Universal Corporation — Form 10-Q Summary
Period clarification: The supplied filing is for the quarter ended September 30, 2019—the second quarter of Universal’s fiscal 2020—and the six months then ended. It is not a 2018 Q2 filing. Financial amounts below are in U.S. dollars; millions unless stated otherwise.
Business context and reporting period
Universal is a global leaf tobacco supplier. Its business is seasonal: crop purchases and working-capital needs typically peak in the first half of the fiscal year, while shipments and results are expected to be weighted toward the second half. The financial statements are unaudited.
Financial performance and liquidity
| Metric | Quarter ended September 30, 2019 | Six months ended September 30, 2019 |
|---|---|---|
| Revenue | $475.9; down 11.8% year over year | $772.8; down 15.9% |
| Operating income | $43.2; down 20.5% | $50.7; down 19.2% |
| Net income attributable to Universal | $28.1; down 10.7% | $30.1; down 32.4% |
| Diluted EPS | $1.11 vs. $1.24 | $1.19 vs. $1.76 |
| Operating margin | 9.1% vs. 10.1% | 6.6% vs. 6.8% |
| Dividends declared per share | $0.76 vs. $0.75 | $1.52 vs. $1.50 |
Quarterly gross margin was approximately 20.2%, compared with 18.4% a year earlier; first-half gross margin was approximately 20.0%, compared with 18.7%. These percentages are calculated from reported revenue and cost of goods sold.
- Cash flow: Cash used in operations was $279.8 for the six months, versus $213.0 used a year earlier. The increase was attributed principally to crop-purchase and shipment timing. Capital spending was $13.3, compared with $20.0.
- Cash and working capital: Cash was $53.2 at September 30, down from $297.6 at March 31, 2019. Tobacco inventory was $918.6, up $289.0 from fiscal year-end, reflecting seasonal purchases.
- Debt and liquidity: Notes payable and overdrafts were $155.4; long-term debt was $368.6. The company reported net debt as 27% of net capitalization, versus approximately 10% at March 31, 2019, and said it complied with debt covenants. It had $355 available on its committed revolving credit facility and about $184 in unused uncommitted lines; no long-term debt matures in fiscal 2020.
- Other balance-sheet items: Total assets were $2,218.2 and total shareholders’ equity was $1,338.6. Adoption of lease accounting added operating lease right-of-use assets of $34.8 and lease liabilities of $31.9 at September 30, 2019.
Material changes versus the prior comparable period
- Lower revenue reflected reduced volumes and prices. The prior-year first half benefited from larger carryover-crop sales, especially in North America and Africa; current-period comparisons also faced softer demand and larger flue-cured crops.
- Other Regions operating income fell to $28.7 for the first half from $43.5, with lower African carryover volumes and delayed shipments, as well as less favorable Brazilian product mix. North America operating income fell to $6.4 from $17.2, mainly due to lower carryover sales.
- Other Tobacco Operations improved to $18.0 of first-half operating income from $1.9, reflecting stronger Indonesian wrapper tobacco results and improved performance at the oriental joint venture.
- First-half net income comparisons were affected by tax items: the 2019 period included a $2.8 tax accrual related to an unresolved foreign tax matter, while the 2018 period included a $7.8 benefit from reversing a foreign dividend withholding tax liability. Excluding these items, management said first-half net income and diluted EPS declined by $3.9 and $0.16, respectively.
Outlook, commentary, risks and unusual items
- Management expects shipments and results to be weighted toward the second half, consistent with the business’s seasonality. It described reduced sales prices, softer demand and larger flue-cured crops as pressures on margins. No numerical earnings or revenue guidance was provided.
- The company expects to spend approximately $50–$60 over the next 12 months on capital projects, including growth, efficiency and maintenance investments. It reported returning just over $50 to shareholders through dividends and repurchases in the first half.
- Management said it had agreed in principle with a major customer to provide additional sustainable tobacco supply and value-added services in the Philippines, and was pursuing potential investments in adjacent industries. The filing does not quantify the expected financial impact of these opportunities.
- Contingencies: The Tanzania Fair Competition Commission had imposed a reported $197 million fine jointly against company subsidiaries in an antitrust matter; execution was stayed during appeal. The company said material liability was remote and recorded no amount. It also described two newer Tanzania allegations, including a potentially similarly large fine in one matter, and likewise recorded no liability, citing remote likelihood of material loss.
- Brazil VAT assessments were approximately $11 million for Santa Catarina and $5 million for Paraná, with reasonably possible loss ranges up to those amounts. Management said loss was not probable and recorded no liability; tax portions paid may generate recoverable VAT credits.
- Foreign-currency and interest-rate exposures remain relevant. The company had $370 of interest-rate swaps against term loans, with a fair-value liability of about $22, and estimated that a 1% change in short-term rates could change annual interest expense by about $1.6 before at least partial customer-charge offsets.
- Management identified risks including crop quality and availability, customer concentration, shipment timing, weather, regulation, litigation, and currency and interest-rate changes. It reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Confirm the filing period: quarter ended September 30, 2019, rather than 2018 Q2.
- Track second-half shipment timing, crop volumes, sales prices and the conversion of seasonal inventory into customer shipments and cash.
- Monitor operating performance by region, particularly continued weakness in North America and Other Regions and whether gains in Other Tobacco Operations persist.
- Review cash usage, seasonal borrowing, covenant compliance and available credit as working-capital needs change.
- Follow developments in the Tanzania proceedings and Brazilian VAT disputes, including changes to management’s loss assessments or recorded liabilities.
- Assess whether the Philippines supply arrangement, adjacent-market investments and planned capital expenditures produce measurable returns.