Universal Corporation — Form 10-Q Summary
Reporting-period note: The request identifies “2018 Q3,” but the filing is for the quarter ended December 31, 2019, Universal’s fiscal 2020 third quarter, and the nine months ended December 31, 2019. Comparisons below are against the corresponding 2018 periods.
Business context and financial results
Universal is a global leaf tobacco supplier. Its business is seasonal: crop purchases and working-capital needs generally peak in the first half of the fiscal year, with shipments weighted toward the second half. Amounts below are in U.S. dollars; financial-statement amounts are in millions unless noted.
| Metric | Three months ended Dec. 31, 2019 | Three months ended Dec. 31, 2018 | Nine months ended Dec. 31, 2019 | Nine months ended Dec. 31, 2018 |
|---|---|---|---|---|
| Revenue | $505.0 | $636.1 | $1,277.9 | $1,555.4 |
| Operating income | $44.1 | $37.7 | $94.8 | $100.4 |
| Net income attributable to Universal | $26.0 | $28.1 | $56.1 | $72.8 |
| Diluted EPS | $1.04 | $1.11 | $2.23 | $2.87 |
| Dividends declared per share | $0.76 | $0.75 | $2.28 | $2.25 |
- Revenue declined about 21% for the quarter and 18% for the nine-month period, primarily on lower sales volumes and prices. Approximate operating margins were 8.7% and 5.9% for the respective quarters, and 7.4% and 6.5% for the respective nine-month periods.
- Quarterly operating income increased despite lower revenue; nine-month operating income decreased. Segment operating income, a non-GAAP measure, fell to $44.0 million for the quarter from $62.6 million and to $97.1 million for the nine months from $125.3 million.
- Net cash used in operating activities was $172.9 million for the nine months, versus $97.3 million a year earlier. Capital expenditures were $21.7 million, versus $28.4 million. Cash decreased by $232.8 million from fiscal year-end to $64.7 million.
- At December 31, 2019, total debt was approximately $461.3 million, comprising $92.6 million of notes payable and $368.7 million of long-term debt. Management reported net debt at 24% of net capitalization, versus about 10% at March 31, 2019, and stated the company was in compliance with debt covenants.
- Current assets were $1,578.9 million and current liabilities $270.6 million. Universal reported $430 million available under its committed revolving credit facility, maturing in December 2023, plus about $177 million in unused uncommitted lines. Management said available resources after the FruitSmart acquisition exceeded normal working-capital needs and anticipated capital expenditures over the next 12 months.
Material changes and management commentary
- Management attributed weaker year-to-date results mainly to prior-year carryover crop sales, particularly in North America and Africa, and lower volumes and prices. Flue-cured oversupply created a selective market and pressured volumes and margins. Customer-directed shipments were expected to be concentrated in the fourth fiscal quarter.
- Other Regions operating income declined $28.7 million for the nine months, and North America declined $13.7 million. Other Tobacco Operations improved by $14.2 million for the nine months, principally on stronger dark-tobacco wrapper sales; its quarterly operating income was lower year over year.
- Reported comparisons include unusual items. The prior-year period included $19.4 million of Tanzania restructuring and impairment costs and, for the nine months, a $7.8 million tax benefit from reversing a dividend-withholding-tax liability. Current-period nine-month results included a $2.8 million tax provision for an unresolved foreign tax matter and $1.9 million of FruitSmart acquisition costs. Excluding the items shown in the filing’s reconciliation, adjusted diluted EPS was $1.08 versus $1.73 for the quarter and $2.41 versus $3.19 for the nine months.
- Tobacco inventory was $937.7 million at December 31, up $308.1 million from March 31. Uncommitted inventory was $197.7 million, about 21% of tobacco inventory, slightly above management’s target range.
- Universal acquired FruitSmart, a specialty fruit and vegetable ingredient processor, in early January 2020. The filing gives the completion date as January 1 in a financial-statement note and January 3 in MD&A. Consideration was approximately $80 million in cash plus up to $25 million in contingent payments tied to 2020 and 2021 financial targets; the acquisition was funded with cash and the revolving credit facility.
- Management described continued investment in the leaf business and growth in non-tobacco activities. It expected $50–$60 million of capital expenditures over the next 12 months. No numerical earnings or revenue guidance was provided.
Risks, contingencies, and other notable items
- The Tanzania Fair Competition Commission imposed a proposed joint fine of approximately $197 million on Universal subsidiaries in an antitrust matter; execution is stayed pending appeal. The company said material liability was remote and recorded no amount. It also disclosed two further provisional FCC allegations, likewise assessed by management as remote with no accrual.
- Brazilian VAT assessments remained disputed: approximately $12 million for Santa Catarina and $4 million for Paraná. Management said loss was not probable and recorded no liability; resolution may take a long time.
- Brazilian grower-loan guarantees had a maximum potential exposure of $5.1 million at December 31, 2019. Recoverable VAT credits totaled about $58 million gross, with approximately $20 million in valuation allowances.
- Interest-rate and currency movements remain relevant risks. Variable-rate debt was approximately $93 million; management estimated a hypothetical 1% short-term rate change would affect annual interest expense by about $0.9 million, at least partly mitigated by customer charges. The company uses derivatives for hedging and stated it does not use them for speculation.
- Universal adopted lease accounting in April 2019, recognizing $34.2 million of operating lease right-of-use assets and $31.9 million of lease liabilities at December 31. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied filing is fiscal 2020 Q3, not 2018 Q3.
- Review shipment timing, crop volumes and prices, and whether management’s expected fourth-quarter shipments and inventory reduction occurred.
- Assess liquidity and seasonal borrowing after the FruitSmart acquisition, including the use of revolving credit and the acquisition’s contingent consideration.
- Track FruitSmart integration, performance against earnout targets, and whether the acquisition contributes to the stated non-tobacco growth strategy.
- Monitor uncommitted tobacco inventory, working-capital cash use, and the resolution of the Tanzania and Brazilian tax matters.
- Reconcile reported and adjusted earnings, including prior-year restructuring and tax benefits and current-period acquisition costs and tax provision.