Universal Corporation
Nov 5, 2010

Universal Corporation Reports Six Month Results

RICHMOND, Va., Nov. 5, 2010 /PRNewswire via COMTEX/ --

HIGHLIGHTS

 

Six Months

Fully diluted earnings per share $2.65, compared $3.23 in last year's record performance

Lower volumes and margins, combined with shipment timing, reduced results.

Results included $3 million in restructuring charges and a $7.4 million reversal of half of EU fine.

Quarter

Fully diluted earnings per share, at $1.78, including restructuring and fine reversal, was level with prior year

George C. Freeman, III, Chairman, President, and Chief Executive Officer of Universal Corporation (NYSE: UVV), announced that net income for the first half of fiscal year 2011, which ended on September 30, 2010, was $77.2 million, or $2.65 per diluted share. Results were lower than last year's net income of $96.3 million, or $3.23 per diluted share, as most regions saw declines from last year's strong performance. Those lower results reflected lower margins and volumes, which were in part due to delayed shipments. Revenues for the six months of about $1.2 billion were down about 5% on those lower volumes.

In addition, the Company recorded about $3 million in restructuring charges mostly related to its U.S. operations in the first six months of the year, of which $2 million were recorded in the second quarter. The Company recognized the reversal of a portion of a previously recorded European Commission fine pertaining to its European subsidiary, Deltafina. The fine was accrued in fiscal year 2005 and related to the Spanish tobacco processing market. The reversal, which was recorded in the second quarter, was based on the decision in September of the General Court of the European Union to reduce, by half, the amount of the fine against Deltafina. The reversal represented $7.4 million in income before taxes, or $0.17 per diluted share. The Company also recorded $1.2 million in interest income on funds that had been deposited to permit the appeal.

For the second quarter of fiscal year 2011, net income was $51.8 million, or $1.78 per diluted share, compared to last year's net income of $52.5 million, or $1.77 per diluted share. Results were nearly level with last year as the reversal of the European Commission fine offset restructuring charges and lower operating results from lower volumes, caused in part by shipping delays, and lower average margins. Revenues for the quarter of about $664 million were up 2.5%, reflecting higher prices of green leaf.

Mr. Freeman stated, "Although our second fiscal quarter results were similar to last year's performance, we continue to experience shipment delays, primarily in Africa, Asia, and Europe. We expect those shipments to be completed during the remainder of the fiscal year.

"More fundamentally, we are beginning to see the effects of an oversupply of flue-cured leaf, despite the smaller Brazilian crop. Successive large crops in several flue-cured sourcing areas have stimulated margin pressures from customers that are typical of an oversupplied market. Following two fiscal years of higher than normal customer demand, we are seeing some decreases due to softer cigarette sales in some markets, which also can cause customers to reduce durations, thus accentuating the decline in leaf demand.

"We have successfully navigated oversupplied markets throughout the history of the company, and although each one has unique features, the process is generally the same. Crop sizes are lowered to permit supply to match demand. We are also aggressively working to replace volumes where direct customer sourcing has changed our customer base, and thus far, we have had encouraging success in Brazil and Malawi. Except for the effect of our recent transaction with Philip Morris International in Brazil, we believe that we have seen the majority of the impact of these sourcing changes in this fiscal year. We have effectively managed change in our business in the past and believe that we are well positioned to respond to it now. We remain cautiously optimistic about fiscal year 2011, and we believe that we will achieve our objectives of preparing for the future by rationalizing our operations to reduce costs and replacing volumes as we meet the changing needs of our customers. We have made a first step in cost reduction during the first six months of the fiscal year with personnel reductions in our U.S. and South American operations. As we take additional steps this year, we expect to incur related charges in future periods. We will continue a strong focus on operating improvements, cost reductions, and new business development as the year progresses."

FLUE-CURED AND BURLEY LEAF TOBACCO OPERATIONS:

First Six Months

Operating income for the flue-cured and burley tobacco operations, which comprise the North America and Other Regions segments, was $106.6 million in the first half of fiscal year 2011, compared to $133.6 million for the first half last year, as a combination of lower margins and volumes as well as some delayed shipments in the Other Regions segment offset earnings improvements in North America. Revenues were $1.1 billion, a 6.3% decline from last year, primarily because of lower volumes, in part caused by delayed shipments in Africa and Europe. In North America, operating income increased by over $7 million primarily due to an increase in sales of carryover tobacco from last year's crop in the United States. Revenues for this segment also increased by 39%, to $120 million, primarily due to those higher volumes. Earnings for the Other Regions segment were $90.9 million, a decline of about $35 million from last year's first half. The decline was caused primarily by a combination of lower margins and lower volumes, in part caused by shipment timing. Asian performance improved on better product mix and a favorable currency remeasurement comparison; however, volumes were lower as shipments from India were delayed compared to prior years. African shipments were substantially lower this year because the current crop shipments will be completed later, in part due to port congestion. In South America, volumes were below last year, in part due to the smaller crop in Brazil caused by adverse weather conditions. In addition, the strengthening currency in Brazil increased the cost of leaf there, making Brazilian leaf less competitive, and caused lower margins. In Europe, lower margins on higher farm prices for leaf combined with lower volumes and weaker local currencies reduced reported results. In addition, some shipments from Italy have been delayed this year. Segment performance benefited from lower selling, general, and administrative expense, due in part to a prior year accrual related to the Company's Foreign Corrupt Practices Act ("FCPA") matter. Revenues for Other Regions were about $962 million, a 10% decline, from lower volumes, in part related to shipment timing in Africa, Asia, and Europe.

Second Quarter

In the second quarter of fiscal year 2011, operating income for flue-cured and burley operations increased slightly, to $70.6 million, compared to the same period last year. Revenues for the group at $616.7 million were higher, largely reflecting increased shipments from Brazil after delays in the first fiscal quarter. Operating income for the North America segment increased by $4 million, mainly due to increased shipments of old crop tobacco, which also increased revenues. Results for the Other Regions segment were down by about 4.7% from last year, to $58.6 million, as volumes and operating margins declined and shipments were delayed, particularly in Africa and Europe. However, revenues for the group increased to $560 million on higher volumes, the higher cost of green leaf due in part to the weaker U.S. dollar, and a higher proportion of lamina in Brazilian shipments this year.

OTHER TOBACCO OPERATIONS:

The Other Tobacco Operations segment operating income declined in both the quarter and the six months, primarily due to lower results from the oriental tobacco joint venture. Reduced volumes and lower margins combined with lower currency gains this year depressed results for this business for both periods. Dark tobacco results also declined for both periods due to lower margins, primarily related to operations in Indonesia, where currency costs and lower wrapper volumes reduced results. Revenues for this segment increased for the six months of fiscal year 2011, to $121 million, primarily related to the timing of customer deliveries by the just-in-time services group and increased dark tobacco shipments after a soft beginning to the prior year. For the quarter, revenues in this segment declined, primarily because of lower imports of oriental tobacco into the United States.

OTHER ITEMS:

Cost of sales decreased by 1% to $968 million in the first half of the fiscal year, but increased by 6% for the quarter, primarily due to the weaker U.S. dollar and increased sales from Brazil that had been delayed from the first quarter. Selling, general, and administrative costs decreased significantly in both the second fiscal quarter and in the first half of the year. The decrease in the first half was 21%, most of which was due to the $7.4 million effect on the second fiscal quarter of the reversal of the European Commission fine, and approximately $7 million benefit from lower currency remeasurement and exchange losses in the current year. In addition prior year six-month results included accruals for costs associated with the FCPA matter. Interest expense was down in part because of interest costs accrued in last year's second quarter related to the FCPA matter and in part because of lower effective interest rates. Interest income in the second quarter and the six 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 six months, at 30% and 31% respectively, were lower than the 35% U.S. federal statutory rate due to the recognition of foreign tax credits. Those rates were slightly higher than the comparable periods last year.

In October 2010, Universal's 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 the Company in agronomy and leaf procurement functions. 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 expects to continue to supply processed leaf and provide processing services in Brazil to PMI and its subsidiaries. The assignment of the farmer contracts and related assets will be reflected in the Company's operating results in the quarter ending December 31, 2010. Total proceeds of approximately $34 million received in the transaction exceeded the net book value of the assets conveyed.

Additional information

Amounts 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; 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, 2010, 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 Form10-K for the year ended March31, 2010.

At 9:00 a.m. (Eastern Time) on November 5, 2010, 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 for three months. A taped replay of the call will also be available until November 26, 2010, by dialing (800) 642-1687. The confirmation number to access the replay is 22966510.

Headquartered in Richmond, Virginia, Universal Corporation is the world's leading tobacco merchant and processor and conducts business in more than 30 countries. Its revenues for the fiscal year ended March 31, 2010, were $2.5 billion. For more information on Universal Corporation, visit its web site at www.universalcorp.com.

UNIVERSAL CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF INCOME

 

(In thousands of dollars, except per share data)

 


Three Months Ended
September 30,


Six Months Ended
September 30,

 


2010


2009


2010


2009

 


(Unaudited)


(Unaudited)

 

Sales and other operating revenues


$ 664,188


$ 647,918


$ 1,203,104


$ 1,264,030

 

Costs and expenses









 

Cost of goods sold


530,914


500,575


967,593


977,323

 

Selling, general and administrative expenses


51,649


71,478


111,832


141,070

 

Restructuring costs


2,020


--


2,969


--

 

Operating income


79,605


75,865


120,710


145,637

 

Equity in pretax earnings of unconsolidated affiliates


2,014


5,605


2,392


9,246

 

Interest income


1,416


231


1,860


796

 

Interest expense


5,862


6,694


10,988


14,849

 

Income before income taxes and other items


77,173


75,007


113,974


140,830

 

Income taxes


23,390


20,335


35,773


42,354

 

Net income


53,783


54,672


78,201


98,476

 

Less: net (income) loss attributable to noncontrolling interests in subsidiaries


(1,952)


(2,157)


(1,050)


(2,216)

 

Net income attributable to Universal Corporation


51,831


52,515


77,151


96,260

 

Dividends on Universal Corporation convertible perpetual preferred stock


(3,713)


(3,713)


(7,425)


(7,425)

 

Earnings available to Universal Corporation common shareholders


$ 48,118


$ 48,802


$ 69,726


$ 88,835

 









 

Earnings per share attributable to Universal Corporation common shareholders:









 

Basic


$ 2.00


$ 1.97


$ 2.89


$ 3.57

 

Diluted


$ 1.78


$ 1.77


$ 2.65


$ 3.23

 

See accompanying notes.









 
                 

UNIVERSAL CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

 

(In thousands of dollars)

 


September 30,
2010


September 30,
2009


March 31,
2010

 


(Unaudited)


(Unaudited)



 

ASSETS







 

Current







 

Cash and cash equivalents


$ 43,816


$ 61,991


$ 245,953

 

Accounts receivable, net


315,290


293,985


266,960

 

Advances to suppliers, net


128,923


89,169


167,400

 

Accounts receivable - unconsolidated affiliates


68,493


39,199


11,670

 

Inventories - at lower of cost or market:







 

Tobacco


1,076,984


919,842


812,186

 

Other


64,792


66,039


52,952

 

Prepaid income taxes


11,075


23,544


13,514

 

Deferred income taxes


47,342


48,503


47,074

 

Other current assets


74,227


74,236


75,367

 

Total current assets


1,830,942


1,616,508


1,693,076

 







 

Land


15,866


16,188


16,036

 

Buildings


266,298


259,596


266,350

 

Machinery and equipment


551,551


523,380


532,824

 


833,715


799,164


815,210

 

Less accumulated depreciation


(503,859)


(476,256)


(485,723)

 


329,856


322,908


329,487

 

Other assets







 

Goodwill and other intangibles


105,444


106,036


105,561

 

Investments in unconsolidated affiliates


107,588


120,608


106,336

 

Deferred income taxes


30,177


15,080


30,073

 

Other noncurrent assets


90,431


115,342


106,507

 


333,640


357,066


348,477

 

Total assets


$ 2,494,438


$ 2,296,482


$ 2,371,040

 

See accompanying notes.







 
             

UNIVERSAL CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

 

(In thousands of dollars)

 


September 30,
2010


September 30,
2009


March 31,
2010

 


(Unaudited)


(Unaudited)



 

LIABILITIES AND SHAREHOLDERS' EQUITY







 

Current







 

Notes payable and overdrafts


$ 372,727


$ 301,376


$ 177,013

 

Accounts payable and accrued expenses


214,339


214,729


259,576

 

Accounts payable - unconsolidated affiliates


140


6,988


6,464

 

Customer advances and deposits


86,628


70,089


107,858

 

Accrued compensation


17,559


22,581


30,097

 

Income taxes payable


15,656


11,574


18,991

 

Current portion of long-term obligations


100,000


--


15,000

 

Total current liabilities


807,049


627,337


614,999

 

Long-term obligations


326,466


331,905


414,764

 

Pensions and other postretirement benefits


100,899


86,888


96,888

 

Other long-term liabilities


52,936


73,845


69,886

 

Deferred income taxes


45,459


55,035


46,128

 

Total liabilities


1,332,809


1,175,010


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 September 30, 2009, and March 31, 2010)


213,023


213,023


213,023

 

Common stock, no par value, 100,000,000 shares authorized, 23,908,085






 

shares issued and outstanding (24,715,901 at September 30, 2009, and







 

24,325,228 at March 31, 2010)


194,523


195,227


195,001

 

Retained earnings


798,269


743,922


767,213

 

Accumulated other comprehensive loss


(51,122)


(36,745)


(52,667)

 

Total Universal Corporation shareholders' equity


1,154,693


1,115,427


1,122,570

 

Noncontrolling interests in subsidiaries


6,936


6,045


5,805

 

Total shareholders' equity


1,161,629


1,121,472


1,128,375

 

Total liabilities and shareholders' equity


$ 2,494,438


$ 2,296,482


$ 2,371,040

 

See accompanying notes.







 
             

UNIVERSAL CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(In thousands of dollars)

 


Six Months Ended
September 30,

 


2010


2009

 


(Unaudited)

 

CASH FLOWS FROM OPERATING ACTIVITIES:





 

Net income


$ 78,201


$ 98,476

 

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





 

Depreciation


21,516


20,524

 

Amortization


814


1,020

 

Provisions for losses on advances and guaranteed loans to suppliers


7,363


8,827

 

Foreign currency remeasurement loss (gain), net


(183)


8,562

 

Restructuring costs


2,969


--

 

Other, net


(15,239)


8,562

 

Changes in operating assets and liabilities, net


(410,647)


(279,720)

 

Net cash used by operating activities


(315,206)


(133,749)

 

CASH FLOWS FROM INVESTING ACTIVITIES:





 

Purchase of property, plant and equipment


(23,345)


(26,429)

 

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


5,684


2,134

 

Net cash used by investing activities


(17,661)


(24,295)

 

CASH FLOWS FROM FINANCING ACTIVITIES:





 

Issuance (repayment) of short-term debt, net


190,000


125,997

 

Repayment of long-term obligations


(10,000)


(79,500)

 

Issuance of common stock


--


72

 

Repurchase of common stock


(19,540)


(10,947)

 

Dividends paid on convertible perpetual preferred stock


(7,425)


(7,425)

 

Dividends paid on common stock


(22,779)


(22,950)

 

Net cash provided by financing activities


130,256


5,247

 

Effect of exchange rate changes on cash


474


2,162

 

Net decrease in cash and cash equivalents


(202,137)


(150,635)

 

Cash and cash equivalents at beginning of year


245,953


212,626

 

Cash and cash equivalents at end of period


$ 43,816


$ 61,991

 

See accompanying notes.





 
         

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. 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, 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 $87 million ($108 million face amount including unpaid accrued interest, less $21 million recorded for the fair value of the guarantees). About 75% 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, 2010, was the face amount, $108 million including unpaid accrued interest ($132 million as of September 30, 2009, and $112 million at March 31, 2010). The fair value of the guarantees was a liability of approximately $21 million at September 30, 2010 ($22 million at September 30, 2009, and $26 million at March 31, 2010). In addition to these guarantees, the Company has other contingent liabilities totaling approximately $53 million, primarily related to a bank guarantee that bonds an appeal of a 2006 fine in the European Union.

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.



Three Months Ended
September 30,


Six Months Ended
September 30,

 

(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


$ 51,831


$ 52,515


$ 77,151


$ 96,260

 

Less: Dividends on convertible perpetual preferred stock


(3,713)


(3,713)


(7,425)


(7,425)

 

Earnings available to Universal Corporation common shareholders









 

for calculation of basic earnings per share


48,118


48,802


69,726


88,835

 

Denominator for basic earnings per share









 

Weighted average shares outstanding


24,081


24,801


24,147


24,892

 

Basic earnings per share


$ 2.00


$ 1.97


$ 2.89


$ 3.57

 









 

Diluted Earnings Per Share









 

Numerator for diluted earnings per share









 

Earnings available to Universal Corporation common shareholders


$ 48,118


$ 48,802


$ 69,726


$ 88,835

 

Add: Dividends on convertible perpetual preferred stock (if









 

conversion assumed)


3,713


3,713


7,425


7,425

 

Earnings available to Universal Corporation common shareholders









 

for calculation of diluted earnings per share


51,831


52,515


77,151


96,260

 









 

Denominator for diluted earnings per share:









 

Weighted average shares outstanding


24,081


24,801


24,147


24,892

 

Effect of dilutive securities (if conversion or exercise assumed)









 

Convertible perpetual preferred stock


4,747


4,732


4,745


4,730

 

Employee share-based awards


225


162


242


147

 

Denominator for diluted earnings per share


29,053


29,695


29,134


29,769

 

Diluted earnings per share


$ 1.78


$ 1.77


$ 2.65


$ 3.23

 
                 

For the six months ended September 30, 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 725,401 shares at a weighted-average exercise price of $51.15 for the period ended September 30, 2010, and 725,201 shares at a weighted-average exercise price of $50.33 for the period ended September 30, 2009.

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:



Three Months Ended
September 30,


Six Months Ended
September 30,

 

(in thousands of dollars)


2010


2009


2010


2009

 

SALES AND OTHER OPERATING REVENUES









 

Flue-cured and burley leaf tobacco operations:









 

North America


$ 56,751


$ 49,874


$ 119,918


$ 86,006

 

Other regions (1)


559,939


547,177


961,758


1,068,349

 

Subtotal


616,690


597,051


1,081,676


1,154,355

 

Other tobacco operations (2)


47,498


50,867


121,428


109,675

 

Consolidated sales and other operating revenues


$ 664,188


$ 647,918


$ 1,203,104


$ 1,264,030

 

OPERATING INCOME









 

Flue-cured and burley leaf tobacco operations:









 

North America


$ 11,998


$ 7,948


$ 15,690


$ 8,254

 

Other regions (1)


58,583


61,477


90,910


125,386

 

Subtotal


70,581


69,425


106,600


133,640

 

Other tobacco operations (2)


5,613


12,045


12,026


21,243

 

Segment operating income


76,194


81,470


118,626


154,883

 









 

Deduct: Equity in pretax earnings of unconsolidated affiliates (3)


(2,014)


(5,605)


(2,392)


(9,246)

 

Restructuring costs (4)


(2,020)


--


(2,969)


--

 

Add: Reversal of European Commission fines (4)


7,445


--


7,445


--

 

Consolidated operating income


$ 79,605


$ 75,865


$ 120,710


$ 145,637

 
                 

SOURCE Universal Corporation