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 December 31, 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 - 33,233,334 shares outstanding as of February 8, 1999
<TABLE> PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Universal Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS Three and Six Months Ended December 31, 1998 and 1997 (In thousands of dollars, except per share data) <CAPTION> Three Months Six Months 1998 1997 1998 1997 -------------------------------- --------------------------------- <S> <C> <C> <C> <C> Sales and other operating revenues $1,297,719 $1,265,157 $2,177,004 $2,288,313 Costs and expenses Cost of goods sold 1,129,187 1,093,490 1,871,888 1,974,411 Selling, general and administrative expenses 85,670 87,142 163,984 165,579 --------------------------------------------------------------------- Operating Income 82,862 84,525 141,132 148,323 Equity in pretax earnings of unconsolidated affiliates 1,212 1,512 1,782 5,257 Interest expense 13,146 15,879 28,688 29,681 --------------------------------------------------------------------- Income before income taxes and other items 70,928 70,158 114,226 123,899 Income taxes 26,243 28,691 42,264 49,997 Minority interests 3,261 3,382 3,481 3,044 --------------------------------------------------------------------- --------------------------------------------------------------------- Net Income $ 41,424 $ 38,085 $ 68,481 $ 70,858 - ---------------------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------- Earnings per share $ 1.23 $ 1.08 $ 2.02 $ 2.02 - ---------------------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------- Diluted earnings per share $ 1.23 $ 1.08 $ 2.01 $ 2.00 - ---------------------------------------------------------------------------------------------------------------------------------- Retained earnings - Beginning of period $508,137 $424,298 Net income 68,481 70,858 Cash dividends declared ($.58 - 1998; $.545 - 1997) (19,415) (19,191) Purchase of common stock (54,004) --------------------------------------------------------------------- Retained earnings - End of period $503,199 $475,965 - ----------------------------------------------------------------------------------------------------------------------------------
Universal Corporation and Subsidiaries CONSOLIDATED BALANCE SHEETS (In thousands of dollars) <CAPTION> December 31, June 30, 1998 1998 -------------------- ---------------------- ASSETS Current Cash and cash equivalents $ 80,479 $ 79,835 Accounts receivable 375,783 392,821 Advances to suppliers 107,183 104,439 Accounts receivable - unconsolidated affiliates 14,323 49,343 Inventories - at lower of cost or market: Tobacco 687,424 541,822 Lumber and building products 92,089 97,071 Agri-products 67,910 89,990 Other 23,705 33,162 Prepaid income taxes 8,139 18,347 Deferred income taxes 4,152 3,794 Other current assets 18,882 19,665 ------------------------------------------------- Total current assets 1,480,069 1,430,289 Property, plant and equipment - at cost Land 31,570 29,951 Buildings 236,871 219,594 Machinery and equipment 498,746 466,177 ------------------------------------------------- 767,187 715,722 Less accumulated depreciation 407,905 385,967 ------------------------------------------------- 359,282 329,755 Other assets Goodwill 120,542 120,889 Other intangibles 19,683 18,586 Investments in unconsolidated affiliates 87,898 87,052 Other noncurrent assets 80,344 70,134 ------------------------------------------------- 308,467 296,661 ------------------------------------------------- $2,147,818 $2,056,705 - -------------------------------------------------------------------------------------------------------------------------- See accompanying notes.
Universal Corporation and Subsidiaries CONSOLIDATED BALANCE SHEETS (In thousands of dollars) <CAPTION> December 31, June 30, 1998 1998 -------------------- ---------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Notes payable and overdrafts $ 525,730 $ 586,450 Accounts payable 289,599 285,994 Accounts payable - unconsolidated affiliates 12,601 17,116 Customer advances and deposits 294,898 125,311 Accrued compensation 18,786 24,706 Income taxes payable 25,459 27,693 Current portion of long-term obligations 30,841 34,251 ------------------------------------------------- Total current liabilities 1,197,914 1,101,521 Long-term obligations 240,881 263,140 Postretirement benefits other than pensions 43,947 44,535 Other long-term liabilities 49,002 40,909 Deferred income taxes 29,248 27,065 Minority interests 35,687 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 33,358,984 shares (34,866,406 at June 30, 1998) 78,673 80,122 Retained earnings 503,199 508,137 Accumulated other comprehensive income (30,733) (40,392) ------------------------------------------------- Total shareholders' equity 551,139 547,867 ------------------------------------------------- $ 2,147,818 $ 2,056,705 - -------------------------------------------------------------------------------------------------------------------------- See accompanying notes.
Universal Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS Six Months Ended December 31, 1998 and 1997 (In thousands of dollars) <CAPTION> December 31, December 31, 1998 1997 -------------------- -------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 68,481 $ 70,858 Adjustments to reconcile net income to net cash provided by operating activities 29,000 30,700 Changes in operating assets and liabilities net of effects from purchase of businesses 100,363 (54,842) ---------------------------------------------- Net cash provided by operating activities 197,844 46,716 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property, plant and equipment (38,700) (51,700) ---------------------------------------------- Net cash used in investing activities (38,700) (51,700) CASH FLOWS FROM FINANCING ACTIVITIES: Issuance (repayment) of short-term debt, net (60,700) 52,000 Repayment of long-term debt (23,000) (20,000) Purchases of common stock (57,700) Issuance of common stock 2,300 5,300 Dividends paid (19,400) (19,200) ---------------------------------------------- Net cash provided (used) in financing activities (158,500) 18,100 ---------------------------------------------- Net increase in cash and cash equivalents 644 13,116 Cash and cash equivalents at beginning of year 79,835 109,070 ---------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 80,479 $ 122,186 - ------------------------------------------------------------------------------------------------------------------- </TABLE>
Universal Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998 All figures contained herein are unaudited. 1) Universal Corporation, together with its subsidiaries and affiliates, is also referred to as the Company or Universal. The operations of domestic and foreign tobacco, lumber and building products, and agri-products segments are seasonal. Therefore, the results of operations for the six-month period ended December 31, 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 December 31, 1998, total exposure under guarantees issued for banking facilities of unconsolidated affiliates was approximately $11 million. Other contingent liabilities approximate $40 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 $40 million; however, recent currency fluctuations and possible interest rate changes could affect that amount. 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 a material adverse effect on the Company's consolidated financial position or results of operations. At December 31, 1998, the Company had outstanding short-term loans of $29 million and long-term loans of $17.2 million to a farmer cooperative in Argentina. The loans are secured by tobacco and liens on real property, processing machinery and equipment and other assets of the cooperative. Upon export of the tobacco, which is usually in less than twelve months, the short-term loans should be recovered. The long-term loans are scheduled for repayment over the next nine years. Ultimate collection of the loans is contingent upon the ability of the farmers to produce competitively priced tobacco suitable for export, the financial management of the cooperative and the value of the assets pledged as security for the loans. 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. <TABLE> <CAPTION> Three Months Six Months Periods ended December 31, 1998 1997 1998 1997 ----------------- ----------------- ----------------- ----------------- (in millions of dollars) <S> <C> <C> <C> <C> Net income $41 $38 $68 $71 Foreign currency translation adjustment 8 2 10 (5) ----------------- ----------------- ----------------- ----------------- Comprehensive income $49 $40 $78 $66 ================= ================= ================= ================= 4) The following table sets forth the computation of earnings per share and diluted earnings per share. Three Months Six Months Periods ended December 31, 1998 1997 1998 1997 ----------------- ----------------- ----------------- ----------------- Net income (in thousands of dollars) $41,424 $38,085 $68,481 $70,858 Denominator for earnings per share: Weighted average shares 33,571,791 35,172,358 33,981,541 35,155,747 Effect of dilutive securities: Employee stock options 42,832 217,767 67,693 204,113 ----------------- ----------------- ----------------- ----------------- Denominator for diluted earnings per share 33,614,623 35,390,125 34,049,234 35,359,860 Earnings per share $1.23 $1.08 $2.02 $2.02 ================= ================= ================= ================= Diluted earnings per share $1.23 $1.08 $2.01 $2.00 ================= ================= ================= ================= </TABLE> 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. 6) Amounts in the three- and six-month periods for the last year have been reclassified to be reported on a consistent basis with the current year's presentation.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources Working capital declined from $329 million at June 30, 1998 to $282 million at December 31, 1998. Although the net change in current assets and current liabilities was $50 million and $96 million respectively, the components of working capital on a comparative basis fluctuated to varying degrees compared to June 30th primarily due to the seasonality of tobacco operations. The majority of the increase in current assets was reflected in tobacco inventory which in turn was supported by an increase in customer advances. The increases primarily represent purchases of crops that have not been processed and/or shipped due to customer requirements. In the United States, December 31 tobacco working capital needs represent a combination of unshipped processed flue-cured tobacco plus burley tobacco purchases from mid-November. A significant percentage of the Company's U. S. burley volume is purchased in the second quarter of the fiscal year. Processing begins shortly after purchase of the tobacco and continues through the beginning of the fourth quarter. June 30th usually represents the low point of U.S. tobacco working capital needs as most of the current crop has been shipped. Variations may occur quarter to quarter in the proportion of notes payable and customer advances that support inventories, depending on the Company's and its customers' borrowing capabilities, interest rates and exchange rates. Although working capital changes reflected a seasonal increase as is the pattern in the industry, the amount of that increase in inventory is significantly lower than that of last year. The lower seasonal investment is primarily due to the lower prices of green tobacco worldwide and the smaller tobacco crop in Brazil. This lower inventory investment is also reflected in lower financing requirements. The Company generally does not purchase tobacco in the U.S. on a speculative basis. In a number of foreign operating regions the Company may advance funds for the purchase of tobacco or in some cases advance farmers agricultural materials, such as seed and fertilizer. These advances are recovered from the delivery of tobacco by the respective creditor. See note 2 of the Company's notes to the financial statements for additional information regarding advances in Argentina. 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. Contracts used to manage foreign currency risks are not material. 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 repurchase plan announced in May 1998. In addition, on February 4, 1999, the Company's Board of Directors authorized an additional $100 million purchase through June 30, 2000. As of December 31, 1998, cumulative share purchases were 2.2 million shares for approximately $77.5 million. The repurchase plans have been and are expected to continue to be funded from operating cash flows. The liquidity and capital resources of the Company at December 31, 1998, remain adequate to support the Company's foreseeable operating needs. Results of Operations 'Sales and Other Operating Revenues' for the second quarter of fiscal year 1999 were up slightly and declined 5% for the six months compared to last year. The six-month decline reflects the impact of shipment timing in the first quarter primarily due to African and dark tobacco operations. In addition, the Company contributed its Turkish subsidiary into a joint venture in oriental tobaccos during the fourth quarter last year. Revenues for lumber and building products and agri-products were comparable for the six-month periods. `Operating Income' for the quarter and the six-month period ended December 31, 1998, declined 2% and 5% respectively compared to the same periods last year. In the quarter, Brazilian results were off slightly due to lower volumes handled out of the smaller crop and similarly, a smaller U.S. flue-cured crop resulted in lower volumes processed during the quarter. In addition, there were quality problems with crops in Argentina and Kyrgystan, while shipments of some Oriental tobacco by the Company's joint venture have been delayed until the second half of the year. The negative impact of these developments was partially offset by improved results in Africa and the Far East. For the six months, these factors combined with shipment timing issues in the first quarter held tobacco earnings for the period below last year's record pace. Dark results in the quarter improved, reflecting the continued tight world market for wrapper leaf, and old crop shipments. For the six months, dark tobacco results were comparable to last year. Lumber and building products results were adversely affected in the quarter by excessive rains in Holland that disrupted construction activity and impacted the regional sales outlets. Wholesale results also declined due to margin pressures. However, industrial timber earnings were up due to improved margins. Agri-product results were comparable to last year for the quarter and six-month period. Interest expense was down from the comparable periods last year principally reflecting lower borrowing levels by the Company due in part to lower tobacco leaf prices. The estimated effective tax rate for fiscal 1999 was 37% compared to 40% in the previous year primarily due to the anticipated mix of foreign and domestic earnings and management's current assessment of pending and contested tax issues. It should be noted that although recent news from Brazil has caused concern in world financial circles, the currency devaluation may well be favorable for the future export of Brazilian tobacco. However, the leaf industry will continue to face uncertainties in the months ahead resulting from the aftermath of the tobacco settlement in the U.S., from continued economic and financial turmoil in a number of Southeast Asian areas, Latin America and the former Soviet Union and from uncommitted inventories held in the trade. These factors, which affect the overall industry environment, have thus far not had a significant effect on Universal's operations and should not materially affect earnings for the year. Management remains confident about the Company's strategic direction. The Company has continued to minimize unsold inventories. Therefore, despite the effect of adverse weather in some areas on tobacco production and on construction activity and lumber sales in Holland, management still expects to achieve earnings for the year form continuing operations in line with its previous projections. The Company cautions readers that the statements contained herein regarding expected earnings are forward-looking statements based upon management's current knowledge and assumptions about future events, including anticipated levels of demand for the Company's products and services, costs incurred in providing these products and services, and timing of shipments to customers. Lumber earnings could also be affected by a number of factors, including currency translations, and unusual weather conditions in the Netherlands. Actual results, therefore could vary from those expected. For more details on factors that could affect expectations, see the Company's Annual Report on Form 10-K for the year ended June 30, 1998, as filed with the Securities and Exchange Commission. 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 contingency planning for the year 2000, the Company's operating regions have submitted drafts of their contingency plans, which have identified potential risk areas, and the possibility of a disruption to related business operations. These contingency plans are currently being reviewed by the Company. The Company has revised its total estimated costs of addressing the year 2000 problem from $5.7 million to $7.5 million primarily to reflect certain internal costs that had previously been omitted. Approximately $6.7 million was spent through December 31, 1998. The Company does not expect the total cost of preparing its internal technology for the year 2000 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.
PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K a. Exhibits -------- 4 Form of Common Stock Certificate, effective February 13, 1999.* 10.1 Universal Corporation Amended and Restated 1994 Stock Option Plan for Non-Employee Directors. * 10.2 Form of Amendment to Non-Employee Director Non-Qualified Stock Option Agreement(s).* 10.3 First Amendment to the Universal Leaf Tobacco Company, Incorporated Benefit Restoration Trust, dated January 12, 1999, between Universal Leaf Tobacco Company, Incorporated and Wachovia Bank, N. A., as trustee. * 10.4 Form of Non-Employee Director Restricted Stock Agreement. * 27 Financial Data Schedule.* b. Reports on Form 8-K * 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. Date: February 11, 1999 UNIVERSAL CORPORATION ------------------------------------------ (Registrant) /s/ Hartwell H. Roper ------------------------------------------ Hartwell H. Roper, Vice President and Chief Financial Officer /s/ William J. Coronado ------------------------------------------ William J. Coronado, Vice President and Controller (Principal Accounting Officer)