Add
UVV to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| UVV > SEC Filings for UVV > Form 10-Q on 6-Nov-2009 | All Recent SEC Filings |
6-Nov-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 half of the fiscal year 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 purchased common stock under 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 $134 million in net cash flow to fund operating activities during the first six months of fiscal year 2010. Tobacco inventory, at $920 million, was up $334 million during the first six months of fiscal year 2010 on seasonal tobacco crop purchases in several areas, including Africa, North America, and Asia. Tobacco inventory levels are $142 million higher than September 30, 2008, levels, primarily reflecting shipments from Africa, the Philippines, and Argentina that are expected to be completed later this year than last year. 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 $89 million at September 30, 2009, a reduction of $125 million from March 31, 2009, as crops were delivered in payment of those balances primarily in Asia, Africa, and South America. Compared to the same time last year, advances to suppliers were $80 million lower, reflecting lower advances in Brazil that are offset by higher farmer guarantees there and lower advances in Argentina. Accounts receivable increased by $31 million compared to March 31, 2009, reflecting seasonal increases.
We generally do not purchase material quantities of tobacco on a speculative basis. At September 30, 2009, our uncommitted inventories were $66 million, or about 7%, of total tobacco inventory, compared to $124 million, or about 21%, of our March 31, 2009, inventory, and $74 million, or about 9%, of our September 30, 2008 inventory. These percentages are within normal ranges for our business within their respective times of year.
Customer deposits were up $56 million in the first six months of fiscal year 2010, reflecting the normal seasonal increase.
Investment
During the six months ended September 30, 2009, we invested about $26 million in our fixed assets compared to $22 million in the first six months of last year. Depreciation expense was approximately $21 million and $20 million in the six months ended September 30, 2009 and 2008, respectively. 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. In addition, we expect to spend approximately twice that on other customer-related investment opportunities, the largest part of which will be spent during the current fiscal year.
Financing
We define our net debt as 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. We also define our total capitalization as our net debt plus shareholders' equity. Net debt increased by about $260 million to $641 million during the six months ended September 30, 2009, primarily due to seasonal working capital requirements. Net debt as a percentage of total capitalization was approximately 36% at September 30, 2009, up from about 27% at March 31, 2009, and down from approximately 39% at September 30, 2008. Net debt was about $24 million lower than September 30, 2008 levels, and it was at the lower end of our operating range of 35% to 45% of total capitalization. We also repaid $79.5 million in long-term debt that matured in September 2009, and we provided $11 million in funding to our pension plans during the six months.
As of September 30, 2009, we were in compliance with the covenants of our debt agreements. We had $245 million available under a committed revolving credit facility that will expire on August 31, 2012, $62 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 totaled $301 million, and we had no current maturities of long-term debt. In addition, we had about $565 million in unused, uncommitted credit lines. Our seasonal working capital requirements typically increase significantly between March and September and decline after mid-year. We plan to spend approximately $30 million to expand and upgrade our Lancaster dark tobacco processing facility and complete other new investments requested by our customers. 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.
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 were carried out from time to time on the open market at prevailing market prices. During the six months ended September 30, 2009, we purchased 304,000 shares of common stock at an aggregate cost of $11.2 million (average price per share of $37.04), which brought our total purchases under the program to 2.86 million shares at an aggregate cost of $139 million (average price per share of $48.66). The program expires on November 15, 2009. On November 5, 2009, we announced that our Board of Directors had approved a new authorization for the purchase of up to $150 million of our common stock through November 5, 2012. The purchases are to be carried out from time to time on the open market or in privately negotiated transactions at prices not exceeding prevailing market rates. The program will be based on free cash flow generated in prior years and an assessment of our capital needs. As of September 30, 2009, we had approximately 24.7 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 September 30, 2009, the fair value of our outstanding interest rate swap agreements was an asset of $11.9 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 September 30, 2009, all forward contracts to hedge 2008-2009 crop tobacco purchases were settled, and we had approximately $1.6 million in losses on those contracts recorded in accumulated other comprehensive loss. At September 30, 2009, we had other forward contracts outstanding that were not designated as hedges, and the fair value of those contracts was not material.
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 six months of fiscal year 2010, which ended on September 30, 2009, was $96.3 million, or $3.23 per diluted share. Results were above last year's net income of $62.9 million, or $2.02 per diluted share, mostly because of a $17 million decline in currency-related costs, better margins, and a favorable tax rate related to the reversal of provisions for uncertain tax positions due to expiration of the time period during which those positions could be challenged by the tax authorities. Revenues for the six months of about $1.3 billion were flat, as lower volumes due to later shipments and reduced old crop tobacco sales were offset by a better mix of business and higher prices in some areas.
For the second quarter of fiscal year 2010, net income was $52.5 million, or $1.77 per diluted share, compared to last year's net income of $41.8 million, or $1.38 per diluted share. The increase was primarily due to a $25 million decline in currency-related costs and the tax provision reversal. Revenues for the quarter of about $648 million were down significantly, as some shipments were either accelerated into the first quarter or delayed until later in the year.
Flue-cured and Burley Operations
First Six Months
Operating income for our flue-cured and burley tobacco operations, which comprise our North America and Other Regions segments, increased by more than 30% to $134 million for the first half of this fiscal year, largely on the strength of lower currency-related costs and better margins. Revenues were flat, primarily because a better mix of business and higher prices in some areas offset the effect of lower volumes from shipment delays and lower old crop shipments. In North America, operating income increased by nearly $5 million due to higher prices and improved experience with farmer advances in some areas, although revenues declined on lower sales of old crop leaf and lower Canadian volumes. Earnings for the Other Regions segment were up by 28%, primarily due to lower currency-related costs in Brazil. Volumes improved in Asia and South America, although shipment delays in some areas limited that improvement. African shipments were substantially lower this year because the current crop will be shipped later and first quarter shipments of old crop were reduced. Earnings in Africa improved because of a better product mix and additional processing income. In Europe, lower
margins and a weaker local currency reduced reported results. Revenues for Other Regions were nearly flat for the six months as lower volumes, especially in Africa, were offset by improved mix.
Second Quarter
In the second quarter of fiscal year 2010, operating income for flue-cured and burley operations increased by 5% to $69 million, compared to the same period last year. Revenues for the group at $597 million were markedly lower as improvements in product mix overall did not offset the impact of lower volumes, primarily related to late shipments in Africa and accelerated shipments from Brazil and Europe in the first quarter of fiscal year 2010. Operating income for the North America segment increased by $4 million, largely reflecting some pricing improvements and lower costs, which more than offset the effects of lower volumes shipped. Revenues for North America were down on lower volumes. Results for the Other Regions segment were flat on lower volumes, as operating margins improved mostly because of lower currency losses this year. Although average sales prices in the Other Regions segment were slightly higher in the quarter, that increase was not sufficient to offset the effect on segment revenues of lower shipments from Africa.
Other Tobacco Operations
The Other Tobacco Operations segment performed well during the first six months
of fiscal year 2010. The dark tobacco group saw an improved mix of business that
more than offset slightly lower volumes and costs of rationalizing their U.S.
operations. Despite an improvement in product mix that benefited current year
results, the oriental tobacco joint venture earnings were flat due to the
absence of currency gains in the first half of this year. For the second quarter
of fiscal year 2010, the segment was flat. Improvement in the dark tobacco
business volumes and margin were offset by lower results from the oriental
tobacco group where currency gains last year were not repeated. Revenues for the
segment were higher in both the quarter and the six months ended September 30,
2009, on higher volumes in the quarter and flat volumes for the six months. Dark
tobacco revenues, which are normally the predominant factor in this segment's
revenues, were higher in the quarter due to higher prices caused by increased
leaf costs during last year's purchasing season and a more favorable product
mix. Revenues for dark tobacco were flat for the six months.
Other Information
Cost of sales decreased by 21% to about $500 million in the quarter ended September 30, 2009, on the lower volumes shipped, and lower costs, as the U.S. dollar had strengthened against the currencies of many origins during the leaf purchasing season. Selling, general, and administrative costs decreased by 15%, reflecting lower currency remeasurement losses this year. For the six months, the pattern was similar with somewhat lower volumes combining with lower costs to reduce cost of sales by about 5% and selling, general, and administrative expenses falling by 5% in response to lower currency remeasurement losses. Interest expense was about $3 million lower than that of fiscal year 2009 in the quarter and the six months because of lower average borrowing combined with lower average interest rates. The effective income tax rate at 30% for the six months is lower than that of last year because of the reversal of some taxes
provided on uncertain tax positions due to expiration of the time period during which those positions could be challenged by the tax authorities. Absent that reversal, the rate would be lower than the U.S. statutory income tax rate due to the relative size of earnings in regions with lower statutory tax rates.
General Overview
We are very pleased with our performance so far this year. All of our operations continue to perform well, benefitting from continued cost controls and global coordination. Earlier shipments of Brazilian and European tobacco boosted results in our first fiscal quarter, so we expected lower volumes this period. In addition, some African shipments will be later this year than last. Our costs were lower this quarter, especially those related to currency movement, and that factor has offset the effect of reduced shipments.
We do not foresee an oversupply of flue-cured tobacco in the coming year. In fact, rains in Brazil during the season could reduce the crop there. Although African burley crops were very large this year, they were smaller than we anticipated, and it appears that the supply has been absorbed by the market. We would not expect to see any significant increase in worldwide dealer inventories for flue-cured and burley tobacco. However, looking at the current worldwide situation, the U.S. dollar has weakened in recent weeks, which could increase costs as we enter the next purchasing season.
As we look ahead in the intermediate term, we will maintain our relationship with Japan Tobacco Inc. ("JTI"), one of our largest customers, as they work on their previously announced steps to enhance direct leaf procurement capabilities in some origins by acquiring and entering joint ventures with smaller leaf merchants. They have made certain announcements in recent weeks regarding their progress toward that goal, and we believe that it is likely that our U.S. flue-cured and burley volumes for JTI as well as our Malawi burley volumes for them will be reduced or eliminated over time, although we expect these actions will have no effect on volumes this fiscal year. We remain focused on measuring the business impact of these volume reductions and believe that we will continue to sell them significant volumes of processed tobacco outside these two countries.
|
|