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Press release from PR Newswire

Universal Corporation Reports First Quarter Earnings

Tuesday, August 03, 2010

Universal Corporation Reports First Quarter Earnings14:15 EDT Tuesday, August 03, 2010RICHMOND, Va., Aug. 3 /PRNewswire-FirstCall/ -- HIGHLIGHTSLater 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 informationThis 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 $2.5 billion. For more information on Universal Corporation, visit its web site at www.universalcorp.com.UNIVERSAL CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOME (In thousands of dollars, except per share data)Three Months EndedJune 30,20102009(Unaudited)Sales and other operating revenues$ 538,916$ 616,112Costs and expenses    Cost of goods sold436,679476,748    Selling, general and administrative expenses60,18369,592    Restructuring costs949?Operating income41,10569,772    Equity in pretax earnings of unconsolidated affiliates3783,641    Interest income444565    Interest expense5,1268,155Income before income taxes and other items36,80165,823    Income taxes12,38322,019Net income24,41843,804Less:  net (income) loss attributable to noncontrolling interests in subsidiaries902(59)Net income attributable to Universal Corporation25,32043,745Dividends on Universal Corporation convertible perpetual   preferred stock(3,712)(3,712)Earnings available to Universal Corporation common shareholders$   21,608$   40,033Earnings per share attributable to Universal Corporation common shareholders:    Basic$       0.89$       1.60    Diluted$       0.87$       1.47See accompanying notes.UNIVERSAL CORPORATION AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(In thousands of dollars)June 30,2010June 30,2009March 31,2010(Unaudited)(Unaudited)ASSETSCurrent    Cash and cash equivalents$      61,781$    131,167$    245,953    Accounts receivable, net221,053229,764266,960    Advances to suppliers, net122,878141,383167,400    Accounts receivable - unconsolidated affiliates42,40315,65411,670    Inventories - at lower of cost or market:        Tobacco1,152,427886,232812,186        Other66,18366,85152,952    Prepaid income taxes14,06214,23813,514    Deferred income taxes46,05843,38547,074    Other current assets72,04280,03175,367        Total current assets1,798,8871,608,7051,693,076Property, plant and equipment    Land15,74016,00216,036    Buildings262,468254,846266,350    Machinery and equipment535,480507,681532,824813,688778,529815,210        Less accumulated depreciation(486,576)(462,266)(485,723)327,112316,263329,487Other assets    Goodwill and other intangibles105,409106,030105,561    Investments in unconsolidated affiliates95,494112,781106,336    Deferred income taxes28,62720,39330,073    Other noncurrent assets101,87091,297106,507331,400330,501348,477        Total assets$ 2,457,399$ 2,255,469$ 2,371,040See accompanying notes.UNIVERSAL CORPORATION AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(In thousands of dollars)June 30,2010June 30,2009March 31,2010(Unaudited)(Unaudited)LIABILITIES AND SHAREHOLDERS' EQUITYCurrent    Notes payable and overdrafts$    298,899$    171,125$    177,013    Accounts payable and accrued expenses239,451281,336259,576    Accounts payable - unconsolidated affiliates9771006,464    Customer advances and deposits144,47757,288107,858    Accrued compensation17,97820,81830,097    Income taxes payable13,9588,83918,991    Current portion of long-term obligations5,00079,50015,000           Total current liabilities720,740619,006614,999Long-term obligations418,547329,596414,764Pensions and other postretirement benefits98,68694,21996,888Other long-term liabilities65,41281,63969,886Deferred income taxes38,62751,22646,128           Total liabilities1,342,0121,175,6861,242,665Shareholders' 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)213,023213,023213,023    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)194,960195,437195,001    Retained earnings768,772712,684767,213    Accumulated other comprehensive loss(66,242)(45,207)(52,667)           Total Universal Corporation shareholders' equity1,110,5131,075,9371,122,570  Noncontrolling interests in subsidiaries4,8743,8465,805           Total shareholders' equity1,115,3871,079,7831,128,375           Total liabilities and shareholders' equity$ 2,457,399$ 2,255,469$ 2,371,040See accompanying notes. UNIVERSAL CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands of dollars)Three Months EndedJune 30,20102009(Unaudited)CASH FLOWS FROM OPERATING ACTIVITIES:   Net income$  24,418$   43,804   Adjustments to reconcile net income to net cash used by operating activities:      Depreciation10,8239,902      Amortization412504      Provisions for losses on advances and guaranteed loans to suppliers2,991583      Foreign currency remeasurement loss, net1,8766,261      Restructuring costs949?      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 other9451,813        Net cash used by investing activities(12,209)(9,345)CASH FLOWS FROM FINANCING ACTIVITIES:    Issuance (repayment) of short-term debt, net127,985(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 activities91,913(21,278)Effect of exchange rate changes on cash(1,052)888Net decrease in cash and cash equivalents(184,172)(81,459)Cash and cash equivalents at beginning of year245,953212,626Cash and cash equivalents at end of period$  61,781$ 131,167See 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 LIABILITIESGuarantees 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 $47 million, primarily related to a bank guarantee that bonds an appeal of a 2006 fine in the European Union. Various subsidiaries of the Company are involved in other litigation and tax examinations incidental to their business activities. While the outcome of these matters cannot be predicted with certainty, management is vigorously defending the claims and does not currently expect that any of them will have a material adverse effect on the Company's financial position. However, should one or more of these matters be resolved in a manner adverse to management's current expectation, the effect on the Company's results of operations for a particular fiscal reporting period could be material.NOTE 3.   EARNINGS PER SHAREThe following table sets forth the computation of earnings per share for the periods presented in the consolidated statements of income.Three Months EndedJune 30,(in thousands, except per share data)20102009Basic Earnings Per ShareNumerator for basic earnings per share   Net income attributable to Universal Corporation$ 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 share21,60840,033 Denominator for basic earnings per share    Weighted average shares outstanding24,21324,985 Basic earnings per share$     0.89$     1.60Diluted Earnings Per ShareNumerator 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)3,7123,712   Earnings available to Universal Corporation common shareholders      for calculation of diluted earnings per share25,32043,745Denominator for diluted earnings per share:    Weighted average shares outstanding24,21324,985    Effect of dilutive securities (if conversion or exercise assumed)       Convertible perpetual preferred stock4,7424,728       Employee share-based awards260131    Denominator for diluted earnings per share29,21529,844Diluted earnings per share$     0.87$     1.47For 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 $46.79 for the quarter ended June 30, 2009.NOTE 4.   SEGMENT INFORMATIONThe principal approach used by management to evaluate the Company's performance is by geographic region, although some components of the business are evaluated on the basis of their worldwide operations. The Company evaluates the performance of its segments based on operating income after allocated overhead expenses (excluding significant non-recurring charges or credits), plus equity in pretax earnings of unconsolidated affiliates.Operating results for the Company's reportable segments for each period presented in the consolidated statements of income were as follows:Three Months Ended June 30,(in thousands of dollars) 20102009SALES AND OTHER OPERATING REVENUES   Flue-cured and burley leaf tobacco operations:        North America$   63,167$   36,132        Other regions (1)401,819521,172             Subtotal464,986557,304   Other tobacco operations (2)73,93058,808   Consolidated sales and other operating revenues$ 538,916$ 616,112OPERATING INCOME   Flue-cured and burley leaf tobacco operations:        North America$     3,692$        306        Other regions (1)32,32763,909             Subtotal36,01964,215   Other tobacco operations (2)6,4139,198   Segment operating income42,43273,413   Less: Equity in pretax earnings of unconsolidated affiliates (3)3783,641           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 CorporationFor further information: Karen M. L. Whelan of Universal Corporation, +1-804-359-9311, Fax: +1-804-254-3584, investor@universalleaf.com