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| UVV > SEC Filings for UVV > Form 10-Q on 6-Feb-2009 | All Recent SEC Filings |
6-Feb-2009
Quarterly Report
This Quarterly Report on Form 10-Q and the following "Management's Discussion and Analysis of Financial Condition and Results of Operations" contain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Among other things, these statements relate to the Company's financial condition, results of operation, and future business plans, operations, opportunities, and prospects. In addition, the Company and its representatives may from time to time make written or oral forward-looking statements, including statements contained in other filings with the Securities and Exchange Commission and in reports to shareholders. These forward-looking statements are generally identified by the use of words such as we "expect," "believe," "anticipate," "could," "should," "may," "plan," "will," "predict," "estimate," and similar expressions or words of similar import. These forward-looking statements are based upon management's current knowledge and assumptions about future events and involve risks and uncertainties that could cause actual results, performance, or achievements to be materially different from any anticipated results, prospects, performance, or achievements expressed or implied by such forward-looking statements. Such risks and uncertainties include: 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; changes in exchange rates; and general economic, political, market, and weather conditions. For a further description of factors that may cause actual results to differ materially from such
forward-looking statements, see Item 1A, "Risk Factors" of our Annual Report on Form 10-K for the fiscal year ended March 31, 2008. We caution investors not to place undue reliance on any forward-looking statements as these statements speak only as of the date when made, and we undertake no obligation to update any forward-looking statements made in this report. This Form 10-Q should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended March 31, 2008.
Liquidity and Capital Resources
Overview
After significant seasonal working capital investments during the first half of our fiscal year, we generally see contraction in inventory and other working capital elements in the second half of the fiscal year as major crops in Africa are being shipped and South American shipments near completion. Reflecting this seasonal pattern, inventory levels have declined, cash balances have increased, short-term bank borrowings and customer funds have decreased, and operating cash flows have increased since September 30.
Our liquidity and capital resource requirements are predominantly short term in nature and relate to working capital for tobacco crop purchases. Working capital needs are seasonal within each geographic region. The geographic dispersion and the timing of working capital needs permit us to predict our general level of cash requirements, although crop size, prices paid to farmers, and currency fluctuations affect requirements each year. Each geographic area follows a cycle of buying, processing, and shipping, although in several regions, we also provide agricultural materials to farmers during the growing season. The timing of the elements of each cycle is influenced by such things as local weather conditions and individual customer shipping requirements, which may change the level or the duration of crop financing. Despite a predominance of short-term needs, we maintain a relatively large portion of our total debt as long-term to reduce liquidity risk.
Operations
We used $7 million in net cash flow to fund operating activities during the nine months ended December 31, 2008. Accounts receivable increased by $111 million to $343 million reflecting higher volumes and pricing primarily related to increased leaf costs. Tobacco inventory at $614 million was up slightly from $603 million at March 31, 2008. Compared to December 31, 2007, tobacco inventory levels are about $126 million, or 27%, higher, primarily due to higher green tobacco costs, caused by the weakness of the U.S. dollar during the primary buying periods in Africa and South America, by higher local currency prices paid to farmers, and by trading opportunities in the United States. Other inventory, which includes packing supplies and agricultural materials such as fertilizer, was about $25 million higher primarily because deliveries to African farmers were delayed by weather conditions. Inventory is usually financed with a mix of cash, notes payable, and customer deposits, depending on our borrowing capabilities, interest rates, and exchange rates, as well as those of our customers.
We generally do not purchase material quantities of tobacco on a speculative basis. At December 31, 2008, our uncommitted inventories were $97 million, or about 16% of total tobacco inventory, compared to $89 million, or about 15% of our March 31, 2008, inventory, and $64 million, or about 13% of our December 31, 2007, inventory. Compared to last year's third quarter, uncommitted inventories increased as the effect of decreased volumes of uncommitted inventories in most regions was more than offset by higher local currency prices paid to farmers and increased volumes held for trade in one area.
Customer deposits were almost $59 million lower this year as we reduced customer prepayment programs. Accounts receivable increased by $109 million due to higher volumes and selling prices this year, as well as lower customer deposits. Advances to suppliers increased by $39 million, primarily because we began advancing funds to suppliers in two regions.
Conditions in worldwide financial markets changed dramatically in recent months and continue to be volatile. The U.S. dollar strengthened significantly against many currencies, which has the effect of reducing the U.S. dollar cost of future tobacco purchases in local currency. Most of our fiscal year 2009 inventory was purchased before that change and thus reflects the higher costs. In addition, agricultural materials for next year's crops were purchased before the U.S. dollar strengthened.
Investment
During the nine months ended December 31, 2008, we invested about $29 million in our fixed assets, which was slightly less than our depreciation expense of $32 million. Our intent is to limit maintenance capital spending to a level below depreciation expense in order to maintain strong cash flow; however, from time to time larger projects may be undertaken. In the first nine months of last year, capital spending was $18 million. The increase was primarily caused by the replacement of aircraft in Africa.
Financing
We consider the sum of notes payable and overdrafts, long-term debt (including current portion), and customer advances and deposits, less cash, cash equivalents, and short-term investments on our balance sheet to be our net debt. We also consider our net debt plus minority interests and shareholders' equity to be our total capitalization. Net debt increased by about $182 million to $488 million during the nine months ended December 31, 2008. The increase reflects higher seasonal working capital requirements caused by higher green tobacco costs due to the weakness of the U.S. dollar during the primary buying periods in Africa and South America, and it also reflects the use of prior year cash flows for share repurchases. Net debt as a percentage of capitalization was approximately 32% at December 31, 2008, up from approximately 21% at March 31, 2008, and 20% at December 31, 2007. Net debt has increased by about $213 million since December 31, 2007, as we utilized cash balances and issued new short-term debt to fund higher seasonal working capital requirements and purchase common shares.
As of December 31, 2008, we were in compliance with the covenants of our debt agreements. We had $400 million available under a committed revolving credit facility that will expire on August 31, 2012, and $94 million in cash, cash equivalents, and short-term investments. Our short-term debt and current maturities of long-term debt totaled $220 million. In addition, we had about $425 million in unused, uncommitted credit lines. Our seasonal working capital requirements typically increase from December to September by up to $200 million. In addition, we have $79.5 million in long-term debt maturing in September 2009, and we expect to provide up to $20 million in additional funding to our qualified pension plan. While available capital resources from our committed revolving credit facility and uncommitted credit lines exceed these anticipated needs, we may explore issuing additional long-term debt in order to better control liquidity risk. If we were to issue new long-term debt in the current markets, we believe that the cost of that debt would be substantially higher than our current, outstanding debt and that the increased interest expense would impact our future results. If we refinanced our maturing debt today, we believe our interest expense could increase by up to $3 million per year.
On November 7, 2007, we announced that our Board of Directors had approved the purchase of up to $150 million of our common stock through November 2009. The purchases are carried out from time to time on the open market or in privately negotiated transactions at prices not exceeding prevailing market rates. During the nine months ended December 31, 2008, we purchased 2.2 million shares of common stock at an aggregate cost of $110.5 million (average price per share of $49.59), which brought our total purchases under the program to 2.55 million shares at an aggregate cost of $128 million (average price per share of $50.05). As of December 31, 2008, we had approximately 25.0 million common shares outstanding.
Results of Operations
Earnings per diluted share increased by 14% to $1.78 for our 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 our reported segments, especially in flue-cured and burley operations where shipments of larger African crops and good performance by our 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, we 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.
Flue-cured and Burley Operations
Our 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 the larger burley crops there. The segment's performance was hurt by lower results from our 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 our 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, we 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. We made substantial progress on our 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 we expect to utilize more of our foreign tax credit carryforwards, which caused the reduction of a valuation allowance for those credits. During the current year quarter, we 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%.
General Overview
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. Our regions have delivered operating improvements through 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.
We continue to closely monitor the tobacco subsidy system in the European Union ("E.U."). The E.U. subsidy makes up well over half of the revenue that a European farmer receives on a tobacco crop, and the current subsidies expire with the completion of the 2009 crop, most of which we would expect to sell to customers in fiscal year 2011. Despite support for the extension of the tobacco subsidies from tobacco producing countries and votes in May and November 2008 by the E.U. Parliament in favor of extending those subsidies, the E.U. Commission and E.U. Council of Ministers did not address an extension in their November 2008 meeting. We believe that national governments will continue to work to find solutions to the problem because of the importance of tobacco production to local economies.
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