Universal Corporation — Form 10-Q Summary
Business context and reporting period
Universal is a global leaf tobacco merchant and processor. This filing covers the fiscal third quarter and nine months ended December 31, 2010; the company notes that its seasonal results for an individual quarter may not indicate full-year performance. Financial amounts below are in millions of dollars, except per-share data.
Financial performance and position
| Metric | Three months ended Dec. 31, 2010 | Prior-year quarter | Nine months ended Dec. 31, 2010 | Prior-year period |
|---|---|---|---|---|
| Revenue | $688.2 | $661.2 | $1,891.3 | $1,925.2 |
| Operating income | $87.6 | $68.9 | $208.3 | $214.6 |
| Net income attributable to Universal | $52.3 | $45.7 | $129.4 | $142.0 |
| Diluted EPS | $1.82 | $1.54 | $4.46 | $4.78 |
| Approx. gross margin | 22.4% | 21.9% | 20.6% | 22.4% |
| Approx. operating margin | 12.7% | 10.4% | 11.0% | 11.1% |
- Quarterly revenue rose about 4%; nine-month revenue declined about 2%. Quarterly operating income and diluted EPS improved, while nine-month attributable income and diluted EPS fell.
- Cash flow from operations was negative $89.4 for the nine months, versus positive $54.8 a year earlier. Capital expenditures were $31.8; cash declined from $246.0 at March 31, 2010 to $91.4 at December 31.
- At December 31, current assets were $1,661.5 and current liabilities $614.0. Notes payable and overdrafts were $204.8; current and long-term obligations totaled $417.5. Management-defined net debt, which also includes customer advances and deposits and deducts cash, was approximately $619, up about $150 during the nine months.
- Management reported $400 of availability under its committed revolving facility, approximately $487 in unused uncommitted credit lines, and compliance with debt covenants. It said available resources exceeded projected normal working-capital, restructuring, debt-maturity, and capital-spending needs over the next 12 months.
- Declared common dividends were $1.41 per share for the nine months. The company repurchased 784,185 shares for $33.4 during that period, under a program authorizing up to $150 through November 2011.
Material changes and unusual items
- Quarterly results included a $19.4 pretax gain from transferring Brazilian farmer contracts and related assets to a Philip Morris International subsidiary, partly offset by $11.0 of restructuring and impairment costs. The nine-month period also included a $7.4 pretax reversal of part of a previously accrued European Commission fine.
- The Brazil transaction transferred contracts with approximately 8,100 farmers, representing about 20% of Universal’s recent annual Brazilian volume. The buyer assumed related farmer-loan guarantees; Universal expects to process tobacco bought directly by the buyer beginning with the 2011 crop and to continue selling processed Brazilian leaf to PMI.
- Universal decided to close its Simcoe, Ontario processing facility and process Canadian leaf in North Carolina. It recorded $2.7 of termination benefits and $5.6 of impairment in the quarter; future pension settlement costs of approximately $4–$5 are expected, but depend on plan and market factors. Other restructuring actions affected roughly 170 employees.
- Quarterly flue-cured and burley segment operating income increased 12% to $74.3, while nine-month segment operating income decreased 9% to $180.9, notably reflecting weaker Brazil results. Other Tobacco Operations income declined in both periods, principally because of lower oriental tobacco joint-venture results.
Outlook, commentary, and risks
- Management gave no specific numerical earnings or revenue guidance. It said delayed shipments caused by port congestion had partly been completed and the remainder was expected to be completed by fiscal year-end.
- Management expects global leaf markets to move into oversupply and is working with farmers and customers to plan crop requirements. Uncommitted tobacco inventory was $117, or approximately 12% of tobacco inventory, which management described as reasonable.
- The business has seasonal working-capital demands, and shipment timing, crop sizes and prices, customer sourcing changes, weather, foreign-exchange movements, and economic or political conditions may affect results and liquidity. Management said comparisons also reflect customer vertical integration and efforts to replace lost volumes.
- Brazilian grower-loan guarantees had a maximum potential payment amount of $97, including accrued interest, with a recorded fair-value liability of approximately $20. Other contingent liabilities totaled approximately $51.
- The Italian antitrust fine imposed jointly on Universal and Deltafina is €30 million, plus approximately €5.2 million accumulated interest at December 31, 2010. Universal has not accrued the fine, citing counsel’s view that Deltafina is likely to prevail; an adverse outcome could be material. A separate Spanish fine was reduced by the court, and Deltafina appealed the remaining decision.
Important facts for investors to verify
- Whether crop shipments delayed by logistics were completed as expected and how shipment timing affects working capital and cash generation.
- Whether the Brazilian contract transfer, related processing agreement, and continued PMI sales replace the transferred volume and earnings over time.
- Progress and total costs of the Simcoe closure and broader restructuring, including the expected pension settlement costs.
- Developments in global tobacco supply and demand, uncommitted inventory, and customer vertical integration.
- Outcome and potential financial exposure of the European Commission cases, grower guarantees, and other contingencies.
- Seasonal liquidity, debt maturities, covenant compliance, and the pace of share repurchases relative to cash needs.