Universal (UVV) 10-Q 2006 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended June 30, 2005

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: 1-652

UNIVERSAL CORPORATION

(Exact name of registrant as specified in its charter)

Virginia	54-0414210
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

1501 North Hamilton Street, Richmond, Virginia	23060
(Address of principal executive offices)	(Zip Code)

804-359-9311

(Registrant’s telephone number)

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 is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  x    No  ¨

As of August 1, 2005, the total number of shares of common stock outstanding was 25,705,109.

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	14
3.	Quantitative and Qualitative Disclosures About Market Risk	18
4.	Controls and Procedures	20
	PART II - OTHER INFORMATION
1.	Legal Proceedings	21
6.	Exhibits	23
	Signatures	24

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

UNIVERSAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS

(In thousands of dollars, except per share data)

	Three Months Ended June 30,
	2005			2004
	(Unaudited)
Sales and other operating revenues	$	860,144		$	737,141
Costs and expenses
Cost of goods sold		720,576			601,067
Selling, general and administrative expenses		100,566			94,849
Operating income		39,002			41,225
Equity in pretax earnings (loss) of unconsolidated affiliates		(2,921	)		2,909
Interest expense		18,808			12,608
Income before income taxes and other items		17,273			31,526
Income taxes		6,823			12,453
Minority interests		(1,369	)		(1,406	)
Net income	$	11,819		$	20,479
Earnings per common share - basic	$	0.46		$	0.80
Earnings per common share - diluted	$	0.46		$	0.80
Retained earnings - beginning of period	$	733,763		$	679,202
Net income		11,819			20,479
Cash dividends declared ($.42 in 2005, $.39 in 2004)		(10,786	)		(9,951	)
Retained earnings - end of period	$	734,796		$	689,730

See accompanying notes.

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UNIVERSAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands of dollars)

	June 30, 2005			June 30, 2004			March 31, 2005
	(Unaudited)			(Unaudited)
ASSETS
Current
Cash and cash equivalents	$	64,223		$	52,686		$	58,625
Accounts receivable, net		489,248			425,146			494,963
Advances to suppliers, net		151,492			124,356			171,906
Accounts receivable - unconsolidated affiliates		4,693			6,545			4,759
Inventories - at lower of cost or market:
Tobacco		838,089			790,089			609,114
Lumber and building products		148,157			150,045			167,333
Agri-products		166,587			127,573			172,448
Other		70,185			49,715			42,473
Prepaid income taxes		4,132			10,061			5,504
Deferred income taxes		7,151			15,146			6,875
Other current assets		64,869			65,889			54,808
Total current assets		2,008,826			1,817,251			1,788,808
Property, plant and equipment - at cost
Land		72,002			70,188			78,127
Buildings		378,851			376,952			395,077
Machinery and equipment		760,505			703,716			746,198
		1,211,358			1,150,856			1,219,402
Less accumulated depreciation		(588,650	)		(574,783	)		(595,732	)
		622,708			576,073			623,670
Other assets
Goodwill and other intangibles		135,420			133,844			138,053
Investments in unconsolidated affiliates		86,390			89,043			98,789
Deferred income taxes		90,967			61,758			85,014
Other noncurrent assets		172,923			91,883			150,990
		485,700			376,528			472,846
Total assets	$	3,117,234		$	2,769,852		$	2,885,324

See accompanying notes.

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UNIVERSAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands of dollars)

	June 30, 2005			June 30, 2004			March 31, 2005
	(Unaudited)			(Unaudited)
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current
Notes payable and overdrafts	$	538,460		$	394,375		$	429,470
Accounts payable		355,313			340,848			299,452
Accounts payable - unconsolidated affiliates		637			401			279
Customer advances and deposits		144,230			183,554			48,634
Accrued compensation		27,611			25,786			35,621
Income taxes payable		32,622			30,559			32,866
Current portion of long-term obligations		113,438			57,419			123,439
Total current liabilities		1,212,311			1,032,942			969,761
Long-term obligations		838,733			769,348			838,687
Postretirement benefits other than pensions		43,918			42,283			43,459
Other long-term liabilities		133,916			93,824			131,885
Deferred income taxes		41,421			32,484			43,899
Total liabilities		2,270,299			1,970,881			2,027,691
Minority interests		30,750			32,272			32,245
Shareholders’ equity
Preferred stock, no par value, authorized 5,000,000 shares, none issued or outstanding		—			—			—
Common stock, no par value, authorized 100,000,000 shares, 25,682,609 issued and outstanding shares (25,532,406 at June 30, 2004, and 25,668,590 at March 31, 2005)		118,010			111,896			117,520
Retained earnings		734,796			689,730			733,763
Accumulated other comprehensive loss		(36,621	)		(34,927	)		(28,895	)
Total shareholders’ equity		816,185			766,699			822,388
Total liabilities and shareholders’ equity	$	3,117,234		$	2,769,852		$	2,882,324

See accompanying notes.

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UNIVERSAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands of dollars)

	Three Months Ended June 30,
	2005			2004
	(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	11,819		$	20,479
Depreciation		15,695			15,585
Amortization		1,127			848
Other adjustments to reconcile net income to net cash provided by operating activities		16,163			5,825
Changes in operating assets and liabilities		(113,622	)		(112,017	)
Net cash used by operating activities		(68,818	)		(69,280	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment		(27,076	)		(14,078	)
Purchase of business, net of cash acquired		—			(12,477	)
Sales of property, plant, and equipment and other		2,171			2,261
Net cash used in investing activities		(24,905	)		(24,294	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of short-term debt, net		125,436			120,655
Repayment of long-term debt		(11,439	)		(4,550	)
Issuance of common stock		490			802
Dividends paid		(10,786	)		(9,951	)
Other		(3,713	)		—
Net cash provided by in financing activities		99,988			106,956
Effect of exchange rate changes on cash		(667	)		(6	)
Net increase in cash and cash equivalents		5,598			13,376
Cash and cash equivalents at beginning of year		58,625			39,310
Cash and cash equivalents at end of period	$	64,223		$	52,686

See accompanying notes.

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UNIVERSAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. BASIS OF PRESENTATION

Universal Corporation, with its subsidiaries (the “Company” or “Universal”), has operations in tobacco, lumber and building products, and agri-products. Because of the seasonal nature of these businesses, 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, 2005.

NOTE 2. ACCOUNTING PRONOUNCEMENTS

In November 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4” (“Statement No. 151”). Statement No. 151 amends Accounting Research Bulletin No. 43 (“ARB No. 43”) to clarify that abnormal amounts of production-related costs, such as idle facility expense, freight, handling costs, and wasted materials, should be recognized as current-period charges rather than being recorded as inventory cost. Statement No. 151 also requires that allocation of fixed production overhead to inventory cost be based on the normal capacity of a company’s production facilities. Statement No. 151 is not effective for Universal until fiscal year 2007; however, earlier adoption is permitted. The Company does not currently expect the impact of Statement No. 151 to be material to its financial statements.

In December 2004, the FASB issued a revision of Statement of Financial Accounting Standards No. 123, titled “Share-Based Payment” (“Statement No. 123R”). Statement No. 123R requires that share-based payments, such as grants of stock options, restricted shares, and stock appreciation rights, be measured at fair value and reported as expense in a company’s financial statements over the requisite service period. The earlier guidance that Statement No. 123R replaces allows companies the alternative of recognizing expense for share-based payments in their financial statements or disclosing the pro forma effect of those payments in the notes to the financial statements. Universal periodically issues share-based payments to employees under its compensation programs and has elected to make pro forma disclosures under the current accounting guidance. The Company is required to adopt Statement No. 123R as of April 1, 2006, which is the first quarter of fiscal year 2007. Beginning in that quarter, the Company will recognize expense over the service period for the fair value of all grants issued after March 31, 2006, as well as expense attributable to the remaining service period for all prior grants that have not fully vested by that date. The Company has made certain changes in its stock compensation program for fiscal year 2006 and for future share-based grants. Management is currently evaluating the alternative valuation models that may be used for share-based payments issued

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after the adoption of Statement No. 123R and the effect the Statement will have on its consolidated financial statements. Since vesting of share-based payments is normally accelerated at the date a grantee retires, the requisite service period under Statement No. 123R does not extend beyond the earliest date the grantee is eligible to retire. As a result, after the Statement is adopted, the fair value of the grants will be recognized as expense over the shorter of the stated vesting period or the period to the date of retirement eligibility. This will result in immediate recognition of the fair value of grants to any employees who are already eligible for retirement and create less uniformity in expense from period to period. The Company currently attributes service for expense recognition over the shorter of the required service period or the period to the employee’s mandatory retirement date, with recognition being accelerated if an employee elects to retire early.

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 June 30, 2005, total exposure under subsidiaries’ guarantees issued for banking facilities of Brazilian farmers was approximately $171 million. About 61% of these guarantees expire within one year, and nearly all of the remainder expire within five years. The Company withholds payments due to the farmers on delivery of tobacco and forwards those payments to the third-party bank. Failure of farmers to deliver sufficient quantities of tobacco to the Company to cover their obligations to third-party banks could result in a liability for the Company; however, in that case, the Company would have recourse against the farmers. The maximum potential amount of future payments that the Company’s subsidiary could be required to make is the face amount, $171 million, and any unpaid accrued interest. The accrual recorded for the value of the guarantees was approximately $4 million and $3 million at June 30, 2005 and 2004, respectively, and approximately $4 million at March 31, 2005. In addition, the Company has contingent liabilities of approximately $4 million that consist primarily of bid and performance bonds. The Company considers the possibility of a material loss on any of the guarantees and other contingencies to be remote.

Assets Held in Zimbabwe

In recent years, economic and political changes in Zimbabwe have led to a significant decline in tobacco production in that country. Universal has been able to offset the effect of this decline on its business with increased production in other countries. If the political situation in Zimbabwe were to further deteriorate significantly, the Company’s ability to recover its assets there could be impaired. The Company’s equity in its net assets of subsidiaries in Zimbabwe was approximately $46 million at June 30, 2005.

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European Commission Fines and Other Legal Matters

In October of 2004, the European Commission (the “Commission”) imposed fines on “five companies active in the raw Spanish tobacco processing market” totaling €20 million (approximately $25 million) for “colluding on the prices paid to, and the quantities bought from, the tobacco growers in Spain.” Two of the Company’s subsidiaries, including Deltafina, S.p.A. (“Deltafina”), an Italian subsidiary, were among the five companies assessed fines. In its decision, the Commission imposed a fine of €11.88 million (approximately $14.8 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 approximately $14.9 million in the second quarter of fiscal year 2005 to accrue the full amount of the fines assessed the Company’s subsidiaries.

In January of 2005, Deltafina filed an appeal in the Court of First Instance of the European Communities. The appeal process is likely to take several years to complete, and the ultimate outcome is uncertain. In February 2005, Deltafina deposited the amount of the fine into an interest-bearing escrow account in order to stay execution during the appeal process.

In 2002, the Company reported that it was aware that the Commission was investigating certain aspects of the leaf tobacco markets in Italy. Deltafina buys and processes tobacco in Italy. The Company reported that it did not believe that the Commission investigation in Italy would result in penalties being assessed against it or its subsidiaries that would be material to the Company’s earnings. The reason the Company held this belief was that it had received conditional immunity from the Commission because Deltafina had voluntarily informed the Commission of the activities that were the basis of the investigation. On December 28, 2004, the Company received a preliminary indication that the Commission intended to revoke Deltafina’s immunity for disclosing in April 2002 that it had applied for immunity. The Company believes that the Commission did not know all of the facts concerning that disclosure. Deltafina informed the Commission of those facts in a hearing in March 2005. In addition, 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 of 2002, and the Commission never told Deltafina that the disclosure would be a problem. In the event that the Commission does not reinstate Deltafina’s immunity, it is likely that the Commission will impose a fine on Deltafina. Current guidelines allow the Commission to assess fines in this case in amounts that would be material to the Company’s earnings. However, management is unable to estimate an amount at this time, and no liability has been recorded in the financial statements.

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

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NOTE 4. STOCK-BASED COMPENSATION

As permitted under Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation,” the Company applies the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” to stock options granted to employees. Under Statement No. 123, as amended by Statement No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure,” the Company discloses pro forma net income and basic and diluted earnings per share as if the fair value-based method had been applied to all awards.

	Three Months Ended June 30,
	2005			2004
(In thousands of dollars, except per share data)
Net income	$	11,819		$	20,479
Stock-based employee compensation cost, net of tax effect, under fair value accounting		(1,617	)		(874	)
Pro forma net income under fair value method	$	10,202		$	19,605
Earnings per share - basic	$	0.46		$	0.80
Per share stock-based employee compensation cost, net of tax effect, under fair value accounting		(0.06	)		(0.03	)
Pro forma earnings per share - basic	$	0.40		$	0.77
Earnings per share - diluted	$	0.46		$	0.80
Per share stock-based employee compensation cost, net of tax effect, under fair value accounting		(0.06	)		(0.03	)
Pro forma earnings per share - diluted	$	0.40		$	0.77

As discussed in Note 2, Universal is required to adopt FASB Statement No. 123R, which requires that share-based payments be reported as expense, effective April 1, 2006, which is the first quarter of fiscal year 2007.

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NOTE 5. EARNINGS PER SHARE

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

	Three Months Ended June 30,
(In thousands of dollars, except per share data)	2005		2004
Net income	$	11,819	$	20,479
Denominator for basic earnings per share:
Weighted average shares		25,670,747		25,471,365
Effect of dilutive securities:
Employee stock options		126,747		217,284
Denominator for diluted earnings per share		25,797,494		25,688,649
Earnings per share – basic	$	0.46	$	0.80
Earnings per share – diluted	$	0.46	$	0.80

NOTE 6. COMPREHENSIVE INCOME

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

	Three Months Ended June 30,
(in thousands of dollars)	2005			2004
Net income	$	11,819		$	20,479
Foreign currency translation adjustment, net of taxes		(8,294	)		(921	)
Foreign currency hedge adjustment, net of taxes		568			(2,132	)
Comprehensive income	$	4,093		$	17,426

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NOTE 7. SEGMENT INFORMATION

Segments are based on product categories. The Company evaluates performance based on segment operating income and equity in pretax earnings of unconsolidated affiliates.

	Three Months Ended June 30,
(in thousands of dollars)	2005			2004
SALES AND OTHER OPERATING REVENUES
Tobacco	$	395,392		$	349,468
Lumber and building products distribution		243,196			222,772
Agri-products		221,556			164,901
Consolidated total	$	860,144		$	737,141
OPERATING INCOME
Tobacco	$	17,871		$	32,237
Lumber and building products distribution		14,879			15,752
Agri-products		7,521			3,705
Total segment operating income		40,271			51,694
Less:
Corporate expenses		4,190			7,560
Equity in pretax earnings (loss) of unconsolidated affiliates		(2,921	)		2,909
Consolidated total	$	39,002		$	41,225

NOTE 8. PENSION PLANS AND POSTRETIREMENT BENEFITS

The Company has several defined benefit pension plans covering U.S. and foreign salaried employees and certain 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 are as follows:

	Foreign Pension Benefits						Domestic Pension Benefits						Other Postretirement Benefits
	Three Months Ended June 30,						Three Months Ended June 30,						Three Months Ended June 30,
(in thousands of dollars)	2005			2004			2005			2004			2005			2004
Service cost	$	653		$	738		$	1,349		$	1,269		$	302		$	213
Interest cost		1,727			1,751			2,732			2,739			727			833
Expected return on plan assets		(1,501	)		(1,527	)		(2,538	)		(2,593	)		(45	)		(46	)
Settlement cost		—			—			—			1,536			—			—
Net amortization and deferral		(33	)		6			729			626			(12	)		55
Net periodic benefit cost	$	846		$	968		$	2,272		$	3,577		$	972		$	1,055

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During the three months ended June 30, 2005, the Company made contributions of $1.1 million to foreign plans and expects to make additional contributions of $3.7 million to foreign plans and $9.6 million to domestic plans in the remaining nine months of the fiscal year.

NOTE 9. INCOME TAXES

The Company’s consolidated effective income tax rate for the three months ended June 30, 2005 and 2004 was approximately 39.5%. The effective tax rate is higher than the 35% U.S. marginal corporate tax rate primarily due to excess foreign taxes recorded in countries where the tax rate exceeds the U.S. rate and to local tax expense recorded by a foreign subsidiary with U.S. dollar losses.

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

This Form 10-Q and the following “Management’s Discussion and Analysis of Financial Condition and Results of Operations” include “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. The Company cautions readers that any statements contained herein regarding earnings and expectations for our performance are forward-looking statements based upon management’s current knowledge and assumptions about future events, including anticipated levels of demand for and supply of our products and services; costs incurred in providing these products and services; timing of shipments to customers; changes in market structure; and general economic, political, market, and weather conditions. Lumber and building products earnings are also affected by changes in exchange rates between the U.S. dollar and the euro. Actual results, therefore, could vary from those expected. A further list and description of these risks, uncertainties and other factors can be found in our Annual Report on Form 10-K for the fiscal year ended March 31, 2005 and in other documents we file with the Securities and Exchange Commission. This Form 10-Q should be read in conjunction with our Annual Report on Form 10-K for the year ended March 31, 2005.

Liquidity and Capital Resources

Overview

Our liquidity and capital resource requirements are predominantly short term in nature and primarily relate to working capital required for tobacco crop purchases. Working capital needs are seasonal within each geographic region. The geographic dispersion and the timing of working capital needs permit us to predict our general level of cash requirements. The marketing of the crop in each geographic area is heavily influenced by weather conditions and follows the cycle of buying, processing, and shipping of the tobacco crop. The timing of individual customer shipping requirements may change the level or the duration of crop financing. Despite a predominance of short-term needs, the Company maintains a relatively large portion of its total debt as long-term to reduce liquidity risk.

Working Capital

Working capital at June 30, 2005, was $797 million, down $23 million from the level at March 31, 2005. Although working capital has decreased, significant components of working capital have increased reflecting seasonal expansion. Tobacco inventories and other inventories, which include supplies for the tobacco segment, have increased by $229 million and $28 million, respectively. Those increases were primarily financed using notes payable and customer advances and deposits, which together increased by about $205 million. We expect seasonal increases in working capital items as tobacco inventories increase during the first half of the fiscal year when tobacco is received and processed in Africa and Brazil and is awaiting shipment to customers. In Africa, shipments to customers usually have just begun by the end of June, while shipments in Brazil usually are well underway at that point. For the past two years, first quarter shipments from Brazil have been delayed causing larger than usual inventories there. During the second half of the year, the balances usually begin to decline as inventories are

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shipped and receivables collected. During the quarter ended June 30, 2005, both Africa and Brazil experienced seasonal increases in inventory, but the increase in Brazil also reflects increased costs caused by the strong Brazilian currency. Although inventories for the lumber and building products and agri-products segments included seasonal declines from March 31, 2005, balances, they also reflected higher rubber prices than last year as well as higher volumes in rubber and nuts and dried fruits.

Inventory is usually financed with a mix of cash, notes payable, and customer deposits, depending on our borrowing capabilities, interest rates, and exchange rates, as well as those of our customers. We generally do not purchase material quantities of tobacco on a speculative basis. Thus, the quarter’s $229 million increase in tobacco inventory to $838 million represents primarily tobacco that has been committed to customers. Management believes that the current level of uncommitted inventories of $108 million is acceptable. During the quarter, customer advances increased by about $96 million, to $144 million and provided more than 40% of the funding for inventory purchases. The level of customer advances can vary from year to year as customers review their circumstances. Accordingly, we treat such advances as borrowings when we review our balance sheet structure.

Tobacco inventory as of June 30, 2005, also reflects an increase over the balance at June 30, 2004. Both balances include seasonal increases, but the size of the Brazilian crop and the strong Brazilian currency caused the June 2005 balance to exceed the June 2004 balance by $36 million. Working capital decreased by about $12 million during the period from June 30, 2004, to June 30, 2005.

Investing Activities

During the quarter ended June 30, 2005, we invested about $27 million in our fixed assets. The largest portion of that was spent in Africa where we are completing the construction of a processing facility in Mozambique.

Financing Activities

Debt increased during the quarter as we funded our working capital needs. Total debt increased by $99 million. On May 25, 2005, we entered into a private placement transaction, borrowing $200 million under a three-year floating rate note. The note bears interest at LIBOR plus 1.25% and is callable after one year. The proceeds were used to retire short-term notes, commercial paper, and borrowings under our revolving credit facility. On our March 31, 2005, balance sheet, we classified $200 million of borrowings supported by our revolving credit facility as long-term debt because of the issuance, subsequent to fiscal year end, of the $200 million three-year note to refinance those borrowings.

As of June 30, 2005, we were in compliance with the covenants of our debt agreements. We had $500 million available under a five-year committed revolving credit facility and $64 million in cash. In addition, we had $105 million available on our shelf registration and over $675 million in unused, uncommitted bank lines. Our short-term debt and current maturities of long-term debt totaled $652 million. Thus, we believe that our liquidity and capital resources at June 30, 2005, remained adequate to support our foreseeable operating needs.

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Results of Operations

Net income for the quarter ended June 30, 2005, was $11.8 million, or 46 cents per diluted share, compared to $20.5 million, or 80 cents per diluted share, last year. The current quarter’s earnings were below last year’s first quarter results due to a decline in tobacco operating earnings and higher interest expense. Revenues were $860 million in the quarter, compared to $737 million a year ago. Revenue increased for the quarter in all three operating segments.

Results from our joint venture in oriental tobaccos were lower due to shipment timing, which reduced carryover sales in the current quarter. Customers requested accelerated shipments at the end of fiscal year 2005 and, therefore, sales that would normally have occurred during the first quarter were recorded during the fourth quarter of fiscal year 2005. In addition, although tobacco shipments from Brazil were comparable to those of last year, margins on those sales were lower. Higher costs due to the relative strength of the Brazilian currency and lower average leaf quality caused by adverse weather conditions have combined to reduce operating margins. Carryover shipments from Africa were up significantly in the quarter, but they were at lower operating margins because the shipments were of lower value stock, including by-products, and because of higher selling and administrative costs in the region. Sales volumes of blended strips were lower in the quarter, and are forecast to be lower for the year, due to a decline in demand for this product.

Non-tobacco results were mixed for the quarter. Lumber and building products operations continued to perform well in a very difficult market but produced lower earnings in the quarter, while the results for agri-products were substantially higher. The continued weakness of the economy in the Netherlands along with heavy price competition has depressed quarterly results in the lumber and building products segment. Results in the construction supply market improved on higher volumes, but severe pricing pressures from DIY retailers negatively affected margins in retail supply. Agri-product results benefited from higher sales volumes and cost control efforts, primarily in rubber and seeds. In addition, results from nuts and dried fruits operations improved over last year. Revenues of the agri-products segment increased by more than 30%, principally because of higher commodity prices, higher volumes of rubber, and last year’s consolidation of a former joint venture after acquiring control.

Corporate expenses were lower in the quarter primarily due to lower costs related to pension settlement this year and a currency gain on a foreign withholding tax refund. Interest expense was substantially higher for the quarter due to increased borrowing levels and higher short-term interest rates. Although outstanding debt levels increased by approximately $270 million over those of last year’s first quarter, interest costs were primarily affected by the increase in short-term interest rates, which nearly tripled since last year. In addition, our tax rate remains high at 39.5% due to excess foreign taxes recorded in countries where the tax rate exceeds the U.S. rate and due to local tax expense recorded by a foreign subsidiary with a U.S. dollar loss for the quarter.

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Tobacco crops in the United States are projected to be 9% smaller as farmers react to the end of the price support program. Italy has recently adopted the European Union’s 40% minimum decoupling provisions for the tobacco subsidy for most growths. That move is likely to reduce production, but is also likely to maintain a viable Italian tobacco sector for the interim period. The decline in Italian production will accelerate after the expiration of the interim period with the 2010 crop, unless action is taken to extend the system through year 2013 or alternative funds are made available at the national level. In contrast, the Greek government has adopted 100% decoupling so that farmers can receive the E.U. subsidy without growing tobacco. This move is likely to reduce production of certain classical oriental styles handled by our joint venture. Our African expansion program is beginning to show results in the form of production of a larger quantity of good quality leaf, which should increase results. Flue-cured crops in Malawi, Tanzania, and Zambia are all of good quality and demand is strong. The quality of the Mozambique burley crop is good, demand is strong, and new customers have entered the market. Large crops in South America will cause excess supply in certain grades of tobacco, which is likely to increase uncommitted inventories and reduce supplier margins.

The remainder of the fiscal year will be particularly challenging. Tobacco results will continue to be hampered by the below-average quality of the Brazilian crop and the strength of the Brazilian currency, along with lower shipments from our oriental tobacco joint venture. Lumber and building products will have to contend with a continued weak European economy and the prospect of a stronger U.S. dollar, which will reduce translated euro-based results. In addition, continuing costs of compliance with the Sarbanes-Oxley Act, higher interest costs, and a high corporate tax rate will weigh on the year. In addressing these challenges, we plan to focus on customer service, reduce overhead by $9 million by the end of the fiscal year, and strengthen our balance sheet.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rates

Interest rate risk is limited in the tobacco business because customers usually pre-finance purchases or pay market rates of interest for inventory purchased for their accounts. Our tobacco customers pay interest on tobacco purchased for their order. That interest is paid at rates based on current markets for variable-rate debt. If we fund our committed tobacco inventory with fixed-rate debt, we may not be able to recover interest at that fixed rate if current market interest rates were to fall. As of June 30, 2005, tobacco inventory of $838 million included about $730 million in inventory that was committed for sale to customers and about $108 million that was not committed. Committed inventory, after deducting $144 million in customer deposits, represents our net exposure of $586 million. We maintain a substantial portion of our debt at variable interest rates either directly or through interest rate exchange agreements in order to mitigate substantially interest rate risk related to carrying fixed-rate debt. Debt carried at variable interest rates was about $861 million at June 30, 2005. Although a hypothetical 1% change in short-term interest rates would result in a change in annual interest expense of approximately $8.6 million, about 68% of that amount should be offset with changes in customer charges.

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. Most of the 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 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 investment in individual countries. In these countries, we are vulnerable to currency gains and losses to the extent that any local currency balances do not offset each other.

Our lumber and building products operations, which are based in The Netherlands, use the euro as their functional currency. In certain tobacco markets that are primarily domestic, we use the local currency as the functional currency. Examples of these domestic markets are Canada, Hungary, and Poland. In each case, reported earnings are affected by the translation of the local currency into the U.S. dollar.

Commodity

We use commodity futures in our rubber business to reduce the risk of price fluctuations. We do not enter into rubber contracts for trading purposes. All forward commodity contracts are adjusted to fair market value during the year, and gains and losses are recorded in income at that time. The amounts recorded during the quarters ended June 30, 2005 and 2004, were not material.

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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, currencies, and commodities, to manage and reduce the risks inherent in interest rate, currency, and price fluctuations.

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, contract, or invoice determines the amount, maturity, and other specifics of the hedge. Counterparty risk is limited to institutions with long-term debt ratings of A or better.

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

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

European Commission Fines in Spain

In October of 2004, the European Commission (the “Commission”) imposed fines on “five companies active in the raw Spanish tobacco processing market” totaling €20 million (approximately $25 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 (approximately $135,000) on TAES, and a fine of €11.88 million (approximately $14.8 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. Universal recorded a charge of approximately $14.9 million in the quarter ending September 30, 2004, to accrue the full amount of the fines assessed the Company’s subsidiaries.

In January of 2005, Deltafina filed an appeal in the Court of First Instance of the European Communities. The main ground of appeal is that the Commission erred in imposing liability on Deltafina as a cartel participant, particularly as the cartel leader, when Deltafina was not an actual party to the agreement and was incapable of acting in the relevant market. In addition, Deltafina argues that (i) the Commission failed to allege that Deltafina was a member of the cartel and cartel leader prior to issuing its decision, thereby impairing Deltafina’s right to defend itself, and (ii) that the Commission failed to try to prove that the practices affected trade between Member States of the European Community. The appeal also argues that the Commission incorrectly calculated the amount of the Deltafina fine. The appeal process is likely to take several years to complete, and the ultimate outcome is uncertain. In February 2005, Deltafina deposited the amount of the fine into an interest-bearing escrow account in order to stay execution during the appeal process.

European Commission Actions in Italy

In 2002, Universal reported that it was aware that the Commission was investigating certain aspects of the leaf tobacco markets in Italy. Deltafina buys and processes tobacco in Italy. The Company reported that it did not believe that the Commission investigation in Italy would result in penalties being assessed against it or its subsidiaries that would be material to the Company’s earnings. The reason the Company held this belief was that it had received conditional immunity from the Commission because Deltafina had voluntarily informed the Commission of the activities that were the basis of the investigation. On December 28, 2004, the Company received a preliminary indication that the Commission intended to revoke Deltafina’s immunity for disclosing in April 2002 that it had applied for immunity. Universal believes that the Commission did not know all of the facts concerning that disclosure. Deltafina informed the Commission of those facts in a hearing in March 2005. In addition, neither the Commission’s

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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 of 2002, and the Commission never told Deltafina that the disclosure would be a problem. In the event that the Commission does not reinstate Deltafina’s immunity, it is likely that the Commission will impose a fine on Deltafina. Current guidelines allow the Commission to assess fines in this case in amounts that would be material to the Company’s earnings. However, management is unable to estimate an amount at this time, and no liability has been recorded in the financial statements.

Other Legal Matters

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

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ITEM 6. EXHIBITS

10.1	Amendment No. 3 to Stemming Services Agreement.*
31.1	Certification of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.*
31.2	Certification of Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.*
32.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350.*
32.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350.*

* Filed herewith

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SIGNATURES

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

Date: August 9, 2005	UNIVERSAL CORPORATION
	(Registrant)
	/s/ Hartwell H. Roper
	Hartwell H. Roper, Vice President and
	Chief Financial Officer
	/s/ Robert M. Peebles
	Robert M. Peebles, Controller
	(Principal Accounting Officer)

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