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, 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 - 35,313,742 shares outstanding as of May 3, 1998
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Universal Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
Three and Nine Months Ended March 31, 1998 and 1997
(In thousands of dollars, except per share data)
<CAPTION>
Three Months Nine Months
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C>
Sales and other operating revenues ....... $1,152,696 $1,013,715 $3,441,009 $3,171,776
Costs and expenses
Cost of goods sold ................... 996,853 871,895 2,981,402 2,757,278
Selling, general and administrative .. 89,390 83,123 244,831 231,658
Interest ............................. 16,585 15,243 46,266 49,498
---------- ---------- ---------- ----------
1,102,828 970,261 3,272,499 3,038,434
---------- ---------- ---------- ----------
Income before income taxes and other items 49,868 43,454 168,510 133,342
Income taxes ......................... 19,767 17,381 67,404 53,336
Minority interests ................... 2,729 1,694 5,773 5,643
---------- ---------- ---------- ----------
Income from consolidated operations ...... 27,372 24,379 95,333 74,363
Equity in net income of unconsolidated
affiliates 4,174 3,235 7,071 4,675
---------- ---------- ---------- ----------
Net income ............................... $ 31,546 $ 27,614 $ 102,404 $ 79,038
========== ========== ========== ==========
Earnings per share ....................... $ .90 $ .79 $ 2.91 $ 2.25
========== ========== ========== ==========
Diluted earnings per share ............... $ .89 $ .78 $ 2.89 $ 2.25
========== ========== ========== ==========
Retained earnings - Beginning of period.... $424,298 $360,273
Net income................................. 102,404 79,038
Cash dividends declared ($.825-1998;
$.785-1997)............................ (29,079) (27,177)
---------- ----------
Retained earnings - End of period.......... $497,623 $412,134
========== ==========
See accompanying notes.
<PAGE>
Universal Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
<CAPTION>
March 31, June 30,
1998 1997
---------- ----------
ASSETS
Current
Cash and cash equivalents ..................... $ 110,493 $ 109,070
Accounts and notes receivable ................. 454,703 428,430
Advances to suppliers ......................... 121,553 79,499
Accounts receivable - unconsolidated affiliates 9,956 7,768
Inventories - at lower of cost or market:
Tobacco ................................... 656,681 570,650
Lumber and building products .............. 100,915 105,567
Agri-products ............................. 88,636 80,812
Other ..................................... 31,368 12,444
Prepaid income taxes .......................... 7,284 7,665
Deferred income taxes ......................... 7,258 7,064
Other current assets .......................... 15,705 22,270
---------- ----------
Total current assets ...................... 1,604,552 1,431,239
Property, plant and equipment - at cost
Land .......................................... 30,305 30,887
Buildings ..................................... 219,629 214,605
Machinery and equipment ....................... 466,390 430,360
---------- ----------
716,324 675,852
Less accumulated depreciation ............. 382,618 366,200
---------- ----------
333,706 309,652
Other assets
Goodwill ...................................... 120,429 117,483
Other intangibles ............................. 20,502 22,703
Investments in unconsolidated affiliates ...... 42,792 33,413
Deferred income taxes ......................... 1,613 1,509
Other noncurrent assets ....................... 72,773 65,980
---------- ----------
258,109 241,088
---------- ----------
$2,196,367 $1,981,979
========== ==========
See accompanying notes.
Universal Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars)
<CAPTION>
March 31, June 30,
1998 1997
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Notes payable and overdrafts ....................... $ 673,871 $ 589,648
Accounts payable ................................... 275,044 275,980
Accounts payable - unconsolidated affiliates ....... 15,060 10,204
Customer advances and deposits ..................... 197,409 144,175
Accrued compensation ............................... 20,620 19,296
Income taxes payable ............................... 30,011 16,166
Current portion long-term obligations .............. 29,504 28,228
----------- -----------
Total current liabilities ...................... 1,241,519 1,083,697
Long-term obligations .................................. 280,722 291,637
Postretirement benefits other than pensions ............ 45,798 45,553
Other long-term liabilities ............................ 40,640 42,273
Deferred income taxes .................................. 17,388 18,527
Minority interests ..................................... 34,171 30,699
Shareholders' equity
Additional 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 35,313,742 shares
(35,139,137 at June 30,1997) .................... 82,964 77,040
Retained earnings .................................. 497,623 424,298
Foreign currency translation adjustments ........... (44,458) (31,745)
----------- -----------
Total shareholders' equity ..................... 536,129 469,593
----------- -----------
$ 2,196,367 $ 1,981,979
=========== ===========
<PAGE>
Universal Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended March 31, 1998 and 1997
(In thousands of dollars)
<CAPTION>
1998 1997
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................. $ 102,404 $ 79,038
Adjustments to reconcile net income to net cash provided
by operating activities ............................ 37,500 51,000
Changes in operating assets and liabilities ............ (106,981) (133,934)
--------- ---------
Net cash provided by (used in) operating activities 32,923 (3,896)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment .............. (72,500) (35,700)
--------- ---------
Net cash used in investing activities .............. (72,500) (35,700)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of short-term debt - net ...................... 84,200 43,400
Repayment of long-term debt ............................ (20,000) (76,900)
Issuance of long-term debt ............................. 0 18,600
Issuance of common stock ............................... 5,900 280
Dividends paid ......................................... (29,100) (27,200)
--------- ---------
Net cash provided (used) by financing activities ... 41,000 (41,820)
--------- ---------
Net increase (decrease) in cash and cash equivalents ....... 1,423 (81,416)
Cash and cash equivalents at beginning of period ........... 109,070 214,782
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ................. $ 110,493 $ 133,366
========= =========
</TABLE>
<PAGE>
6
Universal Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
All figures contained herein are unaudited.
1) The operations of segments of domestic and foreign tobacco, lumber and
building products, and agri-products are seasonal. Therefore, the results of
operations for the nine-month period ended March 31, 1998, are not necessarily
indicative of results to be expected for the year ending June 30, 1998. 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 March 31, 1998, total exposure under guarantees
issued for banking facilities of unconsolidated affiliates was approximately $6
million. Other contingent liabilities approximate $42 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 $55 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) In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"), which establishes standards for reporting and display of comprehensive
income and its components. SFAS 130 is effective for fiscal years beginning
after December 15, 1997, and the Company will adopt it for fiscal year 1999.
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS 131"). SFAS 131 is effective for fiscal years
beginning after December 15, 1997. The Company is currently evaluating the
implementation of SFAS 131 and plans to adopt it for fiscal year 1999.
4) In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"), which
was adopted by the Company in the quarter ended December 31, 1997. Prior to the
adoption of SFAS 128, the Company was not required to present the dilutive
effects of employee stock options because the effects were immaterial. SFAS 128
requires the presentation of both basic and diluted earnings per share,
regardless of materiality, unless the per share amounts are equal. The effect of
adopting SFAS 128 on earnings per share calculations for prior periods is not
material.
Net income was not affected by the calculation of basic and diluted earnings per
share for any of the periods presented. The following table sets forth the
computation of earnings per share and diluted earnings per share.
<TABLE>
<CAPTION>
Three Months Nine Months
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C>
Net income ($ in thousands).................... $31,546 $27,614 $102,404 $79,038
========== ========== ========== ==========
Denominator for earnings per share
Weighted average shares............... 35,298,742 35,085,332 35,202,716 35,068,788
---------- ---------- ---------- ----------
Effect of dilutive securities
Employee stock options................ 270,228 144,382 226,151 114,599
---------- ---------- ---------- ----------
Denominator for diluted earnings per share..... 35,568,970 35,229,714 35,428,867 35,183,387
========== ========== ========== ==========
Earnings per share............................. $.90 $.79 $2.91 $2.25
========== ========== ========== ==========
Diluted earnings per share..................... $.89 $.78 $2.89 $2.25
========== ========== ========== ==========
</TABLE>
5) In March 1998, the AICPA issued Statement of Position (SOP) 98-1, "Accounting
For the Costs of Computer Software Developed or Obtained for Internal Use". The
SOP is effective for the Company's fiscal year beginning July 1, 1999. The SOP
will require the capitalization of certain costs incurred after the date of
adoption in connection with developing or obtaining software for internal use.
The Company currently expenses such costs as incurred. The Company has not yet
assessed what the impact of the SOP will be on the Company's future earnings or
financial position.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial Condition
Working capital at March 31, 1998, was $363 million compared to $347
million at June 30, 1997. Due to the seasonal nature of the Company's tobacco
operations, the components of working capital on a comparative basis increased
significantly compared to June 30th. Current assets and current liabilities
increased $174 million and $158 million, respectively. The majority of the
increase was seasonal and was reflected in accounts receivable, advances to
suppliers, and tobacco inventory that was supported by increased notes payable
and overdrafts and customer advances. The mix of notes payable and customer
advances supporting inventories is dependent on the Company's borrowing
capabilities, interest rates, and exchange rates as well as those of its
customers. The increase in tobacco inventories primarily represents purchases of
crops that have not yet been processed and/or shipped due to customer
requirements. The Company generally does not purchase tobacco on a speculative
basis. While the inventory of domestic tobacco operations is normally higher at
March 31st than at June 30th, Brazilian inventories are lower. Advances to
farmers for agricultural materials, such as seed and fertilizer, were higher at
the end of March compared to June as advances are made for the upcoming year's
crops in Brazil and Latin America.
Generally, the Company's international tobacco operations conduct
business in U.S. dollars, thereby limiting foreign exchange risk to local
production and overhead costs, which represent the smallest portion of its cost
of sales. The Company's 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 increase in capital expenditures for the nine months ended March
31, 1998, compared to the last year was due to the acquisition of processing
plants in Tanzania and Poland and other capital improvements to tobacco
processing facilities. On May 6, 1998, Universal announced that its Board of
Directors had approved the purchase of up to $100 million of the common stock of
the Company. The purchases will be carried out from time to time on the open
market or in privately negotiated transactions at prices not exceeding
prevailing market rates. The purchases are expected to be funded primarily from
operating cash flow of the Company. Universal currently has approximately 35.3
million common shares outstanding. Management believes that the Universal's
liquidity and capital resources at March 31, 1998, remain adequate to support
its businesses.
Results of Operations
'Sales and Other Operating Revenues' for the third quarter of fiscal
year 1998 increased 14% compared to the same period last year due to strong
foreign tobacco sales. In addition, dark tobacco revenues increased during the
quarter. Lumber and building product revenues were adversely affected by lower
market pricing of softwood, hardwood and plywood volume reductions as customers
anticipated further price softening, and the strength of the U.S. dollar, which
has appreciated approximately 16 percent against the Dutch guilder since the
third quarter of last year. For the nine-month period, `Sales and Other
Operating Revenues' increased by approximately $270 million or 9% compared to
the nine months ended March 31, 1997. Lower lumber and building products
revenues for the nine months were offset by strong tobacco sales growth during
the same period.
Operating income (earnings before interest and taxes) increased in both
the third quarter and the nine-month period compared to the corresponding
periods last year. In the third quarter, operating income increased by $8
million or 13% compared to the third quarter of fiscal year 1997. During the
nine months ended March 31, operating income increased by $32 million or 17%.
The increase in the nine-month period was principally due to improvements
realized in both domestic and foreign tobacco operations. Domestic tobacco
operations for the nine months benefited from higher volumes purchased and
processed. In the quarter, domestic operating results were down due to
differences in the timing of shipments and larger sales of old crop tobaccos
last year. Foreign tobacco operations for the quarter were led by improved
African operations, while the nine month period was positively impacted by
larger Brazilian flue-cured and burley crops as well as gains in Africa and
Western Europe. Oriental tobacco and dark tobacco operations also improved. In
lumber and building products, operating income in both periods was down due to
the aforementioned effect of a strong U.S. dollar. Volumes and margins were also
lower due to the unprecedented simultaneous declines in world market prices for
hardwood, softwood, and plywood. Agri-products operating income in the quarter
and nine months was well above last year, benefiting from a strong international
tea market and rubber operations.
'Selling, General and Administrative Expenses' for the nine-month
period increased by approximately 6% over the comparable period last year
reflecting increased foreign tobacco shipments. Interest expense for the nine
months was down compared to last year principally reflecting the Company's
improved borrowing rates and controlled borrowing levels.
As a result of the Company's inventory control policies, it is
currently not holding material leaf inventories that are not committed to
customers. No significant impact is anticipated in the Company's financial
condition or results of operations from the current weakness in the economies of
countries in Southeast Asia. While world leaf production has increased and
uncommitted inventories held by stabilization cooperatives and the dealer trade
are up somewhat, Universal has been able to expand sales volumes and continues
to have very low inventories of uncommitted leaf. Quarterly comparisons continue
to be impacted by the timing of shipments to customers.
The Company is currently in the process of evaluating the potential
impact on its worldwide computer systems related to the year 2000. Systems and
equipment may malfunction due to the inability to recognize a date ending with
the digits "00", which could disrupt and have a material adverse impact on some
of the Company's operations. The Company expects to complete its evaluation by
June 30, 1998, and complete implementation of corrective actions by June 30,
1999. At the current time the Company has not finalized the total costs
resulting from the Year 2000 issue. In compliance with current generally
accepted accounting principles, costs incurred to fix the Year 2000 problems are
expensed as incurred. The Company believes that these costs will not be material
to its consolidated financial condition or results of operations. Costs such as
vendor-supplied software and computer hardware will be capitalized and amortized
to expense over their expected useful life. There can be no assurance that the
actual costs incurred or any delay in implementation of corrective actions
related to remediation of the Year 2000 problems will not have a material
adverse affect on the Company's future financial condition or results of
operations.
In January 1998, the Company reached an agreement to sell its minority
interest in a Dutch spice joint venture. The transaction is expected to result
in an after-tax gain of approximately $11 million, which will be recognized in
fourth quarter of fiscal year 1998.
Reference is made to Items 1 and 7 and the Notes to the Consolidated
Financial Statements in Item 8 of the Company's Form 10-K for the fiscal year
ended June 30, 1997, 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.
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
--------
12 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 dated January
23, 1998, describing an agreement to sell a subsidiary's share
of a European joint venture in spices.
ii) The Company filed a current Report on Form 8-K dated May 7,
1998, describing a share repurchase plan approved by the Board
of Directors.
* Filed Herewith
<PAGE>
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: May 8,1998 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)
EXHIBIT 12.
Universal Corporation and Subsidiaries
RATIO OF EARNINGS TO FIXED CHARGES
Nine Months Ended March 31, 1998 and 1997
1998 1997
-------- --------
Pretax income from continuing operations . $168,510 $133,342
Pretax income of unconsolidated affiliates 10,856 6,386
Fixed charges ............................ 46,853 50,154
-------- --------
Earnings ................................. $226,219 $189,449
======== ========
Interest ................................. $ 46,266 $ 49,498
Interest of unconsolidated affiliates .... 364 400
Debt discount amortization ............... 223 256
-------- --------
Fixed charges ............................ $ 46,853 $ 50,154
======== ========
Ratio of earnings to fixed charges ....... 4.8 3.8
======== ========
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> MAR-31-1998
<CASH> 110,493
<SECURITIES> 0
<RECEIVABLES> 454,703
<ALLOWANCES> 0
<INVENTORY> 877,600
<CURRENT-ASSETS> 1,604,552
<PP&E> 716,324
<DEPRECIATION> 382,618
<TOTAL-ASSETS> 2,196,367
<CURRENT-LIABILITIES> 1,241,519
<BONDS> 280,722
<COMMON> 82,964
0
0
<OTHER-SE> 453,165
<TOTAL-LIABILITY-AND-EQUITY> 2,196,367
<SALES> 3,441,009
<TOTAL-REVENUES> 3,441,009
<CGS> 2,981,402
<TOTAL-COSTS> 2,981,402
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 46,266
<INCOME-PRETAX> 168,510
<INCOME-TAX> 67,404
<INCOME-CONTINUING> 102,404
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 102,404
<EPS-PRIMARY> 2.91
<EPS-DILUTED> 2.89
</TABLE>
