Universal Corporation — Form 10-Q Summary
Period clarification: The filing covers the fiscal quarter and nine months ended December 31, 2011 (fiscal 2012 Q3), not 2010 Q3. Dollar amounts below are in millions unless stated otherwise.
Business context and reporting period
Universal is a global leaf tobacco merchant and processor. Its business is seasonal, and management cautions that quarterly results are not necessarily indicative of full-year results. The filing was signed February 7, 2012.
Financial performance
| Metric | Three months ended Dec. 31, 2011 | Prior year | Nine months ended Dec. 31, 2011 | Prior year |
|---|---|---|---|---|
| Revenue | $672.4 | $688.2 | $1,792.9 | $1,891.3 |
| Operating income | $93.1 | $87.6 | $138.3 | $208.3 |
| Net income attributable to Universal | $58.5 | $52.3 | $66.3 | $129.4 |
| Diluted EPS | $2.06 | $1.82 | $2.34 | $4.46 |
- Quarterly revenue fell about 2%; management attributed this mainly to lower leaf prices despite higher volumes. Nine-month revenue fell about 5%, reflecting lower prices and the change from some Brazilian leaf sales to toll processing after farmer contracts were assigned to PMI.
- Quarterly diluted EPS rose about 13%. Management reported segment operating income of $83.4 million, up $5.6 million, as stronger Other Regions results outweighed declines in North America and Other Tobacco Operations.
- Nine-month earnings were sharply lower, principally because of the $49.1 million Italian European Commission fine and interest charge recorded in September 2011. The filing identifies unusual items as a net pretax benefit of $10.7 million for the quarter and a net pretax charge of $38.6 million for the nine months; their reported diluted-EPS effects were $0.25 benefit and $1.39 charge, respectively.
- For the nine months, segment operating income was $174.6 million versus $196.4 million. Other Regions improved, while North America and Other Tobacco Operations declined. The nine-month results also included $12 million of dividends from unconsolidated affiliates.
Cash flow, liquidity and debt
- Operating cash flow was positive $60.0 million for the nine months, compared with cash used of $89.4 million in the prior-year period. The change reflected lower working-capital requirements; operating-asset and liability changes still used $132.6 million.
- Investing cash flow was a $1.7 million use; capital expenditures were $30.3 million. Financing cash flow was a $44.9 million use. Cash increased $11.4 million from fiscal year-end to $152.4 million.
- At December 31, cash was $152.4 million; notes payable and overdrafts were $130.2 million; current and long-term obligations totaled $410.0 million. The company-defined net debt, which also deducts customer advances and deposits, was $433 million; net debt was 26% of net capitalization.
- Universal had a new $450 million committed revolving facility, with the full amount available, and a funded $100 million amortizing term loan. Both mature in November 2016. It also reported $426 million of unused, uncommitted local credit lines. The company was in compliance with debt covenants.
- Current assets were $1,712.4 million and current liabilities $429.6 million. Seasonal working-capital needs are typically highest in the first half of the fiscal year.
Material changes, outlook and risks
- Management said the global tobacco oversupply was affecting prices and margins and could continue into the next fiscal year. It expected crop sizes to decline in many growing regions, potentially easing pressure, while some grade markets appeared to be tightening. Management described the underlying business as healthy and said shipment timing was back on track in most origins.
- Quarterly results benefited from an $11.1 million gain on a Brazilian property sale. The nine-month period also included a $9.6 million fire-insurance gain; reconstruction of the European facility was completed and it was fully operational.
- The Italian antitrust fine remains under appeal by Deltafina at the European Court of Justice. The $49.1 million charge was recorded; a bank guarantee secures the amount during the appeal, which management expected could take up to two years. Payment would not be due until a decision.
- Brazilian tax authorities assessed approximately $26 million for VAT matters. The company is contesting the assessment and recorded no liability because management did not consider a loss probable. Recoverable VAT credits totaled about $83 million, with a $25 million valuation allowance.
- Brazilian grower-loan guarantees had a maximum potential payment of $38 million and a recorded fair-value liability of about $4.8 million. Other contingent liabilities were approximately $4 million. Advances to suppliers totaled $187 million gross, with $78 million in valuation allowances.
- Further restructuring costs or impairments may arise as the company pursues cost reductions. The filing reports no material changes to previously disclosed risk factors; management judged disclosure controls effective.
Important facts for investors to verify
- Track the Italian fine appeal, its potential outcome and timing, and whether any further charge or payment is required.
- Assess earnings excluding the fine, asset-sale and insurance gains, restructuring costs, and other unusual items.
- Monitor crop volumes, leaf pricing and margins, shipment timing, and performance in North America and Other Tobacco Operations.
- Review seasonal working-capital movements, grower advances and guarantees, and availability under the revolving facility and covenant compliance.
- Follow the Brazilian VAT dispute and recoverability of VAT credits and supplier advances.