Universal Corporation (NYSE: UVV) — Form 10-Q Summary
Period clarification: The supplied filing is for the quarter ended June 30, 2020, Universal’s first quarter of fiscal 2021—not 2019 Q1 as stated in the request metadata. Comparisons below are with the quarter ended June 30, 2019. Unless stated otherwise, amounts are in U.S. dollars.
Business context and reporting period
Universal is a global leaf tobacco supplier, with seasonal results affected by crop purchases, processing, and shipment timing. The quarter included its FruitSmart fruit and vegetable ingredient business, acquired January 1, 2020.
Financial results and liquidity
| Metric | Three months ended June 30, 2020 | Prior-year comparable |
|---|---|---|
| Revenue | $315.8 million | $296.9 million |
| Gross profit and margin | $53.8 million; 17.0% | $58.7 million; 19.8% |
| Operating income | $8.5 million | $7.5 million |
| Adjusted operating income | $4.4 million | $7.5 million |
| Net income attributable to Universal | $7.3 million | $2.1 million |
| Adjusted net income attributable to Universal | $0.5 million | $4.8 million |
| Diluted EPS; adjusted diluted EPS | $0.29; $0.02 | $0.08; $0.19 |
| Cash from operating activities | $0.05 million | Cash used of $116.7 million |
Revenue rose 6%, reflecting higher volumes, partly offset by lower sales and leaf prices and a less favorable mix. Cost of goods sold increased about 10%; the calculated gross margin declined. Reported operating income included a $4.2 million gain from reducing FruitSmart contingent consideration. Reported net income also benefited from a $4.4 million tax benefit; excluding the filing’s identified non-recurring items, adjusted net income and diluted EPS were lower year over year. Interest expense was $6.8 million, up from $4.0 million, including $1.8 million related to an uncertain foreign tax matter.
At June 30, 2020, cash was $100.0 million, current assets $1.46 billion, and current liabilities $265.6 million. Notes payable and overdrafts were $92.8 million; long-term debt was $368.8 million, with no long-term debt maturity until fiscal 2024. The company reported $430 million available on its committed revolving facility and about $216 million in unused uncommitted lines, and said it was in compliance with debt covenants. Net debt to net capitalization was approximately 23%, versus 18% a year earlier.
Tobacco inventory was $858.9 million, up $151.6 million from March 31, 2020 on seasonal purchases, but $39.5 million below June 30, 2019. Uncommitted inventory was $176.3 million, or 20.5% of tobacco inventory. Capital expenditures were $8.4 million; dividends paid were $18.6 million, and dividends declared were $0.77 per common share. Cash and cash equivalents ended the quarter at $100.0 million.
Material changes versus the prior comparable period
- Reported revenue and earnings increased, but adjusted operating income, adjusted net income, and adjusted diluted EPS declined.
- Operating cash flow improved substantially from the prior-year seasonal working-capital outflow, although current-quarter operating cash flow was approximately break-even.
- Long-term debt was broadly unchanged year over year; cash was lower, partly reflecting the FruitSmart acquisition.
- Regional operating results were mixed: Other Regions and Other Tobacco Operations reported lower operating income; North America was broadly flat.
Outlook, management commentary, risks, and unusual items
- Management expected fiscal 2021 sales volumes to be weighted to the second half, citing COVID-related processing slowdowns, later customer shipment timing, and slower customer orders. It reported no material supply-chain impact to date, while cautioning that the pandemic’s future effects were uncertain.
- Management expected to spend approximately $55 million to $65 million on capital projects over the next 12 months. It said cash, operating cash flow, and available liquidity were expected to cover requirements for at least 12 months, but noted that COVID-related shipment delays could extend working-capital needs.
- Management described burley supply as balanced and flue-cured supply as slightly oversupplied, while reporting strong demand for natural wrapper tobacco. It noted lower-margin carryover tobacco in Brazilian shipments and delays from limited vessel availability.
- The $4.2 million FruitSmart contingent-consideration reversal reflected a forecast that 2020 performance would not reach the payment threshold. The acquisition cost approximately $80 million in cash, with up to $25 million of contingent consideration.
- COVID-related disruptions and currency volatility, crop size and pricing, shipment timing, customer concentration, and foreign-exchange and interest-rate exposures remain risks. The company identified disputed Brazilian VAT assessments with possible losses up to approximately $9 million in Santa Catarina and $3 million in Paraná; it considered no loss probable and recorded no liability. It also cited other litigation and tax matters, without expecting a material adverse effect on business or financial position.
- The filing reported no material change to previously disclosed risk factors. Management concluded disclosure controls were effective; FruitSmart was excluded from the internal-control assessment for the quarter.
Important facts for investors to verify
- Confirm the intended reporting period: this filing covers fiscal 2021 Q1, ended June 30, 2020.
- Reconcile reported and adjusted earnings, particularly the FruitSmart valuation gain, tax benefit, and uncertain-tax-position interest expense.
- Track whether COVID-related processing and shipment delays shift sales into the second half and affect working capital or quarterly comparability.
- Monitor inventory commitments, crop prices and volumes, and the recovery of margins after the quarter’s lower-margin carryover shipments.
- Review liquidity and seasonal borrowing needs, hedge valuations, and the outcomes of the Brazilian VAT assessments.