Universal Corporation — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2012, filed November 6, 2012. This is fiscal 2013’s second quarter; the supplied metadata’s “2011 Q2” does not match the filing. Universal is a global leaf tobacco supplier, and its results are seasonal.
Financial performance
| Metric | Three months ended September 30, 2012 | Six months ended September 30, 2012 | Comparable 2011 period |
|---|---|---|---|
| Revenue | $675.2 million, up 5% | $1,136.6 million, up 1% | $641.0 million; $1,120.5 million |
| Operating income | $75.1 million | $117.9 million | $9.7 million; $45.2 million |
| Net income attributable to Universal | $48.0 million | $71.1 million | Loss of $8.0 million; income of $7.8 million |
| Diluted earnings per share | $1.68 | $2.50 | Loss of $0.51; income of $0.02 |
| Cash flow from operations | Used $54.8 million in the first half | Used $122.0 million |
First-half segment operating income, which excludes specified unusual items, rose 34% to $122.7 million; second-quarter segment operating income rose 27% to $78.5 million. Gross profit was $138.0 million for the quarter and $230.1 million for the half-year. Reported operating-income comparisons were affected by prior-year charges and credits, including the Italian fine and a fire-insurance gain.
Liquidity, debt, and capital
At September 30, 2012, cash was $115.7 million, current assets $1.72 billion, and current liabilities $377.9 million. Notes payable and overdrafts were $93.6 million; current long-term obligations were $8.8 million and long-term obligations were $387.5 million. Management reported net debt of approximately $422 million, up about $130 million from March 31, principally due to seasonal working-capital needs. Net debt was 25% of net capitalization, below the company’s target range and down from 34% a year earlier. The company had $450 million available under its committed revolving facility and was compliant with debt covenants.
Operating cash use improved by about $67 million year over year, primarily because of lower working-capital needs. Tobacco inventory was $901 million, up seasonally by $219 million from March 31 but $66 million below September 2011. Capital expenditures were $19.5 million; management said no major fiscal 2013 capital expenditures had been approved. The quarterly common dividend was $0.49 per share. No shares were repurchased during the quarter; the full $100 million authorization remained available.
Changes, outlook, and risks
- Higher volumes, shipment timing, carryover crops, and sales from uncommitted inventory supported first-half results. Management cautioned that second-half shipment volumes were not expected to match the prior year, as uncommitted stocks were at very low levels.
- Other Regions earnings improved on stronger South American and African volumes and higher dividend income from unconsolidated affiliates. North America earnings declined amid lower volumes, shipment delays, and fewer old-crop sales. Other Tobacco Operations improved, particularly in Indonesian dark tobacco.
- Management said it expected market conditions to improve and anticipated larger crops in several key origins where production had not met demand. The filing provides no quantified earnings or revenue guidance.
- Unusual items included $3.7 million of first-half restructuring costs in 2012, versus prior-year charges for a $49.1 million European Commission fine and a $9.6 million fire-insurance gain. The fine remained under appeal at the European Court of Justice; payment was stayed by a bank guarantee pending the decision.
- Three related lawsuits allege pesticide and herbicide exposure and birth defects among Argentine children; the company intends to defend them, and potential liability was not predictable. A Brazilian VAT assessment had been reduced to approximately $19 million and was being contested; no liability was recorded because a loss was not considered probable.
- Other risks include seasonal working-capital needs, crop and shipment variability, currency and interest-rate movements, and legal, tax, regulatory, weather, and market conditions. Management reported effective disclosure controls and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Confirm the reporting-period designation: the filing covers the quarter ended September 30, 2012, not 2011.
- Assess how much of the earnings improvement reflects shipment timing and prior-year unusual items, versus sustained operating performance.
- Monitor second-half shipments, crop volumes, uncommitted inventory, and seasonal cash and borrowing needs.
- Track the European Commission appeal, the Argentine lawsuits, and the contested Brazilian VAT assessment.
- Review debt capacity, covenant compliance, and the company’s use of its committed credit facility and share-repurchase authorization.