United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JULY 31, 2001
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File No. 1-123
BROWN-FORMAN CORPORATION
(Exact name of Registrant as specified in its Charter)
Delaware 61-0143150
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
850 Dixie Highway
Louisville, Kentucky 40210
(Address of principal executive offices) (Zip Code)
(502) 585-1100
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
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 issuer's classes of
common stock, as of the latest practicable date: August 31, 2001
Class A Common Stock ($.15 par value, voting) 28,891,260
Class B Common Stock ($.15 par value, nonvoting) 39,385,519
BROWN-FORMAN CORPORATION
Index to Quarterly Report Form 10-Q
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) Page
Condensed Consolidated Statement of Income
Three months ended July 31, 2000 and 2001 3
Condensed Consolidated Balance Sheet
April 30, 2001 and July 31, 2001 4
Condensed Consolidated Statement of Cash Flows
Three months ended July 31, 2000 and 2001 5
Notes to the Condensed Consolidated Financial Statements 6 - 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10 - 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk 13
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
BROWN-FORMAN CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
(Dollars in millions, except per share amounts)
Three Months Ended
July 31,
2000 2001
------- -------
Net sales $ 466.0 $ 469.7
Excise taxes 55.6 51.7
Cost of sales 155.4 170.1
------- -------
Gross profit 255.0 247.9
Selling, general, and administrative expenses 115.0 114.9
Advertising expenses 72.1 71.7
------- -------
Operating income 67.9 61.3
Interest income 3.1 1.1
Interest expense 4.0 2.6
------- -------
Income before income taxes 67.0 59.8
Taxes on income 24.4 20.6
------- -------
Net income $ 42.6 $ 39.2
======= =======
Earnings per share
- Basic and Diluted $ 0.62 $ 0.57
======= =======
Shares (in thousands) used in the
calculation of earnings per share
- Basic 68,517 68,416
- Diluted 68,558 68,557
Cash dividends declared per common share $ 0.31 $ 0.33
======= =======
See notes to the condensed consolidated financial statements.
3
BROWN-FORMAN CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(Dollars in millions)
April 30, July 31,
2001 2001
(Unaudited)
-------- --------
Assets
- ------
Cash and cash equivalents $ 86.1 $ 86.4
Accounts receivable, net 302.6 275.5
Inventories:
Barreled whiskey 219.6 217.7
Finished goods 216.3 247.4
Work in process 99.1 81.0
Raw materials and supplies 48.5 56.9
-------- --------
Total inventories 583.5 603.0
Other current assets 27.9 20.9
-------- --------
Total current assets 1,000.1 985.8
Property, plant and equipment, net 417.8 424.1
Goodwill 250.9 250.9
Other assets 270.9 275.1
-------- --------
Total assets $1,939.7 $1,935.9
======== ========
Liabilities
- -----------
Commercial paper $ 204.4 $ 217.7
Accounts payable and accrued expenses 280.8 245.0
Accrued taxes on income 45.4 56.9
Dividends payable -- 22.5
Deferred income taxes 8.0 8.0
-------- --------
Total current liabilities 538.6 550.1
Long-term debt 40.2 40.2
Deferred income taxes 61.4 54.1
Accrued postretirement benefits 58.7 58.9
Other liabilities and deferred income 53.6 61.7
-------- --------
Total liabilities 752.5 765.0
Stockholders' Equity
- --------------------
Common stock 10.3 10.3
Retained earnings 1,225.6 1,219.7
Accumulated other comprehensive loss (16.5) (14.7)
Treasury stock (537,394 and 719,459 common
shares at April 30 and July 31, respectively) (32.2) (44.4)
-------- --------
Total stockholders' equity 1,187.2 1,170.9
-------- --------
Total liabilities and stockholders' equity $1,939.7 $1,935.9
======== ========
Note: The balance sheet at April 30, 2001, has been taken from the audited
financial statements at that date, and condensed.
See notes to the condensed consolidated financial statements.
4
BROWN-FORMAN CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(In millions; amounts in parentheses are reductions of cash)
Three Months Ended
July 31,
2000 2001
------- -------
Cash flows from operating activities:
Net income $ 42.6 $ 39.2
Adjustments to reconcile net income to net
cash provided by (used for) operations:
Depreciation 13.2 13.3
Amortization 2.7 --
Deferred income taxes (13.3) (7.3)
Other (4.7) 7.7
Changes in assets and liabilities:
Accounts receivable 48.8 27.1
Inventories (20.7) (19.5)
Other current assets 5.5 7.0
Accounts payable and accrued expenses (29.1) (35.8)
Accrued taxes on income 36.3 11.5
------- -------
Cash provided by operating activities 81.3 43.2
Cash flows from investing activities:
Additions to property, plant, and equipment (21.0) (19.9)
Investment in affiliate (14.8) --
Other (4.3) (1.0)
------- -------
Cash used for investing activities (40.1) (20.9)
Cash flows from financing activities:
Net change in commercial paper (12.1) 13.3
Acquisition of treasury stock -- (12.7)
Dividends paid (21.3) (22.6)
------- -------
Cash used for financing activities (33.4) (22.0)
------- -------
Net increase in cash and cash equivalents 7.8 0.3
Cash and cash equivalents, beginning of period 180.2 86.1
------- -------
Cash and cash equivalents, end of period $ 188.0 $ 86.4
======= =======
See notes to the condensed consolidated financial statements.
5
BROWN-FORMAN CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In these notes, "we," "us," and "our" refer to Brown-Forman Corporation.
1. Condensed Consolidated Financial Statements
We prepared these unaudited condensed consolidated statements using our
customary accounting practices as set out in our 2001 annual report on Form 10-K
(the "2001 Annual Report"). We made all of the adjustments (which includes only
normal, recurring adjustments) needed to present this data fairly.
We condensed or omitted some of the information found in financial statements
prepared according to generally accepted accounting principles ("GAAP"). You
should read these financial statements together with the 2001 Annual Report,
which does conform to GAAP.
2. Inventories
We use the last-in, first-out method to determine the cost of almost all of our
inventories. If the last-in, first-out method had not been used, inventories
would have been $105.2 million higher than reported as of April 30, 2001, and
$108.5 million higher than reported as of July 31, 2001.
3. Environmental
Along with other responsible parties, we face environmental claims resulting
from the cleanup of several waste deposit sites. We have accrued our estimated
portion of cleanup costs. We expect either the other responsible parties or
insurance to cover the remaining costs. We do not believe that any additional
costs we incur to satisfy environmental claims will have a material adverse
effect on our financial condition or results of operations.
4. Contingencies
We get sued in the ordinary course of business. Some suits and claims seek
significant damages. Many of them take years to resolve, which makes it
difficult for us to predict their outcomes. We believe, based on our legal
counsel's advice, that none of the suits and claims pending against us will have
a material adverse effect on our financial condition or results of operations.
5. Earnings Per Share
Basic earnings per share is calculated using net income divided by the weighted
average number of common shares outstanding during the period. Diluted earnings
per share is calculated in the same manner, except that the denominator also
includes additional common shares that would have been issued if outstanding
stock options had been exercised during the period. The dilutive effect of
outstanding stock options is determined by application of the treasury stock
method.
6
6. Business Segment Information
(Dollars in millions) Three Months Ended
July 31,
2000 2001
------ ------
Net sales:
Wine and spirits $341.1 $343.0
Consumer durables 124.9 126.7
------ ------
Consolidated net sales $466.0 $469.7
====== ======
Operating income (loss):
Wine and spirits $ 68.1 $ 62.3
Consumer durables (0.2) (1.0)
------ ------
67.9 61.3
Interest expense, net 0.9 1.5
------ ------
Consolidated income before income taxes $ 67.0 $ 59.8
====== ======
April 30, July 31,
2001 2001
------ ------
Goodwill:
Wine and spirits $120.6 $120.6
Consumer durables 130.3 130.3
------ ------
Consolidated goodwill $250.9 $250.9
====== ======
7. Derivative Instruments and Hedging Activities
Effective May 1, 2001, we adopted Financial Accounting Standards Board (FASB)
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities." That Statement requires that all derivative instruments be reported
on the balance sheet at fair value. The cumulative effect of adopting Statement
No. 133 as of May 1, 2001, was not material to the company's consolidated
financial statements.
We use synthetic foreign currency forward contracts, generally with average
maturities of less than one year, as protection against the risk that the
eventual U.S. dollar cash flows resulting from the forecasted sale and purchase
of goods in foreign currencies will be adversely affected by changes in exchange
rates. These derivative financial instruments are designated as cash flow
hedges.
We formally assess, both at the inception and at least quarterly thereafter,
whether the derivative financial instruments are effective at offsetting changes
in the cash flows of the hedged transactions. The effective portion of a
derivative's change in fair value is deferred in accumulated other comprehensive
income or loss until the underlying hedged transaction is recognized in
earnings. Any ineffective portion of the change in fair value is immediately
recognized in earnings.
The net gain recognized in earnings during the three months ended July 31, 2001,
due to the ineffectiveness or discontinuation of cash flow hedges was not
material. Because all of our outstanding cash flow hedging instruments hedge
sales or purchases that are forecasted to occur within the next twelve months,
we expect to reclassify all of the existing $1.2 million net gain from
accumulated other comprehensive loss to earnings during the next twelve months.
7
8. Comprehensive Income
Comprehensive income, which is defined as the change in equity from transactions
and other events from nonowner sources, was as follows (in millions):
Three Months Ended
July 31,
2000 2001
------ ------
Net income $ 42.6 $ 39.2
Other comprehensive income:
Change in unrealized gain on cash flow hedges:
Cumulative effect of accounting change,
net of tax of $1.3 in 2001 -- 2.0
Reclassification to earnings,
net of tax of $0.5 in 2001 -- (0.8)
------ ------
-- 1.2
Foreign currency translation adjustment 0.3 0.6
------ ------
Other comprehensive income 0.3 1.8
------ ------
Comprehensive income $ 42.9 $ 41.0
====== ======
Accumulated other comprehensive loss (income) consisted of the following
(in millions):
April 30, July 31,
2001 2001
------ ------
Cumulative translation adjustment $ 16.5 $ 15.9
Unrealized gain on cash flow hedge contracts -- (1.2)
------ ------
$ 16.5 $ 14.7
====== ======
8
9. Goodwill and Other Intangible Assets
On July 20, 2001, the FASB issued Statement No. 141, "Business Combinations,"
and Statement No. 142, "Goodwill and Other Intangible Assets." Statement No. 141
requires that the purchase method of accounting be used for all business
combinations initiated or completed after June 30, 2001. Statement No. 141 also
specifies the criteria under which intangible assets acquired in a purchase
method business combination should be recognized and reported apart from
goodwill. Statement No. 142 requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead assessed for
impairment at least annually by applying a fair value-based test. Statement No.
142 also requires that intangible assets with definite useful lives be amortized
over their respective estimated useful lives to their estimated residual values,
and reviewed for impairment in accordance with Statement No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of."
Statement No. 141 became effective upon its issuance. We elected to adopt
Statement No. 142 as of May 1, 2001, and are in the process of performing the
transitional goodwill impairment test, which must be completed by the end of
fiscal 2002. Any impairment loss recognized as a result of this transitional
assessment would be recorded as the cumulative effect of a change in accounting
principle and would require the restatement of net income for the three months
ended July 31, 2001.
The following table adjusts reported net income and earnings per share for the
three months ended July 31, 2000 (prior to the adoption date) to exclude
amortization of goodwill and other intangible assets with indefinite useful
lives:
Net Income Basic and Diluted
(in millions) Earnings Per Share
----------- ------------------
As reported $ 42.6 $ 0.62
Amortization of goodwill 2.5 0.04
Amortization of other intangibles 0.2 --
----------- ------------------
Adjusted $ 45.3 $ 0.66
=========== ==================
The intangible assets with indefinite useful lives, other than goodwill, consist
of trademarks of $7.5 million and $7.8 million as of April 30 and July 31, 2001,
respectively. These trademarks are included in "Other Assets" in the
accompanying condensed consolidated balance sheet. We have no significant
intangible assets with definite useful lives and, thus, no significant
amortization expense for the three months ended July 31, 2001.
10. Reclassifications
Certain prior year amounts have been reclassified to conform with the current
year presentation.
9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
You should read the following discussion and analysis along with our 2001 Annual
Report. Note that the results of operations for the three months ended July 31,
2001, do not necessarily indicate what our operating results for the full fiscal
year will be. In this Item, "we," "us," and "our" refer to Brown-Forman
Corporation.
Risk Factors Affecting Forward-Looking Statements:
From time to time, we may make forward-looking statements related to our
anticipated financial performance, business prospects, new products, and similar
matters. We make several such statements in the discussion and analysis which
follows, but we do not guarantee that the results indicated will actually be
achieved.
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. To comply with the terms of the safe harbor, we note
that the following non-exclusive list of important risk factors could cause our
actual results and experience to differ materially from the anticipated results
or other expectations expressed in those forward-looking statements:
Generally: We operate in highly competitive markets. Our business is subject to
changes in general economic conditions, changes in consumer preferences, the
degree of acceptance of new products, and the uncertainties of litigation. As
our business continues to expand outside the United States, our financial
results are more exposed to foreign exchange rate fluctuations and the health of
foreign economies.
Beverage Risk Factors: Our domestic beverage business, like most other consumer
businesses, will be hurt if the U.S. economy softens further or goes into a
recession. Beverage wholesalers and retailers in the U.S. appear to be lowering
their beverage trade inventories, which adversely affects shipments. A further
slowing of business travel and entertainment would also affect demand for our
premium beverage products. Profits from our international beverage business may
be adversely affected if the U.S. dollar continues to strengthen against other
currencies or if economic conditions deteriorate in the principal countries to
which we export our beverage products, including the United Kingdom, Germany,
Japan, and Australia. Our long-term outlook for our beverage business
anticipates continued success of Jack Daniel's Tennessee Whiskey, Southern
Comfort, and our other core spirit and wine brands. This assumption is based in
part on favorable demographic trends in the U.S. and many international markets
for the sale of spirits and wine. Current expectations for our global beverage
business may not be met if these demographic trends do not translate into
corresponding sales increases. Profits could also be affected by increases in
the price of grain, grapes or energy.
The wine and spirits business, both in the United States and abroad, is also
sensitive to political and social trends. The U.S. beverage alcohol business is
highly sensitive to tax increases; an increase in the federal excise tax (which
we do not anticipate at this time) would depress our domestic beverage business.
Legal or regulatory measures against beverage alcohol (including its advertising
and promotion) could adversely affect sales. Product liability litigation
against the alcohol industry, while not currently a major risk factor, could
become significant if new lawsuits were filed against alcohol manufacturers.
10
Consumer Durables Risk Factors: Earnings projections for our consumer durables
segment anticipate a continued strengthening of our Lenox business and the
revitalization of our Hartmann business. These projections could be offset by
factors such as poor consumer response to direct mail, a soft retail environment
at outlet malls, further department store consolidation, or weakened demand for
tableware, giftware and/or leather goods. Consumer durables are usually
discretionary purchases and the business would be impacted if the U.S. economy
softens further or goes into a recession.
Results of Operations:
First Quarter Fiscal 2002 Compared to First Quarter Fiscal 2001
Here is a summary of our operating performance (expressed in millions,
except percentage and per share amounts):
Three Months Ended
July 31,
2000 2001 Change
------ ------ ------
Net Sales:
Wine & Spirits $341.1 $343.0 1 %
Consumer Durables 124.9 126.7 2 %
------ ------
Total $466.0 $469.7 1 %
Gross Profit:
Wine & Spirits $190.4 $186.3 (2 %)
Consumer Durables 64.6 61.6 (5 %)
------ ------
Total $255.0 $247.9 (3 %)
Operating Income (Loss):
Wine & Spirits $ 68.1 $ 62.3 (9 %)
Consumer Durables (0.2) (1.0) N/M
------ ------
Total $ 67.9 $ 61.3 (10 %)
Net Income $ 42.6 $ 39.2 (8 %)
Earnings per Share - Basic and Diluted $ 0.62 $ 0.57 (8 %)
Effective Tax Rate 36.4% 34.5%
Beverage revenues rose 1% during the quarter, while gross profits fell 2% and
operating income declined 9%. Adjusted for the negative impact of foreign
currency translation, beverage operating income grew 4% on a 2% increase in
revenues. A decline in segment gross margin from 55.8% last year to 54.3% was
influenced by weaker currencies in key overseas markets. Advertising investments
for the quarter were down 1% in U.S. dollar terms, but rose slightly on a local
currency basis.
11
U.S. consumer demand for Jack Daniel's moderated in the quarter, attributed to
the slowing economy. Volume trends for Jack Daniel's remain vibrant in Europe,
however, where they grew at a double-digit rate for the quarter. U.S. growth for
Southern Comfort continues to reflect renewed marketing and sales initiatives,
and sales of Finlandia remain robust around the world. Demand for the company's
premium wine brands also continued to strengthen, with U.S. depletions for the
quarter attaining record levels.
Revenues for Consumer Durables rose 2% during the quarter, boosted by strong
gains for Lenox collectible and giftware products sold direct to consumers. A
soft U.S. retail environment has clearly dampened orders for fine china and
other tabletop products, however, resulting in an overall drop in gross profits
for the segment. A seasonal business that typically reports a loss in the May-
July period, Consumer Durables reported a first quarter operating loss of
$1.0 million, compared to a $0.2 million loss in the same period last year.
Net interest expense increased from last year's first quarter, primarily
reflecting financing costs associated with our $84 million equity investment in
Finlandia Vodka Worldwide Ltd. The reduction in the company's consolidated
effective tax rate was largely due to the discontinuation of goodwill
amortization, which is not tax deductible.
As discussed in Note 9 to the accompanying condensed consolidated financial
statements, we adopted FASB Statement No. 142 as of May 1, 2001. As a result,
goodwill and other intangible assets that have indefinite useful lives are no
longer subject to amortization. Rather, such assets must be assessed for
impairment by applying a fair value-based test on at least an annual basis. The
discontinuation of amortization improved earnings for the quarter by $2.7
million, or $0.04 per share, and will benefit earnings comparisons for the full
year by $12.4 million, or $0.18 per share. We are in the process of performing
the transitional goodwill impairment test, which must be completed by the end of
fiscal 2002. Any impairment loss recognized as a result of this transitional
assessment would be recorded as the cumulative effect of a change in accounting
principle and would require the restatement of net income for the three months
ended July 31, 2001.
Our current forecast indicates full-year fiscal 2002 earnings of $3.50 per
share, an increase of 3% over last year. Our earnings outlook anticipates a
series of business improvement initiatives to streamline procurement and
production practices, reduce inventories, and improve connections with our
customers. First quarter results included $3 million of after-tax costs to fund
this business improvement program. Additional investments being contemplated
could lower net income by approximately $20 million between now and the end of
fiscal 2003. These investments are expected to produce greater benefit in the
future, significantly strengthening the company's long-term cash flow and
earnings.
12
Liquidity and Financial Condition
Cash and cash equivalents changed little during the three months ended July 31,
2001, as cash provided by operating activities was used for financing and
investing activities. Cash provided by operations totaled $43.2 million,
primarily reflecting net income before depreciation and the normal seasonal
increase in accrued income taxes and decrease in accounts receivable during the
period. Those amounts were partially offset by a reduction in accounts payable
and accrued expenses, and an increase in inventories, as well as a continuing
liquidation of deferred income taxes in compliance with revised U.S. tax
regulations. Cash of $20.9 million was used for investing activities, as we
continue to expand the capacity of our wine and spirits production facilities.
Cash of $22.0 million was used for financing activities, primarily reflecting
dividends paid during the period.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Since April 30, 2001, there have been no material changes in the company's
interest rate, foreign currency and commodity price exposures, the types of
derivative financial instruments used to hedge those exposures, or the
underlying market conditions.
13
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Stockholders of the company held July 26, 2001, the
following matter was voted upon:
Election of Jerry E. Abramson, Barry D. Bramley, Geo. Garvin Brown III,
Owsley Brown II, Donald G. Calder, Owsley Brown Frazier, Richard P. Mayer,
Stephen E. O'Neil, William M. Street, and Dace Brown Stubbs to serve as
directors until the next annual election of directors, or until a successor
has been elected and qualified.
For Withheld
---------- --------
Jerry E. Abramson 27,874,381 10,063
Barry D. Bramley 27,877,363 7,081
Geo. Garvin Brown III 27,878,054 6,390
Owsley Brown II 27,845,793 38,651
Donald G. Calder 27,878,046 6,398
Owsley Brown Frazier 27,877,949 6,495
Richard P. Mayer 27,878,054 6,390
Stephen E. O'Neil 27,876,147 8,297
William M. Street 27,845,639 38,805
Dace Brown Stubbs 27,877,937 6,507
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: None
(b) Reports on Form 8-K:
On July 19, 2001, the Registrant filed a report on Form 8-K announcing
its purchase of 96,831 shares of its Class A Common Stock and 93,085
shares of its Class B Common Stock in a private transaction.
14
SIGNATURES
As required by the Securities Exchange Act of 1934, the Registrant has caused
this report to be signed on its behalf by the undersigned authorized officer.
BROWN-FORMAN CORPORATION
(Registrant)
Date: September 13, 2001 By: /s/ Phoebe A. Wood
Phoebe A. Wood
Executive Vice President and
Chief Financial Officer
(On behalf of the Registrant and
as Principal Financial Officer)
15