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, 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) </TABLE> 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 - 26,737,578 shares outstanding as of October 24, 2001
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Universal Corporation and Subsidiaries UNAUDITED CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS Three Months Ended September 30, 2001 and 2000 (In thousands of dollars, except per share data) <TABLE> <CAPTION> 2001 2000 ------------------- ------------------ <S> <C> <C> Sales and other operating revenues $ 616,377 $ 650,765 Costs and expenses Cost of goods sold 499,911 537,355 Selling, general and administrative expenses 61,644 61,474 ------------------------------------------- Operating Income 54,822 51,936 Equity in pretax earnings of unconsolidated affiliates 1,313 1,349 Interest expense 13,559 14,829 ------------------------------------------- Income before income taxes and other items 42,576 38,456 Income taxes 14,902 14,998 Minority interests (655) (1,507) ------------------------------------------- Net Income $ 28,329 $ 24,965 ----------------------------------------------------------------------------------------------------------------- Earnings per common share $ 1.04 $ .89 ----------------------------------------------------------------------------------------------------------------- Diluted earnings per share $ 1.04 $ .89 ----------------------------------------------------------------------------------------------------------------- Retained earnings - beginning of period $ 540,546 $ 499,490 Net income 28,329 24,965 Cash dividends declared ($.32 - 2001, $.31 - 2000) (8,626) (8,421) Purchase of common stock (8,142) (9,573) ------------------------------------------- Retained earnings - end of period $ 552,107 $ 506,461 ----------------------------------------------------------------------------------------------------------------- </TABLE> See accompanying notes.
2 Universal Corporation and Subsidiaries CONSOLIDATED BALANCE SHEETS (In thousands of dollars) <TABLE> <CAPTION> Sept. 30, June 30, 2001 2001 -------------- ------------- <S> <C> <C> ASSETS Current Cash and cash equivalents $ 59,400 $ 109,540 Accounts receivable 354,464 330,146 Advances to suppliers 73,267 66,683 Accounts receivable - unconsolidated affiliates 4,459 3,531 Inventories - at lower of cost or market: Tobacco 597,000 389,520 Lumber and building products 80,669 78,945 Agri-products 77,001 80,168 Other 25,561 26,176 Prepaid income taxes 18,022 17,683 Deferred income taxes 8,511 8,256 Other current assets 20,621 21,998 --------------------------------------------- Total current assets 1,318,975 1,132,646 Property, plant and equipment - at cost Land 26,575 26,523 Buildings 245,269 236,875 Machinery and equipment 504,066 500,505 --------------------------------------------- 775,910 763,903 Less accumulated depreciation 426,378 425,808 --------------------------------------------- 349,532 338,095 Other Goodwill 111,413 111,341 Other intangibles 11,368 12,191 Investments in unconsolidated affiliates 79,728 78,860 Deferred income taxes 33,618 37,620 Other noncurrent assets 86,653 71,620 --------------------------------------------- 322,780 311,632 --------------------------------------------- $ 1,991,287 $ 1,782,373 ---------------------------------------------------------------------------------------------------------------------------- </TABLE> See accompanying notes.
3 Universal Corporation and Subsidiaries CONSOLIDATED BALANCE SHEETS (In thousands of dollars) <TABLE> <CAPTION> Sept. 30, June 30, 2001 2001 -------------- ------------- <S> <C> <C> LIABILITIES AND SHAREHOLDERS' EQUITY Current Notes payable and overdrafts $ 254,188 $ 190,776 Accounts payable 254,808 241,607 Accounts payable - unconsolidated affiliates 3,106 4,967 Customer advances and deposits 206,673 96,166 Accrued compensation 13,949 22,020 Income taxes payable 29,189 23,789 Current portion of long-term obligations 2,505 2,440 ---------------------------------------------- Total current liabilities 764,418 581,765 Long-term obligations 526,100 515,349 Postretirement benefits other than pensions 39,056 39,088 Other long-term liabilities 66,769 59,351 Deferred income taxes 6,849 6,380 Minority interests 26,018 28,311 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 26,978,878 shares (27,184,663 at June 30, 2001) 85,437 85,582 Retained earnings 552,107 540,546 Accumulated other comprehensive income (75,467) (73,999) ---------------------------------------------- Total shareholders' equity 562,077 552,129 ---------------------------------------------- $ 1,991,287 $ 1,782,373 ----------------------------------------------------------------------------------------------------------------------------- </TABLE> See accompanying notes.
4 Universal Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS Three months ended September 30, 2001 and 2000 (In thousands of dollars) <TABLE> <CAPTION> 2001 2000 --------------- -------------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 28,329 $ 24,965 Adjustments to reconcile net income to net cash provided by operating activities 16,100 9,500 Changes in operating assets and liabilities (112,869) (76,893) ------------------------------------- Net cash provided by operating activities (68,440) (42,428) CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property, plant and equipment (24,800) (16,000) Purchase of business, net of cash acquired (14,000) ------------------------------------- Net cash provided (used) in investing activities (38,800) (16,000) CASH FLOWS FROM FINANCING ACTIVITIES: Issuance (repayment) of short-term debt, net 74,500 100,700 Repayment of long-term debt - (20,000) Purchases of common stock (8,800) (10,500) Dividends paid (8,600) (8,400) ------------------------------------- Net cash provided (used) in financing activities 57,100 61,800 Net increase in cash and cash equivalents (50,140) 3,372 Cash and cash equivalents at beginning of year 109,540 61,395 CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 59,400 $ 64,767 ------------------------------------------------------------------------------------------------------------ </TABLE> See accompanying notes.
5 Universal Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 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 ended September 30, 2001, are not necessarily indicative of results to be expected for the year ending June 30, 2002. 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. In addition, certain subsidiaries provide guarantees that ensure that value-added taxes will be repaid if the crops are not exported. At September 30, 2001, total exposure under guarantees issued for banking facilities of Brazilian farmers was approximately $50 million. Other contingent liabilities approximate $30 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 $18 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. Although the Company does not expect any significant impact on fiscal year 2002 earnings, if the political situation in Zimbabwe were to deteriorate significantly, the Company's ability to recover its assets there could be impaired. The Company's equity in its net assets of subsidiaries in Zimbabwe was $37 million at June 30, 2001. 3). On July 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 141 "Business Combinations" and No. 142 "Goodwill and Other Intangible Assets." The adoption of these standards did not have a material impact on the quarterly consolidated financial position or results of operations for the Company. 4). During fiscal years 2000 and 2001, the Company adopted restructuring plans with a total cost of $19.7 million. During the three-month period ended September 30, 2001, the Company made $2.6 million in cash payments to 84 employees. No additional restructuring costs were recorded during the quarter. The remaining liability for severance payments as of September 30, 2001 was $4 million and will be paid during fiscal years 2002 and 2003.
6 5). The following table sets forth the computation of earnings per share and diluted earnings per share. <TABLE> <CAPTION> Periods ended September 30, 2001 2000 ----------------------------------------------------------------------------------- <S> <C> Net income (in thousands of dollars) $ 28,329 $ 24,965 ------------------------------- Denominator for earnings per share: Weighted average shares 27,110,489 28,055,105 Effect of dilutive securities: Employee stock options 185,454 5,460 ----------- ----------- Denominator for diluted earnings per share 27,295,943 28,060,565 ----------- ----------- Earnings per share $ 1.04 $ 0.89 ----------------------------------------------------------------------------------- Diluted earnings per share $ 1.04 $ 0.89 ----------------------------------------------------------------------------------- </TABLE> 6). Comprehensive Income: <TABLE> <CAPTION> Periods ended September 30, 2001 2000 ----------------------------------------------------------------------------------- (in thousands of dollars) <S> <C> <C> Net income $ 28,329 $ 24,965 Foreign currency translation adjustment (1,468) 226 ----------- ----------- Comprehensive income $ 26,861 $ 25,191 ----------------------------------------------------------------------------------- </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 ended September 30, 2001 2000 ----------------------------------------------------------------------------------- (in thousands of dollars) <S> <C> <C> SALES AND OTHER OPERATING REVENUES Tobacco $ 375,258 $ 402,245 Lumber/building products 126,189 129,662 Agri-products 114,930 118,858 ------------------------------ Consolidated total $ 616,377 $ 650,765 ----------------------------------------------------------------------------------- OPERATING INCOME Tobacco $ 49,123 $ 46,780 Lumber/building products 7,825 7,650 Agri-products 4,165 3,757 ----------------------------------------------------------------------------------- Total 61,113 58,187 Less: Corporate expenses 4,978 4,902 Equity in pretax earnings of unconsolidated affiliates 1,313 1,349 ------------------------------ Consolidated total $ 54,822 $ 51,936 ----------------------------------------------------------------------------------- </TABLE>
7 8). Depreciation and amortization for the three-month periods are as follows: <TABLE> <CAPTION> Three months ended September 30, 2001 2000 ----------------------------------------------------------------------------------- (in thousands of dollars) <S> <C> <C> Depreciation $ 11,147 $ 10,744 -------- ----------- Amortization $ 1,244 $ 1,609 ----------------------------------------------------------------------------------- </TABLE>
8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources ------------------------------- Working capital at September 30, 2001, was $555 million compared to $551 million at June 30, 2001. The increase in working capital was the result of an increase in current assets of $186 million, primarily from a seasonal increase in tobacco inventories, net of an $182 million increase in current liabilities. In the United States, tobacco working capital needs are normally at their lowest point at June 30. Tobacco inventories increased during the quarter in Brazil, Malawi and the United States as tobacco is purchased from farmers and at auction. The purchased tobacco is financed with cash, notes payable and customer deposits. 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 on a speculative basis; thus the respective increase in inventory represents primarily 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.
9 On October 23, 2001, the Board of Directors increased the Company's authority to repurchase its common shares by $150 million. The programs provide for purchases of up to $450 million. As of October 24, 2001, the Company had purchased, since the inception of the program, 9.8 million shares of Universal common stock for approximately $269 million. Currently, about 26.7 million common shares are outstanding. Management believes that the liquidity and capital resources of the company at September 30, 2001, remain adequate to support the Company's foreseeable operating needs. Results of Operations --------------------- 'Sales and Other Operating Revenues' decreased $34 million or 5% in the first quarter of fiscal year 2002 compared to the prior year's comparable quarter. In the quarter, tobacco revenues were down by $27 million; lumber and building products revenues were down by $3 million; and agri-products revenues decreased by $4 million. The most important factor in the revenue decline has been the reduction in revenue caused by the shift in the United States to direct purchasing of tobacco leaf by manufacturers. Sales volumes of the Company's lumber and building operations declined due to the 6% appreciation in the dollar against the euro. Agri-product revenues have declined due to weaknesses in the tea and rubber businesses. Fiscal year 2001 segment operating income in the first quarter increased by $3 million or 5% compared to the same period last year. Tobacco earnings for the quarter were $2 million higher that the prior year's first quarter due to increased shipments to customers of tobaccos from Brazil, Asia and Africa. The African shipments had been delayed from the prior year primarily due to late marketing of crops, while the Brazilian shipments were earlier than usual. The positive benefits of these shipments was partially offset by higher costs in the United States due
10 to transition from an auction system to direct contracting as well as the loss of income from green market services. Old crop shipments in the first quarter of cigar leaf from Brazil and Indonesia also bolstered the Company's earnings from the sale of dark tobacco. Lumber and building product results increased by 2% as increases in local currency results offset the 6% decline in the value of the euro compared to the dollar. Agri-product results were also higher as the Company's confectionery seeds and nuts and dried fruits distribution operations performed well compensating for weaker results for rubber and tea. Interest expense decreased for the quarter due to lower interest rates. The Company's estimated effective tax rate in fiscal year 2002 declined slightly from the prior year's annual rate to 35%. Despite the strong first quarter, the Company announced on September 27, 2001, its earnings expectation of approximately $100 million for the full 2002 fiscal year. The Company continues to see higher costs in the United States where the transition from an auction market to direct contracting with farmers has required sufficient staffing to participate in both systems. In addition, the very high price of U.S. leaf has made it extremely difficult to recover all of the increased costs, particularly start-up costs, emanating from the new system. Rising medical costs have also adversely affected U.S. operations. Another major factor in the changed earnings outlook is the reduction in crops being marketed this year from a number of important areas including Brazil, Malawi, and Zimbabwe. Because of the Company's traditionally large orders in these origins, it is difficult to purchase all of our requirements when crops are reduced significantly. This year, the Company faces the unusual circumstance of smaller crops in a number of these areas at the same time. In addition, the continuing political and economic instability in Zimbabwe together with the very high prices
11 being paid for this year's crops have reduced their attractiveness in world markets and led to the shifting of some business to other origins such as Brazil. Although the current fiscal year will be negatively impacted, the Company's Brazilian operations could see a benefit from such shifts in fiscal year 2003. The present outlook is for continued good performance from the Company's non-tobacco operations in fiscal year 2002. However, if the European economy weakens significantly in the aftermath of the tragic events of September 11, the Company's lumber and building products operations could be adversely affected. Also, the volatility of the dollar/euro exchange rate makes accurate projection of dollar results for these Dutch companies difficult. The Company is moving aggressively to deal with the increased costs and inefficiencies associated with this period of far reaching change in the U. S. tobacco market. In addition to continuing efforts to manage U.S. costs, the Company's actions include the significant investments announced this spring in new and upgraded processing facilities in North Carolina and in Danville, Virginia. The upgrade in Danville should begin to have a positive impact on our U.S. operations in fiscal year 2003, and the new plant will begin operations in the following year. While smaller crops in key regions will reduce our volumes in the near term, they should also lead to improved market balance over the longer term. Based on preliminary indications, we now expect larger crops to be marketed in fiscal year 2003 in both Brazil and Malawi, where the Company has a significant presence. 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 and supply of the Company's products and
12 services, costs incurred in providing these products and services, timing of shipments to customers, changes in market structure, and general economic, political, market and weather conditions. Lumber and building products earnings are also affected by changes in exchange rates between the U.S. dollar and the euro. 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, 2001, 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.
13 PART II. OTHER INFORMATION Item 1. Legal Proceedings Item 6. EXHIBITS AND REPORTS ON FORM 8-K a. Exhibits 12. Ratio of earnings to fixed charges.* b. Reports on Form 8-K. Report on Form 8-K filed August 3, 2001 filing press release announcing fiscal year earnings and filing press release announcing quarterly dividend. Report on Form 8-K filed September 23, 2001 filing press release announcing earnings expectations. * - Filed herewith
14 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: October 26, 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)