Universal Corporation — Form 10-Q Summary
Period clarification: The request identifies “2016 Q1,” but the filing is for the quarter ended June 30, 2017, Universal’s first quarter of fiscal 2018. The comparable quarter ended June 30, 2016. Universal is a global leaf tobacco supplier; results are seasonal and this quarter may not indicate full-year performance.
Financial performance
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Quarter ended June 30, 2017 | Quarter ended June 30, 2016 |
|---|---|---|
| Revenue | $284.6 | $295.5 |
| Gross profit and margin | $53.9; 18.9% | $52.2; 17.7% |
| Operating income (loss) and margin | $6.6; 2.3% | $(8.0); (2.7)% |
| Net income (loss) attributable to Universal | $3.6 | $(5.5) |
| Diluted earnings (loss) per share | $0.14 | $(0.40) |
| Operating cash flow | $(117.1) | $16.1 |
| Capital expenditures | $6.4 | $7.3 |
- Revenue declined 4%, on lower total volumes and less favorable product mix. Cost of goods sold fell about 5%; SG&A decreased $12.9 million to $47.3 million, mainly reflecting currency remeasurement and exchange gains versus losses in the prior-year quarter.
- Net income improved despite lower revenue. Current-quarter taxes included discrete benefits; excluding them, management estimated tax expense of about $1 million and an effective tax rate of approximately 34%.
- At June 30, cash was $128.6 million; short-term debt and overdrafts were $45.1 million and long-term debt was $368.8 million. Net debt was about 18% of net capitalization, versus 9% a year earlier and 11% at March 31, 2017.
- Cash flow from operations was negative largely because of seasonal crop purchases and working capital: tobacco inventory increased $352.0 million from March 31 to $917.9 million. Cash was $155.4 million below its March 31 balance.
- Common dividends declared were $0.54 per share, compared with $0.53 in the prior-year quarter. Total assets were $2.105 billion and shareholders’ equity was $1.322 billion at June 30.
Material changes and business drivers
- Segment operating income was $6.1 million versus a loss of $8.1 million. Other Regions improved by $21.1 million to $4.1 million, primarily from lower SG&A, currency gains versus prior-year losses, and earlier distributions from unconsolidated subsidiaries.
- North America operating income fell $4.5 million to $2.4 million, mainly on lower shipments and less favorable mix. Other Tobacco Operations moved from $2.0 million of income to a $0.3 million loss, largely due to lower volumes and mix in dark tobacco and weaker oriental results.
- Brazilian crop production recovered, increasing purchase and processing volumes and improving factory unit costs. Cash balances versus the prior-year quarter were also affected by the January 2017 cash settlement of the mandatory preferred-stock conversion; all preferred shares have been converted or redeemed.
Outlook, risks, and contingencies
- The filing provides no specific full-year earnings guidance. Management expects higher Brazilian volumes to support earnings through fiscal 2018; crop purchases in Brazil were essentially complete and African purchases were progressing well. Crop quality was described as good.
- Management forecast worldwide burley production of about 510 million kilos for fiscal 2018, approximately 13% below fiscal 2017, and said demand may slightly exceed supply. It warned that smaller-than-expected African burley crops and challenging Tanzanian market conditions could reduce regional sales volumes. Customer orders were progressing as anticipated; uncommitted inventory was 17% of tobacco inventory.
- Management planned $40–$45 million of capital spending over the next 12 months. It reported $430 million available under a committed revolving facility maturing in December 2019 and about $245 million of unused, uncommitted credit lines; debt covenants were being met and no long-term debt matures in fiscal 2018.
- Brazilian VAT assessments remain contested: approximately $14 million in Santa Catarina and $5 million in Parana. Management said no loss was probable and recorded no liability; outcomes and timing remain uncertain. Other litigation and tax matters were not expected to materially affect business or financial position, though an adverse resolution could materially affect a particular period.
- Brazilian grower-loan guarantees had a maximum potential payment of $3 million; other contingent liabilities were about $2 million. Recoverable VAT credits totaled approximately $56 million before $15 million of valuation allowances.
- Key operating exposures include crop size and quality, shipment timing, weather, tobacco demand and supply, foreign exchange, interest rates, regulation, and political and economic conditions. Management reported no material changes to the risk factors in its fiscal 2017 Form 10-K. Disclosure controls were deemed effective.
Important facts for investors to verify
- Confirm the intended reporting period: this filing covers fiscal Q1 2018, not 2016 Q1.
- Assess whether the operating-income rebound is sustainable, given its dependence on currency gains, lower SG&A, and timing of affiliate distributions.
- Track seasonal working-capital needs, inventory levels, cash use, and borrowing as crops are purchased and shipments are weighted toward the second half.
- Monitor Brazilian and African crop volumes, burley supply-demand conditions, customer orders, and uncommitted inventory.
- Follow resolution of the Brazilian VAT assessments and the recoverability of VAT credits and supplier advances.
- Review the effect of discrete tax benefits and the company’s debt, credit-facility availability, and covenant position.