Universal Corporation — Form 10-Q Summary
Reporting period: The filing covers the quarter and six months ended September 30, 2011 (the second quarter and first half of fiscal 2012), not 2010 Q2 as stated in the request metadata. Universal is a global leaf tobacco merchant and processor. Its business is seasonal, and management cautions that quarterly results may not indicate full-year performance.
Financial results
Amounts below are in millions of dollars except per-share data. Comparisons are with the corresponding 2010 periods.
| Metric | Three months ended Sep. 30 | Six months ended Sep. 30 |
|---|---|---|
| Revenue | $641.0 vs. $664.2 | $1,120.5 vs. $1,203.1 |
| Gross profit | $119.4 vs. $133.3 | $213.8 vs. $235.5 |
| Operating income | $9.7 vs. $79.6 | $45.2 vs. $120.7 |
| Net income (loss) attributable to Universal | $(8.0) vs. $51.8 | $7.8 vs. $77.2 |
| Common earnings (loss) per diluted share | $(0.51) vs. $1.78 | $0.02 vs. $2.65 |
| Operating cash flow | Not separately presented | $(122.0) vs. $(315.2) |
Reported operating margin was approximately 1.5% for the quarter and 4.0% for the half-year, versus 12.0% and 10.0%, respectively, a year earlier. Results include significant unusual items, especially the $49.1 million charge for European Commission fines and interest relating to Italy. Segment operating income, which excludes certain significant charges and credits, was $61.9 million for the quarter versus $76.2 million, and $91.2 million for the half-year versus $118.6 million.
- Cash and liquidity: Cash and equivalents were $45.5 million at September 30, down from $141.0 million at March 31, 2011. Current assets were $1,745.4 million and current liabilities $583.1 million.
- Debt: Notes payable and overdrafts were $288.4 million; current long-term obligations were $10.0 million and long-term obligations $300.0 million. Management’s defined net debt was $609 million, up about $178 million from March 31, primarily due to seasonal working-capital needs. Net debt was 34% of net capitalization; management said this was within its target range.
- Cash uses and funding: Capital expenditures were $18.5 million. Financing activities provided $28.9 million, including $144.1 million net short-term borrowing, offset in part by repayment of $95.0 million of long-term debt and dividends. The company reported $239 million available under its committed revolver at quarter-end, plus about $438 million in unused uncommitted lines, and said it complied with debt covenants.
Changes and operating drivers
- Revenue declined about 3% in the quarter and 7% for the half-year. Management attributed lower revenue partly to reduced leaf prices in oversupplied markets, lower South American volumes, and a shift from leaf sales to toll processing following the prior-year assignment of Brazilian farmer contracts to Philip Morris International.
- Lower margins in most regions reduced segment earnings. North America was affected by lower processing volumes and higher factory unit costs; Other Regions by margin pressure, reduced South American volumes, later African shipments, and Brazilian currency effects. Other Tobacco Operations also weakened on lower volumes and margins.
- Operating cash use improved by $193 million year over year, mainly because working-capital needs were lower. Tobacco inventory was $966.9 million, up seasonally from March but $110 million below September 2010. Management cited lower purchases and leaf costs in some origins, later African purchases, and a smaller, delayed U.S. crop after Hurricane Irene.
- Uncommitted tobacco inventory was $135 million, about 14% of tobacco inventory, compared with 12% a year earlier; management described levels as within the normal seasonal range.
Outlook, risks and unusual items
- Outlook: No specific earnings or revenue guidance is provided. Management said selling activity accelerated after a slow start, but lower margins appeared consistent with a normal market correction; shipments were later than usual in Brazil and Africa. It cited strong customer relationships, cost control and inventory discipline. The company announced its 41st consecutive annual dividend increase.
- Italian antitrust matter: After a September 2011 General Court decision rejected Deltafina’s bid to reinstate immunity, Universal recorded a $49.1 million charge for a €30 million fine plus €5.9 million accrued interest. Deltafina intended to appeal; a bank guarantee stayed execution, and management expected the appeal to take up to two years. The filing says payment would not be due until the European Court of Justice decision.
- Other unusual items: A $9.6 million fire-insurance gain and a $2.1 million business-interruption recovery were recognized in the first quarter. Malawi legislation prompted a roughly $4 million reversal of severance liabilities, subject to further government guidance. Restructuring costs were $9.8 million in the half-year; the company said additional restructuring or impairment charges may occur.
- Contingencies: A Brazilian VAT assessment for approximately $26 million was being contested; no liability was recorded because management did not consider a loss probable. Brazilian grower-loan guarantees had a maximum potential payment of $47 million and a recorded fair-value liability of about $13 million. Other contingent liabilities totaled about $4 million.
- Credit and capital allocation: In November 2011, after quarter-end, Universal entered a five-year agreement providing a $450 million revolving facility and a $100 million term loan, replacing prior financing. It also authorized up to $100 million of share repurchases through November 2013. Routine capital spending is intended to remain below depreciation; no major fiscal 2012 capital projects had been approved.
- Key business risks include crop supply and demand, weather, shipment timing, tobacco prices and margins, regulation and taxation, foreign exchange, and general economic and political conditions. Management reported no material change to previously disclosed risk factors and said disclosure controls were effective.
Important facts for investors to verify
- Confirm the scale and accounting treatment of the $49.1 million Italian fine charge, the appeal timetable, and any effect on future cash payments or taxes.
- Track crop deliveries, shipment timing, leaf prices and margins, particularly in Brazil and Africa, and assess whether the reported improvement in selling activity continued.
- Monitor seasonal working-capital use, inventory commitments, net debt and availability under the new credit facilities as the crop cycle progresses.
- Follow the Brazilian VAT assessment and grower guarantees, including any change in the probability of loss or recorded reserves.
- Assess further restructuring costs, the realization of fire-insurance proceeds, and whether dividend and repurchase plans remain consistent with liquidity needs.