Universal Corp. 10-Q Summary: Period Ended December 31, 2008
Business Context and Reporting Period
Universal Corporation is a leading global leaf tobacco merchant and processor. This Form 10-Q covers the quarterly period ended December 31, 2008 (the third quarter of fiscal year 2009). The company has divested most non-tobacco operations, which are reported as discontinued operations. The business is seasonal, with working capital needs peaking during crop purchasing periods.
Key Financial Metrics
| Metric | Three Months Ended Dec 31, 2008 | Nine Months Ended Dec 31, 2008 |
|---|---|---|
| Sales and Operating Revenues | $699.1 million | $1,991.0 million |
| Operating Income | $77.4 million | $186.8 million |
| Net Income | $53.1 million | $116.0 million |
| Diluted EPS | $1.78 | $3.78 |
| Cash and Cash Equivalents | $88.0 million | (Balance Sheet Item) |
| Net Debt | $488 million (approx.) | (Calculated per MD&A) |
| Operating Cash Flow (9 months) | ($6.8 million) used | (Due to working capital changes) |
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 22% for the quarter and 19% for the nine-month period compared to the prior year. This was driven by higher volumes (recovery from small African crops in the prior year) and increased green tobacco costs passed through to customers.
- Earnings: Net income rose 5% for the quarter and 6% for the nine-month period. Diluted EPS increased 14% for the quarter.
- Currency Impact: Significant currency remeasurement losses, primarily due to the devaluation of the Brazilian Real (approx. 22% in the quarter, 32% year-to-date), reduced operating income by approximately $20 million in the quarter and $43 million for the nine months.
- Working Capital: Accounts receivable increased by $109 million and tobacco inventory rose by $126 million compared to the prior year, reflecting higher costs and volumes. This contributed to a net use of cash in operating activities for the nine-month period.
- Share Repurchases: The company repurchased 2.2 million shares for $110.5 million during the nine-month period, totaling $128 million under the program since November 2007.
Guidance, Outlook, and Risks
- Outlook: Management expects the effective tax rate for fiscal year 2009 to approximate 31%. They anticipate a large burley crop in Africa for the next fiscal year, potentially leading to oversupply, while flue-cured markets are expected to remain balanced.
- Liquidity: Net debt increased to approximately $488 million. The company has $400 million available under a committed revolving credit facility and $425 million in uncommitted lines. Management may explore issuing long-term debt to manage liquidity risk, though current market rates are higher.
- Pension Funding: Due to market declines, pension plan assets dropped by $35 million. The company expects to contribute an additional $10 million to $20 million to its qualified plan by March 2009.
- Legal Contingencies:
- EU Fines: The company is appealing a €30 million fine in Italy (approx. $42 million) and a €11.88 million fine in Spain. No charge has been accrued for the Italian fine as management believes it will prevail.
- FCPA Investigation: An ongoing SEC investigation regarding potential violations of the Foreign Corrupt Practices Act involving approx. $1 million in payments over seven years. Sanctions could be material.
- Guarantees: Total exposure under guarantees for Brazilian farmer loans is approximately $133 million.
Investor Verification Checklist
- Currency Exposure: Verify the extent of net monetary assets in Brazil and the potential for further remeasurement losses if the Real continues to devalue.
- Legal Resolutions: Monitor the status of the European Commission appeals (Italy and Spain) and the SEC investigation regarding the Foreign Corrupt Practices Act.
- Debt Refinancing: Assess the impact of potential refinancing of $79.5 million in long-term debt maturing in September 2009, given current higher interest rates.
- Pension Contributions: Confirm the actual amount of additional pension funding required in the fourth quarter of fiscal 2009.
- Inventory Levels: Review the composition of the $614 million tobacco inventory, specifically the $97 million in uncommitted inventory, to assess market risk.