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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ x ] Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the Period Ended September 30, 1996
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 1-652
UNIVERSAL CORPORATION
(Exact name of Registrant as specified in its charter)
VIRGINIA 54-0414210
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1501 North Hamilton Street, Richmond, Virginia 23230
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code - (804) 359-9311
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 for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Common Stock, No par value-35,057,757 shares outstanding as of November 13, 1996
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Universal Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
Three Months Ended September 30, 1996 and 1995
1996 1995
--------------- ---------------
Sales and other operating revenues $820,840 $842,454
Costs and expenses
Cost of goods sold 700,301 744,825
Selling, general and administrative 71,486 65,127
Interest 15,911 17,225
--------------- ---------------
787,698 827,177
--------------- ---------------
Income before income taxes and other items 33,142 15,277
Income taxes 13,219 5,806
Minority interests 608 181
--------------- ---------------
Income from consolidated operations 19,315 9,290
Equity in net income of unconsolidated affiliates 707 899
--------------- ---------------
Net income $ 20,022 $ 10,189
=============== ===============
Earnings per common share $.57 $.29
=============== ===============
Retained earnings - Beginning of period $360,273 $323,595
Net income 20,022 10,189
Cash dividends declared ($.255-1996; $.25-1995) (8,940) (8,758)
--------------- ---------------
Retained earnings - End of period $371,355 $325,026
=============== ===============
Average common shares outstanding 35,056,357 35,030,314
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Universal Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
September 30, June 30,
1996 1996
-------------- ---------------
ASSETS
Current
Cash and cash equivalents $ 80,296 $ 214,782
Accounts and notes receivable 464,035 384,278
Accounts receivable - unconsolidated affiliates 8,539 17,843
Inventories - at lower of cost or market:
Tobacco 659,693 490,557
Lumber and building products 115,898 106,916
Agri-products 58,703 71,145
Other 12,998 15,373
Prepaid income taxes 7,939 5,867
Deferred income taxes 5,983 5,984
Other current assets 14,925 16,215
-------------- ---------------
Total current assets 1,429,009 1,328,960
Real estate, plant and equipment - at cost
Land 34,618 33,786
Buildings 218,660 218,012
Machinery and equipment 427,153 414,141
-------------- ---------------
680,431 665,939
Less accumulated depreciation 358,540 345,549
-------------- ---------------
321,891 320,390
Other assets
Goodwill 121,437 122,579
Other intangibles 25,752 26,726
Investments in unconsolidated affiliates 28,631 27,191
Deferred income taxes 12,861 13,029
Other noncurrent assets 63,272 50,638
-------------- ---------------
251,953 240,163
-------------- ---------------
$2,002,853 $1,889,513
============== ===============
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Universal Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
September 30, June 30,
1996 1996
------------ --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Notes payable and overdrafts $ 580,309 $ 551,667
Accounts payable 208,408 222,154
Accounts payable - unconsolidated affiliates 8,760 6,813
Customer advances and deposits 223,805 122,894
Accrued compensation 13,587 18,245
Income taxes payable 22,293 24,061
Current portion long-term obligations 81,099 83,348
------------- ------------
Total current liabilities 1,138,261 1,029,182
Long - term obligations 297,318 309,543
Postretirement benefits other than pensions 46,015 46,268
Other long - term liabilities 41,607 44,920
Deferred income taxes 18,399 13,846
Minority interests 28,812 28,449
Shareholders' equity
Preferred stock $100 par, 8% cumulative, authorized
75,000 shares, issued and outstanding 4 shares
Additional preferred stock, no par value, authorized
5,000,000 shares, none issued or outstanding
Common stock, no par value, authorized 50,000,000
shares, issued and outstanding 35,056,357 shares 76,053 76,053
Retained earnings 371,355 360,273
Foreign currency translation adjustments (14,967) (19,021)
----------- -----------
Total shareholders' equity 432,441 417,305
----------- -----------
$2,002,853 $1,889,513
=========== ===========
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Universal Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended September 30, 1996 and 1995
1996 1995
----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 20,022 $ 10,189
Adjustments to reconcile net income to net cash provided
by operating activities 18,300 4,700
Changes in operating assets and liabilities net of effects from
purchase of businesses (159,408) (82,861)
----------- ------------
Net cash used in operating activities (121,086) (67,972)
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (13,000) (9,500)
Other (100) 700
----------- ------------
Net cash used in investing activities (13,100) (8,800)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of short-term debt - net 28,600 12,600
Issuance (repayment) of long-term debt (20,000) (15,000)
Proceeds from minority investment in a subsidiary 0 10,000
Dividends paid (8,900) (8,800)
----------- ------------
Net cash used in financing activities (300) (1,200)
----------- ------------
Net decrease in cash and cash equivalents (134,486) (77,972)
Cash and cash equivalents at beginning of period 214,782 158,093
----------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 80,296 $ 80,121
=========== ============
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Universal Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
All figures contained herein are unaudited and stated in thousands of dollars
1) The Company's operating segments of domestic and foreign tobacco,
lumber and building products and agri-products are seasonal. Therefore,
the results of operations for the three-month period ended September 30,
1996 are not necessarily indicative of results to be expected for the
year ending June 30, 1997. All adjustments necessary to fairly state the
results for such period have been included and were of a normal recurring
nature.
2) The Company provides guarantees for seasonal pre-export crop financing
for some of its subsidiaries and unconsolidated affiliates. In addition,
certain subsidiaries provide guarantees that ensure that Common Market
subsidies and value-added taxes will be repaid if the crops are not
exported or if the subsidies are not properly distributed to Common Market
farmers. At September 30, 1996, total exposure under guarantees issued for
banking facilities of unconsolidated affiliates was $1 million. Other
contingent liabilities approximate $53 million and relate principally to
Common Market guarantees. The Company considers the possibility of loss on
any of these guarantees to be remote.
3) Amounts in the prior year's statement have been reclassified to be
reported on a consistent basis with the current year's presentation.
4) In the first quarter of fiscal year 1997 the company adopted Statement
of Financial Accounting Standard No. 121 "Accounting for the impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of" which did
not and is not expected to have a material impact on results of operations
or financial position.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
Working capital at September 30, 1996, was $291 million compared
to $300 million at June 30, 1996. The 3% decline in working capital was
accounted for by increases in current assets of $101 million offset by an
increase in current liabilities of $110 million. The most significant
increases were accounted for by tobacco inventory (up $170 million) and
customer advances (up $101 million). These increases primarily relate to
the Company's domestic tobacco operations. Within the U.S., tobacco
working capital needs are normally at their lowest point at June 30. In
mid to late July, the U.S. flue-cured tobacco markets open and the
Company's working capital needs increase. As tobacco is purchased and
shipped to factories for processing, inventories generally rise. This
increase in inventories is offset by increases in notes payable and/or
customer advances. The mix of notes payable and customer advances is
dependent on both the Company's and its customers' borrowing capabilities,
interest rates and exchange rates. The Company does not purchase tobacco in
the United States on a speculative basis; thus the increase in inventory
represents tobacco that has been committed to customers.
Generally the Company's international tobacco operations conduct
business in U.S. dollars, thereby limiting foreign exchange risk to local
overhead and production costs. Agri-product and lumber operations enter
into foreign exchange contracts to hedge firm purchase and sales
commitments for terms that are generally less than six months. Interest
rate risk is limited because customers in the tobacco business usually
pre-finance purchases or pay market rates of interest for inventory
purchased on their order.
The liquidity and capital resources of the Company at
September 30, 1996 remain adequate to support the Company's operations.
Results of Operations
'Sales and Other Operating Revenues' decreased $22 million or 3% in
the quarter. Tobacco revenue decreased by $60 million in the quarter
primarily due to a two week delay in the harvesting and marketing of the
U.S flue-cured crop. The decline in the U.S. was partially offset by
increased foreign tobacco revenues resulting from a combination of strong
demand and earlier shipments at customer request.
Gross profits in the quarter increased almost 23% to $120 million due
to improvements realized in tobacco operations. Foreign tobacco operations
improved with the major regions reporting operating gains. Customer demand
remained firm as world flue-cured and burley production increased. Higher
volumes coupled with efficiencies from the Company's cost reduction
activities led to improved margins. In the U.S., profits were down due to
the aforementioned lower volumes bought and processed. Lumber and building
product gross margins improved due to a combination of strong demand and
efficient capacity utilization. Agri product gross profits improved due to
improved results in spice, merchandising and confectionery seeds.
'Selling, General and Administrative Expenses' in the quarter
increased by 10% compared to last year, primarily reflecting the higher
volumes shipped by foreign tobacco operations. Interest expense decreased
by 8% due to the effect of lower interest rates on long-term borrowings
and timing of receipts from accelerated shipments by foreign operations.
World tobacco markets continue to reflect growing cigarette
consumption and strong leaf demand which provide an opportunity to handle
larger leaf volumes as the year progresses. Quarterly comparisons of
fiscal 1997 to fiscal 1996 will be more difficult due to the abnormal crop
conditions in the U.S., as well as earlier shipments to customers in the
Company's foreign operations. A significant portion of the expected
improvement in earnings for the year has been realized in the first
quarter.
8
Forward Looking Statements
The foregoing discussion contains certain forward-looking statements,
which may be identified by phrases such as "the Company expects" or words of
similar effect. In addition, from time to time, the Company may publish
forward-looking statements relating to such matters as anticipated financial
performance, business prospects and similar matters. The Private Securities
Litigation Reform Act of 1995 provides a safe harbor for forward-looking
statements. The following important factors, among other things, in some cases
have affected, and in the future could affect, the Company's actual results and
could cause the Company's actual results for fiscal year 1997 and any interim
period to differ materially from those expressed in any forward-looking
statements made by, or on behalf of, the Company. The Company assumes no duty to
update any of the statements in this report.
I. TOBACCO
Operating Factors
The financial results of the Company are affected by a number
of factors that directly or indirectly impact the tobacco operations of the
Company's business. Operating factors that may affect the Company's results of
operations include:
Competition; Reliance on Significant Customers. The leaf
tobacco industry is highly competitive. Competition among leaf tobacco merchants
is based primarily on the price charged for products and services as well as the
firm's ability to meet customer specifications in the buying, processing and
financing of tobacco. In addition, there is competition in all countries to buy
the available tobacco from suppliers.
There are only a few global competitors in the leaf tobacco industry
and they are dependent upon a few large tobacco manufacturing customers. The
Company's loss of any large or significant customer would have a material
adverse effect on the Company's results of operations. The Company has long-term
contracts (which under certain circumstances may be amended or terminated) with
a few of these customers, and, while there are no formal continuing contracts
with the others, the Company has done business with each of its major customers
for over 40 years.
Market Balance. The Company's financial results may be significantly
affected by the overall balance of supply and demand for leaf tobacco. Customers
purchase tobacco based upon their expectations of future requirements, and those
expectations can change from time to time depending upon internal and external
factors affecting their business. Trends in the consumption of American Blend
cigarettes as well as trends in cigar sales influence manufacturers'
expectations and thus their demand for leaf tobacco. Production of tobacco may
be significantly affected by fluctuations in the weather in geographically
dispersed regions as well as by crop disease. Any material imbalance in the
supply and demand for tobacco may impact the Company's results of operations.
Methods of Purchasing Tobacco. The Company purchases leaf
tobacco from farmers, growers and other suppliers through public auction and
privately negotiated contract purchases. In a number of countries, including
Brazil, Hungary, Italy and Mexico, where the Company contracts directly with
tobacco farmers, in some cases before harvest, the Company takes the risk that
the delivered quality and quantity will meet market requirements.
9
Timing of Customer Shipments. The Company generally recognizes sales
and revenue from tobacco operations at the time that title to the tobacco passes
to the customer, which is usually upon shipment. Since individual shipments may
be large and since the customer typically specifies shipping dates, the
Company's financial results for any period may vary significantly.
Governmental Factors
The Company's tobacco business is heavily regulated by federal, state
and local governments in the United States and by foreign governments in
jurisdictions where the Company operates. Governmental factors that may affect
the Company's results of operations include:
Government Efforts to Reduce Tobacco Consumption. The United States
government has taken or proposed actions that may have the effect of reducing
U.S. consumption of tobacco products. These activities have included: (1) the
U.S. Environmental Protection Agency's decision to classify environmental
tobacco smoke as a "Group A" (known human) carcinogen; (2) restrictions on the
use of tobacco products in public places and places of employment including a
proposal by the U.S. Occupational Safety and Health Administration to ban
smoking in the work place; (3) proposals by the U.S. Food and Drug
Administration to regulate nicotine as a drug and sharply restrict cigarette
advertising and promotion; (4) proposals to increase the U.S. excise tax on
cigarettes; and (5) the recently announced policy of the U.S. government to link
certain federal grants to the enforcement of state laws restricting the sale of
tobacco products. Numerous other legislative and regulatory anti-smoking
measures have also been proposed at the federal, state and local levels.
In addition, a number of foreign governments have also taken steps to
restrict or prohibit cigarette advertising and promotion, to increase taxes on
cigarettes and to discourage cigarette smoking. In some cases, such restrictions
are more onerous than those in the U.S. For example, advertising and promotion
of cigarettes has been banned or severely restricted for several years in
Australia, Canada, Finland, France, Italy, Singapore and a number of other
countries.
The Company cannot predict the extent to which government efforts to
reduce tobacco consumption might affect the Company's business. Although the
trend in the United States generally has been toward decreased consumption of
cigarettes, cigar sales have increased significantly in recent years and the
overall worldwide consumption of tobacco products (particularly those products
using the milder American Blend of tobacco over dark tobacco) has continued to
grow steadily. However, a significant decrease in overall worldwide tobacco
consumption brought about by existing or future governmental laws and
regulations would reduce demand for the Company's products and services and
adversely affect the Company's results of operations.
Political Uncertainties in Foreign Tobacco Operations. The Company's
international operations are subject to uncertainties and risks relating to the
political stability or instability of certain foreign governments, principally
in developing and emerging markets, and to the effects of changes in the trade
policies and economic regulation of foreign governments. These uncertainties and
risks include the effects of war, insurrection, expropriation or nationalization
of assets, undeveloped or antiquated commercial laws, subsidies for local
tobacco concerns, licenses to conduct business in foreign jurisdictions, import
and export restrictions, the imposition of excise and other taxes on tobacco,
monetary and exchange controls, inflationary economies, and restrictions on
repatriation of earnings or proceeds from liquidated assets of foreign
subsidiaries. The Company has substantial capital investments in Brazil and in
Africa and the profitability of these operations can materially affect the
Company's net profit from tobacco operations.
10
United States Trade Policies. The United States price support system is
an industry-funded program that is administered by the U.S. government. The
effect of the price support system has been to increase the cost of domestic
tobacco relative to most foreign tobacco, resulting in a decline in exports of
domestic tobacco. In 1995, Congress repealed certain domestic content
legislation that had required that all domestically manufactured cigarettes
contain at least 75% domestically grown tobacco and replaced it with a less
restrictive tariff rate import quota system, which was also designed to assist
domestic tobacco growers. It is not possible to predict the extent to which
future trade policies or other governmental activities might affect the
Company's business.
Tax Matters. The Company through its subsidiaries is subject to the tax
laws of many jurisdictions, and from time to time contests assessments of taxes
due. Changes in tax laws or the interpretation of tax laws can affect the
Company's net profit as can the resolution of various pending and contested tax
issues.
Health Issues; Public Sentiment; Industry Litigation
Reports and speculation with respect to the alleged harmful physical
effects of cigarette smoking have been publicized for many years and, together
with decreased social acceptance of smoking and increased pressure from
anti-smoking groups, have had an ongoing adverse effect on sales of tobacco
products. A significant decrease in sales of tobacco products brought about by
health concerns, decreased social acceptance or other factors would reduce
demand for the Company's products and services and adversely affect the
Company's results of operations.
In addition, litigation is pending against manufacturers of consumer
tobacco products seeking damages for health problems alleged to have resulted
from the use of tobacco in various forms. This includes the recent filings of
lawsuits against cigarette manufacturers by several states in the United States
seeking reimbursement of Medicaid and other expenditures by such states claimed
to have been made to treat diseases allegedly caused by cigarette smoking.
Neither the Company nor, to the Company's knowledge, any other leaf merchant is
a party to this litigation. It is not possible to predict the outcome of such
litigation or what effect adverse determinations in pending or future litigation
against manufacturers might have on the business of the Company.
Financial Factors
Financial factors that may affect the Company's results of operations
include:
Extensions of Credit. Although the Company's credit experience in its
tobacco operations has been excellent and extensions of credit to customers are
carefully evaluated, a significant delay in payment or write-off of amounts due
the Company could adversely affect the Company's results. In addition, crop
advances to farmers are generally secured by the farmer's agreement to deliver
green tobacco; in the event of crop failure, such deliveries could be delayed
until the next season. Funds held by subsidiaries are generally invested in
local banks or loaned to other subsidiaries. To reduce credit risk, investment
limits are established with each bank according to the Company's evaluation of
credit standing.
Fluctuations in Foreign Currency Exchange Rates. The Company's
tobacco business is generally denominated in U.S. dollars, as is the business
of the industry as a whole. Accordingly, there is minimal currency risk
related to the sale of tobacco, and the Company funds its purchases of local
crops for export in U.S. dollars. However, local country operating costs,
including processing costs, are subject to the effects of exchange
fluctuations of the local currency against the U.S. dollar.
11
Interest Rates. Interest rate risk in the Company's tobacco operations
is limited because customers usually pre-finance purchases or pay market rates
of interest for inventory purchased on their order. However, on a short term
basis, the Company may be exposed to interest rate fluctuations if customers
delay shipments of tobacco such that the timing of revenue recognition does not
match the timing of the related expense.
II. LUMBER AND BUILDING PRODUCTS
The Company's lumber and building products business is seasonal to the
extent that winter weather may temporarily interrupt the operations of its
customers in the building industry. The business is also subject to exchange
risks and other normal market and operational risks associated with lumber
operations centered in Europe, including economic conditions in the countries
where the Company is located and related trends in the building and construction
industry.
III. AGRI-PRODUCTS
The agri-products business is affected by operating and other factors
that are similar to those that affect the Company's tobacco operations,
including crop risks and market balance, and to governmental factors such as
political uncertainties in countries of crop origin.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Shareholders held on October 22, 1996 the
following matter was voted on:
To elect four Directors to serve for a three-year term and one Director
to serve for a two-year term.
All nominees for Director were elected.
12
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.
Date: November 11,1996 UNIVERSAL CORPORATION
---------------- -------------------------------
(Registrant)
/s/ Hartwell H. Roper
-------------------------------
Hartwell H. Roper, Vice President and
Chief Financial Officer
/s/ William J. Coronado
-------------------------------
William J. Coronado, Controller
(Principal Accounting Officer)