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 JANUARY 31, 2002
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: February 28, 2002
Class A Common Stock ($.15 par value, voting) 28,891,260
Class B Common Stock ($.15 par value, nonvoting) 39,420,947
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 January 31, 2001 and 2002 3
Nine months ended January 31, 2001 and 2002 3
Condensed Consolidated Balance Sheet
April 30, 2001 and January 31, 2002 4
Condensed Consolidated Statement of Cash Flows
Nine months ended January 31, 2001 and 2002 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 - 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk 15
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
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 Nine Months Ended
January 31, January 31,
2001 2002 2001 2002
------- ------- -------- --------
Net sales $ 559.4 $ 570.5 $1,672.2 $1,684.3
Excise taxes 64.1 66.6 192.3 186.6
Cost of sales 205.0 221.9 594.6 638.1
------- ------- -------- --------
Gross profit 290.3 282.0 885.3 859.6
Advertising expenses 74.5 76.9 229.0 232.4
Selling, general, and
administrative expenses 125.0 116.8 368.9 353.6
------- ------- -------- --------
Operating income 90.8 88.3 287.4 273.6
Interest income 2.0 0.7 6.8 2.7
Interest expense 4.3 1.5 12.9 6.7
------- ------- -------- --------
Income before income taxes 88.5 87.5 281.3 269.6
Taxes on income 32.2 30.2 102.4 93.0
------- ------- -------- --------
Net income $ 56.3 $ 57.3 $ 178.9 $ 176.6
======= ======= ======== ========
Earnings per share
- Basic and Diluted $ 0.82 $ 0.84 $ 2.61 $ 2.58
======= ======= ======== ========
Shares (in thousands) used in the
calculation of earnings per share
- Basic 68,460 68,293 68,482 68,341
- Diluted 68,599 68,403 68,563 68,469
Cash dividends declared
per common share $ 0.33 $ 0.35 $ 0.95 $ 1.01
======= ======= ======== ========
See notes to the condensed consolidated financial statements.
3
BROWN-FORMAN CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(Dollars in millions)
April 30, January 31,
2001 2002
(Unaudited)
-------- --------
Assets
- ------
Cash and cash equivalents $ 86.1 $ 124.8
Accounts receivable, net 302.6 225.5
Inventories:
Barreled whiskey 219.6 210.9
Finished goods 216.3 209.0
Work in process 99.1 116.7
Raw materials and supplies 48.5 55.7
-------- --------
Total inventories 583.5 592.3
Other current assets 27.9 23.6
-------- --------
Total current assets 1,000.1 966.2
Property, plant and equipment, net 417.8 429.6
Goodwill 247.4 247.4
Other assets 274.4 296.8
-------- --------
Total assets $1,939.7 $1,940.0
======== ========
Liabilities
- -----------
Commercial paper $ 204.4 $ 162.0
Accounts payable and accrued expenses 280.8 266.2
Accrued taxes on income 45.4 33.9
Dividends payable -- 23.9
Deferred income taxes 8.0 8.0
-------- --------
Total current liabilities 538.6 494.0
Long-term debt 40.2 40.2
Deferred income taxes 61.4 32.9
Accrued postretirement benefits 58.7 59.7
Other liabilities and deferred income 53.6 53.7
-------- --------
Total liabilities 752.5 680.5
Stockholders' Equity
- --------------------
Common stock 10.3 10.3
Retained earnings 1,225.6 1,309.0
Accumulated other comprehensive loss (16.5) (17.4)
Treasury stock (537,394 and 687,638 common shares
at April 30 and January 31, respectively) (32.2) (42.4)
-------- --------
Total stockholders' equity 1,187.2 1,259.5
-------- --------
Total liabilities and stockholders' equity $1,939.7 $1,940.0
======== ========
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)
Nine Months Ended
January 31,
2001 2002
------- -------
Cash flows from operating activities:
Net income $ 178.9 $ 176.6
Adjustments to reconcile net income to net
cash provided by (used for) operations:
Depreciation 40.5 40.4
Amortization 8.9 --
Deferred income taxes (35.0) (28.5)
Other (14.7) (15.3)
Changes in assets and liabilities:
Accounts receivable 50.0 77.1
Inventories (66.4) (8.8)
Other current assets 13.4 3.5
Accounts payable and accrued expenses 10.8 (14.6)
Accrued taxes on income 39.8 (11.5)
------- -------
Cash provided by operating activities 226.2 218.9
Cash flows from investing activities:
Additions to property, plant, and equipment (74.1) (50.7)
Investment in affiliates (113.1) --
Other (1.7) (5.4)
------- -------
Cash used for investing activities (188.9) (56.1)
Cash flows from financing activities:
Net change in commercial paper (64.9) (42.4)
Reduction of long-term debt (6.0) --
Acquisition of treasury stock (3.1) (12.7)
Dividends paid (65.0) (69.0)
------- -------
Cash used for financing activities (139.0) (124.1)
------- -------
Net increase (decrease) in
cash and cash equivalents (101.7) 38.7
Cash and cash equivalents, beginning of period 180.2 86.1
------- -------
Cash and cash equivalents, end of period $ 78.5 $ 124.8
======= =======
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
$118.0 million higher than reported as of January 31, 2002.
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.
6
5. Earnings Per Share
Basic earnings per share is calculated as 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. Business Segment Information (in millions)
Three Months Ended Nine Months Ended
January 31, January 31,
2001 2002 2001 2002
------ ------ -------- --------
Net sales:
Wine and spirits $394.0 $400.5 $1,188.5 $1,218.5
Consumer durables 165.4 170.0 483.7 465.8
------ ------ -------- --------
Consolidated net sales $559.4 $570.5 $1,672.2 $1,684.3
====== ====== ======== ========
Operating income:
Wine and spirits $ 77.5 $ 79.4 $ 241.7 $ 250.8
Consumer durables 13.3 8.9 45.7 22.8
------ ------ -------- --------
90.8 88.3 287.4 273.6
Interest expense, net 2.3 0.8 6.1 4.0
------ ------ -------- --------
Consolidated income
before income taxes $ 88.5 $ 87.5 $ 281.3 $ 269.6
====== ====== ======== ========
April 30, January 31,
2001 2002
Goodwill: ------ ------
Wine and spirits $116.2 $116.2
Consumer durables 131.2 131.2
------ ------
Consolidated goodwill $247.4 $247.4
====== ======
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 foreign currency forward contracts and options, 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.
7
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 Loss (Income)" 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 nine months ended January 31,
2002 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 $0.8 million net gain from
accumulated other comprehensive loss to earnings during the next twelve months.
8. Comprehensive Income
Comprehensive income, which includes all changes in equity except those
resulting from investments by shareholders and distributions to shareholders,
was as follows (in millions):
Three Months Ended Nine Months Ended
January 31, January 31,
2001 2002 2001 2002
------ ------ ------ ------
Net income $ 56.3 $ 57.3 $178.9 $176.6
Other comprehensive income:
Change in unrealized gain
on cash flow hedges:
Cumulative effect of accounting
change, net of tax expense of
$1.3 in the nine months ended
January 31, 2001 -- -- -- 2.0
Change in fair value of cash
flow hedges, net of tax benefit
of $0.6 and $0.4 in the three and
nine months ended January 31,
2002, respectively -- 0.9 -- 0.6
Reclassification to earnings,
net of tax benefit of $0.3 and
$1.2 in the three and nine months
ended January 31, 2002,
respectively -- (0.5) -- (1.8)
------ ------ ------ ------
-- 0.4 -- 0.8
Foreign currency translation
adjustment 3.2 (2.7) (1.0) (1.7)
------ ------ ------ ------
Other comprehensive income (loss) 3.2 (2.3) (1.0) (0.9)
------ ------ ------ ------
Comprehensive income $ 59.5 $ 55.0 $177.9 $175.7
====== ====== ====== ======
Accumulated other comprehensive loss (income) consisted of the following
(in millions):
April 30, January 31,
2001 2002
------ ------
Cumulative translation adjustment $ 16.5 $ 18.2
Unrealized gain on cash flow hedge contracts -- (0.8)
------ ------
$ 16.5 $ 17.4
====== ======
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 be 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. No impairment of intangible assets was
indicated as of that date.
The following table adjusts reported net income and earnings per share for the
nine months ended January 31, 2001 (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 $178.9 $ 2.61
Amortization of goodwill 8.4 0.12
Amortization of other intangibles 0.5 0.01
----------- ------------------
Adjusted $187.8 $ 2.74
=========== ==================
The intangible assets with indefinite useful lives, other than goodwill, consist
of trademarks of $7.5 million and $8.4 million as of April 30, 2001, and January
31, 2002, 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 nine months ended January 31, 2002.
10. Reclassifications
Certain prior year amounts have been reclassified to conform with the current
year presentation.
11. Other
Effective May 1, 2001, we adopted FASB Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." That Statement resolves certain
implementation issues related to FASB Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
The adoption of Statement No. 144 did not have a material impact on our
consolidated financial statements.
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 nine months ended
January 31, 2002 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.
Important Information Regarding 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, within the meaning of the Private Securities Litigation Reform Act of
1995. The words "believe", "expect", "anticipate", "project", and similar
expressions, among others, identify forward-looking statements, which speak only
as of the date the statement was made. We have no current intention of updating
or revising any forward-looking statements, whether as a result of new
information, future events or otherwise, except as otherwise required by law.
In the discussion and analysis that follows, we make several such forward-
looking statements, but we do not guarantee that the results indicated will
actually be achieved. These statements are subject to a number of important
risks and uncertainties, which could cause our actual results and experience to
differ materially from the anticipated results or other expectations expressed
in those forward-looking statements. We set forth below a non-exclusive list of
such risks and uncertainties.
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. However, the bulk of our business remains in the U.S. and our
business prospects generally are dependent heavily on the state of the U.S.
economy, which appears to be in recession. Earnings could be adversely impacted
by terrorist attacks, such as those of September 11, 2001 and related subsequent
events, including the U.S response, other hostile acts, retaliation, and threats
of any of these. Earnings could also be hurt if the United States went to war
with Iraq or another country deemed to be harboring terrorists.
Beverage Risk Factors: The beverage alcohol business is not "recession proof."
Current projections for our domestic beverage business assume that the U.S.
economy will rebound in late 2002 and through the next calendar year. Such a
rebound should also increase business travel and entertainment, which helps our
business. If this rebound does not occur, our earnings will be weaker. Beverage
wholesalers and retailers in the U.S. appear to be lowering their beverage trade
inventories, which adversely affects shipments. Profits from our international
beverage business may be adversely affected if the U.S. dollar strengthens
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. The 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 hurt by increases in
the price of grain, grapes or energy.
10
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.
Increases in state excise taxes on spirits and wine to meet budget shortfalls
could dampen sales in those states. 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 lawsuits are
filed against alcohol manufacturers.
Consumer Durables Risk Factors: Earnings from our consumer durables segment are
difficult to project because of the uncertain U.S. economy. Growth of fine china
dinnerware and crystal glassware hinges on the health of major department
stores, the primary channel of distribution for these products. Projections will
also be affected by further department store consolidation, a soft retail
environment at outlet malls and consumer response to direct mail. The Hartmann
luggage business is in a state of transition following a disappointing earnings
year, and faces substantially reduced demand due to a decline in business and
leisure travel. Consumer durables are discretionary purchases and, as such,
demand for these products likely will be dependent on the degree to which the
general health of the economy and consumer confidence improve.
Results of Operations:
Third Quarter Fiscal 2002 Compared to Third Quarter Fiscal 2001
Here is a summary of our operating performance (expressed in millions,
except percentage and per share amounts):
Three Months Ended
January 31,
2001 2002 Change
------ ------ ------
Net Sales:
Wine & Spirits $394.0 $400.5 2 %
Consumer Durables 165.4 170.0 3 %
------ ------
Total $559.4 $570.5 2 %
Gross Profit:
Wine & Spirits $209.0 $200.3 (4 %)
Consumer Durables 81.3 81.7 1 %
------ ------
Total $290.3 $282.0 (3 %)
Operating Income:
Wine & Spirits $ 77.5 $ 79.4 2 %
Consumer Durables 13.3 8.9 (33 %)
------ ------
Total $ 90.8 $ 88.3 (3 %)
Net Income $ 56.3 $ 57.3 2 %
Earnings per Share - Basic and Diluted $ 0.82 $ 0.84 2 %
Effective Tax Rate 36.4% 34.5%
11
Beverage revenues increased 2% during the quarter. Gross margins were under
pressure due to an increasingly competitive pricing environment for wine
products, unfavorable exchange rates, and costs related to the company's supply
chain initiatives. Wine and spirits operating income increased 2%, reflecting
lower operating expenses and the benefit of FASB Statement No. 142 (FAS 142). On
a constant exchange basis and excluding the benefit from FAS 142, third quarter
operating income for the segment increased 5%.
Although depletion growth for Jack Daniel's in the U.S. has slowed this fiscal
year, international volume trends remain strong. In particular, depletions have
increased at double-digit rates in such important markets as the United Kingdom,
Spain, Italy and Korea. Modest U.S. depletion growth for Southern Comfort,
combined with sustained price increases, have resulted in record worldwide gross
profits for the brand. Volume trends for the company's major wine brands
accelerated this quarter and are up solidly year-to-date. However, pricing
competition is intense and we expect the gross margin on our wine brands to
decrease this year.
Third quarter sales and gross profit for the consumer durables segment improved
3% and 1%, respectively, rebounding from a sharp decline experienced in the
second quarter. Sales were up strongly in the direct-to-consumer channel and
through company-owned retail outlets, while orders from department stores
remained weak. Excluding the costs to close a crystal manufacturing plant and
the benefit from FAS 142, operating income was up 1% in the quarter. The company
is taking steps to reduce future costs through its business improvement
initiatives. Although the cost of implementing these programs will lower current
year earnings, we believe that the segment will be in a significantly better
position for growth in fiscal years 2003 and beyond.
As discussed in Note 9 to the accompanying condensed consolidated financial
statements, we adopted FAS 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. As of May 1, 2001, no
impairment of intangible assets was indicated. The discontinuation of
amortization improved operating earnings for the quarter by $3.1 million, or
$0.04 per share.
On a constant exchange basis, excluding FAS 142 benefits as well as the plant
closing costs and other non-recurring business improvement initiatives, the
company's earnings per share increased 8% over the same period last year.
12
Results of Operations:
Nine Months Fiscal 2002 Compared to Nine Months Fiscal 2001
Here is a summary of our operating performance (expressed in millions,
except percentage and per share amounts):
Nine Months Ended
January 31,
2001 2002 Change
-------- -------- ------
Net Sales:
Wine & Spirits $1,188.5 $1,218.5 3 %
Consumer Durables 483.7 465.8 (4 %)
-------- --------
Total $1,672.2 $1,684.3 1 %
Gross Profit:
Wine & Spirits $ 641.2 $ 636.3 (1 %)
Consumer Durables 244.1 223.3 (8 %)
-------- --------
Total $ 885.3 $ 859.6 (3 %)
Operating Income:
Wine & Spirits $ 241.7 $ 250.8 4 %
Consumer Durables 45.7 22.8 (50 %)
-------- --------
Total $ 287.4 $ 273.6 (5 %)
Net Income $ 178.9 $ 176.6 (1 %)
Earnings per Share - Basic and Diluted $ 2.61 $ 2.58 (1 %)
Effective Tax Rate 36.4% 34.5%
Beverage revenues grew 3% during the period, while gross profit declined 1% as a
result of a more competitive pricing environment for wines, unfavorable exchange
rates, and costs related to the company's supply chain initiatives. Operating
income for the segment improved 4%, reflecting reduced operating expenses and
the benefit from the adoption of FAS 142 discussed above. Had FAS 142 been
effective last year, beverage operating income for the first nine months of
fiscal 2001 would have exceeded the amount reported for that period by $4.7
million.
Revenues and gross profit for Consumer Durables were down 4% and 8%,
respectively, resulting in a 50% drop in operating income. Consequences of
September 11 and the effects of a slowing U.S. economy have had a significant
impact on sales to department stores and through company owned retail outlets.
While the segment benefited from the adoption of FAS 142, lower production
levels and higher discounting activity tempered margins during the period. Had
FAS 142 been effective last year, segment operating income for the first nine
months of fiscal 2001 would have exceeded the amount reported for that period by
$4.2 million.
Net interest expense declined from last year as a result of lower interest
rates. The reduction in the company's consolidated effective tax rate was
largely due to the discontinuation of goodwill amortization, which is not tax
deductible.
13
The discontinuation of amortization as a result of the company's adoption of FAS
142 improved consolidated earnings for the first nine months of fiscal 2002 by
$8.9 million, or $0.13 per share, and will benefit earnings comparisons for the
full year by $12.4 million, or $0.18 per share.
As announced in July, we are undertaking a series of business improvement
initiatives to streamline procurement and production practices, reduce
inventories, and improve connections with our customers. The total cost of this
program is expected to reduce net income by $20 million over fiscal years 2002
and 2003. First quarter results included $3 million of after-tax costs related
to this program. Third quarter results included $4 million of after-tax costs,
principally related to a recently announced decision to close our crystal
manufacturing facility. Remaining initiatives being contemplated could lower net
income by an additional $13 million between now and the end of fiscal year 2003.
These initiatives are expected to produce a number of benefits in the future
that will strengthen the company's long-term cash flow and earnings.
On a constant exchange basis, excluding FAS 142 benefits as well as the plant
closing costs and other non-recurring business improvement initiatives, the
company's year-to-date earnings per share improved 2%.
Liquidity and Financial Condition
Cash and cash equivalents increased by $38.7 million during the nine months
ended January 31, 2002, as cash provided by operating activities exceeded cash
used for investing and financing activities. Cash provided by operations totaled
$218.9 million, primarily reflecting net income before depreciation, and a
normal seasonal decrease in accounts receivable, offset partially by a
continuing liquidation of deferred income taxes in compliance with revised U.S.
tax regulations. Cash of $56.1 million was used for investing activities,
consisting mostly of expenditures to expand and modernize our production
facilities. In financing activities, $124.1 million was used primarily to pay
dividends and reduce the amount of outstanding commercial paper.
Dividends
The Board of Directors increased the quarterly cash dividend 6.1% from $0.33 to
$0.35 per share on both Class A and Class B common stock, payable January 1,
2002. As a result, the indicated annual cash dividend per share rose from $1.32
to $1.40.
14
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.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: None
(b) Reports on Form 8-K: None
15
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: March 6, 2002 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)
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