Universal Corporation
Nov 6, 2014

Universal Corporation Reports Six-Month Results

RICHMOND, Va., Nov. 6, 2014 /PRNewswire/ --

HIGHLIGHTS

Six Months
Diluted earnings per share of $0.35.
Revenues down 32%, to $736 million due to later market timing.
Dividend increase announced for the 44th consecutive year.

Second Quarter
Diluted earnings per share of $0.48.
Segment operating income of $29 million.

George C. Freeman, III, Chairman, President, and Chief Executive Officer of Universal Corporation (NYSE: UVV), reported that net income for the first half of fiscal year 2015, which ended on September 30, 2014, was $15.7 million, or $0.35 per diluted share, compared with $83.8 million, or $2.95 per diluted share for the same period last year. Last year's results included a non-recurring gain in the first fiscal quarter of $81.6 million before tax ($53.1 million after tax, or $1.96 per diluted share), which resulted from the favorable outcome of litigation in Brazil related to excise tax credits. Results for the current fiscal year included an income tax benefit of $8.0 million (or $0.34 per diluted share) arising from a subsidiary's payment of a portion of a fine following the unsuccessful appeal of a long-running court case. Excluding those items in both years, net income for the six months decreased $23.0 million compared to the same period last year. For the second fiscal quarter ended September 30, 2014, net income was $15.0 million, or $0.48 per diluted share, compared with net income for the prior year's second quarter of $25.4 million, or $0.90 per diluted share.

Segment operating income for the first half of fiscal year 2015 was $20.9 million, a decrease of $34.7 million, and for the quarter ended September 30, 2014, was $28.6 million, a decrease of $20.7 million, both compared to the same periods last fiscal year. Those declines resulted primarily from reduced volumes due to market conditions which have pushed shipments into the second half of the fiscal year. Consolidated revenues decreased by 32% to $735.6 million for the first half of fiscal year 2015, and by 29% to $464.1 million for the three months ended September 30, 2014, compared to the same periods in the prior year, mostly as a result of the lower volumes and lower average prices.

Mr. Freeman stated, "Our results continue to be impacted by an oversupply in tobacco leaf markets and the effects of softer demand from our customers. As is typical under these conditions, markets have developed slowly in some origins, with a later start to purchasing and processing, as well as delayed receipt of shipping instructions from customers. While we usually ship a large portion of our volumes in the second half of our fiscal year, this year significantly more volume is being pushed into this period. Improvements that we have made in Africa, including the opening of our second processing line in Mozambique, will help to move shipments out prior to our current fiscal year end, barring any unexpected logistical challenges. We expect modestly lower lamina volumes in fiscal year 2015 compared to the prior fiscal year due to soft customer demand, but we believe we remain well-positioned in the industry with our strong customer relationships, increasing customer satisfaction with our products and services, and our solid market share. Revenues for the fiscal year are also expected to be down compared to the previous fiscal year primarily due to declining prices and the soft demand that is typical of an oversupply environment. We are confident in our ability to adapt and manage through this period, as we have demonstrated in the past.

"Looking forward, we continue to monitor market challenges in the global tobacco industry that may impact our customers as we explore ways to provide more value-added services, make our operations more efficient, and reduce sourcing complexity. For example, as we announced yesterday, we are expanding sales through a new leaf supply agreement with one of our longstanding global customers, Philip Morris International, Inc., for purchasing processed grades of tobacco. This new arrangement will broaden our leaf purchasing and grower support activities in the United States in fiscal year 2016. In addition, we continue to work to balance anticipated global leaf tobacco supply and demand and to minimize our uncommitted inventories, which remained within our normal range at the end of September.

"I am also pleased to report that we were able to reward our shareholders for the 44th consecutive year with an annual dividend increase as announced earlier today."

FLUE-CURED AND BURLEY LEAF TOBACCO OPERATIONS:

OTHER REGIONS:

Operating income for the Other Regions segment was $11.1 million for the first half of fiscal year 2015, compared to $37.3 million in the first half of the prior fiscal year. The reduction was driven by lower volumes in all regions. The volume reductions were mainly attributable to delays of current crop shipments into the second half of the fiscal year. Gross profit margins for the segment were improved for the period, despite approximately $10 million of inventory writedowns on certain styles of tobacco that were in excess of demand. Although volumes were down for the Africa region on processing and shipment delays, shipments from Mozambique had caught up with prior year levels by September 30, 2014. Better margins in Brazil, compared with last year's volatile pricing situation that pressured margins, partially offset declines from lower volumes there. Selling, general, and administrative expenses for this segment were down for the six months ended September 30, 2014, as beneficial comparisons to the prior year's heavy foreign currency remeasurement and exchange losses, mostly in the Philippines and South America, and lower supplier provisions, were partially offset by a large value-added tax valuation allowance in South America. Revenues for the segment were down about 31% to $569.2 million, reflecting those lower volumes and lower average green leaf prices.

Operating income for the Other Regions segment was down 49% to $21.7 million in the quarter ended September 30, 2014, compared with the prior year. Similar to the six-month period ended September 30, 2014, the decline was primarily related to lower volumes in most origins as well as inventory writedowns on certain styles of tobacco that were in excess of demand and partially offset by lower selling, general, and administrative expenses largely due to lower supplier provisions. Revenues for the Other Regions segment declined by 30% to $371.7 million in the quarter ended September 30, 2014, compared with the prior year, mainly as a result of the reduced volumes.

NORTH AMERICA:

North America segment operating income of $6.0 million for the six months ended September 30, 2014, decreased by $4.9 million, compared with the same period in the previous year, on reduced sales and processing volumes. The reductions were mainly due to timing, as a result of shipment orders delayed into the second half of the fiscal year, as well as the later harvesting of current crops in the United States due to this year's weather conditions. Revenues for the segment declined by $60.1 million to $85.0 million on those lower volumes.

Similarly, segment operating income for the second quarter of fiscal year 2015 of $4.3 million was down $4.2 million compared with last year's comparable period, on lower sales volumes in Mexico and Guatemala, mainly due to later timing of shipments and delays at the ports. Those factors were partly offset by reduced selling, general, and administrative costs, mostly on lower postretirement benefit costs. The volume reduction also influenced second quarter fiscal year 2015 revenues, which declined by 34% to $53.3 million for the segment.

OTHER TOBACCO OPERATIONS:

For the first half of fiscal year 2015, the Other Tobacco Operations segment's operating income decreased by $3.6 million to $3.9 million from results for the same period last fiscal year. The dark tobacco operations saw declines primarily as a result of lower overall volumes and higher provisions on supplier advances. Those declines were partially mitigated by improved results for the oriental joint venture on better margins from product mix and the absence of the prior fiscal year's currency exchanges losses from devaluation of the Turkish lira. The segment results were also impacted this fiscal year by operational startup costs incurred by our new liquid nicotine and food ingredients businesses. Selling, general, and administrative costs for the segment were lower on reduced foreign currency exchange and remeasurement losses, principally in Indonesia. Revenues for the Other Tobacco Operations segment were down about 28% to $81.3 million for the first half of fiscal year 2015, primarily attributable to the lower volumes in the dark tobacco operations.

The Other Tobacco Operations segment operating income improved by $4.3 million to $2.6 million for the quarter ended September 30, 2014, compared with the same period for the previous fiscal year. Results for the dark tobacco business improved slightly for the second fiscal quarter, as benefits from favorable comparisons to last year's Indonesian foreign currency remeasurement and exchange losses were offset by lower sales volumes of wrapper tobaccos in that origin due to adverse weather conditions that reduced the availability of wrapper in the crop. Results in the fiscal quarter increased for the oriental joint venture on higher volumes, better margins from product mix, and lower selling, general and administrative costs. Revenues for the segment of $39.1 million for the second fiscal quarter were relatively flat, as the lower volumes for the dark tobacco business were offset by volume increases due to the timing of shipments of oriental tobaccos into the United States.

OTHER ITEMS:

Cost of goods sold decreased by about 29% to $379.0 million for the second quarter, and by about 33% to $595.0 million for the first half of fiscal year 2015. The percentage reductions in both periods are comparable to the revenue reductions and reflect the lower sales volumes in the respective periods, as well as lower green leaf prices.

Selling, general, and administrative costs decreased by $11.5 million and by $8.6 million in the first half and second quarter of fiscal year 2015, respectively. In both periods, the declines were chiefly due to favorable comparisons to the previous year's currency remeasurement and exchange losses, mainly in Asia and South America, lower loss provisions on advances to suppliers, and lower incentive compensation costs. Those benefits for the six-month period were partly offset by higher value-added tax valuation allowances in South America.

The consolidated effective income tax rates were approximately 24% and 29% for the quarters ended September 30, 2014 and 2013, respectively. Income taxes for the first half of fiscal year 2015 were impacted by a non-recurring benefit of $8.0 million arising from the partial payment of the European Commission fine by our Italian subsidiary in June 2014.  Excluding that item, the consolidated effective tax rate for the six months ended September 30, 2014, was approximately 10%. The consolidated effective tax rate for the six-month period ended September 30, 2013, was 33%. The rates for all periods were lower than the 35% federal statutory rate because of lower effective tax rates on income from certain foreign subsidiaries. The effective tax rate for the six months ended September 30, 2013, was also lower than the federal statutory rate because of changes in exchange rates on deferred income tax assets and liabilities.

Additional information

Amounts included in the previous discussion are attributable to Universal Corporation and exclude earnings related to non-controlling interests in subsidiaries. In addition, the total for segment operating income referred to in this discussion is a non-GAAP measure. This measure is not a financial measure calculated in accordance with GAAP and should not be considered as a substitute for net income, operating income, cash from operating activities or any other operating performance measure calculated in accordance with GAAP, and it may not be comparable to similarly titled measures reported by other companies. A reconciliation of the total for segment operating income to consolidated operating income is in Note 3. Segment Information, included in this earnings release. The Company evaluates its segment performance excluding certain significant charges or credits. The Company believes this measure, which excludes these items that it believes are not indicative of its core operating results, provides investors with important information that is useful in understanding its business results and trends.

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, 2014, 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 fiscal year ended March 31, 2014.

At 5:00 p.m. (Eastern Time) on November 6, 2014, 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 5, 2015. A taped replay of the call will be available through November 19, 2014, by dialing (855) 859-2056. The confirmation number to access the replay is 24066410.

Headquartered in Richmond, Virginia, Universal Corporation is the leading global leaf tobacco supplier and conducts business in more than 30 countries. Its revenues for the fiscal year ended March 31, 2014, were $2.5 billion. For more information on Universal Corporation, visit its website at www.universalcorp.com.

UNIVERSAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(in thousands of dollars, except per share data)




















Three Months Ended September 30,


Six Months Ended September 30,



2014


2013


2014


2013



(Unaudited)


(Unaudited)

Sales and other operating revenues


$

464,116



$

650,869



$

735,588



$

1,084,397


Costs and expenses









Cost of goods sold


379,045



531,557



594,977



893,617


Selling, general and administrative expenses


59,809



68,455



123,586



135,074


Other income








(81,619)


Restructuring costs


3,350



1,308



3,350



1,308


Operating income


21,912



49,549



13,675



136,017


Equity in pretax earnings (loss) of unconsolidated affiliates


3,317



(1,563)



3,918



(34)


Interest income


67



143



210



404


Interest expense


4,852



6,160



8,872



11,466


Income before income taxes


20,444



41,969



8,931



124,921


Income tax expense (benefit)


4,960



12,139



(7,078)



41,178


Net income


15,484



29,830



16,009



83,743


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


(459)



(4,386)



(267)



10


Net income attributable to Universal Corporation


15,025



25,444



15,742



83,753


Dividends on Universal Corporation convertible perpetual preferred stock


(3,713)



(3,713)



(7,425)



(7,425)


Earnings available to Universal Corporation common shareholders


$

11,312



$

21,731



$

8,317



$

76,328











Earnings per share attributable to Universal Corporation common shareholders:









Basic


$

0.49



$

0.94



$

0.36



$

3.28


Diluted


$

0.48



$

0.90



$

0.35



$

2.95


See accompanying notes.

 

UNIVERSAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars)
















September 30,


September 30,


March 31,



2014


2013


2014



(Unaudited)


(Unaudited)



ASSETS







Current assets







Cash and cash equivalents


$

29,567



$

74,631



$

163,532


Accounts receivable, net


290,162



365,777



468,015


Advances to suppliers, net


70,296



62,013



134,621


Accounts receivable—unconsolidated affiliates


98,707



70,175



7,375


Inventories—at lower of cost or market:







    Tobacco


1,164,293



1,037,320



639,812


    Other


100,516



80,651



67,219


Prepaid income taxes


28,138



28,004



27,866


Deferred income taxes


34,560



30,751



22,052


Other current assets


83,754



130,721



142,755


    Total current assets


1,899,993



1,880,043



1,673,247









Property, plant and equipment







    Land


17,022



17,231



17,275


    Buildings


239,568



237,923



239,913


    Machinery and equipment


577,064



563,615



562,597




833,654



818,769



819,785


      Less: accumulated depreciation


(528,722)



(530,038)



(523,239)




304,932



288,731



296,546


Other assets







    Goodwill and other intangibles


99,291



99,648



99,453


    Investments in unconsolidated affiliates


88,841



99,362



95,305


    Deferred income taxes


18,861



28,026



14,562


    Other noncurrent assets


68,973



87,748



91,794




275,966



314,784



301,114









      Total assets


$

2,480,891



$

2,483,558



$

2,270,907


See accompanying notes.

 

UNIVERSAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars)
















September 30,


September 30,


March 31,



2014


2013


2014



(Unaudited)


(Unaudited)



LIABILITIES AND SHAREHOLDERS' EQUITY







Current liabilities







Notes payable and overdrafts


$

359,349



$

194,266



$

62,905


Accounts payable and accrued expenses


154,826



222,226



212,422


Accounts payable—unconsolidated affiliates


1,150



8



65


Customer advances and deposits


57,723



92,871



15,869


Accrued compensation


20,272



22,152



31,772


Income taxes payable


11,164



14,694



15,694


Current portion of long-term obligations


118,750



213,750



116,250


Total current liabilities


723,234



759,967



454,977









Long-term obligations


230,000



173,750



240,000


Pensions and other postretirement benefits


74,975



95,098



85,081


Other long-term liabilities


34,567



35,911



34,457


Deferred income taxes


39,235



59,373



45,500


Total liabilities


1,102,011



1,124,099



860,015









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, 220,000 shares authorized, 219,999 shares issued and outstanding (219,999 at September 30, 2013 and March 31, 2014)


213,023



213,023



213,023


Common stock, no par value, 100,000,000 shares authorized, 23,183,259 shares issued and outstanding (23,215,946 at September 30, 2013, and 23,216,312 at March 31, 2014)


207,552



202,844



206,446


Retained earnings


971,391



959,242



993,093


Accumulated other comprehensive loss


(44,001)



(42,505)



(34,332)


Total Universal Corporation shareholders' equity


1,347,965



1,332,604



1,378,230


Noncontrolling interests in subsidiaries


30,915



26,855



32,662


Total shareholders' equity


1,378,880



1,359,459



1,410,892









Total liabilities and shareholders' equity


$

2,480,891



$

2,483,558



$

2,270,907


See accompanying notes.

 

UNIVERSAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)












Six Months Ended September 30,



2014


2013



(Unaudited)

CASH FLOWS FROM OPERATING ACTIVITIES:





Net income


$

16,009



$

83,743


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





Depreciation


17,298



20,034


Amortization


816



835


Net provision for losses (recoveries) on advances and guaranteed loans to suppliers


(2,497)



3,556


Foreign currency remeasurement loss (gain), net


7,156



7,009


Gain on favorable outcome of excise tax case in Brazil




(81,619)


Restructuring costs


3,350



1,308


Other, net


(9,470)



2,421


Changes in operating assets and liabilities, net


(386,404)



(344,433)


Net cash used by operating activities


(353,742)



(307,146)







CASH FLOWS FROM INVESTING ACTIVITIES:





Purchase of property, plant and equipment


(30,571)



(19,772)


Proceeds from sale of property, plant and equipment


983



334


    Net cash used by investing activities


(29,588)



(19,438)







CASH FLOWS FROM FINANCING ACTIVITIES:





Issuance (repayment) of short-term debt, net


297,507



85,150


Repayment of long-term obligations


(7,500)



(5,000)


Dividends paid to noncontrolling interests


(1,977)



(1,884)


Issuance of common stock


187



457


Repurchase of common stock


(7,202)



(14,145)


Dividends paid on convertible perpetual preferred stock


(7,425)



(7,425)


Dividends paid on common stock


(23,661)



(23,272)


    Net cash provided by financing activities


249,929



33,881







Effect of exchange rate changes on cash


(564)



(530)


Net decrease in cash and cash equivalents


(133,965)



(293,233)


Cash and cash equivalents at beginning of year


163,532



367,864







Cash and cash equivalents at end of period


$

29,567



$

74,631


See accompanying notes.

 

NOTE 1. BASIS OF PRESENTATION

Universal Corporation, with its subsidiaries ("Universal" or the "Company"), is the leading global leaf tobacco supplier. 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. These financial statements 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, 2014.

NOTE 2.   EARNINGS PER SHARE

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



Three Months Ended September 30,


Six Months Ended September 30,

(in thousands, except share and per share data)


2014


2013


2014


2013










Basic Earnings Per Share









Numerator for basic earnings per share









    Net income attributable to Universal Corporation


$

15,025



$

25,444



$

15,742



$

83,753


    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


$

11,312



$

21,731



$

8,317



$

76,328











 Denominator for basic earnings per share









    Weighted average shares outstanding


23,178,082



23,207,043



23,200,589



23,261,604











 Basic earnings per share


$

0.49



$

0.94



$

0.36



$

3.28











Diluted Earnings Per Share









Numerator for diluted earnings per share









    Earnings available to Universal Corporation common shareholders


$

11,312



$

21,731



$

8,317



$

76,328


Add: Dividends on convertible perpetual preferred stock (if conversion assumed)




3,713





7,425


Earnings available to Universal Corporation common shareholders for calculation of diluted earnings per share


$

11,312



$

25,444



$

8,317



$

83,753











Denominator for diluted earnings per share









    Weighted average shares outstanding


23,178,082



23,207,043



23,200,589



23,261,604


    Effect of dilutive securities (if conversion or exercise assumed)









        Convertible perpetual preferred stock




4,818,160





4,815,235


        Employee share-based awards


330,345



311,342



320,982



323,827


Denominator for diluted earnings per share


23,508,427



28,336,545



23,521,571



28,400,666











Diluted earnings per share


$

0.48



$

0.90



$

0.35



$

2.95


 

NOTE 3. SEGMENT INFORMATION

The principal approach used by management to evaluate the Company's performance is by geographic region, although the dark air-cured and oriental tobacco businesses are each 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 the 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)


2014


2013


2014


2013










SALES AND OTHER OPERATING REVENUES









Flue-cured and burley leaf tobacco operations:









North America


$

53,308



$

80,967



$

85,006



$

145,118


Other regions (1)


371,669



530,610



569,241



826,870


Subtotal


424,977



611,577



654,247



971,988


Other tobacco operations (2)


39,139



39,292



81,341



112,409


Consolidated sales and other operating revenues


$

464,116



$

650,869



$

735,588



$

1,084,397











OPERATING INCOME









Flue-cured and burley leaf tobacco operations:









North America


$

4,278



$

8,539



$

5,957



$

10,894


Other regions (1)


21,661



42,454



11,086



37,270


Subtotal


25,939



50,993



17,043



48,164


Other tobacco operations (2)


2,640



(1,699)



3,900



7,508


Segment operating income


28,579



49,294



20,943



55,672


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


(3,317)



1,563



(3,918)



34


Restructuring costs (4)


(3,350)



(1,308)



(3,350)



(1,308)


Add: Other income (5)








81,619


Consolidated operating income


$

21,912



$

49,549



$

13,675



$

136,017


 



(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) 

Equity in pretax (earnings) loss of unconsolidated affiliates is included in segment operating income (Other Tobacco Operations segment), but is reported below consolidated operating income and excluded from that total in the consolidated statements of income and comprehensive income.



(4) 

Restructuring costs are excluded from segment operating income, but are included in consolidated operating income in the consolidated statements of income and comprehensive income.



(5) 

Other income represents the gain on the favorable outcome of the IPI tax credit case in Brazil. This item is excluded from segment operating income, but is included in consolidated operating income in the consolidated statements of income and comprehensive income.

 

SOURCE Universal Corporation

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