2013 Annual Report
established 1918
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A B O U T T H E C O M P A N Y
Universal Corporation, headquartered in Richmond, Virginia, is the leading global leaf tobacco
supplier. Tobacco has been its principal focus since its founding in 1918. The largest portion of
the Company’s business involves procuring and processing flue-cured and burley leaf tobacco
for manufacturers of consumer tobacco products. Universal conducts business in more than 30
countries on 5 continents and employs over 25,000 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
March 31, 2013
March 31, 2012
March 31, 2011
Fiscal Year Ended
Fiscal Year Ended
Fiscal Year Ended
O P E R A T I O N S
Sales and other operating revenues
$ 2,461,699 *
$ 2,446,877 *
$ 2,571,527 *
Segment operating income
Operating income
Net income
Net income attributable to Universal Corporation
232,757 *
223,009 *
140,919 *
132,750 *
223,548 *
180,304 *
100,819 *
92,057 *
257,925 *
254,600 *
164,550 *
156,565 *
P E R C O M M O N S H A R E
Net income attributable to Universal Corporation
common shareholders—diluted
$ 4.66 *
$ 3.25 *
$ 5.42 *
Dividends declared
Indicated 12-month dividend rate
Market price at year end
A T Y E A R E N D
Working capital
1.98 *
2.00 *
56.04 *
1.94 *
1.96 *
46.60 *
1.90 *
1.92**
43.54**
$ 1,123,376 *
$ 1,297,921 *
$ 1,065,883**
Total Universal Corporation shareholders’ equity
1,258,571 *
1,183,451 *
1,185,606 *
Net Income per Diluted Share**
Dividends Declared
Operating Income
in dollars
in dollars
in millions of dollars
*
2
4
.
5
8
6
.
5
2
3
.
4
*
6
6
.
4
*
5
2
.
3
8
9
1.
4
9
1.
0
9
1.
6
8
1.
2
8
1.
*
6
.
4
5
2
2
7.
5
2
9
.
9
0
2
*
0
.
3
2
2
*
3
.
0
8
1
13
12
11
10
09
13
12
11
10
09
13
12
11
10
09
* Includes unusual items outlined in the tables on pages 20 and 22 of the accompanying Annual Report on Form 10-K.
** Attributable to Universal Corporation after deducting amounts attributable to noncontrolling interests in consolidated subsidiaries.
1
2013 A N NUA L RE PORT
1 Executive Committee
2 Pension Investment Committee
3 Finance Committee
4 Audit Committee
5
Executive Compensation, Nominating,
and Corporate Governance Committee
Retires August 6, 2013
6
* Committee Chairman
C H A I R M E N E M E R I T U S
Henry H. Harrell
Allen B. King
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 AT I O N
George C. Freeman, III 1 * 3
Chairman, President, and
Chief Executive Officer
Universal Corporation
John B. Adams, Jr. 3 4
President and
Chief Executive Officer
Bowman Companies
Diana F. Cantor 2 4
Partner
Alternative Investment
Management, L.L.C.
Chester A. Crocker 2 3
Professor
Georgetown University
Charles H. Foster, Jr. 1 3 * 5
Retired Chairman
LandAmerica Financial
Group, Inc.
Thomas H. Johnson 1 5
Chief Executive Officer
The Taffrail Group, L.L.C.
Eddie N. Moore, Jr. 2 3 4 *
President, Emeritus
Virginia State University
Jeremiah J. Sheehan 1 4 5 * 6
Retired Chairman and
Chief Executive Officer
Reynolds Metals Company
Robert C. Sledd 2 * 4
Retired Chairman and
Chief Executive Officer
Performance Food Group
Managing Partner
Pinnacle Ventures, L.L.C.
2
UN IVE RSAL C OR POR ATION
O F F I C E R S U N I V E R S A L C O R P O R AT I O N
George C. Freeman, III
Chairman, President, and
Chief Executive Officer
Candace C. Formacek
Vice President and Treasurer
Harvard B. Smith
Chief Compliance Officer
Jennifer S. Rowe
Assistant Vice President,
Capital Markets
W. Keith Brewer
Executive Vice President and
Chief Operating Officer
Robert M. Peebles
Vice President and Controller
Joseph W. Hearington, Jr.
Corporate Director,
Internal Auditing
Catherine H. Claiborne
Assistant Secretary
David C. Moore
Senior Vice President and
Chief Financial Officer
Preston D. Wigner
Vice President,
General Counsel and
Secretary
Pamela J. Kepple
Corporate Director, Taxes
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 PA N Y, I N C .
George C. Freeman, III
Chairman and
Chief Executive Officer
Theodore G. Broome
Executive Vice President and
Sales Director
Paul G. Beevor
Managing Director,
Asia Region
Clayton G. Frazier
Managing Director,
North America Region
W. Keith Brewer
President and
Chief Operating Officer
James A. Huffman
Senior Vice President,
Information and Planning
Friedrich G. Bossert
Managing Director,
Dark Air-Cured Region
Charles A. M. Graham
Managing Director,
Africa Region
David C. Moore
Executive Vice President and
Chief Financial Officer
Airton L. Hentschke
Executive Vice President
Preston D. Wigner
Senior Vice President,
General Counsel and
Assistant Secretary
Orlando Astuti 1
Managing Director,
Europe Region
Cesar A. Bünecker
Managing Director,
South America Region
Jonathan R. Wertheimer
President,
Socotab, L.L.C.
1 Retires June 30, 2013
3
2013 A N NUA L RE PORT
T O O U R S H A R E H O L D E R S
I am proud that Universal Corporation has a track record of consistently
delivering good results and returning significant value to our shareholders.
Fiscal year 2013 results were no exception, as we achieved earnings of
$4.66 per diluted share. Segment operating income of $233 million for fiscal
year 2013 increased by $9 million, compared to the prior year, on improved
performance in our Other Regions and Other Tobacco Operations segments,
partially offset by a decline in our North America segment. These results
are notable because they are stronger than we had anticipated at the start
of the fiscal year and reflect benefits from sales of previously uncommitted
inventories and carryover shipments of large African and South American
crops. Lower selling, general, and administrative costs also bolstered our
results, reflecting both the positive effects of our targeted cost reduction and efficiency improvement efforts, as well as
some cost benefits, such as currency remeasurement and exchange gains, which are unpredictable.
As fiscal year 2014 begins, we are seeing larger crop sizes in many key sourcing areas for flue-cured and
burley tobacco. Sales activity has been robust thus far this year, driven by strong demand for burley and quality flavor
flue-cured tobaccos. In fact, current year crop levels for burley tobacco are not expected to meet global requirements.
We also hold very low levels of uncommitted inventory available for sale to our customers and will not have the benefit
of carryover shipments that helped our results in fiscal year 2013. While we expect another productive year in fiscal
2014, total volumes shipped may be lower.
Over the last three fiscal years, we have earned over $700 million in segment operating income and
strengthened our balance sheet by repaying almost $103 million in debt. We also generated over $488 million in net
cash flow from operations and returned almost $240 million to our shareholders over that period through a combination
of dividends and share repurchases. I believe that we have been able to deliver these impressive achievements because
we have remained focused on our goal of supplying a compliant product that meets our customers’ requirements in a
competitive yet sustainable manner.
As we portray in our annual report this year, a vast amount of work and expertise goes into tobacco production
well before the first seedlings emerge from the soil. We have long been a leader in our industry by successfully working
with both our farmers and our customers to cultivate the quality leaf desired by our customers while at the same time
promoting a strong sustainable supplier base. We train our farmers to grow tobacco using good agricultural practices
designed to meet our customers’ need for a compliant product while promoting sustainable crops. We also believe in
supporting our grower communities; this support comes in many forms, from providing safe, clean drinking water to
building clinics and schools.
4
U NIV ERSA L COR PORAT ION
Our long-term challenge is to source enough leaf tobacco to meet sustained growth in demand. We expect
that ongoing demand for leaf tobacco will continue to grow at a slow rate primarily due to increased consumption in
emerging markets. As the global supply of tobacco remains tight, we explore ways to expand production in areas
where it makes economic sense. We have been successful at this in the past, particularly in Africa, as evidenced
by our operations in Mozambique, where we have dramatically expanded tobacco production. We expect Africa to
continue to grow in importance as a tobacco source and to eventually lead increases in tobacco production outside
of China. Due to our expertise in working with grower communities there, we believe that we will continue to be a
leader in this important region. Universal plays a vital role with respect to the global supply of tobacco. We expect that
provision of compliant leaf, security of supply, and social responsibility concerns will continue to increase in importance
in the future. Meeting these requirements will involve significant efforts on our part, and we are well-positioned, both
operationally and fiscally, to address those needs.
The success of our company is attributable to the knowledge and hard work of many talented individuals
around the world. Two of these valued colleagues are retiring this year after many years of service to the Company.
Jeremiah J. Sheehan is retiring from our Board of Directors. He has been a valued Director for the last fifteen
years. He has served on many committees, most recently chairing the Executive Compensation, Nominating, and
Corporate Governance Committee and serving on the Executive and Audit Committees. His breadth of experience
from having run a multinational public company, as well as his leadership and ability to ask insightful and challenging
questions will be missed. More personally, he was a mentor to me especially in my early years in my position. I
appreciate his guidance.
We also have been extremely fortunate to have had Orlando Astuti at the helm of our European operations,
guiding us through difficult market changes there in recent years. We are the only independent, global leaf supplier
with significant operations remaining in Europe. I believe Orlando’s leadership is the main reason that we have been
able to remain and continue to succeed in this region. With thirty years of experience in the tobacco industry, he is not
only a talented manager, but also an untiring advocate for European tobacco growers. He has been a dear friend to his
colleagues in Richmond and around the world. We will miss his keen intellect and his subtle wit. I thank both of these
individuals for their many years of service to our company.
George C. Freeman, III
Chairman, President, and Chief Executive Officer
5
2013 A N NUA L RE PORT
Universal—A Vital Link in the Global Tobacco Supply Chain
Universal has long been a vital link in the global tobacco supply chain. For tobacco production to thrive, those at the
beginning of the chain – our tobacco growers – must be able to sustainably produce and profit fairly from their crops.
The procedures and practices to accomplish this are unique to each origin, and our strong local teams provide the
necessary expertise. Through our activities, a small one-hectare farmer in Tete, Mozambique, is provided access
to the global tobacco market. Farmers in the Isabella province in the Philippines benefit from cutting edge advice
and extension services to enhance tobacco growing practices. Growers in Mzuzu, Malawi, receive critical front-end
financial support for the purchase of the crop inputs necessary each year to allow them to plant their crop and sustain
their livelihood.
At the other end of the supply chain, our customers – tobacco product manufacturers – are increasingly demanding
not only quality leaf, but quality compliant leaf. Compliant leaf has many meanings, depending on the customer, but
generally necessitates that the leaf supplier ensure that the tobacco was grown utilizing good agricultural practices
(GAP) in a sustainable manner related not only to the environment, but also to social concerns and grower profitability.
We have invested significant resources in the programs and infrastructure needed to work with growers to produce
compliant leaf and support our growers’ communities.
Research—Vast amounts of research go into the tobacco seeds that we provide to our farmers. Our research has
led to better yielding and higher quality tobacco varieties that improve farmers’ economic viability and environmental
sustainability.
Training—Through our large global staff of scientists, agronomists, and technicians, we provide a full range of
agronomic advice to our contracted farmers. This includes training on effective seedling production, proper land
selection and preparation, nutrient management, crop husbandry, integrated pest management, proper harvesting
and curing techniques, farm safety, and environmental stewardship.
Community—We also support the communities in which we operate. We sponsor programs to supply clean
drinking water, to build schools and clinics, and to grow food crops, among others.
Our leadership role between the two vastly different ends of a complex supply chain – the tobacco grower and the
tobacco product manufacturer – is where our company adds value and thrives. With our guidance, the small farmer
in Tete is able to profitably and sustainably produce leaf tobacco acceptable to sophisticated global tobacco product
manufacturers. And those tobacco product manufacturers are able to purchase tobacco types, styles, and qualities
from nearly anywhere in the world, with the comfort that the leaf is compliant, from a single source. Our function – our
passion – is to simply do whatever it takes to simultaneously satisfy, in a competitive manner, these two vastly different,
yet interdependent stakeholders and serve as a vital link in the global tobacco supply chain.
6
U NIV ERSA L COR PORAT ION
7
2013 A N NUA L RE PORT
PERFOR MAN CE G R APH
C o m pa r i s o n o f 5 Yea r C um u l a t i ve To t a l R et u r n*
$180
$160
$140
$120
$100
$80
$60
$40
$20
$0
3/08
3/09
3/10
3/11
3/12
3/13
Universal Corporation
S&P MidCap 400
Peer Group
*$100 invested on March 31, 2008 in stock or index, including reinvestment of dividends. Fiscal year ending March 31.
Copyright© 2013 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.
The performance graph compares the cumulative total shareholder return on Universal Corporation common
stock for the last five fiscal 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. The graph
assumes that $100 was invested in Universal Corporation common stock at the end of the Company’s 2008 fiscal year,
and in each of the comparative indices, in each case with dividends reinvested.
CU M UL AT I VE TOTAL RE T UR N O N
UN IVERSAL CORPOR AT ION COM M ON STOCK
2008
2009
2010
2011
2012
2013
At March 31
Universal Corporation
$ 100.00
$ 47.65
$ 88.05
$ 76.02
$ 85.23
$ 106.67
S & P MidCap 400
Peer Group
100.00
100.00
63.90
63.58
104.85
84.27
133.11
66.56
135.75
62.42
159.95
64.40
8
U NIV ERSA L COR PORAT ION
2013 Universal Corporation
10 - K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 2013
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________TO_______________
Commission File Number: 001-00652
UNIVERSAL CORPORATION
(Exact name of registrant as specified in its charter)
Virginia
(State or other jurisdiction of
incorporation or organization)
9201 Forest Hill Avenue,
Richmond, Virginia
(Address of principal executive offices)
54-0414210
(I.R.S. Employer
Identification Number)
23235
(Zip Code)
Registrant's telephone number, including area code: 804-359-9311
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, no par value
Name of each exchange on
which registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 (d) of the Act.
Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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.
Large accelerated filer
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
The aggregate market value of the registrant's voting and non-voting common equity held by non-affiliates, based upon the closing
sales price on the New York Stock Exchange of the registrant's common stock on September 30, 2012, the last day of the registrant's
most recently completed second fiscal quarter, was approximately $979 million.
As of May 20, 2013, the total number of shares of common stock outstanding was 23,339,382.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information contained in the 2013 Proxy Statement for the Annual Meeting of Shareholders of the registrant is incorporated
by reference into Part III hereof.
UNIVERSAL CORPORATION
FORM 10-K
TABLE OF CONTENTS
Item No.
Page
PART I
1.
1A.
1B.
2.
3.
4.
5.
6.
7.
Business ....................................................................................................................................................
Risk Factors...............................................................................................................................................
Unresolved Staff Comments .....................................................................................................................
Properties ..................................................................................................................................................
Legal Proceedings .....................................................................................................................................
Mine Safety Disclosures ...........................................................................................................................
PART II
Market for Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities.................................................................................................
Selected Financial Data.............................................................................................................................
Management's Discussion and Analysis of Financial Condition and Results of Operations....................
7A.
Quantitative and Qualitative Disclosures About Market Risk ..................................................................
8.
9.
9A.
9B.
10.
11.
12.
13.
14.
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
15.
Exhibits, Financial Statement Schedules ..................................................................................................
Signatures..................................................................................................................................................
3
9
13
14
15
15
16
17
19
34
36
89
89
89
90
91
91
91
91
92
94
2
General
This Annual Report on Form 10-K, which we refer to herein as our Annual Report, contains “forward-looking statements”
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended
(the “Exchange Act”). Among other things, these statements relate to Universal Corporation’s financial condition, results of operations
and future business plans, operations, opportunities, and prospects. In addition, Universal Corporation and its representatives may
make written or oral forward-looking statements from time to time, including statements contained in other filings with the Securities
and Exchange Commission (the “SEC”) and in reports to shareholders. These forward-looking statements are generally identified
by the use of words such as we “expect,” “believe,” “anticipate,” “could,” “should,” “may,” “plan,” “will,” “predict,” “estimate,”
and similar expressions or words of similar import. These forward-looking statements are based upon management’s current
knowledge and assumptions about future events and involve risks and uncertainties that could cause actual results, performance, or
achievements to be materially different from any anticipated results, prospects, performance, or achievements expressed or implied
by such forward-looking statements. Such risks and uncertainties include, but are not limited to: anticipated levels of demand for
and supply of our products and services; costs incurred in providing these products and services; timing of shipments to customers;
changes in market structure; government regulation; product taxation; industry consolidation and evolution; changes in exchange
rates; and 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 leading global leaf tobacco supplier. We operate in over 30 countries on five continents. Tobacco has been
our principal focus since our founding in 1918. The largest portion of our business involves procuring and processing flue-cured
and burley leaf tobacco for manufacturers of consumer tobacco products. Our reportable segments for our flue-cured and burley
tobacco operations are North America and Other Regions. We also have a third reportable segment, Other Tobacco Operations,
which comprises our dark tobacco business, our oriental tobacco joint venture, and certain tobacco-related services. We generated
approximately $2.5 billion in consolidated revenues and earned $232.8 million in total segment operating income in fiscal year
2013. Universal Corporation is a holding company that operates through numerous directly and indirectly owned subsidiaries.
Universal Corporation’s primary subsidiary is Universal Leaf Tobacco Company, Incorporated. See Exhibit 21, “Subsidiaries of
the Registrant,” for additional subsidiary information.
3
Key Operating Principles
We believe that by following several key operating principles we can continue to produce good financial returns from our
business and enhance shareholder value. These key operating principles are:
•
•
Strategic market position. We work closely with both our customers and suppliers to ensure that we deliver a product
that meets our customers' needs and promotes a strong sustainable supplier base. We believe that developing and
maintaining these relationships is particularly valuable in the leaf tobacco industry where delivering quality, compliant
tobacco at an appropriate price is a key factor in long-term profitability. Balancing these relationships allows us to
optimize our inventory levels to reduce risk during market downturns by enabling us to target our tobacco production
contracts against customer purchase indications. We work to adapt our business model to meet our customers' evolving
needs while providing the compliant products, stability of supply, and the high level of service that distinguishes our
company.
Strong local management. We operate with strong local management. We believe that having strong local
management in each leaf tobacco origin helps us better identify and adjust to constantly changing market conditions
and provides us with specific market knowledge quickly. We believe that this, coupled with effective global
coordination, is a key factor in our ability to continue to deliver the high quality, competitively-priced products that
our customers expect.
• Compliant products. We focus on sourcing a compliant product that meets customer requirements in a competitive,
yet sustainable manner. We sponsor programs to educate farmers in good agricultural practices, the reduction of non-
tobacco related materials, product traceability, elimination of child labor, environmental sustainability, and social
responsibility, among others.
• Diversified sources. We strive to maintain diversified sources of leaf tobacco to minimize reliance on any one sourcing
area. We operate in over 30 countries on five continents and maintain a presence in all major flue-cured, burley,
oriental, and dark air-cured tobacco growing regions in the world. Our global reach allows us to meet our customers'
diverse and dynamic leaf requirements and helps minimize the impact of crop failures or other localized supply
interruptions.
• 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 appropriate opportunities are identified. We believe that lower
interest and capital costs give us a competitive advantage. Our financial strength also affords us financial flexibility
in dealing with customer requirements and market changes. We continually work to improve our financial condition
and 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. Copies are also available, without
charge, from Universal Corporation Investor Relations, 9201 Forest Hill Avenue, Richmond, VA 23235. Reports filed with the SEC
may be viewed at www.sec.gov or obtained at the SEC Public Reference Room at 100 F Street, NE, Washington, D.C. 20549.
Information regarding the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. We
also post our press releases on our website. Information on our website is not deemed to be incorporated by reference into this
Annual Report.
In addition, our Corporate Governance Guidelines, Code of Conduct, and charters for the Audit Committee, the Executive
Committee, the Executive Compensation, Nominating and Corporate Governance Committee, the Pension Investment Committee,
and the Finance Committee are available free of charge to shareholders and the public through the “Corporate Governance” section
of our website. Printed copies of the foregoing are available to any shareholder upon written request to our Treasurer at the address
set forth on the cover of this Annual Report or may be requested through our website, www.universalcorp.com.
4
B.
Description of Business
General
Our primary business is procuring, financing, processing, packing, storing, and shipping leaf tobacco for sale to, or for the
account of, manufacturers of consumer tobacco products throughout the world. Procuring leaf tobacco involves contracting with,
providing agronomy support to, and financing farmers in many origins. We do not manufacture cigarettes or other consumer tobacco
products. Through various operating subsidiaries and unconsolidated affiliates located in tobacco-growing countries around the
world, we contract, purchase, process, and sell flue-cured and burley tobaccos, as well as dark air-cured and oriental tobaccos. We
also provide value-added services to our customers, including blending, chemical and physical testing of tobacco, service cutting
for select manufacturers, manufacturing reconstituted leaf tobacco, and managing just-in-time inventory. 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. Sales to our five largest customers, with whom we have longstanding relationships, have accounted for more
than 60% of our consolidated revenues for each of the past three fiscal years. Our sales consist primarily of flue-cured and burley
tobaccos. For the fiscal year ended March 31, 2013, our flue-cured and burley operations accounted for 90% of our revenues and
91% of our segment operating income.
Because unprocessed, or “green,” tobacco is a perishable product, processing of leaf tobacco is an essential service to our
customers. Our processing of leaf tobacco includes grading in the factories, blending, removal of non-tobacco material, separation
of leaf from the stems, drying, packing to precise moisture targets for proper aging, as well as temporary storage. Accomplishing
these tasks generally requires investments in factories and machinery in areas where the tobacco is grown. Processed tobacco that
has been properly packed can be stored by customers for a number of years prior to use, but most processed tobacco is used within
two to three years.
We are a major purchaser and processor in the chief exporting regions for flue-cured and burley tobacco throughout the
world. We estimate that we have historically handled, through leaf sales and processing, 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. Recently, as tobacco growing regions have expanded in Africa, we have handled a larger
proportion of the crops there. We also handled between 25% and 35% of the flue-cured and burley tobacco produced in North
America in fiscal year 2013. The majority of this tobacco was sourced in the United States, where we sell processed U.S. tobacco
to cigarette manufacturers and process U.S. flue-cured and burley tobacco on a fee basis. We participate in the procurement,
processing, storage, and sale of oriental tobacco through ownership of a 49% equity interest in Socotab, L.L.C., a leading processor
and leaf supplier of oriental tobaccos. 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 ability to meet customer style, volume, and quality requirements, our
expertise in dealing with large numbers of farmers, our long-standing relationships with customers, our development of processing
equipment and technologies, and our financial position.
We also have a leading position in worldwide dark tobacco markets. Our dark tobacco operations are located in most of
the major producing countries and in other smaller markets. We operate in major dark tobacco producing countries, including the
United States, the Dominican Republic, Indonesia, Paraguay, the Philippines, Nicaragua, and Brazil. Dark tobaccos are typically
used in the manufacture of cigars, pipe tobacco, and smokeless tobacco products, and as components of certain “roll-your-own”
cigarette products.
Sales are made by our sales force and, to a much smaller degree, through the use of commissioned agents. Most customers
are long-established tobacco product manufacturers.
We conduct our business in varying degrees in a number of countries, including Argentina, Bangladesh, Brazil, the
Dominican Republic, Germany, Guatemala, Hungary, India, Indonesia, Italy, Malawi, Mexico, Mozambique, the Netherlands,
Nicaragua, Paraguay, the People’s Republic of China, the Philippines, Poland, Russia, Singapore, South Africa, Spain, Switzerland,
Tanzania, the United States, Zambia, and Zimbabwe. In addition, Socotab, L.L.C. has oriental tobacco operations in Bulgaria,
Greece, Macedonia, and Turkey.
5
In the majority of the countries where we operate, 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. Agronomy services include programs to educate farmers in good agricultural practices, the reduction of non-tobacco
related materials, product traceability, elimination of child labor, environmental sustainability, and social responsibility. In Malawi,
Zambia, and Zimbabwe, we also purchase some tobacco under auction systems.
Our foreign operations are subject to international business risks, including unsettled political conditions, expropriation,
import and export restrictions, exchange controls, and currency fluctuations. During the tobacco season in many of the countries
listed above, we advance funds, guarantee local loans, or do both, each in substantial amounts, for the eventual purchase of tobacco.
The majority of these seasonal advances and loan guarantees mature in one year or less upon the farmers’ delivery of contracted
tobaccos. Most advances to farmers are denominated in local currency, which is a source of foreign currency exchange rate risk.
Most tobacco sales are denominated in U.S. dollars, which reduces our foreign currency exchange risk after the tobacco has been
purchased. See Item 1A, “Risk Factors” for more information about our foreign currency exchange and other risks.
For a discussion of recent developments and trends in our business, along with factors that may affect our business, see
Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Item 1A, “Risk Factors.”
Seasonality
Our operations are seasonal in nature. Tobacco in Brazil is usually purchased from January through July, while buying in
Malawi, Mozambique, and other African countries typically begins around April and continues through November. Farmers begin
to sell U.S. flue-cured tobacco in late July, and the marketing season lasts for approximately four months. These overlapping
marketing periods tend to minimize 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 borrowings from banks, and customer
advances, and these funding sources normally reach their peak usage in each region during its respective purchasing or processing
period. Our balance sheet at our fiscal year end reflects seasonal expansions in working capital in South America and Central
America.
Customers
A material part of our business is dependent upon a few customers. Our five largest customers are Philip Morris International,
Inc., Imperial Tobacco Group, PLC, China Tobacco International, Inc., British American Tobacco, PLC, and Japan Tobacco, Inc.
In the aggregate, these customers have accounted for more than 60% of our consolidated revenues for each of the past three fiscal
years. For the fiscal year ended March 31, 2013, each of Philip Morris International, Inc. and Imperial Tobacco Group, PLC,
including their respective affiliates, accounted for 10% or more of our revenues, while the other three customers each accounted
for between 8% and 10% of our revenues. The loss of, or substantial reduction in business from, any of these customers could have
a material adverse effect on our results. We have longstanding relationships with these customers.
We had commitments from customers for approximately $506 million of the tobacco in our inventories at March 31, 2013.
Based upon historical experience, we expect that at least 85% of such orders will be delivered during fiscal year 2014. Most of our
product requires shipment via trucks and oceangoing vessels to reach customer destinations. Delays in the delivery of orders can
result from such factors as truck and container availability, port access and capacity, vessel scheduling, and changing customer
requirements for shipment.
As more fully described in Note 1 to the consolidated financial statements in Item 8 of 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, including the United States, Italy, and Brazil, we process tobacco that is owned by our customers,
and we recognize the revenue for that service when the processing is completed.
6
Competition
The leaf tobacco industry is highly competitive. Competition among leaf tobacco merchants is based on the ability to meet
customer specifications in the growing, 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 and sell the available tobacco. Our principal competitor is Alliance One
International, Inc. (“Alliance One”). Alliance One operates in most of the countries where we operate. Based on our estimates,
we do not believe that worldwide market shares differ substantially between the two companies. Most of our major customers are
partially vertically integrated, and thus also compete with us for the purchase of leaf tobacco in several of the major markets.
In most major markets, smaller competitors are very active. These competitors typically have lower overhead requirements
and provide less support to customers and farmers. Due to their lower cost structures, they can often offer a price on products that
is lower than our price. However, we believe that we provide quality controls and farm programs that add value for our customers
in an increasingly regulated world and make our products highly desirable. 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
such as the elimination of child labor 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 security of supply that we are able to provide due to our strong relationships with our farmer base.
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. Our Dark Air-Cured group supplies dark air-cured tobacco principally to manufacturers of cigars, pipe tobacco,
and smokeless tobacco products, and our Oriental business supplies oriental tobacco to cigarette manufacturers. Our Special Services
group primarily provides laboratory services, including physical and chemical product testing and smoke 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 require lower working capital investments for crop financing and inventory. The Dark Air-Cured, Oriental, and
Special Services segments, which have differing characteristics in some of the categories mentioned above, are reported together
as Other Tobacco Operations, because each is below the measurement threshold for separate reporting.
Financial Information about Segments
Our North America and Other Regions reportable segments, which represent our flue-cured and burley tobacco operations,
accounted for 14% and 76% of our revenues and 8% and 83% of our segment operating income, respectively, in fiscal year 2013.
Our Other Tobacco Operations reportable segment accounted for 10% of our revenues and 9% of our segment operating income in
fiscal year 2013. 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, 2013, 2012, and 2011, are set forth in
Note 15 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 15 to the consolidated financial statements.
7
C.
Employees
We employed over 25,000 employees throughout the world during the fiscal year ended March 31, 2013. We estimated
this figure because the majority of our personnel are seasonal employees.
D.
Research and Development
We did not expend material amounts for research and development during the fiscal years ended March 31, 2013, 2012,
or 2011.
E.
Patents, etc.
We hold no material patents, licenses, franchises, or concessions.
F.
Government Regulation, Environmental Matters, and Other Matters
Our business is subject to general governmental regulation in the United States and in foreign jurisdictions where we
conduct business. Such regulation includes, but is not limited to, matters relating to environmental protection. To date, governmental
provisions regulating the discharge of material into the environment have not had a material effect upon our capital expenditures,
earnings, or competitive position. See Item 1A, “Risk Factors” for a discussion of government regulations and other factors that
may affect our business.
8
Item 1A. Risk Factors
Operating Factors
In areas where we purchase leaf tobacco directly from farmers, we bear the risk that the tobacco we receive will not meet quality
and quantity requirements.
When we contract directly with tobacco farmers or tobacco farmer cooperatives, which is the method we use to purchase
tobacco in most countries, we bear the risk that the tobacco delivered may not meet customer quality and quantity requirements. If
the tobacco does not meet such market requirements, we may not be able to fill all of our customers’ orders, and such failure would
have an adverse effect on profitability and results of operations. Because in a contract market we buy all of the farmers’ production,
which encompasses many leaf 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.
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 suppliers and dealers is based on the ability to meet customer requirements in
the buying, processing, and financing of tobacco, and on the price charged for products and services. We believe that we consistently
meet our customers’ requirements and charge competitive prices. Because we rely upon a few significant customers, the consolidation,
significant increase in 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 compete for both the purchase and sale of leaf with smaller leaf tobacco suppliers in some of the markets where we
conduct business. Some of these smaller leaf tobacco suppliers operate in more than one country. Since they typically provide little
or no support to farmers, these leaf tobacco merchants typically have lower overhead requirements than we do. Due to their lower
cost structures, they often can offer prices on products and services that are lower than our prices. Our customers also directly source
leaf tobacco from farmers to meet some of their raw material needs. Direct sourcing provides our customers with some qualities
and quantities of tobacco that they prefer not to use in their existing blends and that may be offered for sale. This competition for
both the sale and purchase of leaf could reduce the volume of the leaf we handle and could negatively impact our financial results.
Our financial results can be significantly affected by changes in the balance of supply and demand for leaf tobacco.
As a leaf tobacco supplier, our financial results can be significantly affected by changes in the overall balance of worldwide
supply and demand for leaf tobacco. The demand for tobacco, which is based upon customers’ expectations of their future
requirements, can change from time to time depending upon factors affecting the demand for their products. Our customers’
expectations and their demand for leaf tobacco are influenced by a number of factors, including:
•
•
•
•
trends in the global consumption of cigarettes,
trends in consumption of cigars and other tobacco products,
trends in consumption of alternative tobacco products, and
levels of competition among our customers.
9
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 leaf tobacco held by leaf tobacco suppliers. Production of tobacco in a
given year may be significantly affected by such factors as:
demographic shifts that change the number of farmers or the amount of land available to grow tobacco,
decisions by farmers to grow crops other than tobacco,
elimination of government subsidies to farmers,
volume of annual tobacco plantings and yields realized by farmers,
availability of crop inputs,
•
•
•
•
•
• weather and natural disasters, including any adverse weather conditions that may result from climate change, and
•
crop infestation and disease.
Any significant change in these factors could cause a material imbalance in the supply of and demand for tobacco, which
would affect our results of operations.
Our financial results will vary according to tobacco growing conditions, customer requirements, and other factors. These factors
may also limit the ability to accurately forecast our future performance and increase the risk of an investment in our common stock
or other securities.
Our financial results, particularly our year-over-year quarterly comparisons, may be significantly affected by variations in
tobacco growing seasons and fluctuations in crop sizes. The timing of the cultivation and delivery of tobacco is dependent upon a
number of factors, including weather and other natural events, and our processing schedules and results of operations can be
significantly altered by these factors. In addition, the potential impact of climate change is uncertain and may vary by geographic
region. The possible effects, as described in various public accounts, could include changes in rainfall patterns, water shortages,
changing storm patterns and intensities, and changing temperature levels that could adversely impact our costs and business operations
and the supply and demand for leaf tobacco. Our operations also rely on dependable and efficient transportation services. A disruption
in transportation services, as a result of climate change or otherwise, may also significantly impact our results of operations.
Further, the timing and unpredictability of customer orders and shipments may require us to keep tobacco in inventory and
may also result in variations in quarterly and annual financial results. We base sales recognition on the passage of ownership. Since
individual shipments may represent significant amounts of revenue, our quarterly and annual financial results may vary significantly
depending on the needs and shipping instructions of our customers and the availability of transportation services. These fluctuations
result in varying volumes and sales in given periods, which also reduce the comparability of financial results.
Major shifts in customer requirements for tobacco supply may significantly affect our operating results.
If our customers significantly alter their requirements for tobacco volumes from certain regions, we may have to change
our production facilities and alter our fixed asset base in certain origins. Permanent or long-term reduction in demand for tobacco
from origins where we have operations may trigger restructuring and impairment charges. We may also need to make significant
capital investments in other regions to develop the needed infrastructure to meet customer supply requirements.
Weather and other conditions can affect the marketability of our products.
Tobacco crops are subject to vagaries of weather and the environment that can, in some cases, change the quality or size of
the crops. If a weather event is particularly severe, such as a major drought or hurricane, the affected crop could be destroyed or
damaged to an extent that it would be less desirable to manufacturers, which would result in a reduction in revenues. If such an
event is also widespread, it could affect our ability to acquire the quantity of tobacco required by our customers. In addition, other
factors can affect the marketability of tobacco, including, among other things, the presence of excess residues of crop protection
agents or non-tobacco related materials. A significant event impacting the condition or quality of a large amount of any of the crops
that we buy could make it difficult for us to sell these products or to fill customers’ orders.
10
Regulatory and Governmental Factors
Government efforts to regulate the production and consumption of tobacco products could have a significant impact on the businesses
of our customers, which would, in turn, affect our results of operations.
The U.S. federal government and certain state and local governments have taken or proposed actions that may have the
effect of reducing U.S. consumption of tobacco products and indirectly reducing demand for our products and services. These
activities have included:
•
•
•
•
restrictions on the use of tobacco products in public places and places of employment,
legislation authorizing the U.S. Food and Drug Administration (the “FDA”) to regulate the manufacturing and marketing
of 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 only produces about 5% of the cigarettes manufactured worldwide.
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 tobacco products and
services and could have a material adverse effect on our results of operations.
Government actions can have a significant effect on the sourcing of tobacco. If some of the current efforts are successful, we could
have difficulty obtaining sufficient tobacco to meet our customers’ requirements, which could have an adverse effect on our
performance and results of operations.
The WHO, through the FCTC, has created a formal study group to identify and assess crop diversification initiatives and
alternatives to growing leaf tobacco 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.
Certain recommendations by the WHO, through the FCTC, may cause shifts in customer usage of certain styles of tobacco.
As seen in countries like Canada and Brazil and recently discussed in the European Union, efforts have been taken to eliminate
ingredients from the manufacturing process for tobacco products. Such decisions could cause a change in requirements for certain
styles of tobacco in particular countries. Shifts in customer demand from one type of tobacco to another could create sourcing
challenges as requirements move from one origin to another.
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.
11
Because we conduct a significant portion of our operations internationally, political and economic uncertainties in certain countries
could have an adverse effect on our performance and results of operations.
Our international operations are subject to uncertainties and risks relating to the political stability of certain foreign
governments, principally in developing countries and emerging markets, and also to the effects of changes in the trade policies and
economic regulations of foreign governments. These uncertainties and risks, which include undeveloped or antiquated commercial
law, the expropriation, indigenization, or nationalization of assets, and the authority to revoke or refuse to renew business licenses
and work permits, may adversely impact our ability to effectively manage our operations in those countries. We have substantial
capital investments in South America and Africa, and the performance of our operations in those regions can materially affect our
earnings. If the political situation in any of the countries where we conduct business were to deteriorate significantly, our ability to
recover assets located there could be impaired. To the extent that we do not replace any lost volumes of tobacco with tobacco from
other sources, or we incur increased costs related to such replacement, our financial condition or results of operations, or both, would
suffer.
Changes in tax laws in the countries where we do business may adversely affect our results of operations.
Through our subsidiaries, we are subject to the tax laws of many jurisdictions. Changes in tax laws or the interpretation of
tax laws can affect our earnings, as can the resolution of various pending and contested tax issues. In most jurisdictions, we regularly
have audits and examinations by the designated tax authorities, and additional tax assessments are common. We believe that we
routinely comply with applicable tax laws in the jurisdictions where we operate, and we vigorously contest all significant tax
assessments where we believe we are in compliance with the tax laws.
Financial Factors
Failure of our customers or suppliers to repay extensions of credit could materially impact our results of operations.
We extend credit to both suppliers and customers. A significant bad debt provision related to amounts due could adversely
affect our results of operations. In addition, crop advances to farmers are generally secured by the farmers’ agreement to deliver
green tobacco. In the event of crop failure, delivery failure, or permanent reductions in crop sizes, full recovery of advances may
never be realized, or otherwise could be delayed until future crops are delivered. See Notes 1 and 14 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, the local currency is the functional currency. Examples of these
markets are Hungary, Poland, and the Philippines. Similarly, the local currency is the functional currency in other markets, such as
Western Europe, where export sales have been denominated primarily in local currencies. In these markets, reported earnings are
affected by the translation of the local currency into the U.S. dollar. See Item 7A, “Qualitative and Quantitative Disclosure About
Market Risk” for additional discussion related to foreign currency exchange risk.
Our purchases of tobacco are generally made in local currency, and we also provide farmer advances that are denominated
in the local currency. We account for currency remeasurement gains or losses on those advances as period costs, and they are usually
accompanied by offsetting increases or decreases in the purchase cost of tobacco, which is priced in the local currency. The effect
of differences in the cost of tobacco is generally not realized in our earnings until the tobacco is sold, which often occurs in a quarter
or fiscal year subsequent to the recognition of the related remeasurement gains or losses. The difference in timing could affect our
profitability in a given quarter or fiscal year.
12
We have used currency hedging strategies to reduce our foreign currency exchange rate risks in some markets. In addition,
where we source tobacco in countries with illiquid or nonexistent forward foreign exchange markets, we often manage our foreign
exchange risk by matching funding for inventory purchases with the currency of sale and by minimizing our net investment in these
countries. To the extent that we have net monetary assets or liabilities in local currency, 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 may 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
below.
Low investment performance by our defined benefit pension plan assets and changes in pension plan valuation assumptions may
increase our pension expense and may require us to fund a larger portion of our pension obligations, thus, diverting funds from other
potential uses.
We sponsor domestic defined benefit pension plans that cover certain eligible employees. Our results of operations may
be positively or negatively affected by the amount of expense we record for these plans. U.S. generally accepted accounting principles
(“GAAP”) require that we calculate expense for the plans using actuarial valuations. These valuations reflect assumptions about
financial market and other economic conditions that may change based on changes in key economic indicators. The most significant
year-end assumptions we used to estimate pension expense for fiscal year 2013 were 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 “Pension and other postretirement benefits
plan adjustments.” At the end of fiscal year 2013, the projected benefit obligation of our U.S. pension plans was $272 million and
plan assets were $188 million. For a discussion regarding how our financial statements can be affected by pension plan valuation
assumptions, see “Critical Accounting Estimates – Pension and Other Postretirement Benefit Plans” in “Management’s Discussion
and Analysis of Financial Condition and Results of Operations” in Item 7 and in Note 11 to the consolidated financial statements in
Item 8. Although GAAP expense and pension funding contributions are not directly related, key economic factors that affect GAAP
expense can also affect the amount of cash we are required to contribute to our pension plans under requirements of the Employee
Retirement Income Security Act (“ERISA”). Failure to achieve expected returns on plan assets could also result in an increase to
the amount of cash we would be required to contribute to our pension plans. In order to maintain or improve the funded status of
our plans, we may also choose to contribute more cash to our plans than required by ERISA regulations.
Item 1B. Unresolved Staff Comments
None
13
Item 2. Properties
Except as noted, we own the following significant properties (greater than 500,000 square feet):
Location
Flue-Cured and Burley Leaf Tobacco Operations:
North America:
United States
Principal Use
Building Area
(Square Feet)
Nash County, North Carolina .......................................................................... Factory and storages
1,312,000
Other Regions:
Brazil
Santa Cruz ....................................................................................................... Factory and storages
Joinville (1) ....................................................................................................... Factory and storages
2,386,000
964,000
Malawi
Lilongwe.......................................................................................................... Factory and storages
942,000
Mozambique
Tete .................................................................................................................. Factory and storages
748,000
Philippines
Agoo, La Union ............................................................................................... Factory and storages
766,000
Tanzania
Morogoro......................................................................................................... Factory and storages
803,000
Zimbabwe
Harare (2) .......................................................................................................... Factory and storages
1,445,000
Other Tobacco Operations:
United States
Lancaster, Pennsylvania .................................................................................. Factory and storages
793,000
(1)
(2)
Leased from a third party.
Owned by an unconsolidated subsidiary.
We lease headquarters office space of about 45,000 square feet at 9201 Forest Hill Avenue in Richmond, Virginia, which
we believe is adequate for our current needs.
Our business involves, among other things, storing and processing green tobacco and storing processed tobacco. We operate
processing facilities in major tobacco growing areas. In addition, we require tobacco storage facilities that are in close proximity to
the processing facilities. We own most of the tobacco storage facilities, but we lease additional space as needs arise, and expenses
related to such leases are not material. We believe that the properties currently utilized in our tobacco operations are maintained in
good operating condition and are suitable and adequate for our purposes at our current volumes.
In addition to our significant properties listed above, we own other processing facilities in the following countries: Germany,
Hungary, Italy, the Netherlands, 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, 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.
Except for the Lancaster, Pennsylvania facility, the facilities described above are engaged primarily in processing tobaccos
used by manufacturers in the production of cigarettes. The Lancaster facility, as well as facilities in Brazil, the Dominican Republic,
Indonesia, and Paraguay, process tobaccos used in making cigar, pipe, and smokeless products, as well as components of certain
“roll-your-own” products.
14
Item 3. Legal Proceedings
European Commission Fines in Italy
In 2002, we reported that we were aware that the European Commission (the “Commission”) was investigating certain
aspects of the leaf tobacco markets in Italy. One of our subsidiaries, Deltafina S.p.A (“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 from the Commission that the Commission had imposed fines totaling
€30 million 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. In January 2006, Universal Corporation and Deltafina each
filed appeals in the General Court of the European Union (“General Court”). Deltafina’s appeal was held on September 28, 2010.
For strategic reasons related to the defense of the Deltafina appeal, we withdrew our appeal. On September 9, 2011, the General
Court issued its decision, in which it rejected Deltafina’s application to reinstate immunity. Deltafina appealed the decision of the
General Court to the European Court of Justice, and a hearing was held in November 2012. Effective with the September 9, 2011
General Court decision, we recorded a charge for the full amount of the fine (€30 million) plus accumulated interest (€5.9 million).
The charge totaled $49.1 million at the exchange rate in effect on the date of the General Court decision. Deltafina maintains a bank
guarantee in favor of the Commission in the amount of the fine plus accumulated interest in order to stay execution during the appeals
process. We expect the appeal to be decided during fiscal year 2014. Any fine and interest Deltafina may ultimately be required to
pay would not be due until the European Court of Justice issues its decision.
Other Legal Matters
In addition to the above-mentioned matter, 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 business or financial position. However,
should one or more of these matters be resolved in a manner adverse to our current expectation, the effect on our results of operations
for a particular fiscal reporting period could be material.
Item 4. Mine Safety Disclosures
Not applicable.
15
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
PART II
Common Equity
Our common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol “UVV.” The following table
sets forth the high and low sales prices per share of the common stock on the NYSE Composite Tape, based upon published financial
sources, and the dividends declared on each share of common stock for the quarter indicated.
Fiscal Year Ended March 31, 2013
Cash dividends declared .....................................................................................
$
0.49 $
0.49 $
0.50 $
0.50
First Quarter
Second Quarter Third Quarter
Fourth Quarter
Market price range:
High..................................................................................................................
Low ..................................................................................................................
47.40
44.08
51.10
44.03
52.25
45.62
58.36
51.29
Fiscal Year Ended March 31, 2012
Cash dividends declared .....................................................................................
$
0.48 $
0.48 $
0.49 $
0.49
Market price range:
High..................................................................................................................
Low ..................................................................................................................
45.72
36.94
41.48
35.11
47.38
35.78
48.60
44.88
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 our 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 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, 2013. At May 20, 2013, there were 1,341 holders of record of our common stock. See Notes 6 and 12 to
the consolidated financial statements in Item 8 for more information on debt covenants and equity securities.
Purchases of Equity Securities
The following
table summarizes our repurchases of our common stock during
the
three-month period
ended March 31, 2013:
Period (1)
Total Number of
Shares
Repurchased
Average Price Paid
Per Share
(2)
Total Number of
Shares
Repurchased as
Part of Publicly
Announced Plans
or Programs (3)
Dollar Value of
Shares that May
Yet Be Purchased
Under the Plans or
Programs (3)
January 1, 2013 to January 31, 2013...........................................
19,835
$
February 1, 2013 to February 28, 2013.......................................
March 1, 2013 to March 31, 2013...............................................
16,869
17,616
Total ............................................................................................
54,320
$
52.86
55.62
56.39
54.86
19,835
$
93,300,880
16,869
17,616
92,362,684
91,369,273
54,320
$
91,369,273
(1)
(2)
(3)
Repurchases are based on the date the shares were traded. This presentation differs from the consolidated statement of cash flows, where the cost of share
repurchases is based on the date the transactions were settled.
Amounts listed for average price paid per share include broker commissions paid in the transactions.
A stock repurchase plan, which was authorized by our Board of Directors, became effective and was publicly announced on November 8, 2011. This stock
repurchase plan authorizes the purchase of up to $100 million in common stock in open market or privately negotiated transactions, subject to market conditions
and other factors. This stock repurchase program will expire on the earlier of November 15, 2013, or when we have exhausted the funds authorized for the
program.
16
Item 6. Selected Financial Data
Summary of Operations
Sales and other operating revenues.................................................................... $ 2,461,699
$ 2,446,877
$ 2,571,527
$ 2,491,738
$ 2,554,659
Fiscal Year Ended March 31,
2013
2012
2011
2010
2009
(in thousands, except per share data, ratios, and number of shareholders)
Segment operating income
(1) ........................................................................... $
232,757
Operating income............................................................................................... $
223,009
Net income ......................................................................................................... $
(2) ....................................... $
Net income attributable to Universal Corporation
140,919
132,750
Earnings available to Universal Corporation common shareholders................. $
117,900
Return on beginning common shareholders’ equity ..........................................
12.1%
Earnings per share attributable to
Universal Corporation common shareholders:
Basic............................................................................................................. $
Diluted.......................................................................................................... $
5.05
4.66
Financial Position at Year End
$
$
$
$
$
$
$
223,548
180,304
100,819
92,057
77,207
$
$
$
$
$
$
$
257,925
254,600
164,550
156,565
141,715
15.6%
5.94
5.42
$
$
$
$
$
$
$
279,585
257,209
170,345
168,397
153,547
18.8%
6.21
5.68
$
$
$
$
$
$
$
230,475
209,932
132,561
131,739
116,889
13.0%
4.57
4.32
7.9%
3.32
3.25
Current ratio .......................................................................................................
2.80
4.31
3.08
2.75
2.74
Total assets......................................................................................................... $ 2,306,155
$ 2,266,919
$ 2,227,867
$ 2,371,040
$ 2,138,176
Long-term obligations........................................................................................ $
181,250
$
392,500
$
320,193
$
414,764
$
331,808
Working capital.................................................................................................. $ 1,123,376
$ 1,297,921
$ 1,065,883
$ 1,078,077
$
954,044
Total Universal Corporation shareholders’ equity............................................. $ 1,258,571
$ 1,183,451
$ 1,185,606
$ 1,122,570
$ 1,029,473
General
Ratio of earnings to fixed charges .....................................................................
Ratio of earnings to combined fixed charges and preference dividends............
8.87
4.69
Number of common shareholders......................................................................
1,354
Weighted average common shares outstanding:
Basic................................................................................................................
Diluted.............................................................................................................
23,355
28,478
Dividends per share of convertible perpetual preferred stock (annual)............. $
67.50
Dividends per share of common stock (annual) ................................................ $
1.98
Book value per common share........................................................................... $
44.79
$
$
$
7.53
4.07
1,408
23,228
28,339
67.50
1.94
41.73
$
$
$
9.41
5.17
1,447
23,859
28,888
67.50
1.90
41.85
$
$
$
9.43
5.29
1,518
24,732
29,662
67.50
1.86
37.39
$
$
$
5.54
3.55
1,597
25,570
30,466
67.50
1.82
32.66
(1) 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. See Note 15 to the consolidated financial statements in Item 8 of this Annual
Report.
(2) We hold less than a 100% financial interest in certain consolidated subsidiaries, and a portion of net income is attributable to the noncontrolling interests in
those subsidiaries.
17
The calculations of the ratio of earnings to fixed charges and the ratio of earnings to combined fixed charges and preference
dividends are shown in Exhibit 12. Fixed charges primarily represent interest expense we incurred during the designated 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 as follows:
•
•
•
Fiscal Year 2013 – $4.1 million in restructuring costs, primarily related to workforce reductions in Africa. The effect
of these charges was a reduction in net income of $1.8 million, or $0.06 per diluted share.
Fiscal Year 2012 – $49.1 million charge to accrue a fine and accumulated interest imposed jointly on the Company and
Deltafina, S.p.A. (“Deltafina”), an Italian subsidiary, by the European Commission related to tobacco buying practices
in Italy. The charge reflected a September 2011 appeals court decision rejecting Deltafina's application to reinstate its
immunity in the case. No income tax benefit was recorded on the non-deductible fine portion of the charge. In addition
to that charge, we recorded restructuring costs of $11.7 million, including approximately $8.6 million for employee
termination benefits, primarily related to our operations in the U.S. and South America, and $3.1 million for costs to
exit a supplier arrangement in Europe. Results for the year also included a gain of $11.1 million on the sale of land and
buildings in Brazil that were most recently used for storage activities and a $9.6 million gain on insurance settlement
proceeds to replace factory and equipment lost in a fire at a plant in Europe. On a combined basis, the net effect of
these items decreased income before income taxes by $40.0 million and net income by $40.3 million, or $1.42 per
diluted share.
Fiscal Year 2011 – $7.4 million reversal of a portion of a charge recorded in fiscal year 2005 to accrue a fine imposed
by the European Commission on Deltafina, S.p.A., our subsidiary in Italy, related to tobacco buying practices in Spain.
The reversal reflected a favorable European Union’s General Court decision in Deltafina’s appeal of the fine. We also
recorded a $19.4 million gain on the assignment of farmer contracts and sale of related assets in Brazil to an operating
subsidiary of a major customer. In addition to those items, which benefited fiscal year 2011 earnings, we recorded
$21.5 million in restructuring and impairment costs during the year. A significant portion of those costs related to our
decision to close our leaf tobacco processing operations in Canada and sell the assets of those operations. Restructuring
charges were also recorded to recognize costs associated with voluntary early retirement offers in our U.S. operations
and additional voluntary and involuntary separations in various other locations. On a combined basis, the net effect
of these items increased income before income taxes by $5.3 million, and increased net income by $3.3 million, or
about $0.12 per diluted share.
•
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.
18
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of financial condition and results of operations is provided to enhance the understanding of,
and should be read in conjunction with, Part I, Item 1, “Business” and Item 8, “Financial Statements and Supplementary Data.”
For information on risks and uncertainties related to our business that may make past performance not indicative of future results,
or cause actual results to differ materially from any forward-looking statements, see “General,” and Part I, Item 1A, “Risk Factors.”
OVERVIEW
We are the leading global leaf tobacco supplier. We derive most of our revenues from sales of processed tobacco to
manufacturers of tobacco products throughout the world and from fees and commissions for specific services. We hold a strategic
position in the world leaf markets where we work closely with both our customers and farmers to ensure that we deliver a compliant
product that meets our customers' needs while promoting a strong supplier base. We adapt to meet changes in customer requirements
as well as broader changes in the leaf markets while continuing to provide the stability of supply and high level of service that
distinguishes us in the marketplace. We believe that we have successfully met the needs of both our customers and suppliers while
adapting to changes in leaf markets. Consequently, we have delivered strong results to our shareholders. Over the last three fiscal
years, we have strengthened our balance sheet by repaying almost $103 million in debt, generated over $488 million in net cash flow
from operations, and returned almost $240 million to our shareholders through a combination of dividends and share repurchases.
After record results and large crops in fiscal year 2010, we continued to see large burley crops in fiscal year 2011 while
flue-cured production was reduced somewhat by a weather issue in Brazil. During the year, we began to see the signs of oversupply
in lower margins and elevated supplier and dealer inventories. In addition, we assigned farmer contracts in Brazil to a subsidiary of
Philip Morris International as part of its efforts to increase its direct sourcing capability there. In response to customer efforts in
direct sourcing and our need to reduce costs in an oversupplied market, we began a process of reviewing each of our operations with
the purpose of rationalizing global operations to fit market conditions. That process gave rise to numerous cost-saving initiatives
which continued into fiscal year 2012.
In fiscal year 2012, we had a slow start to the tobacco buying season, which is typical in a cycle of oversupply as both
customers and farmers delayed action to evaluate market development. However, selling activity increased after prices declined at
both the farm and the supplier and dealer levels. We experienced lower margins as a result of the oversupplied market conditions.
In Brazil, we also saw the effect in our first quarter of reduced sales of leaf due to the assignment of some of our farmer contracts
to a subsidiary of Philip Morris International during fiscal year 2011. Processing volumes in North America decreased due to
processing contracts that expired in 2011. We continued to make progress on our restructuring programs in several regions, to further
reduce operating cost structures where necessary. Earnings were negatively impacted by a charge related to the rejection of our
European Commission fine appeal, although we appealed that decision to a higher court and expect resolution in fiscal year 2014.
Despite smaller crops, rising leaf production costs, and margin pressures in most regions, we delivered better performance
in fiscal year 2013 than we had anticipated at the beginning of the fiscal year. Some of this success was attributable to the sale of
previously uncommitted inventories and carryover shipments of the prior year's large African and South American crops. In addition,
we benefited from lower selling, general, and administrative costs. Certain of these costs reductions were unpredictable - such as
currency remeasurement and exchange gains - and may not be recurring, while others were a result of our targeted cost reduction
and efficiency improvement efforts. In fiscal year 2013, we also generated over $230 million in cash flow from our operations and
returned nearly $70 million to our shareholders through a combination of dividends and share repurchases. In addition to our financial
achievements, our strong local management teams around the globe continued to advance our goal of providing compliant leaf,
produced in a sustainable and competitive manner, to our customers.
As we move into fiscal year 2014, we are seeing crop sizes increase in many of the key sourcing areas for flue-cured and
burley tobacco in response to strong global leaf demand. Sales activity has also been robust, especially for quality flavor flue-cured
styles of tobacco. Burley tobacco remains in high demand, and current year crop levels are not expected to meet global requirements.
At the same time, our uncommitted inventories are near historic lows, limiting our ability to glean additional volumes from this
source. In addition to the low uncommitted inventories, we will not have the benefit of carryover crop shipments which helped our
results in the first and second quarters of fiscal year 2013. While we look forward to another productive year, total volumes shipped
may be lower in fiscal year 2014.
We remain committed to being a leader in our industry and are excited about the future. Universal plays a vital role with
respect to the global supply of tobacco, and we have a solid balance sheet that allows us to capitalize on opportunities to grow our
business. We champion programs to address critical industry issues such as the elimination of child labor and the eradication of illicit
trade in tobacco products. We partner with our suppliers to enhance their production, ensure compliant leaf, and to support their
communities, and we provide solutions for our contracted farmers through the efforts of our large team of agronomists and field
technicians worldwide. We also actively work with our longstanding customers to balance tobacco production with their continued
strong demand.
19
Fiscal Year Ended March 31, 2013, Compared to the Fiscal Year Ended March 31, 2012
RESULTS OF OPERATIONS
Net income for the fiscal year ended March 31, 2013, was $132.8 million, or $4.66 per diluted share, compared with last
year's net income of $92.1 million, or $3.25 per diluted share. The comparison of the current and prior fiscal year is affected by
several unusual items, which are described below, amounting to net pretax charges of $4.1 million ($0.06 per diluted share), and
$40.1 million ($1.42 per diluted share) for fiscal years 2013 and 2012, respectively. Segment operating income for fiscal year 2013,
which excludes those unusual items, was $232.8 million, up $9.2 million compared with the prior year, as improved performance in
our Other Regions and Other Tobacco Operations segments was partially offset by a decline in our North America segment. Revenues
for fiscal year 2013 of $2.5 billion were relatively flat compared with the previous year, on lower volumes at higher average prices.
The following table sets forth the unusual items included in the annual results, none of which are included in segment results:
(in millions of dollars, except per share amounts)
(Charges) and gains
Restructuring costs
(Charge for) reversal of European Commission fines in Italy
(1) ................................................................................................
(2) ..................................................................................................................................................................
(3) ....................................................................................................................
Gain on fire loss insurance settlement in Europe
Gain on sale of facility in Brazil (4) ..............................................................................................................................................
Total effect on operating income ..................................................................................................................................................
Total effect on net income.............................................................................................................................................................
Total effect on diluted earnings per share.....................................................................................................................................
Fiscal Year Ended
March 31,
2013
2012
$
$
$
$
— $
(4.1)
—
—
(4.1)
(1.8)
(0.06)
$
$
$
(49.1)
(11.7)
9.6
11.1
(40.1)
(40.3)
(1.42)
(1)
Fines and accumulated interest from the September 9, 2011, decision by the General Court of the European Union rejecting an Italian subsidiary's application to
reinstate immunity related to infringements of European Union antitrust law in the Italian raw tobacco market.
(2)
Restructuring charges, primarily related to workforce reductions in the United States, South America, Europe, and Africa.
(3)
The fire loss insurance settlement related to a plant fire in Europe in 2010. The operating assets were replaced.
(4)
Sale of land and storage buildings in Brazil in November 2011.
Flue-cured and Burley Leaf Tobacco Operations
For the fiscal year ended March 31, 2013, operating income for our flue-cured and burley leaf tobacco operations, which
includes our North America and Other Regions segments, of $212.3 million, was nearly flat compared to the prior year's results of
$210.7 million. The slight increase reflected improved operating results for the year in our Other Regions segment, which was mostly
offset by reduced earnings in our North America segment. Sales volumes for fiscal year 2013 reflected the smaller current crops as
well as additional volumes from carryover shipments from last year's large crops. Those carryover crops, mainly from South America
and Africa, primarily were shipped in the first half of this year. Revenues for the group were flat compared with the prior year, at
$2.2 billion.
Operating income for our Other Regions segment of $192.6 million was up 7%, compared to $180.7 million for the previous
year. Benefits from significant reductions in selling, general, and administrative expenses outweighed the effects of lower volumes
and margins in most origins. The selling, general, and administrative expense reductions were largely attributable to a decline in
provisions for farmer bad debts, net currency remeasurement and exchange benefits in Africa, South America and Asia, and lower
customer claims in comparison with the prior year. Revenues for the segment of $1.9 billion were relatively flat, on lower overall
volumes at higher average prices mostly due to higher green leaf costs.
Operating income for our North America segment declined by $10.3 million to $19.7 million for fiscal year 2013, compared
with the previous year. Despite higher overall sales volumes and increased processing business, the earnings decline was influenced
by lower margins on higher green leaf costs and higher overhead allocations. Revenues for the segment of $334.7 million were up
7% on those higher sales and processing volumes.
20
Other Tobacco Operations
In our Other Tobacco Operations segment, operating income for fiscal year 2013 improved by $7.6 million to $20.5 million,
on a favorable product mix due in part to stronger wrapper sales in our dark tobacco operations from recovery of the Indonesian crop
shortages. The results for our oriental joint venture also improved on better margins, as well as lower operating expenses due to a
stronger U.S. dollar and overhead cost reductions. Revenues for this segment for fiscal year 2013 increased by about 7%, to $255.1
million, mainly due to increased wrapper volume in our dark tobacco operations.
Other Items
Cost of goods sold of $2.0 billion was up about 1% for the year ended March 31, 2013, compared with the prior year. The
change reflected higher green leaf costs and was consistent with comparable changes in sales revenues for the relevant period. Selling,
general, and administrative costs declined by $16.3 million compared to the previous year. The decline was driven mainly by benefits
from currency remeasurement and exchange gains in our Other Regions segment, a reduction in provisions for farmer bad debts,
and lower customer claims.
Interest expense was down $0.8 million to $22.0 million compared with the previous year, primarily due to lower average
borrowing levels as a result of reduced working capital requirements this year. The consolidated effective income tax rate on pretax
earnings was approximately 32% and 38% for the fiscal years ended March 31, 2013 and 2012, respectively. Last year's rate was
higher because we did not record an income tax benefit on the non-deductible fine portion of the charge for the European Commission
fine and interest in Italy. Without that item, the effective income tax rate would have been approximately 29%. The rates in all
periods, excluding adjustments, were lower than the 35% federal statutory rate because of the effect of changes in exchange rates
on deferred income tax assets and liabilities, as well as lower effective rates on income from certain foreign subsidiaries.
Fiscal Year Ended March 31, 2012, Compared to the Fiscal Year Ended March 31, 2011
Net income for the fiscal year ended March 31, 2012, was $92.1 million, or $3.25 per diluted share, including the effect of
the charge for the European Commission fine and interest in Italy. That charge and other unusual items during fiscal year 2012
amounted to a net pretax charge of $40.1 million ($1.42 per diluted share). Those results compared to fiscal year 2011 net income
of $156.6 million, or $5.42 per diluted share, which included unusual items amounting to a net pretax benefit of $5.3 million ($0.12
per diluted share). Segment operating income for fiscal year 2012, which excluded those unusual items, was $223.5 million, down
$34.4 million compared with fiscal year 2011 as lower results in our North America and Other Tobacco Operations segments were
partially offset by improved performance in our Other Regions segment. The fiscal year 2012 results reflected the full impact of the
assignment of Brazilian farmer contracts to Philip Morris International in fiscal year 2011, as well as the decline in processing
volumes in the North America segment related to the expiration of customer contracts. Operating income in this period included
$12 million in dividend income from unconsolidated subsidiaries. Revenues for fiscal year 2012 fell to $2.4 billion from $2.6 billion
in fiscal year 2011, primarily due to lower leaf prices on slightly higher volumes.
21
The following table sets forth the unusual items included in reported results, none of which are included in segment results:
(in millions of dollars, except per share amounts)
(Charges) and gains
(1) ...............................................................................
(Charge for) reversal of European Commission fines in Italy and Spain
Restructuring and impairment costs (2) .......................................................................................................................................
(3) ...................................................................................................................
Gain on fire loss insurance settlement in Europe
(4) .............................................................................................................................................
(5) ..........................................................................
Gain on assignment of farmer contracts and sale of related assets in Brazil
Gain on sale of facility in Brazil
Total effect on operating income..................................................................................................................................................
Total effect on net income............................................................................................................................................................
Total effect on diluted earnings per share.....................................................................................................................................
Fiscal Year Ended
March 31,
2012
2011
$
(49.1)
$
(11.7)
9.6
11.1
—
(40.1)
(40.3)
(1.42)
$
$
$
$
$
$
7.4
(21.5)
—
—
19.4
5.3
3.3
0.12
(1)
Fiscal year 2012 - fines and accumulated interest related to the September 9, 2011 decision by the General Court of the European Union rejecting an Italian
subsidiary's application to reinstate immunity related to infringements of European Union antitrust law in the Italian raw tobacco market.
Fiscal year 2011 - the reversal of a portion of a European Commission fine recorded by an Italian subsidiary in 2005 related to the Spanish tobacco processing
market, following a decision of the General Court of the European Union that reduced the amount of the fine by half.
(2)
Restructuring and impairment charges, primarily related to plant closures and workforce reductions in the United States, South America, and Europe.
(3)
Fire loss insurance settlement in June 2011 related to a plant fire in Europe in 2010. The operating assets were replaced.
(4)
Sale of land and storage buildings in Brazil in November 2011.
(5)
Assignment of farmer production contracts and related assets in Brazil in October 2010.
Flue-cured and Burley Leaf Tobacco Operations
For the fiscal year ended March 31, 2012, operating income for the flue-cured and burley leaf tobacco operations, which
included the North America and Other Regions segments, was about $211 million, an 8% decrease compared to fiscal year 2011
results of about $229 million. The decline reflected improved operating results for fiscal year 2012 in the Other Regions segment,
which were outweighed by reduced earnings in the North America segment. Revenues for the group were down about 3%, to $2.2
billion due to lower leaf prices, despite higher volumes for fiscal year 2012.
Operating income of $180.7 million for the Other Regions segment was up 6%, compared to $170 million for fiscal year
2011. In Africa, higher sales volumes in some origins, partly due to completion of more shipments prior to March 31, 2012, mitigated
tighter margins and lower third-party processing income. Earnings also benefited from the reversal of statutory severance obligations
there. Earnings in the South America region were down, although the effect of reduced sales volumes related to the assignment of
farmer contracts in fiscal year 2011 was moderated significantly by increased sales to new and existing customers, as well as lower
costs from restructuring activities and a smaller farmer base in Brazil. In Europe, results improved on higher shipments and an
insurance recovery, while Asia experienced declines in the period, primarily due to reduced trading volumes and inventory
adjustments. Selling, general, and administrative expenses for the segment were flat for fiscal year 2012, and cost of goods sold
declined about 4% due mostly to reduced green leaf prices and the effect of increased toll processing in Brazil. In addition, results
for the Other Regions segment included $12 million in dividend income from unconsolidated subsidiaries. Revenues for the segment
of $1.9 billion were relatively flat as higher overall volumes combined with lower prices in most regions and a less favorable mix.
Operating income for the North America segment declined by $29.2 million to $30.0 million for fiscal year 2012, as results
included the full impact of lower toll processing volumes there. The lower processing volumes were partly mitigated by reduced
overhead costs, including savings from restructuring initiatives. Results for both fiscal years 2012 and 2011 also reflected sales of
uncommitted leaf inventories. Revenues for the segment were down 8% to $314.2 million.
22
Other Tobacco Operations
In the Other Tobacco Operations segment, operating income for fiscal year 2012 declined by $15.8 million to $12.8 million,
due primarily to lower volumes and margins in the dark tobacco operations as a result of a decline in global market sales. The oriental
joint venture also experienced lower overall sales volumes and margins for fiscal year 2012, partially mitigated by reduced overhead
costs and the benefit from business realignment charges taken in fiscal year 2011. Revenues for this segment for fiscal year 2012
decreased by $47.5 million, to $239.2 million. The majority of this change was due to the transfer of Special Services business to
the Other Regions segment and lower dark tobacco volumes.
Other Items
Cost of goods sold decreased by about 4% to $2.0 billion for the year ended March 31, 2012, primarily as a result of reduced
green leaf prices in most origins, offset somewhat by higher volumes. Selling, general, and administrative costs fell by $7.4 million
for the year. The decline included a favorable comparison on costs related to a smaller farmer base in South America and a positive
variance from the reversal of non-income tax provisions due to a favorable tax ruling in South America, partially offset by unfavorable
variances on currency remeasurement primarily in South America and Asia.
Interest expense was down 1% to $22.8 million for the year ended March 31, 2012, primarily reflecting lower average
borrowing levels. Interest income for fiscal year 2012 was about $1.4 million lower, due to the previous year's recognition of interest
income on the return of funds that had been escrowed to bond the appeal of the European Commission fine in Spain.
The consolidated effective income tax rate on pretax earnings was approximately 38% for the fiscal year ended March 31,
2012. The rate was higher than the 35% U.S. statutory tax rate because we did not record an income tax benefit on the non-deductible
fine portion of the charge for the European Commission fine and interest in Italy. Without that item, the effective income tax rate
for fiscal year 2012 would have been approximately 29%. That rate was lower than the U.S. statutory rate primarily due to the effect
of exchange rate movements on deferred taxes and recognition of benefits on fiscal year 2011 operating losses of certain foreign
subsidiaries, and to recoveries of state income taxes. The effective income tax rate for the year ended March 31, 2011, was
approximately 32%. The effective rate for 2011 was less than the statutory rate due to the reversal of previously recorded liabilities
for uncertain tax positions and recognition of benefits on fiscal year 2010 operating losses of certain foreign subsidiaries.
During the first quarter of fiscal year 2012, an insurance settlement was received for replacement cost recovery on the
factory and equipment destroyed in a fire at our sheet tobacco operations in Europe in 2010. The settlement generated a gain of $9.6
million. In the third quarter of fiscal year 2012, we sold land and storage buildings in Brazil in exchange for other property and $9.4
million in cash. The transaction resulted in a gain of $11.1 million. Both of these gains are reported in other income in the consolidated
statements of income.
Accounting Pronouncements
In February 2013, the FASB issued Accounting Standards Update 2013-02, “Comprehensive Income (Topic 220): Reporting
of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” The new guidance requires entities to report the effect
of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income unless the
amounts are not reclassified in their entirety to net income. For amounts that are not required to be reclassified in their entirety to
net income in the same reporting period, entities are required to cross-reference other disclosures that provide additional detail about
those amounts. The new guidance is effective prospectively for all interim and annual periods beginning after December 15, 2012,
with early adoption permitted. The Company does not expect any impact on the Company's results of operations, cash flows or
financial position as the guidance relates only to additional disclosures.
We believe the other new accounting guidance issued during fiscal year 2013 would not have a material impact on our
financial statements.
23
Overview
LIQUIDITY AND CAPITAL RESOURCES
During the fiscal year ended March 31, 2013, our operations generated positive operating cash flows. Seasonal working
capital requirements were lower this fiscal year largely due to smaller crops, the completion of carryover shipments from last year's
large crops in some origins, and sales of uncommitted inventories. We had more than sufficient liquidity to meet our needs. We also
continued our conservative financial policies, maintained our discipline on using our free cash flow, ended the fiscal year with lower
uncommitted tobacco inventory levels, and reduced our leverage ratios while returning funds to shareholders.
Our liquidity and capital resource requirements are predominately short-term in nature and primarily relate to working
capital required for tobacco crop purchases. Working capital needs are seasonal within each geographic region. The geographic
dispersion and the timing of working capital needs permit us to predict our general level of cash requirements, although crop sizes,
prices paid to farmers, shipment and delivery timing, and currency fluctuations affect requirements each year. Peak working capital
requirements are generally reached during the first and second fiscal quarters. Each geographic area follows a cycle of buying,
processing, and shipping, and in many regions we also provide agricultural materials to farmers during the growing season. The
timing of the elements of each cycle is influenced by such factors as local weather conditions and individual customer shipping
requirements, which may change the level or the duration of crop financing. Despite a predominance of short-term needs, we maintain
a relatively large portion of our total debt as long-term to reduce liquidity risk. We also periodically have large cash balances that
we utilize to meet our working capital requirements.
We believe that our financial resources are adequate to support our capital needs for at least the next twelve months. Our
seasonal borrowing requirements primarily relate to purchasing crops in South America and Africa and can increase from March to
September by more than $300 million. The funding required can vary significantly depending upon such factors as crop sizes, the
price of leaf, the relative strength of the U.S. dollar, and the timing of shipments and customer payments. We deal with this uncertainty
by maintaining substantial credit lines and cash balances. In addition to our operating requirements for working capital, we have
$211 million of long-term debt maturing in fiscal year 2014, and we expect to provide around $13 million in funding to our pension
plans. While available capital resources from our cash balances, a committed revolving credit facility, and uncommitted credit lines
exceed these anticipated needs, we may explore refinancing long-term debt in order to better manage long-term liquidity risk. After
balancing our capital structure, any excess cash flow from operations after dividends and capital expenditures will be available to
fund expansion, purchase our stock, or otherwise enhance shareholder value.
Cash Flow
Our operations provided about $234 million in operating cash flows in fiscal year 2013. Using those funds, we spent $31
million on capital projects, returned almost $70 million to shareholders in the form of dividends and repurchases of our common
stock, and reduced our total debt by $35 million. At March 31, 2013, cash balances totaled $368 million.
Working Capital
Working capital at March 31, 2013, was about $1.1 billion, down $175 million from last year's level. Cash and cash
equivalents increased by over $106 million while the current portion of long-term obligations increased by $195 million. Accounts
payable and accrued expenses increased by about $38 million in large part due to the reclassification of the liability for our European
Commission fine from a long-term to a current liability. Our legal appeal of the fine is expected to be resolved by the end of fiscal
year 2014.
Tobacco inventories at March 31, 2013, were down $59 million. Inventories were lower due to smaller African crops and
less uncommitted tobacco inventory. We usually finance inventory with a mix of cash, notes payable, and customer deposits,
depending on our borrowing capabilities, interest rates, and exchange rates, as well as those of our customers. We generally do not
purchase material quantities of tobacco on a speculative basis. However, when we contract directly with farmers, we are obligated
to buy their entire crop. Our uncommitted tobacco inventories decreased by approximately $26 million to $117 million, or about
19% of tobacco inventory. Uncommitted inventories at March 31, 2012, were $143 million, which represented 21% of tobacco
inventory. The level of these uncommitted inventories is influenced by timing of farmer deliveries of new crops.
24
Share Repurchase Activity
Our Board of Directors approved our current share repurchase program in November 2011. This program expires in
November 2013 and authorizes purchases of up to $100 million of our common stock. Under the authorization, we may purchase
shares from time to time on the open market or in privately negotiated transactions at prices not exceeding prevailing market rates.
During fiscal year 2013, we purchased 169,432 shares of common stock at an aggregate cost of $9 million (average price per share
of $50.94), based on trading dates. We did not purchase any shares under this program prior to the beginning of this fiscal year. In
determining our level of common stock 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. At March 31, 2013, our available authorization under our current share repurchase program
was $91 million, and approximately 23.3 million common shares were outstanding.
Capital Spending
Our capital expenditures are generally limited to those that add value for our customers, replace or maintain equipment,
increase efficiency, or position us for future growth. Our capital expenditures were approximately $31 million in fiscal year 2013,
$38 million in fiscal year 2012, and $39 million in fiscal year 2011. Depreciation expense was approximately $43 million, $42
million, and $44 million, respectively, in each of fiscal years 2013, 2012, and 2011. 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 projects
that increase spending beyond those limits. We currently have no major capital expenditures planned in fiscal year 2014.
Outstanding Debt and Other Financing Arrangements
We consider the sum of notes payable and overdrafts, long-term debt (including the 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 decreased by $137 million to $155 million during the fiscal
year ended March 31, 2013. The decrease primarily reflects higher cash balances and lower notes payable and overdrafts. Net debt
as a percentage of capitalization was approximately 11% at March 31, 2013, down from 19% at March 31, 2012, and it was lower
than our target range for peak borrowings of 35% to 45% of total capitalization.
We have a committed revolving credit facility of $450 million and a funded five-year amortizing term loan facility. Both
facilities will mature in November 2016. As of March 31, 2013, we had no borrowings under the revolving credit facility. Under
the terms of the facilities, we must maintain a minimum level of tangible net worth and observe limits on debt levels. As of March
31, 2013, we were in compliance with all covenants of our debt agreements. As of March 31, 2013, we, together with our consolidated
affiliates, had approximately $412 million in uncommitted lines of credit, of which approximately $307 million were unused and
available to support seasonal working capital needs. We also have an active, undenominated universal shelf registration filed with
the SEC in November 2011, which provides for future issuance of additional debt or equity securities.
We have $211 million of long-term debt maturing in fiscal year 2014. Although available capital resources from our cash
balances, committed credit facility, and uncommitted credit lines exceed the amount of the maturing debt, we may explore refinancing
long-term debt in order to better control long-term liquidity risk.
Derivatives
From time to time, we use interest rate swap agreements to manage our exposure to changes in interest rates. At March 31,
2013, the fair value of our outstanding interest rate swap agreements was a liability of about $2 million, and the notional amount
swapped was approximately $93 million. These agreements were entered into to eliminate the variability of cash flows in the interest
payments on our variable rate amortizing term loan. Under the swap agreements, we receive variable rate interest and pay fixed rate
interest. The swaps are accounted for as cash flow hedges.
We also enter forward contracts from time to time to hedge certain foreign currency exposures, primarily related to forecast
purchases of tobacco and related processing costs in Brazil, as well as our net monetary asset exposure in local currency there. We
generally account for our hedges of forecast tobacco purchases as cash flow hedges. At March 31, 2013, 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 not material at March 31, 2013. For additional information, see Note 9 to the consolidated financial statements
in Item 8.
25
—
5,324
—
—
—
Pension Funding
Funds supporting our ERISA-regulated U.S. defined benefit pension plans increased by $11 million to $188 million, as
contributions and asset returns exceeded benefit payments. The accumulated benefit obligation (“ABO”) and the projected benefit
obligation (“PBO”) were approximately $227 million and $241 million, respectively, as of March 31, 2013. The ABO and PBO are
calculated on the basis of certain assumptions that are outlined in Note 11 to the consolidated financial statements in Item 8. We
expect to make contributions of about $13 million to our pension plans, including $10 million to our ERISA-regulated plans, during
the next year. It is our policy to regularly monitor the performance of the funds and to review the adequacy of our funding and plan
contributions.
Contractual Obligations
Our contractual obligations as of March 31, 2013, were as follows:
(in thousands of dollars)
Notes payable and long-term debt (1) ........................................................................
Total
2014
2015-2016
2017-2018
After 2018
$
531,351
$
339,049
$
154,267
$
38,035
$
Operating lease obligations ........................................................................................
44,230
16,890
14,806
7,210
Inventory purchase obligations:
Tobacco ....................................................................................................................
792,079
792,079
Agricultural materials...............................................................................................
Other purchase obligations.........................................................................................
62,991
9,723
62,991
9,723
—
—
—
—
—
—
Total..........................................................................................................................
$ 1,440,374
$ 1,220,732
$
169,073
$
45,245
$
5,324
(1)
Includes interest payments. Interest payments on $105.0 million of variable rate debt were estimated based on rates as of March 31, 2013. The Company has
entered interest rate swaps that effectively convert the interest payments on the $92.5 million outstanding balance of its amortizing bank term loan from variable
to fixed. The fixed rate has been used to determine the contractual interest payments for all periods.
In addition to principal and interest payments on notes payable and long-term debt, our contractual obligations include
operating lease payments, inventory purchase commitments, and capital expenditure commitments. Operating lease obligations
represent minimum payments due under leases for various production, storage, distribution, and other facilities, as well as vehicles
and equipment. Tobacco inventory purchase obligations primarily represent contracts to purchase tobacco from farmers. The amounts
shown above are estimates since actual quantities purchased will depend on crop yield, and prices will depend on the quality of the
tobacco delivered. About 55% 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 $132
million at March 31, 2013. In addition, we have guaranteed bank loans to farmers in Brazil and Malawi that relate to a portion of
our tobacco purchase obligations in those countries. At March 31, 2013, we were contingently liable under those guarantees for
outstanding balances of approximately $20 million (including accrued interest), and we had recorded a liability of approximately $4
million for the fair value of those guarantees. As tobacco is purchased and the related bank loans are repaid, our contingent liability
is reduced.
26
CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS
In preparing the financial statements in accordance with GAAP, we are required to make estimates and assumptions that
have an impact on the assets, liabilities, revenue, and expense amounts reported. These estimates can also affect our supplemental
information disclosures, including information about contingencies, risks, and financial condition. We believe, given current facts
and circumstances, that our estimates and assumptions are reasonable, adhere to GAAP, and are consistently applied. However,
changes in the assumptions used could result in a material adjustment to the financial statements. Our critical accounting estimates
and assumptions are in the following areas:
Inventories
Inventories of tobacco are valued at the lower of cost or market with cost determined under the specific cost method. Raw
materials are clearly identified at the time of purchase. We track the costs associated with raw materials in the final product lots,
and maintain this identification through the time of sale. We also capitalize direct and indirect costs related to processing raw
materials. This method of cost accounting is referred to as the specific cost or specific identification method. We write down
inventory for changes in market value based upon assumptions related to future demand and market conditions if the indicated market
value is below cost. Future demand assumptions can be impacted by changes in customer sales, changes in customers’ inventory
positions and policies, competitors’ pricing policies and inventory positions, 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 2013, 2012, and 2011 were $1.5 million, $8.3
million, and $8.5 million, respectively.
Advances to Suppliers and Guarantees of Bank Loans to Suppliers
In many sourcing origins, we provide tobacco growers with agronomy services and seasonal crop advances of, or for, seed,
fertilizer, and other supplies. These advances are short term in nature and are customarily repaid upon delivery of tobacco to us. In
several origins, we have also made long-term advances to tobacco farmers to finance curing barns and other farm infrastructure. In
Brazil and Malawi, we also guarantee 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 those cases, we may extend
repayment of the advances into the following crop year or satisfy the guarantee by acquiring the loan from the bank. In either
situation, we will incur losses whenever we are unable to recover the full amount of the loans and advances. At each reporting period,
we must make estimates and assumptions in determining the valuation allowance for advances to farmers and the liability to accrue
for our obligations under bank loan guarantees. At March 31, 2013, the gross balance of advances to suppliers totaled approximately
$199 million, and the related valuation allowance totaled approximately $54 million. The fair value of the loan guarantees for farmers
in Brazil and Malawi was a liability of approximately $4 million at March 31, 2013.
Recoverable Value-Added Tax Credits
In many foreign countries, we pay significant amounts of value-added tax (“VAT”) on purchases of unprocessed and
processed tobacco, crop inputs, packing materials, and various other goods and services. In some countries, VAT is a national tax,
and in other countries it is assessed at the state level. Items subject to VAT vary from jurisdiction to jurisdiction, as do the rates at
which the tax is assessed. When we sell tobacco to customers in the country of origin, we generally collect VAT on those sales. We
are normally permitted to offset our VAT payments against those collections and remit only the incremental VAT collections to the
tax authorities. When tobacco is sold for export, VAT is normally not assessed. In countries where our tobacco sales are predominately
for export markets, we often do not generate enough VAT collections on downstream sales to fully offset our VAT payments. In
those situations, we can accumulate unused VAT credits. Some jurisdictions have procedures that allow companies to apply for
refunds of unused VAT credits from the tax authorities, but the refund process often takes an extended period of time and it is not
uncommon for refund applications to be challenged or rejected in part on technical grounds. Other jurisdictions may permit companies
to sell or transfer unused VAT credits to third parties in private transactions, although approval for such transactions must normally
be obtained from the tax authorities, limits on the amounts that can be transferred are usually imposed, and the proceeds realized
may be heavily discounted from the face value of the credits. Due to these factors, in some countries we can accumulate significant
balances of VAT credits over time. We review these balances on a regular basis, and we record valuation allowances on the credits
to reflect amounts that we do not expect to recover, as well as discounts anticipated on credits we expect to sell or transfer. In
determining the appropriate valuation allowance to record in a given jurisdiction, we must make various estimates and assumptions
about factors affecting the ultimate recovery of the VAT credits. At March 31, 2013, the gross balance of recoverable tax credits
(primarily VAT) totaled approximately $73 million, and the related valuation allowance totaled approximately $26 million.
27
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. Although permitted under Accounting Standards Codification Topic 350 (“ASC 350”),
through March 31, 2013, we have not elected to base our initial assessment of potential impairment on qualitative factors. We follow
the guidance in ASC 350 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. Over 90% of our goodwill balance relates to our reporting unit in Brazil.
Fair Value Measurements
We hold various financial assets and financial liabilities that are required to be measured and reported at fair value in our
financial statements, including money market funds, trading securities associated with deferred compensation plans, interest rate
swaps, forward foreign currency exchange contracts, and guarantees of bank loans to tobacco growers. We follow the relevant
accounting guidance in determining the fair values of these financial assets and liabilities. Quoted market prices (Level 1 of the fair
value hierarchy) are used in most cases to determine the fair values of trading securities. Money market funds are valued based on
net asset value (“NAV”), which is computed based on amortized cost (Level 2 of the fair value hierarchy). 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 $4 million at March 31, 2013, 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, 2013, a
1% increase in the expected loss percentage for all guaranteed farmer loans would not have had a material effect on the fair value
of the guarantee obligation. In addition, a 1% change in the risk-adjusted interest rate would not have had a material effect on the
fair value of the guarantee obligation. We incorporate credit risk in determining the fair values of our financial assets and financial
liabilities, but that risk did not materially affect the fair values of any of those assets or liabilities at March 31, 2013.
Income Taxes
Our consolidated effective income tax rate is based on our expected taxable income, tax laws and statutory tax rates, and
tax planning opportunities in the various jurisdictions in which we operate. Significant judgment is required in determining the
effective tax rate and evaluating our tax position. We are subject to the tax laws of many jurisdictions, and could be subject to a tax
audit in each of these jurisdictions, which could result in adjustments to tax expense in future periods. In the event that there is a
significant, unusual, or one-time item recognized in our results, the tax attributed to that discrete item would be recorded at the same
time as the item.
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
28
on our periodic earnings forecasts, we project the upcoming year’s taxable income to help us evaluate our ability to realize deferred
tax assets.
The functional currency in most of our significant foreign operations is the U.S. dollar, as export tobacco sales are generally
made in dollars. Purchasing and processing costs are usually incurred in local currency. When the U.S. dollar is weakening relative
to the local currency, purchasing and processing costs increase in dollar terms, resulting in higher cost inventory. The sale of that
inventory in dollars generates less taxable income in local currency, which results in lower income taxes owed when translated into
U.S. dollars. This causes the effective income tax rate on dollar income to be lower than the statutory rate in the local country. The
reverse can occur when the local currency is weakening relative to the U.S. dollar, thereby causing the effective income tax rate on
dollar earnings to be above the statutory rate. This impact on our effective income tax rate in a country can be significant during a
normal crop cycle. A prolonged period of strengthening or weakening over more than one crop may increase the impact if we sell
material quantities of old crop inventories. Lower-taxed foreign source income increases our ability to use foreign tax credits. Higher-
taxed foreign source income has the reverse effect. When these changes occur in our larger operations, such as our operations in
Brazil, they can have a material impact on our overall tax position.
For additional disclosures on income taxes, see Notes 1 and 5 to the consolidated financial statements in Item 8.
Pension and Other Postretirement Benefit Plans
The measurement of our pension and other postretirement obligations and costs at the end of each fiscal year requires that
we make various assumptions that are used by our actuaries in estimating the present value of projected future benefit payments to
all plan participants. Those assumptions take into consideration the likelihood of potential future events such as salary increases
and demographic experience. The assumptions we use may have an effect on the amount and timing of future contributions to our
plans. The plan trustee conducts an independent valuation of the fair value of pension plan assets. The significant assumptions used
in the calculation of our pension and postretirement obligations are:
• Discount rate – The discount rate is based on investment yields on a hypothetical portfolio of actual long-term corporate
bonds rated AA that align with the cash flows for our benefit obligations.
•
Salary scale – The salary scale assumption is based on our long-term actual experience for salary increases, the near-
term outlook, and expected inflation.
• Expected long-term return on plan assets – The expected long-term return on plan assets reflects asset allocations and
investment strategy adopted by the Pension Investment Committee of the Board of Directors.
• Retirement and mortality rates – Retirement rates are based on actual plan experience along with our near-term outlook.
Early retirement assumptions are based on our actual experience. Mortality rates are based on standard group annuity
(RP-2000) mortality tables which have been updated to reflect improvements in life expectancy projected to 2018.
• Healthcare cost trend rates – For postretirement medical plan obligations and costs, we make assumptions on future
inflationary increases in medical costs. These assumptions are based on our actual experience, along with third-party
forecasts of long-term medical cost trends.
From one fiscal year to the next, the rates we use for each of the above assumptions may change based on market developments
and other factors. In addition, actual returns on plan assets and other data affecting our benefit obligations will differ from the
assumptions used to actuarially measure those obligations. The effects of these changes and differences increase or decrease the
obligation we record for our pension and other postretirement benefit plans, and they also create gains and losses that are accumulated
and amortized over future periods, thus affecting the expense we recognize for these plans over those periods. These effects may
be significant. For example, between fiscal year 2009 and fiscal year 2013, the discount rates used to measure the obligations for
our domestic benefit plans declined by more than 3.50%, reflecting the significant decline in interest rates and bond yields in the
U.S. market. Over this period, our related benefit obligation increased by more than $100 million (approximately 50%) and our
annual expense increased by more than $4 million (more than 40%). The reduction in discount rates accounted for a large portion
of the increase in the benefit obligation and annual expense.
29
As of March 31, 2013, the effect of the indicated increase or decrease in the selected pension and other postretirement
benefit valuation assumptions is shown below. The effect assumes no change in benefit levels.
(in thousands of dollars)
Changes in Assumptions for Pension Benefits
Discount Rate:
Effect on
2013
Projected
Benefit
Obligation
Increase
(Decrease)
Effect on
2014 Annual
Expense
Increase
(Decrease)
1% increase ...............................................................................................................................................................................
$
(31,400) $
1% decrease ..............................................................................................................................................................................
38,241
Salary Scale:
1% increase ...............................................................................................................................................................................
1% decrease ..............................................................................................................................................................................
Long-Term Rate of Return on Assets:
1% increase ...............................................................................................................................................................................
1% decrease ..............................................................................................................................................................................
Changes in Assumptions for Other Postretirement Benefits
Discount Rate:
1% increase ...............................................................................................................................................................................
1% decrease ..............................................................................................................................................................................
Healthcare Cost Trend Rate:
1% increase ...............................................................................................................................................................................
1% decrease ..............................................................................................................................................................................
5,737
(5,394)
—
—
(4,371)
5,218
1,503
(1,351)
(2,936)
3,488
1,271
(1,192)
(1,881)
1,880
(456)
(174)
88
(79)
See Note 11 to the consolidated financial statements in Item 8 for additional information on pension and postretirement
benefit plans.
Other Estimates and Assumptions
Other management estimates and assumptions are routinely required in preparing our financial statements, including the
determination of valuation allowances on accounts receivable and the fair value of long-lived assets. Changes in market and economic
conditions, local tax laws, and other related factors are considered each reporting period, and adjustments to the accounts are made
based on management’s best judgment.
30
OTHER INFORMATION REGARDING TRENDS
AND MANAGEMENT’S ACTIONS
Our financial performance depends on our ability to obtain an appropriate price for our products and services, to secure the
tobacco volumes and quality desired by our customers, and to maintain efficient, competitive operations. We continually monitor
issues and opportunities that may impact the supply of and demand for leaf tobacco, the volumes of leaf tobacco that we handle, and
the services we provide.
Supply
Crop sizes in fiscal year 2013 came down in most of our key sourcing areas for flue-cured and burley tobacco, including
Brazil, Tanzania, and Malawi, following oversupply conditions in the previous year. Due to these lower crop sizes, shipments were
completed earlier in fiscal year 2013, and we experienced strong sales of uncommitted tobacco inventories. We enter fiscal year
2014 with very low uncommitted inventories available for sale and fewer shipments of prior year crop carrying into our first fiscal
quarter. Crop sizes for flue-cured, burley and oriental tobaccos are expected to increase in fiscal year 2014. However, the supply
of certain types of tobacco, including quality flavor flue-cured and burley leaf, may not meet demand.
Production
Worldwide flue-cured tobacco production in fiscal year 2013 increased by about 210 million kilos to 4.7 billion kilos. The
total includes China, an extremely large market that is predominately domestic. Because very little of that tobacco is available outside
of that country to trade, we generally exclude Chinese crops when we consider worldwide production. On that basis, worldwide
flue-cured tobacco production in fiscal year 2013 decreased by about 8%, to 2.0 billion kilos. Burley crops decreased sharply by
about 28% in fiscal year 2013. This lower current crop tobacco production drove increased sales of uncommitted tobacco inventories.
We estimate that at March 31, 2013, industry uncommitted flue-cured and burley inventories totaled about 29 million kilos, a decrease
of about 66% from March 31, 2012 levels. These levels are very low, and the supply of tobacco for sale in fiscal year 2014 may not
fully meet demand for certain styles and qualities.
We believe flue-cured production (excluding China) will increase by about 6%, to about 2.1 billion kilos, in fiscal year
2014. Burley production is forecast to increase by about 29%, with a large part of this increase coming from the recovery of tobacco
production in Malawi. We also believe that oriental tobacco has moved from an undersupply to a balanced position primarily due
to crop sizes increasing faster than anticipated to meet forecast demand. We forecast that dark air-cured production will increase
slightly by about 1% in fiscal year 2014 to about 120 million kilos.
Looking forward, we believe that global tobacco production will continue to increase to meet continued slow but steady
growth in total demand. South America, Asia, Africa, and North America will remain key sourcing regions for flue-cured and burley
tobaccos. We believe that declines in European production following changes in the subsidy system, which reduced flue-cured and
burley production there by over 100 million kilos, have leveled out. Over the last decade, Africa has experienced a growth in flue-
cured and burley tobacco production of over 200 million kilos. We expect Africa to continue to be an important tobacco source and
to lead tobacco production growth outside of China.
Pricing
Factors that affect green tobacco prices include global supply and demand, market conditions, production costs, foreign
exchange rates, and competition from other crops. We work with farmers to maintain tobacco production and to secure product at
price levels that are attractive to both the farmers and our customers. Our objective is to secure compliant tobacco that is produced
in a cost-effective manner under a sustainable business model with the desired quality for our customers. In some areas, tobacco
competes with agricultural commodity products for farmer production. If prices for soybeans, wheat, rice, and seed oils rise, green
tobacco prices may have to rise to maintain tobacco production levels. This could be a factor in efforts of the WHO to shift farmer
production away from leaf tobacco to other crops. After reductions through early 2009, commodity prices and crop production costs
such as energy and labor increased and remain at higher levels. Any current increase in these costs would affect crops sold in fiscal
year 2015. In the past, market shortages have also led to green tobacco price increases.
31
Demand
We expect that ongoing global demand for leaf tobacco will continue to grow at a slow rate primarily due to increased
consumption in emerging markets (Asia, the Middle East, and Africa), influenced by demographic trends such as population growth
and increasing disposable income. We believe these increases will continue to offset declining cigarette consumption in developed
markets. However, demand is affected by many factors, including regulation and product taxation. Illicit trade is another factor
which influences demand for leaf tobacco. Industry estimates of the illegal, unregulated black market for cigarettes are approximately
11% of global consumption, and we are supportive of industry efforts to eradicate illicit trade. On a year-to-year basis, we are also
susceptible to fluctuations in leaf supply due to crop sizes and leaf demand as manufacturers adjust inventories or respond to changes
in cigarette markets. We anticipate that leaf tobacco available for sale in fiscal year 2014 both from current crop production and
uncommitted tobacco inventories may not meet demand for certain styles of tobacco, including quality flavor flue-cured and burley
leaf.
Over the past ten years, industry data shows that total world consumption of cigarettes grew at the compound annual rate
of 0.7%, including annual growth of about 3.8% in China, which experienced higher increases during the second half of the period.
Outside China, consumption fell by 1.1% during the ten-year period. Our sales consist primarily of flue-cured and burley tobaccos.
Those types of tobacco, along with oriental tobaccos, are the major ingredients in cigarettes. We expect that demand for these types
of tobacco will increase as global consumption of cigarettes increases. In addition, to the extent that domestic leaf production in
China does not meet increasing quality expectations for Chinese cigarette brands, those styles of tobacco could be sourced from
other origins where we have major market positions. In recent years, China has been buying greater amounts of tobacco outside its
borders. We believe this trend will continue with expected growth in Chinese demand. We also sell dark tobacco which is used in
cigars and other smokeless products. We expect demand for this category of tobacco to remain stable.
Regulation
Decreased social acceptance of smoking and increased pressure from anti-smoking groups have had an ongoing adverse
effect on the percentage of the population using tobacco products, particularly in the United States and Western Europe. Also, 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 (“FCTC”), which was negotiated under the auspices of the WHO and
offers guidelines for discouraging or controlling tobacco use. Countries that are parties to the FCTC may choose the level of
implementation of the guidelines that is most suitable with their approach to tobacco control. 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 and shifts to modified risk tobacco products brought about by existing or future governmental laws and
regulations could reduce demand for our products and services and could have a material adverse effect on our results of operations.
In addition, certain recommendations by the WHO, through the FCTC, may cause shifts in customer usage of certain types
and styles of tobacco. As seen in countries like Canada and Brazil and recently discussed in the European Union, efforts have been
taken to eliminate from the manufacturing process additives that enhance flavor and aroma of tobacco products. Such decisions
could cause a change in requirements for certain tobaccos in particular countries. Shifts in customer demand from one type of tobacco
to another could create sourcing issues as requirements move from one origin to another. Furthermore, instruction at the farm level
may be required to produce the changing styles of tobacco needed by tobacco product manufacturers. Given our established and
well-developed programs at the farm level worldwide, we are particularly well positioned to meet manufacturer requirements.
In 2009, the U.S. Congress passed the Family Smoking Prevention and Tobacco Control Act (“the Act”). This legislation
authorizes the FDA to regulate the manufacturing and marketing of tobacco products. To date, the FDA has banned flavored cigarettes,
restricted youth access to tobacco products, banned advertising claims regarding certain tobacco products, established new smokeless
tobacco warnings, and issued new cigarette health warnings. In addition, the FDA established the Center for Tobacco Products
(“CTP”). To date, the CTP has focused on establishing the scientific foundation and regulatory framework for regulating tobacco
products in the United States. Recently, the CTP indicated that “deeming” regulations are forthcoming which will encompass
additional manufactured tobacco products. This could mean FDA regulation of tobacco products such as cigars and alternative
tobacco products is forthcoming. Regulations impacting our customer base that change the requirements for leaf tobacco will
inherently impact our business. As discussed, we have established programs that begin at the farm level to assist our customers with
raw material information to support leaf traceability and customer testing requirements. Additionally, given our global presence, we
also have the ability to source different types and styles of tobacco for our customers should their needs change due to regulation of
ingredients.
32
Product Taxation
A number of governments, particularly federal and local governments in the United States and the European Union, impose
excise or similar taxes on tobacco products. There has been, and will likely continue to be, new legislation proposing new or increased
taxes on tobacco products. In some cases, proposed legislation seeks to significantly increase existing taxes on tobacco products,
or impose new taxes on products that to date have not been subject to tax.
Industry Evolution
In the last ten years, consolidation has increased the size of many of the multinational manufacturers of tobacco products
and has increased the quantities of leaf tobacco that each one requires. This has also created an environment where security of supply
is of increasing importance. A key success factor for leaf suppliers is the ability to provide customers with the quality of leaf and
the level of service they desire on a global basis at competitive prices, consistent with stability of supply.
Customer efforts to procure leaf directly from farmers changed parts of our business. Several years ago, Japan Tobacco
and Philip Morris International took steps to procure more of their leaf needs directly from farmers. We believe that the manufacturers
took these actions for several reasons, including the desire to enhance internal expertise in leaf procurement, actively manage the
leaf supply chain in an increasingly regulated environment, ensure supply, and work more directly with tobacco growers. Direct
leaf procurement by manufacturers is not new and has always been a factor in our business. Recently, we have seen no increases in
direct leaf procurement by manufacturers, and none are expected.
As the leading global leaf tobacco merchant and processor, we add significant value to the system, providing expertise in
dealing with large numbers of farmers, providing a clearinghouse for various qualities of leaf produced in each crop, and delivering
products that meet stringent customer quality specifications. We also help stabilize the tobacco markets and influence crop
development at the farm level. Our key objective is to continually adapt our business model to meet our customers' evolving needs
while continuing to provide stability of supply and the quality that distinguishes our products and services. In addition, we monitor
new product developments in the industry to identify areas where we can provide additional value to our customers.
Compliant Leaf
The production of compliant leaf for the tobacco industry continues to grow in importance. The definition of compliant
leaf generally requires that the leaf supplier ensure that the tobacco was grown utilizing good agricultural practices (“GAP”), absent
any non-tobacco material or excessive crop protection agent residues, in a sustainable manner related not only to the environment,
but to social concerns and grower profitability. We have invested significant resources in the programs and infrastructure needed to
work with growers to produce compliant leaf. These programs include training in GAP, advising growers on concerns such as the
need to eliminate child labor and the importance of sustainable wood usage, as well as working with growers on improving farm
yields to increase efficiencies and ensure the grower's profitability in the globally competitive environment. We believe that compliant
leaf will continue to be important to our customers and should favor suppliers able to deliver this product.
33
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. We bill our customers interest on tobacco purchased for
their order at certain points in the inventory cycle. That interest is paid at rates based on current markets for variable rate debt. If
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, 2013, tobacco inventory of $623 million included $506 million in inventory that
was committed for sale to customers and $117 million that was not committed. Committed inventory, after deducting about $17
million in customer deposits, represents our potential net exposure of about $490 million. We normally maintain a portion of our
debt at variable interest rates in order to mitigate such interest rate risk related to carrying fixed-rate debt. At March 31, 2013, we
had large cash balances that we plan to use to fund seasonal purchases of tobacco, and thus, debt carried at variable interest rates, at
$128 million, was at a cyclical low point. Although a hypothetical 1% change in short-term interest rates would result in a change
in annual interest expense of approximately $1 million, that amount would be at least partially mitigated by changes in charges to
customers. Our policy is to work toward a level of floating-rate liabilities, including customer deposits, that reflects our average
committed inventory levels over time.
In addition, changes in interest rates affect the calculation of our pension plan liabilities. As rates decrease, the liability for
the present value of amounts expected to be paid under the plans increases. Rate changes also affect expense. As of the March 31,
2013 measurement date, a 1% decrease in the discount rate would have increased the projected benefit obligation (“PBO”) for
pensions by $31 million and increased annual pension expense by $3 million. Conversely, a 1% increase in the discount rate would
have reduced the PBO by $38 million and reduced annual pension expense by $3 million.
Currency
The international leaf tobacco trade generally is conducted in U.S. dollars, thereby limiting foreign exchange risk to that
which is related to leaf purchase and production costs, overhead, and income taxes in the source country. We also provide farmer
advances that are directly related to leaf purchases and are denominated in the local currency. Any currency gains or losses on those
advances are usually offset by 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 remeasurement gains and losses to the extent that monetary assets and liabilities denominated in local currency
do not offset each other. We recognized $10.6 million in net remeasurement gains in fiscal year 2013, compared to $2.3 million in
net remeasurement losses in fiscal year 2012, and $4.4 million in net remeasurement gains in fiscal year 2011. We recognized $1.0
million in net foreign currency transaction losses in fiscal year 2013, compared to net transaction gains of $4.2 million in fiscal year
2012, and net transaction gains of $1.7 million in fiscal year 2011. In addition to foreign exchange gains and losses, we are exposed
to changes in the cost of tobacco due to changes in the value of the local currency in relation to the U.S. dollar. We have entered
forward currency exchange contracts to hedge against the effects of currency movements on purchases of tobacco to reduce the
volatility of costs. In addition, we periodically enter into forward contracts to hedge balance sheet exposures. See Note 9 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 are primarily
in local currencies, we also use the local currency as the functional currency. In each case, reported earnings are affected by the
translation of the local currency into the U.S. dollar.
34
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. We routinely review counterparty risk as part of our derivative program.
35
Item 8. Financial Statements and Supplementary Data
UNIVERSAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(in thousands of dollars, except per share data)
2013
2012
2011
Sales and other operating revenues ........................................................................................................ $
2,461,699
$
2,446,877
$
2,571,527
Fiscal Year Ended March 31,
Costs and expenses
Cost of goods sold ...............................................................................................................................
1,999,282
1,974,885
2,063,194
Selling, general and administrative expenses......................................................................................
235,295
Other income .......................................................................................................................................
Restructuring and impairment costs ....................................................................................................
Charge for (reversal of) European Commission fines in Italy & Spain ..............................................
—
4,113
—
251,639
(20,703)
11,661
49,091
259,042
(19,368)
21,504
(7,445)
Operating income ...................................................................................................................................
223,009
180,304
254,600
Equity in pretax earnings of unconsolidated affiliates ........................................................................
Interest income ....................................................................................................................................
Interest expense ...................................................................................................................................
Income before income taxes and other items .........................................................................................
Income taxes........................................................................................................................................
Net income .............................................................................................................................................
Less: net income attributable to noncontrolling interests in subsidiaries..............................................
Net income attributable to Universal Corporation .................................................................................
5,635
654
22,013
207,285
66,366
140,919
(8,169)
132,750
3,195
1,314
22,835
161,978
61,159
100,819
(8,762)
92,057
8,634
2,723
23,058
242,899
78,349
164,550
(7,985)
156,565
Dividends on Universal Corporation convertible perpetual preferred stock..........................................
(14,850)
(14,850)
(14,850)
Earnings available to Universal Corporation common shareholders ..................................................... $
117,900
$
77,207
$
141,715
Earnings per share attributable to Universal Corporation common shareholders:
Basic .................................................................................................................................................... $
Diluted ................................................................................................................................................. $
5.05
4.66
$
$
3.32
3.25
$
$
5.94
5.42
Weighted average common shares outstanding:
Basic ....................................................................................................................................................
Diluted .................................................................................................................................................
23,355
28,478
23,228
28,339
23,859
28,888
See accompanying notes.
36
UNIVERSAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands of dollars)
Fiscal Year Ended March 31,
2013
2012
2011
Net income ............................................................................................................................................. $
140,919
$
100,819
$
164,550
Other comprehensive income (loss):
Foreign currency translation adjustments, net of income taxes..........................................................
Foreign currency hedge adjustments, net of income taxes .................................................................
Interest rate hedge adjustments, net of income taxes..........................................................................
Pension and other postretirement benefit plan adjustments, net of income taxes ..............................
Total other comprehensive income (loss), net of income taxes....................................................
Total comprehensive income ........................................................................................................
Less: comprehensive income attributable to noncontrolling interests...................................................
(3,370)
87
(364)
8,803
5,156
146,075
(8,504)
(8,158)
(3,424)
(727)
(23,195)
(35,504)
65,315
(8,843)
7,297
2,961
—
(2,258)
8,000
172,550
(8,094)
Comprehensive income attributable to Universal Corporation ............................................................. $
137,571
$
56,472
$
164,456
See accompanying notes.
37
UNIVERSAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars)
Current assets
ASSETS
March 31,
2013
2012
Cash and cash equivalents.................................................................................................................................................... $
367,864 $
Accounts receivable, net.......................................................................................................................................................
Advances to suppliers, net....................................................................................................................................................
Accounts receivable—unconsolidated affiliates ..................................................................................................................
401,747
132,100
555
261,699
390,790
135,317
7,370
Inventories—at lower of cost or market:
Tobacco..............................................................................................................................................................................
623,377
682,095
Other..................................................................................................................................................................................
Prepaid income taxes............................................................................................................................................................
Deferred income taxes..........................................................................................................................................................
57,745
6,245
32,127
Other current assets ..............................................................................................................................................................
124,213
53,197
20,819
51,025
88,317
Total current assets............................................................................................................................................................
1,745,973
1,690,629
Property, plant and equipment
Land......................................................................................................................................................................................
Buildings ..............................................................................................................................................................................
Machinery and equipment ....................................................................................................................................................
17,125
234,694
545,478
797,297
17,087
228,982
537,031
783,100
Less accumulated depreciation..........................................................................................................................................
(509,829)
(479,908)
Other assets
Goodwill and other intangibles ............................................................................................................................................
Investments in unconsolidated affiliates ..............................................................................................................................
Deferred income taxes..........................................................................................................................................................
Other noncurrent assets ........................................................................................................................................................
287,468
303,192
99,048
94,405
23,783
55,478
99,266
93,312
23,634
56,886
272,714
273,098
Total assets......................................................................................................................................................................... $
2,306,155 $
2,266,919
38
UNIVERSAL CORPORATION
CONSOLIDATED BALANCE SHEETS—(Continued)
(in thousands of dollars)
Current liabilities
LIABILITIES AND SHAREHOLDERS’ EQUITY
March 31,
2013
2012
Notes payable and overdrafts............................................................................................................................................... $
105,318
$
Accounts payable and accrued expenses .............................................................................................................................
225,648
Accounts payable—unconsolidated affiliates......................................................................................................................
Customer advances and deposits .........................................................................................................................................
Accrued compensation.........................................................................................................................................................
Income taxes payable...........................................................................................................................................................
4,739
24,914
36,694
14,034
Current portion of long-term obligations.............................................................................................................................
211,250
128,016
187,790
295
16,832
30,659
12,866
16,250
Total current liabilities................................................................................................................................................
622,597
392,708
Long-term obligations.............................................................................................................................................................
Pensions and other postretirement benefits.............................................................................................................................
Other long-term liabilities.......................................................................................................................................................
Deferred income taxes ............................................................................................................................................................
181,250
135,629
36,838
42,184
392,500
140,529
90,609
44,583
Total liabilities ............................................................................................................................................................
1,018,498
1,060,929
Shareholders’ equity
Universal Corporation:
Preferred stock:
Series A Junior Participating Preferred Stock, no par value, 500,000 shares authorized,
none issued or outstanding ..........................................................................................................................................
—
—
Series B 6.75% Convertible Perpetual Preferred Stock, no par value, 220,000 shares authorized,
219,999 shares issued and outstanding (219,999 at March 31, 2012).........................................................................
213,023
213,023
Common stock, no par value, 100,000,000 shares authorized, 23,343,973 shares issued
and outstanding (23,257,175 at March 31, 2012)...........................................................................................................
202,579
Retained earnings.................................................................................................................................................................
918,509
196,135
854,654
Accumulated other comprehensive loss...............................................................................................................................
(75,540)
(80,361)
Total Universal Corporation shareholders' equity.......................................................................................................
1,258,571
1,183,451
Noncontrolling interests in subsidiaries..................................................................................................................................
29,086
22,539
Total shareholders' equity ...........................................................................................................................................
1,287,657
1,205,990
Total liabilities and shareholders' equity..................................................................................................................... $
2,306,155 $
2,266,919
See accompanying notes.
39
UNIVERSAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
Cash Flows From Operating Activities:
Fiscal Year Ended March 31,
2013
2012
2011
Net income ............................................................................................................................................. $
140,919
$
100,819
$
164,550
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation ........................................................................................................................................
Amortization........................................................................................................................................
Provision for losses on advances and guaranteed loans to suppliers ..................................................
Inventory write-downs ........................................................................................................................
Stock-based compensation expense ....................................................................................................
Foreign currency remeasurement loss (gain), net ...............................................................................
Deferred income taxes.........................................................................................................................
Equity in net income (loss) of unconsolidated affiliates, net of dividends .........................................
Gain on fire loss insurance settlement.................................................................................................
Gain on sale of property in Brazil .......................................................................................................
Gain on assignment of farmer contracts and sale of related assets .....................................................
Restructuring and impairment costs ....................................................................................................
Charge for (reversal of) European Commission fines in Italy and Spain............................................
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......................................................................................................
43,408
1,708
1,623
1,523
6,171
(10,579)
11,794
(4,966)
—
—
—
4,113
—
(1,174)
(5,433)
6,578
18,111
11,167
9,503
Net cash provided by operating activities ...........................................................................................
234,466
Cash Flows From Investing Activities:
Purchase of property, plant and equipment .........................................................................................
(30,783)
Proceeds from assignment of farmer contracts and sale of related assets...........................................
Proceeds from sale of property, plant and equipment .........................................................................
Proceeds from fire loss insurance settlement ......................................................................................
Other, net .............................................................................................................................................
—
3,534
—
1,004
Net cash (used) provided by investing activities..............................................................................
(26,245)
Cash Flows From Financing Activities:
Repayment of short-term debt, net ......................................................................................................
Issuance of long-term obligations .......................................................................................................
Repayment of long-term obligations...................................................................................................
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 .......................................................................................................
Proceeds from termination of interest rate swap agreements..............................................................
Debt issuance costs and other..............................................................................................................
(18,374)
—
(16,250)
(1,957)
3,949
(8,481)
(14,850)
(45,996)
—
—
Net cash used by financing activities ...............................................................................................
(101,959)
Effect of exchange rate changes on cash................................................................................................
Net increase (decrease) in cash and cash equivalents ............................................................................
Cash and cash equivalents at beginning of year.....................................................................................
(97)
106,165
261,699
42,158
1,708
11,930
8,324
5,987
2,253
6,770
14,658
(9,592)
(11,111)
—
11,661
49,091
1,719
(25,480)
31,907
(1,535)
(53,487)
12,006
199,786
(38,174)
—
18,366
9,933
—
(9,875)
(17,388)
100,000
(96,250)
(103)
134
(4,004)
(14,850)
(44,711)
13,388
(3,539)
(67,323)
(1,896)
120,692
141,007
Cash and Cash Equivalents at End of Year....................................................................................... $
367,864
$
261,699
$
43,654
1,618
18,666
8,539
5,893
(4,424)
(1,044)
(3,731)
—
—
(19,368)
21,504
(7,445)
2,381
(79,648)
75,146
(3,631)
(67,206)
(101,236)
54,218
(39,129)
34,946
5,575
—
260
1,652
(39,350)
—
(15,000)
(100)
—
(46,929)
(14,850)
(45,321)
—
—
(161,550)
734
(104,946)
245,953
141,007
Supplemental information—cash paid for:
Interest ................................................................................................................................................. $
Income taxes, net of refunds................................................................................................................ $
22,027
35,913
$
$
20,462
51,625
$
$
23,622
79,724
See accompanying notes.
40
UNIVERSAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(in thousands of dollars)
Fiscal Year Ended March 31, 2013
Universal Corporation Shareholders
Series B
6.75%
Convertible
Perpetual
Preferred
Stock
Common
Stock
Retained
Earnings
Accumulated
Other
Comprehensive
Income
(Loss)
Non-
controlling
Interests
Total
Shareholders'
Equity
Balance at beginning of year ............................................................
$
213,023
$ 196,135
$ 854,654
$
(80,361) $
22,539
$
1,205,990
Changes in preferred and common stock
Issuance of common stock ......................................................
Repurchase of common stock..................................................
Accrual of stock-based compensation .....................................
Withholding of shares from stock-based compensation for
grantee income taxes .............................................................
Dividend equivalents on RSUs................................................
Changes in retained earnings
Net income ..............................................................................
Cash dividends declared
Series B 6.75% convertible perpetual preferred stock
($67.50 per share) ............................................................
Common stock ($1.98 per share) .......................................
Repurchase of common stock..................................................
Dividend equivalents on RSUs................................................
Other comprehensive income (loss)
Foreign currency translation adjustments, net of income
taxes.......................................................................................
Foreign currency hedge adjustments, net of income taxes......
Interest rate hedge adjustments, net of income taxes ..............
Pension and other postretirement benefit plan adjustments,
net of income taxes................................................................
Other changes in noncontrolling interests
Dividends paid to noncontrolling shareholders.......................
—
—
—
—
—
—
—
—
—
—
—
—
—
—
3,949
(1,432)
6,171
(2,819)
575
—
—
—
—
—
—
132,750
—
—
—
—
—
—
—
—
—
(14,850)
(46,272)
(7,198)
(575)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
3,949
(1,432)
6,171
(2,819)
575
8,169
140,919
—
—
—
—
(14,850)
(46,272)
(7,198)
(575)
(3,705)
335
(3,370)
87
(364)
8,803
—
—
—
87
(364)
8,803
—
(1,957)
(1,957)
Balance at end of year ......................................................................
$
213,023
$ 202,579
$ 918,509
$
(75,540) $
29,086
$
1,287,657
41
UNIVERSAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY—(Continued)
(in thousands of dollars)
Fiscal Year Ended March 31, 2012
Universal Corporation Shareholders
Series B
6.75%
Convertible
Perpetual
Preferred
Stock
Common
Stock
Retained
Earnings
Accumulated
Other
Comprehensive
Income
(Loss)
Non-
controlling
Interests
Total
Shareholders'
Equity
Balance at beginning of year ............................................................
$
213,023
$ 191,608
$ 825,751
$
(44,776) $
13,799
$
1,199,405
Changes in preferred and common stock
Issuance of common stock ......................................................
Repurchase of common stock..................................................
Accrual of stock-based compensation .....................................
Withholding of shares from stock-based compensation for
grantee income taxes .............................................................
Dividend equivalents on RSUs................................................
Changes in retained earnings
Net income ..............................................................................
Cash dividends declared
Series B 6.75% convertible perpetual preferred stock
($67.50 per share) ............................................................
Common stock ($1.94 per share) .......................................
Repurchase of common stock..................................................
Dividend equivalents on RSUs................................................
Other comprehensive income (loss)
Foreign currency translation adjustments, net of income
taxes.......................................................................................
Foreign currency hedge adjustments, net of income taxes......
Interest rate hedge adjustments, net of income taxes ..............
Pension and other postretirement benefit plan adjustments,
net of income taxes................................................................
Other changes in noncontrolling interests
Dividends paid to noncontrolling shareholders.......................
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
259
(661)
5,987
(1,584)
526
—
—
—
—
—
—
92,057
—
—
—
—
—
—
—
—
—
(14,850)
(44,951)
(2,827)
(526)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(8,239)
(3,424)
(727)
(23,195)
—
—
—
—
—
259
(661)
5,987
(1,584)
526
8,762
100,819
—
—
—
—
81
—
—
—
(14,850)
(44,951)
(2,827)
(526)
(8,158)
(3,424)
(727)
(23,195)
—
(103)
(103)
Balance at end of year ......................................................................
$
213,023
$ 196,135
$ 854,654
$
(80,361) $
22,539
$
1,205,990
42
UNIVERSAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY—(Continued)
(in thousands of dollars)
Fiscal Year Ended March 31, 2011
Universal Corporation Shareholders
Series B
6.75%
Convertible
Perpetual
Preferred
Stock
Common
Stock
Retained
Earnings
Accumulated
Other
Comprehensive
Income
(Loss)
Non-
controlling
Interests
Total
Shareholders'
Equity
Balance at beginning of year ............................................................
$
213,023
$ 195,001
$ 767,213
$
(52,667) $
5,805
$
1,128,375
Changes in preferred and common stock
Issuance of common stock ......................................................
Repurchase of common stock..................................................
Accrual of stock-based compensation .....................................
Withholding of shares from stock-based compensation for
grantee income taxes .............................................................
Dividend equivalents on RSUs................................................
Changes in retained earnings
Net income ..............................................................................
Cash dividends declared
Series B 6.75% convertible perpetual preferred stock
($67.50 per share) ............................................................
Common stock ($1.90 per share) .......................................
Repurchase of common stock..................................................
Dividend equivalents on RSUs................................................
Other comprehensive income (loss)
Foreign currency translation adjustments, net of income
taxes.......................................................................................
Foreign currency hedge adjustments, net of income taxes......
Pension and other postretirement benefit plan adjustments,
net of income taxes................................................................
Other changes in noncontrolling interests
Dividends paid to noncontrolling shareholders.......................
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(8,995)
5,893
(724)
433
—
—
—
—
—
—
156,565
—
—
—
—
—
—
—
—
(14,850)
(45,043)
(37,701)
(433)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
7,188
2,961
(2,258)
—
—
—
—
—
—
(8,995)
5,893
(724)
433
7,985
164,550
—
—
—
—
109
—
—
(14,850)
(45,043)
(37,701)
(433)
7,297
2,961
(2,258)
—
(100)
(100)
Balance at end of year ......................................................................
$
213,023
$ 191,608
$ 825,751
$
(44,776) $
13,799
$
1,199,405
43
UNIVERSAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY—(Continued)
(in thousands)
Preferred Shares Outstanding:
Series B 6.75% Convertible Perpetual Preferred Stock:
Fiscal Year Ended March 31,
2013
2012
2011
Balance at beginning of year.....................................................................................................................
Issuance of convertible perpetual preferred stock ....................................................................................
Repurchase of convertible perpetual preferred stock................................................................................
Balance at end of year...............................................................................................................................
220
—
—
220
220
—
—
220
Common Shares Outstanding:
Balance at beginning of year.....................................................................................................................
23,257
23,241
Issuance of common stock and exercise of stock options and SARs .......................................................
Repurchase of common stock ...................................................................................................................
256
(169)
97
(80)
Balance at end of year...............................................................................................................................
23,344
23,257
220
—
—
220
24,325
28
(1,113)
23,241
See accompanying notes.
44
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts are in thousands, except per share amounts or as otherwise noted.)
NOTE 1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Universal Corporation, which together with its subsidiaries is referred to herein as “Universal” or the “Company,” is the
leading global leaf tobacco merchant and processor. The Company conducts business in over 30 countries, primarily in major
tobacco-producing regions of the world.
Consolidation
The consolidated financial statements include the accounts of Universal Corporation and all domestic and foreign subsidiaries
in which the Company maintains a controlling financial interest. Control is generally determined based on a voting interest of greater
than 50%, such that Universal controls all significant corporate activities of the subsidiary. All significant intercompany accounts
and transactions are eliminated in consolidation.
The equity method of accounting is used for investments in companies where Universal Corporation has a voting interest
of 20% to 50%. These investments are accounted for under the equity method because Universal exercises significant influence
over those companies, but not control. 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 $16.7 million in fiscal year
2012 from companies accounted for under the equity method. No significant dividends were received from those companies in fiscal
years 2013 or 2011.
The Company's 49% ownership interest in Socotab L.L.C. (“Socotab”), a leading processor and leaf merchant of oriental
tobaccos with operations located principally in Europe, is the primary investment accounted for under the equity method. The
investment in Socotab is an important part of the Company's overall product and service arrangements with its major customers.
Over the past several years, Socotab has experienced reduced demand for oriental tobaccos and lower margins, which have reduced
its operating profits. As discussed further below, the Company reviews the carrying value of its investments in unconsolidated
affiliates on a regular basis and considers whether any factors exist that might indicate an impairment in value that is other than
temporary. At March 31, 2013, the Company determined that no such factors existed with respect to the investment in Socotab. The
Company, together with Socotab management, continues to evaluate the longer-term outlook for the business, and an impairment
charge could be recorded in a future period if it is determined that the fair value of the investment is less than the carrying value and
the decline in value is not temporary.
In fiscal year 2006, the Company deconsolidated its operations in Zimbabwe under accounting requirements that apply
under certain conditions to foreign subsidiaries that are subject to foreign exchange controls and other government restrictions. Since
that time, the investment has been accounted for using the cost method, as required under the accounting guidance. The investment
in the Zimbabwe operations was zero at March 31, 2013 and 2012. The Company has a net foreign currency translation loss associated
with the Zimbabwe operations of approximately $7.2 million, which remains a component of accumulated other comprehensive loss.
As a regular part of its reporting, the Company reviews the conditions that resulted in the deconsolidation of the Zimbabwe operations
to confirm that such accounting treatment is still appropriate. Dividends from the Zimbabwe operations are recorded in income in
the period received.
The Company holds less than a 100% financial interest in certain consolidated subsidiaries. The net income and shareholders’
equity attributable to the noncontrolling interests in these subsidiaries are reported on the face of the consolidated financial statements.
During fiscal years 2013, 2012, and 2011, there were no changes in the Company’s ownership percentage in any of these subsidiaries.
Investments in Unconsolidated Affiliates
The Company’s equity method investments and its cost method investments, which include its Zimbabwe operations, are
non-marketable securities. Universal reviews such investments for impairment whenever events or changes in circumstances indicate
that the carrying amount of an investment may not be recovered. For example, the Company would review such an investment for
impairment if the investee were to lose a significant customer, suffer a large reduction in sales margins, experience a major change
in its business environment, or undergo any other significant change in its normal business. In assessing the recoverability of equity
45
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 consolidated income tax expense.
The following table provides a reconciliation of (1) equity in the pretax earnings of unconsolidated affiliates, as reported
in the consolidated statements of income to (2) equity in the net income of unconsolidated affiliates, net of dividends, as reported in
the consolidated statements of cash flows for the fiscal years ended March 31, 2013, 2012, and 2011:
Fiscal Year Ended March 31,
2013
2012
2011
Equity in pretax earnings reported in the consolidated statements of income....................................... $
5,635
$
3,195
$
Less: Equity in income taxes ................................................................................................................
Equity in net income ..............................................................................................................................
Less: Dividends received on investments (1) ........................................................................................
(547)
5,088
(122)
(1,130)
2,065
(16,723)
Equity in net income, net of dividends, reported in the consolidated statements of cash flows............ $
4,966
$
(14,658) $
8,634
(3,651)
4,983
(1,252)
3,731
(1)
In accordance with the applicable accounting guidance, dividends received from unconsolidated affiliates accounted for on the equity method that represent a
return on capital (i.e., a return of earnings on a cumulative basis) are presented as operating cash flows in the consolidated statements of cash flows.
Earnings per Share
The Company calculates basic earnings per share based on earnings available to common shareholders after payment of
dividends on the Company’s Series B 6.75% Convertible Perpetual Preferred Stock. 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 stock 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.
Calculations of earnings per share for the fiscal years ended March 31, 2013, 2012, and 2011, are provided in Note 4.
Cash and Cash Equivalents
All highly liquid investments with a maturity of three months or less at the time of purchase are classified as cash equivalents.
Advances to Suppliers
In many sourcing origins where the Company operates, it provides agronomy services and seasonal advances of seed,
fertilizer, and other supplies to tobacco farmers for crop production, or makes seasonal cash advances to farmers for the procurement
of those inputs. These advances are short term, are repaid upon delivery of tobacco to the Company, and are reported in advances
to suppliers in the consolidated balance sheets. In several origins, the Company has made long-term advances to tobacco farmers
to finance curing barns and other farm infrastructure. In some years, due to low crop yields and other factors, individual farmers
may not deliver sufficient volumes of tobacco to fully repay their seasonal advances, and the Company may extend repayment of
46
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
those advances into the following crop year. The long-term portion of advances is included in other noncurrent assets in the
consolidated balance sheets. Both the current and the long-term portions of advances to suppliers are reported net of allowances
recorded when the Company determines that amounts outstanding are not likely to be collected. Short-term and long-term advances
to suppliers totaled $199.1 million at March 31, 2013 and $225.0 million at March 31, 2012. The related valuation allowances totaled
$54.4 million at March 31, 2013, and $74.4 million at March 31, 2012, and were estimated based on the Company’s historical loss
information and crop projections. The allowances were increased by net provisions for estimated uncollectible amounts of
approximately $1.6 million in fiscal year 2013, $11.9 million in fiscal year 2012, and $18.7 million in fiscal year 2011. 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. Accrual of interest is discontinued
when an advance is not expected to be fully collected. Advances on which interest accrual had been discontinued totaled approximately
$40.0 million at March 31, 2013, and $59.9 million at March 31, 2012.
Inventories
Tobacco inventories are valued at the lower of cost or market. Raw materials primarily consist of unprocessed leaf tobacco,
which is clearly identified by type and grade at the time of purchase. The Company tracks the costs associated with this tobacco in
the final product lots, and maintains this identification through the time of sale. This method of cost accounting is referred to as the
specific cost or specific identification method. The predominant cost component of the Company’s inventories is the cost of the
unprocessed tobacco. Direct and indirect processing costs related to these raw materials are capitalized and allocated to inventory
in a systematic manner. The Company does not capitalize any interest or sales-related costs in inventory. Freight costs are recorded
in cost of goods sold. Other inventories consist primarily of seed, fertilizer, packing materials, and other supplies, and are valued
principally at the lower of average cost or market.
Recoverable Value-Added Tax Credits
In many foreign countries, the Company’s local operating subsidiaries pay significant amounts of value-added tax (“VAT”)
on purchases of unprocessed and processed tobacco, crop inputs, packing materials, and various other goods and services. In some
countries, VAT is a national tax, and in other countries it is assessed at the state level. Items subject to VAT vary from jurisdiction
to jurisdiction, as do the rates at which the tax is assessed. When tobacco is sold to customers in the country of origin, the operating
subsidiaries generally collect VAT on those sales. The subsidiaries are normally permitted to offset their VAT payments against the
collections and remit only the incremental VAT collections to the tax authorities. When tobacco is sold for export, VAT is normally
not assessed. In countries where tobacco sales are predominately for export markets, VAT collections generated on downstream
sales are often not sufficient to fully offset the subsidiaries’ VAT payments. In those situations, unused VAT credits can accumulate.
Some jurisdictions have procedures that allow companies to apply for refunds of unused VAT credits from the tax authorities, but
the refund process often takes an extended period of time and it is not uncommon for refund applications to be challenged or rejected
in part on technical grounds. Other jurisdictions may permit companies to sell or transfer unused VAT credits to third parties in
private transactions, although approval for such transactions must normally be obtained from the tax authorities, limits on the amounts
that can be transferred are usually imposed, and the proceeds realized may be heavily discounted from the face value of the credits.
Due to these factors, local operating subsidiaries in some countries can accumulate significant balances of VAT credits over time.
The Company reviews these balances on a regular basis and records valuation allowances on the credits to reflect amounts that are
not expected to be recovered, as well as discounts anticipated on credits that are expected to be sold or transferred. At March 31,
2013 and 2012, the aggregate balance of recoverable tax credits held by the Company’s subsidiaries totaled approximately $73
million and $82 million, respectively, and the related valuation allowances totaled approximately $26 million and $25 million,
respectively. The net balances are reported in other current assets and other noncurrent assets in the consolidated balance sheets.
In June 2011, tax authorities in Brazil completed an audit of inter-state VAT filings by the Company’s operating subsidiary
there and issued assessments for tax, penalties, and interest for tax periods from 2006 through 2009 totaling approximately $24
million based on the exchange rate for the Brazilian currency at March 31, 2013. Management of the operating subsidiary and outside
counsel believe that errors were made by the tax authorities in determining portions of the assessment and that various defenses
support the subsidiary’s positions. Accordingly, the subsidiary took steps to contest the full amount of the assessment. As of March 31,
2013, a portion of the subsidiary’s arguments had been accepted, and the outstanding assessments had been reduced to approximately
$17 million. The subsidiary is continuing to contest the full remaining amount of the assessment. While the range of reasonably
possible loss is zero up to the full $17 million remaining assessment, based on the strength of the subsidiary's defenses, no loss within
that range is considered probable at this time and no liability has been recorded at March 31, 2013.
47
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 2013, 2012, or 2011.
Goodwill and Other Intangibles
Goodwill and other intangibles principally consist of the excess of the purchase price of acquired companies over the fair
value of the net assets. Goodwill is carried at the lower of cost or fair value. Although Accounting Standards Codification Topic
350 (“ASC 350”) permits companies to base their initial assessments of potential goodwill impairment on qualitative factors, the
Company elected to continue using a fair value measurement approach at March 31, 2013. This approach 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.
The majority of the Company’s goodwill relates to its reporting unit in Brazil. No charges for goodwill impairment were recorded
in fiscal years 2013, 2012, or 2011. During the third quarter of fiscal year 2011, goodwill was reduced by approximately $5.8 million
to reflect amounts allocated to leaf procurement activities associated with farmer contracts and related assets that were conveyed to
an operating subsidiary of one of the Company’s major customers (see Note 14).
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). As discussed in Note 2, the Company recorded an impairment charge of $5.6 million in the third quarter of fiscal year
2011 in connection with its decision to close its leaf tobacco processing facility in Simcoe, Ontario, Canada and sell the related assets.
No significant charges for the impairment of long-lived assets were recorded during fiscal years 2013 or 2012.
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.
48
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:
2013
March 31,
2012
2011
Foreign currency translation adjustments
Before income taxes............................................................................................................................ $
(18,031) $
(12,331) $
Allocated income taxes .......................................................................................................................
2,476
481
Foreign currency hedge adjustments
Before income taxes............................................................................................................................
Allocated income taxes .......................................................................................................................
Interest rate hedge adjustments
Before income taxes............................................................................................................................
Allocated income taxes .......................................................................................................................
(1,316)
461
(1,679)
588
(1,449)
507
(1,119)
392
(819)
(2,792)
3,819
(1,337)
—
—
Pension and other postretirement benefit plan adjustments
Before income taxes............................................................................................................................
Allocated income taxes .......................................................................................................................
(89,285)
31,246
(102,833)
35,991
(66,851)
23,204
Total accumulated other comprehensive loss, net of income taxes ....................................................... $
(75,540) $
(80,361) $
(44,776)
Fair Values of Financial Instruments
The fair values of the Company’s long-term obligations, disclosed in Note 7, 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
9.
49
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 gains of $10.6 million in fiscal year 2013, net remeasurement losses of $2.3 million
in fiscal year 2012, and net remeasurement gains of $4.4 million in fiscal year 2011.
Foreign currency transactions and forward foreign currency exchange contracts that are not designated as hedges generate
gains and losses when they are settled or when they are marked to market under the prescribed accounting guidance. These transaction
gains and losses are also included in earnings as a component of selling, general, and administrative expenses. The Company
recognized net foreign currency transaction losses of $1.0 million in fiscal year 2013, net transaction gains of $4.2 million in fiscal
year 2012, and net transaction gains of $1.7 million in fiscal year 2011.
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 have accounted for
less than 5% of total revenue on an annual basis through the fiscal year ended March 31, 2013. 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 stock, restricted stock 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 13.
Estimates and Assumptions
The preparation of financial statements in conformity with generally accepted accounting principles in the United States
requires management to make estimates and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
50
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Accounting Pronouncements
Pronouncements Recently Adopted
In September 2011, the FASB issued Accounting Standards Update 2011-08, “Testing for Goodwill Impairment” (“ASU
2011-08”), which updated the accounting guidance for goodwill in Accounting Standards Codification Topic 350. The objective of
ASU 2011-08 is to simplify the process of testing for goodwill impairment by permitting companies to first assess qualitative factors
to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Companies are
required to calculate the fair value of a reporting unit if the qualitative evaluation indicates that it is more likely than not that the fair
value is less than the carrying amount. ASU 2011-08 was effective for annual and interim goodwill impairment tests performed for
fiscal years beginning after December 15, 2011, and was adopted by the Company for the fiscal year ended March 31, 2013. The
adoption of ASU 2011-08 did not have a material effect on the Company’s financial statements.
Pronouncements to be Adopted in Future Periods
In February 2013, the FASB issued Accounting Standards Update 2013-02, “Comprehensive Income (Topic 220): Reporting
of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” The new guidance requires entities to report the effect
of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income unless the
amounts are not reclassified in their entirety to net income. For amounts that are not required to be reclassified in their entirety to
net income in the same reporting period, entities are required to cross-reference other disclosures that provide additional detail about
those amounts. The new guidance is effective prospectively for all interim and annual periods beginning after December 15, 2012,
with early adoption permitted. The Company does not expect any impact on the Company's results of operations, cash flows or
financial position as the guidance relates only to additional disclosures.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year’s presentation.
NOTE 2. RESTRUCTURING AND IMPAIRMENT COSTS
During the fiscal years ended March 31, 2011, 2012 and 2013, Universal recorded restructuring and impairment costs
related to various initiatives to adjust certain operations and reduce costs. A significant portion of the restructuring and impairment
charges related to the Company’s November 2010 decision to close its leaf tobacco processing facility in Simcoe, Ontario, Canada.
The Company continues to buy tobacco grown in Canada, but now processes that leaf at its U.S. factory in North Carolina. The
Simcoe processing facility and a separate storage complex were classified as “held for sale” at the date the decision was made to
close the operations, and an impairment charge of approximately $5.6 million was recorded in the third quarter of fiscal year 2011
to write those assets down to their fair values, net of selling costs. The sales of both properties were completed during fiscal year
2012 at prices approximating their adjusted book values. All full-time salaried employees at the Simcoe location were terminated
by June 30, 2011. During fiscal year 2011, the Company recorded approximately $2.4 million in costs for termination benefits
payable to those employees under Canadian law and $4.1 million in pension curtailment and settlement costs related to the termination
of the Canadian employees’ defined benefit pension plan. The Canadian operations were included in the North America segment.
In addition to the restructuring and impairment costs related to the closure of the facility in Canada, the Company recorded
restructuring costs associated with various other cost reduction initiatives during fiscal years 2011, 2012, and 2013. A significant
portion of those costs consisted of employee termination benefits associated with voluntary early retirement offers and involuntary
separations at the Company’s headquarters and operating locations in the United States, South America, Africa, Europe, and Asia
that are part of the North America and Other Regions reportable segments. In addition, during fiscal year 2012, the Company recorded
approximately $3.1 million in costs related to the termination of its business arrangements with a supplier and processor of tobacco
in Europe in response to market changes. That cost related to an operating subsidiary that is part of the Other Regions reportable
segment.
51
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
A summary of the restructuring and impairment costs recorded during fiscal years 2011, 2012, and 2013 is as follows:
Employee
Termination
Benefits
Pension
Curtailment
and Settlement
Costs
Other
Restructuring
Costs
Impairment of
Property, Plant
and Equipment
Total
Fiscal Year 2011 Costs:
Closure of processing facility in Canada ..........................
$
2,412
$
4,081
$
— $
5,632
$
Other restructuring and cost reduction initiatives.............
Total ..................................................................................
8,743
11,155
Fiscal Year 2012 Costs:
Other restructuring and cost reduction initiatives.............
8,564
Fiscal Year 2013 Costs:
Other restructuring and cost reduction initiatives.............
4,113
—
4,081
—
—
636
636
3,097
—
—
5,632
—
—
Total costs - fiscal years 2011, 2012 and 2013 .................
$
23,832
$
4,081
$
3,733
$
5,632
$
12,125
9,379
21,504
11,661
4,113
37,278
A reconciliation of the Company’s liability for the employee termination benefits and other restructuring costs outlined
above through March 31, 2013, is as follows:
Employee
Termination
Benefits
Other Costs
Total
Fiscal Year 2011 Activity:
Costs charged to expense ....................................................................................................................
$
11,155
$
636
$
11,791
Payments .............................................................................................................................................
Balance at March 31, 2011 .................................................................................................................
Fiscal Year 2012 Activity:
Costs charged to expense ....................................................................................................................
Payments .............................................................................................................................................
Balance at March 31, 2012 .................................................................................................................
Fiscal Year 2013 Activity:
Costs charged to expense ....................................................................................................................
Payments .............................................................................................................................................
(4,769)
6,386
8,564
(13,679)
1,271
4,113
(5,002)
(411)
225
3,097
(3,031)
291
—
(291)
Balance at March 31, 2013 .................................................................................................................
$
382
$
— $
(5,180)
6,611
11,661
(16,710)
1,562
4,113
(5,293)
382
The majority of the restructuring liability at March 31, 2013 will be paid in the early part of fiscal year 2014. Universal
continually reviews its business for opportunities to realize efficiencies, reduce costs, and realign its operations in response to business
changes. The Company may incur additional restructuring costs and asset impairment charges in future periods as business changes
occur and additional cost savings initiatives are implemented.
52
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE 3. 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 €1 1.88 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 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 the Company’s subsidiaries.
In January 2005, Deltafina filed an appeal in the General Court of the European Union (“General Court”). A hearing was
held in June 2009, and on September 8, 2010, the General Court issued its decision, in which it reduced the amount of the Deltafina
fine to €6.12 million. The General Court held in part that the Commission erred in finding Deltafina acted as the leader of the Spanish
cartel, and that the Commission’s corresponding increase of the underlying fine by 50% was not justified. As a result of the General
Court’s decision in September 2010, during the second quarter of fiscal year 2011, the Company reversed €5.76 million (approximately
$7.4 million) of the charge previously recorded to accrue the fine and recognized approximately $1.2 million of interest income
returned on funds deposited in escrow to secure the fine. Deltafina filed an appeal to the General Court decision with the European
Court of Justice on November 18, 2010. Although Deltafina believed the General Court erred in not reducing the remaining fine
further based on numerous grounds, due to strategic reasons Deltafina withdrew its appeal in June 2011. The result was to end the
matter in the judicial system, and to confirm the fine reduction granted in the General Court.
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 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. In January 2006, the Company and Deltafina each
filed appeals in the General Court. Deltafina’s appeal was held on September 28, 2010. For strategic reasons related to the defense
of the Deltafina appeal, Universal withdrew its appeal. On September 9, 2011, the General Court issued its decision, in which it
rejected Deltafina’s application to reinstate immunity. Deltafina has appealed the decision of the General Court to the European
Court of Justice. Effective with the September 9, 2011 General Court decision, the Company recorded a charge for the full amount
of the fine (€30 million) plus accumulated interest (€5.9 million). The charge totaled $49.1 million at the exchange rate in effect on
the date of the General Court decision. Deltafina maintains a bank guarantee in favor of the Commission in the amount of the fine
plus accumulated interest in order to stay execution during the appeals process, and the Company has collateralized that guarantee
with a bank deposit totaling approximately $48.6 million at March 31, 2013. At March 31, 2013, the accrued liability for the fine
and interest is reported in other current liabilities, and the deposit is recorded in other current assets. The Company expects the
appeal to be decided during fiscal year 2014. Any fine and interest Deltafina may ultimately be required to pay would not be due
until the European Court of Justice issues its decision.
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, including the assessments disclosed in Note 1 related to inter-state value added
taxes in Brazil. While the outcome of these matters cannot be predicted with certainty, management is vigorously defending the
matters and does not currently expect that any of them will have a material adverse effect on the Company’s business or financial
position. However, should one or more of these matters be resolved in a manner adverse to management’s current expectation, the
effect on the Company’s results of operations for a particular fiscal reporting period could be material.
53
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE 4. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share:
Fiscal Year Ended March 31,
2013
2012
2011
Basic Earnings Per Share
Numerator for basic earnings per share
Net income attributable to Universal Corporation.............................................................................. $
132,750
$
92,057
$
156,565
Less: Dividends on convertible perpetual preferred stock.................................................................
(14,850)
(14,850)
(14,850)
Earnings available to Universal Corporation common shareholders for
calculation of basic earnings per share .............................................................................................
117,900
77,207
141,715
Denominator for basic earnings per share
Weighted average shares outstanding.................................................................................................
23,355
23,228
23,859
Basic earnings per share..................................................................................................................... $
5.05
$
3.32
$
5.94
Diluted Earnings Per Share
Numerator for diluted earnings per share
Earnings available to Universal Corporation common shareholders.................................................. $
117,900
$
77,207
$
141,715
Add: Dividends on convertible perpetual preferred stock (if conversion assumed)..........................
14,850
14,850
14,850
Earnings available to Universal Corporation common shareholders for
calculation of diluted earnings per share ..........................................................................................
132,750
92,057
156,565
Denominator for diluted earnings per share
Weighted average shares outstanding.................................................................................................
23,355
23,228
23,859
Effect of dilutive securities (if conversion or exercise assumed)
Convertible perpetual preferred stock..............................................................................................
Employee share-based awards .........................................................................................................
Denominator for diluted earnings per share........................................................................................
4,797
326
28,478
4,772
339
28,339
4,750
279
28,888
Diluted earnings per share .................................................................................................................. $
4.66
$
3.25
$
5.42
For the fiscal years ended March 31, 2013, 2012 and 2011, the Company had the following potentially dilutive securities
(stock appreciation rights and/or stock options) outstanding that were not included in the computation of diluted earnings per share
because their effect would have been antidilutive:
Fiscal Year Ended March 31,
2013
2012
2011
Potentially dilutive securities (shares in thousands) ..............................................................................
169
348
Weighted-average exercise price ........................................................................................................... $
62.66
$
56.75
$
623
53.44
54
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE 5. INCOME TAXES
Income Tax Expense
Income taxes consisted of the following:
Fiscal Year Ended March 31,
2013
2012
2011
Current
United States....................................................................................................................................... $
(3,465) $
2,871
$
State and local ....................................................................................................................................
Foreign................................................................................................................................................
Deferred
United States.......................................................................................................................................
State and local ....................................................................................................................................
Foreign................................................................................................................................................
682
57,355
54,572
1,746
279
9,769
11,794
(2,064)
53,582
54,389
4,796
444
1,530
6,770
Total................................................................................................................................................. $
66,366
$
61,159
$
18,052
2,290
59,051
79,393
(43)
(226)
(775)
(1,044)
78,349
Foreign taxes include U.S. tax expense on earnings of foreign subsidiaries. The Company has no undistributed earnings
of consolidated foreign subsidiaries that are classified as permanently reinvested.
Consolidated Effective Income Tax Rate
A reconciliation of the statutory U.S. federal rate to the Company’s effective income tax rate is as follows:
Fiscal Year Ended March 31,
2013
2012
2011
Statutory tax rate ...................................................................................................................................
35.0%
State income taxes, net of federal benefit .............................................................................................
Change in valuation allowance on deferred tax assets..........................................................................
Nondeductible European Commission fine ..........................................................................................
Dividends received from deconsolidated operations ............................................................................
Other, including changes in liabilities recorded for uncertain tax positions.........................................
0.3
(0.1)
—
(1.5)
(1.7)
35.0%
(0.7)
0.7
8.6
(1.8)
(4.0)
Effective income tax rate ......................................................................................................................
32.0%
37.8%
35.0%
0.6
(0.2)
—
—
(3.2)
32.2%
The Company amended certain prior year state income tax returns during fiscal year 2012. The related income tax refunds
reduced income tax expense and the consolidated effective tax rate for the year.
Components of Income Before Income Taxes and Other Items
The U.S. and foreign components of income before income taxes and other items were as follows:
United States .......................................................................................................................................... $
(4,161) $
21,773 $
Foreign ...................................................................................................................................................
211,446
140,205
Total .................................................................................................................................................... $
207,285 $
161,978 $
32,826
210,073
242,899
Fiscal Year Ended March 31,
2013
2012
2011
55
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Deferred Income Tax Liabilities and Assets
Significant components of deferred tax liabilities and assets were as follows:
March 31,
2013
2012
Liabilities
Foreign withholding taxes ...................................................................................................................................................... $
25,074 $
Undistributed earnings ...........................................................................................................................................................
Goodwill.................................................................................................................................................................................
All other..................................................................................................................................................................................
32,346
30,851
14,099
14,192
46,010
30,851
20,998
Total deferred tax liabilities.............................................................................................................................................. $
102,370
$
112,051
Assets
Employee benefit plans .......................................................................................................................................................... $
60,397 $
Reserves and accruals.............................................................................................................................................................
Deferred income .....................................................................................................................................................................
Deferred compensation...........................................................................................................................................................
All other..................................................................................................................................................................................
Total deferred tax assets ...................................................................................................................................................
Valuation allowance ...............................................................................................................................................................
32,795
4,732
3,616
12,292
113,832
(1,252)
69,373
45,793
8,098
3,035
17,144
143,443
(4,620)
Net deferred tax assets...................................................................................................................................................... $
112,580 $
138,823
At March 31, 2013, the Company had no material net operating loss carryforwards in either its domestic or foreign operations.
56
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Combined Income Tax Expense (Benefit)
The combined income tax expense (benefit) allocable to continuing operations, other comprehensive income, and direct
adjustments to shareholders' equity was as follows:
Fiscal Year Ended March 31,
2013
2012
2011
Continuing operations ............................................................................................................................ $
66,366
$
61,159
$
78,349
Other comprehensive income.................................................................................................................
2,600
(18,296)
Direct adjustments to shareholders' equity.............................................................................................
(1,052)
(285)
3,210
159
Total................................................................................................................................................. $
67,914 $
42,578 $
81,718
Uncertain Tax Positions
A reconciliation of the beginning and ending balance of the gross liability for uncertain tax positions for the fiscal years
ended March 31, 2013, 2012 and 2011, is as follows:
Fiscal Year Ended March 31,
2013
2012
2011
Liability for uncertain tax positions, beginning of year ......................................................................... $
7,913
$
9,223
$
22,184
Additions:
Related to tax positions for the current year........................................................................................
Related to tax positions for prior years ...............................................................................................
Reductions:
Related to tax positions for prior years ...............................................................................................
Due to settlements with tax jurisdictions ............................................................................................
Due to lapses of statutes of limitations................................................................................................
Effect of currency rate movement .......................................................................................................
191
—
—
(66)
(2,339)
(314)
262
1,072
—
(698)
(1,213)
(733)
Liability for uncertain tax positions, end of year ................................................................................... $
5,385
$
7,913
$
1,184
77
(205)
(12,765)
(1,571)
319
9,223
Of the total liability for uncertain tax positions at March 31, 2013, approximately $4.4 million could have an effect on the
consolidated effective tax rate if the tax benefits are recognized. The liability for uncertain tax positions includes $1.8 million related
to tax positions for which it is reasonably possible that the amounts could change significantly before March 31, 2014. 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.
In fiscal year 2011, of the reduction in the liability for uncertain tax positions of $12.8 million due to settlements with tax
jurisdictions, approximately $5.7 million represented tax paid and $7.1 million represented amounts reversed through income tax
expense.
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
$1.6 million in fiscal year 2013, net expense for interest and penalties of $0.4 million in fiscal year 2012, and a net reversal of interest
and penalties of $0.2 million in fiscal year 2011. At March 31, 2013 and 2012, $2.7 million and $4.5 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, 2013, the Company's earliest open tax year for U.S. federal income tax purposes
was its fiscal year ended March 31, 2010. Open tax years in state and foreign jurisdictions generally range from 3 to 6 years.
57
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE 6. CREDIT FACILITIES
Bank Credit Agreement
In November 2011, the Company entered a five-year bank credit agreement that provides for a $450 million committed
revolving credit facility, as well as a fully funded $100 million amortizing term loan. Borrowings under the revolving credit facility
and the term loan bear interest at variable rates, based on either (1) LIBOR plus a margin that is based on certain credit measures or
(2) the higher of the federal funds rate plus 0.5%, prime rate, or one-month LIBOR plus 1.0%, each plus a margin. The Company
also pays a facility fee on the revolving credit facility. Both the revolving credit facility and the term loan mature in November 2016.
Other information related to the term loan, including the outstanding balances at March 31, 2013 and 2012, is disclosed in Note 7.
Certain covenants in the bank 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 those covenants at March 31, 2013. There were no amounts outstanding
under the revolving credit facility at March 31, 2013.
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,
2013 and 2012, approximately $105 million and $128 million, respectively, were outstanding under these uncommitted lines of
credit. The weighted-average interest rates on short-term borrowings outstanding as of March 31, 2013 and 2012, were approximately
3.8% and 7.1%, respectively. The higher weighted-average interest rate at March 31, 2012 reflected higher local borrowings in
countries where market interest rates are higher. At March 31, 2013, the Company and its consolidated affiliates had unused
uncommitted lines of credit totaling approximately $307 million.
NOTE 7. LONG-TERM OBLIGATIONS
Long-term obligations consisted of the following:
March 31,
2013
2012
Medium-term notes................................................................................................................................................................. $
300,000 $
310,000
Amortizing bank term loan .....................................................................................................................................................
Total outstanding................................................................................................................................................................
92,500
392,500
98,750
408,750
Less: current portion ...............................................................................................................................................................
(211,250)
(16,250)
Long-term obligations ........................................................................................................................................................ $
181,250 $
392,500
The Company's medium-term notes mature at various dates from October 2013 to December 2014 and were all issued with
fixed interest rates. Interest rates on the notes range from 5.20% to 6.25%. As discussed in Note 6, the Company borrowed $100
million in November 2011 under an amortizing term loan under its bank credit agreement. The term loan is being repaid in quarterly
installments that began on March 31, 2012, increase annually, and conclude with a final payment due November 3, 2016. The loan
may be prepaid at any time without penalty or premium at the option of the Company. As discussed below, the Company has interest
rate swaps on the term loan that convert the floating base rate to a fixed base rate. Including the effect of the swaps and the facility
margin, the interest rate on the term loan was 2.91% at March 31, 2013.
As noted above, from time to time, the Company uses interest rate swap agreements to manage its exposure to changes in
interest rates. In November 2011, the Company entered into receive-floating/pay-fixed interest rate swap agreements on the
outstanding balance of its amortizing bank term loan. These swap agreements were designated as cash flow hedges of the variable
rate interest payments on the loan. The aggregate notional amount of the swaps, which is being reduced as quarterly payments are
made over the term of the loan, was $92.5 million at March 31, 2013, and $98.8 million at March 31, 2012. The fair value of the
interest rate swap agreements was a liability of $1.7 million at March 31, 2013. The Company previously had receive-fixed/pay-
floating interest rate swap agreements in place on $245 million of long-term debt. Those swap agreements were designated as hedges
of the fair value of the underlying debt. During fiscal year 2012, they were all settled prior to or concurrent with the maturity of the
underlying debt, and none were outstanding at March 31, 2012 or 2013. Additional disclosures related to the Company’s interest
rate swap agreements are provided in Note 9.
58
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Maturities of long-term debt outstanding at March 31, 2013, by fiscal year, were as follows: 2014 – $211 million; 2015 –
$116 million; 2016 – $28 million; and 2017 – $38 million. All long-term debt outstanding at March 31, 2013, is scheduled to be
repaid by the end of fiscal year 2017.
In November 2011, the Company filed an undenominated universal shelf registration statement with the U.S. Securities
and Exchange Commission to provide for the future issuance of an undefined amount of additional debt or equity securities as
determined by the Company and offered in one or more prospectus supplements prior to issuance.
Disclosures about the fair value of long-term obligations are provided in Note 10.
NOTE 8. LEASES
The Company’s subsidiaries lease various production, storage, distribution, and other facilities, as well as vehicles and
equipment used in their operations. Some of the leases have options to extend the lease term at market rates. These arrangements
are classified as operating leases for accounting purposes. Rent expense on operating leases totaled $19.3 million in fiscal year 2013,
$20.6 million in fiscal year 2012, and $21.8 million in fiscal year 2011. Future minimum payments under non-cancelable operating
leases total $16.9 million in 2014, $8.6 million in 2015, $6.2 million in 2016, $3.9 million in 2017, $3.3 million in 2018, and $5.3
million after 2018.
59
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE 9. DERIVATIVES AND HEDGING ACTIVITIES
Universal is exposed to various risks in its worldwide operations and uses derivative financial instruments to manage two
specific types of risks – interest rate risk and foreign currency exchange rate risk. Interest rate risk has been managed by entering
into interest rate swap agreements, and foreign currency exchange rate risk has been managed by entering into forward foreign
currency exchange contracts. However, the Company’s policy also permits other types of derivative instruments. In addition, foreign
currency exchange rate risk is also managed through strategies that do not involve derivative instruments, such as using local
borrowings and other approaches to minimize net monetary positions in non-functional currencies. The disclosures below provide
additional information about the Company’s hedging strategies, the derivative instruments used, and the effects of these activities
on the consolidated statements of income and 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. The Company has not hedged
any net investment in the equity of subsidiaries denominated in currencies other than the U.S. dollar.
Hedging Strategy for Interest Rate Risk
The Company previously entered into receive-fixed/pay-floating interest rate swap agreements totaling $245 million notional
amount that were designated and qualified as hedges of the exposure to changes in the fair value of the underlying debt instruments
created by fluctuations in prevailing market interest rates. During fiscal year 2012, several of those swap contracts in the notional
amount of $50 million were settled on maturity of the underlying debt, and the remaining contracts in the total notional amount of
$195 million were settled prior to maturity at an aggregate gain of approximately $13 million. That gain is being amortized over
the remaining terms of the underlying debt instruments as a reduction in interest expense. No fixed-to-floating interest rate swap
agreements were outstanding at March 31, 2013.
In November 2011, the Company entered into receive-floating/pay-fixed interest rate swap agreements that were designated
and qualify as hedges of the exposure to changes in interest payment cash flows created by fluctuations in variable interest rates on
its outstanding amortizing bank term loan. Although no significant ineffectiveness is expected with this hedging strategy, the
effectiveness of the interest rate swaps is evaluated on a quarterly basis. The aggregate notional amount of the interest rate swaps
is being reduced over a five-year period as payments are made on the loan. At March 31, 2013, the total notional amount of the
swaps was approximately $93 million, which corresponded with the outstanding balance of the loan.
Cash Flow Hedging Strategy for Foreign Currency Exchange Rate Risk Related to Forecast Purchases of Tobacco and Related
Processing Costs
The majority of the tobacco production in most countries outside the United States where Universal operates is sold in
export markets at prices denominated in U.S. dollars. However, purchases of tobacco from farmers and most processing costs (such
as labor and energy) in those countries are usually denominated in the local currency. Changes in exchange rates between the U.S.
dollar and the local currencies where tobacco is grown and processed affect the ultimate U.S. dollar cost of the processed tobacco.
From time to time, the Company has 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 the tobacco purchases and processing costs. This strategy offsets the variability
of future U.S. dollar cash flows for tobacco purchases and processing costs for the foreign currency notional amount hedged. This
hedging strategy has been used mainly for tobacco purchases and processing costs in Brazil. The aggregate U.S. dollar notional
amount of forward contracts entered for these purposes during fiscal years 2013, 2012, and 2011 was as follows:
(in millions)
Fiscal Year Ended March 31,
2013
2012
2011
Tobacco purchases ...............................................................................................................
$
158.9
$
182.5
$
Processing costs ...................................................................................................................
34.3
48.3
Total..................................................................................................................................
$
193.2
$
230.8
$
235.2
48.5
283.7
All contracts related to tobacco purchases were designated and qualify 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.
60
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For substantially all hedge gains and losses recorded in accumulated other comprehensive loss at March 31, 2013, the
Company expects to complete the sale of the tobacco and recognize the amounts in earnings during fiscal year 2014. At March 31,
2013, all hedged forecast purchases of tobacco not yet completed remained probable of occurring within the originally designated
time period and, as a result, no hedges had been discontinued. Purchases of the 2013 crop are expected to be completed by August
2013, and all forward contracts to hedge those purchases will mature and be settled by that time.
Hedging Strategy for Foreign Currency Exchange Rate Risk Related to Net Local Currency Monetary Assets and Liabilities of
Foreign Subsidiaries
Most of the Company’s foreign subsidiaries transact the majority of their sales in U.S. dollars and finance the majority of
their operating requirements with U.S. dollar borrowings, and therefore use the U.S. dollar as their functional currency. These
subsidiaries normally have certain monetary assets and liabilities on their balance sheets that are denominated in the local currency.
Those assets and liabilities can include cash and cash equivalents, accounts receivable and accounts payable, advances to farmers
and suppliers, deferred income tax assets and liabilities, recoverable value-added taxes, and other items. Net monetary assets and
liabilities denominated in the local currency are remeasured into U.S. dollars each reporting period, generating gains and losses that
the Company records in earnings as a component of selling, general, and administrative expenses. The level of net monetary assets
or liabilities denominated in the local currency normally fluctuates throughout the year based on the operating cycle, but it is most
common for monetary assets to exceed monetary liabilities, sometimes by a significant amount. When this situation exists and the
local currency weakens against the U.S. dollar, remeasurement losses are generated. Conversely, remeasurement gains are generated
on a net monetary asset position when the local currency strengthens against the U.S. dollar. To manage a portion of its exposure
to currency remeasurement gains and losses in Brazil during fiscal year 2011, the Company entered into forward contracts to buy or
sell the local currency at future dates coinciding with expected changes in the overall net local currency monetary asset position of
the subsidiary. Gains and losses on the forward contracts 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. The Company does not designate these contracts as hedges
for accounting purposes. The notional amount of these contracts totaled approximately $60 million in fiscal year 2011, and the
contracts were settled before the end of the fiscal year. No forward contracts were entered for this purpose in fiscal years 2013 or
2012. 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.
Several of the Company’s foreign subsidiaries transact the majority of their sales and finance the majority of their operating
requirements in their local currency, and therefore use their respective local currencies as the functional currency for reporting
purposes. From time to time, these subsidiaries sell tobacco to customers in transactions that are not denominated in the functional
currency. In those situations, the subsidiaries routinely enter into forward exchange contracts to offset currency risk for the period
of time that a fixed-price order and the related trade account receivable are outstanding with the customer. The contracts are not
designated as hedges for accounting purposes.
61
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, 2013, 2012, and 2011.
Fiscal Year Ended March 31,
2013
2012
2011
Fair Value Hedges - Interest Rate Swap Agreements
Derivative
Gain (loss) recognized in earnings................................................................................
$
— $
3,195
$
428
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................................................................................
$
— $
(3,195) $
(428)
Location of gain (loss) recognized in earnings .............................................................
Interest expense
Cash Flow Hedges - Interest Rate Swap Agreements
Derivative
Effective Portion of Hedge
Gain (loss) recorded in accumulated other comprehensive loss ................................
Gain (loss) reclassified from accumulated other comprehensive loss into earnings..
Location of gain (loss) reclassified from accumulated other comprehensive loss
into earnings .............................................................................................................
$
$
(1,470) $
(1,119) $
(910) $
— $
—
—
Interest expense
Ineffective Portion of Hedge
Gain (loss) recognized in earnings .............................................................................
$
— $
— $
—
Location of gain (loss) recognized in earnings ..........................................................
Selling, general and administrative expenses
Hedged Item
Description of hedged item ...........................................................................................
Floating rate interest payments on term loan
Cash Flow Hedges - Forward Foreign Currency Exchange Contracts
Derivative
Effective Portion of Hedge
Gain (loss) recorded in accumulated other comprehensive loss ................................
Gain (loss) reclassified from accumulated other comprehensive
loss into earnings ......................................................................................................
Location of gain (loss) reclassified from accumulated other
comprehensive loss into earnings.............................................................................
$
$
(8,709) $
2,652
(8,741) $
5,882
Cost of goods sold
$
$
2,476
100
Ineffective Portion and Early De-designation of Hedges
Gain (loss) recognized in earnings .............................................................................
$
(1,325) $
857
$
113
Location of gain (loss) recognized in earnings ..........................................................
Selling, general and administrative expenses
Hedged Item
Description of hedged item ..........................................................................................
Forecast purchases of tobacco in Brazil
Derivatives Not Designated as Hedges -
Forward Foreign Currency Exchange Contracts
Gain (loss) recognized in earnings .............................................................................
$
(3,115) $
1,829
$
2,594
Location of gain (loss) recognized in earnings ..........................................................
Selling, general and administrative expenses
62
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the interest rate swap agreements designated as fair value hedges, since the hedges had no ineffectiveness, the gain or
loss recognized in earnings on the derivative was offset by a corresponding loss or gain on the underlying hedged debt. For the
interest rate swap agreements designated as cash flow hedges, the effective portion of the gain or loss on the derivative is recorded
in accumulated other comprehensive loss and any ineffective portion is recorded in selling, general and administrative expenses. At
March 31, 2013, a loss of approximately $1 million is expected to be reclassified over the next twelve months from accumulated
other comprehensive loss to interest expense.
For the forward foreign currency exchange contracts designated as cash flow hedges of tobacco purchases in Brazil, a net
hedge loss of approximately $0.8 million remained in accumulated other comprehensive loss at March 31, 2013. That balance reflects
net losses on contracts related to the 2013 crop. No hedged purchases of 2013 crop tobaccos had been completed and no hedge loss
had been reclassified to earnings at March 31, 2013. The majority of the balance in the accumulated other comprehensive loss will
be recognized in earnings as a component of cost of goods sold in fiscal year 2014 as the 2013 Brazilian crop tobacco is sold to
customers. Based on the hedging strategy, as the gain or loss is recognized in earnings, it is expected to be offset by a change in the
direct cost for the tobacco or by a change in sales prices if the strategy has been mandated by the customer. Generally, margins on
the sale of the tobacco will not be significantly affected.
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, 2013 and 2012:
Derivatives in a Fair Value Asset Position
Derivatives in a Fair Value Liability Position
Balance
Sheet
Location
Fair Value as of March 31,
2013
2012
Balance
Sheet
Location
Fair Value as of March 31,
2013
2012
Derivatives Designated as Hedging Instruments
Interest rate swap agreements designated
as fair value hedges
Interest rate swap agreements designated
as cash flow hedges
Forward foreign currency exchange contracts
designated as cash flow hedges
Total
Derivatives Not Designated as Hedging Instruments
Forward foreign currency exchange contracts
Total
Other
non-current
assets
Other
non-current
assets
Other
current
assets
Other
current
assets
Long-term
obligations
Other
long-term
liabilities
Accounts
payable and
accrued
expenses
Accounts
payable and
accrued
expenses
$
— $
—
1,679
1,119
810
925
$
2,489
$
2,044
$
$
331
331
$
$
427
427
$
— $
—
—
—
— $
—
83
83
— $
— $
273
273
$
$
$
63
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE 10. FAIR VALUE MEASUREMENTS
Universal measures certain financial and nonfinancial assets and liabilities at fair value based on applicable accounting
guidance. The financial assets and liabilities measured at fair value include money market funds, trading securities associated with
deferred compensation plans, interest rate swap agreements, forward foreign currency exchange contracts, and guarantees of bank
loans to tobacco growers. The application of the fair value guidance to nonfinancial assets and liabilities primarily includes
assessments of goodwill and long-lived assets for potential impairment.
Under the accounting guidance, fair value is defined as the price that would be received to sell an asset or paid to transfer
a liability in an orderly transaction between market participants at the measurement date. The framework for measuring fair value
is based on a fair value hierarchy that distinguishes between observable inputs (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.
64
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
At March 31, 2013 and 2012, the Company had certain financial assets and financial liabilities that were required to be
measured and reported at fair value on a recurring basis. These assets and liabilities are listed in the tables below and are classified
based on how their values were determined under the fair value hierarchy:
Assets
Money market funds ....................................................................................................
$
— $
174,551
$
— $
174,551
Trading securities associated with deferred compensation plans ................................
19,168
—
—
19,168
Total financial assets measured and reported at fair value .......................................
$
19,168
$
174,551
$
— $
193,719
March 31, 2013
Level 1
Level 2
Level 3
Total
Liabilities
Guarantees of bank loans to tobacco growers..............................................................
$
— $
— $
4,235
$
Interest rate swap agreements ......................................................................................
Forward foreign currency exchange contracts.............................................................
—
—
1,679
1,141
—
—
Total financial liabilities measured and reported at fair value..................................
$
— $
2,820
$
4,235
$
4,235
1,679
1,141
7,055
March 31, 2012
Level 1
Level 2
Level 3
Total
Assets
Money market funds......................................................................................................
$
— $
48,546
$
— $
Trading securities associated with deferred compensation plans..................................
Forward foreign currency exchange contracts ..............................................................
19,803
—
—
356
—
—
48,546
19,803
356
Total financial assets measured and reported at fair value.......................................
$
19,803
$
48,902
$
— $
68,705
Liabilities
Guarantees of bank loans to tobacco growers ...............................................................
$
— $
— $
5,932
$
Interest rate swap agreements........................................................................................
Forward foreign currency exchange contracts ..............................................................
—
—
1,119
1,352
—
—
Total financial liabilities measured and reported at fair value.................................
$
— $
2,471
$
5,932
$
5,932
1,119
1,352
8,403
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 net asset value, which is computed based on amortized cost (Level 2). 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.
65
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Interest rate swap agreements
The fair values of interest rate swap agreements are determined based on dealer quotes using a discounted cash flow model
matched to the contractual terms of each instrument. Since inputs to the model are observable and significant judgment is not required
in determining the fair values, interest rate swaps are classified within Level 2 of the fair value hierarchy.
Forward foreign currency exchange contracts
The fair values of forward foreign currency exchange contracts are also determined based on dealer quotes using a discounted
cash flow model matched to the contractual terms of each instrument. Since inputs to the model are observable and significant
judgment is not required in determining the fair values, forward foreign currency exchange contracts are classified within Level 2
of the fair value hierarchy.
Guarantees of bank loans to tobacco growers
The Company guarantees bank loans to tobacco growers in Brazil and Malawi for crop financing and/or construction of
curing barns or other tobacco producing assets. In the event that the farmers default on their payments to the banks, the Company
would be required to perform under the guarantees. The Company regularly evaluates the likelihood of farmer defaults based on an
expected loss analysis and records the fair value of its guarantees as an obligation in its consolidated financial statements. The fair
value of the guarantees is determined using the expected loss data for all loans outstanding at each measurement date. The present
value of the cash flows associated with the estimated losses is then calculated at a risk-adjusted interest rate that is aligned with the
expected duration of the liability and includes an adjustment for nonperformance risk. This approach is sometimes referred to as the
“contingent claims valuation method.” Although historical loss data is an observable input, significant judgment is required in
applying this information to the portfolio of guaranteed loans outstanding at each measurement date and in selecting a risk-adjusted
interest rate. Significant increases or decreases in the risk-adjusted interest rate could result in a significantly higher or lower fair
value measurement. The guarantees of bank loans to tobacco growers are therefore classified within Level 3 of the fair value hierarchy.
A reconciliation of the change in the balance of the financial liability for guarantees of bank loans to tobacco growers (Level
3) for the fiscal years ended March 31, 2013 and 2012 is provided below. A significant number of the loans in the portfolio reached
their maturity dates during fiscal year 2012. The Company satisfied its obligations under the related guarantees by remitting payment
to the banks and taking title to the loans, thereby reducing the guarantee liability.
Fiscal Year Ended March 31,
2013
2012
Balance at beginning of year ....................................................................................................................................................
$
5,932
$
20,699
Transfer to allowance for loss on direct loans to farmers (removal of prior crop year and other loans from portfolio) .........
Provision for loss or transfer from allowance for loss on direct loans to farmers (addition of current crop year loans).........
Change in discount rate and estimated collection period .........................................................................................................
Currency remeasurement..........................................................................................................................................................
(7,352)
5,690
135
(170)
Balance at end of year ..............................................................................................................................................................
$
4,235
$
(18,305)
4,279
780
(1,521)
5,932
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.
Long-term Obligations
The fair value of the Company’s long-term obligations, including the current portion, was approximately $404 million at
March 31, 2013 and $428 million at March 31, 2012. The Company estimates the fair value of its long-term obligations using Level
2 inputs which are based upon quoted market prices for the same or similar issues or on the current interest rates available to the
Company for debt of similar terms and maturities.
66
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE 11. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
Defined Benefit Plans
Description of Plans
The Company sponsors several defined benefit pension plans covering U.S. salaried employees and certain foreign and
other employee groups. These plans provide retirement benefits based primarily on employee compensation and years of service.
Plan assets consist primarily of equity and fixed income investments. The Company also sponsors defined benefit plans that provide
postretirement health and life insurance benefits for eligible U.S. employees who have attained specific age and service levels. The
health benefits are funded by the Company as the costs of those benefits are incurred. The plan design includes cost-sharing features
such as deductibles and coinsurance. The life insurance benefits are funded with deposits to a reserve account held by an insurance
company. The Company has the right to amend or discontinue its pension and other postretirement benefit plans at any time.
In the following disclosures, the term “accumulated benefit obligation” (“ABO”) represents the actuarial present value of
estimated future benefit payments earned by participants in the Company's defined benefit pension plans as of the balance sheet date
without regard to the estimated effect of future compensation increases on those benefits. The term does not apply to other
postretirement benefits. “Projected benefit obligation” refers to the projected benefit obligation (“PBO”) for pension benefits and
the accumulated postretirement benefit obligation (“APBO”) for other postretirement benefits. These amounts represent the actuarial
present value of estimated future benefit payments earned by participants in the benefit plans as of the balance sheet date. For pension
benefits, the projected benefit obligation includes the estimated effect of future compensation increases on those benefits.
Actuarial Assumptions
Assumptions used for financial reporting purposes to compute net periodic benefit cost and benefit obligations were as
follows:
Discount rates:
Pension Benefits
Other Postretirement Benefits
2013
2012
2011
2013
2012
2011
Benefit cost for plan year ...................................
Benefit obligation at end of plan year ................
4.60 %
4.20 %
5.50%
4.60%
Expected long-term return on plan assets:
Benefit cost for plan year ...................................
8.00 %
8.00%
Benefit obligation at end of plan year ................
Salary scale............................................................
Healthcare cost trend rate ......................................
8.00 %
5.00 %
N/A
8.00%
5.00%
N/A
6.00%
5.50%
8.00%
8.00%
5.00%
N/A
4.40 %
3.90 %
5.50%
4.40%
4.30 %
4.30%
4.30 %
5.00 %
7.60 %
4.30%
5.00%
7.80%
6.00%
5.50%
4.30%
4.30%
5.00%
8.00%
The healthcare cost trend rate used by the Company is based on a recent study of medical cost inflation rates. The revised
trend assumption of 7.60% in 2013 declines gradually to 4.50% in 2028.
67
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 2013 and 2012, and the funded status of
the plans at March 31, 2013 and 2012:
Pension Benefits
Other Postretirement Benefits
March 31,
March 31,
2013
2012
2013
2012
Actuarial present value of benefit obligation:
Accumulated benefit obligation .................................................................................... $
280,626 $
278,128
$
— $
Projected benefit obligation...........................................................................................
299,161
302,632
48,970
—
48,784
Change in projected benefit obligation:
Projected benefit obligation, beginning of year ............................................................ $
302,632
$
262,085
$
48,784
$
43,888
Service cost....................................................................................................................
Interest cost....................................................................................................................
Effect of discount rate change .......................................................................................
Foreign currency exchange rate changes.......................................................................
Settlements ....................................................................................................................
Other..............................................................................................................................
Benefit payments...........................................................................................................
4,650
13,001
13,798
(1,528)
(13,027)
(6,420)
(13,945)
4,614
13,959
34,292
(1,733)
—
5,975
(16,560)
467
2,303
3,068
—
—
(2,733)
(2,919)
591
2,636
5,205
—
—
529
(4,065)
Projected benefit obligation, end of year....................................................................... $
299,161
$
302,632
$
48,970
$
48,784
3,284
146
3,697
—
—
Change in plan assets:
Plan assets at fair value, beginning of year ................................................................... $
199,525
$
195,715
$
3,062
$
Actual return on plan assets...........................................................................................
Employer contributions .................................................................................................
Settlements ....................................................................................................................
Foreign currency exchange rate changes.......................................................................
Benefit payments...........................................................................................................
22,865
11,552
(13,027)
(1,028)
(13,945)
15,451
6,259
—
(1,340)
(16,560)
151
2,638
—
—
(2,919)
(4,065)
Plan assets at fair value, end of year ............................................................................. $
205,942
$
199,525
$
2,932
$
3,062
Funded status:
Funded status of the plans, end of year ......................................................................... $
(93,219) $
(103,107) $
(46,038) $
(45,722)
68
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The funded status of the Company’s plans at the end of fiscal years 2013 and 2012 was reported in the consolidated balance
sheets as follows:
Pension Benefits
Other Postretirement Benefits
March 31,
March 31,
2013
2012
2013
2012
Non-current asset (included in other noncurrent assets) .................................................. $
1,280
$
1,424
$
— $
—
Current liability (included in accounts payable and accrued expenses)...........................
Non-current liability (reported as pensions and other postretirement benefits) ...............
(1,581)
(92,918)
(6,511)
(98,020)
(3,327)
(42,711)
(3,213)
(42,509)
Amounts recognized in the consolidated balance sheets.................................................. $
(93,219) $
(103,107) $
(46,038) $
(45,722)
Additional information on the funded status of the Company’s plans as of the respective measurement dates for the fiscal
years ended March 31, 2013 and 2012, is as follows:
Pension Benefits
Other Postretirement Benefits
March 31,
March 31,
2013
2012
2013
2012
For plans with a projected benefit obligation in excess of plan assets:
Aggregate projected benefit obligation (PBO) .............................................................. $
290,142
$
294,325
$
48,970
$
48,784
Aggregate fair value of plan assets ................................................................................
195,642
189,795
2,932
3,062
For plans with an accumulated benefit obligation in excess of plan assets:
Aggregate accumulated benefit obligation (ABO) ........................................................
Aggregate fair value of plan assets ................................................................................
272,148
195,642
270,569
189,795
N/A
N/A
N/A
N/A
Net Periodic Benefit Cost
The components of the Company’s net periodic benefit cost were as follows:
Pension Benefits
Other Postretirement Benefits
Fiscal Year Ended March 31,
Fiscal Year Ended March 31,
2013
2012
2011
2013
2012
2011
Components of net periodic benefit cost:
Service cost ........................................................ $
4,650
$
4,614
$
4,835
$
467
$
591
$
Interest cost ........................................................
13,001
13,959
14,168
Expected return on plan assets...........................
(14,632)
(14,958)
(14,938)
Curtailment loss .................................................
Settlement cost ...................................................
Net amortization and deferral ............................
—
3,304
10,299
—
—
6,309
966
3,119
3,937
2,303
(124)
—
—
(8)
2,636
(134)
—
—
(335)
Net periodic benefit cost .................................... $
16,622
$
9,924
$
12,087
$
2,638
$
2,758
$
787
2,534
(144)
—
—
(253)
2,924
A one-percentage-point increase in the assumed healthcare cost trend rate would increase the March 31, 2013, accumulated
postretirement benefit obligation by approximately $1.5 million, while a one-percentage-point decrease would reduce the benefit
obligation by approximately $1.4 million. The aggregate service and interest cost components of the net periodic postretirement
benefit expense for fiscal year 2014 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.
69
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 2013 and 2012 and the amounts included
in accumulated other comprehensive loss at the end of those fiscal years are shown below. Reclassification adjustments represent
amounts included in accumulated other comprehensive loss at the beginning of the year that were recognized in net periodic benefit
cost during the year. All amounts shown are before allocated income taxes.
Pension Benefits
Other Postretirement Benefits
March 31,
March 31,
2013
2012
2013
2012
Change in net actuarial loss (gain):
Net actuarial loss (gain), beginning of year .................................................................. $
108,171
$
75,138
$
(4,644) $
(6,722)
Losses (gains) arising during the year...........................................................................
Reclassification adjustments during the year ................................................................
Net actuarial loss (gain), end of year.............................................................................
(928)
(13,886)
93,357
39,461
(6,428)
717
9
1,475
603
108,171
(3,918)
(4,644)
Change in prior service cost (benefit):
Prior service cost (benefit), beginning of year ..............................................................
(3,080)
(3,393)
Prior service cost arising during the year ......................................................................
Reclassification adjustments during the year ................................................................
—
463
—
313
Prior service cost (benefit), end of year ........................................................................
(2,617)
(3,080)
500
—
(274)
226
—
750
(250)
500
Total amounts in accumulated other comprehensive loss
at end of year, before income taxes............................................................................. $
90,740
$
105,091
$
(3,692) $
(4,144)
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 $10.3 million of the March 31, 2013 net
actuarial loss and $0.2 million of the March 31, 2013 prior service benefit in net periodic benefit cost during fiscal year 2014.
Allocation of Pension Plan Assets
The Company has established, and periodically adjusts, target asset allocations for its investments in its U.S. ERISA-
regulated defined benefit pension plan, which represents 91% of consolidated plan assets and 80% of consolidated PBO at March
31, 2013, to balance the needs of liquidity, total return, and risk control. The assets are required to be diversified across asset classes
and investment styles to achieve that balance. During the year, the asset allocation is reviewed for adherence to the target policy
and rebalanced to the targeted weights. The Company reviews the expected long-term returns of the asset allocation each year to
help determine whether changes are needed. The return is evaluated on a weighted-average basis in relation to inflation. The assumed
long-term rate of return used to calculate annual benefit expense is based on the asset allocation and expected market returns for
those asset classes.
70
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The weighted–average target pension asset allocation and target ranges at the March 31, 2013 measurement date and the
actual asset allocations at the March 31, 2013 and 2012 measurement dates by major asset category were as follows:
Major Asset Category
Target
Allocation
Range
2013
2012
Actual Allocation
March 31,
Domestic equity securities..............................................................................................
44.0 % 37 % - 51%
International equity securities ........................................................................................
(1) ............................................................................................
Fixed income securities
13.0 % 10 % - 16%
33.0 % 26 % - 40%
Alternative investments:
Real estate funds..........................................................................................................
5.0 %
3 % - 7%
Hedge funds.................................................................................................................
5.0 %
3 % - 7%
44.3%
12.7%
32.6%
5.6%
4.8%
45.5 %
12.1 %
32.3 %
5.4 %
4.7 %
Total..........................................................................................................................
100.0 %
100.0%
100.0 %
(1)
Actual amounts include high yield securities and cash balances held for the payment of benefits.
Universal makes regular contributions to its pension and other postretirement benefit plans. As previously noted, for
postretirement health benefits, contributions reflect funding of those benefits as they are incurred. With plan contributions and an
increase in asset values during fiscal years 2012 and 2013, the Company believes that it is in full compliance with all funding
requirements of the Pension Protection Act of 2006. The Company expects to make contributions of approximately $12.9 million
to its defined benefit pension plans in fiscal year 2014, including $10.2 million to its ERISA-regulated U.S. plan and $2.7 million
to its non-ERISA regulated and other plans.
Estimated future benefit payments to be made from the Company’s plans are as follows:
Fiscal Year:
Pension
Benefits
Other
Postretirement
Benefits
2014......................................................................................................................................................................................... $
15,967
$
2015.........................................................................................................................................................................................
2016.........................................................................................................................................................................................
2017.........................................................................................................................................................................................
2018.........................................................................................................................................................................................
2019 - 2023 .............................................................................................................................................................................
19,966
17,787
19,699
16,015
97,776
3,371
3,397
3,398
3,409
3,321
15,977
71
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Fair Values of Pension Plan Assets
Assets held by the Company's defined benefit pension plans primarily consist of domestic and international equity securities,
fixed income securities, and alternative investments. During fiscal year 2012, domestic and international equity securities included
direct investments in common stock as well as investments in commingled funds and common collective trusts. During fiscal year
2013, equity securities were primarily invested in actively-traded mutual funds with underlying common stock investments in U.S.
and foreign companies ranging in size from small to large corporations. The methodologies for determining the fair values of the
plan assets are outlined below. Where the values are based on quoted prices for the securities in an active market, they are classified
as Level 1 of the fair value hierarchy. Where secondary pricing sources are used, they are classified as Level 2 of the hierarchy.
Pricing models that use significant unobservable inputs are classified as Level 3.
• Domestic and international equity securities:
Common stock: Shares of equity securities invested in actively-traded mutual funds are valued based on the net asset
values of the units held in the respective funds which are determined by obtaining quoted prices on nationally recognized
securities exchanges. Direct investment in shares of common stock 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.
These securities are classified as Level 1.
Commingled funds and common collective trusts: These assets are valued at the net asset values of shares held 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 and are classified as
Level 2. These investment vehicles hold equity securities and cash.
•
Fixed income securities: Fixed income investments that are held through mutual funds are valued based on the net asset
values of the units held in the respective funds, which are determined by obtaining quoted prices on nationally recognized
securities exchanges. These securities are classified as Level 1. Other fixed income investments are valued at an
estimated price that a dealer would pay for a similar security on the valuation date using observable market inputs and
are classified as Level 2. These market inputs may include yield curves for similarly rated securities. Small amounts
of cash are held in common collective trusts. Fixed income securities also include insurance assets, which are valued
based on an actuarial calculation. Those securities are classified as Level 3.
• Alternative investments: Real estate assets are valued using valuation models that incorporate income and market
approaches, including external appraisals, to derive fair values. The hedge fund allocation is a fund of hedge funds
and is valued by the manager based on the net asset value of each fund. These models use significant unobservable
inputs and are classified as Level 3 within the fair value hierarchy.
72
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Fair values of the assets of the Company’s pension plans as of March 31, 2013 and 2012, classified based on how their
values were determined under the fair value hierarchy are as follows:
March 31, 2013
Level 1
Level 2
Level 3
Total
Domestic equity securities ........................................................................................ $
83,233
$
International equity securities ...................................................................................
Fixed income securities (1) .......................................................................................
Alternative investments:
Real estate fund......................................................................................................
Hedge fund.............................................................................................................
23,931
61,553
—
—
— $
—
10,300
—
—
— $
—
7,435
8,933
10,557
83,233
23,931
79,288
8,933
10,557
Total investments ................................................................................................ $
168,717
$
10,300
$
26,925
$
205,942
March 31, 2012
Level 1
Level 2
Level 3
Total
Domestic equity securities......................................................................................... $
26,025
$
55,420
$
— $
International equity securities ...................................................................................
(1) .......................................................................................
Fixed income securities
Alternative investments:
Real estate fund ......................................................................................................
Hedge fund .............................................................................................................
20,935
21,470
—
—
—
51,708
—
—
—
6,083
8,358
9,526
81,445
20,935
79,261
8,358
9,526
Total investments................................................................................................. $
68,430
$
107,128
$
23,967
$
199,525
(1)
Includes high yield securities and cash and cash equivalent balances.
During fiscal year 2013, the Company retained an investment manager for the assets of the Company's U.S. ERISA-regulated
defined benefit plan, and a higher percentage of assets are now held in actively traded funds with quoted prices. As a result, the
proportion of assets classified as Level 1 is significantly higher than at March 31, 2012.
Other Benefit Plans
Universal and several subsidiaries offer employer defined contribution savings plans. Amounts charged to expense for
these plans were approximately $1.5 million for fiscal year 2013, $1.1 million for fiscal year 2012, and $1.3 million for fiscal year
2011.
73
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE 12. COMMON AND PREFERRED STOCK
Common Stock
At March 31, 2013, the Company’s shareholders had authorized 100,000,000 shares of its common stock, and 23,343,973
shares were issued and outstanding. Holders of the common stock are entitled to one vote for each share held on all matters requiring
a vote. Holders of the common stock are also entitled to receive dividends when, as, and if declared by the Company’s Board of
Directors. The Board of Directors customarily declares and pays regular quarterly dividends on the outstanding common shares;
however, such dividends are at the Board’s full discretion, and there is no obligation to continue them. If dividends on the Company’s
Series B 6.75% Convertible Perpetual Preferred Stock (the “Preferred Stock” or “Preferred Shares”) are not declared and paid for
any dividend period, then the Company may not pay dividends on the common stock or repurchase common shares until the dividends
on the Preferred Stock have been paid for a period of four consecutive quarters.
Universal’s Board of Directors has authorized programs to repurchase outstanding shares of the Company’s common stock.
Under these programs, the Company has made and may continue to make share repurchases from time to time in the open market
or in privately negotiated transactions at prices not exceeding prevailing market rates. In November 2009, Universal’s Board of
Directors authorized a program (the “2009 program”) to repurchase up to $150 million of the Company’s outstanding common shares.
The Company completed purchases of shares under this program, and it was terminated in November 2011. A total of 1,589,701
shares of common stock were repurchased under the 2009 program at a total cost of approximately $70 million (average price per
share of $44.02). In November 2011, the Board of Directors authorized a program to repurchase up to $100 million of the Company’s
outstanding common shares (the “2011 program”). It expires on November 15, 2013. To date, the Company has purchased 169,432
shares of common stock under the 2011 program at an aggregate cost of $8.6 million (average price per share of $50.94), all during
fiscal year 2013. At March 31, 2013, the available authorization for future share repurchases under the 2011 program was
approximately $91 million.
Total share repurchases for the fiscal years ended March 31, 2013, 2012, and 2011 were as follows:
Fiscal Year Ended March 31,
2013
2012
2011
Number of shares repurchased.................................................................................................................
169,432
80,191
1,113,125
Cost of shares repurchased (in thousands of dollars)............................................................................... $
Weighted-average cost per share.............................................................................................................. $
8,631
50.94
$
$
3,488
43.49
$
$
46,696
41.95
Preferred Stock
The Company is also authorized to issue up to 5,000,000 shares of preferred stock, 500,000 shares of which have been
reserved for Series A Junior Participating Preferred Stock and 220,000 shares of which have been reserved for Series B 6.75%
Convertible Perpetual Preferred Stock. No Series A Junior Participating Preferred Stock has been issued. In 2006, 220,000 shares
of Series B 6.75% Convertible Perpetual Preferred Stock (the “Preferred Stock” or “Preferred Shares”) were issued under this
authorization. At March 31, 2013, 219,999 shares were issued and outstanding. 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.
74
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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, 2013, was 21.8475 shares of common stock per preferred share, which represents a conversion price
of approximately $45.77 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 135.00% of the then prevailing conversion price. With this conversion, the
Company may, at its option, satisfy all or part of the conversion value in cash in lieu of delivering shares. 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 13. EXECUTIVE STOCK PLANS AND STOCK-BASED COMPENSATION
Executive Stock Plans
The Company’s shareholders have approved executive stock plans under which officers, directors, and employees of the
Company may receive grants and awards of common stock, restricted stock, restricted stock units (“RSUs”), performance share
awards (“PSAs”), stock appreciation rights (“SARs”), incentive stock options, and non-qualified stock options. Currently, grants
are outstanding under the 1997 Executive Stock Plan, the 2002 Executive Stock Plan, and the 2007 Stock Incentive Plan. Together,
these plans are referred to in this disclosure as the “Plans.” Up to 2 million shares of the Company’s common stock may be issued
under each of the Plans; however, direct awards of common stock, restricted stock, or RSUs are limited to 500,000 shares under the
2002 Executive Stock Plan and 1,350,000 shares under the 2007 Stock Incentive Plan.
The Company’s practice is to award grants of stock-based compensation to officers at the first regularly-scheduled meeting
of the Executive Compensation, Nominating, and Corporate Governance Committee of the Board of Directors (the “Compensation
Committee”) in the fiscal year following the public release of the Company’s financial results for the prior year. Since fiscal year
2006, grants have included restricted stock, RSUs, PSAs, and stock-settled SARs. In the current fiscal year, the Compensation
Committee awarded only grants of RSUs and PSAs and did not award any grants of 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, 2013.
Outside directors automatically receive restricted stock units or shares of restricted stock following each annual meeting of
shareholders.
Non-qualified stock options and SARs granted under the Plans have an exercise price equal to the market price of a share
of common stock on the date of grant. All stock options currently outstanding under the Plans are fully vested and exercisable, and
they expire 10 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 10 years after the grant date, except that SARs granted after fiscal year 2007 expire on the earlier of
3 years after the grantee’s retirement date or 10 years after the grant date. RSUs awarded under the Plans vest 5 years from the grant
date and are then paid out in shares of common stock. Under the terms of the RSU awards, grantees receive dividend equivalents
in the form of additional RSUs that vest and are paid out on the same date as the original RSU grant. The PSAs vest 3 years from
the grant date, are paid out in shares of common stock at the vesting date, and do not carry rights to dividends or dividend equivalents
prior to vesting. Shares ultimately paid out under PSA grants are dependent on the achievement of predetermined performance
measures established by the Compensation Committee and can range from zero to 150% of the stated award. RSUs awarded to
outside directors vest 3 years after the grant date, and restricted stock vests upon the individual’s retirement from service as a director.
75
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Stock Options and SARs
The following tables summarize the Company’s stock option and SAR activity and related information for fiscal years 2011
through 2013:
Weighted-
Average
Exercise
Price
Weighted-
Average
Contractual
Term
(in years)
Aggregate
Intrinsic
Value
Shares
Fiscal Year Ended March 31, 2011:
Outstanding at beginning of year .............................................................................
831,798
$
Granted .....................................................................................................................
Cancelled/expired.....................................................................................................
Outstanding at end of year........................................................................................
153,600
(62,800)
922,598
Fiscal Year Ended March 31, 2012:
Granted .....................................................................................................................
170,400
Exercised ..................................................................................................................
(195,948)
Cancelled/expired.....................................................................................................
Outstanding at end of year........................................................................................
(41,200)
855,850
Fiscal Year Ended March 31, 2013:
Exercised ..................................................................................................................
(407,758)
Cancelled/expired.....................................................................................................
(29,615)
Outstanding at end of year........................................................................................
418,477
$
Exercisable at end of year ........................................................................................
Expected to vest in future periods ............................................................................
270,201
148,276
$
$
48.36
39.71
62.66
45.94
37.86
35.82
59.25
46.01
41.21
54.83
50.07
56.48
38.39
5.29
$
3,617
3.85
7.92
$
$
999
2,618
Total intrinsic value of stock options and SARs exercised ...................................................................... $
Total fair value of SARs vested................................................................................................................ $
Fiscal Year Ended March 31,
2013
2012
2011
4,249
1,460
$
$
1,745
1,713
$
$
—
1,849
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: $56.04 at
March 31, 2013, $46.60 at March 31, 2012, and $43.54 at March 31, 2011.
76
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
RSUs, Restricted Stock, and PSAs
The following table summarizes the Company’s RSU, restricted stock, and PSA activity for fiscal years 2011 through 2013:
RSUs
Restricted Stock
PSAs
Weighted-
Average
Grant Date
Fair Value
Weighted-
Average
Grant Date
Fair Value
Weighted-
Average
Grant Date
Fair Value
Shares
Shares
Shares
Fiscal Year Ended March 31, 2011:
Unvested at beginning of year ..................
207,764
$
Granted......................................................
Vested........................................................
Unvested at end of year.............................
Fiscal Year Ended March 31, 2012:
Granted......................................................
Vested........................................................
Forfeited....................................................
63,992
(24,940)
246,816
84,290
(39,827)
—
Unvested at end of year.............................
291,279
Fiscal Year Ended March 31, 2013:
Granted......................................................
Vested........................................................
Forfeited....................................................
87,780
(86,925)
—
Unvested at end of year.............................
292,134
$
32.50
41.40
46.35
44.07
38.28
35.94
—
43.72
44.06
52.42
—
41.23
84,750
$
—
(7,000)
77,750
—
(10,350)
—
67,400
—
(7,550)
—
59,850
$
40.87
—
41.96
40.77
—
37.52
—
41.91
—
43.74
—
41.68
93,019
$
38,400
—
131,419
57,383
(44,352)
(1,984)
142,466
92,425
(94,725)
(5,149)
135,017
$
34.85
33.95
—
34.59
35.56
45.96
33.30
31.45
35.25
29.67
36.15
35.12
Shares granted and vested in the above table include dividend equivalents on RSUs and any shares awarded above the base
grant under the performance provisions of PSAs. Shares forfeited or canceled include any reductions from the base PSA grant under
those same performance provisions.
77
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Stock-Based Compensation Expense
Determination of the Grant Date Fair Value of Stock-Based Compensation
As noted above, the Company granted RSUs, restricted stock, and PSAs during fiscal years 2011 through 2013, and SARs
were granted in fiscal years 2011 and 2012. The fair values of the RSUs, restricted stock, and PSAs were 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 Year Ended March 31,
2012
2011
Assumptions:
Expected term ....................................................................................................................................................................
5.0 years
Expected volatility .............................................................................................................................................................
35.80%
Expected dividend yield.....................................................................................................................................................
Risk-free interest rate.........................................................................................................................................................
5.07%
1.66%
Resulting fair value of SARs granted.....................................................................................................................................
$7.46
5.0 years
35.30%
4.73%
2.36%
$8.35
The expected term was based on the Company’s historical stock option and SAR 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 in fiscal
years 2011 and 2012 were awarded on the same date, the fair values shown in the above table represent the weighted-average grant
date fair values for those years.
Recognition 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, 2013, 2012, and 2011, total stock-based compensation expense and the related income tax
benefit recognized were as follows:
Total stock-based compensation expense ................................................................................................. $
Income tax benefit recorded on stock-based compensation expense........................................................ $
Fiscal Year Ended March 31,
2013
2012
2011
6,171
2,160
$
$
5,987
2,095
$
$
5,893
2,063
At March 31, 2013, the Company had $5.1 million of unrecognized compensation expense related to stock-based awards,
which will be recognized over a weighted-average period of approximately 1.3 years. Cash proceeds from the exercise of stock
options were $3.9 million for the fiscal year ended March 31, 2013, and were not material for the fiscal years ended March 31, 2012
or 2011.
78
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE 14. 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.
Most contracts cover one annual growing season. Primarily with the farmer contracts in Brazil, Malawi, Mozambique, Zambia, the
Philippines, Guatemala, and Mexico, the Company provides seasonal financing to support the farmers’ production of their crops or
guarantees their financing from third-party banks. At March 31, 2013, the Company had contracts to purchase approximately $792
million of tobacco 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 $132 million at
March 31, 2013. 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 noted above and discussed in more detail below, the Company also has
arrangements to guarantee bank loans to farmers in Brazil and Malawi, and payments are also withheld on delivery of tobacco to
satisfy repayment of those loans. In addition to its contractual obligations to purchase tobacco, the Company had commitments
related to agricultural materials, approved capital expenditures, and various other requirements that approximated $73 million at
March 31, 2013.
Guarantees and Other Contingent Liabilities
Guarantees of bank loans to growers for crop financing and construction of curing barns or other tobacco producing assets
have long been industry practice in Brazil and support the farmers’ production of tobacco there. During fiscal year 2013, similar
arrangements were established in Malawi in connection with a shift from auction market sourcing to direct procurement in that
country. At March 31, 2013, the Company’s total exposure under guarantees issued by its operating subsidiaries for banking facilities
of farmers in Brazil and Malawi was approximately $16 million ($20 million face amount including unpaid accrued interest, less $4
million recorded for the fair value of the guarantees). All of these guarantees expire within one year. As noted above, the subsidiaries
withhold payments due to the farmers on delivery of tobacco and forward those payments to the third-party banks. Failure of farmers
to deliver sufficient quantities of tobacco to the subsidiaries to cover their obligations to the third-party banks could result in a liability
for the subsidiaries under the related guarantees; however, in that case, the subsidiaries would have recourse against the farmers.
The maximum potential amount of future payments that the Company’s subsidiaries could be required to make at March 31, 2013,
was the face amount, $20 million including unpaid accrued interest ($26 million as of March 31, 2012). The fair value of the
guarantees was a liability of approximately $4 million at March 31, 2013, and $6 million at March 31, 2012. In addition to these
guarantees, the Company has other contingent liabilities totaling approximately $3 million at March 31, 2013.
Major Customers
A material part of the Company’s business is dependent upon a few customers. The Company's five largest customers are
Philip Morris International, Inc., Imperial Tobacco Group, PLC, China Tobacco International, Inc., British American Tobacco, PLC,
and Japan Tobacco, Inc. In the aggregate, these customers have accounted for more than 60% of consolidated revenue for each of
the past three fiscal years. For the fiscal years ended March 31, 2013, 2012 and 2011, revenue from Philip Morris International, Inc.
was approximately $550 million, $610 million, and $750 million, respectively. For the same periods, Imperial Tobacco Group, PLC
accounted for revenue of approximately $330 million, $360 million, and $320 million, respectively, and Japan Tobacco, Inc. accounted
for revenue of approximately $200 million, $210 million, and $340 million, respectively. These customers primarily do business
with various affiliates in the Company’s flue-cured and burley leaf tobacco operations. The loss of, or substantial reduction in
business from, any of these customers could have a material adverse effect on the Company.
79
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 $8.0 million and $8.3 million at
March 31, 2013 and 2012, respectively. At March 31, 2013 and 2012, net accounts receivable by reportable operating segment were
as follows:
March 31,
2013
2012
Flue-cured and burley leaf tobacco operations:
North America...................................................................................................................................................................... $
56,256 $
44,802
Other regions........................................................................................................................................................................
Subtotal............................................................................................................................................................................
Other tobacco operations..........................................................................................................................................................
297,615
353,871
47,876
310,489
355,291
35,499
Consolidated accounts receivable, net...................................................................................................................................... $
401,747 $
390,790
Sale of Property in Brazil
During fiscal year 2012, the Company sold land and buildings in Brazil that were formerly used for processing, storage,
and office activities in exchange for $9.4 million in cash and two warehouses having an aggregate fair value of approximately $11.2
million. The transaction resulted in a gain of $11.1 million, which is reported in other income in the consolidated statement of
income. In the consolidated statement of cash flows, the cash proceeds received in the transaction are included in proceeds from the
sale of property, plant, and equipment in cash flows from investing activities. The fair value of the warehouses received was excluded
from the statement of cash flows since it was non-cash consideration.
Fire Loss Insurance Settlement
In the early part of fiscal year 2012, an operating subsidiary of the Company in Europe completed settlement of an insurance
claim related to a fire in 2010 that destroyed a portion of its facility and temporarily suspended factory operations. The Company
and its subsidiary maintained general liability, business interruption, and replacement cost property insurance coverage on the facility.
As part of the final settlement, the subsidiary received approximately $9.9 million of insurance proceeds to cover the cost of
reconstructing the damaged portion of the facility and replacing equipment that was destroyed in the fire. A gain of approximately
$9.6 million was recorded on the involuntary conversion of those assets and is reported in other income in the consolidated statement
of income. In addition, the subsidiary received insurance proceeds totaling approximately $6.9 million for business interruption
related to the fire. Approximately $4.8 million of the business interruption recovery was recognized in earnings in fiscal year 2011,
and the remaining $2.1 million was recognized in fiscal year 2012. In the consolidated statement of cash flows, the insurance proceeds
attributable to the property and equipment destroyed in the fire are reported in cash flows from investing activities. All other insurance
proceeds received during fiscal year 2011 or with the final claim settlement in fiscal year 2012 have been reported in cash flows
from operating activities. Reconstruction of the facility was completed and the factory returned to full operations during the first
quarter of fiscal year 2012.
80
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Assignment of Farmer Contracts and Sale of Related Assets in Brazil
During fiscal year 2011, Universal’s operating subsidiary in Brazil completed the assignment of tobacco production contracts
with approximately 8,100 farmers to Philip Morris Brasil Industria e Comercio (“PMB”), a subsidiary of Philip Morris International
(“PMI”). As part of the transaction, PMB acquired various related assets, including seasonal crop advances outstanding from the
farmers. PMB also assumed the Company’s obligations under guarantees of bank loans to the farmers for crop financing.
Subsequently, the Company also entered into an agreement to process tobaccos bought directly by PMB from farmers beginning
with the 2011 crop year. In addition, the Company continues to sell processed leaf from Brazil to PMI and its subsidiaries. The
Company received total cash proceeds of approximately $34.9 million from the assignment of farmer contracts and sale of related
assets in fiscal year 2011 and recorded a gain of approximately $19.4 million, which was reported in other income in the consolidated
statement of income. The determination of the gain included approximately $5.8 million of goodwill associated with the activities
conveyed.
Statutory Severance and Pension Obligations in Malawi
In fiscal year 2008, the Company’s operating subsidiary in Malawi recorded a charge to accrue statutory severance obligations
based on court rulings that found the severance benefits payable to employees upon retirement, death, involuntary termination, or
termination by mutual agreement under the Malawi Employment Act of 2000, even in cases where employees are covered by a
company-sponsored pension benefit. Because the effect of the court rulings was to entitle some employees to both private pension
benefits and statutory severance benefits in cases of normal retirement, some of the rulings were appealed to higher courts. During
the first quarter of fiscal year 2012, new Employment and Pension legislation was enacted into law in Malawi. The new legislation
changed prior law related to statutory severance benefits by eliminating the requirement to pay those benefits to employees in cases
of normal retirement. At the same time, the legislation created a new requirement to provide pension benefits to employees who
meet specified service criteria. The pension benefit to which employees are entitled under the new law is generally equivalent to
the accumulated statutory severance benefit under the old law, but it considers any pension or gratuity benefits previously or currently
provided to employees under a company’s private pension programs. The Company’s operating subsidiary in Malawi has historically
provided pension and gratuity payments to specified employee groups that reduce or offset the pension obligations provided under
the new law. The Malawi subsidiary accounted for the enactment of the new legislation in its financial statements during the first
quarter of fiscal year 2012 by reversing approximately $4 million of the statutory severance liability no longer required under the
new law.
81
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE 15. OPERATING SEGMENTS
Universal’s operations involve selecting, procuring, processing, packing, storing, shipping, and financing leaf tobacco for
sale to, or for the account of, manufacturers of consumer tobacco products throughout the world. Through various operating
subsidiaries located in tobacco-growing countries around the world and significant ownership interests in unconsolidated affiliates,
the Company processes and/or sells flue-cured and burley tobaccos, dark air-cured tobaccos, and oriental tobaccos. Flue-cured,
burley, and oriental tobaccos are used principally in the manufacture of cigarettes, and dark air-cured tobaccos are used mainly in
the manufacture of cigars, pipe tobacco, and smokeless tobacco products. A substantial portion of the Company’s revenues are
derived from sales to a limited number of large, multinational cigarette manufacturers.
The principal approach used by management to evaluate the Company’s performance is by geographic region, although the
dark air-cured and oriental tobacco businesses are each evaluated on the basis of their worldwide operations. Oriental tobacco
operations consist principally of a 49% interest in an affiliate, and the performance of those operations is evaluated based on the
Company’s equity in the pretax earnings of that affiliate. Under this structure, the Company has the following primary operating
segments: North America, South America, Africa, Europe, Asia, Dark Air-Cured, Oriental, and Special Services. North America,
South America, Africa, Europe, and Asia are primarily involved in flue-cured and/or burley leaf tobacco operations for supply to
cigarette manufacturers. The Dark Air-Cured group supplies dark air-cured tobacco principally to manufacturers of cigars, pipe
tobacco, and smokeless tobacco products, and the Oriental business supplies oriental tobacco to cigarette manufacturers. From time
to time, the segments may trade in tobaccos that differ from their main varieties, but those activities are not significant to their overall
results. Special Services provides laboratory services, including physical and chemical product testing and smoke testing for
customers.
The five regional operating segments serving the Company’s cigarette manufacturer customer base share similar
characteristics in the nature of their products and services, production processes, class of customer, product distribution methods,
and regulatory environment. Based on the applicable accounting guidance, four of the regions – South America, Africa, Europe,
and Asia – are aggregated into a single reporting segment, “Other Regions”, because they also have similar economic characteristics.
North America is reported as an individual operating segment because its economic characteristics differ from the other regions,
generally because its operations require lower working capital investments for crop financing and inventory. The Dark Air-Cured,
Oriental and Special Services segments, which have dissimilar characteristics in some of the categories mentioned above, are reported
together as “Other Tobacco Operations” because each is below the measurement threshold for separate reporting.
Universal incurs overhead expenses related to senior management, 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.
82
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Reportable segment data as of or for the fiscal years ended March 31, 2013, 2012, and 2011, is as follows:
Sales and Other Operating Revenues
Operating Income
Fiscal Year Ended March 31,
Fiscal Year Ended March 31,
2013
2012
2011
2013
2012
2011
334,676
$
314,248
$
340,366
$
19,740
$
30,037
$
59,278
Flue-cured and burley leaf tobacco operations:
North America.................................................. $
Other Regions (1) .............................................
Subtotal........................................................
Other Tobacco Operations (2) ...............................
1,871,880
1,893,388
1,944,410
2,206,556
2,207,636
2,284,776
255,143
239,241
286,751
Segment total........................................................
2,461,699
2,446,877
2,571,527
Deduct:
Equity in pretax earnings of unconsolidated
affiliates (3) .................................................
Restructuring and impairment costs (4) ...........
(Charge for) reversal of European
(4) .................................
Commission fines
Add:
Other income (4) ..............................................
192,556
212,296
20,461
232,757
180,670
210,707
12,841
223,548
169,989
229,267
28,658
257,925
(5,635)
(4,113)
(3,195)
(11,661)
(8,634)
(21,504)
—
—
(49,091)
7,445
20,703
19,368
Consolidated total................................................. $
2,461,699
$
2,446,877
$
2,571,527
$
223,009
$
180,304
$
254,600
Segment Assets
March 31,
Goodwill
March 31,
2013
2012
2011
2013
2012
2011
Flue-cured and burley leaf tobacco operations:
North America.................................................. $
Other Regions (1) .............................................
Subtotal........................................................
Other Tobacco Operations (2) ...............................
295,785
$
256,546
$
289,950
$
— $
— $
1,682,581
1,712,970
1,612,558
1,978,366
1,969,516
1,902,508
327,789
297,403
325,359
96,667
96,667
1,713
96,564
96,564
1,713
—
96,543
96,543
1,713
Segment and consolidated totals .......................... $
2,306,155
$
2,266,919
$
2,227,867
$
98,380
$
98,277
$
98,256
Depreciation and Amortization
Capital Expenditures
Fiscal Year Ended March 31,
Fiscal Year Ended March 31,
2013
2012
2011
2013
2012
2011
Flue-cured and burley leaf tobacco operations:
North America.................................................. $
Other Regions (1) .............................................
Subtotal........................................................
(2) ..............................
Other Tobacco Operations
11,017
$
10,201
$
11,866
$
2,459
$
438
$
30,118
41,135
3,981
29,475
39,676
4,190
28,541
40,407
4,865
24,886
27,345
3,438
32,059
32,497
5,677
3,080
34,324
37,404
1,725
Segment and consolidated totals .......................... $
45,116
$
43,866
$
45,272
$
30,783
$
38,174
$
39,129
(1)
(2)
(3)
(4)
Includes South America, Africa, Europe, and Asia regions, as well as inter-region eliminations.
Includes Dark Air-Cured, Oriental and Special Services, as well as inter-company eliminations. Oriental does not contribute significantly to the reported amounts
for sales and other operating revenues, goodwill, depreciation and amortization, or capital expenditures because its financial results consist principally of equity
in the pretax earnings of an unconsolidated affiliate. The investment in the unconsolidated affiliate is included in segment assets and was approximately
$91.8 million, $89.7 million, and $110.8 million, at March 31, 2013, 2012, and 2011, respectively.
Item is included in segment operating income, but is not included in consolidated operating income.
Item is not included in segment operating income, but is included in consolidated operating income.
83
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Geographic data as of, or for, the fiscal years ended March 31, 2013, 2012, and 2011, is presented below. Sales and other
operating revenues are attributed to individual countries based on the final destination of the shipment. Long-lived assets generally
consist of net property, plant, and equipment, goodwill, and other intangibles.
Geographic Data
Sales and Other Operating Revenues
Fiscal Year Ended March 31,
2013
2012
2011
United States............................................................................................................................................. $
324,285
$
315,610
$
340,313
Belgium ....................................................................................................................................................
China ........................................................................................................................................................
Germany ...................................................................................................................................................
203,539
229,112
128,144
210,425
210,436
210,791
345,774
168,309
267,087
All other countries ....................................................................................................................................
1,576,619
1,499,615
1,450,044
Consolidated total..................................................................................................................................... $
2,461,699
$
2,446,877
$
2,571,527
Long-Lived Assets
Fiscal Year Ended March 31,
2013
2012
2011
United States............................................................................................................................................. $
67,085
$
75,330
$
88,910
Brazil ........................................................................................................................................................
Mozambique.............................................................................................................................................
All other countries ....................................................................................................................................
137,133
48,016
134,282
139,484
50,475
137,169
141,535
53,854
131,950
Consolidated total..................................................................................................................................... $
386,516
$
402,458
$
416,249
84
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE 16. UNAUDITED QUARTERLY FINANCIAL DATA
Unaudited quarterly financial data for the fiscal years ended March 31, 2013 and 2012, is provided in the table below. Due
to the seasonal nature of the Company's business, management believes it is generally more meaningful to focus on cumulative rather
than quarterly results.
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Fiscal Year Ended March 31, 2013
Sales and other operating revenues........................................................................... $
461,391
$
675,187
$
680,029
$
645,092
Gross profit ...............................................................................................................
Net income ................................................................................................................
Net income attributable to Universal Corporation....................................................
Earnings available to Universal Corporation common shareholders after
dividends on convertible perpetual preferred stock................................................
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.......................................................................................................................
92,030
25,233
23,125
138,049
49,286
47,981
125,441
106,897
39,715
35,542
26,685
26,102
19,413
44,268
31,830
22,389
0.83
0.81
16.88
0.49
47.40
44.08
1.89
1.68
16.87
0.49
51.10
44.03
1.36
1.25
16.88
0.50
52.25
45.62
0.96
0.92
16.87
0.50
58.36
51.29
Fiscal Year Ended March 31, 2012
Sales and other operating revenues........................................................................... $
479,465
$
641,026
$
672,420
$
653,966
Gross profit ...............................................................................................................
Net income (loss) ......................................................................................................
Net income (loss) attributable to Universal Corporation..........................................
Earnings (loss) available to Universal Corporation common shareholders after
dividends on convertible perpetual preferred stock................................................
Earnings (loss) per share attributable to Universal Corporation common
shareholders:
Basic .....................................................................................................................
Diluted ..................................................................................................................
Cash dividends declared per share of convertible perpetual preferred stock............
Cash dividends declared per share of common stock ...............................................
Market price range of common stock:
High ......................................................................................................................
Low.......................................................................................................................
94,358
17,322
15,888
119,426
147,105
111,103
(7,997)
(8,039)
61,602
58,453
29,892
25,755
12,176
(11,752)
54,741
22,042
0.52
0.52
16.88
0.48
45.72
36.94
(0.51)
(0.51)
16.87
0.48
41.48
35.11
2.36
2.06
16.88
0.49
47.38
35.78
0.95
0.91
16.87
0.49
48.60
44.88
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.
85
UNIVERSAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Significant items included in the quarterly results were as follows:
• Second Quarter 2013 – restructuring costs of approximately $3.7 million primarily related to workforce reductions in the
Company’s operations in Africa. The restructuring costs reduced net income attributable to Universal Corporation by $1.5 million
and diluted earnings per share by $0.05.
• First Quarter 2012 – restructuring costs of $6.9 million that included approximately $3.8 million for employee termination benefits,
primarily related to the Company’s U.S. operations, and $3.1 million of costs incurred to exit a supplier arrangement in Europe
in response to market changes. The restructuring costs reduced net income attributable to Universal Corporation by $4.4 million
and diluted earnings per share by $0.19. The Company also recorded a $9.6 million gain on insurance settlement proceeds to
replace factory and equipment lost in a fire at a plant in Europe. The gain on insurance settlement proceeds increased net income
attributable to Universal Corporation by $6.2 million and diluted earnings per share by $0.27.
• Second Quarter 2012 – restructuring costs of $3.0 million primarily related to voluntary and involuntary terminations in the
Company’s operations in the U.S. and South America that reduced net income attributable to Universal Corporation by $1.9
million and diluted earnings per share by $0.08. In addition, the Company recorded a charge of $49.1 million to accrue a fine
and accumulated interest imposed jointly on the Company and Deltafina, S.p.A. (“Deltafina”), its Italian subsidiary, by the
European Commission related to tobacco buying practices in Italy. The charge reflected a September 2011 appeals court decision
rejecting Deltafina’s application to reinstate its immunity in the case. The charge reduced net income attributable to Universal
Corporation by $46.2 million and diluted earnings per share by $1.85. Deltafina has appealed the September 2011 appeals court
decision to the next court level.
• Third Quarter 2012 – a gain of $11.1 million on the sale of land and buildings in Brazil that were most recently used for storage
activities. The gain increased net income attributable to Universal Corporation by $7.2 million and diluted earnings per share
by $0.25.
• Fourth Quarter 2012 – restructuring costs of approximately $1.4 million primarily related to voluntary and involuntary separations
in various locations. The restructuring costs reduced net income attributable to Universal Corporation by $0.9 million and diluted
earnings per share by $0.03.
86
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of
Universal Corporation
We have audited the accompanying consolidated balance sheets of Universal Corporation as of March 31, 2013 and 2012, and the
related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the
three years in the period ended March 31, 2013. Our audits also included the financial statement schedule listed in the Index at Item
15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position
of Universal Corporation at March 31, 2013 and 2012, and the consolidated results of its operations and its cash flows for each of
the three years in the period ended March 31, 2013, in conformity with U.S. generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Universal
Corporation’s internal control over financial reporting as of March 31, 2013, 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 24, 2013 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Richmond, Virginia
May 24, 2013
87
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm,
on Internal Control Over Financial Reporting
The Board of Directors and Shareholders of
Universal Corporation
We have audited Universal Corporation’s internal control over financial reporting as of March 31, 2013, 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, 2013, 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, 2013 and 2012, and the related consolidated statements of
income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended
March 31, 2013 and our report dated May 24, 2013 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Richmond, Virginia
May 24, 2013
88
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
For the three years ended March 31, 2013, there were no changes in independent auditors, nor were there any disagreements
between the Company and its independent auditors on any matter of accounting principles, practices, or financial disclosures.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be
disclosed in reports filed by the Company under the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SEC rules and forms and that such information is accumulated and communicated to the Company’s
management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding
required disclosure. The Company’s Chief Executive Officer and Chief Financial Officer evaluated, with the participation of the
Company’s management, the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rule
13a-15(e)), as of the end of the period covered by this Annual Report. Based on this evaluation, the Company’s management, including
its Chief Executive Officer and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were
effective.
Management’s Report on Internal Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining effective internal control over financial
reporting as defined in Rule 13a-15(f) under the Exchange Act. The Company’s internal control over financial reporting is designed
to provide reasonable assurance to management and the Board of Directors regarding the preparation and fair presentation of the
consolidated financial statements. Due to inherent limitations, internal control over financial reporting may not prevent or detect all
errors or misstatements in the financial statements, and even control procedures that are determined to be effective can provide only
reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions.
As required by Exchange Act Rule 13a-15(c), the Company’s Chief Executive Officer and Chief Financial Officer, with
the participation of other members of management, assessed the effectiveness of the Company’s internal control over financial
reporting as of March 31, 2013. 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,
2013.
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, 2013. Their report on this audit appears on page 88 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.
89
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
2013 Proxy Statement.
The following are executive officers of the Company as of May 24, 2013:
Name and Age
G. C. Freeman, III (50) Chairman, President and
Chief Executive Officer
Position
W. K. Brewer (54)
Executive Vice President and
Chief Operating Officer
D. C. Moore (57)
Senior Vice President and
Chief Financial Officer
T. G. Broome (59)
Executive Vice President and
Sales Director, Universal
Leaf Tobacco Company, Inc.
P. D. Wigner (44)
Vice President, General
Counsel and Secretary
J. A. Huffman (51)
Senior Vice President,
Information and Planning,
Universal Leaf Tobacco
Company, Inc.
Business Experience During Past Five Years
Mr. Freeman was elected Chairman of the Board in August 2008, Chief
Executive Officer effective April 2008, President in December 2006,
and Vice President in November 2005. Mr. Freeman served as General
Counsel and Secretary from February 2001 until November 2005 and
has been employed with the Company since 1997.
Mr. Brewer was elected Executive Vice President and Chief Operating
Officer in August 2008, Vice President of Universal Corporation in
August 2007, and Executive Vice President of Universal Leaf Tobacco
Company, Incorporated (“Universal Leaf”) in March 2006. Mr. Brewer
served as President of Universal Leaf North America U.S., Inc. from
January 2002 until March 2006. He has been employed with the
Company since 1977.
Mr. Moore was elected Senior Vice President and Chief Financial
Officer effective September 2008. Mr. Moore served as Vice President
and Chief Administrative Officer from April 2006 until September
2008, as Senior Vice President of Universal Leaf from September 2005
until April 2006, and as Managing Director of Universal Leaf
International SA from April 2002 until September 2005. He has been
employed with the Company since 1978.
Mr. Broome was elected Executive Vice President and Sales Director,
Universal Leaf, in October 2012. From April 2011 through October
2012, Mr. Broome served as Executive Vice President. From September
1998 through March 2011, Mr. Broome served as Senior Vice President-
Sales. He has been employed with the Company since 1994.
Mr. Wigner was elected Vice President in August 2007, and General
Counsel and Secretary in November 2005 and also served as Chief
Compliance Officer from November 2007 until September 2012. Mr.
Wigner served as Senior Counsel of Universal Leaf from November
2004 until November 2005. He has been employed with the Company
since 2003.
Mr. Huffman was elected Senior Vice President, Information and
Planning, Universal Leaf, in August 2007. From September 2003 to
August 2007, Mr. Huffman served as Senior Vice President. From
September 2002 to September 2003, Mr. Huffman served as Vice
President and Controller. He has been employed with the Company
since 1996.
C. C. Formacek (53)
R. M. Peebles (55)
Vice President and Treasurer Ms. Formacek was elected Vice President and Treasurer effective April
2012. Ms. Formacek served as Treasurer of Universal Leaf from April
2011 through March 2012. She joined the Company in September 2009
and served as Assistant Treasurer of Universal Leaf from that time
through March 2011. Ms. Formacek formerly served as Treasurer of
Chesapeake Corporation from January 2005 through July 2009.
Vice President and Controller Mr. Peebles was elected Vice President and Controller in April 2011.
Mr. Peebles joined the Company in September 2003 and served as
Controller from that time through March 2011.
There are no family relationships between any of the above officers.
90
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 2013 Proxy Statement and such information is incorporated by
reference herein.
Item 11. Executive Compensation
Refer to the captions “Executive Compensation” and “Directors’ Compensation” in the Company’s 2013 Proxy Statement,
which information is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Refer to the caption “Equity Compensation Information” in the Company’s 2013 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 2013 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 2013 Proxy Statement and such information is incorporated by reference
herein.
Item 14. Principal Accounting Fees and Services
Refer to the captions “Audit Information – Fees of Independent Auditors” and “Audit Information – Pre-Approval Policies
and Procedures” in the Company’s 2013 Proxy Statement, which information is incorporated herein by reference.
91
PART IV
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, 2013, 2012, and 2011
Consolidated Statements of Comprehensive Income for the Fiscal Years Ended March 31, 2013, 2012, and 2011
Consolidated Balance Sheets at March 31, 2013 and 2012
Consolidated Statements of Cash Flows for the Fiscal Years Ended March 31, 2013, 2012, and 2011
Consolidated Statements of Changes in Shareholders’ Equity for the Fiscal Years Ended March 31, 2013, 2012,
and 2011
Notes to Consolidated Financial Statements for the Fiscal Years Ended March 31, 2013, 2012, and 2011
Report of Ernst & Young LLP, Independent Registered Accounting Firm
Report of Ernst & Young LLP, Independent Registered Accounting Firm, on Internal Control Over Financial
Reporting
2. Financial Statement Schedules.
Schedule II – Valuation and Qualifying Accounts
3. Exhibits. The exhibits are listed in the Exhibit Index immediately following the signature pages to this 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.
92
Schedule II - Valuation and Qualifying Accounts
Universal Corporation
Fiscal Years Ended March 31, 2013, 2012, and 2011
Description
(in thousands of dollars)
Fiscal Year Ended March 31, 2011:
Allowance for doubtful accounts (deducted from accounts
receivable) ..........................................................................
$
Balance at
Beginning
of Period
Net
Additions
(Reversals)
Charged
to Expense
Additions
Charged
to Other
Accounts
Deductions (1)
Balance
at End
of Period
6,857
$
(681) $
— $
(573) $
5,603
Allowance for supplier accounts (deducted from advances
to suppliers and other noncurrent assets) ...........................
56,243
18,666
Allowance for recoverable taxes (deducted from other
current assets and other noncurrent assets) ........................
17,593
3,785
—
—
29
74,938
748
22,126
Fiscal Year Ended March 31, 2012:
Allowance for doubtful accounts (deducted from accounts
receivable) ..........................................................................
$
5,603
$
4,244
$
— $
(1,540) $
8,307
Allowance for supplier accounts (deducted from advances
to suppliers and other noncurrent assets) ...........................
74,938
11,929
Allowance for recoverable taxes (deducted from other
current assets and other noncurrent assets) ........................
22,126
2,564
—
—
(12,485)
74,382
29
24,719
Fiscal Year Ended March 31, 2013:
Allowance for doubtful accounts (deducted from accounts
receivable) ..........................................................................
$
8,307
$
1,788
$
— $
(2,127) $
7,968
Allowance for supplier accounts (deducted from advances
to suppliers and other noncurrent assets) ...........................
74,382
1,623
Allowance for recoverable taxes (deducted from other
current assets and other noncurrent assets) ........................
24,719
4,005
—
—
(21,612)
54,393
(2,680)
26,044
(1)
Includes direct write-offs of assets and currency remeasurement.
93
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
May 24, 2013
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
/s/ GEORGE C. FREEMAN, III
George C. Freeman, III
Title
Chairman, President, Chief Executive Officer, and Director
(Principal Executive Officer)
/s/ DAVID C. MOORE
David C. Moore
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
/s/ ROBERT M. PEEBLES
Robert M. Peebles
Vice President and Controller
(Principal Accounting Officer)
/s/ JOHN B. ADAMS, JR.
John B. Adams, Jr.
/s/ DIANA F. CANTOR
Diana F. Cantor
/s/ CHESTER A. CROCKER
Chester A. Crocker
/s/ CHARLES H. FOSTER, JR.
Charles H. Foster, Jr.
/s/ THOMAS H. JOHNSON
Thomas H. Johnson
/s/ EDDIE N. MOORE, JR.
Eddie N. Moore, Jr.
/s/ JEREMIAH J. SHEEHAN
Jeremiah J. Sheehan
/s/ ROBERT C. SLEDD
Robert C. Sledd
Director
Director
Director
Director
Director
Director
Director
Director
94
Date
May 24, 2013
May 24, 2013
May 24, 2013
May 24, 2013
May 24, 2013
May 24, 2013
May 24, 2013
May 24, 2013
May 24, 2013
May 24, 2013
May 24, 2013
EXHIBIT INDEX
3.1 Amended and Restated Articles of Incorporation, effective August 9, 2011 (incorporated herein by reference to the
Registrant’s Current Report on Form 8-K Registration Statement filed August 9, 2011, File No. 001-00652).
3.2 Amended and Restated Bylaws (as of August 3, 2010) (incorporated herein by reference to the Registrant’s Current
Report on Form 8-K dated August 3, 2010, File No. 001-00652).
4.1
Indenture between the Registrant and Chemical Bank, as trustee (incorporated herein by reference to the Registrant’s
Current Report on Form 8-K dated February 25, 1991, File No. 001-00652).
4.2 Specimen Common Stock Certificate (incorporated herein by reference to the Registrant’s Amendment No. 1 to
Registrant’s Form 8-A Registration Statement, dated May 7, 1999, File No. 001-00652).
4.3 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 Form of Universal Leaf Tobacco Company, Incorporated Executive Life Insurance Agreement (incorporated herein by
reference to the Registrant’s Annual Report on Form 10-K for the fiscal year ended June 30, 1994, File No. 001-00652).
10.2 Universal Leaf Tobacco Company, Incorporated Deferred Income Plan (incorporated herein by reference to the
Registrant’s Report on Form 8, dated February 8, 1991, File No. 001-00652).
10.3 Universal Leaf Tobacco Company, Incorporated Benefit Replacement Plan (incorporated herein by reference to the
Registrant’s Report on Form 8, dated February 8, 1991, File No. 001-00652).
10.4 Universal Leaf Tobacco Company, Incorporated 1994 Benefit Replacement Plan (incorporated herein by reference to
the Registrant’s Annual Report on Form 10-K for the fiscal year ended June 30, 1994, File No. 001-00652).
10.5 Universal Leaf Tobacco Company, Incorporated 1996 Benefit Restoration Plan (incorporated herein by reference to
the Registrant’s Annual Report on Form 10-K for the fiscal year ended June 30, 1998, File No. 001-00652).
10.6 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).
10.7 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).
10.8 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).
10.9 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).
10.10 Revised Form of Universal Corporation Non-Employee Director Restricted Stock Agreement (incorporated herein by
reference to the Registrant’s Current Report on Form 8-K dated June 9, 2010, File No. 001-00652).
10.11 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).
95
10.12 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).
10.13 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).
10.14 Universal Corporation 2002 Executive Stock Plan, as amended on August 7, 2003 (incorporated herein by reference
to the Registrant’s Annual Report on Form 10-K for the fiscal year ended June 30, 2003, file no. 001-00652).
10.15 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).
10.16 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).
10.17 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).
10.18 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).
10.19 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).
10.20 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).
10.21 Universal Corporation 2007 Amended and Restated Stock Incentive Plan effective August 7, 2012 (incorporated herein
by reference to Exhibit A to the Registrant’s definitive proxy statement filed June 28, 2012, File No. 001-00652).
10.22 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).
10.23 Form of Universal Corporation 2010 Restricted Stock Agreement with Schedule of Awards to named executive officers
(incorporated herein by reference to the Registrant's Annual Report on Form 10-K for the year ended March 31, 2010,
File No. 001-00652).
10.24 Form of Universal Corporation Stock Appreciation Rights Agreement for executive officers (incorporated herein by
reference to the Registrant's Annual Report on Form 10-K for the year ended March 31, 2010, File No. 001-00652).
10.25 Form of Universal Corporation Performance Share Award Agreement (incorporated herein by reference to the
Registrant's Annual Report on Form 10-K for the year ended March 31, 2010, File No. 001-00652).
10.26 Universal Leaf Tobacco Company, Incorporated Deferred Income Plan III, amended and restated as of December 31,
2008 (incorporated herein by reference to the Registrant's Annual Report on Form 10-K for the year ended March 31,
2010, File No. 001-00652).
10.27 Universal Corporation Outside Directors' Deferred Income Plan III, amended and restated as of December 31, 2008,
and amended as of February 1, 2010 (incorporated herein by reference to the Registrant's Annual Report on Form 10-
K for the year ended March 31, 2010, File No. 001-00652).
10.28 Form of Universal Corporation 2011 Restricted Stock Units Agreement (incorporated herein by reference to the
Registrant's Annual Report on Form 10-K for the year ended March 31, 2011, File No. 001-00652).
10.29 Form of Universal Corporation Stock Appreciation Rights Agreement for executive officers (incorporated herein by
reference to the Registrant's Annual Report on Form 10-K for the year ended March 31, 2011, File No. 001-00652).
10.30 Form of Universal Corporation Performance Share Award Agreement (incorporated herein by reference to the
Registrant's Annual Report on Form 10-K for the year ended March 31, 2011, File No. 001-00652).
96
10.31 Plea Agreement between Universal Leaf Tobacos Ltda., Universal Corporation and the United States Department of
Justice (incorporated herein by reference to the Registrant’s Current Report on Form 8-K filed August 6, 2010, File
No. 001-00652).
10.32 Non-Prosecution Agreement between Universal Corporation and the United States Department of Justice (incorporated
herein by reference to the Registrant’s Current Report on Form 8-K filed August 6, 2010, File No. 001-00652).
10.33 Consent of Defendant Universal Corporation and Final Judgment as to Defendant Universal Corporation (incorporated
herein by reference to the Registrant’s Current Report on Form 8-K filed August 6, 2010, File No. 001-00652).
10.34 Credit Agreement dated November 3, 2011, among the Registrant, as Borrower; the Lenders from time to time party
thereto; and JPMorgan Chase Bank, N.A., as Administrative Agent, SunTrust Bank, as Syndication Agent and AgFirst
Farm Credit Bank and The Royal Bank of Scotland plc as Co-Documentation Agents (incorporated herein by reference
to the Registrant's Current Report on Form 8-K filed November 8, 2011).
12 Ratio of Earnings to Fixed Charges and Ratio of Earnings to Combined Fixed Charges and Preference Dividends.*
21 Subsidiaries of the Registrant.*
23 Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm.*
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
32.1 Statement of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350.*
32.2 Statement of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350.*
101
Interactive Data File (Annual Report on Form 10-K, for the fiscal year ended March 31, 2013, furnished in XBRL
(eXtensible Business Reporting Language)).
Attached as Exhibit 101 to this report are the following documents formatted in XBRL: (i) the Consolidated Statements
of Income for each of the three years ended March 31, 2013, 2012 and 2011, (ii) the Consolidated Statements of
Comprehensive Income for each of the three years ended March 31, 2013, 2012 and 2011, (iii) the Consolidated Balance
Sheets at March 31, 2013 and 2012, (iv) the Consolidated Statement of Cash Flows for each of the three years ended
March 31, 2013, 2012 and 2011, (v) the Consolidated Statement of Shareholders’ Equity for each of the three years
ended March 31, 2013, 2012 and 2011, (vi) the Notes to Consolidated Financial Statements, tagged as blocks of text
and (vii) Schedule II - Valuation and Qualifying Accounts, tagged as blocks of text.
_________
* Filed herewith.
97
S H A R E H O L D E R I N F O R M A T I O N
A N N U A L M E E T I N G
The Annual Meeting of Shareholders will be held
at the offices of the Company, 9201 Forest Hill
Avenue, Richmond, Virginia, on Tuesday, August
6, 2013. A proxy statement and request for proxies
are included in this mailing to shareholders.
S T O C K L I S T E D
New York Stock Exchange
S T O C K S Y M B O L
UVV
D I V I D E N D R E I N V E S T M E N T P L A N
The Company offers to its common shareholders
an automatic dividend reinvestment and cash
payment plan to purchase additional shares. The
Company bears all brokerage and service fees.
Booklets describing the plan in detail are available
upon request.
T R A N S F E R A G E N T A N D
R E G I S T R A R A N D D I V I D E N D
R E I N V E S T M E N T P L A N A G E N T
Wells Fargo Bank, N.A.
Shareowner Services
P.O. Box 64854
St. Paul, Minnesota 55164-0854
(800) 468-9716
or
Universal Corporation
Shareholder Services
(804) 359-9311
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:
Candace C. Formacek
Vice President and Treasurer
Jennifer S. Rowe
Assistant Vice President, Capital Markets
(804) 359-9311
Information Requests:
(804) 254-3789 or investor@universalleaf.com
D I V I D E N D P AY 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.
A
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2
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1
3
P.O. Box 25099
Richmond, VA. 23260
www.universalcorp.com