Universal Corporation — Form 10-Q Summary
Business context and reporting period. Universal is a global leaf tobacco merchant and processor. This filing covers the fiscal first quarter ended June 30, 2010, with comparisons to the quarter ended June 30, 2009. Results are seasonal; the company notes that first-quarter performance is not necessarily indicative of the full year. Amounts below are in U.S. dollars.
Key financial metrics
| Metric | Quarter ended June 30, 2010 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $538.9 million | $616.1 million | Down 13% |
| Operating income | $41.1 million | $69.8 million | Down 41% |
| Operating margin | 7.6% | 11.3% | Down 3.7 percentage points |
| Net income attributable to Universal | $25.3 million | $43.7 million | Down 42% |
| Diluted EPS | $0.87 | $1.47 | Down 41% |
| Net cash used in operating activities | $262.8 million | $51.7 million | Greater seasonal use of cash |
| Capital expenditures | $13.2 million | $11.2 million | Up $2.0 million |
Cost of goods sold was $436.7 million, down 8%; selling, general and administrative expenses were $60.2 million, down 14%. The effective tax rate was approximately 33.5%, similar to the prior-year quarter. Interest expense fell to $5.1 million from $8.2 million.
At June 30, 2010, cash was $61.8 million, total current assets $1.799 billion, and current liabilities $720.7 million. Notes payable and overdrafts were $298.9 million; long-term obligations were $418.5 million, plus $5.0 million current maturities. Management-defined net debt was $805 million, or approximately 42% of net capitalization, versus 29% at March 31, 2010 and 32% a year earlier. The company reported $300 million available under its committed revolving credit facility and about $553 million in unused, uncommitted credit lines; it was in compliance with debt covenants.
Material changes and operating performance
- Flue-cured and burley operations revenue fell 17% to $465.0 million and operating income declined 44% to $36.0 million. Prior-year early shipments in South America and Europe made comparisons difficult; a smaller Brazilian crop and weaker euro also weighed on results.
- North America improved from a low seasonal base, with increased carryover-stock sales. Other tobacco operations revenue rose 26% to $73.9 million, largely because of delivery timing, while operating income declined about $3 million, mainly on weaker oriental joint-venture results.
- Tobacco inventory reached $1.152 billion, up $340 million from March 31 and $266 million year over year. Management attributed the increase to seasonal crop purchases, higher leaf costs, earlier farmer deliveries in some countries, and shipment timing. Uncommitted tobacco was $117 million, about 10% of total tobacco inventory.
- Cash and cash equivalents declined by $184.2 million during the quarter. Seasonal working-capital investment drove operating cash use; the company funded needs with cash, short-term borrowings, customer advances, and operating cash flows.
- The company repurchased 198,223 shares during the quarter for approximately $10.2 million. The remaining authorization was about $120.0 million under a program permitting up to $150 million in purchases.
Outlook, commentary, risks, and unusual items
- Management provided no specific numerical earnings or revenue guidance. It said fiscal 2011 would be challenging, while remaining cautiously optimistic about cost reduction, replacement of lost volumes, and competitiveness. It expects shipment timing differences to correct over the remainder of the year.
- Challenges cited include a smaller Brazilian crop, leaf-cost-driven margin pressure, softer cigarette sales and customer demand, manufacturer sourcing changes, and potential flue-cured tobacco oversupply. Estimated worldwide dealer flue-cured and burley inventories were 105 million kilos versus 70 million a year earlier, though still below the long-term average.
- Universal agreed to assign farmer contracts representing about 20% of its current annual Brazilian volume to a Philip Morris International subsidiary, along with related assets and certain employees. Closing was expected in October 2010, subject to conditions and government approvals; consideration was expected to exceed the book value of assets conveyed. Universal expected to continue supplying processed leaf and processing services.
- A $0.95 million restructuring charge related to voluntary early-retirement benefits in U.S. operations was recorded; most benefits were expected to be paid after retirements in the following quarter.
- Brazilian grower-loan guarantees had a $62 million maximum potential payment amount and a $15.6 million recorded fair-value liability. About 60% of the guarantees expire within one year.
- The Spanish European Commission fine appeal remained pending, with a decision expected in September 2010 but ultimate resolution potentially taking years; the related fine had previously been accrued and funds placed in escrow. In the Italian antitrust matter, the company had not accrued the approximately €30 million fine, citing counsel’s view that it was probable Deltafina would prevail; accumulated interest was about €4.7 million.
- For the FCPA matter, the company reported agreements in principle with DOJ and SEC representatives, subject to definitive agreements and approvals. Expected terms included injunctive relief, disgorgement, interest, fines or penalties, and an independent compliance monitor. The company said recorded accruals were adequate and the expected settlement would not materially affect financial condition or results.
- Risk factors were reported as unchanged from the fiscal 2010 Form 10-K. Key exposures include crop supply and demand, shipment timing, weather, currency and interest-rate movements, legal proceedings, and evolving customer sourcing practices.
Important facts for investors to verify
- Whether planned shipment catch-up, crop volumes, and customer demand support management’s cautiously optimistic fiscal 2011 outlook.
- Closing terms, timing, approvals, and financial effects of the Brazilian farmer-contract and asset assignment to PMI.
- Seasonal inventory funding, cash use, net debt, and continued availability of committed and uncommitted credit.
- Outcomes and final financial terms of the FCPA settlement and European Commission antitrust appeals.
- Whether margin pressure, leaf-cost increases, potential oversupply, and manufacturer direct-sourcing initiatives lead to further volume or earnings changes.