recorded at March 31, 2010,
could be reversed if the Malawi Supreme Court affirms the appeals court decision, or if legislative amendments are passed.
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, 2010, 2009, and 2008, is as follows:
Income Statement Information:
Sales.........................................................................................................................
$
394,767
$
398,196
$
329,112
Gross profit..............................................................................................................
Net income attributable to Socotab L.L.C.................................................................
84,645
29,244
84,318
33,033
75,475
20,470
Fiscal Ye ars Ende d March 31,
2010
2009
2008
Balance Sheet Information:
Current assets...........................................................................................................
$
304,032
$
293,695
Property, plant and equipment and other assets........................................................
Current liabilities......................................................................................................
Long-term obligations and other liabilities................................................................
Noncontrolling interests in subsidiaries.....................................................................
85,429
200,842
31,490
310
68,303
199,517
9,739
338
March 31,
2010
2009
(cid:3)
85
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.
86
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Reportable segment data as of or for the fiscal years ended March 31, 2010, 2009, and 2008, is as follows:
Sale s and O the r O pe rating Re ve nue s
O pe rating Income
Fiscal Ye ar Ende d March 31,
Fiscal Ye ar Ende d March 31,
2010
2009
2008
2010
2009
2008
Flue-cured and burley leaf tobacco operations:
North America...........................................
$
357,195
$
416,899
$
336,170
$
57,006
$
48,010
$
34,379
Other Regions (1).......................................
Subtotal...................................................
1,895,829
2,253,024
Other T obacco Operations (2).......................
238,714
1,848,430
2,265,329
289,330
1,485,304
1,821,474
324,348
Segment total................................................
2,491,738
2,554,659
2,145,822
182,513
239,519
40,066
279,585
140,476
188,486
41,989
230,475
143,589
177,968
39,960
217,928
Less:
Equity in pretax earnings of unconsolidated
affiliates (3)............................................
Restructuring costs (4)................................
22,376
—
20,543
—
13,500
12,915
Consolidated total..........................................
$
2,491,738
$
2,554,659
$
2,145,822
$
257,209
$
209,932
$
191,513
Se gme nt Asse ts
March 31,
2009
2010
2008
2010
Goodwill
March 31,
2009
2008
Flue-cured and burley leaf tobacco operations:
North America...........................................
$
362,008
$
295,908
$
298,015
$
—
$
—
$
—
Other Regions (1).......................................
Subtotal...................................................
1,649,349
2,011,357
Other T obacco Operations (2).......................
359,683
1,535,736
1,831,644
306,532
1,590,253
1,888,268
298,493
102,224
102,224
1,713
102,462
102,462
1,713
102,812
102,812
1,713
Segment and consolidated totals.....................
$
2,371,040
$
2,138,176
$
2,186,761
$
103,937
$
104,175
$
104,525
De pre ciation and Amortiz ation
Capital Expe nditure s
Fiscal Ye ar Ende d March 31,
Fiscal Ye ar Ende d March 31,
2010
2009
2008
2010
2009
2008
Flue-cured and burley leaf tobacco operations:
North America...........................................
$
11,953
$
10,926
$
11,423
$
12,105
$
3,215
$
5,296
Other Regions (1).......................................
Subtotal...................................................
Other T obacco Operations (2).......................
26,710
38,663
4,833
27,866
38,792
2,998
28,924
40,347
2,893
31,283
43,388
14,189
25,595
28,810
6,846
18,354
23,650
4,054
Segment and consolidated totals.....................
$
43,496
$
41,790
$
43,240
$
57,577
$
35,656
$
27,704
(1) Includes South America, Africa, Europe, and Asia regions, as well as inter-region eliminations.
(2) 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 $101.4 million, $98.8 million, and $106.6 million, at March 31, 2010, 2009, and 2008, respectively.
(3) Item is included in segment operating income, but is not included in consolidated operating income.
(4) Item is not included in segment operating income, but is included in consolidated operating income.
87
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Geographic data as of, or for, the fiscal years ended March 31, 2010, 2009, and 2008, 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.
Ge ographic Data
Sale s and O the r O pe rating Re ve nue s
Fiscal Ye ar Ende d March 31,
2010
2009
2008
United States..................................................................................................................
$
305,390
$
370,182
$
358,198
Belgium..........................................................................................................................
469,067
All other countries..........................................................................................................
1,717,281
527,807
1,656,670
416,148
1,371,476
Consolidated total...........................................................................................................
$
2,491,738
$
2,554,659
$
2,145,822
United States..................................................................................................................
$
103,548
$
96,667
$
101,600
Brazil..............................................................................................................................
Mozambique...................................................................................................................
All other countries..........................................................................................................
156,961
50,045
126,071
158,591
48,679
115,067
165,180
50,686
124,896
Consolidated total...........................................................................................................
$
436,625
$
419,004
$
442,362
Long-Live d Asse ts
Fiscal Ye ar Ende d March 31,
2010
2009
2008
88
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, 2010 and 2009, is provided in the table
below. Due to the seasonal nature of the Company's business, management believes it is generally more meaningful to focus
on cumulative rather than quarterly results.
First
Q uarte r
Se cond
Q uarte r
Third
Q uarte r
Fourth
Q uarte r
Fiscal Ye ar Ende d March 31, 2010
Sales and other operating revenues.....................................................
$
616,112
$
647,918
$
661,205
$
566,503
Gross profit.......................................................................................
Net income........................................................................................
Net income attributable to Universal Corporation.............................
Earnings available to Universal Corporation common shareholders
139,364
43,804
43,745
147,343
54,672
52,515
144,664
48,474
45,696
110,894
23,395
26,441
after dividends on convertible perpetual preferred stock..................
40,033
48,802
41,984
22,728
Earnings per share attributable to Universal Corporation
common shareholders:
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................................................................................................
1.60
1.47
16.88
0.46
38.29
29.27
1.97
1.77
16.87
0.46
44.02
33.46
1.70
1.54
16.88
0.47
49.48
41.27
0.93
0.90
16.87
0.47
55.19
45.36
Fiscal Ye ar Ende d March 31, 2009
Sales and other operating revenues.....................................................
$
506,287
$
785,590
$
699,144
$
563,638
Gross profit.......................................................................................
Net income........................................................................................
Net income attributable to Universal Corporation.............................
Earnings available to common shareholders after dividends on
103,034
21,140
21,111
155,143
45,967
41,782
165,968
52,793
53,084
95,196
12,661
15,762
convertible perpetual preferred stock...............................................
17,399
38,069
49,372
12,049
Earnings per share attributable to Universal Corporation
common shareholders:
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:
0.65
0.64
16.88
0.45
1.50
1.38
16.87
0.45
1.98
1.78
16.88
0.46
0.48
0.48
16.87
0.46
High...............................................................................................
Low................................................................................................
35.17
25.82
Note: Earnings per share amounts for each fiscal year may not equal the total of the four quarterly amounts due to
differences in weighted-average outstanding shares for the respective periods and to the fact that the Company’s
convertible perpetual preferred stock may be antidilutive for some periods.
64.96
45.00
52.03
29.83
55.63
44.24
(cid:3)
89
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Significant items included in the quarterly results were as follows:
(cid:120) 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 attributable to Universal Corporation by $16.5 million and diluted earnings per share by $0.54.
(cid:120) 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 attributable to Universal Corporation for the third quarter by $12.8 million and diluted earnings per
share by $0.43.
(cid:3)
90
(cid:3)
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, 2010
and 2009, 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, 2010. 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, 2010 and 2009, and the consolidated results of its operations and its cash flows for each of
the three years in the period ended March 31, 2010, 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, during fiscal year 2010, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements (codified in
FASB ASC Topic 810, Consolidation). During fiscal year 2009, the Company adopted the measurement date provisions of
Statement of Financial Accounting Standards No. 158, Employers’ Accounting for Defined Benefit Pension and Other
Postretirement Plans (codified in FASB ASC Topic 715, Compensation – Retirement Benefits). On April 1, 2007, the Company
adopted Financial Accounting Standard Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes (codified in
FASB ASC Topic 740, Income Taxes).
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, 2010, 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 27, 2010 expressed an unqualified opinion thereon.
Richmond, Virginia
May 27, 2010
/s/ ERNST & YOUNG LLP
91
(cid:3)
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting
The Board of Directors and Shareholders
Universal Corporation
We have audited Universal Corporation’s internal control over financial reporting as of March 31, 2010, 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, 2010, 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, 2010 and 2009, 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, 2010 and our
report dated May 27, 2010 expressed an unqualified opinion thereon.
Richmond, Virginia
May 27, 2010
/s/ ERNST & YOUNG LLP
92
(cid:3)
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
For the three years ended March 31, 2010, 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.
(cid:3)
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be
disclosed in reports filed by the Company under the Exchange Act is recorded, processed, summarized and reported within the
time periods specified in the SEC rules and forms and that such information is accumulated and communicated to the Company’s
management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions
regarding required disclosure. The Company’s Chief Executive Officer and Chief Financial Officer evaluated, with the
participation of the Company’s management, the effectiveness of the Company’s disclosure controls and procedures (as defined in
Exchange Act Rule 13a-15(e)), as of the end of the period covered by this Annual Report. Based on this evaluation, the
Company’s management, including its Chief Executive Officer and Chief Financial Officer, concluded that the Company’s
disclosure controls and procedures were effective.
(cid:3)
Management’s Report on Internal Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining effective internal control over financial
reporting as defined in Rule 13a-15(f) under the Exchange Act. The Company’s internal control over financial reporting is
designed to provide reasonable assurance to management and the Board of Directors regarding the preparation and fair
presentation of the consolidated financial statements. Due to inherent limitations, internal control over financial reporting may not
prevent or detect all errors or misstatements in the financial statements, and even control procedures that are determined to be
effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes
in conditions.
As required by Exchange Act Rule 13a-15(c), the Company’s Chief Executive Officer and Chief Financial Officer, with
the participation of other members of management, assessed the effectiveness of the Company’s internal control over financial
reporting as of March 31, 2010. 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 this
assessment, the Company’s management concluded that the Company’s internal control over financial reporting was effective as
of March 31, 2010.
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, 2010. Their report on this audit appears on page 92 of this Annual Report.
Changes in Internal Control Over Financial Reporting
There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s
last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over
financial reporting.
Item 9B. Other Information
None.
93
(cid:3)
(cid:3)(cid:3)
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 2010 Proxy Statement.
The following are executive officers of the Company as of May 27, 2010.
(cid:3)
Name
G. C. Freeman, III
W. K. Brewer
D. C. Moore
K. M. L. Whelan
P. D. Wigner
W. J. Coronado
R. M. Paul
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
Vice President
Executive Vice President, Universal Leaf Tobacco Company, Inc.
Controller
There are no family relationships between any of the above officers.
Age
47
51
54
63
41
56
52
52
(cid:3)
K.M.L. Whelan, W.J. Coronado, 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. R.M. Paul served as Senior Vice President of
Universal Leaf until March 2006 when Mr. Paul was elected Executive Vice President of Universal Leaf.
The Company has a Code of Conduct that includes the NYSE requirements for a “Code of Business Conduct and Ethics”
and the SEC requirements for a “Code of Ethics for Senior Financial Officers.” The Code of Conduct is applicable to all officers,
employees, and outside directors of the Company, including the principal executive officer, principal financial officer, and
principal accounting officer. A copy of the Code of Conduct is available through the “Corporate Governance-Overview” section
of the Company’s website at www.universalcorp.com. If the Company amends a provision of the Code of Conduct, or grants a
waiver from any such provision to a director or executive officer, the Company will disclose such amendments and the details of
such waivers on the Company’s website www.universalcorp.com to the extent required by the SEC or the NYSE.
The information required by Items 407(c)(3), (d)(4) and (d)(5) of Regulation S-K is contained under the captions
“Corporate Governance and Committees—Committees of the Board—Compensation Committee,” “Corporate Governance and
Committees—Committees of the Board—Audit Committee” of the Company’s 2010 Proxy Statement and such information is
incorporated by reference herein.
(cid:3)
94
(cid:3)
Item 11. Executive Compensation
Refer to the captions “Executive Compensation” and “Directors’ Compensation” in the Company’s 2010 Proxy
Statement, which information is incorporated herein by reference.
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, 2010, with respect to compensation plans under which shares of the
Company’s common stock are authorized for issuance.
(cid:3)
Plan Category
Equity compensation plans approved by shareholders:
Number of
Securities to Be
Issued upon
Exercise of
Outstanding
Options,
Warrants and
Rights
Weighted-
Average
Exercise Price
of Outstanding
Options,
Warrants and
Rights
Number of
Securities
Remaining
Available for
Future Issuance
Under Equity
Compensation
Plans (1)
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.............................................................................................................................................
11,000
4,000
552,341
582,224
—
$
39.47
35.81
54.09
40.72
—
—
—
380,730
1,762,038
(2)
(3)
1,149,565
$
47.12
2,142,768
(1) Amounts exclude any securities to be issued upon exercise of outstanding options, warrants, and rights.
(2) 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. Of the 380,730 shares of common stock remaining available for future issuance under that plan, 255,200 shares
are available for awards of common stock or restricted stock.
(3) 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 1,762,028 shares of common stock remaining available for future issuance under that plan, 271,950 shares are
available for awards of common stock, restricted stock units, or restricted stock.
(4) All of the Company’s equity compensation plans have been approved by shareholders.
(cid:3)
Refer also to the caption “Stock Ownership” in the Company’s 2010 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 2010 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 2010 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 2010 Proxy Statement, which information is incorporated herein by reference.
(cid:3)(cid:3)
(cid:3)
(cid:3)
95
(cid:3)
PART IV
(cid:3)(cid:3)
Item 15. Exhibits, Financial Statement Schedules
(a)
The following are filed as part of this Annual Report:
1. Financial Statements.
Consolidated Statements of Income for the Fiscal Years Ended March 31, 2010, 2009, and 2008
Consolidated Balance Sheets at March 31, 2010 and 2009
Consolidated Statements of Cash Flows for the Fiscal Years Ended March 31, 2010, 2009, and 2008
Consolidated Statements of Changes in Shareholders’ Equity for the Fiscal Years Ended March 31, 2010,
2009, and 2008
Notes to Consolidated Financial Statements for the Fiscal Years Ended March 31, 2010, 2009, and 2008
Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting
2. Financial Statement Schedules.
Schedule II – Valuation and Qualifying Accounts
3. Exhibits. The exhibits are listed in the Exhibit Index immediately following the signature pages to this Annual
Report.
(b)
Exhibits
The response to this portion of Item 15 is submitted as a separate section to this Annual Report.
(c)
Financial Statement Schedules
Schedule II – Valuation and Qualifying Accounts appears on the following page of this Annual Report. All other
schedules are not required under the related instructions or are not applicable and therefore have been omitted.
(cid:3)
(cid:3)
96
(cid:3)
Schedule II - Valuation and Qualifying Accounts
Universal Corporation
Fiscal Years Ended March 31, 2010, 2009, and 2008
De scription
(in thousands of dollars)
Fiscal Ye ar Ende d March 31, 2008
Allowance for doubtful accounts (deducted from
accounts receivable and other noncurrent assets)
Allowance for supplier accounts (deducted from
advances to suppliers and other noncurrent assets)
Balance at
Be ginning
of Pe riod
Ne t
Additions
(Re ve rsals)
Charge d
to Expe nse
Additions
Charge d
to O the r
Accounts
De ductions
(a)
Balance
at End
of Pe riod
$
5,083
$
3,456
$
—
$
(619)
$
7,920
47,719
22,323
—
(48,457)
21,585
Allowance for recoverable taxes (deducted from other
current assets and other noncurrent assets)
13,925
(9,277)
—
—
4,648
Fiscal Ye ar Ende d March 31, 2009
Allowance for doubtful accounts (deducted from
accounts receivable and other noncurrent assets)
Allowance for supplier accounts (deducted from
advances to suppliers and other noncurrent assets)
$
7,920
$
(913)
$
—
$
(970)
$
6,037
21,585
26,908
—
(20,329)
28,164
Allowance for recoverable taxes (deducted from other
current assets and other noncurrent assets)
4,648
8,871
—
(1,262)
12,257
Fiscal Ye ar Ende d March 31, 2010
Allowance for doubtful accounts (deducted from
accounts receivable and other noncurrent assets)
Allowance for supplier accounts (deducted from
advances to suppliers and other noncurrent assets)
$
6,037
$
697
$
—
$
123
$
6,857
28,164
18,514
—
9,565
56,243
Allowance for recoverable taxes (deducted from other
current assets and other noncurrent assets)
12,257
3,174
—
2,162
17,593
(a) Includes direct write-offs of assets and currency remeasurement.
97
(cid:3)
SIGNATURES
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.
May 27, 2010
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 27, 2010
George C. Freeman, III
(Principal Executive Officer)
/s/ DAVID C. MOORE
Senior Vice President and Chief Financial Officer
May 27, 2010
David C. Moore
(Principal Financial Officer)
/s/ ROBERT M. PEEBLES
Controller
Robert M. Peebles
(Principal Accounting Officer)
John B. Adams Jr.
Director
/s/ CHESTER A. CROCKER
Director
Chester A. Crocker
/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.
/s/ JEREMIAH J. SHEEHAN
Director
Jeremiah J. Sheehan
98
May 27, 2010
May 27, 2010
May 27, 2010
May 27, 2010
May 27, 2010
May 27, 2010
May 27, 2010
(cid:3)
Signature
Title
/s/ ROBERT C. SLEDD
Director
Robert C. Sledd
/s/ HUBERT R. STALLARD
Director
Hubert R. Stallard
/s/ DR. EUGENE P. TRANI
Director
Dr. Eugene P. Trani
Date
May 27, 2010
May 27, 2010
May 27, 2010
99
(cid:3)
(cid:3)
EXHIBIT INDEX
3.1 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. 001-00652).
3.2 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. 001-00652).
4.1
4.2
Indenture between the Registrant and Chemical Bank, as trustee (incorporated herein by reference to the Registrant’s
Current Report on Form 8-K dated February 25, 1991, File No. 001-00652).
Specimen Common Stock Certificate (incorporated herein by reference to the Registrant’s Amendment No. 1 to
Registrant’s Form 8-A Registration Statement, dated May 7, 1999, File No. 001-00652).
4.3 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. 001-00652).
4.4
4.5
4.6
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. 001-00652).
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. 001-00652).
Form of Fixed Rate Note due December 1, 2014 (incorporated herein by reference to the Registrant’s Current Report on
Form 8-K dated November 20, 2009, File No. 001-00652).
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.
10.1 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. 001-00652).
10.2
Form of Universal Leaf Tobacco Company, Incorporated Executive Life Insurance Agreement (incorporated herein by
reference to the Registrant’s Annual Report on Form 10-K for the fiscal year ended June 30, 1994, File No. 001-00652).
10.3 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. 001-00652).
10.4 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. 001-00652).
10.5 Universal Leaf Tobacco Company, Incorporated 1994 Benefit Replacement Plan (incorporated herein by reference to the
Registrant’s Annual Report on Form 10-K for the fiscal year ended June 30, 1994, File No. 001-00652).
10.6 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. 001-00652).
1
(cid:3)
(cid:3)
10.7 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. 001-00652).
10.8
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. 001-
00652).
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. 001-00652).
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. 001-00652).
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. 001-
00652).
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. 001-00652).
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. 001-00652).
10.14
10.15
10.16
10.17
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. 001-00652).
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. 001-00652).
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. 001-
00652).
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. 001-00652).
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. 001-00652).
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. 001-
00652).
2
(cid:3)
(cid:3)
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. 001-00652).
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. 001-00652).
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. 001-00652).
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. 001-00652).
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. 001-00652).
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. 001-00652).
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. 001-00652).
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. 001-00652).
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. 001-
00652).
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. 001-00652).
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. 001-00652).
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. 001-00652).
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. 001-00652).
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. 001-00652).
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. 001-00652).
3
(cid:3)
(cid:3)
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.
001-00652).
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. 001-00652).
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. 001-00652).
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. 001-00652).
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. 001-00652).
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. 001-00652).
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. 001-00652).
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. 001-00652).
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. 001-00652).
10.44
10.45
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. 001-00652).
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.
001-00652).
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. 001-00652).
10.47 Universal Corporation Executive Officer Annual Incentive Plan, as amended (incorporated herein by reference to the
Registrant's definitive proxy statement filed June 25, 2009, File No. 001-00652).
10.48
Form of Universal Corporation 2010 Restricted Stock Agreement with Schedule of Awards to named executive officers.*
10.49
Form of Universal Corporation Stock Apprecitation Rights Agreement for executive officers.*
10.50
Form of Universal Corporation Performance Share Award Agreement.*
4
(cid:3)
(cid:3)
10.51 Universal Leaf Tobacco Company, Incorporated Deferred Income Plan III, amended and restated as of December 31,
2008.*
10.52 Universal Corporation Outside Directors' Deferred Income Plan III, amended and restated as of December 31, 2008, and
amended as of February 1, 2010.*
12 Ratio of Earnings to Fixed Charges and Ratio of Earnings to Combined Fixed Charges and Preference Dividends.*
21
Subsidiaries of the Registrant.*
23 Consent of Independent Registered Public Accounting Firm.*
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
32.1
Statement of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350.*
32.2
Statement of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350.*
* Filed herewith.
5
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
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 2009 Annual
Meeting of Shareholders.
The Annual Meeting of Shareholders will be held at
the offi ces of the Company, 9201 Forest Hill Avenue,
Richmond, Virginia, on Tuesday, August 3, 2010. 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
The Edgeworth Building
Suite 201, 2100 East Cary Street
Richmond, Virginia 23223
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
Jennifer S. Rowe
Assistant Vice President,
Capital Markets
(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
P . O . B O X 2 5 0 9 9
R I C H M O N D , V A 2 3 2 6 0
W W W . U N I V E R S A L C O R P . C O M