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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 1999
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 1-7626
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UNIVERSAL FOODS CORPORATION
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(Exact name of registrant as specified in its charter)
Wisconsin 39-0561070
- ------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
433 East Michigan Street, Milwaukee, Wisconsin 53202
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(Address of principal executive offices)
Registrant's telephone number, including area code: (414) 271-6755
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NONE
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(Former name, former address and former fiscal year, if changed since
last report.)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or such shorter period that
the Registrant was required to file such reports) and (2) has been
subject to such filing requirements for at least the past 90 days.
Yes X No
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Indicate the number of shares outstanding of each of the issuer's
classes of Common Stock as of the latest practicable date.
Class Outstanding at July 31, 1999
- --------------------------------------- ----------------------------
Common Stock, par value $0.10 per share 50,278,292 shares
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UNIVERSAL FOODS CORPORATION
INDEX
Page No.
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PART I, FINANCIAL INFORMATION:
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets
- June 30, 1999 and September 30, 1998. 1
Consolidated Condensed Statements of Earnings
- Three and Nine Months Ended June 30, 1999 and 1998. 2
Consolidated Condensed Statements of Cash Flows
- Nine Months Ended June 30, 1999 and 1998. 3
Notes to Consolidated Condensed Financial Statements. 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 6
Item 3. Quantitative and Qualitative Disclosures About
Market Risk. 9
PART II, OTHER INFORMATION:
Item 4. Submission of Matters to a Vote of Security Holders. 10
Item 6. Exhibits and Reports on Form 8-K. 10
Signatures. 11
Exhibit Index. 12
PART I
FINANCIAL INFORMATION
UNIVERSAL FOODS CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(In Thousands)
June 30 September 30
ASSETS 1999 1998
------ --------- ---------
CURRENT ASSETS:
Cash and cash equivalents $ 7,533 $ 1,632
Trade accounts receivable 136,373 121,833
Inventory:
Finished and in-process products 143,692 145,135
Raw materials and supplies 62,808 51,954
Prepaid expenses and other current assets 46,430 37,201
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TOTAL CURRENT ASSETS 396,836 357,755
INVESTMENTS AND OTHER ASSETS 67,710 60,885
INTANGIBLES 265,103 217,007
PROPERTY, PLANT AND EQUIPMENT:
Cost:
Land and buildings 159,898 155,685
Machinery and equipment 495,667 469,915
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655,565 625,600
Less accumulated depreciation 291,314 270,021
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364,251 355,579
--------- ---------
TOTAL ASSETS $1,093,900 $ 991,226
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Short-term borrowings $29,144 $42,773
Accounts payable and accrued expenses 123,005 122,297
Salaries wages and withholdings from employees 14,836 15,744
Income taxes 28,492 22,066
Current maturities of long-term debt 6,903 6,940
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TOTAL CURRENT LIABILITIES 202,380 209,820
DEFERRED INCOME TAXES 25,348 25,489
OTHER DEFERRED LIABILITIES 19,347 22,619
ACCRUED EMPLOYEE AND RETIREE BENEFITS 35,482 36,065
LONG-TERM DEBT 392,263 291,588
SHAREHOLDERS' EQUITY
Common stock 5,396 5,396
Additional paid-in capital 74,584 74,663
Earnings reinvested in the business 453,412 416,949
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533,392 497,008
Less: Treasury stock, at cost 72,623 51,979
Accumulated other comprehensive income 40,458 37,845
Other 1,231 1,539
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419,080 405,645
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,093,900 $991,226
========= =========
See accompanying notes to Consolidated Condensed Financial Statements.
-1-
UNIVERSAL FOODS CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(In Thousands Except Per Share Amounts)
Three Months Nine Months
Ended June 30 Ended June 30
---------------- ----------------
1999 1998 1999 1998
-------- -------- -------- --------
Revenue $236,556 $214,506 $674,005 $628,410
Cost of products sold 154,577 139,512 440,201 409,093
Selling and administrative
expenses 43,845 40,347 129,476 124,764
-------- -------- -------- --------
Operating income 38,134 34,647 104,328 94,553
Interest expense 7,260 5,595 19,166 16,069
-------- -------- -------- --------
Earnings before income taxes 30,874 29,052 85,162 78,484
Income taxes 10,148 9,878 28,529 26,685
-------- -------- -------- --------
Net earnings $20,726 $19,174 $56,633 $51,799
======== ======== ======== ========
Average number of common shares outstanding:
Basic 50,181 51,320 50,632 51,153
====== ====== ====== ======
Diluted 50,704 52,131 51,239 51,859
====== ====== ====== ======
Net earnings per common share:
Basic $ .41 $ .37 $1.12 $1.01
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Diluted $ .41 $ .37 $1.11 $1.00
====== ====== ====== ======
Dividends per common share $.1325 $.1325 $.3975 $.3975
====== ====== ====== ======
See accompanying notes to Consolidated Condensed Financial Statements.
-2-
UNIVERSAL FOODS CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
Nine Months Ended
June 30
------------------
1999 1998
---- ----
Net cash provided by operating activities $69,167 $56,470
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Cash flows from investing activities:
Acquisition of property, plant and equipment (38,920) (42,730)
Acquisition of new businesses (net cash acquired) (52,958) (47,281)
Other items, net (4,124) (6,257)
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Net cash used in investing activities (96,002) (96,268)
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Cash flows from financing activities:
Proceeds from additional borrowings 172,202 67,226
Reduction in debt (98,046) (1,353)
Purchase of treasury stock (24,018) (14,090)
Dividends (20,170) (20,350)
Proceeds from options exercised and other 3,100 12,217
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Net cash provided by financing activities 33,068 43,650
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Effect of exchange rate changes on cash and
cash equivalents (332) (408)
Net increase in cash and cash equivalents 5,901 3,444
Cash and cash equivalents at beginning of period 1,632 1,258
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Cash and cash equivalents at end of period $7,533 $4,702
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Cash paid during the period for:
Interest $17,032 $16,907
Income taxes 20,173 20,265
See accompanying notes to Consolidated Condensed Financial Statements.
-3-
UNIVERSAL FOODS CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. In the opinion of the Company, the accompanying consolidated
condensed financial statements contain all adjustments
(consisting of only normal recurring accruals) necessary to
present fairly the financial position as of June 30, 1999 and
September 30, 1998 and the results of operations for the three
and nine month periods ended June 30, 1999 and 1998 and cash
flows for the nine month periods ended June 30, 1999 and 1998.
The results of operations for any interim period are not
necessarily indicative of the results to be expected for the
full fiscal year.
2. Refer to the footnotes in the Company's annual financial
statements for the year ended September 30, 1998, for a
description of the accounting policies, which have been
continued without change (except as discussed in Note 6), and
for additional details of the Company's financial condition.
The details in those notes have not changed except as a result
of normal transactions in the interim.
3. Expenses are charged to operations in the year incurred.
However, for interim reporting purposes, certain of these
expenses are charged to operations based on an estimate rather
than as expenses are actually incurred.
4. During the nine months ended June 30, 1999 and 1998, the
Company repurchased 1,084,000 and 736,391 shares of common
stock for an aggregate price of $24,018,000 and $14,967,000,
respectively.
5. For the nine months ended June 30, 1999, depreciation and
amortization were $31,964,000 and $5,427,000, respectively.
For the nine months ended June 30, 1998, depreciation and
amortization were $28,667,000 and $4,490,000, respectively.
6. In the first quarter of fiscal 1999, the Company adopted
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (SFAS No. 130), which establishes
standards for reporting comprehensive income in financial
statements. Comprehensive income includes all changes in equity
during a period except those resulting from investments by or
distributions to stockholders. The adoption of this statement
had no impact on net earnings. Comprehensive income for all
periods presented consists of net earnings and foreign currency
translation adjustments. The Company deems its foreign
investments to be permanent in nature and does not provide for
taxes on currency translation adjustments arising from
converting the investment in a foreign currency to U.S. dollars.
There are no reclassification adjustments to be reported.
The components of comprehensive income for the periods presented
are as follows (in thousands):
Three Months Nine Months
Ended June 30 Ended June 30
-------------- --------------
1999 1998 1999 1998
---- ---- ---- ----
Net earnings $20,726 $19,174 $56,633 $51,799
Other comprehensive income (loss):
Foreign currency translation
adjustment (808) (4,498) (2,613) (10,345)
-------- -------- -------- --------
Comprehensive income $19,918 $14,676 $54,020 $41,454
======== ======== ======== ========
7. The Financial Accounting Standards Board has issued statement
No. 131 "Disclosures about Segments of an Enterprise and Related
Information." This statement is effective for the Company in
fiscal 1999 but does not require interim disclosure in the year
of adoption. The Company is currently evaluating the impact of
this new pronouncement.
-4-
8. During the second quarter, the Company acquired for cash
Les Colorants Wackherr located in Paris, France, and certain
assets of Quimica Universal located in Lima, Peru. Les
Colorants Wackherr formulates and produces colors for major
cosmetic houses throughout Europe, Asia and North America.
Quimica Universal specializes in the production of carminic acid
and annatto, natural colors used in food and other applications.
The two companies have annual combined revenues of approximately
$18 million.
9. On March 25, 1999, the Company issued $150,000,000 of Notes
due April 1, 2009, with an annual stated interest rate of 6.50%.
The Notes are unsecured and pay interest semi-annually on April
1 and October 1 of each year.
10.On April 19, 1999, the Company acquired Pointing Holdings, Ltd.,
a manufacturer of food colors, flavors and specialty chemicals
headquartered in the United Kingdom. Annual revenue is
approximately $43 million with 60% of sales from Europe and the
remaining 40% in North America, South America and Australia.
The purchase price was paid with a combination of cash, notes
and the assumption of debt.
11.On July 14, 1999, the Company announced an agreement to acquire
Nino Fornaciari fu Riccardo, S.N.C., a premier manufacturer of
natural colors for the food and beverage industries. Fornaciari
is located in Reggio Emilia, Italy. Annual revenue is
approximately $10 million. The acquisition for cash should be
completed in the fourth quarter.
-5-
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS:
Revenue for the three and nine months ended June 30, 1999
was $236,556,000 and $674,005,000, respectively, compared
with $214,506,000 and $628,410,000 a year ago. Revenue for
the three months ended June 30, 1999 increased by 10.3% over
the prior year. Four of the five divisions reported revenue
growth for the third quarter. For the nine months ended
June 30, 1999, all divisions reported increased revenue
compared to the prior year. The Color division revenue
reached record levels with an increase of 30.8% for the
quarter ended June 30, 1999. This was due to gains in
domestic volumes combined with increased international
revenue partially due to recent acquisitions. The Flavor
division, up 6.0% for the quarter, reported improvements in
all product groups, with significant gains in dairy and
beverage in the U.S. Asia Pacific revenue grew 28.4%,
driven by higher volumes of flavor and color products. The
Dehydrated division revenue declined for the quarter
primarily as a result of reduced volume caused by the U.S.
garlic crop shortage.
Gross profit margins were 34.7% for the third quarter of
fiscal 1999 compared with 35.0% for the same period last
year. For the nine months, gross profit margins were 34.7%
compared to 34.9% during the same period last year. The
decrease in gross profit margins resulted primarily from
higher processing costs for garlic products in the
Dehydrated division and a change in the product mix in the
Color division, partially offset by lower raw material costs
in the other divisions. In the third quarter the Company
decided to close its frozen vegetable processing operations
in Ireland. Costs to exit the business were recognized in
the third quarter and did not have a material impact on
consolidated results. The exit costs were substantially
offset by gains on the sale of other assets and from the
favorable settlement of a previously reserved litigation
claim.
Selling and administrative expenses decreased to 18.5% of
revenue during the third quarter from 18.8% during the same
period last year. For the nine months ended June 30, 1999,
selling and administrative expenses decreased to 19.2% of
revenue from 19.9% last year.
Interest expense in the third quarter increased to
$7,260,000 from $5,595,000 in the same period last year.
Interest expense was $19,166,000 and $16,069,000 for the
nine months ended June 30, 1999 and 1998, respectively. The
increase in interest expense is primarily the result of
increased debt outstanding.
FINANCIAL CONDITION:
The current ratio increased to 2.0 at June 30, 1999 from 1.7
at September 30, 1998. Net working capital increased
$46,521,000 from September 30, 1998 to $194,456,000 at June
30, 1999. The increase in net working capital is due to a
reduction in short-term borrowings as a result of the
issuance in March 1999 of $150,000,000 of Notes and an
increase in net current assets which were added through
acquisitions.
Net cash provided by operating activities was $69,167,000
for the nine months ended June 30, 1999, compared to
$56,470,000 for the nine months ended June 30, 1998. The
increase in cash provided by operating activities in fiscal
1999 was primarily due to higher earnings plus increased
depreciation and amortization expense.
Net cash used in investing activities was $96,002,000 for
the nine months ended June 30, 1999 compared with
$96,268,000 for the nine months ended June 30, 1998.
Net cash provided by financing activities was $33,068,000
for the nine months ended June 30, 1999 compared with
$43,650,000 last year. Proceeds from the issuance of
$150,000,000 of Notes were used to reduce short-term
borrowings that were previously incurred to fund
acquisitions, to fund capital expenditures and to meet
working capital needs. Dividends of $20,170,000 and
$20,350,000 were paid during the nine months ended June 30,
1999 and 1998, respectively.
-6-
YEAR 2000:
With the new millennium approaching, organizations are
examining their installed computer systems, network
elements, software applications, and other business systems
to ensure that they are Year 2000 ("Y2K") compliant. This
issue occurs because many computers and computer
applications define the year using only the last two digits.
The assumption is that the first two digits are always 19.
Therefore, the year 2000 would be stored as "00" and could
be mistakenly identified as 1900 by the computer. This
mistake could lead to errors in calculations, comparisons,
and the sorting of data. If not remedied, the potential
risks to the Company range from minor business interruptions
to, in the worst-case scenario, a complete shutdown of
various operations.
The Company has developed a comprehensive Project Plan ("the
Plan") for addressing the Y2K issue. The Plan includes the
following components:
1) Vendor and system surveys, including an assessment of
Company systems, applications, and business-critical
third-party systems;
2) Development of action plans to remedy business
critical, non-compliant systems;
3) Implementation of those action plans;
4) System testing using multiple critical dates;
5) Creation of Y2K rollover and contingency plans;
6) Implementation of the Y2K rollover and contingency
plans; and
7) Post Y2K strategies.
The Company is implementing the Plan primarily using
internal personnel. The Company has engaged certain outside
consultants with recognized expertise in assessing and
dealing with Y2K needs to assist in the management of the
Plan. Each division is responsible for identifying and
fixing the problems within its operations. Plan
coordination is being overseen by the Corporate executive
staff and the Board of Directors.
To date, key financial, operational, and informational
systems, including equipment with embedded microprocessors,
have been inventoried and assessed. Detailed plans have
been developed, and a majority of those plans have been
implemented. System implementation at the Company has
included upgrading system code and/or replacing hardware,
and upgrading or replacing current systems. The Plan also
included an evaluation of the Company's communication
systems, security systems and other non-IT systems for
purposes of determining whether Y2K issues exist. Since most
of the business critical systems at Universal Foods have
been purchased from third party vendors, the majority of
remedies have been through upgrades. When available, written
certifications of Y2K compliance for these systems have been
obtained.
Because of the nature of implementation plans for business
critical systems, system testing activities have overlapped
implementation activities. System testing has been
completed at many of our divisional sites. Once a system
has been tested, no upgrades or modifications will be made
to that system until after March 2000. It is expected that
Y2K testing will be substantially completed by September
1999.
The creation of rollover and contingency plans began in
March 1999. A majority of the plans are expected to be
completed by September 1999. The purpose of the rollover
and contingency plans will be to reduce or mitigate the risk
to the Company from Y2K factors beyond the Company's
control.
The Company has also explored with vendors the impact that
the Y2K issue will have on their ability to source products
for the Company. Major suppliers of raw materials and other
goods and services have been sent a questionnaire regarding
their Y2K compliance and their plans to be Y2K compliant.
If it is determined that a critical vendor is not adequately
addressing the Y2K issue, a contingency plan for that vendor
will be developed.
-7-
The costs of outside consultants to assist with software
remediation and project management has not been and is not
expected to be material. During fiscal 1999, the Company
estimates that it will incur capital expenditures of
approximately $10.0 million as a result of accelerating the
rollout of computer operating systems and the replacement of
non-compliant process control systems in various plants. In
addition, the Company estimates that during 1999,
approximately 30% of its Information Technology ("IT")
personnel will be dedicated to implementation of the
Company's Plan. The foregoing allocation of resources is
not expected to significantly impact other IT projects as
many of the planned and in process projects are normal
business system migrations that upgrade and improve the
Company's current systems in addition to resolving Y2K
issues.
The Company believes it is taking reasonable steps which,
when fully implemented, will prevent major business
interruptions and will minimize the Company's risk of
exposure to liability to third parties due to Y2K issues.
There can be no assurance, however, that the Company will be
successful in its efforts. Further, the costs of the
Company's efforts to address Y2K issues and the dates on
which the Company believes it will complete the Plan
described above are based upon management's best estimates.
There can be no assurance that these estimates will prove to
be accurate, and the actual cost and progress on these
projects could differ materially from those currently
anticipated.
At the present time, the Company does not expect Y2K issues
to have a material effect on the Company's results of
operations, liquidity or financial condition. The Company
believes the decentralized environment of the Company's
information systems reduces its overall risk of
noncompliance with Y2K issues. The effect, if any, on the
Company's results of operations if the Company's customers
or its suppliers are not fully Y2K compliant is not
reasonably estimable and, therefore, the Company is unable
to predict and thus describe its most likely worst case Y2K
scenario.
-8-
ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the Company's market
risk during the nine months ended June 30, 1999. For
additional information on market risk, refer to pages 14 and
15 of the Company's 1998 Annual Report.
FORWARD-LOOKING INFORMATION
This document contains forward-looking statements that
reflect management's current assumptions and estimates of
future economic circumstances, industry conditions, Company
performance and financial results, and Year 2000 compliance.
The Private Securities Litigation Reform Act of 1995
provides a safe harbor for such forward-looking statements.
Such forward-looking statements are not guarantees of future
performance and involve known and unknown risks,
uncertainties and other factors that could cause actual
events to differ materially from those expressed in those
statements. A variety of factors could cause the Company's
actual results and experience to differ materially from the
anticipated results. These factors and assumptions include
the pace and nature of new product introductions by the
Company's customers; execution of the Company's acquisition
program; industry and economic factors related to the
Company's domestic and international business; the timely
resolution of the Year 2000 issue by the Company and its
customers and suppliers; and the outcome of various
productivity-improvement and cost-reduction efforts. The
Company does not undertake to publicly update or revise its
forward-looking statements even if experience or future
changes make it clear that any projected results expressed
or implied therein will not be realized.
-9-
PART II
OTHER INFORMATION
ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The information responsive to this item was provided in, and
is incorporated by reference from the Company's quarterly
report on Form 10-Q for the quarter ended December 31, 1998,
filed on February 12, 1999.
ITEM 6.EXHIBITS AND REPORTS ON FORM 8-K
(a)Exhibit 27 Financial Data Schedule
(b)No reports on Form 8-K were required to be filed during
the quarter ended June 30, 1999.
-10-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
UNIVERSAL FOODS CORPORATION
Date: August 13, 1999 By: /s/ John L. Hammond
---------------------------------------
John L. Hammond, Vice President,
Secretary and General Counsel
Date: August 13, 1999 By: /s/ Michael L. Hennen
---------------------------------------
Michael L. Hennen, Corporate Controller
-11-
UNIVERSAL FOODS CORPORATION
EXHIBIT INDEX TO
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1999
Exhibit Incorporated by Filed
Number Description Reference From Herewith
- ------ ----------------------- --------------------- ----------
3.1 Universal Foods Exhibit A to the
Corporation Amended and Registrant's
Restated Articles of Definitive Proxy
Incorporation adopted Statement filed on
January 21, 1998 Schedule 14A on
December 15, 1998
(Commission File No.
1-7626)
3.2 Universal Foods Exhibit 3.2 to Annual
Corporation Restated Report on Form 10-K
Bylaws for the fiscal year
ended September 30,
1995 (Commission File
No. 1-7626)
4.1 Rights Agreement dated Exhibit 1.1 to
as of August 6, 1998, Registration Statement
between Registrant and on Form 8-A dated July
Firstar Trust Company 20, 1998 (Commission
File No. 1-7626)
4.2 Indenture between Exhibit 4.1 to
Registrant and The Registration Statement
First National Bank of on Form S-3 dated
Chicago, as Trustee, November 9, 1998
relating to the (Commission File 333-
Registrant's 6.50% 67015)
Notes due April 1,
2009.
4.3 Pricing Agreement dated Exhibit 99.1 to
as of March 22, 1999, Registrant's Current
between the Registrant Report on Form 8-K
and Goldman, Sachs & dated March 24, 1999
Co., First Chicago and filed March 25,
Capital Markets, Inc., 1999 (Commission File
and ABN AMRO No. 1-7626)
Incorporated relating
to the Registrant's
6.50% Notes due April
1, 2009.
27 Financial Data Schedule X
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