Business context and reporting period
Universal Corporation is a global leaf tobacco supplier. The filing covers the quarter and nine months ended December 31, 2016 (fiscal 2017 Q3), compared with the same periods in 2015. The request metadata says “2015 Q3,” but the filing itself identifies the reporting period as December 31, 2016.
Results are seasonal: crop purchases and working-capital needs typically peak in the first half, while shipments are generally weighted toward the second half. Management says the Brazilian buying program was reduced because of a smaller crop, associated with El Niño weather, and unsustainable green-leaf prices.
Financial performance
Amounts are in millions of dollars except per-share data. Margins shown are calculated from reported figures.
| Metric | Three months ended Dec. 31, 2016 | Prior year | Nine months ended Dec. 31, 2016 | Prior year |
|---|---|---|---|---|
| Revenue | $668.8 | $584.6 | $1,421.2 | $1,316.4 |
| Operating income | $83.2 | $69.2 | $118.5 | $101.2 |
| Net income attributable to Universal | $53.6 | $44.5 | $73.4 | $61.1 |
| Diluted EPS | $1.92 | $1.60 | $2.63 | $2.18 |
| Gross margin | 20.3% | 20.5% | 19.4% | 20.2% |
| Operating margin | 12.4% | 11.8% | 8.3% | 7.7% |
Quarterly revenue rose about 14% and nine-month revenue about 8%, primarily on higher sales volumes. Operating income increased in both periods. Nine-month diluted EPS was affected by the conversion of preferred shares and related diluted-share calculations; it should be considered alongside the per-share disclosures in the filing.
For the nine months, net cash provided by operating activities was $182.8 million, versus $10.2 million in the prior year. Capital expenditures were $28.5 million, compared with $38.5 million; operating cash flow less capital expenditures was approximately $154.2 million. Cash increased to $411.5 million from $319.4 million at March 31, 2016. Financing activities used $62.1 million, including common and preferred dividends.
At December 31, 2016, total assets were $2,226.9 million, current assets $1,665.0 million, and current liabilities $238.7 million. Notes payable and overdrafts were $52.1 million and long-term debt was $368.6 million. Management’s defined net debt, which also incorporates customer advances and deposits and short-term investments, was $23.4 million; net debt was about 2% of net capitalization. The company reported $430 million available under its committed revolver and about $320 million in unused uncommitted lines, and stated that it was compliant with debt covenants.
Material changes versus prior comparable periods
- Quarterly and nine-month operating income improved, with stronger performance in Other Regions and Other Tobacco Operations. North America improved for the nine months but declined in the quarter.
- Other Regions benefited from higher quarterly volumes, lower selling, general and administrative costs, and distributions from unconsolidated subsidiaries. Nine-month revenue in that segment nevertheless fell $16.6 million, as lower green-leaf prices and processing revenue offset modest volume gains.
- North America’s quarterly results were hurt by reduced factory yields and inventory write-downs on weather-affected U.S. crops, less favorable product mix, and export sales timing.
- Other Tobacco Operations benefited from higher dark-tobacco volumes, including recovery from prior-year volcanic-ash crop damage in Indonesia. Losses in the new food-ingredients business weighed on nine-month results.
- Nine-month SG&A declined $13.1 million, aided by reversal of VAT reserves and comparison with prior-year land-related costs. The prior-year period also included a $3.4 million gain on remeasurement of a joint-venture interest after acquiring the partner’s stake.
- Operating cash flow rose sharply, chiefly due to lower working-capital requirements from reduced Brazilian purchases and earlier shipments. Tobacco inventory was $229.5 million below December 2015 levels.
Outlook, risks and unusual items
- Management expected fourth-quarter fiscal 2017 volumes to be below the prior-year quarter because of the smaller Brazilian buying program and earlier shipments elsewhere, but expected full-year lamina volumes to be only modestly below fiscal 2016.
- Management planned approximately $40–$45 million of capital expenditures over the next 12 months. It said available cash and credit resources exceeded normal working-capital needs and anticipated capital spending.
- In December 2016, 111,072 Series B preferred shares converted into approximately 2.5 million common shares. In January 2017, the remaining 107,418 preferred shares were mandatorily converted for approximately $178.4 million in cash. Preferred dividends of about $15 million annually ceased. The cash conversion was expected to reduce retained earnings by approximately $74.4 million in the quarter ending March 31, 2017, and to reduce earnings available to common shareholders for EPS purposes in that quarter and fiscal year.
- Restructuring and impairment costs were $3.9 million for the nine months, primarily related to closing the Hungary processing facility and shifting processing to Italy. The prior-year nine months included $2.4 million of costs, mainly related to scaling back operations in Zambia.
- Brazilian VAT assessments remain contested: approximately $14 million in Santa Catarina and $5 million in Paraná. Management and outside counsel considered losses not probable, so no liability was recorded; outcomes and timing remain uncertain. Brazil grower-loan guarantees had a maximum potential payment of $35 million, with a recorded fair-value liability of about $1.8 million.
- Other litigation and tax matters were described as incidental, with no expected material adverse effect on business or financial position, although an adverse resolution could materially affect results in a particular period. Management reported no material changes to previously disclosed risk factors.
- Key exposures include crop size and weather, tobacco demand and shipment timing, prices and product mix, foreign-exchange and interest-rate movements, regulation, taxation, and political and economic conditions. Management cautioned that forward-looking statements involve risks and undertook no obligation to update them.
Important facts for investors to verify
- Confirm the reporting-period discrepancy: the supplied metadata says 2015 Q3, while the filing reports fiscal 2017 Q3 ended December 31, 2016.
- Assess whether volume and earnings improvements are sustainable or chiefly reflect earlier shipment timing, segment mix, reserve reversals, and prior-year comparisons.
- Review the effects of the smaller Brazilian crop and lower buying program on future volumes, margins, supplier advances, and working-capital needs.
- Track the January 2017 cash settlement of preferred shares, the resulting retained-earnings/EPS charge, and the ongoing effect of eliminating preferred dividends.
- Monitor the unresolved Brazilian VAT assessments and the collectability of supplier advances and recoverable VAT credits.
- Verify liquidity and debt capacity after the $178.4 million preferred-stock cash conversion and through the seasonal working-capital cycle.