Universal Corporation — Form 10-Q Summary
Reporting period: The filing covers the quarter and nine months ended December 31, 2013 (fiscal 2014 third quarter), not 2012 Q3 as stated in the request metadata. Universal is a global leaf tobacco merchant and processor; its operations are seasonal, so quarterly results may not indicate full-year performance.
Financial performance
| Metric | Three months ended Dec. 31, 2013 | Nine months ended Dec. 31, 2013 | Comparable 2012 period |
|---|---|---|---|
| Revenue | $767.8 million, up 13% | $1.852 billion, up 2% | $680.0 million; $1.817 billion |
| Net income attributable to Universal | $38.6 million | $122.3 million | $35.5 million; $106.6 million |
| Diluted EPS | $1.36 | $4.31 | $1.25; $3.75 |
| Operating income | $69.4 million | $205.5 million | $64.5 million; $182.4 million |
| Cash from operating activities | $(14.2) million for nine months | $201.7 million for nine months |
Third-quarter segment operating income, a non-GAAP measure, increased 18% to $74.6 million. For nine months it fell to $130.3 million from $185.9 million, mainly due to weaker South American margins, higher green-leaf prices, increased SG&A, currency effects, and lower prior-year carryover and uncommitted-inventory sales. Nine-month results include an $81.6 million pretax Brazilian excise-tax-credit litigation gain ($53.1 million after tax, or $1.87 per diluted share), as well as $4.7 million of restructuring costs. The quarter included $3.4 million of restructuring costs.
Gross margin is not separately stated. Reported operating income includes the Brazilian tax-credit gain in the nine-month period; segment operating income excludes that gain and restructuring charges.
Liquidity, debt and cash flow
- At December 31, cash and cash equivalents were $191.9 million; current assets were $1.738 billion and current liabilities $515.2 million.
- Debt comprised $72.3 million of short-term notes and overdrafts, $115.0 million of current long-term obligations, and $245.0 million of long-term obligations. Company-defined net debt was $300.3 million, up about $145.4 million during the nine months; net debt to net capitalization was approximately 18%, versus 14% a year earlier.
- Operating cash flow was negative $14.2 million, primarily reflecting seasonal working-capital investment. Tobacco inventory rose $218.5 million from March 31 to $841.8 million, driven by seasonal purchases, larger crops, and higher prices. Cash declined $176.0 million from fiscal year-end.
- Universal repaid $200 million of 5.2% notes at maturity in October and entered a new $175 million unsecured, five-year term loan. It reported $450 million available under its committed revolver and about $351.6 million of unused, uncommitted credit lines; it was in compliance with debt covenants.
- Capital spending was $30.8 million for nine months. The company approved about $50 million of projects over the next two fiscal years, including expanded tobacco production and processing capacity in Mozambique.
Changes, outlook and risks
- Management described the third quarter as strong: shipment volumes exceeded the prior-year quarter and operating profit improved in each segment. Fourth-quarter processing and shipping schedules were proceeding normally, and management expected second-half shipment volumes to exceed the prior-year period.
- Management noted that the preliminary 2014 crop outlook indicated increased production in some origins, while cigarette manufacturers’ needs could decline with lower cigarette sales in Europe and the United States. Uncommitted inventory remained relatively low.
- Key operating exposures include seasonal working-capital needs, crop size and weather, tobacco prices, customer shipment timing, foreign-exchange movements, and tobacco demand. Nine-month foreign-currency remeasurement and exchange losses were $17.7 million, compared with gains of $9.6 million a year earlier.
- Brazil’s approximately $104 million of court-awarded IPI tax credits are usable against future federal taxes for up to five years and subject to audit; the company recorded an allowance and an $81.6 million net gain. Credit use began in the December quarter.
- The European Commission fine appeal remained pending, with a decision expected during calendar 2014. The company had recorded the €30 million fine plus interest and cash-collateralized the guarantee with a deposit of about $53 million. A Brazilian VAT assessment had been reduced to about $15 million; management said no loss was probable and recorded no liability.
- Brazilian factory consolidation was substantially completed in December. Other contingent exposures include approximately $41 million of face-value farmer-loan guarantees, expiring within one year, and potential losses on supplier advances. Management reported no material change in previously disclosed risk factors.
Investor verification priorities
- Reconcile the reported nine-month earnings benefit from the Brazilian tax-credit case with the credits’ estimated realization, five-year expiration, and audit risk.
- Track crop shipments, tobacco inventory and uncommitted inventory, especially given seasonal cash outflows and higher crop costs.
- Assess whether South American margins, foreign-exchange results, and segment operating income recover after the nine-month decline.
- Monitor the European Commission appeal, the Brazilian VAT assessment, and farmer guarantees and supplier-advance allowances.
- Review liquidity and leverage through the seasonal cycle, including debt maturities, working-capital needs, and planned capital projects.