RICHMOND, Va., Nov. 8, 2011 /PRNewswire/ --

HIGHLIGHTS

Results include a $49 million charge on loss of appeal of European Commission fine.

Six Months  

Fully diluted earnings per share of $0.02 included $1.90 in net charges, largely due to charge on European Commission fine.

Segment operating results of $91 million declined on lower volumes and margins, compared to near record results last year.

Second Quarter  

Segment operating earnings at $62 million, down $14 million from prior year.

Uncommitted inventory levels reduced from first quarter to 14% of total inventory.

George C. Freeman, III, Chairman, President, and Chief Executive Officer of Universal Corporation (NYSE: UVV), announced that net income for the first six months of fiscal year 2012, which ended on September 30, 2011, was $7.8 million, or $0.02 per diluted share, net of the charge for the European Commission fine, which reduced diluted earnings per share by $1.90.  These amounts were down compared with last year's net income of $77.2 million, or $2.65 per diluted share. The comparison of the current and prior year periods is affected significantly by several unusual items, which are described below and amount to an aggregate pretax charge of $49.3 million ($1.90 per diluted share) in fiscal year 2012, and an aggregate benefit of $4.5 million ($0.10 per share) in the same period last year. Similarly, the second fiscal quarter's net loss of $8.0 million, or $0.51 per diluted share, included charges totaling $52.1 million ($1.93 per share) compared with net income for the prior year's second quarter of $51.8 million, or $1.78 per diluted share, which included a net benefit from similar items of $5.4 million ($0.12 per share).  

Segment operating income, which excludes the effect of those unusual items, was also lower in both the three- and six-month periods ended September 30, 2011, on reduced margins in most regions, consistent with the current cyclical market oversupply situation.  In addition, results for the first half of fiscal year 2012 reflect the first quarter impact of last year's assignment of farmer contracts to Philip Morris International in Brazil.  Segment operating income for the second fiscal quarter also declined on lower processing volumes in North America and reduced leaf volumes and margins in the Other Tobacco operations segment.  Operating results in both periods also reflected $6.1 million in dividend income from unconsolidated subsidiaries.  Revenues fell by 7% to $1.1 billion for the six months, and by 3% to $641 million for the three months ended September 30, 2011, in part due to reductions in leaf prices related to oversupply conditions, which produced a very competitive environment.  In addition, revenues were lower because toll processing volumes replaced a portion of leaf sales to Philip Morris International as a result of the assignment of farmer contracts in Brazil last year.

The following table sets forth the charges and gains included in reported results:

Mr. Freeman stated, "Despite the effects on current year earnings of the rejection of our European Commission fine appeal, we are doing well in a very difficult market. As the year is developing, the slow early season sales have been picking up.  Although it is too early to indicate a correction, selling activity began to accelerate in the second quarter of the fiscal year.  The increase in activity came after prices declined at both the farm and the dealer level.  Today, lower margins appear to be largely due to the normal effects of a market correction in our business. Shipments are later this year in Brazil and Africa.

"I am pleased to see the increase in selling activity since the end of the first fiscal quarter, and I am proud of our team's success in managing uncommitted inventory levels.  That is one of the ways that we guard our financial resources to enable us to grow when we have opportunities.  It also allows us to reward our shareholders as we have with our 41st consecutive annual dividend increase, which we announced today.  Most importantly, our customer relationships remain strong, and we continue to focus on keeping costs low by maximizing efficiencies in our procurement and production processes while supporting the core of our successful operation - sustainable tobacco production."

FLUE-CURED AND BURLEY LEAF TOBACCO OPERATIONS:

Six Months

Operating income for the flue-cured and burley tobacco operations, which includes results for the North America and Other Regions segments, was $88.0 million in the first half of fiscal year 2012, compared to $106.6 million for the first half of the prior year, on lower margins in most regions.  Revenues of $1.0 billion declined 5.7% from last year, as processing volumes replaced some lamina sales following last year's agreement with Philip Morris International in South America and as margin pressures reduced leaf prices in most origins.

In the North America segment, operating income decreased by 32% on reduced toll processing and higher factory unit costs.  Revenues for this segment increased by 5% to $126 million, chiefly due to higher sales of old crop tobaccos.  

Earnings for the Other Regions segment were $77.4 million, a decline of about 15% from last year's first half earnings of $90.9 million.  The decline was caused primarily by lower margins in several areas, combined with reduced sales volumes in South America and the effects of currency remeasurement and exchange losses due to the weakening of the Brazilian real against the U.S. dollar during that period.  The lower South American volumes in part reflected the reduced leaf sales to Philip Morris International related to farmer contract assignments completed last year, which impacted the first quarter.  African performance declined in the period on margin pressures in some origins as well as timing differences related to business mix and later shipments of current crop. These operating factors were partly offset by carryover shipments of old crop leaf.  Asia's results were lower on the absence of last year's currency gains in the Philippines, as well as a decrease in trading business.  In Europe, reduced volumes and higher leaf costs were offset by insurance recoveries on a fire loss. Selling, general, and administrative expenses for the segment were relatively flat, as unfavorable currency comparisons in South America and Asia were offset by currency gains and the reversal of a statutory severance accrual in Africa.  In addition, results of the Other Regions segment benefited from $6.1 million in dividend income from unconsolidated subsidiaries.  Revenues for Other Regions were about $894 million, reflecting a 7% decline from lower leaf volumes in South America and lower green leaf prices.

Second Quarter

In the second quarter of fiscal year 2012, operating income for flue-cured and burley operations declined by $9.1 million, to $61.5 million, compared to the same period last year. Revenues for the group at $602.9 million were down about 2%, on a combination of lower sales volumes in South America, higher volumes related to shipment timing in Asia, and the effects of local currency strengthening in Europe on U.S. dollar translated sales.  Operating income for the North America segment decreased by about $7 million, as increased shipments of old crop tobacco partially replaced the lower income from reduced processing volumes. The old crop sales also increased revenues for this segment.  Results for the Other Regions segment were down by about 4% from last year, to $56.4 million, on lower volumes in South America and reduced margins.   Revenues for the group decreased by 4% to $535 million on slightly higher overall volumes for the Region and the lower cost of green leaf.

OTHER TOBACCO OPERATIONS:

The Other Tobacco Operations segment operating income declined by $5.2 million for the quarter and $8.8 million for the six months, compared with the same periods for the previous fiscal year.  Results from the oriental tobacco joint venture were lower due to reduced volumes, partly from shipments delayed into the second half of the year, as well as lower margins, which were affected by inventory writedowns. Overhead costs for the oriental venture were lower as a result of cost savings programs. Dark tobacco results also declined for both periods. Results were depressed for this business as a result of reduced volumes, partly due to poor crops, shipment timing, and lower margins, which included unfavorable foreign currency exchange comparisons this year. Revenues for this segment decreased for the first half of fiscal year 2012 by 17%, to $100 million, mostly related to the transfer of some business from the just-in-time Special Services group to the Other Regions segment, and the timing of shipments of oriental tobaccos through the United States.  Those items were partly offset by increased old crop shipments of dark tobacco in the first quarter.  For the quarter, revenues in this segment also declined, primarily because of the Special Services group business transfer.

OTHER ITEMS:

In September 2011, the Company announced that the General Court of the European Union issued a decision rejecting the appeal of Deltafina, S.p.A, its Italian subsidiary. That appeal related to the European Commission's revocation of Deltafina's immunity from a fine of euro 30 million (about $41 million on September 9, 2011) assessed against Deltafina and the Company jointly for actions in connection with Deltafina's purchase and processing of tobacco in the Italian raw tobacco market between 1995 and 2002.  Deltafina intends to appeal the decision of the General Court.  Effective with the September 9, 2011 General Court decision, the Company recorded a charge for the full amount of the fine (euro 30 million) plus accumulated interest (euro 5.9 million). The charge totaled $49.1 million at the exchange rate in effect on the date of the General Court decision.

Cost of sales decreased by about 7% to $907 million in the first half of the fiscal year principally due to lower volumes of leaf sold, and by about 2% for the second quarter, as a result of lower green leaf prices.

Selling, general, and administrative costs were relatively flat in both the second fiscal quarter and in the first half of the year.  For the quarter, currency-related items generated unfavorable variances of about $7 million, primarily related to remeasurement in South America and Asia. Those variances were offset by the reversal of non-income tax provisions due to a favorable tax ruling in South America and reduced employment costs as a result of restructuring programs in various operations.  

Interest expense was relatively flat for the second quarter and first half of fiscal year 2012 compared with previous periods. Interest income in the second quarter and the six months of the current year was about $1 million lower due to the previous year's recognition of interest income on the return of funds that had been escrowed to bond the appeal of the European Commission fine in Spain.  

The consolidated effective income tax rates on pretax earnings were approximately 275% and 70% for the quarter and six months ended September 30, 2011. Those rates were significantly higher than normal because the Company did not record an income tax benefit on the non-deductible fine portion of the charge recorded during the quarter for the European Commission fine and interest in Italy (approximately $40 million of the total $49.1 million charge). Without that item, the effective income tax rates would have been approximately 29% and 31% for the quarter and six months, respectively. Those rates were lower than the 35% federal statutory rate chiefly due to the effect of exchange rate changes on deferred income taxes of certain foreign subsidiaries.  The effective income tax rates for the quarter and six months ended September 30, 2010, were approximately 30% and 31%, respectively. Those rates were lower than the 35% U.S. federal statutory rate principally due to the recognition of foreign tax credits.

On November 3, 2011, Universal entered a new 5-year credit agreement, which provides for a $450 million revolving credit facility, as well as a $100 million term loan.  The new revolving credit facility replaces an existing $400 million revolving credit facility that would have matured in August 2012.  The term loan replaces a $95 million medium-term note that matured on September 1, 2011, and was funded under the previous credit facility. The new facilities mature in November 2016.

Additional information

Amounts described as "net income" and "earnings per diluted share" that are included in the previous discussion are attributable to Universal Corporation and exclude earnings related to non-controlling interests in subsidiaries.

This information includes "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 its 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 its products and services; costs incurred in providing these products and services; timing of shipments to customers; changes in market structure; government regulation; product taxation; industry consolidation and evolution; and general economic, political, market, and weather conditions. Actual results, therefore, could vary from those expected.  A further list and description of these risks, uncertainties, and other factors can be found in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2011, and in other documents the Company files with the Securities and Exchange Commission.  This information should be read in conjunction with the Annual Report on Form 10-K for the year ended March 31, 2011.

At 5:00 p.m. (Eastern Time) on November 8, 2011, the Company will host a conference call to discuss these results.  Those wishing to listen to the call may do so by visiting www.universalcorp.com at that time.  A replay of the webcast will be available at that site through February 8, 2012.  A taped replay of the call will be available through November 29, 2011, by dialing (855) 859-2056.  The confirmation number to access the replay is 25630202.

Headquartered in Richmond, Virginia, Universal Corporation is the leading global leaf tobacco merchant and processor and conducts business in more than 30 countries.  Its revenues for the fiscal year ended March 31, 2011, were $2.6 billion. For more information on Universal Corporation, visit its web site at www.universalcorp.com.

NOTE 1.   BASIS OF PRESENTATION

Universal Corporation, with its subsidiaries ("Universal" or the "Company"), is the leading global 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, 2011.

NOTE 2.   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 September 30, 2011, the Company's total exposure under guarantees issued by its operating subsidiary in Brazil for banking facilities of farmers in that country was approximately $34 million ($47 million face amount including unpaid accrued interest, less $13 million recorded for the fair value of the guarantees).  About 96% 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 September 30, 2011, was the face amount, $47 million including unpaid accrued interest ($108 million as of September 30, 2010, and $73 million at March 31, 2011).  The fair value of the guarantees was a liability of approximately $13 million at September 30, 2011 ($21 million at September 30, 2010, and $21 million at March 31, 2011).  In addition to these guarantees, the Company has other contingent liabilities totaling approximately $4 million.  

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

NOTE 3.   EARNINGS PER SHARE

The following table sets forth the computation of earnings per share for the periods presented in the consolidated statements of income.

For the three and six months ended September 30, 2011, conversion of the Company's outstanding Series B 6.75% Convertible Perpetual Preferred Stock was not assumed since the effect would have been antidilutive. For the three months ended September 30, 2011, exercise or distribution of employee share-based awards also was not assumed since the effect would have been antidilutive.

For the six months ended September 30, 2011 and 2010, 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 759,801 shares at a weighted-average exercise price of $48.13 for the six months ended September 30, 2011, and 725,401 shares at a weighted-average exercise price of $51.15 for the six months ended September 30, 2010.

NOTE 4.   SEGMENT INFORMATION

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 were as follows:

SOURCE Universal Corporation