Universal Corporation — Form 10-Q Summary
Business context and reporting period
Universal is a global leaf tobacco merchant and processor. This filing covers the fiscal second quarter and six months ended September 30, 2010; the business is seasonal, and first-half results are not necessarily indicative of full-year results. Financial amounts below are in millions of U.S. dollars unless stated otherwise.
Financial performance
| Metric | Quarter ended September 30, 2010 | Quarter ended September 30, 2009 | Six months ended September 30, 2010 | Six months ended September 30, 2009 |
|---|---|---|---|---|
| Revenue | $664.2 | $647.9 | $1,203.1 | $1,264.0 |
| Operating income | $79.6 | $75.9 | $120.7 | $145.6 |
| Net income attributable to Universal | $51.8 | $52.5 | $77.2 | $96.3 |
| Diluted EPS | $1.78 | $1.77 | $2.65 | $3.23 |
| Operating margin | 12.0% | 11.7% | 10.0% | 11.5% |
| Gross margin | 20.1% | 22.7% | 19.6% | 22.7% |
Six-month operating cash flow was negative $315.2 million, compared with negative $133.7 million a year earlier, principally reflecting seasonal working-capital investment. Investing cash outflow was $17.7 million; financing provided $130.3 million. Cash declined to $43.8 million from $246.0 million at March 31, 2010.
At September 30, 2010, current assets were $1,830.9 million and current liabilities $807.0 million. Short-term notes payable and overdrafts were $372.7 million; current maturities of long-term obligations were $100.0 million, and long-term obligations were $326.5 million. Company-defined net debt was $842 million, or approximately 42% of net capitalization. Universal reported $208 million available under its committed revolver and approximately $510 million in unused uncommitted credit lines, and stated it was in compliance with debt covenants.
Material changes versus the prior comparable period
- Second-quarter revenue increased 2.5%, while first-half revenue declined about 5%. For the half year, lower margins and volumes and delayed shipments contributed to declines in operating income, net income, and diluted EPS.
- Quarterly net income was nearly flat year over year; a $7.4 million pretax reversal of a previously accrued Spanish antitrust fine and $1.2 million of related escrow interest helped offset lower operating results and restructuring costs.
- First-half tobacco inventory was $1.1 billion, up $265 million from March 31, 2010 and $157 million from September 30, 2009. Management attributed the increase to seasonal purchases, larger crops in some regions, later shipments, and higher leaf costs.
- First-half selling, general and administrative expense fell 21%, reflecting the fine reversal, lower currency remeasurement and exchange losses, and prior-year costs related to an FCPA matter. Restructuring costs were $3.0 million for the half year.
Outlook, risks, contingencies, and unusual items
- Management expected delayed shipments, mainly in Africa, Asia, and Europe, to be completed during the remainder of fiscal 2011. It was cautiously optimistic about the year but gave no quantified earnings or revenue guidance.
- Management cited oversupply of flue-cured leaf, margin pressure, softer cigarette sales in some markets, changing customer sourcing, shipment timing, adverse Brazilian weather, and currency movements as business considerations. It planned further cost reductions and expected additional restructuring charges, and potentially asset impairment charges.
- In October 2010, Universal assigned tobacco production contracts involving approximately 8,100 Brazilian farmers to a PMI subsidiary. The contracts represented about 20% of its Brazilian volume in the most recent crop year. Universal received approximately $34 million, exceeding the net book value of assets conveyed, and expects to continue supplying processed leaf and processing services to PMI. The transaction was expected to affect results in the quarter ending December 31, 2010.
- The European General Court reduced Deltafina’s Spanish fine; Universal reversed approximately $7.4 million of accrued expense. An appeal could still be filed. In a separate Italian antitrust case, the €30 million fine plus approximately €6.7 million of accumulated interest was not accrued; Universal said counsel believed Deltafina would probably prevail. Universal withdrew its own appeal for strategic reasons, while Deltafina’s appeal continued.
- Brazilian grower-loan guarantees had a recorded fair-value liability of approximately $21.2 million and maximum potential payments of $108 million, including accrued interest. Other contingencies were approximately $53 million, primarily related to a bank guarantee for the European fine appeal.
- Universal reported no material changes to previously disclosed risk factors and stated that disclosure controls were effective. Key exposures include seasonal working-capital needs, crop supply and demand, shipment timing, weather, foreign exchange and interest rates, and legal or tax matters.
Important facts for investors to verify
- Whether delayed shipments were completed as expected and how shipment timing, leaf oversupply, customer demand, and margins affected subsequent results.
- The cash-flow and debt impact of seasonal inventory financing, including the trajectory of net debt and availability of committed and uncommitted credit.
- The operational and financial effects of the Brazilian farmer-contract assignment, including the volume retained through PMI supply and processing arrangements.
- Developments in the Spanish and Italian antitrust proceedings, including any appeals, potential payment exposure, and escrow or guarantee treatment.
- The filing gives inconsistent expiration dates for the common-stock repurchase authorization: MD&A says November 2011, while the Part II disclosure says November 5, 2012. Investors should verify the applicable authorization terms.