Universal Corporation — Form 10-Q Summary
Period clarification: The supplied filing is for the quarter and six months ended September 30, 2017 (Universal’s fiscal 2018 second quarter), not 2016 Q2 as stated in the request metadata. The financial statements are unaudited. Universal is a global leaf tobacco supplier; results are seasonal, and interim results may not indicate full-year performance.
Financial results
| Metric | Quarter ended September 30, 2017 | Six months ended September 30, 2017 |
|---|---|---|
| Revenue | $488.2 million, up 6.9% year over year | $772.9 million, up 2.7% |
| Operating income | $45.0 million, up 3.8% | $51.5 million, up from $35.3 million |
| Net income attributable to Universal | $26.2 million, versus $25.3 million | $29.7 million, versus $19.8 million |
| Diluted EPS | $1.02, versus $0.90 | $1.16, versus $0.54 |
| Operating cash flow | Not reported separately for the quarter | $(223.8) million, versus $22.4 million |
For the quarter, cost of goods sold was $395.2 million and SG&A was $48.1 million. For the six-month period, cost of goods sold was $625.9 million and SG&A was $95.4 million. The six-month operating cash outflow principally reflected seasonal working-capital investment, including higher crop purchases in Brazil; tobacco inventory rose $303.4 million from March 31 to $869.3 million.
At September 30, cash was $41.2 million; current assets were $1.572 billion and current liabilities $280.9 million. Notes payable and overdrafts were $98.3 million, and long-term debt was $368.9 million, with no long-term debt maturing in fiscal 2018. Management reported net debt as a percentage of net capitalization of about 26%, up from about 11% at September 30, 2016 and March 31, 2017. The company had $405 million available under its committed revolver and about $226 million in unused uncommitted credit lines, and reported compliance with debt covenants.
Changes and operating drivers
- Revenue growth reflected somewhat higher sales volumes and higher processing and other revenues. The Other Regions segment improved, while North America and Other Tobacco Operations declined.
- Other Regions six-month segment operating income rose to $41.6 million from $15.3 million, benefiting from higher volumes, processing revenues, lower SG&A and a gain on the sale of a former Hungary facility. North America six-month segment operating income fell to $10.3 million from $20.4 million, mainly on lower shipment volumes and less favorable margins.
- Other Tobacco Operations reported a six-month segment operating loss of $0.1 million, versus income of $4.4 million, with declines attributed to currency effects, a VAT charge, product mix and shipment delays.
- Comparisons of EPS are affected by the prior-year preferred stock. All preferred shares were converted into common shares or redeemed for cash in fiscal 2017; preferred dividends ended, and the common share count changed. The filing reports no preferred shares outstanding in the current period.
- Six-month operating cash flow was also affected by seasonal changes in operating assets and liabilities. Cash was down $242.8 million from March 31, while notes payable and overdrafts increased $39.1 million.
Outlook, risks and unusual items
- Management expects shipments to remain weighted to the second half of fiscal 2018, but anticipates modestly lower full-year lamina sales volumes. Lower African burley production is expected to affect second-half volumes; management expects global burley production to recover in next year’s crop.
- Management said first-half results were in line with expectations, citing higher current-crop sales and processing volumes and lower factory unit costs following Brazil’s crop recovery. Planned capital spending is approximately $35–$45 million over the next 12 months.
- Seasonal crop financing, weather, crop yields, shipment timing, customer demand and currency movements can affect working capital and results. The company uses interest-rate swaps and foreign-exchange contracts for risk management, not speculation. Variable-rate debt was about $98 million; management estimated a 1% short-term rate change would change annual interest expense by about $1 million, partly mitigated by customer charges.
- Brazilian VAT assessments remain contested: the outstanding Santa Catarina assessment was approximately $15 million and the Paraná assessment approximately $5 million. Management considered no loss probable and recorded no liability; outcomes and timing remain uncertain. The filing also cites about $31 million of maximum potential payments under Brazilian grower loan guarantees, with a fair-value liability of about $1 million.
- Quarterly effective tax rate was 32.9%, versus 34.6%, primarily reflecting non-taxable life-insurance income. Six-month effective tax rate was 29.8%, also benefiting from discrete tax items. The filing does not state the amount of the life-insurance benefit itself.
- The prior-year comparable periods included $3.7 million of restructuring and impairment costs, mainly related to closing the Hungary processing facility; none were recorded in the current six-month period. Management announced a new authorization to repurchase up to $100 million of equity securities through November 15, 2019, and an annual dividend increase, but the filing does not state the increased dividend amount.
- Management reported no material changes to the risk factors in its fiscal 2017 Form 10-K and said disclosure controls were effective. It cautioned that actual results may differ from forward-looking statements.
Investor verification priorities
- Confirm that the reporting period is fiscal Q2 2018, ended September 30, 2017, rather than the 2016 Q2 indicated in the request.
- Track seasonal working-capital needs, Brazil crop purchases, cash balances, borrowings and revolver availability as shipments progress in the second half.
- Assess whether lower African burley production and the forecast modest decline in full-year lamina volumes affect shipment timing, margins or customer demand.
- Monitor the Brazil VAT disputes, grower loan guarantees, VAT-credit recoverability and other legal or tax matters; the filing provides no assurance of final outcomes.
- Separate recurring operating performance from the effects of preferred-stock conversion, discrete tax benefits, the Hungary asset-sale gain and currency remeasurement.
- Verify the new repurchase authorization and dividend increase, including subsequent share repurchases and the actual dividend rate.