Business context and reporting period
Universal Corporation is a global leaf tobacco supplier. This Form 10-Q covers the quarter and nine months ended December 31, 2012—the third quarter of fiscal 2013, not calendar or fiscal 2011 Q3 as the request metadata indicates. Results are seasonal and quarterly results may not indicate full-year performance.
Financial results and liquidity
| Metric | Three months ended Dec. 31, 2012 | Nine months ended Dec. 31, 2012 |
|---|---|---|
| Revenue | $680.0 million, up 1% | $1,816.6 million, up 1% |
| Operating income | $64.5 million, down 31% | $182.4 million, up 32% |
| Net income attributable to Universal | $35.5 million, versus $58.5 million | $106.6 million, versus $66.3 million |
| Diluted EPS | $1.25, versus $2.06 | $3.75, versus $2.34 |
| Operating cash flow | Not separately reported | $201.7 million, versus $60.0 million |
For the quarter, operating margin was approximately 9.5%, versus 13.8% a year earlier; for the nine months it was approximately 10.0%, versus 7.7%. These are calculated from reported operating income and revenue and include unusual items. Nine-month net income was $114.2 million including noncontrolling interests; $106.6 million was attributable to Universal. Cash and cash equivalents were $341.6 million at December 31, 2012.
At December 31, current assets were $1,741.6 million and current liabilities $567.4 million. Debt consisted of $87.4 million of notes payable and overdrafts, $210.0 million of current long-term obligations, and $185.0 million of long-term obligations. The company reported net debt of $201 million under its own definition, down about $91 million during the nine months. It had $450 million available under a committed revolver and approximately $431 million of unused, uncommitted credit lines. The company was in compliance with debt covenants.
Material changes versus prior comparable periods
- Quarterly operating income and earnings declined as lower volumes and margins affected all segments; prior-year quarter included an $11.1 million gain on a Brazil property sale. Revenue rose slightly despite lower quarterly shipment volumes, largely on higher average prices.
- Nine-month earnings improved substantially versus the prior year, which included a $49.1 million charge for the European Commission fine and interest, partly offset by gains of $9.6 million from an insurance settlement and $11.1 million from a Brazil property sale. Current-period restructuring costs were $3.7 million, versus $10.2 million a year earlier.
- Nine-month segment operating income, excluding significant nonrecurring items under the company’s segment measure, increased $11.3 million to $185.9 million. Other Regions improved on higher South American and African volumes and shipment timing; North America declined on lower volumes and fewer carryover sales.
- Operating cash flow increased by $141.7 million, primarily due to lower working-capital needs. Tobacco inventory was $120 million below the prior December, and uncommitted inventory was $77 million, approximately 10% of total tobacco inventory.
Outlook, risks, contingencies, and unusual items
Management anticipated lower shipments in the fourth quarter because current-year shipments had occurred earlier, prior-year crops were larger, and uncommitted inventory was lower. It expected a return to more normal crop sizes in the next fiscal year. The company stated that cash, credit availability, and operating resources exceeded anticipated working-capital, debt-maturity, fine-appeal, and capital-spending needs for the next 12 months; it may consider additional long-term debt to manage liquidity risk. No major capital expenditures were approved for the next 12 months.
The European Court of Justice heard Deltafina’s appeal in November 2012 concerning the €30 million antitrust fine plus accumulated interest, recorded as a $49.1 million charge in 2011. The fine remained subject to appeal, supported by a bank guarantee; management expected a decision within 15 months. A Brazil VAT assessment had been reduced to approximately $18 million and remained contested; management considered no loss probable and recorded no liability. The company also had approximately $30 million of exposure under grower loan guarantees (with a $35 million maximum potential payment) and $6 million of other contingent liabilities. The Hupan, Chalanuk, and Da Silva lawsuits were dismissed as to Universal in December 2012.
Key risks include crop size and weather, customer shipment timing and demand, tobacco prices and costs, foreign exchange and interest rates, regulation, and litigation. Management reported no material change in previously disclosed risk factors and concluded disclosure controls were effective. The company cautioned that forward-looking statements are subject to risks and undertook no obligation to update them.
Important facts for investors to verify
- Confirm the reporting period: the filing is for the quarter ended December 31, 2012 (FY2013 Q3).
- Track the European Commission fine appeal, potential payment timing, and the status of the bank guarantee.
- Assess the sustainability of unusually strong nine-month operating cash flow and the seasonal working-capital cycle, including crop sizes and shipment timing.
- Monitor fourth-quarter shipment and earnings performance against management’s expectation of lower shipments and the low level of uncommitted inventory.
- Review the $210 million current debt maturity, available committed and uncommitted credit, and the company’s stated net-debt measure.
- Follow the Brazil VAT assessment and grower guarantee exposure, as well as any additional restructuring charges or other legal and tax developments.