Universal Corporation Reports Improved Six-Month Results

Nov 05, 2015, 16:15 ET from Universal Corporation

RICHMOND, Va., Nov. 5, 2015 /PRNewswire/ --  

HIGHLIGHTS

Six Months
Operating income up $18 million, to $32 million
Revenues were flat, at $732 million
Dividend increase announced for the 45th consecutive year
Second Quarter
Operating income up $15 million, to $37 million
Net income up 50%, to $22.5 million
Diluted earnings per share of $0.81

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 2016, which ended on September 30, 2015, was $16.5 million, or $0.40 per diluted share, compared with $15.7 million, or $0.35 per diluted share for the same period last year. Results for the six months ended September 30, 2015, included restructuring and impairment costs of $2.4 million ($0.07 per diluted share). Last year's results for the six months ended September 30, 2014, 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, and restructuring costs of $3.4 million ($0.09 per diluted share). Excluding those items in both years, net income for the six months increased $8.1 million ($0.37 per diluted share) compared to the same period last year. For the second fiscal quarter ended September 30, 2015, net income was $22.5 million, or $0.81 per diluted share, compared with net income for the prior year's second quarter of $15.0 million, or $0.48 per diluted share.

Segment operating income for the first half of fiscal year 2016 was $34.6 million, an increase of $13.7 million, and for the quarter ended September 30, 2015, was $38.1 million, an increase of $9.6 million, both compared to the same periods last fiscal year. Those increases resulted primarily from earnings improvements in the Other Regions segment, offset in part by declines in the Other Tobacco Operations segment. Consolidated revenues decreased by 1% to $731.8 million for the first half of fiscal year 2016, and by 2% to $456.4 million for the three months ended September 30, 2015, compared to the same periods in the prior year, mostly as a result of higher volumes offset by lower average green prices, as well as lower processing revenues.

Mr. Freeman stated, "We are pleased with the performance of our operations in the first half of this year, which has progressed as expected given the lingering effects of an oversupplied market. Our results for the six months ended September 30, 2015, include higher sales volumes, lower overhead costs, and better overall margins in our key operating regions, due in part to efforts in recent years to improve efficiencies and reduce costs in our business. We continue to support supply chain efficiencies such as in Poland where we recently announced an agreement to assume processing of tobaccos in crop year 2015 for a major customer, giving rise to improved processing efficiencies in that country.                

"We still anticipate that total lamina sales volumes from the current year's crops will slightly exceed those of last year. Similar to last year, we expect strong shipments in the second half of the fiscal year, but this year we expect much heavier volumes will ship in the fourth fiscal quarter. Due to this later timing, and depending upon factors such as port and container availability, some shipments may fall into the first fiscal quarter of 2017.

"We are monitoring weather conditions around the world that will likely have a negative impact on 2016 crop quality and production levels. As a result of the recent heavy rains and hail in southern Brazil from an El Nino weather pattern, we have reduced production projections for both flue-cured and burley in that country by about 8%. The smaller crop sizes could decrease our buying program there next year. The same weather pattern may also affect Africa, decreasing rainfall and impacting crop sizes and quality. We believe that the combination of this weather pattern and reduced plantings in some origins will bring markets largely into balance in fiscal year 2017.

"Construction of the processing facility for our new food ingredients business has been substantially completed, and we expect to begin commercial production in our third fiscal quarter. In addition, as we begin the second half of our fiscal year, we believe we are well-positioned with low uncommitted inventories and a strong balance sheet, and we continue to reward our shareholders as evidenced by our 45th consecutive annual dividend increase announced earlier today."

FLUE-CURED AND BURLEY LEAF TOBACCO OPERATIONS: OTHER REGIONS:

Operating income for the Other Regions segment increased by $15.3 million to $26.4 million for the first half of fiscal year 2016, compared to the first half of the prior fiscal year. The improvement was largely attributable to reduced selling, general, and administrative costs, although higher sales volumes for the segment and better overall margins in most regions also contributed to the earnings increase. Sales from carryover crops in Africa and higher volumes in Asia helped mitigate declining volumes and the effect of devaluation of local currencies on U.S. dollar-translated results for the Europe region. The South America region saw positive cost comparisons in the first half of the year from the suspension of operations in Argentina last year. Selling, general, and administrative expenses for the segment improved on the absence of last year's large value-added tax valuation provision, lower incentive compensation costs, and the impact of a stronger U.S. dollar on local currency expenses. These improvements were partially offset by higher net currency remeasurement and exchange losses, mainly in Africa and Asia, and the costs incurred in the current quarter to settle third party challenges to the property rights and valuation of a large tract of forestry land.

Revenues for the Other Regions segment for the six months ended September 30, 2015 were down about 4% to $548.4 million, reflecting the higher volumes at lower average green leaf prices for the segment as a whole, as well as a decline in processing revenues.

Operating income for the Other Regions segment increased $12.6 million to $34.2 million in the quarter ended September 30, 2015, compared with the quarter ended September 30, 2014. A combination of stronger sales volumes, lower inventory writedowns, lower green leaf costs, a better product mix, and lower local-currency factory overheads contributed to improved margins for the segment. Selling, general, and administrative expenses declined slightly for this segment in the second fiscal quarter as lower incentive compensation costs and the positive effect of the stronger U.S. dollar on other local currency-denominated overheads were partly offset by the costs to settle third party challenges to the property rights and valuation of a large tract of forestry land. Revenues for the Other Regions segment declined slightly by $0.6 million to $371.0 million in the quarter ended September 30, 2015, compared with the prior year, on higher total volumes and a better mix, offset by lower average green prices and processing revenues.

NORTH AMERICA: North America segment operating income of $7.2 million for the six months ended September 30, 2015, increased by $1.2 million, compared with the same period in the previous year. The improvement was driven by higher domestic volumes, mainly from carryover crop sales in the first fiscal quarter. Selling, general and administrative costs were higher for the period, but were flat as a percentage of sales. Segment revenues for the first half of fiscal year 2016 increased by $13.0 million to $98.0 million on those higher volumes, offset by modest declines in processing revenues and a less favorable product mix.

Segment operating income for the second quarter of fiscal year 2016 of $3.8 million was down by $0.5 million from last year's comparable quarter. The earnings decline was mainly driven by higher selling, general, and administrative costs, including variances related to provisions for supplier advances and currency remeasurement losses in Mexico. Second quarter fiscal year 2016 revenues declined by about 7% to $49.4 million for the segment, mainly from lower sales and processing volumes.

OTHER TOBACCO OPERATIONS: For the first half of fiscal year 2016, the Other Tobacco Operations segment's operating income decreased by $2.8 million to $1.1 million from results for the same period last fiscal year. Earnings improved for the dark tobacco operations on higher volumes, as well as better margins and lower compensation costs. That improvement was offset by reduced earnings for the oriental joint venture due to lower volumes, partly resulting from later shipments this fiscal year, and higher currency remeasurement losses. In addition, the special services group incurred losses primarily on continuing startup costs for the new food ingredients business. Selling, general, and administrative costs for the segment were flat for the first half of the current fiscal year compared with the previous year. Revenues for the Other Tobacco Operations segment increased by $4.0 million to $85.4 million for the first half of fiscal year 2016, as the stronger volumes for the dark tobacco operations were partly offset by volume declines due to the timing of shipments of oriental tobaccos into the United States.

The Other Tobacco Operations segment operating income declined by $2.5 million to $0.1 million for the quarter ended September 30, 2015, compared with the same period for the previous fiscal year. Results for the dark tobacco business improved slightly for the second fiscal quarter, on better margins and stronger service cutting volumes. Selling, general, and administrative costs in the second fiscal quarter for the segment were negatively impacted by higher costs for the special services group and from higher currency remeasurement and exchange losses, mainly in the dark tobacco operations. Results in the fiscal quarter were down for the oriental joint venture on reduced volumes, due in part to shipments delayed into the second half of the fiscal year, and higher currency remeasurement losses, despite lower administrative costs for the period. Revenues for the segment declined by $3.2 million to $35.9 million for the second fiscal quarter as the improvements for the dark tobacco business were outweighed by lower sales volumes due to the timing of shipments of oriental tobaccos into the United States, compared to the same period in the prior year.

OTHER ITEMS: Cost of goods sold decreased by about 2% to $585.3 million for the first half, and by about 5% to $358.3 million for the second quarter of fiscal year 2016. For both periods, the reductions reflect the lower revenues in the respective periods, from lower overall leaf prices, and improved margins. The second fiscal quarter was also influenced by an improved product mix and lower inventory writedowns.

Selling, general, and administrative costs decreased by $11.5 million in the first half of fiscal year 2016 and increased by $1.0 million for the second fiscal quarter compared with the same periods in the prior fiscal year. In both periods, benefits were achieved from a combination of items, including favorable comparisons to last year's accruals for value-added tax reserves, lower loss provisions on advances to suppliers, lower incentive compensation costs, and reductions in local currency-denominated expenses from devaluation of foreign currencies, mainly in South America and Africa. Expense increases in the periods were driven by larger currency remeasurement losses, mainly in Africa and Asia, and the costs incurred in the current quarter to settle third party challenges to the property rights and valuation of a large tract of forestry land.

The consolidated effective income tax rates were approximately 27% and 24% for the quarters ended September 30, 2015 and 2014, respectively. The consolidated effective tax rate for the six-month period ended September 30, 2015, was approximately 24%. 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 rates for all periods were lower than the 35% federal statutory rate because of lower net effective tax rates on income from certain foreign subsidiaries, as well as effects of changes in local currency exchange rates on deferred income tax balances.

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, 2015, 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, 2015.

At 5:00 p.m. (Eastern Time) on November 5, 2015, 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 2, 2016. A taped replay of the call will be available through November 19, 2015, by dialing (855) 859-2056. The confirmation number to access the replay is 68333154.

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, 2015, were $2.3 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,

2015

2014

2015

2014

(Unaudited)

(Unaudited)

Sales and other operating revenues

$

456,382

$

464,116

$

731,801

$

735,588

Costs and expenses

Cost of goods sold

358,288

379,045

585,318

594,977

Selling, general and administrative expenses

60,810

59,809

112,106

123,586

Restructuring and impairment costs

-

3,350

2,389

3,350

Operating income

37,284

21,912

31,988

13,675

Equity in pretax earnings of unconsolidated affiliates

846

3,317

230

3,918

Interest income

205

67

444

210

Interest expense

3,912

4,852

7,796

8,872

Income before income taxes

34,423

20,444

24,866

8,931

Income tax expense (benefit)

9,359

4,960

5,927

(7,078)

Net income

25,064

15,484

18,939

16,009

Less: net income attributable to noncontrolling interests in subsidiaries

(2,599)

(459)

(2,421)

(267)

Net income attributable to Universal Corporation

22,465

15,025

16,518

15,742

Dividends on Universal Corporation convertible perpetual preferred stock

(3,687)

(3,713)

(7,374)

(7,425)

Earnings available to Universal Corporation common shareholders

$

18,778

$

11,312

$

9,144

$

8,317

Earnings per share attributable to Universal Corporation common shareholders:

Basic

$

0.83

$

0.49

$

0.40

$

0.36

Diluted

$

0.81

$

0.48

$

0.40

$

0.35

See accompanying notes.

 

 

UNIVERSAL CORPORATION CONSOLIDATED BALANCE SHEETS (in thousands of dollars)

September 30,

September 30,

March 31,

2015

2014

2015

(Unaudited)

(Unaudited)

ASSETS

Current assets

Cash and cash equivalents

$

68,970

$

29,567

$

248,783

Accounts receivable, net

303,963

290,162

434,362

Advances to suppliers, net

40,627

70,296

114,883

Accounts receivable - unconsolidated affiliates

59,370

98,707

1,907

Inventories - at lower of cost or market:

Tobacco

999,312

1,164,293

636,488

Other

85,222

100,516

62,195

Prepaid income taxes

19,779

28,138

17,811

Deferred income taxes

31,491

34,560

36,611

Other current assets

75,122

83,754

81,570

Total current assets

1,683,856

1,899,993

1,634,610

Property, plant and equipment

Land

16,583

17,022

16,790

Buildings

252,153

239,568

238,372

Machinery and equipment

585,466

577,064

576,010

854,202

833,654

831,172

Less: accumulated depreciation

(539,749)

(528,722)

(525,783)

314,453

304,932

305,389

Other assets

Goodwill and other intangibles

99,049

99,291

99,146

Investments in unconsolidated affiliates

79,995

88,841

76,512

Deferred income taxes

20,661

18,861

6,301

Other noncurrent assets

55,976

68,973

76,515

255,681

275,966

258,474

Total assets

$

2,253,990

$

2,480,891

$

2,198,473

See accompanying notes.

 

 

UNIVERSAL CORPORATION CONSOLIDATED BALANCE SHEETS (in thousands of dollars)

September 30,

September 30,

March 31,

2015

2014

2015

(Unaudited)

(Unaudited)

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities

Notes payable and overdrafts

$

86,095

$

359,349

$

59,862

Accounts payable and accrued expenses

155,824

154,826

140,112

Accounts payable-unconsolidated affiliates

98

1,150

3,281

Customer advances and deposits

67,100

57,723

30,183

Accrued compensation

18,423

20,272

28,232

Income taxes payable

5,612

11,164

9,243

Current portion of long-term obligations

-

118,750

-

Total current liabilities

333,152

723,234

270,913

Long-term obligations

370,000

230,000

370,000

Pensions and other postretirement benefits

93,588

74,975

97,048

Other long-term liabilities

37,472

34,567

36,790

Deferred income taxes

32,067

39,235

26,628

Total liabilities

866,279

1,102,011

801,379

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, 218,490 shares issued and outstanding (219,999 at September 30, 2014, and 218,490 at March 31, 2015)

211,562

213,023

211,562

Common stock, no par value, 100,000,000 shares authorized, 22,680,233 shares issued and outstanding (23,183,259 at September 30, 2014, and 22,593,266 at March 31, 2015)

207,349

207,552

206,002

Retained earnings

1,005,353

971,391

1,020,155

Accumulated other comprehensive loss

(71,657)

(44,001)

(74,994)

Total Universal Corporation shareholders' equity

1,352,607

1,347,965

1,362,725

Noncontrolling interests in subsidiaries

35,104

30,915

34,369

Total shareholders' equity

1,387,711

1,378,880

1,397,094

Total liabilities and shareholders' equity

$

2,253,990

$

2,480,891

$

2,198,473

See accompanying notes.

 

 

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

Six Months Ended September 30,

2015

2014

(Unaudited)

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income

$

18,939

$

16,009

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

Depreciation

18,362

17,298

Amortization

446

816

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

(4,354)

(2,497)

Foreign currency remeasurement loss (gain), net

21,981

7,156

Restructuring and impairment costs

2,389

3,350

Other, net

481

(9,470)

Changes in operating assets and liabilities, net

(202,046)

(386,404)

Net cash used by operating activities

(143,802)

(353,742)

CASH FLOWS FROM INVESTING ACTIVITIES:

Purchase of property, plant and equipment

(28,457)

(30,571)

Proceeds from sale of property, plant and equipment

1,155

983

Net cash used by investing activities

(27,302)

(29,588)

CASH FLOWS FROM FINANCING ACTIVITIES:

Issuance (repayment) of short-term debt, net

23,826

297,507

Repayment of long-term obligations

-

(7,500)

Dividends paid to noncontrolling interests

(1,260)

(1,977)

Issuance of common stock

-

187

Repurchase of common stock

-

(7,202)

Dividends paid on convertible perpetual preferred stock

(7,374)

(7,425)

Dividends paid on common stock

(23,536)

(23,661)

Net cash provided (used) by financing activities

(8,344)

249,929

Effect of exchange rate changes on cash

(365)

(564)

Net decrease in cash and cash equivalents

(179,813)

(133,965)

Cash and cash equivalents at beginning of year

248,783

163,532

Cash and cash equivalents at end of period

$

68,970

$

29,567

See accompanying notes.

NOTE 1. BASIS OF PRESENTATION

Universal Corporation, which together with its subsidiaries is referred to herein as "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. 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, 2015.

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)

2015

2014

2015

2014

Basic Earnings Per Share

Numerator for basic earnings per share

Net income attributable to Universal Corporation

$

22,465

$

15,025

$

16,518

$

15,742

Less: Dividends on convertible perpetual preferred stock

(3,687)

(3,713)

(7,374)

(7,425)

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

18,778

11,312

9,144

8,317

Denominator for basic earnings per share

Weighted average shares outstanding

22,675,323

23,178,082

22,649,270

23,200,589

Basic earnings per share

$

0.83

$

0.49

$

0.40

$

0.36

Diluted Earnings Per Share

Numerator for diluted earnings per share

    Earnings available to Universal Corporation common shareholders

$

18,778

$

11,312

$

9,144

$

8,317

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

3,687

-

-

-

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

22,465

11,312

9,144

8,317

Denominator for diluted earnings per share

Weighted average shares outstanding

22,675,323

23,178,082

22,649,270

23,200,589

Effect of dilutive securities (if conversion or exercise assumed)

Convertible perpetual preferred stock

4,848,766

-

-

-

Employee share-based awards

326,539

330,445

287,361

320,982

Denominator for diluted earnings per share

27,850,628

23,508,527

22,936,631

23,521,571

Diluted earnings per share

$

0.81

$

0.48

$

0.40

$

0.35

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)

2015

2014

2015

2014

SALES AND OTHER OPERATING REVENUES

Flue-cured and burley leaf tobacco operations:

North America

$

49,421

$

53,308

$

97,993

$

85,006

Other regions (1)

371,032

371,669

548,433

569,241

Subtotal

420,453

424,977

646,426

654,247

Other tobacco operations (2)

35,929

39,139

85,375

81,341

Consolidated sales and other operating revenues

$

456,382

$

464,116

$

731,801

$

735,588

OPERATING INCOME

Flue-cured and burley leaf tobacco operations:

North America

$

3,783

$

4,278

$

7,199

$

5,957

Other regions (1)

34,202

21,661

26,355

11,086

Subtotal

37,985

25,939

33,554

17,043

Other tobacco operations (2)

145

2,640

1,053

3,900

Segment operating income

38,130

28,579

34,607

20,943

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

(846)

(3,317)

(230)

(3,918)

Restructuring and impairment costs (4)

-

(3,350)

(2,389)

(3,350)

Consolidated operating income

$

37,284

$

21,912

$

31,988

$

13,675

 

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

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