Universal Corporation — Form 10-Q Summary
Period clarification: The filing covers the quarter and six months ended September 30, 2013 (Universal’s fiscal 2014 second quarter), not 2012 Q2 as stated in the request metadata. Amounts below are in millions of dollars unless noted. Universal is a global leaf tobacco merchant and processor; its results are seasonal and quarterly results may not indicate full-year performance.
Financial results
| Metric | Three months ended Sep. 30, 2013 | Three months ended Sep. 30, 2012 | Six months ended Sep. 30, 2013 | Six months ended Sep. 30, 2012 |
|---|---|---|---|---|
| Revenue | $650.9 | $675.2 | $1,084.4 | $1,136.6 |
| Operating income | $49.5 | $75.1 | $136.0 | $117.9 |
| Net income attributable to Universal | $25.4 | $48.0 | $83.8 | $71.1 |
| Diluted EPS | $0.90 | $1.68 | $2.95 | $2.50 |
| Operating cash flow | Not presented separately for the quarter | $(307.1) | $(54.8) |
- Second-quarter operating margin, calculated from reported figures, was approximately 7.6%, versus 11.1% a year earlier. Six-month reported operating margin was approximately 12.5%, versus 10.4%; the 2013 figure includes an $81.6 million Brazilian tax-credit gain. Excluding that gain, six-month operating income was approximately $54.4 million.
- Six-month capital expenditures were $19.8 million, compared with $19.5 million. Cash declined to $74.6 million from $367.9 million at March 31, 2013, principally as seasonal working capital was funded.
- At September 30, total debt, including short-term borrowings and current maturities, was approximately $581.8 million. The company’s defined net debt was $600.0 million, up about $445.1 million during the half-year; net debt to net capitalization was approximately 31%, versus 11% at March 31, 2013.
- Current assets were $1,880.0 million and current liabilities $760.0 million. Available liquidity included $74.6 million cash, $370.0 million available under a committed revolving facility, and approximately $304.6 million in unused uncommitted lines.
- Common dividends declared were $0.50 per share for the quarter and $1.00 for the six months. Preferred dividends were $7.4 million for the six months.
Material changes versus the comparable period
- Quarterly revenue fell about 4%, while net income attributable to Universal declined about 47%. Management attributed weaker results mainly to lower shipment volumes, shipment delays, margin pressure from rapidly rising green-leaf costs, and unfavorable foreign-currency results.
- Six-month revenue declined about 5%. Reported operating income and earnings increased year over year because the first half of 2013 included the Brazilian tax-credit gain. Excluding its $53.1 million after-tax impact, six-month net income was approximately $40.4 million below the prior-year period.
- Segment operating income, which excludes the unusual tax-credit gain, declined 37% for the quarter and 55% for the six months. Other Regions was the principal source of weakness; North America improved, supported by higher volumes and lower processing overheads.
- Operating cash outflow increased substantially, primarily due to seasonal working capital. Tobacco inventory rose $413.9 million from March 31 to $1.0 billion, reflecting seasonal purchases, larger crops, and higher green-leaf prices. Inventory was $134.2 million uncommitted, about 13% of total tobacco inventory.
- Foreign-currency remeasurement and exchange results were unfavorable: the company reported losses of $14.4 million for the six months and $9.0 million for the quarter, compared with gains of $9.9 million and $2.8 million, respectively, in the prior-year periods.
Outlook, management commentary, and notable items
- Management expected second-half shipment comparisons to normalize, with volumes meeting or exceeding the prior-year level. It described leaf markets as strong but cited currency losses, shipment timing, and Brazilian margin pressure as challenges. This is management’s expectation, not a quantified earnings forecast.
- The company approved approximately $50 million of expansion and efficiency projects over two years, led by expanded production and processing capacity in Mozambique. Benefits were expected to begin in fiscal 2015.
- A Brazilian court decision finalized in the first quarter entitled the subsidiary to approximately $104 million of IPI tax credits, usable against future Brazilian federal taxes over up to five years and subject to tax-authority audit. After an allowance and related costs, Universal recorded an $81.6 million pretax gain ($53.1 million after tax, or $1.96 per diluted share). The net carrying value of the credits was approximately $90 million; management said the valuation allowance could change.
- After quarter-end, Universal repaid $200 million of 5.2% notes on October 15, 2013, and entered a new $175 million unsecured, five-year term loan on October 28, at LIBOR plus 1.50% at inception. It also announced a new authorization to repurchase up to $100 million of equity through November 15, 2015.
- The European Commission’s €30 million antitrust fine, plus interest, remained under appeal; the accrued amount was approximately $49.1 million and a $52 million bank deposit collateralized the guarantee. A decision was expected during fiscal 2014. Separately, the company’s FCPA monitor certified completion of its three-year monitorship on October 4, 2013.
- Other exposures include approximately $42 million of net exposure under farmer-loan guarantees (with a $46 million maximum potential payment) and a contested Brazilian VAT assessment of approximately $16 million; no loss was considered probable for the VAT matter and no liability was recorded.
- Management reported compliance with debt covenants and effective disclosure controls. It reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether second-half shipment volumes and margins recover as management expected, particularly in South America and Africa.
- How quickly the Brazilian tax credits are realized, whether they withstand audit, and whether the valuation allowance changes.
- The timing and cash-flow impact of seasonal inventory, customer shipments, and working-capital requirements, alongside the increased net debt.
- The outcome and potential payment implications of the EU antitrust appeal and the unresolved Brazilian VAT assessment.
- Execution, total costs, and expected returns from the approximately $50 million capacity and efficiency projects; the filing provides no project-level return estimates.
- The effective borrowing cost and covenant headroom under the new term loan and revolving facility, and the amount ultimately used for share repurchases.