Universal Corporation Announces 14% Increase in Third Quarter Earnings per Share

02/10/2009

FISCAL YEAR 2009 THIRD QUARTER HIGHLIGHTS Diluted earnings per share up 14% to $1.78 compared to $1.56 last year. Revenues up 22% to $699 million on higher volumes from larger crops and higher green tobacco costs. Operating income down $2 million to $77 million due to currency remeasurement losses as the U.S. dollar strengthened. FISCAL YEAR 2009 NINE-MONTH HIGHLIGHTS Diluted earnings per share up 12%, to $3.78 per share versus $3.37 per share last year. Revenues up 19% to $2.0 billion. Operating income up slightly to $187 million. George C. Freeman, III, Chairman, President, and Chief Executive Officer of Universal Corporation (NYSE: UVV), reported a 14% increase in earnings per diluted share to $1.78 for the Company's third fiscal quarter, which ended on December 31, 2008. These results represented net income of $53.1 million compared to $50.8 million, or $1.56 per diluted share, last year. The quarter reflected very strong operations in all of the Company's reported segments, especially in flue-cured and burley operations where shipments of larger African crops and good performance by the North American group had a significant effect. The performance of those operations was offset by the negative effects of currency remeasurement related to Brazilian net monetary assets that reduced operating income by $20 million. Revenues increased by 22% to $699 million, primarily due to increased costs of green tobacco that were passed through in sales prices, as well as to increased volumes after the very small African crops last year. Similar factors affected the nine-month results. In addition, the Company benefited from lower effective tax rates. Net income for the first three quarters of the fiscal year was $116.0 million, or $3.78 per diluted share, up from $109.3 million, or $3.37 per diluted share, reported last year. Revenues increased by 19% during the nine-month period. Mr. Freeman stated, "We are pleased with our operations so far this year. It was gratifying to see the recovery of our African operations. African results improved due to higher volumes as well as efficiencies and strong teamwork. But the continued devaluation of the Brazilian currency has again adversely affected our results because of our balance sheet exposure there. Part of that exposure is related to farmer receivables that will be collected upon delivery of the current crop, and it reflects the higher cost of the local currency when fertilizer and seeds were provided to the farmers. The agricultural materials were purchased in the spring in the midst of the overheated commodity markets and when the local Brazilian currency was 30 - 40% stronger than it is today. The regions have delivered operating improvements as a result of hard work and careful attention to costs. "Tobacco competes with commodity crops for acreage, and world markets for commodity products have changed a great deal during the fiscal year. Early in the year, the cost of green tobacco escalated as all areas worked to ensure sustainability of supply in the face of competing crops. The market situation for fiscal year 2010 is likely to be very different. We saw a much needed recovery in burley volumes in Africa this year, but signs are pointing to an extremely large burley crop there next year, which is likely to move worldwide markets to oversupply. Flue-cured tobacco markets are expected to remain mostly balanced. We continue to work to maintain future production of the type of quality tobacco that our customers require. "Notwithstanding the 12% increase in earnings per share this year, we have not been immune to the effects of the financial chaos in world markets. Remeasurement losses related to the rapid and severe weakening of the local Brazilian currency reduced our earnings per share by $0.91. The value of our pension assets was also reduced by the general market decline, and we expect to provide between $10 million and $20 million in additional funding to our qualified defined benefit plan. But our business is healthy, and our balance sheet is strong. We have prudently managed the cash inflow from the sale of our non-tobacco businesses two years ago. We continue to work on cost control measures. We have passed the peak working capital requirement period during the year, and we believe that our financial resources are adequate to meet our needs." FLUE-CURED AND BURLEY OPERATIONS: The flue-cured and burley operations posted a very strong quarter as operating income increased by 3%, to about $73.6 million, and revenues increased by 27%. North America's revenues and operating income were above last year's numbers primarily because of increased sales of current crop tobacco in the United States, partly due to earlier shipments this year. Results in North America also benefited from increased trading activities. Operating income for the Other Regions segment decreased slightly for the quarter despite improved operations in Africa and volume increases from larger burley crops there. The segment's performance was hurt by lower results from the Company's South American operations due to currency remeasurement losses in Brazil, where the local currency weakened by approximately 22% during the quarter. Some of the remeasurement losses were attributable to advances to farmers for crop inputs for the upcoming growing season. Crop inputs were more expensive this year due to increased fertilizer prices and the weaker U.S. dollar at the time they were purchased. Although the crop inputs are being used for production of the crop that will be sold next year, the advances to farmers for those inputs are remeasured in U.S. dollars along with all other monetary assets and liabilities each reporting period. As a result, the related remeasurement loss affects operating income this year when the prior crop is being sold. Shipments this quarter from South America were higher than in the prior year, but they continued to be hampered by a flood-related port closure. Results from Europe were lower in the quarter because significant shipments took place earlier in the year, and Asian operations saw lower earnings on lower volumes and a negative comparison from currency changes this year. Revenues for Other Regions increased by 29%, to $483 million, due to volume and price increases. Price increases were primarily related to higher cost leaf. For the nine months, results for flue-cured and burley operations increased by more than 5%, to nearly $175 million. The improvement was due to stronger performance in North America where cost savings in Canada and increased volumes in the United States boosted income and revenues. The Other Regions segment reflected stronger performance in the African region from higher volumes and from reduced charges and write downs there. Results of European operations were higher as well, primarily related to higher volumes in the region's tobacco sheet business. South American results were reduced by the effect of the previously mentioned remeasurement losses, which totaled $43 million for the period. The Brazilian currency devalued by about 32% over the nine months, compared to a 15% strengthening last year. Asian results were reduced by their third quarter performance. Revenues for the Other Regions segment were up by 25% to $1.6 billion for the nine months, primarily due to volume increases in Africa and higher prices in several regions related to higher leaf costs. OTHER TOBACCO OPERATIONS Results for Other Tobacco Operations declined as earnings from the Special Services group, where sales were accelerated last year, showed an expected decrease related to a shift of business to the origins. That change also caused the 16% decline in segment revenue in the quarter. In addition, results from the oriental tobacco joint venture declined, primarily due to the sale of lower margin styles and grades this year and to currency remeasurement losses. Earnings of the dark tobacco operations were comparable to last year. For the nine months, segment earnings were 15% lower than the same period last year. The shift in business from Special Services caused the decline, but that effect was partially offset by improved performance in dark tobacco operations and the oriental tobacco joint venture. The latter group saw higher volumes for the nine-month period, the effect of which was partly offset by lower margins and lower currency remeasurement gains this year. OTHER INFORMATION Selling, general and administrative expenses, which are included in segment operating results, increased by about $41 million in the quarter and $72 million for the nine months, primarily due to the large currency remeasurement and exchange losses this year. Last year, when the U.S. dollar was weakening against most other world currencies, the Company generated currency-related gains. In contrast, fiscal year 2009 has seen the U.S. dollar dramatically strengthen against most currencies since the first fiscal quarter, producing the opposite effect. Thus, year-to-year comparisons reflect net expense increases of approximately $35 million for the quarter and $68 million for the nine months due to currency effects. Currency fluctuations primarily impacted our operating results in Brazil, the Philippines, Indonesia, and Africa and were mostly caused by local currency receivables from suppliers. The Company has hedged some of its net monetary assets with local borrowings. Net interest expense increased by $5.4 million in the quarter compared to last year, primarily because of increased cash requirements to fund working capital needs and share repurchases. The Company made substantial progress on its share repurchase program, spending about $110 million to purchase 2.23 million shares during the nine months, bringing program totals, since November 2007, to $128 million and 2.55 million shares. The effective tax rate fell to 26% for the quarter and 30% for the nine months. Those rates were lower than last year's rate of about 36% for both periods, primarily because management expects to utilize more of the Company's foreign tax credit carryforwards, which caused the reduction of a valuation allowance for those credits. During the current year quarter, management also reversed a liability for uncertain tax positions because the statute of limitations for the related tax year expired. For the full year, we expect our effective tax rate to be approximately 31%. Additional information This information includes "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The Company cautions readers that any statements contained herein regarding earnings and expectations for its performance are forward-looking statements based upon management's current knowledge and assumptions about future events, including anticipated levels of demand for and supply of its products and services; costs incurred in providing these products and services; timing of shipments to customers; changes in market structure; and general economic, political, market, and weather conditions. Actual results, therefore, could vary from those expected. A further list and description of these risks, uncertainties and other factors can be found in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2008 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, 2008. At 5:00 p.m. (Eastern Time) on February 5, 2009, 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 February 26, 2009, by dialing (800) 642-1687. The confirmation number to access the replay is 84039948. Headquartered in Richmond, Virginia, Universal Corporation is one of the world's leading tobacco merchants and processors and conducts business in more than 35 countries. Its revenues from continuing operations for the fiscal year ended March 31, 2008, were $2.1 billion. For more information on Universal Corporation, visit its web site at www.universalcorp.com. UNIVERSAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In thousands of dollars, except per share data) Three Months Ended Nine Months Ended December 31, December 31, 2008 2007 2008 2007 (Unaudited) (Unaudited) Sales and other operating Revenues $699,144 $573,094 $1,991,021 $1,678,641 Costs and expenses Cost of goods sold 533,176 446,089 1,566,876 1,324,752 Selling, general and administrative expenses 88,556 47,869 237,351 165,545 Restructuring costs --- 3,304 Operating income 77,412 79,136 186,794 185,040 Equity in pretax earnings of unconsolidated affiliates 5,259 8,477 12,792 7,231 Interest income 195 4,453 1,562 13,317 Interest expense 11,435 10,314 29,214 32,274 Income before income taxes and other items 71,431 81,752 171,934 173,314 Income taxes 18,638 29,204 52,034 62,937 Minority interests, net of income taxes (291) 1,796 3,923 974 Income from continuing Operations 53,084 50,752 115,977 109,403 Loss from discontinued operations, net of income taxes --- (145) Net income 53,084 50,752 115,977 109,258 Dividends on convertible perpetual preferred stock (3,712) (3,712) (11,137) (11,137) Earnings available to common shareholders $49,372 $47,040 $104,840 $98,121 Basic earnings per common share: From continuing operations $1.98 $1.72 $4.07 $3.60 From discontinued operations --- (0.01) Net income $1.98 $1.72 $4.07 $3.59 Diluted earnings per common share: From continuing operations $1.78 $1.56 $3.78 $3.38 From discontinued operations --- (0.01) Net income $1.78 $1.56 $3.78 $3.37 See accompanying notes. UNIVERSAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands of dollars) December 31, December 31, March 31, 2008 2007 2008 (Unaudited) (Unaudited) ASSETS Current Cash and cash equivalents $87,971 $502,277 $186,070 Short-term investments 5,939 - 58,889 Accounts receivable, net 342,595 233,861 231,107 Advances to suppliers, net 153,806 114,897 149,376 Accounts receivable - unconsolidated affiliates 35,234 46,732 43,718 Inventories - at lower of cost or market: Tobacco 613,597 486,785 602,945 Other 67,000 42,289 42,562 Prepaid income taxes 20,270 8,032 17,696 Deferred income taxes 36,799 19,158 22,737 Other current assets 65,630 58,264 61,960 Total current assets 1,428,841 1,512,295 1,417,060 Property, plant and equipment Land 15,978 17,061 16,460 Buildings 252,846 250,202 254,737 Machinery and equipment 503,993 515,870 519,695 772,817 783,133 790,892 Less accumulated depreciation (453,288) (442,844) (456,059) 319,529 340,289 334,833 Other assets Goodwill and other intangibles 106,137 104,689 106,647 Investments in unconsolidated affiliates 110,166 114,622 116,185 Deferred income taxes 35,562 66,991 49,632 Other noncurrent assets 97,020 183,948 109,755 348,885 470,250 382,219 Total assets $2,097,255 $2,322,834 $2,134,112 See accompanying notes. UNIVERSAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands of dollars) December 31, December 30, March 31, 2008 2007 2008 (Unaudited) (Unaudited) LIABILITIES AND SHAREHOLDERS' EQUITY Current Notes payable and overdrafts $140,677 $139,632 $126,229 Accounts payable and accrued Expenses 201,961 173,864 210,354 Accounts payable - unconsolidated affiliates 28,880 8,815 10,343 Customer advances and deposits 27,344 86,099 21,030 Accrued compensation 16,646 15,007 25,484 Income taxes payable 10,087 12,712 8,886 Current portion of long-term Obligations 79,500 150,000 - Total current liabilities 505,095 586,129 402,326 Long-term obligations 333,943 400,644 402,942 Pensions and other postretirement Benefits 86,609 98,242 88,278 Other long-term liabilities 66,796 73,322 84,958 Deferred income taxes 54,156 47,881 36,795 Total liabilities 1,046,599 1,206,218 1,015,299 Minority interests 6,861 6,985 3,182 Shareholders' equity 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 December 31, 2007, and March 31, 2008) 213,023 213,023 213,023 Common stock, no par value, 100,000,000 shares authorized, 24,987,055 shares issued and outstanding (27,299,524 at December 31, 2007, and 27,162,150 at March 31, 2008) 193,020 198,581 206,436 Retained earnings 688,015 729,548 711,655 Accumulated other comprehensive Loss (50,263) (31,521) (15,483) Total shareholders' equity 1,043,795 1,109,631 1,115,631 Total liabilities and shareholders' equity $2,097,255 $2,322,834 $2,134,112 See accompanying notes. UNIVERSAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands of dollars) Nine Months Ended December 31, 2008 2007 (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES OF CONTINUING OPERATIONS: Net income $115,977 $109,258 Adjustments to reconcile net income to net cash provided (used) by operating activities of continuing operations: Net loss from discontinued operations -- 145 Depreciation 31,651 31,028 Amortization 736 1,597 Provisions for losses on advances and guaranteed loans to suppliers 14,427 12,218 Remeasurement loss (gain), net 42,432 (13,187) Restructuring costs -- 3,304 Other, net 31,248 29,677 Changes in operating assets and liabilities, net (243,274) 28,988 Net cash provided (used) by operating activities of continuing operations (6,803) 203,028 CASH FLOWS FROM INVESTING ACTIVITIES OF CONTINUING OPERATIONS: Purchase of property, plant and equipment (28,900) (18,355) Purchases of short-term investments (9,658) -- Maturities and sales of short-term investments 62,833 -- Proceeds from sale of business, less cash of business sold -- 26,556 Proceeds from sale of property, plant and equipment, and other 14,530 15,964 Deposit to escrow account -- (32,098) Net cash provided (used) by investing activities of continuing operations 38,805 (7,933) CASH FLOWS FROM FINANCING ACTIVITIES OF CONTINUING OPERATIONS: Issuance (repayment) of short-term debt, net 28,288 (2,559) Repayment of long-term debt…… -- (14,000) Issuance of common stock 37 16,131 Repurchase of common stock (111,073) (4,084) Dividends paid on convertible perpetual preferred stock (11,137) (11,137) Dividends paid on common stock (34,623) (36,422) Other (104) (907) Net cash used by financing activities of continuing operations (128,612) (52,978) Net cash provided (used) by continuing operations (96,610) 142,117 CASH FLOWS FROM DISCONTINUED OPERATIONS: Net cash provided by operating activities of discontinued operations -- 6,495 Net cash used by investing activities of discontinued operations -- (17) Net cash used by financing activities of discontinued operations -- (4,957) Net cash provided by discontinued operations -- 1,521 Effect of exchange rate changes on cash (1,489) 164 Net increase (decrease) in cash and cash equivalents (98,099) 143,802 Cash and cash equivalents of continuing operations at beginning of year 186,070 358,236 Cash and cash equivalents of discontinued operations at beginning of year -- 239 Less: Cash and cash equivalents of discontinued operations at end of period -- -- Cash and cash equivalents at end of period $87,971 $502,277 See accompanying notes. NOTE 1. BASIS OF PRESENTATION Universal Corporation, with its subsidiaries ("Universal" or the "Company"), is one of the world's leading leaf tobacco merchants and processors. The Company previously had non-tobacco operations, but sold most of them in fiscal year 2007. The remaining non-tobacco businesses, or the assets of those businesses, were sold during fiscal year 2008. Those operations are reported as discontinued operations for all periods in the Company's financial statements. 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 document 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, 2008. NOTE 2. GUARANTEES AND OTHER CONTINGENT LIABILITIES Guarantees of bank loans to growers for crop financing and construction of curing barns or other tobacco producing assets are industry practice in Brazil and support the farmers' production of tobacco there. At December 31, 2008, the Company's total exposure under guarantees issued by its operating subsidiary in Brazil for banking facilities of farmers in that country was approximately $133 million. About 70% 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 the third-party banks. Failure of farmers to deliver sufficient quantities of tobacco to the subsidiary to cover their obligations to third-party banks could result in a liability for the subsidiary under the related guarantee; 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 is the face amount including unpaid accrued interest, or $133 million ($205 million as of December 31, 2007, and $218 million at March 31, 2008). The accrual recorded for the fair value of the guarantees was approximately $10 million and $11 million at December 31, 2008 and 2007, respectively, and approximately $13 million at March 31, 2008. In addition to these guarantees, the Company has other contingent liabilities totaling approximately $56 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 expectations, the effect on the Company's results of operations for a particular fiscal reporting period could be material. NOTE 3. EARNINGS PER SHARE The following table sets forth the computation of earnings per share for the periods presented in the consolidated statements of income. Three Months Ended Nine Months Ended December 31, December 31, (in thousands, except per share data) 2008 2007 2008 2007 Basic Earnings Per Share Numerator for basic earnings per share From continuing operations: Income from continuing operations $53,084 $50,752 $115,977 $109,403 Less: Dividends on convertible perpetual preferred stock (3,712) (3,712) (11,137) (11,137) Earnings available to common shareholders from continuing operations 49,372 47,040 104,840 98,266 From discontinued operations: Earnings (loss) available to common shareholders from discontinued operations --- (145) Net income available to common shareholders $49,372 $47,040 $104,840 $98,121 Denominator for basic earnings per share Weighted average shares outstanding 24,989 27,357 25,759 27,285 Basic earnings per share: From continuing operations $1.98 $1.72 $4.07 $3.60 From discontinued operations --- (0.01) Net income per share $1.98 $1.72 $4.07 $3.59 Diluted Earnings Per Share Numerator for diluted earnings per share From continuing operations: Earnings available to common shareholders from continuing operations $49,372 $47,040 $104,840 $98,266 Add: Dividends on convertible perpetual preferred stock (if conversion assumed) 3,712 3,712 11,137 11,137 Earnings available to common shareholders from continuing operations for calculation of diluted earnings per share 53,084 50,752 115,977 109,403 From discontinued operations: Earnings (loss) available to common shareholders from discontinued operations --- (145) Net income available to common shareholders $53,084 $50,752 $115,977 $109,258 Denominator for diluted earnings per share: Weighted average shares outstanding 24,989 27,357 25,759 27,285 Effect of dilutive securities (if conversion or exercise assumed) Convertible perpetual preferred stock 4,719 4,711 4,717 4,710 Employee share-based awards 142 373 196 385 Denominator for diluted earnings per share 29,850 32,441 30,672 32,380 Diluted earnings per share: From continuing operations $1.78 $1.56 $3.78 $3.38 From discontinued operations --- (0.01) Net income per share $1.78 $1.56 $3.78 $3.37 NOTE 4. SEGMENT INFORMATION The principal approach used by management to evaluate the Company's performance is by geographic region, although some components of the business are evaluated on the basis of their worldwide operations. The Company evaluates the performance of its segments based on operating income after allocated overhead expenses (excluding significant non-recurring charges or credits), plus equity in pretax earnings of unconsolidated affiliates. Operating results for the Company's reportable segments for each period presented in the consolidated statements of income were as follows: Three Months Ended Nine Months Ended December 31, December 31, (in thousands of dollars) 2008 2007 2008 2007 SALES AND OTHER OPERATING REVENUES Flue-cured and burley leaf tobacco operations: North America $160,979 $133,319 $264,272 $222,004 Other regions (1) 482,538 373,670 1,570,299 1,258,781 Subtotal 643,517 506,989 1,834,571 1,480,785 Other tobacco operations (2) 55,627 66,105 156,450 197,856 Consolidated sales and other operating revenues $699,144 $573,094 $1,991,021 $1,678,641 OPERATING INCOME Flue-cured and burley leaf tobacco operations: North America $23,894 $19,395 $27,218 $18,364 Other regions (1) 49,747 52,016 147,385 147,928 Subtotal 73,641 71,411 174,603 166,292 Other tobacco operations (2) 9,030 16,202 24,983 29,283 Segment operating income 82,671 87,613 199,586 195,575 Less: Equity in pretax earnings of unconsolidated affiliates (3) 5,259 8,477 12,792 7,231 Restructuring costs (4) --- 3,304 Consolidated operating income $77,412 $79,136 $186,794 $185,040 (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. Enditem