Universal Corporation
Aug 3, 2010

Universal Corporation Reports First Quarter Earnings

RICHMOND, Va., Aug 03, 2010 /PRNewswire via COMTEX/ --

HIGHLIGHTS

 

Later shipping timing reduces quarter results.

Diluted earnings per share decreased to $0.87 versus $1.47 last year.

Operating income at $41 million nears historical first quarter levels.

George C. Freeman, III, Chairman, President, and Chief Executive Officer of Universal Corporation (NYSE: UVV), announced that net income for the first quarter of fiscal year 2011, which ended on June 30, 2010, was $25.3 million, or $0.87 per diluted share. Those results reflected a 42% decline compared to the same period last year, when income was $43.7 million, or $1.47 per diluted share. Last year's first quarter results were exceptionally strong, primarily due to the effect of earlier shipments of Brazilian and European tobacco in that quarter. Revenues for the first quarter of fiscal year 2011 of about $539 million were lower by about 13%.

Mr. Freeman stated, "Our fiscal year 2011 first quarter results faced difficult comparisons to last year's very strong initial quarter, but were in line with historical trends for the first quarter. Although we expect shipment timing differences to correct during the remainder of the fiscal year, we face some challenges due to a smaller Brazilian crop, margin pressures in some areas as the cost of leaf increases, decreased customer demand due to softer cigarette sales, and changes in manufacturer sourcing methods.

"In June, Philip Morris International announced that, with the help of its two largest leaf suppliers, it will source a portion of its leaf requirements directly from farmers in Brazil, beginning with the crop that will be marketed in our fiscal year 2012. We have not yet completed the transaction with them yet but expect it to be finalized in the fall. Last year, Japan Tobacco Inc. announced its intention to source a portion of its leaf directly in the United States, Brazil, and Malawi, and we expect to see some volume reductions this year related to this initiative. However, we are aggressively working to replace those volumes and have had some success in Brazil and Africa. We have effectively managed change in our business in the past and believe that we are well positioned to respond to it now. We support all of our customers in their strategic endeavors, and we continue to believe that the dealer industry performs a critical function and brings value to the manufacturers. We expect fiscal year 2011 to be challenging, and at this time we remain cautiously optimistic that we will achieve our objectives in reducing costs, replacing volumes, and remaining competitive as we meet the changing needs of our customers. We have made a first step in cost reduction this quarter with a restructuring charge related to a personnel reduction in our U.S. operations. We will continue a strong focus on operating improvements and cost reductions as the year progresses.

"We estimate that worldwide dealer inventories of flue-cured and burley leaf are about 105 million kilos, compared to 70 million last year. Levels remain well below the long-term average, but we believe there is potential for oversupply in flue-cured tobacco. For this season, lower flue-cured crops in Brazil and the United States are being offset by projected increases in Tanzania and Zimbabwe. The level of manufacturers' inventory durations and future supply forecasts also affect market balance."

FLUE-CURED AND BURLEY LEAF TOBACCO OPERATIONS:

Operating income for our flue-cured and burley tobacco operations decreased by 44% to $36 million. Similarly, revenues for those operations declined by 17% to $465 million. That performance includes results from our North America and Other Regions segments. Comparisons for the Other Regions segment results were significantly impacted by early shipments in the first quarter last year in South America and Europe. South America volumes this year were also reduced somewhat by the smaller Brazilian crop caused by excess rain. The effect of these changes in South America was mitigated by lower selling, general, and administrative costs in the region on currency benefits and an accrual in the prior year related to our Foreign Corrupt Practices Act ("FCPA") matter. Results for Europe were also reduced on lower margins this year coupled with the translation effect of the weaker euro. Revenues for the Other Regions segment fell by 23%, primarily reflecting the shipment timing factors. Compared to last year's first quarter, both revenues and operating income for the North America segment improved in its seasonally low period, driven by increased sales of carryover stocks.

OTHER TOBACCO OPERATIONS:

The Other Tobacco Operations segment operating income declined by about $3 million due primarily 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. Dark tobacco results improved slightly as overhead cost savings offset reduced margins and lower volumes in some areas. Revenues for this segment increased by 26% to $74 million primarily related to the timing of customer deliveries by our just-in-time services group and the timing of oriental tobacco shipments into the United States, neither of which had a commensurate effect on segment operating income.

OTHER ITEMS:

Cost of sales decreased by 8% to $437 million in the quarter on lower volumes shipped, partly offset by higher overall leaf purchasing costs. Selling, general, and administrative costs decreased by 14% due to lower currency remeasurement and exchange losses in the current year, and prior year accruals for costs associated with the FCPA matter. Interest expense was down in part because of interest costs accrued in last year's quarter related to the FCPA matter. In addition, we benefited from additional fixed to floating rate interest rate swaps entered after last year's first quarter. The effective income tax rate for the quarter of approximately 34% was comparable to the effective rate for the same quarter last year and lower than the 35% U.S. federal statutory rate.

Additional information

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, 20010, 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, 2010.

At 5:00 p.m. (Eastern Time) on August 3, 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 August 24, 2010, by dialing (800) 642-1687. The confirmation number to access the replay is 92015856.

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
                                                            June 30,
                                                            --------
                                                         2010          2009
                                                         ----          ----
                                                           (Unaudited)
    Sales and other operating revenues               $538,916      $616,112
    Costs and expenses
        Cost of goods sold                            436,679       476,748
        Selling, general and administrative expenses   60,183        69,592
        Restructuring costs                               949             -
                                                          ---           ---
    Operating income                                   41,105        69,772
        Equity in pretax earnings of unconsolidated
         affiliates                                       378         3,641
        Interest income                                   444           565
        Interest expense                                5,126         8,155
                                                        -----         -----
    Income before income taxes and other items         36,801        65,823
        Income taxes                                   12,383        22,019
                                                       ------        ------
    Net income                                         24,418        43,804
    Less:  net (income) loss attributable to
     noncontrolling interests in subsidiaries             902           (59)
                                                          ---           ---
    Net income attributable to Universal Corporation   25,320        43,745
    Dividends on Universal Corporation convertible
     perpetual
       preferred stock                                 (3,712)       (3,712)
                                                       ------        ------
    Earnings available to Universal Corporation
     common shareholders                              $21,608       $40,033
                                                      =======       =======

    Earnings per share attributable to Universal
     Corporation common shareholders:
        Basic                                           $0.89         $1.60
                                                        =====         =====
        Diluted                                         $0.87         $1.47
                                                        =====         =====


    See accompanying notes.

    UNIVERSAL CORPORATION AND SUBSIDIARIES
    CONSOLIDATED BALANCE SHEETS
    (In thousands of dollars)

                                    June 30,      June 30,    March 31,
                                          2010          2009         2010
                                          ----          ----         ----
                                  (Unaudited)   (Unaudited)
                ASSETS
    Current
        Cash and cash equivalents      $61,781      $131,167     $245,953
        Accounts receivable, net       221,053       229,764      266,960
        Advances to suppliers,
         net                           122,878       141,383      167,400
        Accounts receivable -
         unconsolidated
         affiliates                     42,403        15,654       11,670
        Inventories -at lower of
         cost or market:
            Tobacco                  1,152,427       886,232      812,186
            Other                       66,183        66,851       52,952
        Prepaid income taxes            14,062        14,238       13,514
        Deferred income taxes           46,058        43,385       47,074
        Other current assets            72,042        80,031       75,367
                                        ------        ------       ------
            Total current assets     1,798,887     1,608,705    1,693,076
    Property, plant and
     equipment
        Land                            15,740        16,002       16,036
        Buildings                      262,468       254,846      266,350
        Machinery and equipment        535,480       507,681      532,824
                                       -------       -------      -------
                                       813,688       778,529      815,210
            Less accumulated
             depreciation             (486,576)     (462,266)    (485,723)
                                      --------      --------     --------
                                       327,112       316,263      329,487
    Other assets
        Goodwill and other
         intangibles                   105,409       106,030      105,561
        Investments in
         unconsolidated
         affiliates                     95,494       112,781      106,336
        Deferred income taxes           28,627        20,393       30,073
        Other noncurrent assets        101,870        91,297      106,507
                                       -------        ------      -------
                                       331,400       330,501      348,477
                                       -------       -------      -------
            Total assets            $2,457,399    $2,255,469   $2,371,040
                                    ==========    ==========   ==========


    See accompanying notes.

    UNIVERSAL CORPORATION AND SUBSIDIARIES
    CONSOLIDATED BALANCE SHEETS
    (In thousands of dollars)

                                       June 30,      June 30,    March 31,
                                             2010          2009        2010
                                             ----          ----        ----
                                     (Unaudited)   (Unaudited)
             LIABILITIES AND
           SHAREHOLDERS' EQUITY
    Current
        Notes payable and
         overdrafts                      $298,899      $171,125    $177,013
        Accounts payable and
         accrued expenses                 239,451       281,336     259,576
        Accounts payable -
         unconsolidated
         affiliates                           977           100       6,464
        Customer advances and
         deposits                         144,477        57,288     107,858
        Accrued compensation               17,978        20,818      30,097
        Income taxes payable               13,958         8,839      18,991
        Current portion of
         long-term
         obligations                        5,000        79,500      15,000
                                            -----        ------      ------
               Total current
                liabilities               720,740       619,006     614,999
    Long-term obligations                 418,547       329,596     414,764
    Pensions and other
     postretirement
     benefits                              98,686        94,219      96,888
    Other long-term
     liabilities                           65,412        81,639      69,886
    Deferred income taxes                  38,627        51,226      46,128
                                           ------        ------      ------
               Total liabilities        1,342,012     1,175,686   1,242,665
    Shareholders' equity
      Universal Corporation:
        Preferred stock:
           Series A Junior
            Participating
            Preferred Stock, no
            par
           value, 500,000 shares
            authorized, none
            issued
           or outstanding                       -             -           -
           Series B 6.75%
            Convertible Perpetual
            Preferred Stock,
           no par value,
            5,000,000 shares
            authorized, 219,999
           shares issued and
            outstanding (219,999
            at
           June 30, 2009, and
            March 31, 2010)               213,023       213,023     213,023
        Common stock, no par
         value, 100,000,000
         shares
           authorized, 24,155,316
            shares issued and
            outstanding
           (24,901,506 at June
            30, 2009, and
            24,325,228
           at March 31, 2010)             194,960       195,437     195,001
        Retained earnings                 768,772       712,684     767,213
        Accumulated other
         comprehensive loss               (66,242)      (45,207)    (52,667)
                                          -------       -------     -------
               Total Universal
                Corporation
                shareholders' equity    1,110,513     1,075,937   1,122,570
      Noncontrolling
       interests in
       subsidiaries                         4,874         3,846       5,805
                                            -----         -----       -----
               Total shareholders'
                equity                  1,115,387     1,079,783   1,128,375
                                        ---------     ---------   ---------
               Total liabilities and
                shareholders' equity   $2,457,399    $2,255,469  $2,371,040
                                       ==========    ==========  ==========


    See accompanying notes.

    UNIVERSAL CORPORATION AND SUBSIDIARIES
    CONSOLIDATED STATEMENTS OF CASH FLOWS
    (In thousands of dollars)

                                                      Three Months Ended
                                                           June 30,
                                                           --------
                                                       2010           2009
                                                       ----           ----
                                                          (Unaudited)
    CASH FLOWS FROM OPERATING ACTIVITIES:
       Net income                                   $24,418        $43,804
       Adjustments to reconcile net income to
        net cash used by operating
        activities:
          Depreciation                               10,823          9,902
          Amortization                                  412            504
          Provisions for losses on advances and
           guaranteed loans to suppliers              2,991            583
          Foreign currency remeasurement loss,
           net                                        1,876          6,261
          Restructuring costs                           949              -
          Other, net                                 (1,023)        13,825
          Changes in operating assets and
           liabilities, net                       (303,270)      (126,603)
                                                   --------       --------
            Net cash used by operating activities (262,824)        (51,724)
                                                   --------        -------
    CASH FLOWS FROM INVESTING ACTIVITIES:
        Purchase of property, plant and
         equipment                                  (13,154)       (11,158)
        Proceeds from sale of property, plant
         and equipment, and other                       945          1,813
                                                        ---          -----
            Net cash used by investing activities   (12,209)        (9,345)
                                                    -------         ------
    CASH FLOWS FROM FINANCING ACTIVITIES:
        Issuance (repayment) of short-term
         debt, net                                  127,985         (3,124)
        Repayment of long-term obligations          (10,000)             -
        Repurchase of common stock                  (10,933)        (2,981)
        Dividends paid on convertible
         perpetual preferred stock                   (3,712)        (3,712)
        Dividends paid on common stock              (11,427)       (11,461)
            Net cash provided (used) by financing
             activities                              91,913        (21,278)
                                                     ------        -------
    Effect of exchange rate changes on
     cash                                            (1,052)           888
                                                     ------            ---
    Net decrease in cash and cash
     equivalents                                  (184,172)        (81,459)
    Cash and cash equivalents at beginning
     of year                                        245,953        212,626
                                                    -------        -------
    Cash and cash equivalents at end of
     period                                         $61,781       $131,167
                                                    =======       ========


    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 press release 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 June 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 $46 million ($62 million face amount including unpaid interest, less $16 million recorded for the fair value of the guarantees). About 60% 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 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 June 30, 2010, was the face amount ($62 million) including unpaid accrued interest ($82 million as of June 30, 2009, and $112 million at March 31, 2010). The fair value of the guarantees was a liability of approximately $16 million at June 30, 2010 ($36 million at June 30, 2009, and $26 million at March 31, 2010). In addition to these guarantees, the Company has other contingent liabilities totaling approximately $47 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
                                                               June 30,
                                                               --------
    (in thousands, except per share data)                  2010         2009
    -------------------------------------                  ----         ----
    Basic Earnings Per Share
    ------------------------
    Numerator for basic earnings per share
       Net income attributable to Universal
        Corporation                                     $25,320      $43,745
       Less:  Dividends on convertible perpetual
        preferred stock                                 (3,712)      (3,712)
                                                         ------       ------
       Earnings available to Universal Corporation
        common shareholders
          for calculation of basic earnings per share    21,608       40,033
                                                         ------       ------
     Denominator for basic earnings per share
        Weighted average shares outstanding              24,213       24,985
                                                         ------       ------
     Basic earnings per share                             $0.89        $1.60
                                                          =====        =====
    Diluted Earnings Per Share
    --------------------------
    Numerator for diluted earnings per share
       Earnings available to Universal Corporation
        common shareholders                             $21,608      $40,033
       Add:  Dividends on convertible perpetual
        preferred stock (if
          conversion assumed)                             3,712        3,712
                                                          -----        -----
       Earnings available to Universal Corporation
        common shareholders
          for calculation of diluted earnings per share  25,320       43,745
                                                         ------       ------
    Denominator for diluted earnings per share:
        Weighted average shares outstanding              24,213       24,985
        Effect of dilutive securities (if conversion or
         exercise assumed)
           Convertible perpetual preferred stock          4,742        4,728
           Employee share-based awards                      260          131
                                                            ---          ---
        Denominator for diluted earnings per share       29,215       29,844
                                                         ------       ------
    Diluted earnings per share                            $0.87        $1.47
                                                          =====        =====


For the three months ended June 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 657,401 shares at a weighted average exercise price of $52.65 for the quarter ended June 30, 2010, and 959,439 shares at a weighted average exercise price of $46.79 for the quarter ended June 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
                                                          June 30,
                                                          --------
    (in thousands of dollars)                           2010           2009
    -------------------------                           ----           ----
    SALES AND OTHER OPERATING REVENUES
       Flue-cured and burley leaf tobacco
        operations:
            North America                            $63,167        $36,132
            Other regions (1)                        401,819        521,172
                                                     -------        -------
                 Subtotal                            464,986        557,304
       Other tobacco operations (2)                   73,930         58,808
                                                      ------         ------
       Consolidated sales and other operating
        revenues                                    $538,916       $616,112
                                                    ========       ========
    OPERATING INCOME
       Flue-cured and burley leaf tobacco
        operations:
            North America                             $3,692           $306
            Other regions (1)                         32,327         63,909
                                                      ------         ------
                 Subtotal                             36,019         64,215
       Other tobacco operations (2)                    6,413          9,198
                                                       -----          -----
       Segment operating income                       42,432         73,413

       Less: Equity in pretax earnings of
        unconsolidated affiliates (3)                    378          3,641
               Restructuring costs (4)                   949              -
                                                         ---            ---
       Consolidated operating income                 $41,105        $69,772
                                                     =======        =======



    (1)  Includes South America, Africa, Europe, and Asia regions, as
    well as inter-region eliminations.
    (2)  Includes Dark Air-Cured, Special Services, and Oriental, as
    well as inter-company eliminations.  Sales and other operating
    revenues for this reportable segment include limited amounts for
    Oriental because its financial results consist principally of equity
    in the pretax earnings of an unconsolidated affiliate.
    (3)  Item is included in segment operating income, but not included
    in consolidated operating income.
    (4)  Item is not included in segment operating income, but is
    included in consolidated operating income.

SOURCE Universal Corporation