UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q [ x ] Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the Period Ended March 31, 2001 -------------- OR [ ] Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the Transition Period From _______________ to ________________ Commission file number 1-652 ----- UNIVERSAL CORPORATION --------------------------------------------------------- (Exact name of Registrant as specified in its charter) <TABLE> <S> <C> VIRGINIA 54-0414210 --------------------------------------------------------- ----------------------------------------- (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number) 1501 North Hamilton Street, Richmond, Virginia 23230 --------------------------------------------------------- ----------------------------------------- (Address of principal executive offices) (Zip code) </TABLE> Registrant's telephone number, including area code - (804) 359-9311 --------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ --- Indicate the number of shares outstanding of each of the Registrant's classes of Common Stock as of the latest practicable date: Common Stock, No par value - 27,297,824 shares outstanding as of April 25, 2001
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Universal Corporation and Subsidiaries UNAUDITED CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS Three and Nine Months Ended March 31, 2001 and 2000 (In thousands of dollars, except per share data) <TABLE> <CAPTION> THREE MONTHS NINE MONTHS 2001 2000 2001 2000 ----------------------------------------------------------- <S> <C> <C> <C> <C> Sales and other operating revenues $756,168 $1,001,207 $2,401,995 $2,820,666 Costs and expenses Cost of goods sold 605,880 846,271 1,988,818 2,398,979 Selling, general and administrative expenses 76,198 76,028 223,996 231,791 ----------------------------------------------------------- Operating Income 74,090 78,908 189,181 189,896 Equity in pretax earnings of unconsolidated affiliates 3,720 2,186 5,592 8,108 Interest expense 14,982 13,934 47,090 40,474 ----------------------------------------------------------- Income before income taxes and other items 62,828 67,160 147,683 157,530 Income taxes 22,618 24,178 53,166 56,711 Minority interests 4,343 4,524 5,823 6,711 ----------------------------------------------------------- Net Income $ 35,867 $ 38,458 $ 88,694 $ 94,108 - ----------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------- Earnings per common share $ 1.32 $ 1.29 $ 3.22 $ 3.06 - ----------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------- Diluted earnings per share $ 1.31 $ 1.29 $ 3.20 $ 3.06 - ----------------------------------------------------------------------------------------------------------------------------- Retained earnings - beginning of period $ 499,490 $ 510,123 Net income 88,694 94,108 Cash dividends declared ($.95 - 2001, $.92 - 2000) (25,504) (27,515) Purchase of common stock (32,527) (68,176) -------------------------- Retained earnings - end of period $ 530,153 $ 508,540 </TABLE> See accompanying notes.
2 Universal Corporation and Subsidiaries CONSOLIDATED BALANCE SHEETS (In thousands of dollars) March 31, June 30, 2001 2000 ---- ---- ASSETS Current Cash and cash equivalents $ 75,936 $ 61,395 Accounts receivable 294,445 358,897 Advances to suppliers 86,256 52,383 Accounts receivable - unconsolidated affiliates 2,772 12,573 Inventories - at lower of cost or market: Tobacco 527,748 379,504 Lumber and building products 79,360 77,096 Agri-products 75,784 73,024 Other 29,944 33,068 Prepaid income taxes 5,204 9,283 Deferred income taxes 7,933 9,008 Other current assets 15,010 21,919 ---------------------- Total current assets 1,200,392 1,088,150 Property, plant and equipment - at cost Land 27,350 27,377 Buildings 238,205 245,570 Machinery and equipment 521,724 505,323 ---------------------- 787,279 778,270 Less accumulated depreciation 439,932 430,925 ---------------------- 347,347 347,345 Other Goodwill 112,847 113,498 Other intangibles 15,051 17,145 Investments in unconsolidated affiliates 79,181 77,046 Deferred income taxes 32,090 33,606 Other noncurrent assets 85,539 71,314 ---------------------- 324,708 312,609 ---------------------- $1,872,447 $1,748,104 =============================================================================== See accompanying notes.
3 Universal Corporation and Subsidiaries CONSOLIDATED BALANCE SHEETS (In thousands of dollars) March 31, June 30, 2001 2000 ---- ---- LIABILITIES AND SHAREHOLDERS' EQUITY Current Notes payable and overdrafts $ 241,988 $ 356,283 Accounts payable 237,740 256,666 Accounts payable - unconsolidated affiliates 7,452 10,169 Customer advances and deposits 136,060 91,414 Accrued compensation 15,286 20,997 Income taxes payable 34,682 26,682 Current portion of long-term obligations 648 121,023 ---------------------- Total current liabilities 673,856 883,234 Long-term obligations 521,119 223,262 Postretirement benefits other than pensions 40,126 41,295 Other long-term liabilities 53,564 53,948 Deferred income taxes 6,643 11,749 Minority interests 40,328 36,837 Shareholders' equity Preferred stock, no par value, authorized 5,000,000 shares none issued or outstanding Common stock, no par value, authorized 100,000,000 shares, issued and outstanding 27,319,424 shares (28,146,697 at June 30, 2000) 73,621 66,274 Retained earnings 530,153 499,490 Accumulated other comprehensive income (66,963) (67,985) ---------------------- Total shareholders' equity 536,811 497,779 ---------------------- $1,872,447 $1,748,104 =============================================================================== See accompanying notes.
4 Universal Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS Nine months ended March 31, 2001 and 2000 (In thousands of dollars) <TABLE> <CAPTION> 2001 2000 ---- ---- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 88,694 $ 94,108 Adjustments to reconcile net income to net cash provided by operating activities 39,000 12,400 Changes in operating assets and liabilities (85,753) (30,852) -------------------------- Net cash provided by operating activities 41,941 75,656 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property, plant and equipment (47,300) (39,500) Proceeds from sales 9,500 27,000 -------------------------- Net cash used in investing activities (37,800) (12,500) CASH FLOWS FROM FINANCING ACTIVITIES: Issuance (repayment) of short-term debt, net (114,000) (78,000) Repayment of long-term debt (120,000) (20,000) Issuance of long-term debt 295,000 120,000 Purchases of common stock (35,100) (75,000) Issuance of common stock 10,000 - Dividends paid (25,500) (27,500) -------------------------- Net cash provided (used) in financing activities 10,400 (80,500) Net increase (decrease) in cash and cash equivalents 14,541 (17,344) Cash and cash equivalents at beginning of year 61,395 92,784 CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 75,936 $ 75,440 ================================================================================================================== </TABLE> See accompanying notes.
5 Universal Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2001 All figures contained herein are unaudited. 1). Universal Corporation, with its subsidiaries (the "Company"), has seasonal operations in tobacco, lumber and building products, and agri-products. Therefore, the results of operations for the quarter and nine months ended March 31, 2001, are not necessarily indicative of results to be expected for the year ending June 30, 2001. All adjustments necessary to state fairly the results for such period have been included and were of a normal recurring nature. Certain amounts in prior year statements have been reclassified to conform to the current year's presentation. 2). Contingent liabilities: The Company provides guarantees for seasonal pre- export crop financing for some of its subsidiaries and unconsolidated affiliates. In addition, certain subsidiaries provide guarantees that ensure that value-added taxes will be repaid if the crops are not exported. At March 31, 2001, total exposure under guarantees issued for banking facilities of unconsolidated affiliates and suppliers was approximately $45 million. Other contingent liabilities approximate $25 million. The Company considers the possibility of loss on any of these guarantees to be remote. The Company's Brazilian subsidiaries have been notified by the tax authorities of proposed adjustments to income tax returns filed in prior years. The total proposed adjustments, including penalties and interest, approximate $23 million. The Company believes the Brazilian tax returns filed were in compliance with the applicable tax code. The numerous proposed adjustments vary in complexity and amount. While it is not feasible to predict the precise amount or timing of each proposed adjustment, the Company believes that the ultimate disposition will not have a material adverse effect on the Company's consolidated financial position or results of operations. 3). On July 1, 2000, the Company adopted Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities." The adoption of this standard did not have a material impact on the consolidated financial position or results of operations for the Company. 4). In the fourth quarter of fiscal year 2000, plans were approved to reduce the Company's U. S. cost structure including the consolidation of tobacco processing facilities and a corresponding reduction in the number of employees. In fiscal year 2000, the consolidated statement of income included an $11 million pretax charge related to the plan. The charge includes $7 million of severance costs related to 108 employees in purchasing, processing, and sales. During the three-and nine-month periods ended March 31, 2001, the Company paid $900 thousand and $4.7 million in cash payments to 46 and 105 employees, respectively. No additional restructuring costs were recorded during the quarter. 5). The following table sets forth the computation of earnings per share and diluted earnings per share.
6 <TABLE> <CAPTION> Three Months Nine Months Periods ended March 31, 2001 2000 2001 2000 ---- ---- ---- ---- <S> <C> <C> <C> <C> Net income (in thousands of dollars) $ 35,867 $ 38,458 $ 88,694 $ 94,108 ------------- ----------- ----------- ----------- Denominator for earnings per share: Weighted average shares 27,267,852 29,748,157 27,586,075 30,751,659 Effect of dilutive securities: Employee stock options 163,348 1,252 89,520 7,478 ------------- ----------- ----------- ----------- Denominator for diluted earnings per share 27,431,200 29,749,409 27,675,595 30,759,137 ------------- ----------- ----------- ----------- Earnings per share $ 1.32 $ 1.29 $ 3.22 $ 3.06 ============= =========== =========== =========== Diluted earnings per share $ 1.31 $ 1.29 $ 3.20 $ 3.06 ============= =========== =========== =========== </TABLE> 6). Comprehensive Income: <TABLE> <CAPTION> THREE MONTHS NINE MONTHS Periods ended March 31, 2001 2000 2001 2000 - ---------------------------------------------------------------------------------------------------------------- (in thousands of dollars) <S> <C> <C> <C> <C> Net income $ 35,867 $ 38,458 $ 88,694 $ 94,108 Foreign currency translation adjustment 10,948 (10,207) 1,022 (14,045) ------------- ----------- ----------- ----------- Comprehensive income $ 46,815 $ 28,251 $ 89,716 $ 80,063 ============= =========== =========== =========== </TABLE> 7). Segments are based on product categories. The Company evaluates performance based on segment operating income and equity in pretax earnings of unconsolidated affiliates. <TABLE> <CAPTION> THREE MONTHS NINE MONTHS Periods ended March 31, 2001 2000 2001 2000 - ---------------------------------------------------------------------------------------------------------------- (in thousands of dollars) <S> <C> <C> <C> <C> SALES AND OTHER OPERATING REVENUES Tobacco $522,828 $ 765,365 $1,683,149 $2,047,081 Lumber/building products 118,882 128,069 371,582 408,892 Agri-products 114,458 107,773 347,264 364,693 -------------------------------------------------------- Consolidated total $756,168 $1,001,207 $2,401,995 $2,820,666 - ---------------------------------------------------------------------------------------------------------------- OPERATING INCOME Tobacco $ 75,734 $ 77,084 $ 180,925 $ 181,039 Lumber/building products 4,181 5,380 17,931 19,694 Agri-products 3,663 2,640 11,473 10,754 - ---------------------------------------------------------------------------------------------------------------- Total 83,578 85,104 210,329 211,487 Less: Corporate expenses 5,768 4,010 15,556 13,483 Equity in pretax earnings of unconsolidated affiliates 3,720 2,186 5,592 8,108 -------------------------------------------------------- Consolidated total $ 74,090 $ 78,908 $ 189,181 $ 189,896 - ---------------------------------------------------------------------------------------------------------------- </TABLE>
7 8). Short- and Long-Term Debt: During the quarter, the Company issued an aggregate $170 million of fixed rate medium-term notes ranging in maturity from 3 to 7 years and ranging in rate from 7.5% to 7.875%. The proceeds of these issues were used for general corporate purposes. 9). Depreciation and amortization for the three- and nine-month periods are as follows: THREE MONTHS NINE MONTHS Periods ended March 31, 2001 2000 2001 2000 - ------------------------------------------------------------------------------ (in thousands of dollars) Depreciation $11,416 $13,147 $32,534 $35,969 ------- ------- ------- ------- Amortization $ 1,880 $ 1,958 $ 5,720 $ 5,231 ------- ------- ------- -------
8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources - ------------------------------- Working capital at March 31, 2001, was $527 million compared to $205 million at June 30, 2000. The increase in working capital was the net result of an increase in current assets of $112 million, primarily from a seasonal increase in tobacco inventories, along with a $210 million reduction in current liabilities. The decrease in current liabilities was due to repayment of $120 million in long-term debt at its maturity, and a reduction in notes payables and overdrafts of $114 million, netted with an increase of $45 million in customer advances. The Company issued $292 million in medium-term notes during the nine months ended March 31, 2001. The proceeds were used to refinance the maturing long-term debt and finance working capital needs. The mix of notes payable and customer advances is dependent on both the Company's and its customers' borrowing capabilities, interest rates and exchange rates. The working capital accounts fluctuate between March and June primarily due to seasonality. In the United States, tobacco working capital needs are normally at their lowest point at June 30. Generally, the Company's international tobacco operations conduct business in United States dollars, thereby limiting foreign exchange risk to local production and overhead costs. Agri-product and lumber operations enter into foreign exchange contracts to hedge firm purchase and sales commitments for terms of less than six months. Interest rate risk is limited because customers in the tobacco business usually pre-finance purchases or pay market rates of interest for inventory purchased for their accounts. The Company continued its share purchase programs during the quarter, which have been in progress since May 6, 1998. As of April 25, 2001, the Company had purchased 9.2 million
9 shares of Universal common stock for approximately $248 million. The programs provide for purchases of up to $300 million. Currently, about 27.3 million common shares are outstanding. During the first quarter of fiscal year 2001, Universal registered with the Securities and Exchange Commission $400 million in debt securities. The securities are intended to be issued over time as medium-term notes as an additional source of liquidity for general corporate purposes. Pursuant to that medium-term note program, Universal has issued $292 million in notes with maturity dates from October of 2003 to December of 2010. The notes were issued with both fixed and variable interest rates. The interest rates on the notes issued to date range from 7.5% to 8.17%. The proceeds were used to repay maturing long-term debt, and to reduce short-term debt, as well as for general corporate purposes. The company has entered into interest rate swaps in which it receives fixed rate interest and pays a floating rate based on LIBOR. The purpose of these interest rate swaps is to better match its interest rates to the market rates of interest that its customers pay for inventory purchased for their accounts. Management believes that the liquidity and capital resources of the company at March 31, 2001, remain adequate to support the Company's foreseeable operating needs. Results of Operations - --------------------- 'Sales and Other Operating Revenues' decreased $245 million or 24% in the third quarter of fiscal year 2001 and $419 million or 15% for the nine-month period ending March 31, 2001. In the quarter, tobacco revenues were down by $243 million; lumber and building products revenues were down by $9 million; and agri-products revenues increased $7 million. The nine-month decline in revenue compared to the comparable period last year comprised $364 million for tobacco, $37 million for lumber and building products, and $18 million for agri-products. The
10 decline in revenues was due to a number of factors including shipment timing, lower volumes handled in the United States where crops have decreased in response to lower demand, and the impact of the strong dollar on our Dutch lumber operations. In addition, fiscal year 2001 revenues have been reduced as a result of the shift in the United States to direct purchasing of tobacco leaf by manufacturers. Because the Company continued to process the tobacco, the effect of this change on the Company's results of operations was not material. Fiscal year 2001 segment operating income in the third quarter decreased by 2% or $2 million compared to the same period last year. For the nine-month period the decline was $1 million. Tobacco segment operating income dropped slightly by $114 thousand for the nine-month period, despite the recognition of a $4.1 million gain on the sale of a joint venture interest in the first quarter of the prior fiscal year. Lumber and building products operating income declined 22% in the third quarter and 9% for the nine-month period compared to the same periods last year, due in large part to the sharp decrease in the euro exchange rate related to the U. S. dollar. The euro was weaker on average by 11% in the quarter and 14% in the nine months when compared to a year ago. Operating income for the agri-products business improved by 39% in the third quarter and 7% for the nine months. In the agri-product group, tea, merchandising, and dried fruit and nut distribution businesses had a strong quarter, while confectionary sunflower seeds continued to suffer from very competitive world market conditions. Interest expense increased for the quarter and nine months due to higher interest rates. Corporate expenses have increased during the quarter due to increases in amortization of debt issue costs and revolving credit facilities fees and pension costs. The Company's estimated effective tax rate in fiscal year 2001 is consistent with that of the prior year at 36%.
11 In tobacco, the Company's world market share and competitive position remain very strong. Deliveries from Africa have been delayed this year due to the late opening of the tobacco markets in Zimbabwe last spring. Management expects that the remaining African shipments will be completed during this fiscal year. Some dark air-cured leaf shipments from Indonesia and the Dominican Republic have also been postponed at the request of customers. A number of these shipments could be deferred into the next fiscal year. The outlook for the remainder of the fiscal year is positive. The overall tobacco market environment has improved due to a decrease in the unsold leaf inventories that have been overhanging world markets for the last eighteen months, and smaller flue-cured and burley crops in a number of countries. These factors suggest a much improved supply and demand situation for the months ahead. Attractive quality crops are currently being marketed in Brazil and Zimbabwe, and good demand is now forecast for those crops. The situation in the United States continues to be uncertain, with little likelihood that the actions needed to reverse the downward trend in production and exports of U. S. flue- cured and burley tobaccos will be forthcoming, which in part explains the good demand we are experiencing in Brazil and Zimbabwe. Our lumber and building products distribution companies will continue to be significantly affected by the dollar/euro relationship. These companies have continued to perform well this fiscal year despite the very strong appreciation of the dollar. Conditions have been very challenging for a number of our agri- products companies, but overall, the group will have another solid year. While year end results can still be affected by a number of factors, including shipment timing in the case of tobacco and currency fluctuations for the Company's lumber distribution
12 businesses, management now expect to achieve earnings on a per share basis in the range of $3.95 to $4.15 per share. Readers are cautioned that the statements contained herein regarding expected earnings and expectations for the Company's performance are forward- looking statements based upon management's current knowledge and assumptions about future events, including anticipated levels of production of tobacco and demand for tobacco and the Company's products and services, costs incurred in providing these products and services, timing of shipments to customers and market structure. Lumber earnings could also be affected by a number of factors, including the translation effects of currency rate changes and unusual weather conditions in the Netherlands. Actual results, therefore, could vary from those expected. Reference is made to Items 1 and 7 and the Notes to the Consolidated Financial Statements in Item 8 of the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2000, regarding important factors that could cause actual results to differ materially from those contained in any forward-looking statement made by or on behalf of the Company, including forward-looking statements contained in Item 2 of this Form 10-Q. PART II. OTHER INFORMATION
13 Item 1. Legal Proceedings On February 26, 2001, Universal Leaf Tobacco Company, Incorporated, J.P. Taylor Company, Incorporated and Southwestern Tobacco Company, Incorporated, subsidiaries of the Company (the "Company Subsidiaries") were served with the Third Amended Complaint, naming them and other leaf tobacco merchants as defendants in DeLoach, et al. v. Philip Morris Inc., et al., a suit originally filed against U.S. cigarette manufacturers in the United States District Court for the District of Columbia and now pending in the United States District Court for the Middle District of North Carolina, Greensboro Division (Case No. 00-CV- 1235) (the "DeLoach Suit"). The DeLoach Suit is a purported class action brought on behalf of U.S. tobacco growers and quota holders that alleges that defendants violated antitrust laws by bid-rigging at tobacco auctions and by conspiring to undermine the tobacco quota and price support program administered by the federal government. Plaintiffs seek injunctive relief, trebled damages in an unspecified amount, pre- and post-judgment interest, attorneys' fees and costs of litigation. On March 14, 2001, the Company Subsidiaries and other leaf tobacco merchant defendants filed a joint motion to dismiss the Third Amended Complaint. The Company Subsidiaries intend to vigorously defend the DeLoach Suit. The suit is still in its initial stages, and at this time no estimate of the amount or range of loss that could result from an unfavorable outcome can be made. Item 6. EXHIBITS AND REPORTS ON FORM 8-K a. Exhibits 12. Ratio of earnings to fixed charges.*
14 b. Reports on Form 8-K. Report on Form 8-K dated January 8, 2001 reporting that plaintiff in a civil anti-trust lawsuit had moved to have some of the Company's subsidiaries added as defendant. Report on Form 8-K dated January 30, 2001 filing Fixed Rate Note that was issued on January 26, 2001. Report on Form 8-K dated February 1, 2001 filing press release announcing second quarter earnings and quarterly dividend. Report on Form 8-K dated February 12, 2001 filing Fixed Rate Note that was issued on February 7, 2001. Report on Form 8-K dated February 28, 2001 reporting that three of the Company's subsidiaries had been named as defendants in a civil anti-trust lawsuit. * - Filed herewith SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
15 Date: May 7, 2001 UNIVERSAL CORPORATION ------------------------------------------ (Registrant) /s/ Hartwell H. Roper ------------------------------------------ Hartwell H. Roper, Vice President and Chief Financial Officer /s/ James A. Huffman ------------------------------------------ James A. Huffman, Controller (Principal Accounting Officer)