Universal Corporation — Form 10-Q Summary
Reporting period: Quarter and nine months ended December 31, 2021, for fiscal 2022. The filing period differs from the request metadata’s “2020 Q3.” Amounts are in U.S. dollars unless stated otherwise.
Business context and results
Universal is a global business-to-business agricultural-products supplier, with Tobacco Operations and Ingredients Operations segments. Management cautions that results are seasonal and that quarterly results may not indicate full-year performance.
- Quarter: Revenue was $652.6 million, down 3% year over year. Net income attributable to Universal was $34.9 million, or $1.40 per diluted share, versus $33.3 million and $1.34. Operating income was $62.8 million versus $60.2 million. On an adjusted, non-GAAP basis, diluted EPS was $1.80 versus $2.19 and adjusted operating income was $74.9 million versus $85.2 million.
- Nine months: Revenue was $1.457 billion, up 7%. Net income attributable to Universal was $60.8 million, or $2.44 per diluted share, versus $48.0 million and $1.94. Operating income was $103.2 million versus $85.1 million. Adjusted, non-GAAP diluted EPS was $2.76 versus $2.59; adjusted operating income was $116.5 million versus $107.6 million.
- Margins and costs: Nine-month gross margin was 19.7%, up 50 basis points from 19.2%. Nine-month cost of goods sold rose 6% and SG&A rose 9%; management cited acquisitions, inflation, freight and labor costs, and unfavorable foreign-exchange comparisons.
- Segments, nine months: Tobacco revenue was $1.269 billion, down 1%, and operating income was $105.6 million, down 2%. Ingredients revenue was $188.0 million, up 116%, and operating income improved to $10.6 million from a $4.7 million loss. Ingredients growth reflected acquired businesses, including Silva and Shank’s.
Cash flow, debt and liquidity
- Operating cash flow was a use of $51.6 million for the nine months, versus $38.6 million generated a year earlier, largely reflecting seasonal working-capital investment and tobacco shipment timing. Investing used $129.7 million, including $102.5 million for business acquisitions and $39.8 million for capital expenditures. Financing provided $84.2 million.
- At December 31, cash and cash equivalents were $99.3 million; short-term notes payable and overdrafts were $252.6 million; long-term debt was $518.5 million. Net debt as a share of net capitalization was approximately 35%, versus 31% a year earlier and 25% at March 31, 2021.
- Universal reported $260 million available under its committed revolving credit facility and approximately $188 million in unused, uncommitted credit lines. It said it was compliant with debt covenants and expected available liquidity to cover requirements for at least the next 12 months. No long-term debt was due until fiscal 2024.
- Dividends declared were $0.78 per share for the quarter and $2.34 for the nine months. The $100 million share-repurchase authorization remained unused at December 31, 2021.
Material changes, outlook and risks
- Universal acquired flavors-and-extracts business Shank’s on October 4, 2021, for approximately $100 million, plus $2.4 million of working capital, and subsequently bought its operating property for $13.3 million. The company said Shank’s was not material to consolidated results; its preliminary purchase accounting included $41.1 million of goodwill.
- Management cited strong customer demand, but tobacco shipments were affected by customer timing and constrained availability of vessels, containers and trucks. Some shipments from certain origins were expected to move into fiscal 2023. Uncommitted tobacco inventory was $132.0 million, about 15% of tobacco inventory.
- Management expected tobacco shipments to be weighted toward the second half of the fiscal year, with significant fourth-quarter shipments. It anticipated $45–$55 million in capital expenditures over the next 12 months. The filing provides no earnings or revenue guidance.
- Inflation in freight, labor and raw materials was pressuring costs. Management said it was working to incorporate higher costs into product costs and customer contracts; it also forecast smaller crops in several key origins for fiscal 2023, while noting it was early.
- Restructuring and impairment costs were $10.5 million for the nine months, including a $9.4 million impairment related to idled Tanzania operations. The prior-year period included $20.0 million, substantially including the CIFI wind-down.
- COVID-19’s overall future impact remained uncertain. Other risks include seasonal working-capital needs, foreign-exchange and interest-rate exposure, dependence on a limited number of large tobacco customers, acquisition integration, and global supply-chain constraints. Two contested Brazilian VAT assessments had remaining amounts of approximately $9 million and $3 million; management considered no loss probable and recorded no liability. Management said other litigation and tax matters were not expected to materially affect business or financial position, though an adverse resolution could materially affect a period’s results.
Important facts for investors to verify
- Whether delayed tobacco shipments occurred as expected and how timing affected subsequent revenue, margins and cash flow.
- Whether inflation and freight constraints were passed through to customers, and whether crop-size expectations or tobacco inventory commitments changed.
- Shank’s integration and contribution to Ingredients Operations, including the final purchase-price allocation and any effects on margins or cash generation.
- Seasonal working-capital needs, short-term borrowing levels, liquidity availability and compliance with debt covenants.
- Progress and potential exposure in the Brazilian VAT disputes and the exit from Tanzania operations.