Universal Corporation Reports Annual Results

RICHMOND, Va., May 22, 2012 /PRNewswire/ --

HIGHLIGHTS

Fiscal Year 2012

Diluted earnings per share of $3.25 after $1.42 in net unusual charges.
Segment operating income down 13%, to $223.5 million.
Revenues down 5%, to $2.4 billion.

Fourth Fiscal Quarter

Diluted earnings per share of $0.91, down $0.04 per share.
Net income down $1.4 million, to $25.8 million.
Revenues decreased 4%, to $654 million.

George C. Freeman, III, Chairman, President, and Chief Executive Officer of Universal Corporation (NYSE: UVV), announced that net income for the fiscal year ended March 31, 2012, was $92.1 million, or $3.25 per diluted share,  including the effect of the charge in the second fiscal quarter for the European Commission fine described below.  That charge and other unusual items during the year amounted to a net pretax charge of $40.1 million ($1.42 per diluted share).  Those results compare to last year's net income of $156.6 million, or $5.42 per diluted share, which included unusual items amounting to a net pretax benefit of $5.3 million ($0.12 per diluted share).  Segment operating income for the year, which excludes those unusual items, was $223.5 million, down $34.4 million compared with the prior year as lower results in the Company's North America and Other Tobacco Operations segments were partially offset by improved performance in the Other Regions segment.  The fiscal year 2012 results reflected the full impact of last year's assignment of Brazilian farmer contracts to Philip Morris International ("PMI"), as well as the decline in processing volumes in the North America segment related to the expiration of customer contracts. Operating income in this period included $12 million in dividend income from unconsolidated subsidiaries.  Revenues for fiscal year 2012 fell to $2.4 billion from $2.6 billion in the previous year, primarily due to lower leaf prices on slightly higher volumes.

For the fourth quarter of fiscal year 2012, net income was $25.8 million, or $0.91 per diluted share, compared to last year's net income of $27.1 million, or $0.95 per diluted share.  Results in both periods included the pretax effects of restructuring costs, which totaled $1.4 million ($0.03 per diluted share) in fiscal year 2012 and $7.5 million ($0.17 per diluted share) in fiscal year 2011. Segment operating income for the period decreased by $12.6 million compared with the prior year mostly as a result of the decline in processing volumes in the North America segment.  Revenues for the quarter of $654 million were down about 4% on lower leaf prices in many origins and the reduced North America processing volumes.

The following table sets forth the unusual items included in reported results, none of which are included in segment results:

Mr. Freeman stated, "We delivered sound results in fiscal year 2012 despite oversupply conditions that reduced green tobacco prices in many of the major markets and pressured margins.  We operate with strong local management in our leaf origins and the knowledge of these management teams, coupled with our global coordination efforts, enabled us to execute well in the difficult environment.   We successfully managed our risk of excess inventories and ended the year with lower uncommitted inventory levels than the same period last year.  We also maintained our focus on fiscal conservatism and ended the period with a stronger balance sheet position, including an increase in cash of about $120 million.

"Beyond the oversupplied markets, fiscal year 2012 offered many challenges.  Our results included several unusual charges and benefits, including the charge for the European Commission fine.  We also had a significant decline in our processing volumes in the United States due to the expiration of processing contracts there.  In Brazil, we saw the effect of reduced sales of leaf due to the assignment of some of our farmer contracts to PMI last year.  We have also had success in broadening our customer base during this period, and we continue to strengthen our relationships with our existing customers.

"As we move into fiscal year 2013, we are seeing crop sizes come down in most of the key sourcing areas for flue-cured and burley tobacco, and consequently, we expect that our overall sales volumes will decline.  In the United States, crop levels should recover after last year's hurricane damage.  However, we do not expect to benefit from the same level of sales of uncommitted inventories there, as those stocks have been depleted.  These crop and inventory reductions reflect the cyclical nature of our business.  With smaller crop sizes, global markets are beginning to strike a balance between supply and demand. Overall, green leaf prices have stabilized, and we are also seeing higher prices for certain types of tobacco such as quality flavor flue-cured and burley leaf, as well as oriental tobacco.

"Our entire organization continues to focus on delivering a consistent, compliant product that is valued by our customers, especially in today's increasingly regulated world.  We are committed to strengthening the integrity of the leaf tobacco supply chain, which includes measureable efforts to promote sustainable production.  We believe our global reach, our strong regional management teams, and our long-term focus on being a global quality leaf service provider will continue to differentiate us from the other suppliers and dealers in the industry."

FLUE-CURED AND BURLEY LEAF TOBACCO OPERATIONS:

Fiscal Year 2012

For the fiscal year ended March 31, 2012, operating income for the flue-cured and burley leaf tobacco operations, which includes the North America and Other Regions segments, was about $211 million, an 8% decrease compared to the prior year's results of about $229 million.  The decline reflected improved operating results for the year in the Other Regions segment, which were outweighed by reduced earnings in the North America segment.  Revenues for the group were down about 3%, to $2.2 billion due to lower leaf prices, despite higher volumes for the year. 

Operating income of $180.7 million for the Other Regions segment was up 6%, compared to $170 million for the prior year. In Africa, higher sales volumes in some origins, partly due to completion of more shipments prior to fiscal year-end, mitigated tighter margins and lower third-party processing income.  Earnings also benefitted from the reversal of statutory severance obligations there. Earnings in the South America region were down, although the effect of reduced sales volumes related to last year's assignment of farmer contracts was moderated significantly by increased sales to new and existing customers, as well as lower costs from restructuring activities and a smaller farmer base in Brazil.  In Europe, results improved on higher shipments and an insurance recovery, while Asia experienced declines in the period, primarily due to reduced trading volumes and inventory adjustments.  Selling, general, and administrative expenses for the segment were flat for the year, and cost of goods sold declined about 4% due mostly to reduced green leaf prices and the effect of increased toll processing in Brazil.  In addition, results for the Other Regions segment included $12 million in dividend income from unconsolidated subsidiaries.  Revenues for the segment of $1.9 billion were relatively flat as higher overall volumes combined with lower prices in most regions and a less favorable mix. 

Operating income for the North America segment declined by $29.2 million to $30.0 million for fiscal year 2012, as results included the full impact of lower toll processing volumes there.  The lower processing volumes were partly mitigated by reduced overhead costs, including savings from restructuring initiatives.  Results for both fiscal years 2012 and 2011 also reflected sales of uncommitted leaf inventories.  Revenues for the segment were down 8% to $314.2 million.

Fourth Quarter

Operating income for the fourth quarter ended March 31, 2012 for flue-cured and burley leaf tobacco operations, was $40.1 million compared with $48.4 million for the fourth quarter of the previous year.  Earnings improvement in the Other Regions segment for the quarter was more than offset by the earnings decline for the North America segment.  Revenues for the group declined as well to $548.3 million from last year's $572.5 million level primarily on lower green leaf prices in most regions.

Operating earnings for the quarter in the Other Regions segment were up 8% to $33.9 million.  Higher shipments on larger crops and earlier shipment timing comparisons buoyed results in Africa.  South America also saw stronger volumes compared with the same period last year, however operating margins were reduced on increased selling, general, and administrative costs because of a gain on sale of the storage facility which benefitted the previous year.  Earnings in Europe improved on earlier timing of some shipments and third-party processing, as well as reduced administrative costs, including foreign currency exchange gains.  Asia results for the quarter were negatively affected by inventory writedowns, while volumes remained comparable.  Revenues for the Other Regions segment were down about $6 million to $470.1 million as the effects of lower green prices and a weaker product mix were nearly offset by stronger shipment volumes.

Operating earnings for the North America segment of $6.2 million in the fourth fiscal quarter compared with $16.9 million for the same period last year.  Results were significantly affected in the quarter by lower toll processing volumes.  Trading volumes were also down slightly, reducing the favorable impact of lower selling, general, and administrative expense from restructuring savings and smaller incentive accruals.  The processing volume decline similarly reduced revenues, which were down $18.2 million to $78.1 million for the quarter.

OTHER TOBACCO OPERATIONS:

In the Other Tobacco Operations segment, operating income for fiscal year 2012 declined by $15.8 million  to $12.8 million, due primarily to lower volumes and margins in the dark tobacco operations as a result of a decline in global market sales.  The oriental joint venture also experienced declines on lower overall sales volumes and margins for the year, partially mitigated by reduced overhead costs and the benefit from business realignment charges taken in the prior year.  For the fourth quarter, segment operating results decreased by $4.4 million to $8.8 million primarily because of lower results in the dark tobacco operations. 

Revenues for this segment for fiscal year 2012 decreased by $47.5 million, to $239.2 million.  The majority of this change was due to the transfer of Special Services business to the Other Regions segment and lower dark tobacco volumes. Revenues for the quarter however, declined by only $2.0 million, or 2%, as these similar factors were counterbalanced by an increase in sales due to the timing of shipments of oriental tobaccos to the United States compared with the same period in the previous year.

OTHER ITEMS:

Cost of goods sold decreased by about 4% to $2.0 billion for the year ended March 31, 2012 and by about 3% for the fourth quarter compared with the previous year, primarily as a result of reduced green leaf prices in most origins, offset somewhat by higher volumes in both periods.  Selling, general, and administrative costs fell by $7.4 million for the year and increased about $2.7 million for the fourth quarter  compared to the previous year.  The full year decline included a favorable comparison on costs related to a smaller farmer base in South America and a positive variance from the reversal of non-income tax provisions due to a favorable tax ruling in South America, partially offset by unfavorable variances on currency remeasurement primarily in South America and Asia. The increase in the fourth quarter was due mainly to the prior year's gain on the sale of a storage facility in South America.

Interest expense was down 1% to $22.8 million for the full year and down about 6% to $5.5 million for the fourth quarter ended March 31, 2012, compared with the same periods in the previous year, primarily reflecting lower average borrowing levels.  Interest income for fiscal year 2012 was about $1.4 million lower, due to the previous year's recognition of interest income on the return of funds that had been escrowed to bond the appeal of the European Commission fine in Spain. 

The consolidated effective income tax rates on pretax earnings were approximately 29% and 38% for the quarter and fiscal year ended March 31, 2012. The rate for the year was higher because the Company did not record an income tax benefit on the non-deductible fine portion of the charge for the European Commission fine and interest in Italy. Without that item, the effective income tax rate for the year would have been approximately 29%. That rate and the effective rate for the quarter were lower than the 35% federal statutory rate primarily due to the effect of exchange rate movements on deferred taxes and recognition of benefits on prior year operating losses of certain foreign subsidiaries, and to recoveries of state income taxes.  The effective income tax rates for the quarter and year ended March 31, 2011, were approximately 40% and 32%, respectively. The effective rate for the full year was less than the statutory rate due to the reversal of previously recorded liabilities for uncertain tax positions and recognition of benefits on prior year operating losses of certain foreign subsidiaries.  The effective rate for the fourth quarter of fiscal 2011 was higher partly because tax benefits were not realized on the full amount of restructuring costs related to the closure of the Canadian operations.

In September 2011, the Company announced that the General Court of the European Union issued a decision rejecting the appeal of Deltafina, S.p.A, its Italian subsidiary. That appeal related to the European Commission's revocation of Deltafina's immunity from a fine of €30 million (about $41 million on September 9, 2011) assessed against Deltafina and Universal jointly for actions in connection with Deltafina's purchase and processing of tobacco in the Italian raw tobacco market between 1995 and 2002.  Deltafina has appealed the decision of the General Court to the European Court of Justice.  The appeal process could take up to two years.  Effective with the September 9, 2011 General Court decision, the Company recorded a charge for the full amount of the fine (€30 million) plus accumulated interest (€5.9 million). The charge totaled $49.1 million at the exchange rate in effect on the date of the General Court decision.

In November 2011, the Company sold land and storage buildings in Brazil in exchange for other property and $9.4 million in cash.  The transaction resulted in a gain of $11.1 million, which is reported in other income in the consolidated statements of income.

Additional information

Amounts included in the previous discussion are attributable to Universal Corporation and exclude earnings related to non-controlling interests in subsidiaries.

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, 2011, 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, 2011.

At 5:00 p.m. (Eastern Time) on May 22, 2012, 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 August 6, 2012.  A taped replay of the call will be available through June 12, 2012, by dialing (855) 859-2056.  The confirmation number to access the replay is 82743607.

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, 2012, were $2.4 billion. For more information on Universal Corporation, visit its website at www.universalcorp.com.

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.  Certain amounts in prior year statements have been reclassified to conform to the current year presentation. 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, 2011.

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 March 31, 2012, the Company's total exposure under guarantees issued by its operating subsidiary in Brazil for banking facilities of farmers in that country was approximately $20 million, ($26 million face amount including unpaid accrued interest, less $6 million recorded for the fair value of the guarantees).  About 90% of these guarantees expire within one year, and all of the remainder expire within two 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 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 March 31, 2012, was the face amount, $26 million including unpaid accrued interest ($73 million at March 31, 2011).  The fair value of the guarantees was a liability of approximately $6 million at March 31, 2012 ($21 million at March 31, 2011).  In addition to these guarantees, the Company has other contingent liabilities totaling approximately $4 million.

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.

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:

SOURCE Universal Corporation

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