Universal Corporation
UNIVERSAL CORP /VA/ (Form: 10-Q, Received: 08/06/2009 15:23:13)
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended June 30, 2009

or

 

¨ Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

For the Transition Period From              to             

Commission File Number: 001-00652

 

 

UNIVERSAL CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

Virginia   54-0414210

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

 

9201 Forest Hill Avenue,

Richmond, Virginia

  23235
(Address of principal executive offices)   (Zip Code)

804-359-9311

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   ¨     No   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (check one):

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).    Yes   ¨     No   x

As of July 31, 2009, the total number of shares of common stock outstanding was 24,819,136.

 

 

 


Table of Contents

UNIVERSAL CORPORATION

FORM 10-Q

TABLE OF CONTENTS

 

Item No.

        Page
   PART I - FINANCIAL INFORMATION   
1.    Financial Statements    3
2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations    25
3.    Quantitative and Qualitative Disclosures About Market Risk    30
4.    Controls and Procedures    31
   PART II - OTHER INFORMATION   
1.    Legal Proceedings    32
1A.    Risk Factors    34
2.    Unregistered Sales of Equity Securities and Use of Proceeds    34
5.    Other Information    35
6.    Exhibits    35
   Signatures    36

 

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PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

UNIVERSAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS

(In thousands of dollars, except per share data)

 

     Three Months Ended
June 30,
 
     2009     2008  
     (Unaudited)  

Sales and other operating revenues

   $ 616,112      $ 506,287   

Costs and expenses

    

Cost of goods sold

     476,748        403,253   

Selling, general and administrative expenses

     69,592        64,847   
                

Operating income

     69,772        38,187   

Equity in pretax earnings (loss) of unconsolidated affiliates

     3,641        (50

Interest income

     565        950   

Interest expense

     8,155        7,666   
                

Income before income taxes and other items

     65,823        31,421   

Income taxes

     22,019        10,281   
                

Net income

     43,804        21,140   

Less: net income attributable to noncontrolling interests in subsidiaries

     (59     (29
                

Net income attributable to Universal Corporation

     43,745        21,111   

Dividends on Universal Corporation convertible perpetual preferred stock

     (3,712     (3,712
                

Earnings available to Universal Corporation common shareholders

   $ 40,033      $ 17,399   
                

Earnings per share attributable to Universal Corporation common shareholders:

    

Basic

   $ 1.60      $ 0.65   
                

Diluted

   $ 1.47      $ 0.64   
                

Retained earnings - beginning of year

   $ 686,960      $ 711,655   

Net income attributable to Universal Corporation

     43,745        21,111   

Cash dividends declared:

    

Series B 6.75% Convertible Perpetual Preferred Stock

     (3,712     (3,712

Common stock (2009 - $0.46 per share; 2008 - $0.45 per share)

     (11,536     (12,382

Repurchase of common stock - cost in excess of stated capital amount

     (2,773     (45,350
                

Retained earnings - end of period

   $ 712,684      $ 671,322   
                

See accompanying notes.

 

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UNIVERSAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands of dollars)

 

     June 30,
2009
    June 30,
2008
    March 31,
2009
 
     (Unaudited)     (Unaudited)        
ASSETS       

Current

      

Cash and cash equivalents

   $ 131,167      $ 141,805      $ 212,626   

Short-term investments

     —          28,939        —     

Accounts receivable, net

     229,764        224,854        263,383   

Advances to suppliers, net

     141,383        207,743        214,282   

Accounts receivable - unconsolidated affiliates

     15,654        16,183        20,371   

Inventories - at lower of cost or market:

      

Tobacco

     886,232        965,244        586,136   

Other

     66,851        63,766        60,712   

Prepaid income taxes

     14,238        13,005        13,181   

Deferred income taxes

     43,385        24,281        68,264   

Other current assets

     80,031        93,216        64,964   
                        

Total current assets

     1,608,705        1,779,036        1,503,919   

Property, plant and equipment

      

Land

     16,002        16,516        15,773   

Buildings

     254,846        256,470        251,875   

Machinery and equipment

     507,681        517,272        492,214   
                        
     778,529        790,258        759,862   

Less accumulated depreciation

     (462,266     (463,345     (447,575
                        
     316,263        326,913        312,287   

Other assets

      

Goodwill and other intangibles

     106,030        106,413        106,097   

Investments in unconsolidated affiliates

     112,781        115,744        103,987   

Deferred income taxes

     20,393        50,164        17,376   

Other noncurrent assets

     91,297        92,922        94,510   
                        
     330,501        365,243        321,970   
                        

Total assets

   $ 2,255,469      $ 2,471,192      $ 2,138,176   
                        

See accompanying notes.

 

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UNIVERSAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands of dollars)

 

     June 30,
2009
    June 30,
2008
    March 31,
2009
 
     (Unaudited)     (Unaudited)        
LIABILITIES AND SHAREHOLDERS’ EQUITY       

Current

      

Notes payable and overdrafts

   $ 171,125      $ 260,590      $ 168,608   

Accounts payable and accrued expenses

     281,336        310,971        236,837   

Accounts payable - unconsolidated affiliates

     100        119        19,191   

Customer advances and deposits

     57,288        165,945        14,162   

Accrued compensation

     20,818        19,128        24,710   

Income taxes payable

     8,839        7,133        6,867   

Current portion of long-term obligations

     79,500        —          79,500   
                        

Total current liabilities

     619,006        763,886        549,875   

Long-term obligations

     329,596        399,496        331,808   

Pensions and other postretirement benefits

     94,219        91,776        91,248   

Other long-term liabilities

     81,639        95,839        79,159   

Deferred income taxes

     51,226        44,072        52,842   
                        

Total liabilities

     1,175,686        1,395,069        1,104,932   

Shareholders’ equity

      

Universal Corporation:

      

Preferred stock:

      

Series A Junior Participating Preferred Stock, no par value, 500,000 shares authorized, none issued or outstanding

     —          —          —     

Series B 6.75% Convertible Perpetual Preferred Stock, no par value, 5,000,000 shares authorized, 219,999 shares issued and outstanding (219,999 at June 30, 2008, and March 31, 2009)

     213,023        213,023        213,023   

Common stock, no par value, 100,000,000 shares authorized, 24,901,506 shares issued and outstanding (26,095,635 at June 30, 2008, and 24,999,127 at March 31, 2009)

     195,437        200,763        194,037   

Retained earnings

     712,684        671,322        686,960   

Accumulated other comprehensive loss

     (45,207     (12,156     (64,547
                        

Total Universal Corporation shareholders’ equity

     1,075,937        1,072,952        1,029,473   

Noncontrolling interests in subsidiaries

     3,846        3,171        3,771   
                        

Total shareholders’ equity

     1,079,783        1,076,123        1,033,244   
                        

Total liabilities and shareholders’ equity

   $ 2,255,469      $ 2,471,192      $ 2,138,176   
                        

See accompanying notes.

 

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UNIVERSAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands of dollars)

 

     Three Months Ended
June 30,
 
     2009     2008  
     (Unaudited)  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income

   $ 43,804      $ 21,140   

Adjustments to reconcile net income to net cash used by operating activities:

    

Depreciation

     9,902        10,292   

Amortization

     504        249   

Provisions for losses on advances and guaranteed loans to suppliers

     583        3,766   

Remeasurement loss (gain), net

     6,261        (306

Other, net

     13,825        10,280   

Changes in operating assets and liabilities, net

     (126,603     (182,739
                

Net cash used by operating activities

     (51,724     (137,318
                

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Purchase of property, plant and equipment

     (11,158     (6,126

Purchases of short-term investments

     —          (9,658

Maturities and sales of short-term investments

     —          39,608   

Proceeds from sale of property, plant and equipment, and other

     1,813        3,866   
                

Net cash provided (used) by investing activities

     (9,345     27,690   
                

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Issuance (repayment) of short-term debt, net

     (3,124     127,318   

Issuance of common stock

     —          37   

Repurchase of common stock

     (2,981     (47,229

Dividends paid on convertible perpetual preferred stock

     (3,712     (3,712

Dividends paid on common stock

     (11,461     (11,729
                

Net cash provided (used) by financing activities

     (21,278     64,685   
                

Effect of exchange rate changes on cash

     888        678   
                

Net decrease in cash and cash equivalents

     (81,459     (44,265

Cash and cash equivalents at beginning of year

     212,626        186,070   
                

Cash and cash equivalents at end of period

   $ 131,167      $ 141,805   
                

See accompanying notes.

 

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UNIVERSAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. BASIS OF PRESENTATION

Universal Corporation, with its subsidiaries (“Universal” or the “Company”), is the world’s leading leaf tobacco merchant and processor. Because of the seasonal nature of the Company’s business, the results of operations for any fiscal quarter will not necessarily be indicative of results to be expected for other quarters or a full fiscal year. All adjustments necessary to state fairly the results for the period have been included and were of a normal recurring nature. Certain amounts in prior year statements have been reclassified to conform to the current year presentation. As part of the process of preparing its financial statements, the Company performed an evaluation of subsequent events occurring from June 30, 2009, the date of the consolidated balance sheet included in this report, through August 6, 2009, the date its financial statements were issued. This Form 10-Q should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2009.

NOTE 2. ACCOUNTING PRONOUNCEMENTS

Recent Pronouncements Adopted Through June 30, 2009

Effective April 1, 2009, Universal adopted Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards No. 160, “Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51” (“SFAS 160”). SFAS 160 requires that noncontrolling interests in subsidiaries that are included in a company’s consolidated financial statements, commonly referred to as “minority interests,” be reported as a component of shareholders’ equity in the balance sheet. It also requires that a company’s consolidated net income and comprehensive income include the amounts attributable to both the company’s interest and the noncontrolling interest in the subsidiary, identified separately in the financial statements. Finally, the new guidance requires certain disclosures about noncontrolling interests in the consolidated financial statements. Adoption of SFAS 160 did not have a material impact on the Company’s financial statements.

Effective April 1, 2009, Universal also adopted FASB Statement of Financial Accounting Standards No. 141R, “Business Combinations” (“SFAS 141R”), which requires that companies record assets acquired, liabilities assumed, and noncontrolling interests in business combinations at fair value, separately from goodwill, as of the acquisition date. This approach differs from the cost allocation approach provided under previous accounting guidance and can result in recognition of a gain at acquisition date if the cost to acquire a business is less than the net fair value of the assets acquired, liabilities assumed, and noncontrolling interests. SFAS 141R also provides new guidance on recording assets and liabilities that arise from contingencies in a business combination, and it requires that transaction costs associated with business combinations be charged to expense instead of being recorded as part of the cost of the acquired business. Universal will apply the guidance to any business combinations occurring after April 1, 2009.

 

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Effective June 30, 2009, the Company adopted FASB Statement of Financial Accounting Standards No. 165, “Subsequent Events” (“SFAS 165”), which was issued by the FASB in May 2009 with required adoption for interim or annual periods ending after June 15, 2009. SFAS 165 establishes standards for accounting and disclosure for events occurring after the balance sheet date but before financial statements are issued. It defines the period after the balance sheet date during which events or transactions should be evaluated for potential recognition or disclosure, and it provides guidance on recognition and disclosure of actual transactions or events occurring after the balance sheet date. The adoption of SFAS 165 did not have a material effect on the Company’s financial statements.

Pronouncements to be Adopted in Future Periods

In June 2009, the FASB issued Statement of Financial Accounting Standards No. 168, “The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB Statement No. 162” (“SFAS 168”). SFAS 168 establishes the FASB Accounting Standards Codification™ (“Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in preparing financial statements in conformity with generally accepted accounting principles in the United States. Once effective, all guidance in the Codification will carry the same level of authority, and all future changes or additions to U.S. generally accepted accounting principles will be issued as Accounting Standards Updates. SFAS 168 does not make any changes to existing accounting guidance that will impact the Company’s accounting and financial reporting. It is effective for financial statements issued for interim and annual periods ending after September 15, 2009, which means that Universal will begin applying the guidance in its financial statements beginning with the interim period ending September 30, 2009.

NOTE 3. GUARANTEES AND OTHER CONTINGENT LIABILITIES

Guarantees and Other Contingent Liabilities

Guarantees of bank loans to growers for crop financing and construction of curing barns or other tobacco producing assets are industry practice in Brazil and support the farmers’ production of tobacco there. At June 30, 2009, the Company’s total exposure under guarantees issued by its operating subsidiary in Brazil for banking facilities of farmers in that country was approximately $82 million, net of the accrual recorded for the fair value of the guarantees. About 44% of these guarantees expire within one year, and all of the remainder expire within five years. The subsidiary withholds payments due to the farmers on delivery of tobacco and forwards those payments to the third-party banks. Failure of farmers to deliver sufficient quantities of tobacco to the subsidiary to cover their obligations to the third-party banks could result in a liability for the subsidiary under the related guarantees; however, in that case, the subsidiary would have recourse against the farmers. The maximum potential amount of future

 

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payments that the Company’s subsidiary could be required to make at June 30, 2009, was the face amount ($82 million) including unpaid accrued interest ($110 million as of June 30, 2008, and $104 million at March 31, 2009). The fair value of the guarantees was a liability of approximately $36 million at June 30, 2009 ($37 million at June 30, 2008, and $35 million at March 31, 2009). In addition to these guarantees, the Company has other contingent liabilities totaling approximately $53 million, primarily related to a bank guarantee that bonds an appeal of a 2006 fine in the European Union, as discussed below.

European Commission Fines and Other Legal Matters

European Commission Fines in Spain

In October 2004, the European Commission (the “Commission”) imposed fines on “five companies active in the raw Spanish tobacco processing market” totaling €20 million for “colluding on the prices paid to, and the quantities bought from, the tobacco growers in Spain.” Two of the Company’s subsidiaries, Tabacos Espanoles S.A. (“TAES”), a purchaser and processor of raw tobacco in Spain, and Deltafina, S.p.A. (“Deltafina”), an Italian subsidiary, were among the five companies assessed fines. In its decision, the Commission imposed a fine of €108,000 on TAES and a fine of €11.88 million on Deltafina. Deltafina did not and does not purchase or process raw tobacco in the Spanish market, but was and is a significant buyer of tobacco from some of the Spanish processors. The Company recorded a charge of 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 Court of First Instance of the European Communities. The outcome of the appeal is uncertain, and an ultimate resolution to the matter could take several years. The Company has deposited funds in an escrow account with the Commission in the amount of the fine in order to stay execution during the appeal process. This deposit is accounted for as a non-current asset.

European Commission Fines in Italy

In 2002, the Company reported that it was aware that the Commission was investigating certain aspects of the leaf tobacco markets in Italy. Deltafina buys and processes tobacco in Italy. The Company reported that it did not believe that the Commission investigation in Italy would result in penalties being assessed against it or its subsidiaries that would be material to the Company’s earnings. The reason the Company held this belief was that it had received conditional immunity from the Commission because Deltafina had voluntarily informed the Commission of the activities that were the basis of the investigation.

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

 

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Commission never told Deltafina that disclosure would affect Deltafina’s immunity. On November 15, 2005, the Company received notification from the Commission that the Commission had imposed fines totaling €30 million (about $42 million at the June 30, 2009 exchange rate) on Deltafina and the Company jointly for infringing European Union antitrust law in connection with the purchase and processing of tobacco in the Italian raw tobacco market.

The Company does not believe that the decision can be reconciled with the Commission’s Statement of Objections and the facts. The Company and Deltafina each have appealed the decision to the Court of First Instance of the European Communities. Based on consultation with outside legal counsel, the Company believes it is probable that it will prevail in the appeals process and has not accrued a charge for the fine. Deltafina has provided a bank guarantee to the Commission in the amount of the fine plus accrued interest in order to stay execution during the appeal process.

U.S. Foreign Corrupt Practices Act

As a result of a posting to the Company’s Ethics Complaint hotline alleging improper activities that involved or related to certain of its tobacco subsidiaries, the Audit Committee of the Company’s Board of Directors engaged an outside law firm to conduct an investigation of the alleged activities. That investigation revealed that there have been payments that may have violated the U.S. Foreign Corrupt Practices Act. The payments involved approximated $2 million over a seven-year period. In addition, the investigation revealed activities in foreign jurisdictions that may have violated the competition laws of such jurisdictions, but the Company believes those activities did not violate U.S. antitrust laws. The Company voluntarily reported these activities to the Department of Justice (“DOJ”) and Securities and Exchange Commission (“SEC”) in March 2006. On June 6, 2006, the SEC notified the Company that a formal order of investigation had been issued.

The Company has engaged in settlement discussions with the DOJ and SEC to resolve the above-referenced matter. Although those discussions are ongoing, the Company expects to enter into agreements with the DOJ and the SEC to resolve the matter, and it believes it is probable that such resolution will include injunctive relief, disgorgement and prejudgment interest, fines, and penalties. Since this matter arose, the Company has recorded accruals that it believes are adequate to satisfy the estimated financial settlement it expects with the resolution of this matter. However, because the Company’s discussions are ongoing, it cannot predict with certainty when or whether an agreement will be reached with the DOJ and SEC, or the precise terms of any such agreement. The Company will continue to cooperate with the authorities in this matter while resolution discussions proceed.

Other Legal Matters

In addition to the above-mentioned matters, various subsidiaries of the Company are involved in other litigation and tax examinations incidental to their business activities. While the outcome of these matters cannot be predicted with certainty, management is vigorously defending the claims and does not currently expect that any of them will have a material adverse effect on the Company’s financial position. However, should one or more of these matters be resolved in a manner adverse to management’s current expectation, the effect on the Company’s results of operations for a particular fiscal reporting period could be material.

 

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NOTE 4. EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per share:

 

     Three Months Ended
June 30,
 

(in thousands, except per share data)

   2009     2008  

Basic Earnings Per Share

    

Numerator for basic earnings per share

    

Net income attributable to Universal Corporation

   $ 43,745      $ 21,111   

Less: Dividends on convertible perpetual preferred stock

     (3,712     (3,712
                

Earnings available to Universal Corporation common shareholders for calculation of basic earnings per share

     40,033        17,399   
                

Denominator for basic earnings per share

    

Weighted average shares outstanding

     24,985        26,897   
                

Basic earnings per share

   $ 1.60      $ 0.65   
                

Diluted Earnings Per Share

    

Numerator for diluted earnings per share

    

Earnings available to Universal Corporation common shareholders

   $ 40,033      $ 17,399   

Add: Dividends on convertible perpetual preferred stock (if conversion assumed)

     3,712        —     
                

Earnings available to Universal Corporation common shareholders for calculation of diluted earnings per share

     43,745        17,399   
                

Denominator for diluted earnings per share:

    

Weighted average shares outstanding

     24,985        26,897   

Effect of dilutive securities (if conversion or exercise assumed)

    

Convertible perpetual preferred stock

     4,728        —     

Employee share-based awards

     131        218   
                

Denominator for diluted earnings per share

     29,844        27,115   
                

Diluted earnings per share

   $ 1.47      $ 0.64   
                

For the three months ended June 30, 2008, conversion of the Company’s outstanding Series B 6.75% Convertible Perpetual Preferred Stock was not assumed since the effect was not dilutive to earnings per share.

 

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NOTE 5. COMPREHENSIVE INCOME

Comprehensive income for each period presented in the consolidated statements of income and retained earnings was as follows:

 

     Three Months Ended
June 30,

(in thousands of dollars - all amounts net of income taxes)

   2009     2008

Net income

   $ 43,804      $ 21,140

Foreign currency translation adjustment

     8,144        1,690

Foreign currency hedge adjustment

     11,212        1,595
              

Total comprehensive income

     63,160        24,425

Less: comprehensive income attributable to noncontrolling interests in subsidiaries (including foreign currency translation adjustment)

     (75     11
              

Comprehensive income attributable to Universal Corporation

   $ 63,085      $ 24,436
              

NOTE 6. INCOME TAXES

The Company’s consolidated effective income tax rate on pre-tax earnings from continuing operations for the quarter ended June 30, 2009 was approximately 33%. The rate was lower than the 35% U.S. federal statutory rate, primarily due to higher earnings of certain foreign subsidiaries in the African region where income tax rates are generally below the U.S. rate due to the structure of the ownership of the region. For the quarter ended June 30, 2008, the effective income tax rate was also approximately 33%, and was lower than the U.S. federal statutory income tax rate primarily due to changes in the Company’s overall tax position that allowed it to utilize foreign tax credit carryforwards and reverse a valuation allowance that had previously been recorded on those carryforwards.

NOTE 7. DERIVATIVES AND HEDGING ACTIVITIES

Universal is exposed to various risks in its worldwide operations and uses derivative financial instruments to manage two specific types of risks – interest rate risk and foreign currency exchange rate risk. Interest rate risk has been managed by entering into interest rate swap agreements, and foreign currency exchange rate risk has been managed by entering into forward foreign currency exchange contracts. However, the Company’s policy permits other instruments, and management works to minimize net monetary positions in non-functional currencies, which may include using local borrowings. The disclosures below provide additional information about the Company’s hedging strategies, the derivative instruments used, and the effects of these activities on the consolidated statements of income and the consolidated balance sheets.

 

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Fair Value Hedging Strategy for Interest Rate Risk

The Company has entered into interest rate swap agreements to manage its exposure to interest rate risk, with a strategy of maintaining a level of floating rate debt that approximates the interest rate exposure on committed inventories. The strategy is implemented by converting a portion of the Company’s fixed-rate debt to floating rates. The interest rate swap agreements allow the Company to receive amounts equal to the fixed interest payments it is obligated to make on the underlying debt instruments in exchange for making floating-rate interest payments that adjust semi-annually based on changes in the benchmark interest rate.

The interest rate swap agreements are designated and qualify as hedges of the exposure to changes in the fair value of the underlying debt instruments created by fluctuations in prevailing market interest rates. In all cases, the critical terms of each interest rate swap agreement match the terms of the underlying debt instrument, and there is no hedge ineffectiveness. At June 30, 2009, the total notional amount of the Company’s receive-fixed/pay-floating interest rate swaps was $170 million.

Cash Flow Hedging Strategy for Foreign Currency Exchange Rate Risk Related to Forecast Purchases of Tobacco

The majority of the tobacco production in most countries outside the United States where Universal operates is sold in export markets at prices denominated in U.S. dollars. However, purchases of tobacco from farmers and most processing costs (such as labor and energy) in those countries are usually denominated in the local currency. Changes in exchange rates between the U.S. dollar and the local currencies where tobacco is grown and processed affect the ultimate U.S. dollar cost of the processed tobacco and therefore can adversely impact the gross profit earned on the sale of that tobacco. Since the Company is able to reasonably forecast the volume, timing, and local currency cost of its tobacco purchases, it has routinely entered into forward contracts to sell U.S. dollars and buy the local currency at future dates that coincide with the expected timing of a portion of those purchases. This strategy contemplates the Company’s pricing arrangements with key customers and substantially eliminates the variability of future U.S. dollar cash flows for tobacco purchases for the foreign currency notional amount hedged. The Company employed this hedging strategy during the fiscal years ended March 31, 2008 and 2009, and through the quarter ended June 30, 2009, for tobacco purchases in Brazil, where the large crops, the terms of sale to customers, and the availability of derivative markets make it particularly desirable to manage the related foreign exchange rate risk.

The Company did not designate the forward contracts it entered for the 2007-2008 crop year as hedges, and therefore it recognized all related gains and losses in earnings on a mark-to-market basis each reporting period. For the 2008-2009 crop cycle, all contracts were designated and qualify as hedges of the future cash flows associated with forecast purchases of tobacco. As a result, except for insignificant amounts related to any ineffective portion of the hedging strategy, gains and losses on the forward contracts are recognized in comprehensive income as they occur, but are not recognized in earnings until the related tobacco is sold to third-party customers.

 

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During fiscal year 2009 and through the quarter ended June 30, 2009, the Company hedged approximately $241 million U.S. dollar notional amount related to 2008-2009 crop tobacco purchases in Brazil, primarily related to customer contractual requirements. As noted above, all of the related forward contracts were designated and accounted for as cash flow hedges. Purchases of the 2008-2009 crop were completed in July 2009, and all forward contracts that were open at June 30, 2009, matured and were settled by that time. Sales of the 2008-2009 crop began during the quarter ended June 30, 2009, and a portion of the hedge gains and losses previously recorded in accumulated other comprehensive income was reclassified to cost of goods sold related to those sales. For all remaining hedge gains and losses recorded in accumulated other comprehensive loss at June 30, 2009, the Company expects to complete the sale of the tobacco and recognize the amounts in earnings during fiscal year 2010.

During fiscal year 2008 and through the quarter ended June 30, 2008, the Company hedged approximately $240 million U.S. dollar notional amount related to the 2007-2008 crop in Brazil, but they were not designated and accounted for as hedges, so gains and losses on those contracts were recorded in earnings as they occurred.

Hedging Strategy for Foreign Currency Exchange Rate Risk Related to Net Local Currency Monetary Assets and Liabilities of Foreign Subsidiaries

Most of the Company’s foreign subsidiaries transact the majority of their sales in U.S. dollars and finance the majority of their operating requirements with U.S. dollar borrowings, and therefore use the U.S. dollar as their functional currency. These subsidiaries normally have certain monetary assets and liabilities on their balance sheets which are denominated in the local currency. Those assets and liabilities can include cash and cash equivalents, accounts receivable and accounts payable, advances to farmers and suppliers, deferred income tax assets and liabilities, recoverable value-added taxes, and other items. Net monetary assets and liabilities denominated in the local currency are remeasured into U.S. dollars each reporting period, generating gains and losses that the Company records in earnings as a component of selling, general and administrative expenses. The level of net monetary assets or liabilities denominated in the local currency normally fluctuates throughout the year based on the operating cycle, but it is most common for monetary assets to exceed monetary liabilities at most times of the year, sometimes by a significant amount. When this situation exists and the local currency weakens against the U.S. dollar, remeasurement losses are generated. Conversely, remeasurement gains are generated on a net monetary asset position when the local currency strengthens against the U.S. dollar. Due to the size of its operations and the fact that it provides significant financing to farmers for crop production, the Company’s subsidiary in Brazil has significant exposure to currency remeasurement gains and losses due to fluctuations in exchange rates at certain times of the year. To manage a portion of its exposure to currency remeasurement gains and losses in Brazil during fiscal year 2009, the Company entered into forward contracts to sell the Brazilian currency and buy U.S. dollars at future dates coinciding with expected changes in the overall net local currency monetary asset position of the subsidiary. Gains and losses on the forward contracts were recorded in earnings as a component of selling, general, and administrative expenses for each reporting period as they occurred, and thus directly offset the related remeasurement losses or gains for the notional amount hedged in the consolidated statements of income. Accordingly, the Company did not designate these contracts as hedges for accounting

 

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purposes. The notional amount of these contracts totaled approximately $36 million in U.S. dollars, and all of the contracts matured and were settled before March 31, 2009. To further mitigate currency remeasurement exposure, the Company’s Brazilian subsidiary has 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. During the quarter ended June 30, 2009, such local borrowings in Brazil approximated $31 million.

The Company has several foreign subsidiaries that transact the majority of their sales and finance the majority of their operating requirements in their local currency, and therefore use their respective local currencies as the functional currency for reporting purposes. From time to time, these subsidiaries sell tobacco to customers in transactions that are not denominated in the functional currency. In those situations, the subsidiaries routinely enter into forward exchange contracts to offset currency risk for the period of time the related trade account receivable is outstanding with the customer. The contracts are not designated as hedges for accounting purposes.

 

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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 three month periods ended June 30, 2009 and 2008.

 

     Three Months Ended June 30,  

(in thousands of dollars)

   2009     2008  

Fair Value Hedges - Interest Rate Swap Agreements

    

Derivative

    

Loss recognized in earnings

   $ (2,212   $ (3,446

Location of loss recognized in earnings

     Interest expense   

Hedged Item

    

Description of hedged item

     Fixed rate long-term debt   

Gain recognized in earnings

   $ 2,212      $ 3,446   

Location of gain recognized in earnings

     Interest expense   

Cash Flow Hedges - Forward Foreign Currency Exchange Contracts

    

Derivative

    

Effective Portion of Hedge

    

Loss recorded in accumulated other comprehensive loss

   $ (6,385   $ —     

Loss reclassified from accumulated other comprehensive loss into earnings

   $ (9,634   $ —     

Location of loss reclassified from accumulated other comprehensive loss into earnings

     Cost of goods sold   

Ineffective Portion and Early De-designation of Hedges

    

Gain recognized in earnings

   $ 1,872      $ —     

Location of gain recognized in earnings

     Selling, general and administrative expenses   

Hedged Item

    

Description of hedged item

     Forecast purchases of tobacco in Brazil   

Derivatives Not Designated as Hedges - Forward Foreign Currency Exchange Contracts

    

Contracts related to forecast purchases of tobacco in Brazil

    

Gain recognized in earnings

   $ —        $ 1,856   

Location of gain recognized in earnings

     Selling, general and administrative expenses   

Contracts related to net local currency monetary assets and liabilities of subsidiary in Brazil

    

Gain (loss) recognized in earnings

   $ —        $ —     

Location of gain (loss) recognized in earnings

     Selling, general and administrative expenses   

Contracts related to accounts receivable of non-U.S. dollar subsidiaries

    

Gain recognized in earnings

   $ 353      $ 185   

Location of gain recognized in earnings

     Selling, general and administrative expenses   
                

Total gain recognized in earnings for forward foreign currency exchange contracts not designated as hedges

   $ 353      $ 2,041   
                

 

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For the interest rate swap agreements designated as fair value hedges, since the hedges have no ineffectiveness, the gain or loss recognized in earnings on the derivative is offset by a corresponding loss or gain on the underlying hedged debt.

For the forward foreign currency exchange contracts designated as cash flow hedges of tobacco purchases in Brazil, a net hedge loss of approximately $6 million remained in accumulated other comprehensive loss at June 30, 2009. That balance reflects contracts that had matured and were settled, as well as contracts that remained open, less the amount reclassified to earnings related to tobacco sold through June 30, 2009. Assuming continued hedge effectiveness, the contracts that were open at June 30, 2009 could increase or decrease the amount recorded in accumulated other comprehensive loss. The balance in accumulated other comprehensive loss will be recognized in earnings as a component of cost of goods sold during fiscal year 2010 as the remaining 2008-2009 Brazilian crop tobacco is sold to customers. Based on the hedging strategy, as the loss or gain is recognized in earnings, it is generally 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. Margins on the sale of the tobacco are generally not 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 June 30, 2009 and 2008, and March 31, 2009:

 

     Derivatives in a Fair Value Asset Position    Derivatives in a Fair Value Liability Position
     Balance
Sheet
Location
   Fair Value as of    Balance
Sheet
Location
   Fair Value as of

(in thousands of dollars)

      June 30,
2009
   June 30,
2008
   March 31,
2009
      June 30,
2009
   June 30,
2008
   March 31,
2009

Derivatives Designated as Hedging Instruments

                       

Interest rate swap agreements

   Other
non-
current
assets
   $ 9,596    $ 1,530    $ 11,808    Long-term
obligations
   $ —      $ 1,535    $ —  

Forward foreign currency exchange contracts

   Other
current
assets
     176      739      2,397    Accounts
payable and
accrued
expenses
     163      975      10,026
                                               

Total

      $ 9,772    $ 2,269    $ 14,205       $ 163    $ 2,510    $ 10,226
                                               

Derivatives Not Designated as Hedging Instruments

                       

Forward foreign currency exchange contracts

   Other
current
assets
   $ 820    $ —      $ 45    Accounts
payable and
accrued
expenses
   $ —      $ —      $ 712
                                               

Total

      $ 820    $ —      $ 45       $ —      $ —      $ 712
                                               

 

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NOTE 8. FAIR VALUE MEASUREMENTS

Universal adopted the provisions of SFAS 157, “Fair Value Measurements,” (“SFAS 157”) for financial assets and liabilities effective April 1, 2008, and for nonfinancial assets and liabilities effective April 1, 2009. The financial assets and liabilities measured in accordance with SFAS 157 include money market funds, available-for-sale securities, 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 SFAS 157 to nonfinancial assets and liabilities primarily includes assessments of goodwill and long-lived assets for potential impairment. The adoption of SFAS 157 for both financial and nonfinancial assets and liabilities did not have a material effect on the Company’s financial statements.

Under SFAS 157, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The framework for measuring fair value under the guidance is based on a fair value hierarchy that distinguishes between observable inputs (i.e., inputs that are based on market data obtained from independent sources) and unobservable inputs (i.e., inputs that require the Company to make its own assumptions about market participant assumptions because little or no market data exists). There are three levels within the fair value hierarchy:

 

Level

 

Description

1   quoted prices in active markets for identical assets or liabilities that the Company has the ability to access as of the reporting date;
2   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
3   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.

 

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At June 30, 2009, the Company had certain financial assets and financial liabilities that were required to be measured and reported at fair value on a recurring basis. These assets and liabilities are listed in the tables below and classified based on how their values were determined under the fair value hierarchy:

 

     June 30, 2009

(in thousands of dollars)

   Level 1    Level 2    Level 3    Total

Assets:

           

Money market funds

   $ 53,656    $ —      $ —      $ 53,656

Trading securities associated with deferred compensation plans

     15,016      —        —        15,016

Interest rate swaps

     —        9,596      —        9,596

Forward foreign currency exchange contracts

     —        996      —        996
                           

Total assets

   $ 68,672    $ 10,592    $ —      $ 79,264
                           

Liabilities:

           

Guarantees of bank loans to tobacco growers

   $ —      $ —      $ 36,156    $ 36,156

Forward foreign currency exchange contracts

     —        163      —        163
                           

Total liabilities

   $ —      $ 163    $ 36,156    $ 36,319
                           

Money market funds

The fair values of money market funds, which are reported in cash and cash equivalents in the consolidated balance sheets, are based on quoted market prices (Level 1). The fair values of the Company’s money market funds approximate cost due to the short-term maturities and the high credit quality of the issuers of the underlying securities.

Trading securities associated with deferred compensation plans

Trading securities represent mutual fund investments that are matched to employee deferred compensation obligations. These investments are bought and sold as employees defer compensation, receive distributions, or make changes in the funds underlying their accounts. Quoted market prices (Level 1) are used to determine the fair values of the mutual funds and their underlying securities.

Interest rate swaps

The fair values of interest rate swap contracts are determined based on dealer quotes using a discounted cash flow model matched to the contractual terms of each instrument. Since inputs to the model are observable and significant judgment is not required in determining the fair values, interest rate swaps are classified within Level 2 of the fair value hierarchy.

 

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Forward foreign currency exchange contracts

The fair values of forward foreign currency exchange contracts are also determined based on dealer quotes using a discounted cash flow model matched to the contractual terms of each instrument. Since inputs to the model are observable and significant judgment is not required in determining the fair values, forward foreign currency exchange contracts are classified within Level 2 of the fair value hierarchy.

Guarantees of bank loans to tobacco growers

The fair values of the Company’s guarantees of bank loans to tobacco growers are determined by using internally-tracked historical loss data for such loans to develop an estimate of future losses under the guarantees outstanding at the measurement date. The present value of the cash flows associated with those estimated losses is then calculated at a risk-adjusted interest rate. This approach is sometimes referred to as the “contingent claims valuation method”. Although historical loss data is an observable input, significant judgment is required in applying this information to the portfolio of guaranteed loans outstanding at each measurement date and in selecting a risk-adjusted interest rate. The guarantees of bank loans to tobacco growers are therefore classified within Level 3 of the fair value hierarchy.

A reconciliation of the change in the balance of the financial liability for guarantees of bank loans to tobacco growers (Level 3) for the three-months ended June 30, 2009, is as follows:

 

(in thousands of dollars)

   Three Months
Ended
June 30, 2009
 

Balance at beginning of year

   $ 35,154   

Favorable experience in collection of loans

     (5,752

Change in aggregate guaranteed loan balance due to removal of prior crop year loans from the portfolio and addition of current crop year loans

     738   

Change in discount rate and estimated collection period

     448   

Currency remeasurement

     5,568   
        

Balance at end of period

   $ 36,156   
        

Universal has not elected to report at fair value any financial instruments or other items not otherwise required to be reported at fair value under current accounting guidance.

NOTE 9. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS

The Company has 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. The Company also provides postretirement health and life insurance benefits for eligible U.S. employees attaining specific age and service levels.

 

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The components of the Company’s net periodic benefit cost for its continuing operations were as follows:

 

     Pension
Benefits
    Other Postretirement
Benefits
 
     Three Months Ended
June 30,
    Three Months Ended
June 30,
 

(in thousands of dollars)

   2009     2008     2009     2008  

Service cost

   $ 1,015      $ 1,453      $ 163      $ 240   

Interest cost

     3,668        3,456        705        755   

Expected return on plan assets

     (3,436     (3,342     (38     (41

Curtailment loss

     —          815        —          —     

Settlement cost

     1,250        2,341        —          —     

Net amortization and deferral

     246        570        (255     (12
                                

Net periodic benefit cost

   $ 2,743      $ 5,293      $ 575      $ 942   
                                

During the three months ended June 30, 2009, the Company made contributions of approximately $2.9 million to its qualified and non-qualified pension plans. Additional contributions of approximately $9 million are expected during the remaining nine months of fiscal year 2010.

NOTE 10. STOCK-BASED COMPENSATION

Universal’s shareholders have approved Executive Stock Plans (“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. The Company’s practice is to award grants of stock-based compensation to officers on an annual basis 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, which is scheduled on a day between two and twelve business days following the public release of the Company’s annual financial results. The Compensation Committee administers the Company’s Plans consistently following previously defined guidelines. Awards of restricted stock, RSUs, PSAs, SARs, and non-qualified stock options are currently outstanding under the Plans. The non-qualified stock options and SARs have an exercise price equal to the closing price of a share of the Company’s common stock on the grant date. All stock options currently outstanding are fully vested and exercisable, and they expire ten years after the grant date. The SARs are settled in shares of common stock, vest in equal one-third tranches one, two, and three years after the grant date, and expire ten years after the grant date, except that SARs granted after fiscal year 2007 expire on the earlier of three years after the grantee’s retirement date or ten years after the grant date. The RSUs vest five years from the grant date and are then paid out in shares of common stock. Under the terms of the RSU awards, grantees receive dividend equivalents in the form of additional RSUs that vest and are paid out on the same date as the original RSU grant. The PSAs vest three years from the grant date, are paid out in shares of common stock at the vesting date, and do not carry rights to dividends or dividend equivalents prior to vesting. Shares ultimately paid out under PSA grants are dependent on the achievement

 

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of predetermined performance measures established by the Compensation Committee and can range from zero to 150% of the stated award. The Company’s outside directors automatically receive shares of restricted stock following each annual meeting of shareholders. These shares vest upon the individual’s retirement from service as a director.

During the three-month periods ended June 30, 2009 and 2008, Universal issued the following stock-based awards, representing the regular annual grants to officers of the Company:

 

     Three Months Ended June 30,
     2009    2008

SARs:

     

Number granted

     253,800      132,000

Exercise price

   $ 35.30    $ 51.32

Grant date fair value

   $ 7.85    $ 11.65

RSUs:

     

Number granted

     63,450      36,500

Grant date fair value

   $ 35.30    $ 51.32

PSAs:

     

Number granted

     63,450      31,600

Grant date fair value

   $ 29.67    $ 45.96

The grant date fair value of the SARs was estimated using the Black-Scholes pricing model and the following assumptions:

 

     2009     2008  

Expected term

   5.0 years      5.0 years   

Expected volatility

   39.0   31.3

Expected dividend yield

   5.21   3.50

Risk-free interest rate

   2.51   3.32

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 all non-forfeitable awards is recognized as expense at the date of grant. As a result, Universal typically incurs higher stock compensation expense in the first quarter of each fiscal year when grants are awarded than in the other three quarters. For PSAs, the Company generally recognizes fair value expense ratably over the performance and vesting period based on management’s judgment of the ultimate award that is likely to be paid out based on the achievement of the predetermined performance measures. For the three months ended June 30, 2009 and 2008, the Company recorded total stock-based compensation expense of approximately $2.0 million and $1.6 million, respectively. The Company expects to recognize stock-based compensation expense of approximately $3.8 million during the remaining nine months of fiscal year 2010.

 

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NOTE 11. OPERATING SEGMENTS

The principal approach used by management to evaluate the Company’s performance is by geographic region, although some components of the business are evaluated on the basis of their worldwide operations. 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 pretax earnings of unconsolidated affiliates.

Operating results for the Company’s reportable segments for each period presented in the consolidated statements of income and retained earnings were as follows:

 

     Three Months Ended
June 30,
 

(in thousands of dollars)

   2009    2008  

SALES AND OTHER OPERATING REVENUES

     

Flue-cured and burley leaf tobacco operations:

     

North America

   $ 36,132    $ 48,427   

Other regions (1)

     521,172      401,485   
               

Subtotal

     557,304      449,912   

Other tobacco operations (2)

     58,808      56,375   
               

Consolidated sales and other operating revenues

   $ 616,112    $ 506,287   
               

OPERATING INCOME (LOSS)

     

Flue-cured and burley leaf tobacco operations:

     

North America

   $ 306    $ (426

Other regions (1)

     63,909      35,185   
               

Subtotal

     64,215      34,759   

Other tobacco operations (2)

     9,198      3,378   
               

Segment operating income

     73,413      38,137   

Less:

     

Equity in pretax earnings (loss) of unconsolidated affiliates (3)

     3,641      (50
               

Consolidated operating income

   $ 69,772    $ 38,187   
               

 

(1)

Includes South America, Africa, Europe, and Asia regions, as well as inter-region eliminations.

(2)

Includes Dark Air-Cured, Special Services, and Oriental, as well as inter-company eliminations. Sales and other operating revenues for this reportable segment include limited amounts for Oriental because its financial results consist principally of equity in the pretax earnings of an unconsolidated affiliate.

(3)

Item is included in segment operating income, but not included in consolidated operating income.

 

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NOTE 12. CHANGES IN SHAREHOLDERS’ EQUITY AND NONCONTROLLING INTERESTS IN SUBSIDIARIES

As discussed in Note 2, the Company adopted SFAS 160 effective April 1, 2009, and revised its financial statement presentation for noncontrolling interests in subsidiaries to reflect the new guidance. A reconciliation of the changes in Universal Corporation shareholders’ equity and noncontrolling interests in subsidiaries for the quarters ended June 30, 2009 and 2008 is as follows:

 

     Three Months Ended June 30, 2009     Three Months Ended June 30, 2008  

(in thousands of dollars)

   Universal
Corporation
    Noncontrolling
Interests
   Total     Universal
Corporation
    Noncontrolling
Interests
    Total  

Balance at beginning of year

   $ 1,029,473      $ 3,771    $ 1,033,244      $ 1,115,631      $ 3,182      $ 1,118,813   

Changes in common stock

             

Issuance of common stock

     —          —        —          37        —          37   

Repurchase of common stock

     (580     —        (580     (7,889     —          (7,889

Accural of stock-based compensation

     1,980        —        1,980        2,181        —          2,181   

Changes in retained earnings

             

Net income

     43,745        59      43,804        21,111        29        21,140   

Cash dividends declared

             

Series B 6.75% convertible perpetual preferred stock

     (3,712     —        (3,712     (3,712     —          (3,712

Common stock

     (11,536     —        (11,536     (12,382     —          (12,382

Repurchase of common stock

     (2,773     —        (2,773     (45,350     —          (45,350

Other comprehensive income (loss)

             

Translation adjustments, net of income taxes

     8,128        16      8,144        1,730        (40     1,690   

Foreign currency hedge adjustment, net of income taxes

     11,212        —        11,212        1,595        —          1,595   
                                               

Balance at end of period

   $ 1,075,937      $ 3,846    $ 1,079,783      $ 1,072,952      $ 3,171      $ 1,076,123   
                                               

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Quarterly Report on Form 10-Q and the following “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Among other things, these statements relate to the Company’s financial condition, results of operation, and future business plans, operations, opportunities, and prospects. In addition, the Company and its representatives may from time to time make written or oral forward-looking statements, including statements contained in other filings with the Securities and Exchange Commission and in reports to shareholders. These forward-looking statements are generally identified by the use of words such as we “expect,” “believe,” “anticipate,” “could,” “should,” “may,” “plan,” “will,” “predict,” “estimate,” and similar expressions or words of similar import. These forward-looking statements are based upon management’s current knowledge and assumptions about future events and involve risks and uncertainties that could cause actual results, performance, or achievements to be materially different from any anticipated results, prospects, performance, or achievements expressed or implied by such forward-looking statements. Such risks and uncertainties include: anticipated levels of demand for and supply of its products and services; costs incurred in providing these products and services; timing of shipments to customers; changes in market structure; changes in exchange rates; and general economic, political, market, and weather conditions. For a further description of factors that may cause actual results to differ materially from such forward-looking statements, see Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended March 31, 2009. 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. This Form 10-Q should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended March 31, 2009.

Liquidity and Capital Resources

Overview

The first fiscal quarter is generally a period of significant working capital investment in both Brazil and Africa as crops are delivered by farmers. In fiscal year 2010, we funded those requirements using cash on hand, customer advances, and operating cash flows. In addition, we continued our share repurchase program, which is based on free cash flow generated in prior years and an assessment of our future capital needs.

Our liquidity and capital resource requirements are predominantly short term in nature and relate to working capital 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 size, prices paid to farmers, 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, although in many regions, we also

 

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provide agricultural materials to farmers during the growing season. The timing of the elements of each cycle is influenced by such things 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.

Operations

We used $52 million in net cash flow to fund operating activities during the quarter. Tobacco inventory, at $886 million, was up $300 million during the quarter on seasonal tobacco crop purchases in Africa and South America. Tobacco inventory levels are $79 million lower than June 30, 2008 levels, primarily reflecting earlier shipments of Brazilian tobacco and lower average leaf costs related to the stronger U.S. dollar during the purchasing season. Inventory is usually financed with a mix of cash, notes payable, and customer deposits, depending on our borrowing capabilities, interest rates, and exchange rates, as well as those of our customers.

Advances to suppliers were $141 million at June 30, 2009, a reduction of $73 million from March 31, 2009, as crops were delivered in payment of those balances primarily in Asia, Africa, and Brazil. Compared to the same time last year, advances to suppliers were $66 million lower, reflecting earlier crop deliveries and a stronger U.S. dollar this year. Accounts receivable fell by $34 million compared to March 31, 2009, as we collected balances from higher than normal shipments at the end of the last quarter of fiscal year 2009. The balance was comparable to that of the prior year.

We generally do not purchase material quantities of tobacco on a speculative basis. At June 30, 2009, our uncommitted inventories were $90 million, or about 10% of total tobacco inventory, compared to $124 million, or about 21% of our March 31, 2009 inventory, and $75 million, or about 8% of our June 30, 2008, inventory. These percentages are within normal ranges for our business within their respective times of year.

Customer deposits were almost $109 million lower this year as we reduced customer prepayment programs. However, they still reflect a seasonal increase during the quarter.

Investment

During quarter ended June 30, 2009, we invested about $11 million in our fixed assets compared to $6 million in last year’s first fiscal quarter. Depreciation expense was approximately $10 million in both years. Our intent is to limit maintenance capital spending to a level below depreciation expense in order to maintain strong cash flow. However, from time to time larger projects may be undertaken. Earlier this year we announced that we plan to spend approximately $12 million in fiscal year 2010 on an expansion and upgrade of our processing facility in Lancaster, Pennsylvania, to accommodate the consolidation of our U.S. dark tobacco processing into that facility, and we expect to spend a similar amount pursuant to customer contracts over the next 12 months.

 

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Financing

We consider the sum of notes payable and overdrafts, long-term debt (including current portion), and customer advances and deposits, less cash, cash equivalents, and short-term investments on our balance sheet to be our net debt. We also consider our net debt plus shareholders’ equity to be our total capitalization. Net debt increased by about $125 million to $506 million during the quarter ended June 30, 2009, primarily due to seasonal working capital requirements. Net debt as a percentage of capitalization was approximately 32% at June 30, 2009, up from about 27% at March 31, 2009, and down from approximately 38% at June 30, 2008. Net debt was about $149 million lower than June 30, 2008 levels, reflecting earlier shipments and lower green tobacco costs this year.

As of June 30, 2009, we were in compliance with the covenants of our debt agreements. We had $400 million available under a committed revolving credit facility that will expire on August 31, 2012, $131 million in cash and cash equivalents, and $30 million available under a committed credit facility that will expire in December 2009. Our short-term debt and current maturities of long-term debt totaled $251 million. In addition, we had about $539 million in unused, uncommitted credit lines. Our seasonal working capital requirements typically increase from December to September by up to $200 million. In addition to our operating requirements for working capital for the remainder of this fiscal year, we will repay $79.5 million in long-term debt when it matures in September 2009, we plan to spend approximately $20 million to expand and upgrade our Lancaster facility and complete other projects related to customer contracts, and we expect to provide around $9 million in additional funding to our pension plans. While available capital resources from our cash balances, committed credit facilities, and uncommitted credit lines exceed these anticipated needs, we may explore issuing additional long-term debt in order to better control liquidity risk. If we were to issue new long-term debt in the current markets, we believe that the cost of that debt would be substantially higher than the long-term debt we currently have outstanding and that the increased interest expense would impact our future results. If we refinanced our maturing debt today, we believe our interest expense could increase by around $2 million per year.

On November 7, 2007, we announced that our Board of Directors had approved the purchase of up to $150 million of our common stock through November 2009. The purchases are carried out from time to time on the open market or in privately negotiated transactions at prices not exceeding prevailing market rates. During the quarter ended June 30, 2009, we purchased 97 thousand shares of common stock at an aggregate cost of $3.4 million (average price per share of $35.11), which brought our total purchases under the program to 2.65 million shares at an aggregate cost of $131 million (average price per share of $49.50). As of June 30, 2009, we had approximately 24.9 million common shares outstanding.

Derivatives

From time to time, we use interest rate swap agreements to manage our exposure to changes in interest rates. These agreements typically adjust interest rates on designated long-term obligations from fixed to variable. The swaps are accounted for as fair value hedges. At June 30, 2009, the value of our outstanding interest rate swap agreements was an asset of $9.6 million.

 

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We also enter forward contracts from time to time to hedge certain foreign currency exposures, primarily related to forecast purchases of tobacco in Brazil. We account for our hedges of forecast tobacco purchases as cash flow hedges. At June 30, 2009, the fair value of our open contracts was inconsequential and we had approximately $6.4 million in losses on both open and closed contracts recorded in accumulated other comprehensive loss. We also had other forward contracts outstanding that were not designated as hedges, and the fair value of those contracts was an asset of approximately $0.8 million.

Results of Operations

Amounts included in the following discussion are attributable to Universal Corporation and exclude earnings related to non-controlling interests in subsidiaries.

Net income for the first quarter of fiscal year 2010, which ended on June 30, 2009, was $43.7 million, or $1.47 per diluted share. Those results more than doubled last year’s income of $21.1 million, or $0.64 per diluted share, mostly because of earlier shipments of tobacco this year and a more favorable product mix. The same factors caused a 22% revenue increase compared to the same quarter last year. Revenues for the quarter were about $616 million.

Flue-cured and Burley Operations

Operating income for our flue-cured and burley tobacco operations increased by 85% to $64 million. That performance includes results from our North America and Other Regions segments. Operating income for the North America segment reflected its normal seasonal low period, but its performance was also affected by lower sales volumes of old crop U.S. leaf this quarter and lower Canadian volumes from the reduced crop there. The volume decline significantly reduced that segment’s revenues. In contrast, operating income for the Other Regions segment includes the seasonally strong Brazilian operations, which were characterized this year by substantially higher volumes due to earlier shipments. Average leaf sales prices were lower this year, reflecting lower leaf costs. Leaf costs were lower in U.S. dollar terms because of the weaker Brazilian currency during the leaf purchasing season; however, a significant portion of that cost of producing the crop was incurred in the form of inputs advanced to farmers before the local currency weakened and was included in last year’s remeasurement losses. Earlier shipments of tobacco from Europe and increased volumes in Asia also benefited the quarter’s results, while lower shipments of old crop tobacco from Africa reduced that region’s results during its seasonal low period. Revenues for the Other Regions segment increased by nearly 30%, primarily due to the earlier shipments from Brazil and Europe, and the increased Asian trading volumes, which were partly offset by the lower sales of old crop tobacco from Africa. In addition to increased volumes, revenues increased on higher proportions of lamina in shipments during the quarter and higher prices for certain Asian trading volumes.

 

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Other Tobacco Operations

The Other Tobacco Operations segment performed well as the oriental tobacco joint venture results improved, mainly due to a more favorable sales mix as well as to certain cost containment measures. Dark tobacco results also improved on better product mix although volumes declined. During the last quarter of fiscal year 2009, customers had purchased leaf earlier than usual in anticipation of the enactment of U.S. excise tax increases, and thus volumes were lower this year. Despite the lower volumes, dark tobacco revenues, which are the predominant factor in segment revenues, increased due to higher prices caused by increased leaf costs during last year’s purchasing season and a more favorable product mix.

Other Information

Cost of sales increased by 18% to $476 million in the quarter on the increased volumes shipped, offset by lower costs as the U.S. dollar strengthened against the currencies of many origins during the leaf purchasing season. Selling, general, and administrative costs increased by 7%, reflecting additional currency remeasurement losses of about $6 million. Interest expense was comparable to that of fiscal year 2009, and the effective income tax rate was similar to last year’s rate.

General Overview

We are very pleased with our performance during the first quarter. Each of our operations performed as we had expected or better. Earlier shipments of Brazilian and European tobacco boosted our results, and leaf costs were lower due to the stronger U.S. dollar. Looking at the current worldwide situation, we see the U.S. dollar beginning to weaken again, which could increase costs as we enter the next purchasing season. We will be monitoring these factors as the year progresses, and we will be working to control our costs.

We do not foresee any oversupply of flue-cured tobacco in the coming year. Global burley availability improved after the shortage of filler style crops two years ago. There is a large crop again this year. So it is likely that we will see some oversupply of burley. Worldwide dealer inventories for flue-cured and burley tobacco are about 70 million kilos compared to about 80 million kilos last year.

Japan Tobacco Inc., one of our largest customers, recently announced steps to enhance their direct leaf procurement capabilities by acquiring and entering joint ventures with smaller leaf merchants. They enumerated several factors that prompted their moves, including the desire to enhance internal expertise in leaf procurement, actively manage the leaf supply chain, and work more directly with tobacco growers. Over time, these steps are likely to reduce our volumes with them in the United States, and may affect other regions as well. However, the overall impact and timing cannot yet be determined. We are continuing to have dialogue with them and believe that we will continue our long-term relationship.

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rates

After inventory is purchased, interest rate risk is limited in the tobacco business because major customers usually pre-finance purchases or pay market rates of interest for inventory purchased for their accounts. Our customers pay interest on tobacco purchased for their order. That interest is paid at rates based on current markets for variable-rate debt. When we fund our committed tobacco inventory with fixed-rate debt, we may not be able to recover interest at that fixed rate if current market interest rates were to fall. As of June 30, 2009, tobacco inventory of $886 million included about $796 million in inventory that was committed for sale to customers and about $90 million that was not committed. Committed inventory, after deducting $57 million in customer deposits, represents our net exposure of $739 million. We normally maintain a substantial portion of our debt at variable interest rates either directly or through interest rate exchange agreements in order to mitigate interest rate risk related to carrying fixed-rate debt. We also periodically have large cash balances that we use to fund seasonal tobacco purchases. These cash balances reduce our financing needs. Debt carried at variable interest rates was about $341 million at June 30, 2009. Although a hypothetical 1% change in short-term interest rates would result in a change in annual interest expense of approximately $3 million, that amount would be mitigated by changes in charges to customers. Our policy is to work toward a level of floating rate liabilities, including customer deposits, that reflects our average committed inventory levels over time. In addition to the $341 million of debt with variable interest rates, about $239 million of long-term debt has an average fixed rate of 5.66%.

Currency

The international tobacco trade generally is conducted in U.S. dollars, thereby limiting foreign exchange risk to that which is related to 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 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 generally manage our foreign exchange risk by matching funding for inventory purchases with the currency of sale, which is usually the U.S. dollar, and by minimizing our net local currency monetary position in individual countries. We are vulnerable to currency gains and losses to the extent that monetary assets and liabilities denominated in local currency do not offset each other. In addition to foreign exchange gains and losses, we are exposed to changes in the cost of tobacco due to changes in the value of the local currency in relation to the U.S. dollar. For example, when we purchased the Brazilian crop in the beginning of fiscal year 2009, the local currency had appreciated significantly against the U.S. dollar. Thus, the cost of the crop increased over the prior year, in U.S. dollar terms. We enter into forward currency exchange contracts to hedge some of the effects of currency movements on purchases of tobacco to reduce the volatility of costs, primarily related to the requirements of customer contracts. In addition, we enter some forward contracts to hedge balance sheet exposures.

 

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In certain tobacco markets that are primarily domestic, we use the local currency as the functional currency. Examples of these domestic markets are Hungary, Poland, and the Philippines. In other markets, such as Western Europe, where export sales have been primarily in local currencies, we also use the local currency as the functional currency. In each case, reported earnings are affected by the translation of the local currency into the U.S. dollar.

Derivatives Policies

Hedging interest rate exposure using swaps and hedging foreign exchange exposure using forward contracts are specifically contemplated to manage risk in keeping with management’s policies. We may use derivative instruments, such as swaps, forwards, or futures, which are based directly or indirectly upon interest rates and currencies to manage and reduce the risks inherent in interest rate and currency fluctuations. When we use foreign currency derivatives to mitigate our exposure to exchange rate fluctuations, we may choose not to designate them as hedges for accounting purposes, which may result in the effects of the derivatives being recognized in our earnings in periods different from the items that created the exposure.

We do not utilize derivatives for speculative purposes, and we do not enter into market risk-sensitive instruments for trading purposes. Derivatives are transaction specific so that a specific debt instrument, forecast purchase, contract, or invoice determines the amount, maturity, and other specifics of the hedge. Counterparty risk is limited to institutions with long-term debt ratings of A or better.

 

ITEM 4. CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in reports we file under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. Our Chief Executive Officer and Chief Financial Officer evaluated, with the participation of other members of management, the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, management concluded that our disclosure controls and procedures were effective. There were no changes in our internal controls over financial reporting identified in connection with this evaluation that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

 

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PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

European Commission Fines in Spain

In October 2004, the European Commission (the “Commission”) imposed fines on “five companies active in the raw Spanish tobacco processing market” totaling €20 million for “colluding on the prices paid to, and the quantities bought from, the tobacco growers in Spain.” Two of our subsidiaries, Tabacos Espanoles S.A. (“TAES”), a purchaser and processor of raw tobacco in Spain, and Deltafina, S.p.A. (“Deltafina”), an Italian subsidiary, were among the five companies assessed fines. In its decision, the Commission imposed a fine of €108,000 on TAES and a fine of €11.88 million on Deltafina. Deltafina did not and does not purchase or process raw tobacco in the Spanish market, but was and is a significant buyer of tobacco from some of the Spanish processors. We recorded a charge of about €12 million (approximately $14.9 million at the September 2004 exchange rate) in the second quarter of fiscal year 2005 to accrue the full amount of the fines assessed against our subsidiaries.

In January 2005, Deltafina filed an appeal in the Court of First Instance of the European Communities. The outcome of the appeal is uncertain, and an ultimate resolution to the matter could take several years. Deltafina has deposited funds in an escrow account with the Commission in the amount of the fine in order to stay execution during the appeal process. This deposit is accounted for as a non-current asset.

European Commission Fines in Italy

In 2002, we reported that we were aware that the Commission was investigating certain aspects of the leaf tobacco markets in Italy. Deltafina buys and processes tobacco in Italy. We reported that we did not believe that the Commission investigation in Italy would result in penalties being assessed against us or our subsidiaries that would be material to our earnings. The reason we held this belief was that we had received conditional immunity from the Commission because Deltafina had voluntarily informed the Commission of the activities that were the basis of the investigation.

On December 28, 2004, we received a preliminary indication that the Commission intended to revoke Deltafina’s immunity for disclosing in April 2002 that it had applied for immunity. Neither the Commission’s Leniency Notice of February 19, 2002, nor Deltafina’s letter of provisional immunity, contains a specific requirement of confidentiality. The potential for such disclosure was discussed with the Commission in March 2002, and the Commission never told Deltafina that disclosure would affect Deltafina’s immunity. On November 15, 2005, we received notification that the Commission had imposed fines totaling €30 million (about $42 million at the June 30, 2009 exchange rate) on Deltafina and Universal Corporation jointly for infringing European Union antitrust law in connection with the purchase and processing of tobacco in the Italian raw tobacco market.

We do not believe that the decision can be reconciled the Commission’s Statement of Objections and the facts. Both Deltafina and Universal Corporation have appealed the decision

 

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to the Court of First Instance of the European Communities. Based on consultation with outside legal counsel, we believe it is probable that we will prevail in the appeals process, and we have not accrued a charge for the fine. Deltafina has provided a bank guarantee to the Commission in the amount of the fine plus accrued interest in order to stay execution during the appeal process.

U.S. Foreign Corrupt Practices Act

As a result of a posting to our Ethics Complaint hotline alleging improper activities that involved or related to certain of our tobacco subsidiaries, the Audit Committee of our Board of Directors engaged an outside law firm to conduct an investigation of the alleged activities. That investigation revealed that there have been payments that may have violated the U.S. Foreign Corrupt Practices Act. The payments involved approximated $2 million over a seven-year period. In addition, the investigation revealed activities in foreign jurisdictions that may have violated the competition laws of such jurisdictions, but we believe those activities did not violate U.S. antitrust laws. We voluntarily reported these activities to the Department of Justice (“DOJ”) and Securities and Exchange Commission (“SEC”) in March 2006. On June 6, 2006, the SEC notified us that a formal order of investigation had been issued.

We have engaged in settlement discussions with the DOJ and SEC to resolve the above-referenced matter. Although those discussions are ongoing, we expect to enter into agreements with the DOJ and the SEC to resolve the matter, and we believe it is probable that such resolution will include injunctive relief, disgorgement and prejudgment interest, fines, and penalties. Since this matter arose, we have recorded accruals that we believe are adequate to satisfy the estimated financial settlement we expect with the resolution of this matter. However, because our discussions are ongoing, we cannot predict with certainty when or whether an agreement will be reached with the DOJ and SEC, or the precise terms of any such agreement. We will continue to cooperate with the authorities in this matter while resolution discussions proceed.

Other Legal Matters

In addition to the above-mentioned matters, some of our subsidiaries are involved in other litigation or legal and tax matters incidental to their business activities. While the outcome of these matters cannot be predicted with certainty, management is vigorously defending the claims and does not currently expect that any of them will have a material adverse effect on our financial position. However, should one or more of these matters be resolved in a manner adverse to our current expectation, the effect on our results of operations for a particular fiscal reporting period could be material.

 

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ITEM 1A. RISK FACTORS

As of the date of this report, there are no material changes to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended March 31, 2009. In evaluating our risks, readers should carefully consider the risk factors discussed in our Annual Report on Form 10-K, which could materially affect our business, financial condition or operating results, in addition to the other information set forth in this report and in our other filings with the Securities and Exchange Commission.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table summarizes our repurchases of equity securities for the three-month period ended June 30, 2009:

 

Period (1)

   Total Number
of Shares
Repurchased
   Average
Price Paid
Per
Share(2)
   Total Number of
Shares Repurchased
as Part of Publicly
Announced Plan or
Program(3)
   Dollar Value of
Shares that May
Yet Be Purchased
Under the Plans
or Programs(3)

April 1, 2009 to April 30, 2009

   —        —      —        —  

May 1, 2009 to May 31, 2009

   11,250    $ 35.52    11,250    $ 21,827,266

June 1, 2009 to June 30, 2009

   86,371      35.06    86,371    $ 18,799,348
                       

Total

   97,621    $ 35.11    97,621    $ 18,799,348
                       

 

(1) Repurchases are based on the date the shares were traded. This presentation differs from the consolidated statement of cash flows, where the cost of share repurchases is based on the date the transactions were settled.
(2) Amounts listed for average price paid per share includes broker commissions paid in the transactions.
(3) The stock repurchase plan, which was authorized by our Board of Directors, became effective and was publicly announced on November 7, 2007. The stock repurchase plan authorizes the purchase of up to $150 million in common stock in open market or privately negotiated transactions, subject to market conditions and other factors. The stock repurchase plan will expire on the earlier of November 15, 2009, or when we have repurchased all shares authorized for repurchase thereunder.

 

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ITEM 5. OTHER INFORMATION

Re-approval of the Universal Corporation Executive Officer Annual Incentive Plan, as amended

On August 4, 2009, at the 2009 Annual Meeting of Shareholders of Universal Corporation, upon recommendation of the Board of Directors, the shareholders re-approved the Universal Corporation Executive Officer Annual Incentive Plan, as amended (the “Incentive Plan”). The terms and conditions of the Incentive Plan are described on pages 9 through 12 of the 2009 Proxy Statement, which description is incorporated herein by reference. This description of the Incentive Plan is qualified in its entirety by reference to the full text of the Incentive Plan, which is attached as Exhibit A to the 2009 Proxy Statement and filed as Exhibit 10.1 to this Quarterly Report on Form 10-Q and is incorporated herein by reference.

 

ITEM 6. EXHIBITS

 

10.1    Universal Corporation Executive Officer Annual Incentive Plan, as amended (filed as Exhibit A to Universal Corporation’s definitive proxy statement, filed on June 25, 2009 (No. 001-00652), and incorporated herein by reference).
12    Ratio of Earnings to Fixed Charges, and Ratio of Earnings to Combined Fixed Charges and Preference Dividends.*
31.1    Certification of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.*
31.2    Certification of Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.*
32.1    Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350.*
32.2    Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350.*
 
  * Filed herewith

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Date: August 6, 2009    

UNIVERSAL CORPORATION

    (Registrant)
   

/s/ David C. Moore

   

David C. Moore, Senior Vice President

and Chief Financial Officer

    (Principal Financial Officer)
   

/s/ Robert M. Peebles

    Robert M. Peebles, Controller
    (Principal Accounting Officer)

 

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Exhibit 12

UNIVERSAL CORPORATION AND SUBSIDIARIES

RATIO OF EARNINGS TO FIXED CHARGES

AND

RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERENCE DIVIDENDS

 

     Three Months Ended
June 30,
     2009    2008
     (in thousands, except for ratios)

Earnings

     

Pretax income before equity in pretax earnings (loss) of unconsolidated affiliates

   $ 62,182    $ 31,471

Fixed charges (net of interest capitalized)

     9,448      8,947

Distribution of earnings from unconsolidated affiliates

     —        —  
             

Total Earnings

   $ 71,630    $ 40,418
             

Fixed Charges and Preference Dividends

     

Interest expense

   $ 8,155    $ 7,666

Interest capitalized

     —        —  

Amortization of premiums, discounts, and debt issuance costs

     489      227

Interest component of rent expense

     804      1,054
             

Total Fixed Charges

     9,448      8,947

Dividends on convertible perpetual preferred stock (pretax)

     5,711      5,711
             

Total Fixed Charges and Preference Dividends

   $ 15,159    $ 14,658
             

Ratio of Earnings to Fixed Charges

     7.58      4.52
             

Ratio of Earnings to Combined Fixed Charges and Preference Dividends

     4.73      2.76
             

Exhibit 31.1

CERTIFICATION

I, George C. Freeman, III, Chairman, President, and Chief Executive Officer of Universal Corporation, certify that:

 

  1. I have reviewed the Quarterly Report on Form 10-Q of Universal Corporation for the period ended June 30, 2009;

 

  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

  3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

  4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

 

  (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and


  (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

  5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 6, 2009

 

/s/ George C. Freeman, III

George C. Freeman, III
Chairman, President, and Chief Executive Officer
(Principal Executive Officer)

Exhibit 31.2

CERTIFICATION

I, David C. Moore, Senior Vice President and Chief Financial Officer of Universal Corporation, certify that:

 

  1. I have reviewed the Quarterly Report on Form 10-Q of Universal Corporation for the period ended June 30, 2009;

 

  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

  3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

  4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

 

  (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and


  (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of the annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

  5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing equivalent functions):

 

  (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 6, 2009

 

/s/ David C. Moore

David C. Moore
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report of Universal Corporation (the “Company”) on Form 10-Q for the period ended June 30, 2009 as filed with the Securities and Exchange Commission on the date hereof (the “Report”) and pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, I, George C. Freeman, III, Chairman, President, and Chief Executive Officer of the Company, certify, to the best of my knowledge and belief, that

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Dated: August 6, 2009    

/s/ George C. Freeman, III

    George C. Freeman, III
    Chairman, President, and Chief Executive Officer
    (Principal Executive Officer)

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report of Universal Corporation (the “Company”) on Form 10-Q for the period ended June 30, 2009 as filed with the Securities and Exchange Commission on the date hereof (the “Report”) and pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, I, David C. Moore, Senior Vice President and Chief Financial Officer of the Company, certify, to the best of my knowledge and belief, that

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Dated: August 6, 2009    

/s/ David C. Moore

    David C. Moore
    Senior Vice President and Chief Financial Officer
    (Principal Financial Officer)

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request .