1
Exhibit 13.1
BUSINESS PROFILE
Universal Foods Corporation is a global leader in the manufacture and supply of
high-performance flavors, colors, yeast and dehydrated products. The Company's
Performance Products segment produces flavor and color products for food,
beverages, cosmetics, pharmaceuticals, specialty inks and a variety of other
applications. The Natural Products segment produces dehydrated ingredients and a
broad range of yeast products for commercial and retail markets.
PERFORMANCE PRODUCTS
Flavor
REVENUE (in millions)
[BAR CHART]
95 371
96 359
97 321
98 347
99 374
OPERATES AS: UNIVERSAL FLAVORS
We offer one of the most complete ranges of flavors, flavor enhancers and flavor
systems for the food, beverage and dairy industries. Our flavor chemists and
application specialists work closely with customers in the development of custom
taste products with a focus on sensory superiority, ease-of-use and value.
PRODUCTS
Savory, dairy, sweet goods and beverage flavors and flavor systems. Extracts
from yeast, vegetable proteins, meat, milk protein and other natural products
for use primarily as flavor enhancers. Aroma chemicals and fragrances for
personal care and household products.
1999 AND BEYOND
Revenue was up for the year due to strong double-digit gains in sales to the
dairy, beverage and food ingredients categories and the positive contribution of
our first full year following the integration of the bioproducts savory flavor
business. Our year-old creative centers in Indianapolis and Fenton, Missouri,
along with a new flavor creative center in Canada, are providing enhanced
customer support in new product development. Acquisitions completed during the
past two years continue to provide new access to key customers around the globe.
Strategies have been developed for further penetration of the growing markets
for
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nutraceuticals, frozen novelties, cultured dairy products and snack foods.
CUSTOMERS % OF REVENUE
[PIE CHART]
Food Processors 44%
Dairy Product Companies 28%
Beverage Companies 19%
Other 9%
ESTIMATED GLOBAL MARKET $15 billion
Color
REVENUE (in millions)
[BAR CHART]
95 149
96 159
97 192
98 195
99 232
OPERATES AS: WARNER-JENKINSON COMPANY
We are the world's leading supplier of synthetic food colors, with a rapidly
growing share of the global market for natural and cosmetic colors. Our skilled
chemists and color technicians provide outstanding technical support in the
development of high-performance colors and color systems that meet specific
application requirements and performance characteristics.
PRODUCTS
Natural and synthetic colors for food, beverages, confections, cosmetics,
pharmaceuticals, personal care items, inks for ink-jet printers, and a variety
of other products. In addition to our broad range of standard products, we
provide specially tailored products that simplify and enhance the use of color.
1999 AND BEYOND
Revenue for our Color division grew significantly as a result of increased sales
volumes of synthetic, natural and cosmetic colors. New acquisitions added to the
results and further strengthened our Color division during fiscal 1999. Les
Colorants Wackherr, Paris, France, expanded our offerings in colors for
cosmetics and added a new range of
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cosmetic ingredient products. The acquisition of certain assets of Quimica
Universal, Lima, Peru, enhanced our capabilities in the production of annatto
and carminic acid-based products. The acquisition of Pointing Holdings Ltd. in
the U.K. has provided greater access to international markets. The natural color
business of Nino Fornaciari fu Riccardo S.N.C. strengthened our position as the
number one supplier of anthocyanin, a natural color, sold worldwide. Our Color
division continues to grow as we focus on areas with the greatest opportunities
for growth, including natural colors, cosmetic colors, new dyes and specialty
chemical synthesis and purification.
CUSTOMERS % OF REVENUE
[PIE CHART]
Food Processors 75%
Cosmetics Mfrs/Pharmaceutical Companies/Ink-jet Printer Mfrs 25%
ESTIMATED GLOBAL MARKET $2.9 billion
NATURAL PRODUCTS
Yeast
REVENUE (in millions)
[BAR CHART]
95 155
96 156
97 159
98 164
99 164
OPERATES AS: RED STAR YEAST & PRODUCTS
We are the largest North American supplier of yeast to the commercial bakery
market. Our Red Star name denotes quality and reliability in the production and
delivery of yeast products for commercial and retail markets.
PRODUCTS
A diversified line of yeast products including compressed, cream and active dry
yeast for commercial and retail applications, including bakery goods, pizza,
frozen dough, prepared bread machine mixes, and wine making. Nutritional yeast
for health conscious consumers, and bionutrients for use in pharmaceuticals,
biotechnology, and starter cultures for the dairy industry.
4
1999 AND BEYOND
Revenue was comparable to last year due to competitive pressures in the yeast
industry. Favorable raw material costs helped to offset the impact of lower
prices. Red Star Yeast continues to excel in this challenging competitive
environment. Our focus remains on programs to reduce costs and improve
productivity. In addition, we continue to explore opportunities for growth
outside the traditional commercial baking industry. Greater emphasis is being
placed on the production and marketing of higher-margin yeast derivatives,
including bionutrients and nutraceuticals.
CUSTOMERS % OF REVENUE
[PIE CHART]
Commercial Baking Companies 72%
Retail 16%
Bionutrients/Nutraceuticals 12%
ESTIMATED GLOBAL MARKET $2.3 billion
DEHYDRATED PRODUCTS
REVENUE (in millions)
[BAR CHART]
95 117
96 132
97 135
98 147
99 147
OPERATES AS: ROGERS FOODS (U.S.)
UNIVERSAL DEHYDRATES (EUROPE)
We are a market leader in the U.S. production of dehydrated onion, garlic and
chili products and the number one supplier of dehydrated vegetables in Europe.
Our modern dehydration technology, extensive plant breeding and seed development
programs, and comprehensive crop management techniques produce consistent,
top-quality dehydrated products.
PRODUCTS
Dehydrated onion, garlic, chili pepper, paprika, parsley, celery, spinach and
other vegetables for use as ingredients by food processors and sale under
private labels to the retail market and food service industry.
5
1999 AND BEYOND
Revenue for our Dehydrated Products division was flat primarily due to lower
volumes of garlic as a result of a U.S. crop shortage. Onion and chili volumes
were on plan for the year. We closed our unprofitable frozen vegetable
processing operations in Ireland during the latter part of the fiscal year. The
remaining Dehydrated Products operations in Europe continue to turn in a
stronger performance each quarter. Plant breeding and seed development programs
and new crop management techniques provide opportunities for further
improvements in productivity and product quality.
CUSTOMERS % OF REVENUE
[PIE CHART]
Food Processors 55%
Spice Blenders 20%
Repackers/Distributors/Retail 25%
ESTIMATED GLOBAL MARKET $1.2 billion
MANAGEMENT'S ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION
[ Years ended September 30, 1999, 1998 and 1997 ]
The following financial review provides information which management believes is
relevant to an assessment and understanding of the Company's consolidated
results of operations and financial condition. The financial review should be
read in conjunction with the consolidated financial statements and notes
thereto.
RESULTS OF OPERATIONS
In 1999, the Company adopted Statement of Financial Accounting Standards (SFAS)
No. 131 "Disclosures about Segments of an Enterprise and Related Information"
which establishes new standards for reporting and disclosure relating to
segments and geographic data. The Company's reportable segments are as follows:
Performance Products
This segment includes the Flavor and Color divisions, which produce flavor and
color products that impart a desired taste, smell or color to a broad range of
consumer products.
Natural Products
This segment produces yeast and dehydrated products which are used by
manufacturers of various food products.
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NET EARNINGS (in millions)
(excluding unusual items)
[BAR CHART]
95 $56.9
96 $60.9
97 $64.7
98 $72.6
99 $80.1
1999 VS. 1998
Revenue for 1999 increased $63.4 million, or 7.4%, to $920.2 million from $856.8
million in 1998. The overall increase in revenue was attributable to increases
in the Performance Products segment resulting from volume increases and
acquisitions of natural and cosmetic color businesses. U.S. Flavor volume was
particularly strong in the dairy, beverage and food ingredient product
categories. The Color division recorded gains in all product categories. Revenue
in the Natural Products segment was $311 million in both 1999 and 1998. The U.S.
dehydrated products business recorded revenue increases for onion products
offset by lower garlic volumes. In Europe, revenue was flat as the closure of
the frozen vegetable business in Ireland offset increases in dehydrated
products. Revenue in Yeast was flat as volumes and average selling prices were
comparable to 1998. The strengthening of the U.S. dollar relative to foreign
currencies during the year had the effect of reducing reported revenue by
approximately 1.0%.
Cost of products sold as a percent of revenue was 65.2% in 1999 compared to
64.9% in 1998. In the Performance Products segment, cost of products sold as a
percent of revenue increased to 67.4% in 1999 from 66.8% in 1998. This increase
is primarily attributable to changes in product mix at the Color division caused
by additional sales of lower margin synthetic dyes and higher cost of products
sold related to the Pointing business acquired in 1999. In addition, the Flavor
division had increased sales of dairy products in 1999 at lower margins than
other product categories. In the Natural Products segment, cost of products sold
as a percent of revenue decreased to 64.2% in 1999 from 64.9% in 1998 as raw
material costs decreased for most product categories except garlic.
Selling and administrative expenses increased $3.4 million to $175.3 million
from $171.9 million but decreased as a percent of revenue to 19.0% from 20.1%.
Selling and administrative expenses as a percent of revenue were lower in both
the Performance Products and Natural Products segments. Corporate expenses were
lower as increases in intangible amortization expense were offset by a $1.9
million favorable settlement of a previously accrued litigation claim. During
1999, the Company
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closed the frozen vegetable business in Ireland at a cost of approximately $2.7
million.
Operating income in 1999 increased $16.2 million, or 12.6%, to $145.1 million.
Operating income increased $9.6 million, or 10.3%, in the Performance Products
segment as the flavor business in the U.S. continues to improve and the segment
benefited from recent acquisitions. Operating income in the Natural Products
segment was $60.5 million in 1999 compared to $56.6 million in 1998, an increase
of 7.0%. The increase is the result of lower product costs and reduced selling
and administrative expenses.
Interest expense increased $4.8 million to $26.0 million in 1999. The increase
was caused by additional outstanding borrowings which were used primarily to
fund acquisitions (see Note 5 to the Consolidated Financial Statements).
The effective income tax rate for 1999 was 32.7% compared to 32.5% last year.
Both years include the benefits from settlements of prior years' issues that
reduced the effective rate 1.2% in 1999 and 1.4% in 1998.
Net earnings were $80.1 million in 1999 compared to $72.6 million in 1998, an
increase of 10.3%. In 1999, diluted earnings per share increased to $1.57 from
$1.40, an increase of 12.1%.
1998 VS. 1997
Revenue for 1998 increased $31.1 million, or 3.8%, to $856.8 million from $825.7
million in 1997. Revenue in the Performance Products segment increased $28.4
million, or 5.5%, primarily due to volume gains in the international Flavor
business which benefited from 1998 acquisitions. Revenue in the Natural Products
segment was $311.1 million in 1998 compared to $294.3 million in 1997 as volumes
increased in the U.S. dehydrated products business. The overall strengthening of
the U.S. dollar relative to foreign currencies during the year had the effect of
reducing reported revenue by approximately 2.1%.
Cost of products sold as a percent of revenue was 64.9% in 1998 compared to
66.7% in 1997. In the Performance Products segment, cost of products sold as a
percent of revenue decreased to 66.8% in 1998 from 68.5% in 1997. In the Natural
Products segment, cost of products sold as a percent of revenue decreased to
64.9% in 1998 from 65.4% in 1997. The decreases are attributable to increased
productivity and lower raw material costs in the Color and Yeast divisions.
Selling and administrative expenses increased $4.5 million to $171.9 million
from $167.4 million, or 2.7%. As a percent of revenue, selling and
administrative expenses decreased to 20.1% from 20.3%. Included in 1997 selling
and administrative expenses are $7.5 million of integration expenses for the
cost of combining the Company's bioproducts business with the Flavor division.
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Operating income increased $21.6 million in 1998, or 20.2%, to $128.9 million.
Operating income increased $24.1 million, or 35.2%, in the Performance Products
segment as the Flavor division was favorably impacted by acquisitions and cost
savings from the integration of the bioproducts business. Operating income in
the Natural Products segment was $56.6 million in 1998 compared to $51.1 million
in 1997, an increase of 10.7%. The increase primarily resulted from higher
volumes in the U.S. dehydrated products business.
Interest expense increased $4.4 million to $21.2 million in 1998. The increase
was primarily attributable to additional outstanding borrowings which were used
to fund fiscal 1998 acquisitions.
The effective tax rate for 1998 was 32.5% compared to 28.5% for 1997. Both years
include the benefits from settlements of prior years' issues that reduced the
effective rate 1.4% in 1998 and 5.3% in 1997. Excluding the effects of these
items the effective tax rate would have been approximately 34.0%.
Net earnings were $72.6 million in 1998 compared to $64.7 million in 1997, an
increase of 12.3%. In 1998, diluted earnings per share increased to $1.40 from
$1.26, an increase of 11.1%.
FOREIGN REVENUE (in millions)
[BAR CHART]
95 $313
96 $325
97 $324
98 $343
99 $402
LIQUIDITY AND FINANCIAL POSITION
Cash provided by operating activities was $102.5 million in 1999, $95.4 million
in 1998 and $93.7 million in 1997. The 1999 and 1998 amounts include increases
in net earnings and depreciation and amortization expense, offset by normal
increases in net operating assets.
Cash used for investing activities was $121.2 million in 1999, $133.9 million in
1998 and $129.3 million in 1997. Cash used for acquisitions was $58.4 million in
1999 and $68.7 million in 1998. The net assets of the Performance Products
segment grew significantly in 1999 and 1998 as all of the recent acquisitions
were in the Color and Flavor divisions. Capital expenditures totaled $62.6
million in 1999 and $66.1 million in 1998.
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Financing activities provided cash of $21.8 million in 1999, $39.6 million in
1998 and $35.6 million in 1997. Net additional borrowings were $69.2 million in
1999 and $75.0 million in 1998. In November 1998, the Company filed a shelf
registration statement with the Securities and Exchange Commission pursuant to
which the Company may from time to time issue debt securities of up to $300
million in the aggregate. The first transaction under the shelf registration
statement was the sale of $150 million of unsecured notes due in April 2009. The
net proceeds from the sale of the notes were used to repay existing short term
indebtedness, which was used to acquire other companies and to meet the
Company's working capital needs. The Company maintains debt levels considered
prudent based on its cash flows, interest coverage and percentage of total debt
to total capital. During 1999 and 1998, the Company repurchased 1,084,000 and
964,396 shares of treasury stock at a cost of $24.3 million and $21.8 million,
respectively.
The Company has paid uninterrupted quarterly cash dividends since commencing
public trading in its stock over thirty-six years ago. In 1999 and 1998,
dividends paid per share were $0.53.
The impact of inflation on both the Company's financial position and results of
operations has been minimal and is not expected to adversely affect 2000
results.
The Company's financial position remains strong, enabling it to meet cash
requirements for operations, capital expansion programs and dividends to
shareholders.
OPERATING MARGINS
(excluding unusual items)
[BAR CHART]
95 13.0%
96 13.5%
97 13.0%
98 15.0%
99 15.8%
MARKET RISK FACTORS
The Company is exposed to market risk, including changes in interest rates,
currency exchange rates and commodity prices. To manage the volatility relating
to these exposures on a consolidated basis, the Company nets the exposures to
take advantage of natural offsets and enters into various derivative
transactions for some of the remaining exposures pursuant to the Company's
policies covering hedging practices. The financial impacts of these hedging
instruments are offset by corresponding changes in the underlying exposures
being hedged. The
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Company does not hold or issue derivative financial instruments for trading
purposes. Note 1 to the consolidated financial statements includes a discussion
of the Company's accounting policies for financial instruments.
The Company manufactures and sells its products in a number of countries
throughout the world and, as a result, is exposed to movements in foreign
currency exchange rates. The major foreign currency exposures involve the
markets in Western Europe, Mexico and Canada. The primary purpose of the
Company's foreign currency hedging activities is to protect against the
volatility associated with foreign currency sales, purchases of materials and
other assets and liabilities created in the normal course of business. The
Company utilizes forward exchange contracts with durations of generally less
than 12 months. In addition, the Company enters into forward exchange contracts
to hedge intercompany financing transactions and foreign source income. At
September 30, 1999 and 1998, unrealized gains and losses on outstanding forward
exchange contracts are not material. At September 30, 1999 and 1998, the
potential gain or loss in the fair value of the Company's outstanding forward
exchange contracts, assuming a hypothetical 10% fluctuation in the currencies of
such contracts, would be approximately $5.7 million and $5.9 million,
respectively. However, it should be noted that any change in the value of the
contracts, real or hypothetical, would be significantly offset by an inverse
change in the value of the underlying hedged items. In addition, this
hypothetical calculation assumes that each exchange rate would change in the
same direction relative to the U.S. dollar.
The Company manages its debt structure and interest rate risk through the use of
fixed-rate and floating-rate debt and through the use of derivatives. The
Company uses interest-rate swaps to hedge its exposure to interest rate changes
and also to lower its financing costs. Certain foreign currency interest rate
swaps are designated as hedges to the Company's related net foreign investments.
The Company's primary exposure is to U.S. interest rates. At September 30, 1999
and 1998, unrealized gains and losses related to interest rate swap agreements
were not material. As of September 30, 1999 and 1998, the potential gain or loss
in the fair value of the Company's outstanding interest rate swap agreements
assuming a hypothetical 10% fluctuation in the currencies and interest rates of
such contracts would be approximately $10.1 million and $2.5 million,
respectively. However, any change in the value of the contracts, real or
hypothetical, would be significantly offset by an inverse change in the value of
the underlying hedged items.
The Company is the purchaser of certain commodities such as corn, soybean meal,
molasses and fruits. The Company generally purchases these commodities based
upon market prices that are established with the vendor as part of the purchase
process. In general, the Company does not use commodity financial instruments to
hedge commodity prices due to a high correlation between the commodity cost and
the ultimate selling price of the product. On occasion, the Company may enter
into non-
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cancelable contracts, as deemed appropriate, to reduce the effect of price
fluctuations on some future manufacturing requirements.
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 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.
The Company has developed a comprehensive Project Plan ("the Plan") for
addressing the Year 2000 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 Year 2000 rollover and contingency plans;
6 Implementation of the Year 2000 rollover and contingency plans; and
7 Post Year 2000 strategies.
TOTAL DEBT TO TOTAL CAPITAL
[BAR CHART]
95 34.3%
96 36.9%
97 41.1%
98 45.7%
99 50.8%
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 Year 2000 needs to assist in the management of the
Plan. Management of 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 these plans have been implemented.
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System implementation at the Company has included upgrading system code and/or
replacing hardware and upgrading or replacing current systems. The Plan also
includes an evaluation of the Company's communication systems, security systems
and other non-information technology systems for purposes of determining whether
Year 2000 issues exist. Since most of the business critical systems of the
Company have been purchased from third-party vendors, the majority of remedies
have been through upgrades. When available, written certifications of Year 2000
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. As of
September 30, 1999, systems testing has been completed. Once a system has been
tested, no upgrades or modifications will be made to that system until after
March 2000.
A critical part of the Plan involves the investigation and assessment of the
Year 2000 preparedness of important suppliers, vendors, customers, utilities and
other third parties. The Company's initial round of assessments has been
completed. Generally, these third parties have indicated that they are
progressing on schedule with their Year 2000 issues. The Company is continuing
to monitor critical suppliers and vendors and these efforts will continue
throughout the balance of 1999 in order to minimize the risk that any
significant adverse consequences will result due to the failure of these third
parties to be Year 2000 ready.
While the Company has no reason to believe that its exposure to the risks of its
failure or that of third parties to be Year 2000 ready is any greater than the
exposure to such risks that affect its competitors, generally, there can be no
assurance that the consequences of such failures would not have a material
adverse impact on the Company's operations. Although the Company does not
anticipate any major noncompliance issues, the Company believes the most likely
worst case scenario would be the temporary disruption of its business in certain
locations in the event of noncompliance by the Company or such third parties,
which could include temporary plant closings, delays in the delivery and receipt
of products and supplies, invoice and collection errors and inventory
obsolescence. The Company believes that its diverse operations and its
contingency planning should significantly reduce the adverse effect any such
disruptions may have.
The Company has developed and is implementing contingency plans to allow the
Company to continue critical operations in the event either the Company or major
key suppliers or customers fail to resolve their respective Year 2000 issues in
a timely manner. Contingency plans include stockpiling raw and packaging
materials, increasing finished goods inventory levels, developing emergency
backup and recovery procedures, securing alternate suppliers, replacing
electronic applications with manual processes or other appropriate measures.
Standardized progress reporting has been implemented for all divisions
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to report their contingency planning and remediation status to the Corporate
executive staff. The Company's Year 2000 readiness plan, including the further
development and refinement of contingency plans, is an ongoing process and will
continue to evolve and change as new information becomes available.
The cost of outside consultants to assist with software redemption and project
management has not been and is not expected to be material. During 1999, the
Company incurred 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 were dedicated to implementation of the Company's
Plan. The foregoing allocation of resources had no significant impact on 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 Year 2000 issues.
DEPRECIATION/CAPITAL EXPENDITURES (in millions)
[BAR CHART]
95 $28.2/$42.6
96 $29.2/$59.0
97 $32.4/$73.5
98 $38.0/$66.1
99 $41.3/$62.6
EURO CONVERSION
A single currency, the Euro, was introduced in Europe on January 1, 1999. Of the
fifteen member countries of the European Union, eleven adopted the Euro as their
legal currency on that date. Fixed conversion rates between the national
currencies of these eleven countries and the Euro were established on that date.
The national currencies are scheduled to remain legal tender as denominations of
the Euro during the transition period ending December 31, 2001. During this
transition period, parties may settle transactions using either the Euro or a
participating country's national currency. At the current time, the Company does
not believe that the conversion to the Euro will have a material impact on its
business or its financial condition.
OUTLOOK
This report 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
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Reform Act of 1995 provides a safe harbor for such forward-looking 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; and the
outcome of various productivity-improvement and cost-reduction efforts.
The Company seeks to increase revenue and profits through a number of strategic
actions. Strategies for growth include further penetration of existing markets
and entry into new product and geographic markets. In addition, the Company
continues to enhance its technologies and broaden its product base. The Company
has built strong relationships with market leaders in each of the industries
that its serves by providing superior technical support and service.
Universal Foods Corporation continues to seek opportunities to grow in both its
primary market, the food industry, and in non-food markets. Current non-food
applications include cosmetics, personal care products, pharmaceuticals, inks
for ink-jet printers and a variety of other products. The Company believes that
the technologies of the Performance Products segment provide the greatest
opportunities for growth in non-food applications.
The Company completed four acquisitions for its Color division during fiscal
1999. The acquisition of Pointing Holdings Ltd. has provided new opportunities
for geographic growth. The acquisition of Les Colorants Wackherr provides the
Company with an important strategic base and an enhanced line of colors and
ingredient systems for the cosmetic industry. The Company continues to broaden
its line of natural colors. The acquisition of certain assets of Quimica
Universal has enhanced the Company's capabilities in the production of annatto
and carminic acid- based products. The acquisition of the natural color business
of Nino Fornaciari fu Riccardo S.N.C. broadens and expands the Company's
offerings in anthocyanin.
Acquisitions remain an important part of the Company's overall plan for growth.
The Company continues to aggressively pursue attractive acquisition
opportunities and expects to add additional new businesses during fiscal 2000.
CONSOLIDATED STATEMENTS OF EARNINGS
[ In thousands except per share amounts ]
Years ended September 30, 1999 1998 1997
- --------------------------------------------------------------------------------
Revenue $920,192 $856,772 $825,714
Cost of products sold 599,797 556,048 551,090
Selling and administrative expenses 175,285 171,862 167,390
------- ------- -------
Operating income 145,110 128,862 107,234
Interest expense 26,034 21,185 16,798
------- ------- -------
Earnings before income taxes 119,076 107,677 90,436
Income taxes 38,938 35,033 25,748
- --------------------------------------------------------------------------------
Net earnings $ 80,138 $ 72,644 $ 64,688
------- ------- -------
Basic net earnings per common share $ 1.59 $ 1.42 $ 1.27
------- ------- -------
Diluted net earnings per common share $ 1.57 $ 1.40 $ 1.26
------- ------- -------
Average common shares outstanding - basic 50,528 51,155 51,026
------- ------- -------
Average common shares outstanding -
diluted 51,109 51,837 51,390
------- ------- -------
See notes to consolidated financial statements.
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CONSOLIDATED BALANCE SHEETS
[ Dollars in thousands except per share amounts ]
September 30, 1999 1998
- ---------------------------------------------------------------------------------
Assets
Current Assets:
Cash and cash equivalents $ 4,645 $ 1,632
Trade accounts receivable less allowance for losses
of $4,079 and $4,548 143,435 121,833
Inventories 217,217 197,089
Prepaid expenses and other current assets 28,887 21,436
Deferred income taxes 10,386 15,765
--------- -------
Total current assets 404,570 357,755
Investments 38,269 32,400
Other assets 31,252 28,485
Intangibles-at cost, less accumulated amortization
of $47,776 and $40,533 278,309 217,007
Property, Plant and Equipment:
Cost:
Land 18,014 17,365
Buildings 154,642 138,320
Machinery and equipment 509,107 469,915
--------- -------
681,763 625,600
Less accumulated depreciation 291,455 270,021
--------- -------
390,308 355,579
- ---------------------------------------------------------------------------------
Total Assets $1,142,708 $ 991,226
--------- -------
Liabilities and Shareholders' Equity
Current Liabilities:
Short-term borrowings $ 51,464 $ 42,773
Accounts payable and accrued expenses 140,119 122,297
Salaries, wages and withholdings from employees 16,777 15,744
Income taxes 23,849 22,066
Current maturities of long-term debt 9,484 6,940
--------- -------
Total current liabilities 241,693 209,820
Deferred income taxes 28,446 25,489
Other deferred liabilities 20,912 22,619
Accrued employee and retiree benefits 34,678 36,065
Long-term debt 385,397 291,588
Commitments and contingencies -- --
Shareholders' Equity:
Common stock par value $.10 a share, authorized
250,000,000 shares; issued 53,954,874 shares 5,396 5,396
Additional paid-in capital 74,524 74,663
Earnings reinvested in the business 470,253 416,949
Less: Treasury stock, 3,614,759 and 2,797,976 shares,
respectively, at cost 71,309 51,979
Accumulated other comprehensive income 45,278 37,845
Other 2,004 1,539
--------- -------
431,582 405,645
- ---------------------------------------------------------------------------------
Total liabilities and shareholders' equity $1,142,708 $ 991,226
--------- -------
See notes to consolidated financial statements.
16
]
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Earnings Unearned Accumulated
Additional reinvested portion of other Total
[ Dollars in thousands Common paid-in in the Treasury stock restricted comprehensive comprehensive
except per share amounts ] stock capital business Shares Amount stock income income
- -------------------------------------------------------------------------------------------------------------------------------
Balances at September 30, 1996 $5,396 $75,479 $333,290 3,114,016 $(49,892) $(953) $(12,354)
Net earnings 64,688 $64,688
Currency translation (11,393) (11,393)
-------
Total comprehensive income $53,295
-------
Cash dividends paid
$.52 a share (26,534)
Stock options exercised (1,513) (609,638) 9,768
Restricted stock 109 (20,800) 334 (23)
Other 1 3,718 (167)
Purchase of treasury stock 285,200 (5,785)
- -------------------------------------------------------------------------------------------------------------------
Balances at September 30, 1997 5,396 74,076 371,444 2,772,496 (45,742) (976) (23,747)
Net earnings 72,644 $72,644
Currency translation (14,098) (14,098)
-------
Total comprehensive income $58,546
-------
Cash dividends paid -
$.53 a share (27,139)
Stock options exercised (393) (802,674) 13,672
Benefit plans 377 (100,000) 1,713
Restricted stock 128 (39,200) 734 (563)
Other 475 2,958 (560)
Purchase of treasury stock 964,396 (21,796)
- -------------------------------------------------------------------------------------------------------------------
Balances at September 30, 1998 5,396 74,663 416,949 2,797,976 (51,979) (1,539) (37,845)
Net earnings 80,138 $80,138
Currency translation (7,433) (7,433)
-------
Total comprehensive income $72,705
-------
Cash dividends paid -
$.53 a share (26,834)
Stock options exercised (309) (207,282) 3,878
Benefit plans 64 (26,582) 482
Restricted stock 106 (39,000) 769 (465)
Other 5,647 (114)
Purchase of treasury stock 1,084,000 (24,345)
- -------------------------------------------------------------------------------------------------------------------
Balances at September 30, 1999 $5,396 $74,524 $470,253 3,614,759 $(71,309) $(2,004) $(45,278)
------ ------- -------- --------- -------- ------- --------
See notes to consolidated financial statements.
17
CONSOLIDATED STATEMENTS OF CASH FLOWS
[ Dollars in thousands ]
Years ended September 30, 1999 1998 1997
Cash Flows from Operating Activities
- ---------------------------------------------------------------------------------------------------------
Net earnings $ 80,138 $ 72,644 $ 64,688
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation 41,264 38,011 32,399
Amortization 7,653 6,221 4,927
(Gain) loss on sale of property, plant and
equipment and other productive assets (2,446) (3,277) 16
Changes in operating assets and liabilities
(net of effects from acquisition of businesses):
Trade accounts receivable (10,786) (1,135) (13,351)
Inventories (11,266) (5,710) (13,418)
Prepaid expenses and other assets (3,714) (7,678) 198
Accounts payable and accrued
expenses (1,495) (22,425) 7,844
Salaries, wages and withholdings
from employees (1,573) 1,355 2,882
Income taxes (536) 7,537 2,044
Deferred income taxes 9,245 9,681 4,357
Other liabilities (3,982) 199 1,160
- ---------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 102,502 95,423 93,746
-------- -------- --------
Cash Flows from Investing Activities
Acquisition of property, plant and
equipment (62,555) (66,063) (73,502)
Acquisition of new businesses - net of
cash acquired (58,361) (68,670) (50,492)
Proceeds from sale of property, plant and
equipment and other productive assets 4,465 6,656 438
Increase in investments (4,794) (5,860) (5,719)
- ---------------------------------------------------------------------------------------------------------
Net cash used in investing activities (121,245) (133,937) (129,275)
-------- -------- --------
Cash Flows from Financing Activities
Proceeds from additional borrowings 235,872 80,690 66,455
Reduction in debt (166,652) (5,720) (6,651)
Purchase of treasury stock (24,345) (21,796) (5,785)
Dividends (26,834) (27,139) (26,534)
Proceeds from options exercised and other
equity transactions 3,729 13,579 8,089
- ---------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 21,770 39,614 35,574
-------- -------- --------
Effect of exchange rate changes on cash
and cash equivalents (14) (726) (2,182)
- ---------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and
cash equivalents 3,013 374 (2,137)
Cash and cash equivalents at beginning of
year 1,632 1,258 3,395
- ---------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 4,645 $ 1,632 $ 1,258
-------- -------- --------
Cash paid during the year for:
Interest $ 21,182 $ 21,372 $ 16,062
Income taxes 26,447 16,074 16,261
Liabilities assumed in acquisitions 34,868 -- 1,500
See notes to consolidated financial statements.
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[ Tabular amounts in thousands except per share data ]
[ Years ended September 30, 1999, 1998 and 1997 ]
1 Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Universal Foods
Corporation and its subsidiaries ("the Company"). All significant intercompany
accounts and transactions are eliminated.
Use of Estimates
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
periods. Actual results could differ from those estimates.
Revenue Recognition
The Company recognizes operating revenues upon shipment of goods to customers.
Cash Equivalents
Highly liquid investments with maturities of three months or less when acquired
are considered cash equivalents.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined using
the first-in, first-out (FIFO) method.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost reduced by accumulated
depreciation. Depreciation is provided over the estimated useful life using the
straight-line method for financial reporting. Accelerated methods are used for
income tax purposes.
Intangibles
The excess cost over net assets of businesses acquired and other intangibles are
being amortized using the straight-line method over periods ranging from 5 to 40
years.
19
Software Costs
The Company capitalizes certain computer software and software development costs
incurred in connection with developing or obtaining computer software for
internal use in accordance with Statement of Position No. 98-1 ("SOP 98-1"),
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," which was adopted by the Company in 1999. The adoption of SOP
98-1 had no material effect on the Company's financial position or results of
operations.
Capitalized costs are amortized on a straight-line basis over the estimated
useful life of the software.
Impairment of Long-lived Assets
The Company reviews long-lived assets for impairment whenever events or changes
in business circumstances indicate that the carrying amount of the assets may
not be fully recoverable. The Company performs undiscounted cash flow analyses
to determine if an impairment exists. If an impairment is determined to exist,
any related impairment loss is calculated based on fair value.
Financial Instruments
The Company uses derivative financial instruments for the purpose of hedging
currency and interest rate exposures which exist as part of ongoing business
operations. As a policy, the Company does not engage in speculative or leveraged
transactions, nor does the Company hold or issue financial instruments for
trading purposes.
Interest Rate Swap Agreements
The Company may utilize interest rate swap agreements to lower funding
costs, to diversify sources of funding or to alter interest rate exposure.
Amounts paid or received on interest rate swap agreements are deferred and
recognized as adjustments to interest expense. Gains and losses realized
upon the settlement of such contracts are deferred and amortized to
interest expense over the remaining term of the debt instrument or are
recognized immediately if the underlying instrument is settled.
Foreign Currency Contracts
The Company enters into forward and swap contracts to hedge transactions
denominated in foreign currencies in order to reduce the currency risk
associated with fluctuating exchange rates. Such contracts are used
primarily to hedge certain intercompany cash flows, purchases of certain
raw materials and finished goods, for payments arising from certain foreign
currency denominated obligations and to hedge net assets in foreign
subsidiaries. Realized and unrealized gains and losses from instruments
qualifying as hedges are deferred as part of the cost basis of the
underlying transaction. Realized and unrealized gains and losses from
foreign currency contracts used as economic hedges but not qualifying for
hedge accounting are recognized currently as income or expense.
20
Translation of Foreign Currencies
For all significant foreign operations, the functional currency is the local
currency. Assets and liabilities of foreign operations are translated into
United States dollars at current exchange rates. Income and expense accounts are
translated into United States dollars at average rates of exchange prevailing
during the year. Adjustments resulting from the translation to U.S. dollars are
included as foreign currency translation adjustments in shareholders' equity.
Transaction gains and losses are included in earnings for the period.
Stock-Based Compensation
The Company accounts for its stock-based compensation plans using the intrinsic
value-based method in accordance with Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25).
Earnings Per Share
In the first quarter of fiscal 1998, the Company adopted Statement of Financial
Accounting Standards No. 128 ("SFAS No. 128"), "Earnings Per Share," which
requires the disclosure of both diluted and basic earnings per share. Previously
reported earnings per share amounts have been restated, as necessary, to conform
to SFAS No. 128 requirements. The difference between basic and diluted earnings
per share is the dilutive effect of stock options and restricted stock. All
earnings per share amounts are presented on a diluted basis unless otherwise
noted.
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. The statement requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The Company is not
required to adopt the statement until fiscal 2001. The Company is currently
evaluating the effect that implementation of the new standard will have on its
results of operations, financial position and cash flows.
2 Acquisitions
During fiscal 1999, the Company acquired businesses for a total of $92,440,000.
The preliminary allocations of purchase price resulted in goodwill of
$70,626,000 which is being amortized on a straight-line- basis over 40 years.
The businesses acquired were:
In January 1999, the Company acquired for cash the stock of Les Colorants
Wackherr, a manufacturer of colors and ingredients for the cosmetic
industry.
21
In January 1999, the Company acquired certain assets of Quimica Universal,
a manufacturer of annatto and carminic acid-based products, natural colors
primarily used in food.
In April 1999, the Company acquired the stock of Pointing Holdings Ltd., a
manufacturer of food colors, flavors and specialty chemicals. The purchase
price was a combination of cash, notes and the assumption of debt.
In July 1999, the Company acquired for cash the natural color business of
Nino Fornaciari fu Riccardo S.N.C., a worldwide supplier of anthocyanin.
During fiscal 1998, the Company acquired four businesses for cash of
$69,459,000. The allocations of purchase price resulted in goodwill of
$46,931,000 which is being amortized on a straight-line-basis over 40 years. The
businesses acquired were:
In January 1998, the Company acquired the stock of Arancia Ingredientes
Especiales, S.A. de C.V., a manufacturer of savory flavors and other food
ingredients.
In April 1998, the Company acquired the stock of DC Flavours Ltd., a
manufacturer of savory flavors and seasonings.
In May 1998, the Company acquired substantially all of the assets and
business of the beverage business of Sundi GmbH, a German flavor
manufacturer.
In September 1998, the Company acquired the stock of Reggiana Antociani
S.R.L., a manufacturer of natural colors for the food and beverage
industries.
During the second quarter of 1997, the Company acquired Tricon Colors, Inc., an
ink and dye producer, for cash of $44,492,000. The allocation of the purchase
price resulted in goodwill of $37,923,000 which is being amortized on a
straight-line-basis over 40 years.
In September 1997, the Company acquired certain assets of the food color
business of Pyosa S.A., for cash and notes aggregating $7,500,000.
The above acquisitions have been accounted for as purchases and, accordingly,
their results of operations have been included in the financial statements since
their respective dates of acquisition. On an unaudited pro-forma basis, the
effects of the acquisitions were not significant to the Company's results of
operations.
3 Integration Charge
In 1997, the Company recorded an integration charge of $7,500,000
($4,600,000 after tax, or $.09 per share) for the cost of combining its
22
BioProducts and Flavor divisions. This charge, which is classified in selling
and administrative expenses, relates primarily to severance costs substantially
all of which were paid in 1998.
4 Inventories
Inventories include finished and in-process products totaling $159,117,000 and
$145,135,000 at September 30, 1999 and 1998, respectively, and raw materials and
supplies of $58,100,000 and $51,954,000 at September 30, 1999 and 1998,
respectively.
5 Debt
Long-term debt consists of the following obligations at September 30:
1999 1998
Payable in U.S. Dollars:
9.06% senior notes due through July 2004 $ 29,000 $ 34,000
7.59% senior notes due through December 2008 30,000 30,000
7.06% senior notes due through December 2002 30,000 30,000
6.99% senior notes due through December 2007 40,000 40,000
6.77% senior notes due through January 2010 15,000 15,000
6.70% senior notes due through December 2009 20,000 20,000
6.68% senior notes due through January 2011 15,000 15,000
6.38% senior notes due through December 2003 20,000 20,000
6.60% notes due April 2009 148,918 --
Commercial paper and other short-term notes -- 70,000
Various mortgage notes, capital lease obligations
and other notes 6,964 4,714
Notes and credit facilities payable in foreign
currencies 39,999 19,814
-------- --------
394,881 298,528
Current maturities 9,484 6,940
- ---------------------------------------------------------------------------------------------------------
Total long-term debt $385,397 $291,588
-------- --------
In November 1998, the Company filed a shelf registration statement with the
Securities and Exchange Commission pursuant to which the Company may from time
to time issue debt securities of up to $300 million in the aggregate. The first
transaction under the shelf registration statement was the issuance of $150
million in unsecured notes due April 1, 2009 with an annual stated interest rate
of 6.50% (effective rate 6.60%).
The Company has a $70,000,000 multicurrency revolving loan agreement with a
group of three banks. Under the agreement, the Company has the option to elect
to have interest rates determined based upon the LIBOR rate plus margin or the
certificate of deposit rate plus margin. A commitment fee is payable on the
unused amount of credit. The facility matures in August 2003.
The Company issues short-term commercial paper obligations supported by
committed lines of credit included in the Revolving Loan Agreement. The
23
Company also issues other short-term notes. At September 30, 1999, the Company
had $57,000,000 available under the revolving loan agreement and $78,000,000
available under uncommitted lines of credit from several banks.
At September 30, 1998, $70,000,000 of short-term borrowings were classified as
long-term debt reflecting the Company's intent and ability, through the
existence of the unused credit facility, to refinance these borrowings.
The aggregate amounts of maturities on long-term debt each year for the five
years subsequent to September 30, 1999 are as follows: 2000, $9,484,000; 2001,
$15,973,000; 2002, $15,589,000; 2003, $49,387,000, and 2004, $18,958,000.
Substantially all of the senior loan agreements contain restrictions concerning
working capital, borrowings, investments and dividends. Earnings reinvested of
$18,740,000 at September 30, 1999 were unrestricted.
Short-term borrowings consist of commercial paper, uncommitted loans and loans
to foreign subsidiaries denominated in local currencies which are borrowed under
various foreign uncommitted lines of credit. The weighted average interest rates
on short-term borrowings were 6.04% and 5.75% at September 30, 1999 and 1998,
respectively. This includes $70,000,000 reclassified to long-term debt on
September 30, 1998.
6 Financial Instruments and Risk Management
Foreign Currency Contracts
The Company uses forward exchange contracts to reduce the effect of fluctuating
foreign currencies on short-term foreign currency-denominated intercompany
transactions and other known foreign currency exposures. At September 30, 1999
and 1998, the Company had forward exchange contracts, generally with maturities
of one year or less, of $73,939,000 and $65,709,000, respectively.
The Company has foreign currency and related interest rate swap agreements which
were executed to reduce the Company's borrowing costs and serve as hedges of the
Company's net assets in foreign subsidiaries, principally those denominated in
Euros. At September 30, 1999 and 1998, the notional principal amounts of these
agreements were $90,175,000 and $15,175,000, respectively. Aggregate maturities
are $75,000,000 in 2000 and $15,175,000 in 2008. The notional amount is used to
calculate interest payments which are exchanged over the life of the swap
transaction and is equal to the amount of foreign currency or dollar principal
exchanged at maturity. Net unrealized gains and losses associated with the
Company's foreign currency contracts as of September 30, 1999 and 1998 were not
material.
24
Concentrations of Credit Risk
Counterparties to currency exchange and interest rate swap contracts consist of
large major international financial institutions. The Company continually
monitors its positions and the credit ratings of the counterparties involved and
limits the amount of credit exposure to any one party. While the Company may be
exposed to potential losses due to the credit risk of non-performance by these
counterparties, losses are not anticipated. Concentrations of credit risk with
respect to accounts receivable are limited due to the large number of customers,
generally short payment terms, and their dispersion across geographic areas.
Fair Values
The carrying amount of cash and cash equivalents, trade receivables,
investments, financial instruments, accounts payable and short-term borrowings
approximated fair value as of September 30, 1999 and 1998.
The fair value of the Company's long-term debt, including current maturities, is
estimated using discounted cash flows based on the Company's current incremental
borrowing rates for similar types of borrowing arrangements. The fair value at
September 30, 1999 and 1998 was approximately $383,357,000 and $314,669,000,
respectively.
7 Shareholders' Equity
On April 9, 1998, the Company declared a 2-for-1 stock split in the form of a
100% stock dividend, which was distributed on May 22, 1998, to shareholders of
record on May 6, 1998.
On June 25, 1998, the Board of Directors declared a dividend of one preferred
share purchase right (a "Right") for each outstanding share of common stock, par
value of $.10 per share, of the Company. The dividend was paid on August 6,
1998, to the stockholders of record on that date. Each Right entitles the
registered holder to purchase from the Company one one-thousandth of a share of
Series A Participating Cumulative Preferred Stock, without par value (the
"Preferred Share"), of the Company at a price of $125 per one one-thousandth of
a Preferred Share, subject to adjustment. The Right becomes exercisable and
tradable ten days after a person or group acquires 20% or more, or makes an
offer to acquire 20% or more, of the Company's outstanding common stock. When
exercisable, each Right entitles the holder to purchase $250 worth of Company
common stock for $125. Further, upon the occurrence of a merger or transfer of
more than 50% of the Company's assets, the Right entitles the holder to purchase
common stock of an acquiring company having a market value equivalent to two
times the exercise price of the Right. At no time does the Right have any voting
power. The Right is subject to redemption by the Company's Board of Directors
for $.01 per Right at any time prior to the date on which a person or group
acquires beneficial ownership of 20% or more of the Company's common stock. The
Rights expire on September 30, 2008. The Rights replace rights issued under a
prior rights plan, which were redeemed on August 6, 1998.
25
The Company is authorized to issue 250,000 shares of cumulative preferred stock,
of which 100,000 shares are classified as Series A Participating Cumulative
Preferred Stock and were initially reserved for issuance under the Rights plan.
8 Stock Plans
In January 1998, the shareholders approved the 1998 Stock Option Plan. Under the
1998 Plan up to 2,400,000 shares of common stock are available for awards, of
which no more than 600,000 shares may be restricted stock. The Company may also
issue up to 2,400,000 shares of common stock pursuant to the exercise of stock
options or the grant of restricted stock under the 1994 Employee Stock Plan.
Under the 1994 Plan, up to 500,000 shares may be awarded as restricted stock.
Generally, stock options become exercisable over a three year vesting period and
expire 10 years from the date of grant. Awarded shares of restricted stock
become freely transferable at the end of five years. During the period of
restriction, the employee has voting rights and is entitled to receive all
dividends and other distributions paid with respect to the stock. The 1994 Plan
also authorizes the grant of up to 800,000 stock appreciation rights (SARs) in
connection with stock options.
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Accordingly, no compensation cost has
been recognized for the Company's stock option plans. If the Company had elected
to recognize compensation cost based on the fair value of the options granted at
grant date as prescribed by SFAS No. 123, net earnings and earnings per common
share would have been reduced to the pro forma amounts indicated below:
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------
Pro forma net earnings $78,225 $71,120 $63,626
Pro forma net earnings per common share:
Basic $ 1.55 $ 1.39 $ 1.25
Diluted 1.53 1.37 1.24
The pro forma effect on net earnings is not representative of the pro forma
effect on net earnings in future years because it does not take into
consideration pro forma compensation expense related to grants made prior to
1996.
The weighted-average fair value per share of options granted was $6.21 in 1999,
$3.83 in 1998 and $3.90 in 1997.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions:
1999 1998 1997
- -------------------------------------------------------------------------
Dividend yield 2.3% 2.5% 2.6%
Volatility 24% 19% 19%
Risk-free interest rate 5.8% 4.2% 5.8%
Expected term (years) 6 5 5
26
The changes in outstanding stock options during the three years ended September
30, 1999 are summarized below:
Shares Weighted
Outstanding average
options Available price
- ----------------------------------------------------------------------------------------
Balances at September 30, 1996 3,880 1,112 $15.56
Granted 685 (685) 18.71
Restricted stock -- (28) 20.09
Exercised (648) -- 13.68
Cancelled (121) 121 16.81
- ----------------------------------------------------------------------------------------
Balances at September 30, 1997 3,796 520 16.43
Authorized under the 1998 Plan -- 2,400 --
Granted 600 (600) 20.79
Restricted stock -- (42) 21.56
Exercised (867) -- 15.01
Cancelled (146) 146 17.80
- ----------------------------------------------------------------------------------------
Balances at September 30, 1998 3,383 2,424 17.61
Granted 621 (621) 22.37
Restricted stock -- (39) 22.19
Exercised (237) -- 16.16
Cancelled (43) 43 20.39
- ----------------------------------------------------------------------------------------
Balances at September 30, 1999 3,724 1,807 $18.52
----- ----- -----
Weighted
Options average
exercisable price
September 30, 1997 2,462 $15.75
September 30, 1998 2,208 $16.46
September 30, 1999 2,555 $17.07
The following summarizes information concerning currently outstanding and
exercisable options:
Range of exercise price
$12.06- $16.16- $20.51-
16.15 20.50 23.50
- ---------------------------------------------------------------------------------------------------------
Number outstanding 999 1,555 1,170
Weighted average remaining contractual life, in years 5.6 5.8 9.2
Weighted average exercise price $15.36 $17.88 $22.08
- ---------------------------------------------------------------------------------------------------------
Number exercisable 999 1,368 188
Weighted average exercise price $15.36 $17.73 $21.40
27
9 Retirement Plans
The Company provides benefits under defined contribution plans including a
savings plan and ESOP. The savings plan covers substantially all domestic
salaried and certain non-union hourly employees and provides for matching
contributions up to 4% of each employee's salary. The ESOP covers substantially
all domestic employees not covered by a defined benefit plan and provides for
contributions based on a percentage (6% each of the last three years) of each
employee's compensation. Total expense for the Company's defined contribution
plans was $8,001,000, $6,746,000 and $6,984,000 in 1999, 1998 and 1997,
respectively.
10 Other Postretirement Benefits
The Company provides certain health insurance benefits to eligible domestic
retirees and their dependents. In 1997, the Company implemented programs
intended to mitigate rising costs, including adopting a provision that limits
its future obligation to absorb health care cost inflation. The amendment
resulted in an unrecognized prior service gain of $4,318,000 which is being
amortized over the employees average remaining service life. The Company funds
benefit costs on a pay-as-you- go basis, with retirees paying a portion of the
costs.
The funded status of the postretirement benefit plan at September 30 was:
1999 1998
- --------------------------------------------------------------------------------
Benefit obligation at beginning of year $ 13,120 $ 13,290
Service cost 415 418
Interest cost 859 966
Benefits paid (1,106) (622)
Actuarial gain (398) (932)
- --------------------------------------------------------------------------------
Benefit obligation at end of year 12,890 13,120
Plan assets -- --
- --------------------------------------------------------------------------------
Funded status (12,890) (13,120)
Unrecognized prior service cost (7,395) (7,943)
Unrecognized net actuarial gain (10,777) (10,874)
- --------------------------------------------------------------------------------
Net amount recognized $ (31,062) $(31,937)
--------- --------
Components of net periodic benefit cost were:
1999 1998 1997
- ----------------------------------------------------------------------------------
Service cost $ 415 $ 418 $ 419
Interest cost 859 966 959
Amortization of prior service cost (548) (548) (548)
Recognized actuarial gain (506) (425) (441)
- ----------------------------------------------------------------------------------
Postretirement benefit expense $ 220 $ 411 $ 389
----- ----- -----
The weighted average discount rates used in determining the accumulated
postretirement benefit obligation at September 30, 1999 and 1998 were 7.25% and
6.75%, respectively. The health care cost trend rates were assumed to be 7.75%
in 1999 and 8.50% in 1998, gradually declining to 5.5% by the year 2002 and
remaining at that level thereafter.
28
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plan. A one percentage point change in assumed
health care cost trend rates would have the following effects:
1% 1%
increase decrease
- --------------------------------------------------------------------------------
Effect on total of service and interest cost 100 (92)
components
Effect on postretirement benefit obligation 890 (827)
11 Income Taxes
The provision for income taxes is as follows:
1999 1998 1997
- --------------------------------------------------------------------------------
Currently payable:
Federal $14,524 $12,831 $10,556
State 3,385 3,195 3,192
Foreign 11,784 9,509 8,171
Deferred (benefit):
Federal 7,070 8,640 3,426
State 1,108 1,059 403
Foreign 1,067 (201) --
- --------------------------------------------------------------------------------
$38,938 $35,033 $25,748
------ ------ ------
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets and liabilities consist of the following:
1999 1998
- --------------------------------------------------------------------------------
Deferred tax assets:
Benefit plans $(16,988) $(18,501)
Liabilities and reserves (4,875) (9,417)
Other (17,551) (16,393)
------- -------
Gross deferred tax assets (39,414) (44,311)
Valuation allowance 14,307 13,697
------- -------
Total deferred tax assets (25,107) (30,614)
------- -------
Deferred tax liabilities:
Property, plant and equipment 24,839 21,867
Other 18,328 18,471
------- -------
Total deferred tax liabilities 43,167 40,338
- --------------------------------------------------------------------------------
Net deferred tax liabilities $ 18,060 $ 9,724
------- -------
29
The effective tax rate differs from the statutory Federal income tax rate of 35%
as described below:
1999 1998 1997
- --------------------------------------------------------------------------------
Taxes at statutory rate 35.0% 35.0% 35.0%
State income taxes, net of Federal income tax benefit 2.5 2.6 2.6
Tax credits (4.2) (3.9) (4.6)
Settlements of prior years' issues (1.2) (1.4) (5.3)
Other, net 0.6 0.2 0.8
- --------------------------------------------------------------------------------
Effective tax rate 32.7% 32.5% 28.5%
---- ---- ----
The effective tax rates reflect the reversal of tax accruals no longer required
resulting from settlement of prior years' issues. The effective tax rates would
have been 33.9%, 33.9% and 33.8%, in 1999, 1998 and 1997, respectively excluding
the favorable impact of these items.
Earnings before income taxes are summarized as follows:
1999 1998 1997
- --------------------------------------------------------------------------------
United States $ 85,656 $ 81,311 $67,960
Foreign 33,420 26,366 22,476
- --------------------------------------------------------------------------------
$119,076 $107,677 $90,436
------- ------- ------
Domestic income taxes have not been provided on undistributed earnings of
foreign subsidiaries which are considered to be permanently invested. If
undistributed foreign earnings were to be remitted, foreign tax credits would
substantially offset any resulting domestic tax liability.
12 Segment and Geographic Information
In 1999, the Company adopted Statement of Financial Accounting Standards (SFAS)
No. 131 "Disclosures about Segments of an Enterprise and Related Information."
This statement establishes standards for the reporting of financial information
about a company's operating segments for both interim and annual reporting. The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Company evaluates performance
based on operating income of the respective business units before goodwill
amortization, interest expense and income taxes. Total revenue and operating
income by business segment and geographic region include both sales to
customers, as reported in the Company's consolidated statements of earnings, and
intersegment sales, which are accounted for at prices which approximate market
prices and are eliminated in consolidation. Corporate and other revenue consist
primarily of flavor and color products sold by the Asia Pacific division.
Assets by business segment and geographic region are those assets used in
company operations in each segment and geographic region. Corporate and other
assets consist primarily of property, investments and goodwill. Capital
expenditures are reported exclusive of acquisitions.
Segment Information The Company's operations, except for the Asia Pacific
division, are managed on a products and services basis. The Company's two
reportable segments are Performance Products and Natural
30
Products. The Company's Performance Products segment produces flavor and color
products that impart a desired taste, smell or color to a broad range of
consumer products. The Natural Products segment produces yeast and dehydrated
vegetable products which are used by manufacturers of various food products.
Performance Natural Corporate
Products Products and Other Consolidated
1997
- -----------------------------------------------------------------------------------------------------------
Revenue from external
customers $492,158 $289,959 $43,597 $ 825,714
Intersegment revenue 21,047 4,362 -- 25,409
------- ------- ------ -------
Total revenue 513,205 294,321 43,597 851,123
Operating income 68,347 51,092 (12,205) 107,234
Interest expense -- -- 16,798 16,798
Earnings before income taxes 68,347 51,092 (29,003) 90,436
Assets 414,852 209,671 263,206 887,729
Capital expenditures 39,261 32,467 1,774 73,502
Depreciation and amortization 20,455 10,275 6,596 37,326
Restructuring/integration costs 7,500 -- -- 7,500
1998
Revenue from external
customers $511,214 $300,633 $44,925 $ 856,772
Intersegment revenue 30,390 10,417 -- 40,807
------- ------- ------ -------
Total revenue 541,604 311,050 44,925 897,579
Operating income 92,403 56,567 (20,108) 128,862
Interest expense -- -- 21,185 21,185
Earnings before income taxes 92,403 56,567 (41,293) 107,677
Assets 462,310 234,491 294,425 991,226
Capital expenditures 42,158 20,586 3,319 66,063
Depreciation and amortization 22,571 13,501 8,160 44,232
1999
Revenue from external
customers $572,370 $301,238 $ 46,584 $ 920,192
Intersegment revenue 33,778 10,075 -- 43,853
------- ------- ------ -------
Total revenue 606,148 311,313 46,584 964,045
Operating income 101,953 60,503 (17,346) 145,110
Interest expense -- -- 26,034 26,034
Earnings before income taxes 101,953 60,503 (43,380) 119,076
Assets 529,757 232,228 380,723 1,142,708
Capital expenditures 40,437 16,623 5,495 62,555
Depreciation and amortization 25,144 13,926 9,847 48,917
Geographic Information
The Company has manufacturing plants or sales offices in North and South
America, Europe, Asia, Australia and Africa.
31
1999 1998 1997
- -----------------------------------------------------------------------------
Revenue from
external customers
U.S.A. $518,455 $513,828 $501,457
Europe 229,679 172,292 158,759
Asia Pacific 47,156 45,017 55,831
Other 124,902 125,635 109,667
- -----------------------------------------------------------------------------
Consolidated $920,192 $856,772 $825,714
------- ------- -------
Long-lived assets
U.S.A. $375,529 $351,774 $334,003
Europe 279,675 202,667 146,122
Asia Pacific 8,258 7,697 8,525
Other 74,676 71,333 56,831
- -----------------------------------------------------------------------------
Consolidated $738,138 $633,471 $545,481
------- ------- -------
13 Contingencies
The Company is involved in various claims and litigation arising in the normal
course of business. In the opinion of management and Company counsel, the
ultimate resolution of these actions will not materially affect the consolidated
financial position, results of operations or cash flows of the Company.
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
[ Years ended September 30, 1999, 1998 and 1997 ]
The management of Universal Foods Corporation is responsible for preparation of
the financial statements and other financial information included in this annual
report. The financial statements have been prepared in accordance with generally
accepted accounting principles.
It is management's policy to maintain a control-conscious environment through an
effective system of internal accounting controls. These controls are supported
by the careful selection of competent and knowledgeable personnel and by the
communication of standard accounting and reporting policies and procedures
throughout the Company. These controls are adequate to provide reasonable
assurance that assets are safeguarded against material loss or unauthorized use
and to produce the records necessary for the preparation of reliable financial
information. There are limits inherent in all systems of internal control based
on the recognition that the costs of such systems should be related to the
benefits to be derived. Management believes that its systems provide this
appropriate balance.
The control environment is complemented by the Company's internal audit
function, which evaluates the adequacy of the controls, policies and procedures
in place, as well as adherence to them, and recommends improvements for
implementation when applicable. In addition, the Company's independent auditors,
Deloitte & Touche LLP, have developed an
32
understanding of the Company's accounting and financial controls and have
conducted such tests as they considered necessary to render an opinion on the
Company's financial statements.
The Board of Directors pursues its oversight role with respect to the Company's
financial statements through the Audit Committee, which is composed solely of
outside directors. The Audit Committee recommends selection of the Company's
auditors and meets with them and the internal auditors to review the overall
scope and specific plans for their respective audits and results from those
audits. The Committee also meets with management to review overall accounting
policies relating to the reporting of financial results. Both the independent
auditors and internal auditors have unrestricted access to the Audit Committee.
/s/ Kenneth P. Manning /s/ Michael Fung
Kenneth P. Manning Michael Fung
Chairman, President and Vice President and
Chief Executive Officer Chief Financial Officer
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors of Universal Foods
Corporation:
We have audited the accompanying consolidated balance sheets of Universal Foods
Corporation and subsidiaries as of September 30, 1999 and 1998, and the related
consolidated statements of earnings, shareholders' equity and cash flows for
each of the three years in the period ended September 30, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the companies as of September 30,
1999 and 1998, and the results of their operations and their cash flows for each
of the three years in the period ended September 30, 1999 in conformity with
generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Milwaukee, Wisconsin
November 11, 1999
33
FIVE YEAR REVIEW
[Dollars in thousands
except per share data] 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS
Revenue $ 920,192 100.0% $ 856,772 100.0% $ 825,714 100.0% $ 806,352 100.0% $ 792,971 100.0%
Cost of products sold 599,797 65.2 556,048 64.9 551,090 66.7 533,260 66.1 518,194 65.3
Selling and administrative
expenses 175,285 19.0 171,862 20.1 167,390 20.3 164,186 20.4 171,914 21.7
Unusual items -- -- -- -- -- -- 25,000 3.1 (26,847) (3.4)
- -----------------------------------------------------------------------------------------------------------------------------------
Operating income 145,110 15.8 128,862 15.0 107,234 13.0 83,906 10.4 129,710 16.4
Interest expense 26,034 2.9 21,185 2.4 16,798 2.0 15,266 1.9 15,107 1.9
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes 119,076 12.9 107,677 12.6 90,436 11.0 68,640 8.5 114,603 14.5
Income taxes 38,938 4.2 35,033 4.1 25,748 3.2 24,435 3.0 48,500 6.2
- -----------------------------------------------------------------------------------------------------------------------------------
Net earnings $ 80,138 8.7% $ 72,644 8.5% $ 64,688 7.8% $ 44,205 5.5% $ 66,103 8.3%
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Net earnings per common
share:
Basic $ 1.59 $ 1.42 $ 1.27 $ .86 $ 1.27
Diluted 1.57 1.40 1.26 .85 1.26
------------------------------------------------------------------------------------------------------
OTHER RELATED DATA
Earnings per common share
excluding unusual items:
Basic $ 1.59 $ 1.42 $ 1.27 $ 1.18 $ 1.09
Diluted 1.57 1.40 1.26 1.17 1.09
Dividend per common share,
declared and paid .53 .53 .52 .50 .48
Average shares outstanding:
Basic 50,527,998 51,155,000 51,025,542 51,596,964 52,122,538
Diluted 51,109,097 51,836,577 51,389,997 51,936,078 52,338,578
Book value per common share $ 8.60 $ 7.95 $ 7.45 $ 6.93 $ 6.95
Price range per common share 19.44-27.75 18.72-25.44 15.94-20.69 14.00-20.50 13.06-17.44
Share price at September 30 22.94 20.88 20.13 16.25 17.44
Research and development
expenditures 29,533 29,413 31,510 29,824 28,558
Capital expenditures 62,555 66,063 73,502 59,012 42,562
Depreciation 41,264 38,011 32,399 29,178 28,206
Amortization 7,653 6,221 4,927 4,341 6,435
Total assets 1,142,708 991,226 887,729 780,472 776,870
Long-term debt 385,397 291,588 252,526 196,869 160,678
Shareholders' equity 431,582 405,645 380,451 350,966 361,780
Return on average
shareholders' equity 19.2% 18.4% 17.5% 12.2% 18.5%
Total debt to total capital 50.8% 45.7% 41.1% 36.9% 34.3%
Employees 4,252 4,196 4,127 4,035 4,104
The 1997 results include a pretax charge of $7.5 million for integrating two
divisions.
The 1996 results include pretax charges of $25 million relating to adopting SFAS
No. 121 and restructuring costs.
The 1995 results include a net pretax gain of $26.8 million relating to the sale
of the Frozen Foods business, the cost of discontinuing a product line and other
items.
34
QUARTERLY DATA
[Dollars in thousands except per share amounts]
[ Unaudited ] Earnings Earnings
Gross Net per share per share
Revenue profit earnings basic diluted
1999
First Quarter $217,535 $75,688 $16,875 $.33 $.33
Second Quarter 219,914 76,137 19,032 .38 .37
Third Quarter 236,556 81,979 20,726 .41 .41
Fourth Quarter 246,187 86,591 23,505 .47 .46
1998
First Quarter $208,889 $71,882 $15,271 $.30 $.30
Second Quarter 205,015 72,441 17,354 .34 .33
Third Quarter 214,506 74,994 19,174 .37 .37
Fourth Quarter 228,362 81,407 20,845 .41 .40
COMMON STOCK PRICES AND DIVIDENDS
Market price Dividends
High Low per share
1999
First Quarter $27.75 $19.44 $.1325
Second Quarter 27.38 20.00 .1325
Third Quarter 23.63 20.06 .1325
Fourth Quarter 23.56 20.13 .1325
1998
First Quarter $21.47 $18.72 $.1325
Second Quarter 24.69 20.38 .1325
Third Quarter 25.44 21.88 .1325
Fourth Quarter 24.00 20.06 .1325