Universal Corporation — Form 10-Q Summary
Period discrepancy: The request identifies 2019 Q3, but the supplied filing is for the quarter ended December 31, 2020 (Universal’s fiscal third quarter of 2021), with nine-month comparisons to December 31, 2019.
Business context and reporting period
Universal supplies leaf tobacco globally and plant-based ingredients to food and beverage markets. The filing presents results for the three and nine months ended December 31, 2020. The company reorganized its reporting into Tobacco Operations and Ingredients Operations; prior-period segment information was recast. Results are subject to significant seasonal working-capital and shipment timing patterns.
Financial performance and liquidity
| Metric | Three months ended Dec. 31, 2020 | Three months ended Dec. 31, 2019 | Nine months ended Dec. 31, 2020 | Nine months ended Dec. 31, 2019 |
|---|---|---|---|---|
| Sales and other operating revenues | $672.9 million | $505.0 million | $1,365.8 million | $1,277.9 million |
| Operating income | $60.2 million | $44.1 million | $85.1 million | $94.8 million |
| Net income attributable to Universal | $33.3 million | $26.0 million | $48.0 million | $56.1 million |
| Diluted EPS | $1.34 | $1.04 | $1.94 | $2.23 |
Quarterly revenue growth reflected higher tobacco shipments and acquired ingredient businesses. Nine-month revenue growth was also supported by acquisitions, while reported operating income and EPS declined year over year. Management’s non-GAAP adjusted operating income was $85.2 million for the quarter and $107.6 million for nine months, versus $45.1 million and $96.7 million, respectively. Adjusted diluted EPS was $2.19 and $2.59, compared with $1.08 and $2.41. These measures exclude specified acquisition, restructuring, and other items and are not GAAP measures.
For the nine-month period, operating cash flow was $38.6 million, compared with cash used of $172.9 million in the prior-year period. Investing activities used $191.6 million, including $161.1 million for business acquisitions and $33.8 million of capital expenditures. Financing activities provided $145.3 million. Cash and cash equivalents were $95.4 million at December 31, 2020.
At December 31, 2020, current assets were $1.605 billion and current liabilities were $346.3 million. Notes payable and overdrafts were $129.6 million; long-term debt was $518.0 million, with no current portion reported. Gross borrowings across those balance-sheet categories were approximately $647.7 million. Net debt as a percentage of net capitalization was 31%, up from 24% a year earlier. The company reported $410 million available on its committed revolving facility and approximately $180 million in unused uncommitted credit lines, and said it complied with debt covenants.
Material changes and unusual items
- Universal acquired Silva International on October 1, 2020, for approximately $164 million in cash, plus $8.9 million of working capital on hand. The acquisition expanded the ingredients platform; its preliminary purchase-price allocation included $53.7 million of goodwill and $60.8 million of intangibles.
- The company acquired FruitSmart in January 2020. Its contingent consideration liability was reduced by $4.2 million during the first quarter of fiscal 2021, recorded as other income.
- Universal recorded $20.0 million of restructuring and impairment costs, principally to wind down Carolina Innovative Food Ingredients (CIFI). The charge reduced diluted EPS by $0.65. Manufacturing at CIFI ended after December 31, 2020; inventory sales and certain administrative activities were expected to continue into fiscal 2022.
- In December 2020, $150 million of revolving borrowings used to fund Silva were refinanced as additional five- and seven-year term loans. The additional loans were variable-rate and unhedged at quarter end.
- The effective tax rate was 19% for the nine months, including a $4.4 million benefit related to final tax regulations and a $2.9 million benefit from amended prior-year U.S. tax returns. Management stated the rate would have been approximately 29% without those benefits.
Outlook, management commentary, and risks
Management expected fiscal 2021 adjusted operating income to materially exceed fiscal 2020, absent unforeseen events. It cited strong third-quarter tobacco shipments, expected strong fourth-quarter shipments, and most remaining committed 2020-crop orders being packed and ready to ship. Management cautioned that shipment timing, vessel and container availability, port congestion, and COVID-19 could disrupt that outlook. It also expected the ingredients platform to generate 10%–20% of EBITDA in fiscal 2022.
Management said current liquidity should meet obligations for at least the next twelve months. It expected $45–$55 million of capital spending over the next twelve months. COVID-19 had not materially affected the supply chain to date, but had caused some operational and shipment delays, ingredient product-mix shifts, and currency volatility; its future effects remained uncertain. FruitSmart demand was affected by reduced capacity at social venues during the pandemic.
Key risks include seasonal crop and working-capital needs, shipment delays, dependence on a limited number of large tobacco customers, acquisition integration and performance, foreign-exchange and interest-rate exposure, and changing tobacco and ingredient market conditions. Brazilian VAT assessments remained contested: approximately $9 million in Santa Catarina and $3 million in Paraná, including applicable interest as described in the filing. Management considered no loss probable and recorded no liability. Other litigation was not expected to have a material adverse effect, though an adverse resolution could materially affect a particular reporting period.
Important facts for investors to verify
- Confirm the filing period: the supplied 10-Q reports the quarter ended December 31, 2020, not 2019 Q3.
- Review the reconciliation and exclusions behind adjusted operating income and adjusted EPS, particularly the $20.0 million restructuring charge and acquisition-related items.
- Track fourth-quarter tobacco shipment timing and the availability of vessels and containers against management’s fiscal 2021 outlook.
- Assess Silva and FruitSmart integration, earnings contribution, purchase accounting, and the Ingredients Operations outlook, including CIFI’s wind-down.
- Monitor seasonal working capital, borrowings, variable-rate exposure, and covenant compliance; $150 million of added term loans was unhedged at period end.
- Follow developments in the Brazilian VAT disputes and the uncertain impact of COVID-19 on demand, operations, and shipping.