Universal Corporation — Form 10-Q Summary
Period clarification: The supplied filing is for the quarter and nine months ended December 31, 2017 (fiscal 2018 Q3), not 2016 Q3 as stated in the request metadata. Universal describes itself as a leading global leaf tobacco supplier. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions.
Financial performance
| Metric | Three months ended Dec. 31, 2017 | Prior-year quarter | Nine months ended Dec. 31, 2017 | Prior-year nine months |
|---|---|---|---|---|
| Revenue | $653.6m | $668.8m | $1,426.5m | $1,421.2m |
| Operating income | $59.7m | $83.2m | $111.2m | $118.5m |
| Net income attributable to Universal | $45.4m | $53.6m | $75.1m | $73.4m |
| Diluted EPS | $1.78 | $1.92 | $2.94 | $2.63 |
| Operating margin | 9.1% | 12.4% | 7.8% | 8.3% |
Quarterly revenue fell 2.3% and operating income fell 28%; nine-month revenue was nearly flat while operating income declined about 6%. The nine-month earnings increase and higher diluted EPS include a $10.5m one-time tax benefit ($0.41 per diluted share) from U.S. tax legislation. EPS comparisons also reflect the prior-year conversion of preferred stock and changes in weighted-average common shares. No preferred shares remained outstanding in the current periods.
Quarterly results were pressured by lower sales volumes and other revenues, especially in Other Regions, and the prior-year quarter included unusually high sales volumes and about $13m of income related to the timing of distributions from unconsolidated subsidiaries. For the nine-month period, higher processing revenues and green tobacco prices largely offset lower volumes. Brazil’s improved crop volumes and lower factory unit costs benefited results; lower African burley production and fewer North American carryover sales weighed on them.
Cash flow, balance sheet and liquidity
- Cash flow: Operating activities used $49.4m in the nine months, versus providing $182.8m a year earlier. The $232.1m deterioration primarily reflected higher seasonal working-capital needs and increased Brazilian green-leaf purchases. Investing used $19.0m, including $23.6m of capital expenditure; financing used $69.8m, including $40.9m of common dividends and $12.6m of share repurchases.
- Cash and working capital: Cash was $146.6m at December 31, 2017, down from $284.0m at March 31, 2017 and $411.5m a year earlier. Tobacco inventory was $796.2m, up $230.2m from fiscal year-end. Uncommitted inventory was $125.4m, approximately 16% of tobacco inventory. Current assets were $1,577.8m and current liabilities $256.5m; the company’s business is seasonal.
- Debt and funding: Notes payable and overdrafts were $50.8m and long-term debt was $369.0m, with no current portion shown. Universal reported net debt as a percentage of net capitalization of approximately 18%, versus 2% a year earlier and 11% at March 31, 2017. It had $430m available under its committed revolver, about $247.6m in unused uncommitted credit lines, and no long-term debt maturity in fiscal 2018 or 2019. It reported compliance with debt covenants.
- Other financial items: Common dividends declared were $0.55 per share for the quarter and $1.63 for the nine months. The company planned $35m–$45m of capital spending over the next 12 months. Pension contributions were $7.6m for the nine months, with about $0.4m expected for the remainder of fiscal 2018.
Outlook, risks and unusual items
- Management expected fourth-quarter fiscal 2018 volumes to be below the prior-year quarter because of reduced African crop availability, and fiscal 2018 total lamina volumes to be modestly lower than fiscal 2017. It expected fiscal 2019 volumes to be higher if African volumes recover and markets remain stable.
- Management said seasonal working-capital requirements were higher, chiefly due to recovered Brazilian crop levels, but expected cash balances to remain strong enough to support crop purchases and advances. The business is seasonal; shipments are typically weighted to the second half.
- The Tax Cuts and Jobs Act reduced the reported effective tax rates to 19.3% for the quarter and 23.7% for the nine months; without its effects, rates would have been 36.2% and 33.5%. The tax accounting included provisional estimates, including a $21.0m transition-tax liability. Management expected the ongoing tax rate to be somewhat lower but more volatile, and said future adjustments to provisional amounts could be material.
- Brazilian VAT assessments remained contested: approximately $15m in Santa Catarina and $5m in Paraná. Management considered no loss probable and recorded no liability; resolution may take a long time. Brazilian grower-loan guarantees had a maximum potential payment of $36m, expiring within one year, with a recorded fair-value liability of about $1m.
- Key operating exposures include crop yields and weather, shipment timing, tobacco prices and volumes, currency and interest-rate movements, and recovery of supplier advances and VAT credits. Advances to suppliers totaled $136m net of allowances; recoverable VAT credits were about $52m gross with $17m in valuation allowances. Management reported no material change to previously disclosed risk factors, and disclosure controls were deemed effective.
- A new authorization permits up to $100m of share repurchases through November 15, 2019. The company repurchased 220,000 shares for $12.6m during the nine months; none were repurchased in the quarter ended December 31.
Important facts for investors to verify
- Confirm the intended reporting period: the filing covers fiscal 2018 Q3, not 2016 Q3.
- Track operating performance excluding the one-time tax benefit, particularly the African crop shortfall, Brazilian volumes and factory costs, and North American shipment timing.
- Assess the seasonal working-capital draw, inventory composition and cash conversion as shipments progress in the second half.
- Monitor final accounting for the tax law, including the provisional transition-tax and deferred-tax estimates and the effect on future effective tax rates.
- Follow the Brazilian VAT disputes, grower guarantees, and recoverability of supplier advances and VAT credits.