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| UVV > SEC Filings for UVV > Form 10-Q on 6-Aug-2009 | All Recent SEC Filings |
6-Aug-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, 2009. 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, 2009.
Liquidity and Capital Resources
Overview
The first fiscal quarter is generally a period of significant working capital investment in both Brazil and Africa as crops are delivered by farmers. In fiscal year 2010, we funded those requirements using cash on hand, customer advances, and operating cash flows. In addition, we continued our share repurchase program, which is based on free cash flow generated in prior years and an assessment of our future capital needs.
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. Peak working capital requirements are generally reached during the first and second fiscal quarters. Each geographic area follows a cycle of buying, processing, and shipping, although in many 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 $52 million in net cash flow to fund operating activities during the quarter. Tobacco inventory, at $886 million, was up $300 million during the quarter on seasonal tobacco crop purchases in Africa and South America. Tobacco inventory levels are $79 million lower than June 30, 2008 levels, primarily reflecting earlier shipments of Brazilian tobacco and lower average leaf costs related to the stronger U.S. dollar during the purchasing season. 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.
Advances to suppliers were $141 million at June 30, 2009, a reduction of $73 million from March 31, 2009, as crops were delivered in payment of those balances primarily in Asia, Africa, and Brazil. Compared to the same time last year, advances to suppliers were $66 million lower, reflecting earlier crop deliveries and a stronger U.S. dollar this year. Accounts receivable fell by $34 million compared to March 31, 2009, as we collected balances from higher than normal shipments at the end of the last quarter of fiscal year 2009. The balance was comparable to that of the prior year.
We generally do not purchase material quantities of tobacco on a speculative basis. At June 30, 2009, our uncommitted inventories were $90 million, or about 10% of total tobacco inventory, compared to $124 million, or about 21% of our March 31, 2009 inventory, and $75 million, or about 8% of our June 30, 2008, inventory. These percentages are within normal ranges for our business within their respective times of year.
Customer deposits were almost $109 million lower this year as we reduced customer prepayment programs. However, they still reflect a seasonal increase during the quarter.
Investment
During quarter ended June 30, 2009, we invested about $11 million in our fixed assets compared to $6 million in last year's first fiscal quarter. Depreciation expense was approximately $10 million in both years. 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. Earlier this year we announced that we plan to spend approximately $12 million in fiscal year 2010 on an expansion and upgrade of our processing facility in Lancaster, Pennsylvania, to accommodate the consolidation of our U.S. dark tobacco processing into that facility, and we expect to spend a similar amount pursuant to customer contracts over the next 12 months.
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 shareholders' equity to be our total capitalization. Net debt increased by about $125 million to $506 million during the quarter ended June 30, 2009, primarily due to seasonal working capital requirements. Net debt as a percentage of capitalization was approximately 32% at June 30, 2009, up from about 27% at March 31, 2009, and down from approximately 38% at June 30, 2008. Net debt was about $149 million lower than June 30, 2008 levels, reflecting earlier shipments and lower green tobacco costs this year.
As of June 30, 2009, 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, $131 million in cash and cash equivalents, and $30 million available under a committed credit facility that will expire in December 2009. Our short-term debt and current maturities of long-term debt totaled $251 million. In addition, we had about $539 million in unused, uncommitted credit lines. Our seasonal working capital requirements typically increase from December to September by up to $200 million. In addition to our operating requirements for working capital for the remainder of this fiscal year, we will repay $79.5 million in long-term debt when it matures in September 2009, we plan to spend approximately $20 million to expand and upgrade our Lancaster facility and complete other projects related to customer contracts, and we expect to provide around $9 million in additional funding to our pension plans. While available capital resources from our cash balances, committed credit facilities, 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 the long-term debt we currently have outstanding 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 around $2 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 quarter ended June 30, 2009, we purchased 97 thousand shares of common stock at an aggregate cost of $3.4 million (average price per share of $35.11), which brought our total purchases under the program to 2.65 million shares at an aggregate cost of $131 million (average price per share of $49.50). As of June 30, 2009, we had approximately 24.9 million common shares outstanding.
Derivatives
From time to time, we use interest rate swap agreements to manage our exposure to changes in interest rates. These agreements typically adjust interest rates on designated long-term obligations from fixed to variable. The swaps are accounted for as fair value hedges. At June 30, 2009, the value of our outstanding interest rate swap agreements was an asset of $9.6 million.
We also enter forward contracts from time to time to hedge certain foreign currency exposures, primarily related to forecast purchases of tobacco in Brazil. We account for our hedges of forecast tobacco purchases as cash flow hedges. At June 30, 2009, the fair value of our open contracts was inconsequential and we had approximately $6.4 million in losses on both open and closed contracts recorded in accumulated other comprehensive loss. We also had other forward contracts outstanding that were not designated as hedges, and the fair value of those contracts was an asset of approximately $0.8 million.
Results of Operations
Amounts included in the following discussion are attributable to Universal Corporation and exclude earnings related to non-controlling interests in subsidiaries.
Net income for the first quarter of fiscal year 2010, which ended on June 30,
2009, was $43.7 million, or $1.47 per diluted share. Those results more than
doubled last year's income of $21.1 million, or $0.64 per diluted share, mostly
because of earlier shipments of tobacco this year and a more favorable product
mix. The same factors caused a 22% revenue increase compared to the same quarter
last year. Revenues for the quarter were about $616 million.
Flue-cured and Burley Operations
Operating income for our flue-cured and burley tobacco operations increased by 85% to $64 million. That performance includes results from our North America and Other Regions segments. Operating income for the North America segment reflected its normal seasonal low period, but its performance was also affected by lower sales volumes of old crop U.S. leaf this quarter and lower Canadian volumes from the reduced crop there. The volume decline significantly reduced that segment's revenues. In contrast, operating income for the Other Regions segment includes the seasonally strong Brazilian operations, which were characterized this year by substantially higher volumes due to earlier shipments. Average leaf sales prices were lower this year, reflecting lower leaf costs. Leaf costs were lower in U.S. dollar terms because of the weaker Brazilian currency during the leaf purchasing season; however, a significant portion of that cost of producing the crop was incurred in the form of inputs advanced to farmers before the local currency weakened and was included in last year's remeasurement losses. Earlier shipments of tobacco from Europe and increased volumes in Asia also benefited the quarter's results, while lower shipments of old crop tobacco from Africa reduced that region's results during its seasonal low period. Revenues for the Other Regions segment increased by nearly 30%, primarily due to the earlier shipments from Brazil and Europe, and the increased Asian trading volumes, which were partly offset by the lower sales of old crop tobacco from Africa. In addition to increased volumes, revenues increased on higher proportions of lamina in shipments during the quarter and higher prices for certain Asian trading volumes.
Other Tobacco Operations
The Other Tobacco Operations segment performed well as the oriental tobacco joint venture results improved, mainly due to a more favorable sales mix as well as to certain cost containment measures. Dark tobacco results also improved on better product mix although volumes declined. During the last quarter of fiscal year 2009, customers had purchased leaf earlier than usual in anticipation of the enactment of U.S. excise tax increases, and thus volumes were lower this year. Despite the lower volumes, dark tobacco revenues, which are the predominant factor in segment revenues, increased due to higher prices caused by increased leaf costs during last year's purchasing season and a more favorable product mix.
Other Information
Cost of sales increased by 18% to $476 million in the quarter on the increased volumes shipped, offset by lower costs as the U.S. dollar strengthened against the currencies of many origins during the leaf purchasing season. Selling, general, and administrative costs increased by 7%, reflecting additional currency remeasurement losses of about $6 million. Interest expense was comparable to that of fiscal year 2009, and the effective income tax rate was similar to last year's rate.
General Overview
We are very pleased with our performance during the first quarter. Each of our operations performed as we had expected or better. Earlier shipments of Brazilian and European tobacco boosted our results, and leaf costs were lower due to the stronger U.S. dollar. Looking at the current worldwide situation, we see the U.S. dollar beginning to weaken again, which could increase costs as we enter the next purchasing season. We will be monitoring these factors as the year progresses, and we will be working to control our costs.
We do not foresee any oversupply of flue-cured tobacco in the coming year. Global burley availability improved after the shortage of filler style crops two years ago. There is a large crop again this year. So it is likely that we will see some oversupply of burley. Worldwide dealer inventories for flue-cured and burley tobacco are about 70 million kilos compared to about 80 million kilos last year.
Japan Tobacco Inc., one of our largest customers, recently announced steps to enhance their direct leaf procurement capabilities by acquiring and entering joint ventures with smaller leaf merchants. They enumerated several factors that prompted their moves, including the desire to enhance internal expertise in leaf procurement, actively manage the leaf supply chain, and work more directly with tobacco growers. Over time, these steps are likely to reduce our volumes with them in the United States, and may affect other regions as well. However, the overall impact and timing cannot yet be determined. We are continuing to have dialogue with them and believe that we will continue our long-term relationship.
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