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, 1998
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
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(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 - 33,233,334 shares
outstanding as of February 8, 1999
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, 1998 and 1997
(In thousands of dollars, except per share data)
Three Months Six Months
1998 1997 1998 1997
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Sales and other operating revenues $1,297,719 $1,265,157 $2,177,004 $2,288,313
Costs and expenses
Cost of goods sold 1,129,187 1,093,490 1,871,888 1,974,411
Selling, general and administrative expenses 85,670 87,142 163,984 165,579
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Operating Income 82,862 84,525 141,132 148,323
Equity in pretax earnings of unconsolidated affiliates 1,212 1,512 1,782 5,257
Interest expense 13,146 15,879 28,688 29,681
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Income before income taxes and other items 70,928 70,158 114,226 123,899
Income taxes 26,243 28,691 42,264 49,997
Minority interests 3,261 3,382 3,481 3,044
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Net Income $ 41,424 $ 38,085 $ 68,481 $ 70,858
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Earnings per share $ 1.23 $ 1.08 $ 2.02 $ 2.02
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Diluted earnings per share $ 1.23 $ 1.08 $ 2.01 $ 2.00
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Retained earnings - Beginning of period $508,137 $424,298
Net income 68,481 70,858
Cash dividends declared ($.58 - 1998; $.545 - 1997) (19,415) (19,191)
Purchase of common stock (54,004)
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Retained earnings - End of period $503,199 $475,965
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Universal Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
December 31, June 30,
1998 1998
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ASSETS
Current
Cash and cash equivalents $ 80,479 $ 79,835
Accounts receivable 375,783 392,821
Advances to suppliers 107,183 104,439
Accounts receivable - unconsolidated affiliates 14,323 49,343
Inventories - at lower of cost or market:
Tobacco 687,424 541,822
Lumber and building products 92,089 97,071
Agri-products 67,910 89,990
Other 23,705 33,162
Prepaid income taxes 8,139 18,347
Deferred income taxes 4,152 3,794
Other current assets 18,882 19,665
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Total current assets 1,480,069 1,430,289
Property, plant and equipment - at cost
Land 31,570 29,951
Buildings 236,871 219,594
Machinery and equipment 498,746 466,177
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767,187 715,722
Less accumulated depreciation 407,905 385,967
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359,282 329,755
Other assets
Goodwill 120,542 120,889
Other intangibles 19,683 18,586
Investments in unconsolidated affiliates 87,898 87,052
Other noncurrent assets 80,344 70,134
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308,467 296,661
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$2,147,818 $2,056,705
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See accompanying notes.
Universal Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
December 31, June 30,
1998 1998
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Notes payable and overdrafts $ 525,730 $ 586,450
Accounts payable 289,599 285,994
Accounts payable - unconsolidated affiliates 12,601 17,116
Customer advances and deposits 294,898 125,311
Accrued compensation 18,786 24,706
Income taxes payable 25,459 27,693
Current portion of long-term obligations 30,841 34,251
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Total current liabilities 1,197,914 1,101,521
Long-term obligations 240,881 263,140
Postretirement benefits other than pensions 43,947 44,535
Other long-term liabilities 49,002 40,909
Deferred income taxes 29,248 27,065
Minority interests 35,687 31,668
Shareholders' equity
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 33,358,984 shares
(34,866,406 at June 30, 1998) 78,673 80,122
Retained earnings 503,199 508,137
Accumulated other comprehensive income (30,733) (40,392)
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Total shareholders' equity 551,139 547,867
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$ 2,147,818 $ 2,056,705
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See accompanying notes.
Universal Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended December 31, 1998 and 1997
(In thousands of dollars)
December 31, December 31,
1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 68,481 $ 70,858
Adjustments to reconcile net income to net
cash provided by operating activities 29,000 30,700
Changes in operating assets and liabilities net of
effects from purchase of businesses 100,363 (54,842)
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Net cash provided by operating activities 197,844 46,716
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (38,700) (51,700)
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Net cash used in investing activities (38,700) (51,700)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance (repayment) of short-term debt, net (60,700) 52,000
Repayment of long-term debt (23,000) (20,000)
Purchases of common stock (57,700)
Issuance of common stock 2,300 5,300
Dividends paid (19,400) (19,200)
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Net cash provided (used) in financing activities (158,500) 18,100
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Net increase in cash and cash equivalents 644 13,116
Cash and cash equivalents at beginning of year 79,835 109,070
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 80,479 $ 122,186
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Universal Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
All figures contained herein are unaudited.
1) Universal Corporation, together with its subsidiaries and affiliates, is also
referred to as the Company or Universal. The operations of domestic and foreign
tobacco, lumber and building products, and agri-products segments are seasonal.
Therefore, the results of operations for the six-month period ended December 31,
1998, are not necessarily indicative of results to be expected for the year
ending June 30, 1999. All adjustments necessary to state fairly the results for
such period have been included and were of a normal recurring nature.
2). Contingent liabilities: At December 31, 1998, total exposure under
guarantees issued for banking facilities of unconsolidated affiliates was
approximately $11 million. Other contingent liabilities approximate $40 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
proposed adjustments, including penalties and interest, approximate $40 million;
however, recent currency fluctuations and possible interest rate changes could
affect that amount. 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 a material adverse effect on the Company's
consolidated financial position or results of operations. At December 31, 1998,
the Company had outstanding short-term loans of $29 million and long-term loans
of $17.2 million to a farmer cooperative in Argentina. The loans are secured by
tobacco and liens on real property, processing machinery and equipment and other
assets of the cooperative. Upon export of the tobacco, which is usually in less
than twelve months, the short-term loans should be recovered. The long-term
loans are scheduled for repayment over the next nine years. Ultimate collection
of the loans is contingent upon the ability of the farmers to produce
competitively priced tobacco suitable for export, the financial management of
the cooperative and the value of the assets pledged as security for the loans.
3) As of July 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130,"Reporting Comprehensive Income" (SFAS 130). The adoption of
this statement had no impact on the Company's net income or shareholders'
equity. SFAS 130 establishes new rules for the reporting and display of
comprehensive income and its components. SFAS 130 requires foreign currency
translation adjustments to be included in other comprehensive income. Amounts in
prior year financial statements have been reclassified to conform to SFAS 130.
Three Months Six Months
Periods ended December 31, 1998 1997 1998 1997
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(in millions of dollars)
Net income $41 $38 $68 $71
Foreign currency translation adjustment 8 2 10 (5)
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Comprehensive income $49 $40 $78 $66
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4) The following table sets forth the computation of earnings per share and
diluted earnings per share.
Three Months Six Months
Periods ended December 31, 1998 1997 1998 1997
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Net income (in thousands of dollars) $41,424 $38,085 $68,481 $70,858
Denominator for earnings per share:
Weighted average shares 33,571,791 35,172,358 33,981,541 35,155,747
Effect of dilutive securities:
Employee stock options 42,832 217,767 67,693 204,113
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Denominator for diluted earnings per share 33,614,623 35,390,125 34,049,234 35,359,860
Earnings per share $1.23 $1.08 $2.02 $2.02
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Diluted earnings per share $1.23 $1.08 $2.01 $2.00
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5) The lower estimated effective tax rate in fiscal year 1999 is due to the
anticipated mix of foreign and domestic earnings and management's current
assessment of pending and contested tax issues.
6) Amounts in the three- and six-month periods for the last year have been
reclassified to be reported on a consistent basis with the current year's
presentation.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
Working capital declined from $329 million at June 30, 1998 to $282
million at December 31, 1998. Although the net change in current assets and
current liabilities was $50 million and $96 million respectively, the components
of working capital on a comparative basis fluctuated to varying degrees compared
to June 30th primarily due to the seasonality of tobacco operations. The
majority of the increase in current assets was reflected in tobacco inventory
which in turn was supported by an increase in customer advances. The increases
primarily represent purchases of crops that have not been processed and/or
shipped due to customer requirements. In the United States, December 31 tobacco
working capital needs represent a combination of unshipped processed flue-cured
tobacco plus burley tobacco purchases from mid-November. A significant
percentage of the Company's U. S. burley volume is purchased in the second
quarter of the fiscal year. Processing begins shortly after purchase of the
tobacco and continues through the beginning of the fourth quarter. June 30th
usually represents the low point of U.S. tobacco working capital needs as most
of the current crop has been shipped. Variations may occur quarter to quarter in
the proportion of notes payable and customer advances that support inventories,
depending on the Company's and its customers' borrowing capabilities, interest
rates and exchange rates.
Although working capital changes reflected a seasonal increase as is
the pattern in the industry, the amount of that increase in inventory is
significantly lower than that of last year. The lower seasonal investment is
primarily due to the lower prices of green tobacco worldwide and the smaller
tobacco crop in Brazil. This lower inventory investment is also reflected in
lower financing requirements.
The Company generally does not purchase tobacco in the U.S. on a
speculative basis. In a number of foreign operating regions the Company may
advance funds for the purchase of tobacco or in some cases advance farmers
agricultural materials, such as seed and fertilizer. These advances are
recovered from the delivery of tobacco by the respective creditor. See note 2 of
the Company's notes to the financial statements for additional information
regarding advances in Argentina.
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
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.
The Company continues to purchase its common stock pursuant to a $100
million repurchase plan announced in May 1998. In addition, on February 4, 1999,
the Company's Board of Directors authorized an additional $100 million purchase
through June 30, 2000. As of December 31, 1998, cumulative share purchases were
2.2 million shares for approximately $77.5 million. The repurchase plans have
been and are expected to continue to be funded from operating cash flows. The
liquidity and capital resources of the Company at December 31, 1998, remain
adequate to support the Company's foreseeable operating needs.
Results of Operations
'Sales and Other Operating Revenues' for the second quarter of fiscal
year 1999 were up slightly and declined 5% for the six months compared to last
year. The six-month decline reflects the impact of shipment timing in the first
quarter primarily due to African and dark tobacco operations. In addition, the
Company contributed its Turkish subsidiary into a joint venture in oriental
tobaccos during the fourth quarter last year. Revenues for lumber and building
products and agri-products were comparable for the six-month periods. `Operating
Income' for the quarter and the six-month period ended December 31, 1998,
declined 2% and 5% respectively compared to the same periods last year. In the
quarter, Brazilian results were off slightly due to lower volumes handled out of
the smaller crop and similarly, a smaller U.S. flue-cured crop resulted in lower
volumes processed during the quarter. In addition, there were quality problems
with crops in Argentina and Kyrgystan, while shipments of some Oriental tobacco
by the Company's joint venture have been delayed until the second half of the
year. The negative impact of these developments was partially offset by improved
results in Africa and the Far East. For the six months, these factors combined
with shipment timing issues in the first quarter held tobacco earnings for the
period below last year's record pace. Dark results in the quarter improved,
reflecting the continued tight world market for wrapper leaf, and old crop
shipments. For the six months, dark tobacco results were comparable to last
year. Lumber and building products results were adversely affected in the
quarter by excessive rains in Holland that disrupted construction activity and
impacted the regional sales outlets. Wholesale results also declined due to
margin pressures. However, industrial timber earnings were up due to improved
margins. Agri-product results were comparable to last year for the quarter and
six-month period.
Interest expense was down from the comparable periods last year
principally reflecting lower borrowing levels by the Company due in part to
lower tobacco leaf prices. The estimated effective tax rate for fiscal 1999 was
37% compared to 40% in the previous year primarily due to the anticipated mix of
foreign and domestic earnings and management's current assessment of pending and
contested tax issues.
It should be noted that although recent news from Brazil has caused
concern in world financial circles, the currency devaluation may well be
favorable for the future export of Brazilian tobacco. However, the leaf industry
will continue to face uncertainties in the months ahead resulting from the
aftermath of the tobacco settlement in the U.S., from continued economic and
financial turmoil in a number of Southeast Asian areas, Latin America and the
former Soviet Union and from uncommitted inventories held in the trade.
These factors, which affect the overall industry environment, have thus
far not had a significant effect on Universal's operations and should not
materially affect earnings for the year. Management remains confident about the
Company's strategic direction. The Company has continued to minimize unsold
inventories. Therefore, despite the effect of adverse weather in some areas on
tobacco production and on construction activity and lumber sales in Holland,
management still expects to achieve earnings for the year form continuing
operations in line with its previous projections.
The Company cautions readers that the statements contained herein
regarding expected earnings are forward-looking statements based upon
management's current knowledge and assumptions about future events, including
anticipated levels of demand for the Company's products and services, costs
incurred in providing these products and services, and timing of shipments to
customers. Lumber earnings could also be affected by a number of factors,
including currency translations, and unusual weather conditions in the
Netherlands. Actual results, therefore could vary from those expected. For more
details on factors that could affect expectations, see the Company's Annual
Report on Form 10-K for the year ended June 30, 1998, as filed with the
Securities and Exchange Commission.
As reported in the Company's 1998 Annual Report on Form 10-K (refer to
Management's Discussion and Analysis of Financial Condition and Results of
Operations, Year 2000), the Company has developed a plan to mitigate the effects
of the year 2000 problem on its operations. At the time of the report, it was
expected that by December 31, 1998, all of the Company's business locations
would complete the assessment and remediation phases of the plan's internal
aspects. Currently several business locations are not expected to complete the
remediation phase until June 30, 1999. However, this delay should not have a
material adverse effect on the Company's plan. In conjunction with contingency
planning for the year 2000, the Company's operating regions have submitted
drafts of their contingency plans, which have identified potential risk areas,
and the possibility of a disruption to related business operations. These
contingency plans are currently being reviewed by the Company.
The Company has revised its total estimated costs of addressing the
year 2000 problem from $5.7 million to $7.5 million primarily to reflect certain
internal costs that had previously been omitted. Approximately $6.7 million was
spent through December 31, 1998. The Company does not expect the total cost of
preparing its internal technology for the year 2000 to be material to its
consolidated financial condition or results of operations.
Reference is made to Items 1 and 7 and the Notes to the Consolidated
Financial Statements in Item 8 of the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 1998, and "Management's Discussion and Analysis
of Financial Conditions and Results of Operations - Other Information Regarding
Trends and Management's Actions - Factors That May Affect Future Results" in the
Annual Report 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.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
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4 Form of Common Stock Certificate, effective February 13, 1999.*
10.1 Universal Corporation Amended and Restated 1994 Stock Option Plan
for Non-Employee Directors. *
10.2 Form of Amendment to Non-Employee Director Non-Qualified Stock
Option Agreement(s).*
10.3 First Amendment to the Universal Leaf Tobacco Company,
Incorporated Benefit Restoration Trust, dated January 12, 1999,
between Universal Leaf Tobacco Company, Incorporated and Wachovia
Bank, N. A., as trustee. *
10.4 Form of Non-Employee Director Restricted Stock Agreement. *
27 Financial Data Schedule.*
b. Reports on Form 8-K
* Filed Herewith
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 11, 1999 UNIVERSAL CORPORATION
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(Registrant)
/s/ Hartwell H. Roper
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Hartwell H. Roper, Vice President and
Chief Financial Officer
/s/ William J. Coronado
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William J. Coronado, Vice President
and Controller
(Principal Accounting Officer)