=============================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: June 30, 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: 1-7626 UNIVERSAL FOODS CORPORATION ----------------------------------------------------- (Exact name of registrant as specified in its charter) Wisconsin 39-0561070 - ------------------------------- ---------------------------- (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) Number) 433 East Michigan Street, Milwaukee, Wisconsin 53202 ----------------------------------------------------- (Address of principal executive offices) Registrant's telephone number, including area code: (414) 271-6755 --------------- NONE - -------------------------------------------------------------------------------- (Former name, address, and fiscal year, if changed since last report.) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for at least the past 90 days. Yes X No ----- ------ Indicate the number of shares outstanding of each of the issuer's classes of Common Stock as of the latest practicable date. Class Outstanding at July 31,1998 - --------------------------------------- --------------------------- Common Stock, par value $0.10 per share 51,199,254 shares ===============================================================================
UNIVERSAL FOODS CORPORATION INDEX Page No. -------- <TABLE> <S> <C> <C> PART I, FINANCIAL INFORMATION: Consolidated Condensed Balance Sheets - June 30, 1998 and September 30, 1997. 1 Consolidated Condensed Statements of Earnings - Three and Nine Months Ended June 30, 1998 and 1997. 2 Consolidated Condensed Statements of Cash Flows - Nine Months Ended June 30, 1998 and 1997. 3 Notes to Consolidated Condensed Financial Statements. 4 Management's Discussion and Analysis of Results of Operations, Financial Condition and Forward Looking Information. 6 PART II, OTHER INFORMATION: Item 2, Changes in Securities 8 Item 6, Exhibits and Reports on Form 8-K. 9 Signatures. 10 Exhibit Index 11 </TABLE>
PART I FINANCIAL INFORMATION
UNIVERSAL FOODS CORPORATION CONSOLIDATED CONDENSED BALANCE SHEETS ($000's Omitted) <TABLE> June 30, 1998 September 30, ASSETS (Unaudited) 1997 - ------ -------- -------- <S> <C> <C> CURRENT ASSETS: Cash and cash equivalents $ 4,702 $ 1,258 Trade accounts receivable 121,739 117,259 Inventory: Finished and in-process products 130,576 132,150 Raw materials and supplies 53,688 53,402 Prepaid expenses and other current assets 44,048 38,179 -------- -------- TOTAL CURRENT ASSETS 354,753 342,248 INVESTMENTS AND OTHER ASSETS 59,898 55,193 INTANGIBLES 198,693 181,309 PROPERTY, PLANT AND EQUIPMENT: Cost: Land and buildings 150,304 147,659 Machinery and equipment 447,635 388,402 -------- -------- 597,939 536,061 Less accumulated depreciation 257,232 227,082 -------- -------- 340,707 308,979 -------- -------- TOTAL ASSETS $954,051 $887,729 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ CURRENT LIABILITIES: Short-term borrowings $ 43,541 $ 7,971 Accounts payable and accrued expenses 115,970 135,522 Salaries, wages and withholdings from employees 11,954 13,978 Income taxes 19,937 16,151 Current maturities of long-term debt 4,939 4,905 -------- -------- TOTAL CURRENT LIABILITIES 196,341 178,527 DEFERRED INCOME TAXES 17,543 17,550 OTHER DEFERRED LIABILITIES 19,751 20,798 ACCRUED EMPLOYEE AND RETIREE BENEFITS 37,412 37,877 LONG-TERM DEBT 282,479 252,526 SHAREHOLDERS' EQUITY Common stock 5,396 2,698 Additional paid-in capital 74,714 76,774 Earnings reinvested in the business 402,894 371,444 -------- -------- 483,004 450,916 Less: Treasury stock, at cost 47,694 45,742 Other 34,785 24,723 -------- -------- 400,525 380,451 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $954,051 $887,729 ======== ======== See Accompanying Notes to Consolidated Condensed Financial Statements. </TABLE> -1-
UNIVERSAL FOODS CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS (000's Omitted Except Per Share Amounts) (Unaudited) <TABLE> Three Months Nine Months Ended June 30 Ended June 30 ---------------- -------------- 1998 1997 1998 1997 ---- ---- ---- ---- <S> <C> <C> <C> <C> Revenue $214,506 $209,725 $628,410 $608,035 Operating costs and expenses: Cost of products sold 139,512 140,315 409,093 406,206 Selling and administrative expenses 40,347 39,723 124,764 119,318 -------- -------- -------- -------- Total operating costs and expenses 179,859 180,038 533,857 525,524 -------- -------- -------- -------- Operating income 34,647 29,687 94,553 82,511 Interest expense 5,595 4,651 16,069 12,433 -------- -------- -------- -------- Earnings before income taxes 29,052 25,036 78,484 70,078 Income taxes 9,878 8,288 26,685 23,827 -------- -------- -------- -------- Net earnings $ 19,174 $ 16,748 $ 51,799 $ 46,251 ======== ======== ======== ======== Weighted average number of common shares outstanding: Basic 51,320 51,014 51,153 50,935 ======== ======== ======== ======== Diluted 52,131 51,330 51,859 51,265 ======== ======== ======== ======== Net earnings per common share: Basic $0.37 $0.33 $1.01 $0.91 ======== ======== ======== ======== Diluted $0.37 $0.33 $1.00 $0.90 ======== ======== ======== ======== Dividends per common share $0.1325 $0.1300 $0.3975 $0.3900 ======== ======== ======== ======== See accompanying notes to Consolidated Condensed Financial Statements. </TABLE> -2-
UNIVERSAL FOODS CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS ($000's Omitted) (Unaudited) <TABLE> Nine Months Ended June 30 ----------------- 1998 1997 ---- ---- <S> <C> <C> Net cash provided by operating activities $ 56,378 $ 49,724 -------- -------- Cash flows from investing activities: Acquisition of property, plant and equipment (42,730) (51,348) Acquisition of new businesses (net of cash acquired) (47,281) (44,492) Other items, net (6,257) (5,509) -------- -------- Net cash used in investing activities (96,268) (101,349) -------- -------- Cash flows from financing activities: Proceeds from additional borrowings 67,152 69,253 Reduction in debt (1,595) (4,041) Purchase of treasury stock (14,090) -- Dividends (20,350) (19,863) Proceeds from options exercised 12,217 2,959 -------- -------- Net cash provided by financing activities 43,334 48,308 -------- -------- Net increase (decrease) in cash and cash equivalents 3,444 (3,317) Cash and cash equivalents at beginning of period 1,258 3,395 -------- -------- Cash and cash equivalents at end of period $ 4,702 $ 78 ======== ======== Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $ 16,907 $ 11,826 Income taxes 20,265 15,259 See accompanying notes to Consolidated Condensed Financial Statements. </TABLE> -3-
UNIVERSAL FOODS CORPORATION NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS 1. In the opinion of the Company, the accompanying unaudited consolidated condensed financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of June 30, 1998 and September 30, 1997, the results of operations for the three and nine month periods ended June 30, 1998 and 1997 and cash flows for the nine month periods ended June 30, 1998 and 1997. The results of operations for any interim period are not necessarily indicative of the results to be expected for the full fiscal year. 2. Refer to the footnotes in the Company's annual financial statements for the year ended September 30, 1997, for a description of the accounting policies, which have been continued without change (except as discussed in Note 7), and additional details of the Company's financial condition. The details in those notes have not changed except as a result of normal transactions in the interim. 3. Expenses are charged to operations in the year incurred. However, for interim reporting purposes, certain of these expenses are charged to operations based on an estimate rather than as actually incurred. 4. During the nine months ended June 30, 1998, the Company repurchased 736,391 shares of common stock for $14,967,000. 5. For the nine months ended June 30, 1998, depreciation and amortization were $28,667,000 and $4,490,000, respectively. For the nine months ended June 30, 1997, depreciation and amortization were $25,163,000 and $3,540,000, respectively. 6. On December 23, 1997, the Company issued a $30,000,000 senior note bearing interest at 7.06% due December 2002. Proceeds were used to refinance existing indebtedness and for general corporate purposes. 7. In 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 (SFAS No. 128), "Earnings per Share." SFAS No. 128 replaced the previously reported primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously required fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and where necessary, restated to conform to SFAS No. 128 requirements. The difference between basic and diluted earnings per share is the dilutive effect of employee stock options and restricted stock. -4-
UNIVERSAL FOODS CORPORATION NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) 8. On January 6, 1998, the Company announced that it acquired the stock of Arancia Ingredientes Especiales, S.A. de C.V., a manufacturer of savory flavors and other food ingredients for cash of approximately $24.8 million. With annual revenue of approximately $16 million, this acquisition further improves access to certain markets and creates opportunities for synergies with existing flavor operations in North America. The Company completed the acquisition of substantially all of the assets and business of Sundi GmbH, a German flavor manufacturer for cash of approximately $14 million on May 29, 1998. The acquired business has sales of approximately $15 million. Sundi's broad product line emphasizes all-natural flavor ingredients, an important factor for the German market. On April 29, 1998, the Company announced that it acquired DC Flavours Ltd., a manufacturer of savory flavors and seasonings for cash of approximately $7 million. Annual sales are less than $10 million. On an unaudited pro forma basis the acquisitions are not significant to the Company's 1998 results of operations. 9. On April 9, 1998, the Company declared a 2-for-1 stock split in the form of a 100% dividend. The new shares were distributed on May 22, 1998, to shareholders of record on May 6, 1998. All references in the financial statements to per share amounts and average number of shares have been restated for the stock split. 10. The Financial Accounting Standards Board has issued statements No. 130 "Reporting Comprehensive Income" and No. 131 "Disclosures about Segments of an Enterprise and Related Information." These statements will be effective for the Company in fiscal 1999. The Company is currently evaluating the impact of adopting these new pronouncements. 11. 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 $0.10 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 Shares"), of the Company at a price of $125 per one one-thousandth of a Preferred Share (the "Purchase Price"), subject to adjustment. The Right becomes exercisable and tradeable 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 the Company or 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 which a person or group acquires beneficial ownership of 20% or more of the Company's common stock or subsequent thereto at the option of the Board of Directors. The Rights expire on September 30, 2008. The Rights replace the current common stock shareholder rights plan scheduled to expire on September 30, 1998. -5-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS, FINANCIAL CONDITION AND FORWARD LOOKING INFORMATION RESULTS OF OPERATIONS: Revenue for the three and nine months ended June 30, 1998, was $214,506,000 and $628,410,000, respectively, compared to $209,725,000 and $608,035,000 a year ago. Revenue for the three and nine months ended June 30, 1998, increased by 2.3% and 3.4%, respectively, from the prior year periods. Continued domestic volume increases for the Dehydrated division and strong international revenue growth among the food and beverage categories in the Flavor division were partially offset by lower sales in the Color division due to a continued shift in production to more profitable product lines. Gross profit margins increased to 35.0% for the third quarter from 33.1% for the same period last year. Gross profit margin for the first nine months increased to 34.9% from 33.2% for the same period last year. The increase in the gross profit margin is attributable to a shift of sales to higher margin products in the Color division and lower raw material costs in the Red Star division. Selling and administrative expenses decreased slightly to 18.8% of revenue for the third quarter from 18.9% for the same period last year. For the first nine months of fiscal 1998, selling and administrative expenses increased to 19.9% of revenue from 19.6% last year. The change is due to increased goodwill amortization, market development activities in the Color, Red Star and Asia Pacific divisions offset by cost savings in the Flavor division. Interest expense for the third quarter increased to $5,595,000 from $4,651,000 for the same period last year and increased to $16,069,000 from $12,433,000 for the nine months ended June 30, 1998 and 1997, respectively. The increase is primarily the result of additional debt to finance acquisitions. FINANCIAL CONDITION: The current ratio decreased slightly to 1.8 at June 30, 1998, from 1.9 at September 30, 1997, due primarily to an increase in short-term borrowings to finance acquisitions. Net working capital decreased $5,309,000 to $158,412,000 at June 30, 1998, from $163,721,000 at September 30, 1997. Net cash provided by operating activities was $56,378,000 for the nine months ended June 30, 1998, compared to $49,724,000 for the nine months ended June 30, 1997. Higher earnings and improvements in asset management contributed to this increase. Net cash used in investing activities was $96,268,000 for the nine months ended June 30, 1998, compared to $101,349,000 for fiscal 1997. Included in investing activities are capital additions of $42,730,000 for the nine months ended June 30, 1998, and $51,348,000 for the nine months ended June 30, 1997. The capital expenditure program reflects the Company's continuing commitment to maintain and enhance product quality, further automate and upgrade manufacturing processes, and expand the business through internal growth. Net cash provided by financing activities was $43,334,000 and $48,308,000 for the nine months ended June 30, 1998 and 1997, respectively. In the current year, proceeds from additional borrowings of $67,152,000 were used primarily to fund capital expenditures, acquisitions and treasury stock purchases. Dividends of $20,350,000 and $19,863,000 were paid during the first nine months of fiscal 1998 and 1997, respectively. -6-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS, FINANCIAL CONDITION AND FORWARD LOOKING INFORMATION (Continued) YEAR 2000: The "Year 2000" issue affects installed computer systems, network elements, software applications, and other business systems that have time sensitive programs that may not properly reflect or recognize the Year 2000. Because many computers and computer applications define dates by the last two digits of the year, "00" may not be properly identified as the Year 2000. This error could result in miscalculations or systems errors. The Year 2000 issue may also affect the systems and applications of customers and vendors. The Company has developed a comprehensive plan for addressing the Year 2000 issue. The plan includes the following steps and estimated completion dates: ESTIMATED COMPLETION STEPS DATE 1. Perform assessments of principal computer Substantially systems, network elements, software completed applications and other business systems and obtain third-party surveys to identify business critical, non-compliant systems. 2. Develop detailed action plans for non-compliant Substantially systems. completed 3. Implement the action plans. December 31, 1998 4. Perform testing of business critical systems. April 30, 1999 5. Develop Year 2000 rollover plan to address July 31, 1999 items such as systems back-up prior to rollover. 6. Develop Year 2000 contingency plans should key September 30, 1999 systems fail. As of June 30, 1998, the Company has substantially completed steps 1 and 2 and is beginning to implement the action plans. Throughout the process, the Company will receive outside independent feedback on whether business critical issues have been identified and whether the plan is on schedule. Based on the procedures performed through June 30, 1998, the Company believes all business critical systems will be Year 2000 compliant prior to April 30, 1999. Accordingly, the Company does not expect Year 2000 issues to have a material effect on the Company's results of operations, liquidity or financial condition. However, the Company is unable to determine the impact, if any, of third party non-compliance. Through June 30, 1998, the cost of modifying system software and engaging outside consultants has not been material. The Company estimates that through September 30, 1999 approximately 30% of its Information Technology personnel will be directed at Year 2000 issues. During Fiscal 1999 the Company estimates it will incur capital expenditures of approximately $10.0 million as a result of accelerating the rollout of computer operating systems and to replace non-compliant process control systems in various plants. -7-
PART II OTHER INFORMATION Item 2. CHANGES IN SECURITIES The Company adopted a new Shareholder Rights Plan on August 6, 1998, that replaces its current rights plan scheduled to expire on September 30, 1998. The terms of the proposed plan are substantially similar to the terms of the Company's existing plan, except that the new plan grants holders the right to purchase one one-thousandth of a share of a newly designated series of the Company's Cumulative Preferred Stock instead of one share of Common Stock. The principal effect of this change to the plan is to eliminate the need to reserve authorized but unissued common shares in order to meet stock exchange listing requirements and thereby retain the availability of authorized but unissued common shares for other business purposes. A copy of the new Shareholder Rights Plan has been filed with the Securities and Exchange Commission as an Exhibit to a Registration Statement on Form 8-A dated July 20, 1998, which is hereby incorporated herein by reference. -8-
Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. (See Exhibit Index on the last page of this report.) (b) A report on Form 8-K, dated April 10, 1998, was filed in connection with the Company's two-for-one stock split. A report on Form 8-K, dated June 26, 1998, was filed in connection with the adoption of the Share Purchase Rights Plan which replaces the Company's Shareholders' Rights Plan which was to expire on September 30, 1998. -9-
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. UNIVERSAL FOODS CORPORATION Date: August 13, 1998 By: /s/ John L. Hammond ------------------------------------------- John L. Hammond, Vice President, Secretary and General Counsel Date: August 13, 1998 By: /s/ Michael L. Hennen ------------------------------------------- Michael L. Hennen, Corporate Controller -10-
UNIVERSAL FOODS CORPORATION EXHIBIT INDEX 1998 QUARTER 3 FORM 10-Q Incorporated Herein by Exhibit Reference Filed Number Description from Herewith - ------- -------------------------------------- -------------- -------- 3.3 Resolution of the Board of Directors adopted on June 25, 1998 amending the Articles of Incorporation (accompanied X by a complete copy of the Articles of Incorporation, as amended) 4 Shareholder Rights Plan Previously filed on Form 8-A dated July 20, 1998 27.1 Financial Data Schedule 1998 Quarter 3 X 27.2 Financial Data Schedule - Restated 1997 X 3-MOS, 6-MOS, 9-MOS, AND 12-MOS 27.3 Financial Data Schedule - Restated 1996 X 3-MOS, 6-MOS, 9-MOS, AND 12-MOS 27.4 Financial Data Schedule - Restated 1995 X 12-MOS -11-