UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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 December 31, 1997
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
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(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
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(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
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Indicate the number of shares outstanding of each of the Registrant's classes of
Common Stock as of the latest practicable date.
Common Stock, No par value - 35,283,742 shares outstanding as of February 5,
1998
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Universal Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
Three and Six Months Ended December 31, 1997 and 1996
(In thousands of dollars, except per share data)
Three Months Six Months
1997 1996 1997 1996
----------------- ----------------- --------------- --------------
Sales and other operating revenues.............. $1,265,157 $1,337,221 $2,288,313 $2,158,061
Costs and expenses
Costs of goods sold......................... 1,103,628 1,185,082 1,984,549 1,885,383
Selling, general and administrative......... 77,004 77,049 155,441 148,535
Interest.................................... 15,879 18,344 29,681 34,255
----------------- ----------------- --------------- --------------
1,196,511 1,280,475 2,169,671 2,068,173
----------------- ----------------- --------------- --------------
Income before income taxes and other items...... 68,646 56,746 118,642 89,888
Income taxes................................ 27,637 22,736 47,637 35,955
Minority interests.......................... 3,382 3,341 3,044 3,949
----------------- ----------------- --------------- --------------
Income from consolidated operations............. 37,627 30,669 67,961 49,984
Equity in net income of unconsolidated
affiliate.................................. 458 733 2,897 1,440
----------------- ----------------- --------------- --------------
Net income...................................... $38,085 $ 31,402 $70,858 $51,424
================= ================= =============== ==============
Earnings per share.............................. $1.08 $.90 $2.02 $1.47
================= ================= =============== ==============
Diluted earnings per share $1.08 $.89 $2.00 $1.46
================= ================= =============== ==============
Retained earnings - Beginning of period......... $424,298 $360,273
Net income...................................... 70,858 51,424
Cash dividends declared ($.545-1997; $.52-1996).. (19,191) (17,879)
--------------- --------------
Retained earnings - End of period .............. $475,965 $393,818
=============== ==============
3
Universal Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
December 31, June 30,
1997 1997
---------------- -----------------
ASSETS
Current
Cash and cash equivalents.................................. $122,186 $ 109,070
Accounts and notes receivable.............................. 422,349 428,430
Advances to suppliers...................................... 87,672 79,499
Accounts receivable - unconsolidated affiliates............. 11,324 7,768
Inventories - at lower of cost or market:
Tobacco................................................ 847,754 570,650
Lumber and building products........................... 103,548 105,567
Agri-products.......................................... 77,844 80,812
Other.................................................. 21,941 12,444
Prepaid income taxes....................................... 8,289 7,665
Deferred income taxes...................................... 7,583 7,064
Other current assets....................................... 16,002 22,270
---------------- -----------------
Total current assets................................... 1,726,492 1,431,239
Real estate, plant and equipment - at cost
Land....................................................... 32,891 30,887
Buildings.................................................. 230,523 214,605
Machinery and equipment.................................... 453,800 430,360
---------------- -----------------
717,214 675,852
Less accumulated depreciation.......................... 379,877 366,200
---------------- -----------------
337,337 309,652
Other assets
Goodwill................................................... 121,238 117,483
Other intangibles.......................................... 21,583 22,703
Investments in unconsolidated affiliates................... 39,472 33,413
Deferred income taxes...................................... 1,767 1,509
Other noncurrent assets.................................... 72,459 65,980
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256,519 241,088
---------------- -----------------
$2,320,348 $1,981,979
================ =================
See accompanying notes.
4
Universal Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars)
December 31, June 30,
1997 1997
--------------- ---------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Notes payable and overdrafts............................... $641,620 $589,648
Accounts payable........................................... 305,627 275,980
Accounts payable - unconsolidated affiliates............... 14,923 10,204
Customer advances and deposits............................. 334,774 144,175
Accrued compensation....................................... 20,793 19,296
Income taxes payable....................................... 28,071 16,166
Current portion long-term obligations...................... 29,562 28,228
--------------- ---------------
Total current liabilities........ ..................... 1,375,370 1,083,697
Long-term obligations.......................................... 280,304 291,637
Postretirement benefits other than pensions.................... 46,232 45,553
Other long-term liabilities.................................... 40,117 42,273
Deferred income taxes.......................................... 25,467 18,527
Minority interests............................................. 31,702 30,699
Shareholders' equity
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 35,283,742 shares
(35,139,137 at June 30,1996)............................ 82,319 77,040
Retained earnings.......................................... 475,965 424,298
Foreign currency translation adjustments................... (37,128) (31,745)
--------------- ---------------
Total shareholders' equity............................. 521,156 469,593
--------------- ---------------
$2,320,348 $1,981,979
=============== ===============
5
Universal Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended December 31, 1997 and 1996
(In thousands of dollars)
1997 1996
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................. $70,858 $51,424
Adjustments to reconcile net income to net cash provided
by operating activities................................ 30,700 39,200
Changes in operating assets and liabilities................ (54,842) (194,959)
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Net cash provided by (used in) operating activities.... 46,716 (104,335)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment.................. (51,700) (25,300)
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Net cash used in investing activities.................. (51,700) (25,300)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of short-term debt - net.......................... 52,000 31,400
Repayment of long-term debt................................ (20,000) (20,000)
Issuance of long-term debt................................. 0 14,200
Issuance of common stock................................... 5,300 280
Dividends paid............................................. (19,200) (17,900)
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Net cash provided by financing activities.............. 18,100 7,980
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Net increase (decrease) in cash and cash equivalents........... 13,116 (121,655)
Cash and cash equivalents at beginning of period............... 109,070 214,782
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CASH AND CASH EQUIVALENTS AT END OF PERIOD..................... $122,186 $93,127
============== =============
6
Universal Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
All figures contained herein are unaudited. Amounts are stated in thousands of
dollars, except per share data and the number of average common shares
outstanding.
1) The operations of segments of domestic and foreign tobacco, lumber and
building products and agri-products are seasonal. Therefore, the results of
operations for the six-month period ended December 31, 1997, are not necessarily
indicative of results to be expected for the year ending June 30, 1998. All
adjustments necessary to fairly state the results for such period have been
included and were of a normal recurring nature.
2) Contingent liabilities: At December 31, 1997, total exposure under guarantees
issued for banking facilities of unconsolidated affiliates was $2 million. Other
contingent liabilities approximate $48 million and relate principally to
performance bonds and Common Market Guarantees. The Company's Brazilian
subsidiaries have been notified by the tax authorities of proposed adjustments
to the income tax returns filed in prior years. The total adjustments, including
penalties and interest, approximate $55 million. The Company believes the
Brazilian tax returns filed were in compliance with the applicable tax code. The
numerous proposed adjustments vary in complexity and amounts. While it is not
feasible to predict the precise amount or timing of each proposed adjustment,
the Company believes that the ultimate disposition will not have an material
adverse effect on the Company's consolidated financial position or results of
operations.
3) In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"), which establishes standards for reporting and display of comprehensive
income and its components. SFAS 130 is effective for fiscal years beginning
after December 15, 1997, and will be adopted by the Company for fiscal year
1999.
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS 131"). SFAS 131 is effective for fiscal years
beginning after December 15, 1997. The Company is currently evaluating the
implementation of SFAS 131 which will be adopted by the Company for fiscal year
1999.
4) In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"), which
was adopted by the Company in the quarter ended December 31, 1997. Prior to the
adoption of SFAS 128, the Company was not required to present the dilutive
effects of employee stock options because the effects were immaterial. SFAS 128
requires the presentation of both basic and diluted earnings per share,
regardless of materiality, unless the per share amounts are equal. The effect of
adopting SFAS 128 on earnings per share calculations for prior periods is not
material.
7
For all periods presented, net income was not affected by the calculation of
basic and diluted earnings per share. The following table sets forth the
computation of earnings per share and diluted earnings per share.
Three Months Six Months
1997 1996 1997 1996
----------- ----------- ----------- -----------
Net income ($ in thousands) .............. $ 38,085 $ 31,402 $ 70,858 $ 51,424
=========== =========== =========== ===========
Denominator for earnings per share
Weighted average shares ......... 35,172,358 35,064,585 35,155,747 35,060,516
Effect of dilutive securities
Employee stock options .......... 217,767 114,453 204,113 104,208
---------- ---------- ---------- ----------
Denominator for diluted earnings per share 35,390,125 35,179,038 35,359,860 35,164,724
=========== =========== =========== ===========
Earnings per share ....................... $ 1.08 $ .90 $ 2.02 $ 1.47
=========== =========== =========== ===========
Diluted earnings per share ............... $ 1.08 $ .89 $ 2.00 $ 1.46
=========== =========== =========== ===========
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial Condition
Working capital at December 31, 1997 was comparable to June 30, 1997 at
approximately $350 million. Due to the seasonal nature of tobacco operations,
the components of working capital on a comparative basis increased significantly
compared to June 30th. Current assets and current liabilities increased $295
million and $292 million, respectively. The majority of the increase was
reflected in tobacco inventory which was supported by increased notes payable
and overdrafts and customer advances. The mix of notes payable and customer
advances supporting inventories is dependent on the Company's borrowing
capabilities, interest rates and exchange rates as well as those of its
customers. The increase in tobacco inventories primarily represents purchases of
crops that have not yet been processed and/or shipped due to customer
requirements. The Company generally does not purchase tobacco in the U.S. on a
speculative basis; thus the higher inventory levels represent tobacco that has
been committed to customers. In the United States, tobacco working capital at
December 31 represents a combination of processed flue-cured tobacco and burley
tobacco purchases from mid-November. Approximately 70% of the company's U. S.
burley tobacco purchases normally occur during November and December. Processing
begins shortly after the purchase and continues through the spring. June 30th
usually represents the low point of U.S. tobacco working capital needs as most
of the current crop has been shipped and paid for by customers.
Generally, the Company's international tobacco operations conduct
business in U.S. dollars, thereby limiting foreign exchange risk to local
production and overhead costs. Agri-product and lumber operations enter into
foreign exchange contracts to hedge firm purchase and sales commitments for
9
terms of less than six months. Contracts used to manage foreign currency risks
are not material. Interest rate risk is limited because customers in the tobacco
business usually pre-finance purchases or pay market rates of interest for
inventory purchased for their accounts.
Effective December 18, 1997 the Company replaced its $100 million
revolving credit facility with a new $300 million facility issued in two
tranches of $150 million each. The new facility is expected to be used as
support for an increased commercial paper program that will provide flexibility
in the Company's short-term borrowings. The liquidity and capital resources of
the Company at December 31, 1997, remain adequate to support its businesses.
Results of Operations
'Sales and Other Operating Revenues' for the second quarter of fiscal
year 1998 decreased 5% compared to the same period last year due to timing
differences between the first and second quarters related to sales of Brazilian
tobacco and reduced lumber and building products revenues. Lumber and building
product revenues were adversely affected by the strength of the U.S. dollar,
which has appreciated, on average, approximately 17 percent against the Dutch
guilder since the second quarter of last year. For the six month period, `Sales
and Other Operating Revenues' increased by $130 million or 6% compared to the
six months ended December 31, 1996. Lower lumber and building products revenues
for the six months were offset by strong tobacco sales growth year-to-date.
Operating income (pre-tax earnings before interest) increased in both
the second quarter and six- month period compared to the corresponding periods
last year. In the second quarter, operating income increased by $9 million or
13% compared to the second quarter of fiscal year 1997. During the six-month
period ended December 31, operating income increased by $24 million or 19%. The
increases in the second quarter and six-month periods were principally due to
10
improvements realized in both domestic and foreign tobacco operations. Domestic
tobacco operations in the current quarter benefited from higher volumes
purchased and processed. Foreign tobacco operations were positively impacted by
larger Brazilian flue-cured and burley crops. A higher proportion of the
Brazilian crop is normally shipped in the Company's first six months of fiscal
year. In addition, the Company's dark operations continued to benefit from
increased cigar consumption and demand. Lumber and building products operating
income in both periods was down due to the aforementioned effect of a strong
U.S. dollar. Volumes and margins were also lower due to declining world market
prices for hardwood, softwood and plywood. Agri-product operating income in the
quarter and six months were well above last year, benefiting from a strong
international tea market and rubber operations.
'Selling, General and Administrative Expenses' for the six-month period
increased by 5% over the comparable period last year reflecting increased
foreign tobacco shipments. Interest expense was down from the comparable periods
last year principally reflecting lower borrowing levels by the Company.
As a result of the Company's inventory control policies, it is
currently not holding material leaf inventories that are not committed to
customers. No significant impact is anticipated in the Company's financial
condition or results of operations from the current weakness in the economies of
certain countries in Southeast Asia. In spite of large production increases in
China, world flue-cured and burley tobacco markets are essentially in balance.
Quarterly comparisons continue to be impacted by the timing of shipments to
customers.
11
The Company is currently in the process of evaluating the potential
impact on its worldwide computer systems related to the year 2000. Systems and
equipment may malfunction due to the inability to recognize a date ending with
the digits "00", which could disrupt and have a material adverse impact on some
of the Company's operations. The Company expects to complete its evaluation by
June 30, 1998 and complete implementation of corrective actions by June 30,
1999. At the current time the Company has not finalized the total costs
resulting from the Year 2000 issue. In compliance with current generally
accepted accounting principles, costs incurred to fix the Year 2000 problems
will be expensed as incurred. The Company currently believes that these costs
will not be material to its consolidated financial condition or results of
operations. Costs such as vendor-supplied software and computer hardware will be
capitalized and amortized to expense over their expected useful life.
In January 1998 the Company reached an agreement to sell its minority
interest in a Dutch spice joint venture. The transaction is expected to result
in an after-tax gain of approximately $11 million, which will be recognized in
second half of fiscal year 1998's earnings.
Reference is made to Items 1 and 7 and the Notes to the Consolidated
Financial Statements in Item 8 of the Company's Form 10-K for the fiscal year
ended June 30, 1997, regarding important factors that would cause actual results
to differ materially from those contained in any forward-looking statement made
by or on behalf of the Company, including forward-looking statements contained
in Item 2 of this Form 10-Q.
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: February 6, 1998 UNIVERSAL CORPORATION
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(Registrant)
/s/ Hartwell H. Roper
-----------------------------------------------
Hartwell H. Roper, Vice President and
Chief Financial Officer
/s/ William J. Coronado
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William J. Coronado, Controller
(Principal Accounting Officer)
13
PART II. OTHER INFORMATION
EXHIBIT INDEX
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
- -- --------
10.21 Form of Universal Corporation 1997 Restricted Stock Agreement,
with Schedule of Awards to Executive Officers.*
10.22 Form of Universal Corporation 1997 Stock Option and Equity
Accumulation Agreement, with Schedule of Grants to Executive
Officers.*
10.23 Non-Employee Director Restricted Stock Agreement dated October
29, 1997, between Universal Corporation and Charles H. Foster,
Jr.*
10.24 Non-Employee Director Restricted Stock Agreement dated October
29, 1997, between Universal Corporation and Joseph C. Farrell.*
10.25 1997 Non-Qualified Stock Option Agreement between Deli
Universal, Inc. and D.G. Cohen Tervaert.*
10.26 Employment Agreement dated January 15, 1998 between the Company
and Henry H. Harrell, Allen B. King, William L. Taylor, Hartwell
H. Roper, Edward M. Schaaf III, and James M. White III.*
10.27 364 Day Credit Agreement dated December 18, 1997. *
10.28 Three Year Credit Agreement dated December 18, 1997. *
12 Ratio of Earnings to Fixed Charges.*
27 Financial Data Schedule.*
* Filed Herewith