Universal Corporation Reports Six-Month Results

Nov 06, 2014, 16:01 ET from Universal Corporation

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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