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 September 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 1-652 UNIVERSAL CORPORATION ------------------------------------------------------ (Exact name of Registrant as specified in its charter) VIRGINIA 54-0414210 - ------------------------------- ---------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 1501 North Hamilton Street, Richmond, Virginia 23230 ---------------------------------------------- ----- (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code - (804) 359-9311 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --------- --------- Indicate the number of shares outstanding of each of the Registrant's classes of Common Stock as of the latest practicable date: Common Stock, No par value - 33,665,806 shares outstanding as of November 6, 1998
<TABLE> 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Universal Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS Three Months Ended September 30, 1998 and 1997 (In thousands of dollars, except per share data) <CAPTION> September 30, September 30, 1998 1997 <S> <C> <C> Sales and other operating revenues $ 879,285 $1,023,156 Costs and expenses Cost of goods sold 742,701 880,921 Selling, general and administrative expenses 78,314 78,437 -------------------------------------------- Operating income 58,270 63,798 Equity in pretax earnings of unconsolidated affiliates 570 3,745 Interest expense (15,542) (13,802) -------------------------------------------- Income before income taxes and other items 43,298 53,741 Income taxes 16,021 21,306 Minority interests 220 (338) -------------------------------------------- -------------------------------------------- Net income $ 27,057 $ 32,773 ============================================================================================================== -------------------------------------------- Earnings per share $ .79 $ .93 ============================================================================================================== -------------------------------------------- Diluted earnings per share $ .78 $ .93 ============================================================================================================== Retained earnings - Beginning of period 526,715 424,298 Net income 27,057 32,773 Cash dividends declared ($.28 - 1998; $.265 - 1997) (9,448) (9,312) -------------------------------------------- Retained earnings - End of period 544,324 447,759 --------------------------------------------
3 Universal Corporation and Subsidiaries CONSOLIDATED BALANCE SHEETS (In thousands of dollars) <CAPTION> September 30, June 30, 1998 1998 -------------------- ---------------------- ASSETS Current Cash and cash equivalents $ 87,621 $ 79,835 Accounts receivable 396,013 392,821 Advances to suppliers 83,003 104,439 Accounts receivable - unconsolidated affiliates 11,582 49,343 Inventories - at lower of cost or market: Tobacco 603,616 541,822 Lumber and building products 91,820 97,071 Agri-products 76,086 89,990 Other 29,095 33,162 Prepaid income taxes 6,613 18,347 Deferred income taxes 4,175 3,794 Other current assets 18,181 19,665 ------------------------------------------------- Total current assets 1,407,805 1,430,289 Property, plant and equipment - at cost Land 30,216 29,951 Buildings 230,023 219,594 Machinery and equipment 476,437 466,177 ------------------------------------------------- 736,676 715,722 Less accumulated depreciation 395,089 385,967 ------------------------------------------------- 341,587 329,755 Other assets Goodwill 119,987 120,889 Other intangibles 19,522 18,586 Investments in unconsolidated affiliates 87,121 87,052 Other noncurrent assets 74,037 70,134 ------------------------------------------------- 300,667 296,661 ------------------------------------------------- $2,050,059 $2,056,705 ========================================================================================================================= See accompanying notes.
4 Universal Corporation and Subsidiaries CONSOLIDATED BALANCE SHEETS (In thousands of dollars) <CAPTION> September 30, June 30, 1998 1998 -------------------- ---------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Notes payable and overdrafts $ 543,424 $ 586,450 Accounts payable 250,081 285,994 Accounts payable - unconsolidated affiliates 12,101 17,116 Customer advances and deposits 255,099 125,311 Accrued compensation 18,019 24,706 Income taxes payable 19,727 27,693 Current portion of long-term obligations 30,678 34,251 ------------------------------------------------- Total current liabilities 1,129,129 1,101,521 Long-term obligations 246,675 263,140 Postretirement benefits other than pensions 44,219 44,535 Other long-term liabilities 46,232 40,909 Deferred income taxes 20,275 27,065 Minority interests 31,833 31,668 Shareholders' equity Preferred stock, no par value, authorized 5,000,000 shares none issued or outstanding Common stock, no par value, authorized 50,000,000 shares, issued and outstanding 33,875,606 shares (34,866,406 at June 30, 1998) 26,250 61,544 Retained earnings 544,324 526,715 Accumulated other comprehensive income (38,878) (40,392) ------------------------------------------------- Total shareholders' equity 531,696 547,867 ------------------------------------------------- $ 2,050,059 $ 2,056,705 ========================================================================================================================== See accompanying notes.
5 Universal Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS Three Months Ended September 30, 1998 and 1997 (In thousands of dollars) <CAPTION> September 30, September 30, 1998 1997 -------------------- -------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $27,057 $ 32,773 Adjustments to reconcile net income to net cash provided by operating activities 5,600 15,400 Changes in operating assets and liabilities net of effects from purchase of businesses 105,929 (1,641) ---------------------------------------------- Net cash provided by operating activities 138,586 46,532 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property, plant and equipment (20,000) (13,100) ---------------------------------------------- Net cash used in investing activities (20,000) (13,100) CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of short-term debt, net (43,000) (15,600) Repayment of long-term debt (23,000) (20,000) Purchases of common stock (35,300) Dividends paid (9,500) (9,300) ---------------------------------------------- Net cash used in financing activities (110,800) (44,900) ---------------------------------------------- Net increase (decrease) in cash and cash equivalents 7,786 (11,468) Cash and cash equivalents at beginning of year 79,835 109,070 -------------------- -------------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 87,621 $ 97,602 =================================================================================================================== </TABLE>
6 Universal Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1998 All figures contained herein are unaudited. 1) The operations of domestic and foreign tobacco, lumber and building products, and agri-products segments are seasonal. Therefore, the results of operations for the three-month period ended September 30, 1998, are not necessarily indicative of results to be expected for the year ending June 30, 1999. All adjustments necessary to state fairly the results for such period have been included and were of a normal recurring nature. 2) Contingent liabilities: at September 30, 1998, total exposure under guarantees issued for banking facilities of unconsolidated affiliates was approximately $10 million. Other contingent liabilities approximate $45 million and relate principally to performance bonds and Common Market Guarantees. The Company's Brazilian subsidiaries have been notified by the tax authorities of proposed adjustments to the income tax returns filed in prior years. The total proposed adjustments, including penalties and interest, approximate $50 million. The Company believes the Brazilian tax returns filed were in compliance with the applicable tax code. The numerous proposed adjustments vary in complexity and amounts. While it is not feasible to predict the precise amount or timing of each proposed adjustment, the Company believes that the ultimate disposition will not have an material adverse effect on the Company's consolidated financial position or results of operations. 3) As of July 1, 1998 the Company adopted Statement of Financial Accounting Standards No. 130,"Reporting Comprehensive Income" (SFAS 130). The adoption of this statement had no impact on the Company's net income or shareholders' equity. SFAS 130 establishes new rules for the reporting and display of comprehensive income and its components. SFAS 130 requires foreign currency translation adjustments to be included in other comprehensive income. Amounts in prior year financial statements have been reclassified to conform to SFAS 130. Three months ended September 30, 1998 1997 -------------- -------------- (in thousands of dollars) Net income $27,057 $32,773 Foreign currency translation adjustment 1,514 (6,887) -------------- -------------- Comprehensive income $28,571 $25,886 ============== ==============
7 4) The following table sets forth the computation of earnings per share and diluted earnings per share. Three months ended September 30, 1998 1997 ------------- -------------- Net income (in thousands of dollars) $27,057 $32,773 ------------- -------------- Denominator for earnings per share: Weighted average shares 34,391,290 35,139,137 Effect of dilutive securities: Employee stock options 92,553 190,460 ------------- -------------- Denominator for diluted earnings per share 34,483,843 35,329,597 Earnings per share $.79 $.93 ============= ============== Diluted earnings per share $.78 $.93 ============= ============== 5) The lower estimated effective tax rate in fiscal year 1999 is due to the anticipated mix of foreign and domestic earnings and management's current assessment of pending and contested tax issues.
8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources - ------------------------------- Working capital at September 30 was $279 million compared to $329 million at June 30, 1998. The decline in working capital was due to a combination of lower current assets, which were down $22 million, and an increase in current liabilities of $27 million. The working capital accounts fluctuate between September and June primarily due to seasonality. In the U.S., tobacco working capital needs are normally at their lowest point at June 30. In the first quarter of the fiscal year, the U.S. flue-cured tobacco markets open and tobacco is purchased and shipped to factories for processing. Inventories generally rise with increases in the total of notes payable and/or customer advances. 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 Company does not purchase material quantities of tobacco in the United States on a speculative basis; thus the increase in inventory represents tobacco that has been committed to customers. Generally, the Company's international tobacco operations conduct business in U.S. dollars, thereby limiting foreign exchange risk to local production and overhead costs. Agri-product and lumber operations enter into foreign exchange contracts to hedge firm purchase and sales commitments for 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 continues to purchase its common stock pursuant to a $100 million buyback plan announced in May 1998. In the first quarter of fiscal 1999, the Company purchased a total of 992 thousand shares for $35.3 million. Cumulative share purchases as of November 6, 1998 were 1.7 million shares for $64.9 million. The liquidity and capital resources of the Company at September 30, 1998 remain adequate to support the Company's foreseeable operating needs. Results of Operations - --------------------- 'Sales and Other Operating Revenues' decreased $144 million or 14% in the quarter. Tobacco revenues decreased by $135 million in the quarter due to lower green tobacco costs in Brazil and Africa and the timing of shipments in the U.S., Africa and dark tobacco operations. Revenues for lumber and building products and agri-products were each down less than 4% in the quarter. Gross profit (revenues less cost of sales) in the quarter decreased 4% to $137 million principally due to lower results in tobacco operations. A number of operating regions results were lower due to shipment timing, which resulted from some customer shipments made in the fourth quarter of last year instead of the current year's first quarter. U.S. tobacco volumes bought and processed in the quarter were down slightly compared to last year and, in the prior year, there were more shipments of old crop tobacco. In addition, gross margins in Argentina were negatively impacted by the quality of the crop. Brazilian operations benefited from a higher proportion of the smaller 1998 crop shipped in the first quarter of fiscal 1999. Lumber and building product gross margins remain under pressure on comparable sale volumes and lower prices. Agri-products gross profits were up principally on improved tea results. Interest expense increased in the quarter due a change in the method of funding working capital in Brazil. The Company's estimated effective tax rate in fiscal year 1999 is approximately 37% compared to 40% in the first quarter last year. The decline compared to last year's estimated rate in the quarter is due to the anticipated mix of foreign and domestic earnings and management's current assessment of pending and contested tax issues.
9 The outlook for the balance of the year remains good, although timing issues as well as variations in the relative earnings contributions of the company's operating territories could still affect quarterly comparisons. Higher tobacco earnings should be recorded in the United States and Africa reflecting larger volumes expected in both areas. However, the U.S. burley crop has been affected by dry weather in recent weeks and both quantity and quality of the crop are uncertain at this time. On the other hand, Brazilian results should be somewhat lower because of the significant declines in last year's flue-cured and burley crops due to excessive rains. Dark tobacco earnings will also be down for the year, due to lower leaf prices resulting from a surplus of certain types of cigar leaf and the impact of heavy rains in Indonesia which have significantly reduced cigar wrapper yields and leaf quality. Wrapper tobacco continues to be in short supply. Improved results are expected from Universal's lumber and building products operations in the Netherlands as prices appear to be stabilizing, particularly for softwood, and recent dollar/guilder exchange rate developments have been favorable. At the same time, concerns are beginning to be expressed that the problems in Asia, the former Soviet Union and Latin America could lead to an economic slow down in Europe in the months ahead, which could affect lumber usage. Agri-products are expected to do well for the year. Since the Company's last report, the world economic situation has continued to deteriorate, which has the possibility of impacting numerous businesses, including the tobacco merchant business. However, at this writing prospects remain good for the remainder of the year and management is optimistic that earnings from continuing operations in the range of $3.70 to $3.90 per share can be achieved. As reported in the Company's 1998 Annual Report on Form 10-K (refer to Management's Discussion and Analysis of Financial Condition and Results of Operations, Year 2000), the Company has developed a plan to mitigate the effects of the year 2000 problem on its operations. At the time of the report it was expected that by December 31, 1998 all of the Company's business locations would complete the assessment and remediation phases of the plan's internal aspects. Currently several business locations are not expected to complete the remediation phase until June 30, 1999. However, this delay should not have a material adverse effect on the Company's plan. In conjunction with the Company's contingency plan regarding the year 2000 issue, each operating region has begun identifying potential risk areas and the probability of a disruption to business operations. As of September 30, 1998, the Company had spent approximately $5 million of the $5.7 million estimated cost to address the Y2K problem. The Company does not expect the total cost of becoming Y2K compliant with respect to its internal technology to be material to its consolidated financial condition or results of operations. Reference is made to Items 1 and 7 and the Notes to the Consolidated Financial Statements in Item 8 of the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1998, and "Management's Discussion and Analysis of Financial Conditions and Results of Operations - Other Information Regarding Trends and Management's Actions - Factors That May Affect Future Results" in the Annual Report regarding important factors that would cause actual results to differ materially from those contained in any forward-looking statement made by or on behalf of the Company, including forward-looking statements contained in Item 2 of this Form 10-Q.
10 PART II. OTHER INFORMATION Item 4. Submission of Matters to Vote of Security Holders The Company held its annual meeting of its shareholders on October 27, 1998 to elect three directors to serve three-year terms each and one director to serve a two-year term, and to increase the number of authorized shares of the Company's common stock. The names of the four directors and the number of votes cast for each of them are list below: Name of Director Votes For Votes Withheld ---------------- --------- -------------- Joseph C. Farrell (two-year term) 28,456,712 161,466 Charles H. Foster, Jr. (three-year term) 28,964,664 153,514 Allen B. King (three-year term) 28,916,049 202,129 Jeremiah J. Sheehan (three-year term) 28,956,183 161,995 The directors whose terms continued after the meeting are William W. Berry, Dr. Ronald E. Carrier, Lawrence S. Eagleburger, Henry H. Harrell, Richard G. Holder, and Hubert R. Stallard. The number of shares voted as follows for the increase of authorized shares of the Company's common stock: For Abstained Against --- --------- ------- 26,455,208 2,507,402 155,568 Item 6. Exhibits and Reports on Form 8-K a. Exhibits -------- 10.32 Amended and Restated Universal Corporation Outside Directors' Deferred Income Plan dated as of October 1, 1998.* 10.33 Amended and Restated Universal Leaf Tobacco Company, Incorporated 1994 Deferred Income Plan dated as of July 1, 1998.* 12 Statements Regarding Computation of Ratio of Earnings to Fixed Charges.* 27 Financial Data Schedule.* b. Reports on Form 8-K ------------------- (i) The Company filed a current Report on Form 8-K on September 8, 1998 describing the receipt of a subpoena from the Philadelphia Office of the Antitrust Division of the U.S. Department of Justice. (ii) The Company filed a current Report on Form 8-K on August 10, 1998 announcing the Company's earnings for its fiscal year ended June 30, 1998. * Filed Herewith
11 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: November 9, 1998 UNIVERSAL CORPORATION --------------------------------------------- (Registrant) /s/ Hartwell H. Roper --------------------------------------------- Hartwell H. Roper, Vice President and Chief Financial Officer /s/ William J. Coronado --------------------------------------------- William J. Coronado, Controller (Principal Accounting Officer)