10-Q

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 DECEMBER 31, 2010

OR

¨  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM _______________________TO _______________________

Commission File Number:  001-00652

UNIVERSAL CORPORATION

(Exact name of registrant as specified in its charter)

Virginia	54-0414210
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	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 x  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 o   No x

As of February 1, 2011, the total number of shares of common stock outstanding was 23,455,653.

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	24
3.	Quantitative and Qualitative Disclosures About Market Risk	28
4.	Controls and Procedures	29
	PART II - OTHER INFORMATION
1.	Legal Proceedings	30
1A.	Risk Factors	31
2.	Unregistered Sales of Equity Securities and Use of Proceeds	31
5.	Other Information	31
6.	Exhibits	32
	Signatures	33

2

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 December 31,						Nine Months Ended December 31,
	2010			2009			2010			2009
	(Unaudited)						(Unaudited)
Sales and other operating revenues	$	688,208		$	661,205		$	1,891,312		$	1,925,235
Costs and expenses
Cost of goods sold		534,164			516,541			1,501,757			1,493,864
Selling, general and administrative expenses		74,826			75,719			186,658			216,789
Other income		(19,368	)		—			(19,368	)		—
Restructuring and impairment costs		10,995			—			13,964			—
Operating income		87,591			68,945			208,301			214,582
Equity in pretax earnings (loss) of unconsolidated affiliates		(1,439	)		7,783			953			17,029
Interest income		754			130			2,614			926
Interest expense		6,257			5,438			17,245			20,287
Income before income taxes and other items		80,649			71,420			194,623			212,250
Income taxes		23,064			22,946			58,837			65,300
Net income		57,585			48,474			135,786			146,950
Less:  net (income) loss attributable to noncontrolling interests in subsidiaries		(5,287	)		(2,778	)		(6,337	)		(4,994	)
Net income attributable to Universal Corporation		52,298			45,696			129,449			141,956
Dividends on Universal Corporation convertible perpetual preferred stock		(3,712	)		(3,712	)		(11,137	)		(11,137	)
Earnings available to Universal Corporation common shareholders	$	48,586		$	41,984		$	118,312		$	130,819
Earnings per share attributable to Universal Corporation common shareholders:
Basic	$	2.05		$	1.70		$	4.93		$	5.27
Diluted	$	1.82		$	1.54		$	4.46		$	4.78
Retained earnings - beginning of year							$	767,213		$	686,960
Net income attributable to Universal Corporation								129,449			141,956
Cash dividends declared:
Series B 6.75% Convertible Perpetual Preferred Stock								(11,137	)		(11,137	)
Common stock (2010 - $1.41 per share; 2009 - $1.38 per share)								(33,891	)		(34,384	)
Dividend equivalents on restricted stock units								(316	)		(286	)
Repurchase of common stock - cost in excess of stated capital amount								(27,074	)		(13,006	)
Retained earnings - end of period							$	824,244		$	770,103

See accompanying notes.

3

UNIVERSAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands of dollars)

	December 31, 2010			December 31, 2009			March 31, 2010
	(Unaudited)			(Unaudited)
ASSETS
Current
Cash and cash equivalents	$	91,427		$	164,170		$	245,953
Accounts receivable, net		292,490			255,847			266,960
Advances to suppliers, net		132,815			134,209			167,400
Accounts receivable - unconsolidated affiliates		35,978			26,550			11,670
Inventories - at lower of cost or market:
Tobacco		940,168			770,708			812,186
Other		50,551			50,716			52,952
Prepaid income taxes		8,633			14,632			13,514
Deferred income taxes		43,669			48,711			47,074
Other current assets		65,784			64,234			75,367
Total current assets		1,661,515			1,529,777			1,693,076
Land		15,490			16,147			16,036
Buildings		265,390			259,912			266,350
Machinery and equipment		552,575			535,278			532,824
		833,455			811,337			815,210
Less accumulated depreciation		(512,413	)		(483,349	)		(485,723	)
		321,042			327,988			329,487
Other assets
Goodwill and other intangibles		99,602			106,000			105,561
Investments in unconsolidated affiliates		103,821			124,503			106,336
Deferred income taxes		36,373			13,961			30,073
Other noncurrent assets		96,493			122,057			106,507
		336,289			366,521			348,477
Total assets	$	2,318,846		$	2,224,286		$	2,371,040

See accompanying notes.

4

UNIVERSAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands of dollars)

	December 31, 2010			December 31, 2009			March 31, 2010
	(Unaudited)			(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Notes payable and overdrafts	$	204,769		$	151,252		$	177,013
Accounts payable and accrued expenses		180,054			196,126			259,576
Accounts payable - unconsolidated affiliates		15,355			17,398			6,464
Customer advances and deposits		87,934			38,032			107,858
Accrued compensation		19,029			25,143			30,097
Income taxes payable		11,901			11,753			18,991
Current portion of long-term obligations		95,000			15,000			15,000
Total current liabilities		614,042			454,704			614,999
Long-term obligations		322,486			414,222			414,764
Pensions and other postretirement benefits		100,719			90,662			96,888
Other long-term liabilities		47,661			71,607			69,886
Deferred income taxes		44,963			41,608			46,128
Total liabilities		1,129,871			1,072,803			1,242,665
Shareholders' equity
Universal Corporation:
Preferred stock:
Series A Junior Participating Preferred Stock, no par value, 5,000,000 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 December 31, 2009, and March 31, 2010)		213,023			213,023			213,023
Common stock, no par value, 100,000,000 shares authorized, 23,569,443 shares issued and outstanding (24,617,987 at December 31, 2009, and 24,325,228 at March 31, 2010)		193,263			195,679			195,001
Retained earnings		824,244			770,103			767,213
Accumulated other comprehensive loss		(53,670	)		(36,084	)		(52,667	)
Total Universal Corporation shareholders' equity		1,176,860			1,142,721			1,122,570
Noncontrolling interests in subsidiaries		12,115			8,762			5,805
Total shareholders' equity		1,188,975			1,151,483			1,128,375
Total liabilities and shareholders' equity	$	2,318,846		$	2,224,286		$	2,371,040

See accompanying notes.

5

UNIVERSAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands of dollars)

	NineMonthsEnded December31,
	2010			2009
	(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	135,786		$	146,950
Adjustments to reconcile net income to net cash used by operating activities:
Depreciation		32,474			30,888
Amortization		1,220			1,791
Provisions for losses on advances and guaranteed loans to suppliers		19,554			19,148
Foreign currency remeasurement loss (gain), net		(1,368	)		7,219
Gain on assignment of farmer contracts and sale of related assets		(19,368	)		—
Restructuring and impairment costs		13,964			—
Other, net		(9,366	)		(2,841	)
Changes in operating assets and liabilities, net		(262,251	)		(148,345	)
Net cash provided (used) by operating activities		(89,355	)		54,810
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment		(31,801	)		(42,923	)
Proceeds from assignment of farmer contracts and sale of related assets		34,946			—
Proceeds from sale of property, plant and equipment, and other		2,512			3,356
Net cash provided (used) by investing activities		5,657			(39,567	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance (repayment) of short-term debt, net		22,510			(23,935	)
Issuance of long-term obligations		—			99,208
Repayment of long-term obligations		(15,000	)		(79,500	)
Dividends paid to noncontrolling interests		(100	)		(105	)
Issuance of common stock		—			205
Repurchase of common stock		(33,450	)		(15,342	)
Dividends paid on convertible perpetual preferred stock		(11,137	)		(11,137	)
Dividends paid on common stock		(34,011	)		(34,315	)
Other		—			(943	)
Net cash used by financing activities		(71,188	)		(65,864	)
Effect of exchange rate changes on cash		360			2,165
Net decrease in cash and cash equivalents		(154,526	)		(48,456	)
Cash and cash equivalents at beginning of year		245,953			212,626
Cash and cash equivalents at end of period	$	91,427		$	164,170

See accompanying notes.

6

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. 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, 2010.

NOTE 2.   ACCOUNTING PRONOUNCEMENTS

Recent Pronouncements Adopted Through December 31, 2010

In June 2009, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 168, "The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles - a replacement of FASB Statement No. 162" ("SFAS 168"). This Statement established the newly-developed FASB Accounting Standards Codification ("Codification") as the single source of authoritative U.S. generally accepted accounting principles ("GAAP") for all nongovernmental entities. All guidance in the Codification carries the same level of authority, and all changes or additions to GAAP are now issued as Accounting Standards Updates (“ASU’s”). In addition to the Codification, rules and interpretive releases of the U.S. Securities and Exchange Commission (“SEC”) under federal securities laws remain sources of authoritative GAAP for SEC registrants. Universal was required to adopt SFAS 168 effective September 30, 2009. SFAS 168 did not make any changes to existing accounting guidance that impacted the Company’s accounting and financial reporting.

Through December 31, 2010, Universal adopted the following recent accounting pronouncements:

· FASB Accounting Standards Update 2010-06, "Improving Disclosures about Fair Value Measurements" ("ASU 2010-06"), which was issued by the FASB in January 2010 and is effective for interim and annual financial statements for fiscal years beginning after December 15, 2009. ASU 2010-06 expands and clarifies the disclosure requirements related to fair value measurements. It requires companies to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 of the fair value hierarchy and describe the reasons for the transfers. In addition, information about purchases, sales, issuances, and settlements on a gross basis is required in the reconciliation of Level 3 fair-value measurements. ASU 2010-06 also clarifies existing fair value measurement disclosure guidance related to level of disaggregation, fair value inputs, and valuation techniques. Universal was required to apply most provisions of the new guidance effective April 1, 2010, the beginning of the current fiscal year. The adoption of ASU 2010-06 did not have a material effect on the Company’s financial statements.

· FASB Staff Position No. 132(R)-1, "Employers' Disclosures about Postretirement Benefit Plan Assets" ("FSP 132(R)-1"), adopted effective March 31, 2010. This pronouncement, which is now a part of Topic 715 of the Codification, requires expanded disclosures about plan assets of defined benefit pension or other postretirement benefit plans. The new disclosures include information about investment allocation decisions, categories of plan assets, the inputs and valuation techniques used to measure the fair value of those assets, and significant concentrations of credit risk. The disclosures required by FSP 132(R)-1 were included in the Company’s annual financial statements at March 31, 2010, and did not have a material effect on those financial statements.

7

Pronouncements to be Adopted in Future Periods

In addition to the above accounting pronouncements adopted through December 31, 2010, the following pronouncement has been issued and will become effective in fiscal year 2012:

· FASB Accounting Standards Update 2009-13, "Multiple-Deliverable Revenue Arrangements" ("ASU 2009-13"), which was issued by the FASB in October 2009. ASU 2009-13 establishes a selling price hierarchy for determining the selling price of a deliverable in a multiple-deliverable arrangement. It also requires additional disclosures about the methods and assumptions used to evaluate multiple-deliverable arrangements and to identify the significant deliverables within those arrangements. ASU 2009-13 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, which means that Universal will be required to adopt the guidance effective April 1, 2011, the beginning of its fiscal year 2012. The Company is evaluating the potential impact of ASU 2009-13, but does not currently expect that it will have a material effect on its financial statements.

NOTE 3.   GUARANTEES, OTHER CONTINGENT LIABILITIES, AND OTHER MATTERS

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 December 31, 2010, the Company’s total exposure under guarantees issued by its operating subsidiary in Brazil for banking facilities of farmers in that country was approximately $77 million ($97 million face amount including unpaid accrued interest, less $20 million recorded for the fair value of the guarantees).  About 94% 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 payments that the Company’s subsidiary could be required to make at December 31, 2010, was the face amount, $97 million including unpaid accrued interest ($155 million as of December 31, 2009, and $112 million at March 31, 2010).  The fair value of the guarantees was a liability of approximately $20 million at December 31, 2010 ($26 million at December 31, 2009, and $26 million at March 31, 2010).  In addition to these guarantees, the Company has other contingent liabilities totaling approximately $51 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 General Court of the European Union (“General Court”).  A hearing was held in June 2009, and on September 8, 2010, the General Court issued its decision, in which it reduced the amount of the Deltafina fine to €6.12 million. The General Court held in part that the Commission erred in finding Deltafina acted as the leader of the Spanish cartel, and that the Commission’s corresponding increase of the underlying fine by 50% was not justified.  Deltafina filed an appeal to the General Court decision with the European Court of Justice on November 18, 2010.  Although Deltafina agreed with the General Court that there was no basis for finding that Deltafina had acted as the leader of the Spanish cartel, Deltafina believed the General Court erred in not reducing the remaining fine further based on numerous grounds.  A hearing has not been set and an ultimate resolution to the matter could take several years.  The Company had deposited funds in an escrow account with the Commission in February 2005 in an amount equal to the original fine.  The Company received funds from escrow in an amount equal to the reduction by the General Court plus interest that had accrued thereon.  As a result of the General Court’s decision in September 2010, during the quarter ended September 30, 2010, the Company reversed €5.76 million (approximately $7.4 million) of the charge previously recorded to accrue the fine and recognized approximately $1.2 million of interest income returned on the escrow funds. The reversal of the fine is included in selling, general and administrative expense in the consolidated statement of income.

8

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’s investigation in Italy would result in penalties being assessed against it or its subsidiaries that would be material to the Company’s earnings.  The reason the Company held this belief was that it had received conditional immunity from the Commission because Deltafina had voluntarily informed the Commission of the activities that were the basis of the investigation.

On December 28, 2004, the Company received a preliminary indication that the Commission intended to revoke Deltafina’s immunity for disclosing in April 2002 that it had applied for immunity.  Neither the Commission’s Leniency Notice of February 19, 2002, nor Deltafina’s letter of provisional immunity, contains a specific requirement of confidentiality.  The potential for such disclosure was discussed with the Commission in March 2002, and the Commission never told Deltafina that disclosure would affect Deltafina’s immunity.  On November 15, 2005, the Company received notification from the Commission that the Commission had imposed fines totaling €30 million (about $40 million at the December 31, 2010 exchange rate) on Deltafina and the Company jointly for infringing European Union antitrust law in connection with the purchase and processing of tobacco in the Italian raw tobacco market.

The Company does not believe that the decision can be reconciled with either the Commission’s Statement of Objections or the facts.  In January 2006, the Company and Deltafina each filed appeals in the General Court.  Deltafina’s appeal was held on September 28, 2010.  For strategic reasons related to the defense of the Deltafina appeal, Universal withdrew its appeal.  Based on consultation with outside legal counsel, the Company believes it is probable that Deltafina will prevail in the appeals process and has not accrued a charge for the fine.  If the Company and Deltafina are ultimately found liable for the full amount of the fine, then accumulated interest on the fine would also be due and payable. Accumulated interest totaled approximately €5.2 million (about $7.0 million) at December 31, 2010.  Deltafina has provided a bank guarantee to the Commission in the amount of the fine plus accumulated interest in order to stay execution during the appeals process.

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 these matters and does not currently expect that any of them will have a material adverse effect on the Company’s financial position. However, should one or more of these matters be resolved in a manner adverse to management’s current expectation, the effect on the Company’s results of operations for a particular fiscal reporting period could be material.

Assignment of Farmer Contracts and Sale of Related Assets in Brazil

In October 2010, Universal’s operating subsidiary in Brazil completed the assignment of tobacco production contracts with approximately 8,100 farmers to Philip Morris Brasil Industria e Comercio (“PMB”), a subsidiary of Philip Morris International (“PMI”).  As part of the transaction, PMB acquired various related assets, including seasonal crop advances outstanding from the farmers, and hired certain employees who previously worked for the Company in agronomy and leaf procurement functions.  PMB also assumed the Company’s obligations under guarantees of bank loans to the farmers for crop financing.  The farmer contracts assigned represent approximately 20% of the annual volume handled by the Company in Brazil during the most recent crop year.  The Company has entered into an agreement to process tobaccos bought directly by PMB from farmers beginning with the 2011 crop year.  In addition, the Company expects to continue to sell processed leaf from Brazil to PMI and its subsidiaries.   The Company received total cash proceeds of approximately $34.9 million from the assignment of farmer contracts and sale of related assets and recorded a gain of approximately $19.4 million, which is reported in other income in the consolidated statement of income.  The determination of the gain included approximately $5.8 million of goodwill associated with the activities conveyed.

9

NOTE 4.   RESTRUCTURING AND IMPAIRMENT COSTS

In November 2010, Universal decided to close its leaf tobacco processing facility in Simcoe, Ontario, Canada.  The Company will continue to buy tobacco grown in Canada, but will process that leaf at its U.S. factory in North Carolina.  All full-time salaried personnel at the Simcoe location have been or will be terminated with the closure of the facility, and various seasonal employees will not be rehired for the coming crop year.  Under Canadian statutory and common law, the salaried employees and certain seasonal employees are entitled to termination benefits.  The Company accrued the cost of these benefits, which totaled approximately $2.7 million, during the quarter ended December 31, 2010, and they will be paid to the employees shortly after their respective departure dates.  The full-time salaried personnel have vested service under a defined benefit pension plan.  The Company expects to incur pension settlement costs of approximately $4 million to $5 million in one or more future accounting periods as a result of settling those benefit obligations; however, actual settlement costs will depend on a number of factors, including the value of plan assets, discount rates affecting final benefit calculations, and annuity market rates.  The Company has determined that the Simcoe processing facility and a separate storage complex met the accounting requirements for classification as “held for sale” at December 31, 2010.  Based on terms of sale currently being negotiated with a buyer for the processing facility and a recent independent offer for the storage complex, an impairment charge of approximately $5.6 million was recorded during the quarter ended December 31, 2010, to write those assets down to their fair values, net of selling costs.  The Canadian operations are included in the North America segment, and revenues and earnings for these operations have not been material to that segment in recent years.

In addition to the restructuring and impairment costs related to the decision to close the facility in Canada, the Company recorded other restructuring costs during the quarter and nine months ended December 31, 2010, associated with initiatives undertaken to adjust various operations and reduce costs.  Most of the restructuring costs represent employee termination benefits associated with voluntary early retirement offers and involuntary separations at the Company’s headquarters and operating locations in the United States, South America, Africa, and Europe that are part of the North America and Other Regions reportable segments.

A summary of the restructuring and impairment costs recorded through December 31, 2010, is as follows:

(in thousands of dollars)	Closure of Processing Facility in Canada		Other Restructuring and Cost Reduction Initiatives		Total
Restructuring Costs:
Employee termination benefits	$	2,711	$	5,293	$	8,004
Other costs		—		328		328
		2,711		5,621		8,332
Impairment Costs:
Property, plant and equipment		5,632		—		5,632
Total restructuring and impairment costs	$	8,343	$	5,621	$	13,964

A reconciliation of the Company’s liability for the restructuring costs outlined above through December 31, 2010, is as follows:

(in thousands of dollars)	Employee Termination Benefits			Other Costs			Total
Restructuring costs charged to expense during fiscal year 2011	$	8,004		$	328		$	8,332
Payments during fiscal year 2011		(2,682	)		(238	)		(2,920	)
Restructuring liability at December 31, 2010	$	5,322		$	90		$	5,412

10

The employee termination benefits outlined in the tables above relate to approximately 170 total employees, including those affected by the facility closure in Canada.  Most of the restructuring liability at December 31, 2010, will be paid before the end of the current fiscal year.  Universal continually reviews its business for opportunities to realize efficiencies, reduce costs, and realign its operations in response to business changes.  The Company expects to incur additional restructuring costs and may also incur asset impairment charges in future periods as business changes occur and additional cost savings initiatives are implemented.

NOTE 5.   EARNINGS PER SHARE

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

	Three Months Ended December 31,						Nine Months Ended December 31,
(in thousands, except per share data)	2010			2009			2010			2009
Basic Earnings Per Share
Numerator for basic earnings per share
Net income attributable to Universal Corporation	$	52,298		$	45,696		$	129,449		$	141,956
Less:  Dividends on convertible perpetual preferred stock		(3,712	)		(3,712	)		(11,137	)		(11,137	)
Earnings available to Universal Corporation common shareholders for calculation of basic earnings per share		48,586			41,984			118,312			130,819
Denominator for basic earnings per share
Weighted average shares outstanding		23,738			24,684			24,010			24,823
Basic earnings per share	$	2.05		$	1.70		$	4.93		$	5.27
Diluted Earnings Per Share
Numerator for diluted earnings per share
Earnings available to Universal Corporation common shareholders	$	48,586		$	41,984		$	118,312		$	130,819
Add:  Dividends on convertible perpetual preferred stock (if conversion assumed)		3,712			3,712			11,137			11,137
Earnings available to Universal Corporation common shareholders for calculation of diluted earnings per share		52,298			45,696			129,449			141,956
Denominator for diluted earnings per share:
Weighted average shares outstanding		23,738			24,684			24,010			24,823
Effect of dilutive securities (if conversion or exercise assumed)
Convertible perpetual preferred stock		4,752			4,735			4,747			4,731
Employee share-based awards		302			226			262			173
Denominator for diluted earnings per share		28,792			29,645			29,019			29,727
Diluted earnings per share	$	1.82		$	1.54		$	4.46		$	4.78

For the nine months ended December 31, 2010 and 2009, certain employee share-based awards were not included in the computation of diluted earnings per share because their effect would have been anti-dilutive.  These awards included stock appreciation rights and stock options totaling 669,401 shares at a weighted-average exercise price of $52.48 for the period ended December 31, 2010, and 507,801 shares at a weighted-average exercise price of $56.52 for the period ended December 31, 2009.

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NOTE 6.   COMPREHENSIVE INCOME

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

	ThreeMonthsEnded December31,						NineMonthsEnded December31,
(in thousands of dollars - all amounts net of income taxes)	2010			2009			2010			2009
Net income	$	57,585		$	48,474		$	135,786		$	146,950
Foreign currency translation adjustment		(2,252	)		222			(1,091	)		13,814
Foreign currency hedge adjustment		(304	)		482			161			14,750
Total comprehensive income		55,029			49,178			134,856			175,514
Less:  comprehensive income attributable to noncontrolling interests in subsidiaries (including foreign currency translation adjustment)		(5,279	)		(2,822	)		(6,410	)		(5,096	)
Comprehensive income attributable to Universal Corporation	$	49,750		$	46,356		$	128,446		$	170,418

NOTE 7.   INCOME TAXES

The Company is subject to the tax laws of many jurisdictions.  Changes in tax laws or the interpretation of tax laws can affect the Company's earnings, as can the resolution of pending and contested tax issues.  The consolidated income tax rate is affected by a number of factors, including the mix of domestic and foreign earnings and investments, local tax rates of subsidiaries, repatriation of foreign earnings, and the Company's ability to utilize foreign tax credits.

The Company’s consolidated effective income tax rates on pre-tax earnings were approximately 29% and 30% for the quarter and nine months ended December 31, 2010, respectively.  For the quarter and nine months ended December 31, 2009, the effective income tax rates were approximately 32% and 31%, respectively.  The rates were lower than the 35% U.S. statutory rate due in part to earnings of subsidiaries in the Company’s African region, which allowed the recognition of foreign tax credits.  The lower rates for each period also reflect the reversal of uncertain tax positions upon the expiration of statutes of limitations for the related tax years in the respective jurisdictions or upon favorable resolution of the positions with the applicable tax authorities.

NOTE 8.     DERIVATIVES AND HEDGING ACTIVITIES

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

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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 its committed inventories.  The strategy is implemented by borrowing at floating interest rates and 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 are adjusted semi-annually based on changes in the benchmark interest rate.

The Company’s interest rate swap agreements are designated and qualify as hedges of the exposure to changes in the fair value of the underlying debt instruments created by fluctuations in prevailing market interest rates.  In all cases, the critical terms of each interest rate swap agreement match the terms of the underlying debt instrument, and there is no hedge ineffectiveness.  The total notional amount of the Company’s receive-fixed/pay-floating interest rate swaps was $245 million at December 31, 2010, March 31, 2010, and December 31, 2009.

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

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

For the crops bought, processed, and sold in fiscal years 2010 and 2011, all contracts related to tobacco purchases in Brazil were designated and qualify as hedges of the future cash flows associated with the forecast purchases of tobacco.  As a result, except for insignificant amounts related to any ineffective portion of the hedging strategy, changes in fair values of the forward contracts have been recognized in comprehensive income as they occurred, but only recognized in earnings upon  sale of the related tobacco to third-party customers.  Forward contracts related to processing costs have not been designated as hedges, and gains and losses on those contracts have been recognized in earnings on a mark-to-market basis.

From March through July 2010, the Company hedged approximately $109 million U.S. dollar notional amount related to 2009-2010 crop tobacco purchases in Brazil.  Additional forward contracts totaling approximately $58 million U.S. dollar notional amount were entered to mitigate currency exposure on processing costs related to that crop.  Purchases of the 2009-2010 crop were completed in July 2010, and all forward contracts to hedge those purchases matured and were settled by that time.  All hedge gains and losses recorded in accumulated other comprehensive loss were recognized in cost of goods sold with the sale of tobacco by September 30, 2010. As noted above, changes in the fair values of forward contracts related to processing costs were recognized in earnings each quarter on a mark-to-market basis.

From September 2008 through July 2009, the Company hedged approximately $241 million U.S. dollar notional amount related to 2008-2009 crop tobacco purchases in Brazil, primarily related to customer contractual requirements.  Purchases of that crop were completed in July 2009, and all forward contracts related to the crop matured and were settled by that time.  Sales of the 2008-2009 crop began during the first quarter of fiscal year 2010 and were completed by the end of the fiscal year.  As that tobacco was sold, all hedge gains and losses previously recorded in accumulated other comprehensive loss were reclassified to cost of goods sold.

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

Most of the Company’s foreign subsidiaries transact the majority of their sales in U.S. dollars and finance the majority of their operating requirements with U.S. dollar borrowings, and therefore use the U.S. dollar as their functional currency.  These subsidiaries normally have certain monetary assets and liabilities on their balance sheets that are denominated in the local currency.  Those assets and liabilities can include cash and cash equivalents, accounts receivable and accounts payable, advances to farmers and suppliers, deferred income tax assets and liabilities, recoverable value-added taxes, and other items.  Net monetary assets and liabilities denominated in the local currency are remeasured into U.S. dollars each reporting period, generating gains and losses that the Company records in earnings as a component of selling, general and administrative expenses.  The level of net monetary assets or liabilities denominated in the local currency normally fluctuates throughout the year based on the operating cycle, but it is most common for monetary assets to exceed monetary liabilities 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 2011, 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 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 purposes. The notional amount of these contracts totaled approximately $60 million in U.S. dollars. All of the contracts were entered and settled during the quarter ended June 30, 2010. No contracts were entered for this purpose in fiscal year 2010.  To further mitigate currency remeasurement exposure, some of the Company’s foreign subsidiaries have obtained short-term local currency financing during certain periods.  This strategy, while not involving the use of derivative instruments, is intended to minimize the subsidiary’s net monetary position by financing a portion of the local currency monetary assets with local currency monetary liabilities and thus hedging a portion of the overall position.

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

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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 quarters and nine months ended December 31, 2010 and 2009.

	Three Months Ended December 31,						Nine Months Ended December 31,
(in thousands of dollars)	2010			2009			2010			2009
Fair Value Hedges - Interest Rate Swap Agreements
Derivative
Gain (loss) recognized in earnings	$	(3,980	)	$	(2,683	)	$	2,721		$	(2,586	)
Location of gain (loss) recognized in earnings	Interest expense
Hedged Item
Description of hedged item	Fixed rate long-term debt
Gain (loss) recognized in earnings	$	3,980		$	2,683		$	(2,721	)	$	2,586
Location of gain (loss) recognized in earnings	Interest expense
Cash Flow Hedges - Forward Foreign Currency Exchange Contracts
Derivative
Effective Portion of Hedge
Gain (loss) recorded in accumulated other comprehensive loss	$	—		$	—		$	—		$	7,162
Gain (loss) reclassified from accumulated other comprehensive loss into earnings	$	—		$	(1,274	)	$	100		$	(14,492	)
Location of gain (loss) reclassified from accumulated other
comprehensive loss into earnings	Cost of goods sold
Ineffective Portion and Early De-designation of Hedges
Gain (loss) recognized in earnings	$	—		$	—		$	101		$	1,444
Location of gain (loss) recognized in earnings	Selling, general and administrative expenses
Hedged Item
Description of hedged item	Forecast purchases of tobacco in Brazil
Derivatives Not Designated as Hedges -
Forward Foreign Currency Exchange Contracts
Contracts related to forecast processing costs and forecast purchases of tobacco, primarily in Brazil
Gain (loss) recognized in earnings	$	(64	)	$	—		$	1,138		$	—
Location of gain (loss) recognized in earnings	Selling, general and administrative expenses
Contracts related to net local currency monetary assets and liabilities of subsidiary in Brazil
Gain (loss) recognized in earnings	$	—		$	—		$	661		$	—
Location of gain (loss) recognized in earnings	Selling, general and administrative expenses
Contracts related to fixed-price orders and accounts receivable of non-U.S. dollar subsidiaries
Gain (loss) recognized in earnings	$	(511	)	$	826		$	(169	)	$	1,161
Location of gain (loss) recognized in earnings	Selling, general and administrative expenses
Total gain (loss) recognized in earnings for forward foreign
currency exchange contracts not designated as hedges	$	(575	)	$	826		$	1,630		$	1,161

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, no hedge gain or loss remained in accumulated other comprehensive loss at December 31, 2010.

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Effect of Derivative Financial Instruments on the Consolidated Balance Sheets

The table below outlines the effects of the Company’s derivative financial instruments on the consolidated balance sheets at December 31, 2010 and 2009, and March 31, 2010:

	DerivativesinaFairValueAssetPosition							DerivativesinaFairValueLiabilityPosition
	Balance	FairValueasof						Balance	FairValueasof
	Sheet	Dec. 31,		Dec. 31,		March 31,		Sheet	Dec. 31,		Dec. 31,		March 31,
(inthousandsofdollars)	Location	2010		2009		2010		Location	2010		2009		2010
Derivatives Designated
as Hedging Instruments
Interest rate swap	Other
agreements	non-							Long-term
	current							obligations
	assets	$	12,486	$	10,833	$	10,358		$	—	$	1,611	$	593
Forward foreign currency	Other							Accounts
exchange contracts	current							payable and
	assets							accrued
			—		—		84	expenses		—		—		73
Total		$	12,486	$	10,833	$	10,442		$	—	$	1,611	$	666
Derivatives Not Designated
as Hedging Instruments
Forward foreign currency	Other							Accounts
exchange contracts	current							payable and
	assets							accrued
		$	172	$	556	$	740	expenses	$	272	$	287	$	512
Total		$	172	$	556	$	740		$	272	$	287	$	512

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NOTE 9.   FAIR VALUE MEASUREMENTS

Universal measures certain financial and nonfinancial assets and liabilities at fair value based on applicable accounting guidance.  The financial assets and liabilities measured at fair value include money market funds, trading securities associated with deferred compensation plans, interest rate swap agreements, forward foreign currency exchange contracts, and guarantees of bank loans to tobacco growers.  The application of the fair value guidance to nonfinancial assets and liabilities primarily includes assessments of goodwill and long-lived assets for potential impairment.

Under the accounting guidance, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  The framework for measuring fair value 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.

At December 31, 2010, the Company had certain financial assets and financial liabilities that were required to be measured and reported at fair value on a recurring basis.  These assets and liabilities are listed in the table below and classified based on how their values were determined under the fair value hierarchy:

	December31,2010
(inthousandsofdollars)	Level1		Level2		Level3		Total
Assets:
Money market funds	$	42,801	$	—	$	—	$	42,801
Trading securities associated with deferred compensation plans		20,422		—		—		20,422
Interest rate swaps		—		12,486		—		12,486
Forward foreign currency exchange contracts		—		172		—		172
Total assets	$	63,223	$	12,658	$	—	$	75,881
Liabilities:
Guarantees of bank loans to tobacco growers	$	—	$	—	$	19,678	$	19,678
Forward foreign currency exchange contracts		—		272		—		272
Total liabilities	$	—	$	272	$	19,678	$	19,950

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 high credit quality of the issuers of the underlying securities.

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Trading securities associated with deferred compensation plans

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

Interest rate swaps

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

Forward foreign currency exchange contracts

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

Guarantees of bank loans to tobacco growers

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

A reconciliation of the change in the balance of the financial liability for guarantees of bank loans to tobacco growers (Level 3) for the nine months ended December 31, 2010, is as follows:

(in thousands of dollars)	Nine Months Ended December 31, 2010
Balance at beginning of year	$	25,997
Transfer to allowance for loss on direct loans to farmers (removal of prior crop year loans from portfolio and addition of current crop year loans)		(7,336	)
Assumption of guarantees related to assignment of farmer contracts (see Note 3)		(1,110	)
Change in discount rate and estimated collection period		1,001
Currency remeasurement		1,126
Balance at end of period	$	19,678

The effects of currency remeasurement and the change in discount rate and estimated collection period are recorded in earnings and reported in selling, general, and administrative expense. 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.

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NOTE 10.   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.

The components of the Company’s net periodic benefit cost were as follows:

	Pension Benefits						Other Postretirement Benefits
	Three Months Ended December 31,						Three Months Ended December 31,
(in thousands of dollars)	2010			2009			2010			2009
Service cost	$	1,261		$	1,030		$	203		$	162
Interest cost		3,601			3,710			624			705
Expected return on plan assets		(3,728	)		(3,469	)		(35	)		(38	)
Settlement cost		—			2,084			—			—
Net amortization and deferral		1,006			245			(77	)		(255	)
Net periodic benefit cost	$	2,140		$	3,600		$	715		$	574
	Pension Benefits						Other Postretirement Benefits
	Nine Months Ended December 31,						Nine Months Ended December 31,
(in thousands of dollars)	2010			2009			2010			2009
Service cost	$	3,743		$	3,071		$	611		$	489
Interest cost		10,704			11,076			1,873			2,116
Expected return on plan assets		(11,127	)		(10,360	)		(107	)		(114	)
Settlement cost		—			3,334			—			—
Net amortization and deferral		2,999			735			(233	)		(765	)
Net periodic benefit cost	$	6,319		$	7,856		$	2,144		$	1,726

During the nine months ended December 31, 2010, the Company made contributions of approximately $5.2 million to its qualified and non-qualified pension plans.  Additional contributions of approximately $1.5 million are expected during the remaining three months of fiscal year 2011.

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NOTE 11.   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 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 restricted stock units or shares of restricted stock following each annual meeting of shareholders.  RSUs awarded to outside directors vest three years from the grant date, and restricted shares vest upon the individual’s retirement from service as a director.

During the nine-month periods ended December 31, 2010 and 2009, Universal issued the following stock-based awards, representing the regular annual grants to officers and outside directors of the Company:

	Nine Months Ended December 31,
	2010		2009
SARs:
Number granted		153,600		253,800
Exercise price	$	39.71	$	35.30
Grant date fair value	$	8.35	$	7.85
RSUs:
Number granted		53,700		63,450
Weighted average grant date fair value	$	41.14	$	35.30
PSAs:
Number granted		38,400		63,450
Grant date fair value	$	33.95	$	29.67
Restricted Shares:
Number granted		—		17,550
Grant date fair value	$	—	$	39.76

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

	2010			2009
Expected term	5.0 years			5.0 years
Expected volatility		35.3	%		39.0	%
Expected dividend yield		4.73	%		5.21	%
Risk-free interest rate		2.36	%		2.51	%

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 nine-month periods ended December 31, 2010 and 2009, the Company recorded total stock-based compensation expense of approximately $4.8 million and $4.6 million, respectively.  The Company expects to recognize stock-based compensation expense of approximately $1.2 million during the remaining three months of fiscal year 2011.

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NOTE 12.   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 December 31,						Nine Months Ended December 31,
(in thousands of dollars)	2010			2009			2010			2009
SALES AND OTHER OPERATING REVENUES
Flue-cured and burley leaf tobacco operations:
North America	$	124,072		$	101,302		$	243,990		$	187,308
Other regions (1)		506,568			502,624			1,468,326			1,570,973
Subtotal		630,640			603,926			1,712,316			1,758,281
Other tobacco operations (2)		57,568			57,279			178,996			166,954
Consolidated sales and other operating revenues	$	688,208		$	661,205		$	1,891,312		$	1,925,235
OPERATING INCOME
Flue-cured and burley leaf tobacco operations:
North America	$	26,693		$	23,826		$	42,383		$	32,080
Other regions (1)		47,620			42,320			138,530			167,706
Subtotal		74,313			66,146			180,913			199,786
Other tobacco operations (2)		3,466			10,582			15,492			31,825
Segment operating income		77,779			76,728			196,405			231,611
Deduct: Equity in pretax (earnings) loss of unconsolidated affiliates (3)		1,439			(7,783	)		(953	)		(17,029	)
Restructuring and impairment costs (4)		(10,995	)		—			(13,964	)		—
Add:     Other income (4)		19,368			—			19,368			—
Reversal of European Commission fines (4)		—			—			7,445			—
Consolidated operating income	$	87,591		$	68,945		$	208,301		$	214,582

(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.

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

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NOTE 13. CHANGES IN SHAREHOLDERS’ EQUITY AND NONCONTROLLING INTERESTS IN SUBSIDIARIES

A reconciliation of the changes in the Company’s shareholders’ equity and noncontrolling interests in subsidiaries for the nine months ended December 31, 2010 and 2009 is as follows:

	Nine Months Ended December 31, 2010									Nine Months Ended December 31, 2009
	Universal			Noncontrolling						Universal			Noncontrolling
(in thousands of dollars)	Corporation			Interests			Total			Corporation			Interests			Total
Balance at beginning of year	$	1,122,570		$	5,805		$	1,128,375		$	1,029,473		$	3,771		$	1,033,244
Changes in common stock
Issuance of common stock		—			—			—			205			—			205
Repurchase of common stock		(6,297	)		—			(6,297	)		(3,457	)		—			(3,457	)
Accrual of stock-based compensation		4,808			—			4,808			4,609			—			4,609
Withholding of shares for grantee
income taxes (RSUs)		(565	)		—			(565	)		—			—			—
Dividend equivalents on RSUs		316			—			316			286			—			286
Changes in retained earnings
Net income (loss)		129,449			6,337			135,786			141,956			4,994			146,950
Cash dividends declared
Series B 6.75% convertible perpetual
preferred stock		(11,137	)		—			(11,137	)		(11,137	)		—			(11,137	)
Common stock		(33,891	)		—			(33,891	)		(34,384	)		—			(34,384	)
Repurchase of common stock		(27,074	)		—			(27,074	)		(13,006	)		—			(13,006	)
Dividend equivalents on RSUs		(316	)		—			(316	)		(286	)		—			(286	)
Other comprehensive income (loss)
Translation adjustments, net of
income taxes		(1,164	)		73			(1,091	)		13,712			102			13,814
Foreign currency hedge adjustment,
net of income taxes		161			—			161			14,750			—			14,750
Other changes in noncontrolling interests
Dividends paid to noncontrolling
shareholders		—			(100	)		(100	)		—			(105	)		(105	)
Balance at end of period	$	1,176,860		$	12,115		$	1,188,975		$	1,142,721		$	8,762		$	1,151,483

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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, but are not limited to, 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, 2010.  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, 2010.

Liquidity and Capital Resources

Overview

After significant seasonal working capital investments during the first half of our fiscal year, we generally see contraction in inventory and other working capital elements in the second half of the fiscal year as major crops in Africa are being shipped and South American shipments near completion.  Our seasonal working capital requirements typically increase significantly from March to September. In the last three years, funding for that increase has averaged about $300 million.  Reflecting this seasonal pattern, since the seasonal peak in the second fiscal quarter, inventory levels have declined, cash balances have increased, short-term bank borrowings have decreased, and operating cash flow used by operations has decreased.  However, these changes have not been as large as in prior years due to delays in shipment of African crops caused by port congestion.  In addition, we continued our share repurchase program, which is based on free cash flow generated in prior years with certain adjustments 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, shipment and delivery timing, and currency fluctuations affect requirements each year. Peak working capital requirements are generally reached during the first and second fiscal quarters.  Each geographic area follows a cycle of buying, processing, and shipping, although in many regions, we also provide agricultural materials to farmers during the growing season.  The timing of the elements of each cycle is influenced by such factors as local weather conditions and individual customer shipping requirements, which may change the level or the duration of crop financing.  Despite a predominance of short-term needs, we maintain a relatively large portion of our total debt as long-term to reduce liquidity risk.  We also will periodically have large cash balances that we will utilize to meet our working capital requirements.

Operating Activities

 We used $89 million in net cash flows to fund our operating activities during the nine months ended December 31, 2010.  Tobacco inventory, at $940 million, increased by $128 million over this period on seasonal leaf purchases. Tobacco inventory levels were $169 million higher than December 31, 2009 levels, primarily due to later African shipments and larger crops in Africa and the Philippines.  Inventories also reflected higher leaf costs partially due to the effect of the weaker U.S. dollar.  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 $133 million at December 31, 2010, a reduction of $35 million from March 31, 2010, as crops were delivered in payment of those balances primarily in Asia, South America, and Africa.  Accounts receivable increased by $26 million compared to March 31, 2010, reflecting seasonal increases, and increased $37 million over December 31, 2009, levels, primarily due to stronger third quarter sales this year.  Accounts receivable from unconsolidated affiliates were up $24 million in the nine months and $9 million compared to the same period-end last year reflecting increased funding for purchases of leaf by our affiliate in Zimbabwe due to a larger crop there.

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We generally do not purchase material quantities of tobacco on a speculative basis.  We consider our uncommitted tobacco inventories to be our inventory at risk.  At December 31, 2010, our uncommitted inventories were $117 million, or about 12%, of total tobacco inventory, compared to $161 million, or about 20%, of our March 31, 2010, inventory, and $121 million, or about 16%, of our December 31, 2009 inventory.  These percentages are within the normal range for our business for the respective times of year.

Investing Activities

During the nine months ended December 31, 2010, we invested about $32 million in our fixed assets compared to $43 million in the nine months ended December 31, 2009.  Depreciation expense was approximately $32 million and $31 million in the nine months ended December 31, 2010 and 2009, respectively.  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.  Our capital expenditures in fiscal year 2010 included investments to expand and upgrade our processing facility in Lancaster, Pennsylvania, to accommodate the consolidation of our U.S. dark tobacco processing operations.  We had several other projects that required about $20 million of capital investment in aggregate.  We spent approximately $9 million on these projects in fiscal year 2010, $9 million in the nine months ended December 31, 2010, and we expect to spend the remaining $2 million in the current fiscal year.

Financing Activities

We consider the sum of notes payable and overdrafts, long-term debt (including the current portion), and customer advances and deposits, less cash and cash equivalents on our balance sheet to be our net debt.  We also consider our net debt plus shareholders’ equity to be our net capitalization.  Net debt increased by about $150 million to $619 million during the nine months ended December 31, 2010, primarily due to seasonal working capital requirements.  Net debt as a percentage of net capitalization was approximately 34% at December 31, 2010, and reflected normal seasonal expansion, within our target range.   It is up from about 29% at March 31, 2010, and up from approximately 28% at December 31, 2009.  Net debt was about $164 million higher than December 31, 2009 levels, reflecting later shipments this year and higher green tobacco costs.  On average, debt balances have been approximately $100 million higher during the nine months ended December 31, 2010, compared to the same period last year, and cash balances have been lower as we funded working capital requirements for later crop shipments in several origins.

As of December 31, 2010, we were in compliance with all covenants of our debt agreements, which require us to maintain certain levels of tangible net worth and observe restrictions on debt levels.  We had $400 million available under a committed revolving credit facility that will expire on August 31, 2012, and $91 million in cash and cash equivalents.  Our short-term debt totaled $205 million, and we had $95 million of current maturities of long-term debt.  In addition, we had about $487 million in unused, uncommitted credit lines.  Our seasonal working capital requirements typically increase significantly between March and September and decline after mid-year.  Available capital resources from our cash balances, committed credit facility, and uncommitted credit lines exceed our normal working capital needs, projected cash requirements for restructurings, current maturities of long-term debt, and currently anticipated capital expenditure requirements over the next twelve months.

Our Board of Directors approved our current share repurchase program in November 2009.  The program expires in November 2011 and authorizes purchases of up to $150 million of our common stock.  Under the authorization, we purchase shares from time to time on the open market or in privately negotiated transactions at prices not exceeding prevailing market rates.  In determining our level of common share repurchase activity, our intent is to use only cash available after meeting our capital investment, dividend, and working capital requirements.  As a result, our execution of the repurchase program may vary as we realize changes in cash flow generation and availability.  During the nine months ended December 31, 2010, we purchased 784,185 shares of common stock at an aggregate cost of $33.4 million (average price per share of $42.56), based on trading dates, which brought our total purchases under the program to 1,180,570 shares at an aggregate cost of $53.2 million (average price per share of $45.03).  As of December 31, 2010, we had approximately 23.6 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 December 31, 2010, the fair value of our outstanding interest rate swap agreements was $12.5 million, and the notional amount swapped was $245 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 and related processing costs in Brazil, as well as our net monetary asset exposure in local currency there.  We generally account for our hedges of forecast tobacco purchases as cash flow hedges.  At December 31, 2010, there were no such open contracts.  We had other forward contracts outstanding that were not designated as hedges, and the fair value of those contracts was not material at December 31, 2010.

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 third fiscal quarter, which ended December 31, 2010, was $52.3 million, or $1.82 per diluted share, 14% above last year’s net income of $45.7 million, or $1.54 per diluted share.  Solid operating performance in flue-cured and burley leaf tobacco operations offset declines in the Other Tobacco Operations segment, producing an improvement in earnings compared to the prior year’s results. Revenues for the quarter also increased about 4% to $688.2 million reflecting a higher proportion of lamina sales and higher green leaf prices.

During the third quarter, we completed the assignment of tobacco production contracts with approximately 8,100 farmers in Brazil, along with the sale of related assets, to a subsidiary of Philip Morris International (“PMI”) and recorded a net gain of $19.4 million before taxes, or $0.44 per diluted share.  In addition, the results for the quarter include combined restructuring and impairment charges of $11.0 million before taxes, or $0.26 per diluted share, related primarily to the planned closure and sale of related assets of our processing facility in Simcoe, Ontario.

For the nine months ended December 31, 2010, net income was $129.4 million, or $4.46 per diluted share, compared to last year’s net income of $142.0 million, or $4.78 per diluted share, for the same period.  Revenues for the nine months of about $1.9 billion were level with the prior year.  In addition to the gain on the PMI transaction in Brazil, results for the nine months ended December 31, 2010, also include restructuring and impairment charges of $14.0 million before taxes, or $0.32 per diluted share, and income of $7.4 million before taxes, or $0.17 per diluted share, for the second quarter reversal of a portion of a previously recorded European Commission fine due to a favorable court ruling.

Flue-cured and Burley Operations

Third Quarter

Operating income for the third quarter of fiscal year 2011, for the flue-cured and burley operations, which include the North America and Other Regions segments, was $74.3 million, reflecting an improvement of $8.2 million, or 12%, compared to the same period last year.  Earnings for the quarter were buoyed by additional sales in the North America segment of carryover crop and increases in toll processing volumes in the United States.  Results increased in the Asia region on stronger trading volumes and higher volumes sold from the larger crops in the Philippines, as well as the resolution of earlier shipment delays and improved margins.  The Africa region showed improvement in the quarter as well, on a combination of benefits from foreign currency remeasurement and one-time employment cost accruals in the previous year.  Revenues for the group were up 4% at $630.6 million.  The North America segment revenues improved by about $23 million, reflecting increased volumes on old crop sales in this year and higher sales in Mexico. In addition, comparisons benefited from late shipments last year that were delayed into the fourth fiscal quarter.  Sales for the Other Regions segment were relatively flat as reduced volumes partly due to the smaller crop in Brazil and lower demand in Argentina were offset by increased sales in the Asia region.

Nine Months

Operating income for the flue-cured and burley tobacco operations decreased by 9% to $180.9 million for the nine months ended December 31, 2010.  Those results reflect significantly reduced volumes in Brazil, in part due to the smaller Brazilian crop and lower margins from higher currency-related leaf costs.  Earnings in Europe were also down for the nine-month period on lower margins and volumes.  Results in Africa were also lower, although the effect of reduced or delayed sales volumes in some origins has been mitigated by increased processing for third parties.  These decreases were offset somewhat by improved results in the North America segment on increased sales of carryover crop as well as the effect of prior year shipping delays, which affected comparisons.  Also, the Asia region returned improved results for the period on higher volumes from the larger Philippine crops, increased trading earnings, and better experience with the collection of farmer advances.  Revenues were down by 3%, as decreased volumes in South America, Africa, and Europe were partially offset by stronger trading results in Asia and the increase from carryover crop sales in North America.

Other Tobacco Operations

The Other Tobacco Operations segment operating income declined in both the quarter and the nine months versus the prior year, driven primarily by significantly lower results from the oriental tobacco joint venture. Reduced sales volumes and margins and smaller currency gains this year have lowered results for this business for both periods. Dark tobacco results are down for the nine-month period due to lower volumes and margins in some areas. Dark tobacco earnings for the third quarter improved, however, on reductions in overhead and some earlier shipments. Revenues for this segment increased 7% for the nine months, to $179 million, primarily related to higher sales in the just-in-time services group and increased dark tobacco shipments after a soft beginning to the prior year, which offset lower imports of oriental tobacco into the United States.  For the quarter, revenues in this segment were flat.

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Other Information

Cost of sales increased by 1% to about $1.5 billion for the nine months ended December 31, 2010, and increased 3% for the quarter.  Both periods were affected primarily by the effect of a weaker U.S. dollar and the third quarter was influenced as well by a higher proportion of lamina in the sales mix.  Selling, general, and administrative costs decreased by $30 million, or 14%, for the  nine-month period and were relatively flat for the third fiscal quarter compared to the prior year.  The decrease in the nine months was due primarily to the $7.4 million effect on the second fiscal quarter of the reversal of the European Commission fine and a $5 million benefit from lower currency remeasurement and exchange losses in the current year, as well as last year’s accruals for costs associated with the recently settled Foreign Corrupt Practices Act (“FCPA”) matter and for incentive compensation.

Interest expense for the third quarter increased about $1 million due to higher average debt levels in the current year, while interest expense for the nine months ended December 31, 2010, was down about $3 million in part because of interest costs accrued in the prior year related to the FCPA matter and in part because of lower effective interest rates. Interest income in the nine months increased on the recognition of interest income on funds that had been escrowed to bond the appeal of the European Commission fine.  The effective income tax rates for the quarter and nine months, at 29% and 30% respectively, were lower than the 35% U.S. federal statutory rate due to the recognition of foreign tax credits and the reversal of accruals due to resolution of some uncertain tax positions.  Those rates were slightly lower than the comparable periods last year.

In November 2010, we decided to close our leaf tobacco processing facility in Simcoe, Ontario.  We accrued related employee termination benefits of approximately $2.7 million as restructuring costs during the quarter ended December 31, 2010.  We recorded an impairment charge of approximately $5.6 million during the quarter ended December 31, 2010, to write those assets down to their fair values, net of expected selling costs. The Canadian operations are included in our North America segment, and revenues and earnings for these operations have not been material to that segment in recent years.

We also recorded other restructuring costs during the quarter and the nine months ended December 31, 2010, associated with initiatives undertaken to adjust various operations and reduce costs.  Most of the restructuring costs represent accruals for employee termination benefits at our corporate headquarters and at operating locations in the United States, South America, Africa, and Europe that are part of our North America and Other Regions reportable segments.  Total restructuring and impairment costs for the quarter and nine months ended December 31, 2010, were $11.0 million and $14.0 million, respectively.

General Overview

Our operations continue to perform well although comparisons to the prior year are difficult given the record results that were achieved last year.  Although transportation challenges remain, some of the shipments that were delayed due to logistical difficulties earlier in the year have been completed, with the remainder on track to be completed by fiscal year end. Except for the effect of the PMI transactions in Brazil, which will begin to impact operations next year, our comparisons this year reflect the majority of the impact of recent customer vertical integration efforts, and we continue to have some success in securing additional sales to replace lost volumes.  We are working to make sure that we adjust our operations to accurately reflect these and other business changes and are committed to managing prudently our costs as well as our cash flow.  Many of our global restructuring plans are already underway.  We extend our sincere thanks to the current and past employees of our Simcoe Leaf organization in Canada.  They delivered quality products and provided excellent customer service for decades, but market realities eventually prevailed. These types of decisions are never easy as they involve the livelihoods of valued co-workers, but they are necessary to allow us to adapt profitably and effectively to changes in our markets and in our customers’ sourcing requirements.

Looking forward, we continue to believe that global leaf markets are moving into oversupply. We continue our efforts to stabilize markets by working closely with both farmers and customers to carefully plan for crop requirements.  At the same time, we are actively managing our uncommitted inventory levels, which remain reasonable at 12% of total inventories at the end of December 2010.  There are many challenges underway in the global economy as well as in our industry, and we are pleased with the results we are achieving in this environment.

Assignment of Farmer Contracts in Brazil

In October 2010, our operating subsidiary in Brazil completed the assignment of tobacco production contracts with approximately 8,100 farmers to a subsidiary of Philip Morris International (“PMI”).  As part of the transaction, the PMI subsidiary acquired various related assets and hired certain employees who previously worked for us in agronomy and leaf procurement functions.  The PMI subsidiary also assumed obligations under guarantees of bank loans to the farmers for crop financing. The farmer contracts assigned represent approximately 20% of the annual volume handled by us in Brazil during the most recent crop year.  We have entered into an agreement with the PMI subsidiary to process tobaccos bought directly from farmers beginning with the 2011 crop year.  In addition, we expect to continue to sell processed leaf from Brazil to PMI and its subsidiaries.  We received total cash proceeds of approximately $34.9 million from the assignment of farmer contracts and sale of related assets and recorded a net gain of approximately $19.4 million, which is reported in other income in the consolidated statement of income.

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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 December 31, 2010, tobacco inventory of about $940 million included about $823 million in inventory that was committed for sale to customers and about $117 million that was not committed.  Committed inventory, after deducting $88 million in customer deposits, represents our net exposure of $735 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 $450 million at December 31, 2010.  Although a hypothetical 1% change in short-term interest rates would result in a change in annual interest expense of approximately $4.5 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 a substantial portion of our average committed inventory levels over time.  In addition to the $450 million of debt with variable interest rates, about $264 million of long-term debt has an effective average fixed rate of 5.36%.

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, increasing the cost of the crop over the prior year, in U.S. dollar terms.  To reduce the volatility of costs, we enter into forward currency exchange contracts to hedge some of the effects of currency movements on purchases of tobacco and some processing costs, primarily related to the requirements of customer contracts.  In addition, we enter some forward contracts to hedge balance sheet exposures.

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 fair value changes for 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.

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

In January 2005, Deltafina filed an appeal in the General Court of the European Union (“General Court”).  A hearing was held in June 2009, and on September 8, 2010, the General Court issued its decision, in which it reduced the amount of the Deltafina fine to €6.12 million. The General Court held in part that the Commission erred in finding Deltafina acted as the leader of the Spanish cartel, and that the Commission’s corresponding increase of the underlying fine by 50% was not justified.  Deltafina filed an appeal to the General Court decision with the European Court of Justice on November 18, 2010.  Although Deltafina agreed with the General Court that there was no basis for finding that Deltafina had acted as the leader of the Spanish cartel, Deltafina believed the General Court erred in not reducing the remaining fine further based on numerous grounds.  A hearing has not been set and an ultimate resolution to the matter could take several years.   We had deposited funds in an escrow account with the Commission in February 2005 in an amount equal to the original fine.  We received funds from escrow in an amount equal to the reduction by the General Court plus interest that had accrued thereon.  As a result of the General Court’s decision in September 2010, during the quarter ended September 30, 2010, we reversed €5.76 million (approximately $7.4 million) of the charge previously recorded to accrue the fine and recognized approximately $1.2 million of interest income returned on the escrow funds.  The reversal of the fine is included in selling, general and administrative expense in the consolidated statement of income.

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 from the Commission that the Commission had imposed fines totaling €30 million (about $40 million at the December 31, 2010 exchange rate) on Deltafina and Universal Corporation jointly for infringing European Union antitrust law in connection with the purchase and processing of tobacco in the Italian raw tobacco market.

We do not believe that the decision can be reconciled with the Commission’s Statement of Objections and the facts.  In January 2006, Deltafina and Universal Corporation each filed appeals in the General Court.  Deltafina’s appeal was held September 28, 2010.  For strategic reasons related to the defense of the Deltafina appeal, we withdrew our appeal.  Based on consultation with outside legal counsel, we believe it is probable that Deltafina will prevail in the appeals process, and we have not accrued a charge for the fine.  If both Deltafina and Universal Corporation were ultimately found liable for the full amount of the fine, then accumulated interest on the fine would also be due and payable. Accumulated interest totaled approximately €5.2 million (about $7.0 million) at December 31, 2010.  Deltafina has provided a bank guarantee to the Commission in the amount of the fine plus accumulated interest in order to stay execution during the appeals process.

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Other Legal Matters

In addition to the above-mentioned matters, some of our subsidiaries are involved in other litigation and tax examinations incidental to their respective business activities.  While the outcome of these matters cannot be predicted with certainty, management is vigorously defending these matters 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 management’s current expectation, the effect on our results of operations for a particular fiscal reporting period could be material.

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, 2010.  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 December 31, 2010:

Period (1)	Total Number of Shares Repurchased		Average Price Paid Per Share (2)		Total Number of Shares Repurchased as Part of Publicly Announced Plan or Program (3)		Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (3)
October 1, 2010 to October 31, 2010		115,020	$	40.85		115,020	$	106,041,740
November 1, 2010 to November 30, 2010		99,972		42.07		99,972		101,835,705
December 1, 2010 to December 31, 2010		123,650		40.45		123,650		96,834,087
Total		338,642	$	41.07		338,642	$	96,834,087

(1) Repurchases are based on the date the shares were traded.  This presentation differs from the consolidated statement of cash flows, where the cost of share repurchases is based on the date the transactions were settled.

(2) Amounts listed for average price paid per share include broker commissions paid in the transactions.

(3) A stock repurchase plan, which was authorized by our Board of Directors, became effective and was publicly announced on November 5, 2009.   This 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.  This stock repurchase program will expire on the earlier of November 5, 2011, or when we have exhausted the funds authorized for the program.

ITEM 5.   OTHER INFORMATION

The following is provided pursuant to “Item 2.05 — Costs Associated with Exit or Disposal Activities” of Form 8-K, which Universal determined in connection with the preparation of the financial statements for the quarter ended December 31, 2010: the information regarding the Company’s restructuring and impairment costs to be recorded during the quarter ending December 31, 2010, which is set forth in Note 4 to the Consolidated Financial Statements of the Company at and for the period ended December 31, 2010, and which may be found under “Part 1. Financial Information — Item 1. Financial Statements” of this Quarterly Report on Form 10-Q, is hereby incorporated by reference in its entirety.

31

ITEM 6.   EXHIBITS

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.*
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.*
101.0	Interactive Data File (Quarterly Report on Form 10-Q, for the quarterly and six-month periods ended September 30, 2010, furnished in XBRL (eXtensible Business Reporting Language)).
	Attached as Exhibit 101 to this report are the following documents formatted in XBRL: (i) the Consolidated Statements of Income and Retained Earnings for the three months and nine months ended December 31, 2010 and 2009, (ii) the Consolidated Balance Sheets at December 31, 2010, December 31, 2009 and March 31, 2010, and (iii) the Consolidated Statements of Cash Flows for the nine months ended December 31, 2010 and 2009 and (v) the Notes to Consolidated Financial Statements, tagged as blocks of text. Users of this data are advised pursuant to Rule 406T of Regulation S-T that this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities and Exchange Act of 1934, and otherwise is not subject to liability under these sections.

32

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: February 8, 2011	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)

33

EX-12

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 December 31,				Nine Months Ended December 31,
	2010		2009		2010		2009
	(in thousands, except for ratios)
Earnings
Pretax income before equity in pretax
earnings (loss) of unconsolidated affiliates	$	82,088	$	63,637	$	193,670	$	195,221
Fixed charges (net of interest capitalized)		7,389		6,829		20,644		24,267
Distribution of earnings from unconsolidated affiliates		—		147		—		147
Total Earnings	$	89,477	$	70,613	$	214,314	$	219,635
Fixed Charges and Preference Dividends
Interest expense	$	6,257	$	5,438	$	17,245	$	20,287
Interest capitalized		—		—		—		—
Amortization of premiums, discounts, and debt issuance costs		311		535		950		1,513
Interest component of rent expense		821		856		2,449		2,467
Total Fixed Charges		7,389		6,829		20,644		24,267
Dividends on convertible perpetual preferred stock (pretax)		5,711		5,711		17,134		17,134
Total Fixed Charges and Preference Dividends	$	13,100	$	12,540	$	37,778	$	41,401
Ratio of Earnings to Fixed Charges		12.11		10.34		10.38		9.05
Ratio of Earnings to Combined Fixed Charges
and Preference Dividends		6.83		5.63		5.67		5.31

EX-31.1

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 December 31, 2010;

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 that 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:  February 8, 2011

/s/ George C. Freeman, III

George C. Freeman, III

Chairman, President, and Chief Executive Officer

(Principal Executive Officer)

EX-31.2

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 December 31, 2010;

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 that 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:  February 8, 2011

/s/ David C. Moore

David C. Moore

Senior Vice President and

Chief Financial Officer

(Principal Financial Officer)

EX-32.1

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 December 31, 2010 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:  February 8, 2011	/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.

EX-32.2

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 December 31, 2010 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:  February 8, 2011	/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.