Universal Corporation — Form 10-Q Summary
Period clarification: The request identifies 2013 Q1, but the supplied filing is for the quarter ended June 30, 2014, Universal’s first quarter of fiscal 2015. Comparisons below are to the quarter ended June 30, 2013, unless stated otherwise. Universal is a global leaf tobacco merchant and processor; its results are seasonal.
Financial performance and position
| Metric | Quarter ended June 30, 2014 | Comparable 2013 quarter |
|---|---|---|
| Sales and operating revenues | $271.5 million | $433.5 million |
| Operating income (loss) | $(8.2) million | $86.5 million |
| Net income attributable to Universal | $0.7 million | $58.3 million |
| Earnings available to common shareholders | $(3.0) million | $54.6 million |
| Basic and diluted EPS | $(0.13) | $2.34 basic; $2.05 diluted |
| Net cash used by operating activities | $114.9 million | $233.0 million |
- Revenue fell 37.4%, reflecting later customer shipment instructions and lower average prices. Gross profit was approximately $55.5 million, or 20.5% of revenue, versus approximately $71.5 million, or 16.5%, a year earlier.
- The prior-year quarter included an $81.6 million pretax gain ($53.1 million after tax) from a Brazilian IPI excise-tax-credit case. Excluding that nonrecurring gain, management said first-quarter net income was down $4.5 million year over year. Current-quarter results included an $8.0 million income-tax benefit related to settlement of the European Commission fine.
- Interest expense declined to $4.0 million from $5.3 million, primarily reflecting lower average debt balances and interest rates. The common dividend declared was $0.51 per share, versus $0.50.
- At June 30, 2014, cash was $148.5 million; current assets were $1.807 billion and current liabilities $620.4 million. Short-term debt and overdrafts were $205.4 million; current maturities of long-term obligations were $117.5 million; long-term obligations were $235.0 million.
- Company-defined net debt was $470.6 million, up about $199.1 million during the quarter due mainly to seasonal working capital. Net debt was approximately 26% of net capitalization, versus about 16% at March 31, 2014, and was flat with June 30, 2013. The company reported $335 million available on its committed revolver and approximately $318 million in unused, uncommitted credit lines; it was in compliance with debt covenants.
- Cash declined $15.1 million from March 31. Tobacco inventory rose seasonally by $407.8 million to $1.048 billion; $189.4 million, or about 18%, was uncommitted, compared with $79.4 million, or about 7%, a year earlier.
Material changes and operating trends
- Segment operating income declined $14.0 million year over year. Other Regions reported a $10.6 million operating loss, compared with a $5.2 million loss; North American operating income was $1.7 million, down $0.7 million; Other Tobacco Operations income was $1.3 million, down $7.9 million.
- Management attributed weaker reported results primarily to delayed shipments and lower volumes amid oversupply conditions. Brazil margins improved from the prior-year period’s market volatility, while lower volumes affected regions and other tobacco operations.
- Operating cash use was $118.1 million lower than in the prior-year quarter, mainly because of reduced working-capital requirements. Capital expenditures were $16.8 million, compared with $10.4 million.
- The European Court of Justice rejected Deltafina’s appeal in June 2014. Universal and Deltafina paid approximately $53.0 million, including interest; the bank guarantee was terminated and its related deposit returned. The payment was not described as having a material impact on operations.
Outlook, risks, and contingencies
- Management expected most shipments to occur in the second half of fiscal 2015. Based on the shipment backlog, it anticipated full-year volumes would not be materially different from the prior year, absent unexpected logistical challenges. Customer orders were described as in line with expectations; management said it was taking a measured approach given oversupply and slow market activity.
- Management planned approximately $80 million of fiscal 2015 capital expenditures, largely for African expansion and a new food-ingredient manufacturing facility. It said available capital resources exceeded anticipated working-capital, debt-maturity, and capital-spending needs for the next 12 months, while it might explore additional long-term debt to manage liquidity risk.
- Key risks include crop yields and weather, shipment timing and customer demand, tobacco oversupply and pricing, currency and interest-rate movements, regulation and taxation, and litigation. The filing reported no material changes to the risk factors in the fiscal 2014 Form 10-K.
- Brazilian VAT assessments had been reduced to approximately $17 million and remained contested; management considered no loss probable and recorded no liability. Other contingent liabilities were approximately $3 million. Brazilian grower-loan guarantees had a maximum potential payment of $8 million, with a fair-value liability of approximately $2 million.
- Recoverable VAT credits totaled approximately $70 million before valuation allowances of approximately $36 million. The Brazilian IPI credits recognized in the prior-year quarter are subject to utilization limits and tax-authority audit; management stated estimates of realizable credits could change.
- The business is seasonal, and management cautioned that quarterly results are not necessarily indicative of full-year performance. Universal was evaluating the impact of the new revenue-recognition standard, scheduled for adoption beginning April 1, 2017.
Important facts for investors to verify
- Confirm the reporting-period mismatch: this filing covers fiscal Q1 2015, not 2013 Q1.
- Track whether delayed shipments recover in the second half and whether full-year volumes meet management’s expectation.
- Monitor uncommitted inventory, crop purchasing, customer orders, and the effect of oversupply and lower green-leaf prices on margins.
- Assess seasonal borrowing and liquidity, including net debt, revolver availability, debt maturities, and planned capital expenditures.
- Review realization of Brazilian tax credits, the contested VAT assessment, and any developments in other legal or contingent matters.