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, 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: August 30, 2002
Class A Common Stock ($.15 par value, voting) 28,891,260
Class B Common Stock ($.15 par value, nonvoting) 39,510,112
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, 2001 and 2002 3
Condensed Consolidated Balance Sheet
April 30, 2002 and July 31, 2002 4
Condensed Consolidated Statement of Cash Flows
Three months ended July 31, 2001 and 2002 5
Notes to the Condensed Consolidated Financial Statements 6 - 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9 - 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk 12
Item 4. Controls and Procedures 12
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
Certifications 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,
2001 2002
------- -------
Net sales $ 473.9 $ 479.6
Excise taxes 51.7 55.5
Cost of sales 173.8 176.7
------- -------
Gross profit 248.4 247.4
Advertising expenses 71.7 78.4
Selling, general, and administrative expenses 115.4 112.9
------- -------
Operating income 61.3 56.1
Interest income 1.1 0.6
Interest expense 2.6 1.6
------- -------
Income before income taxes 59.8 55.1
Taxes on income 20.6 19.0
------- -------
Net income $ 39.2 $ 36.1
======= =======
Earnings per share
- Basic and Diluted $ 0.57 $ 0.53
======= =======
Shares (in thousands) used in the
calculation of earnings per share
- Basic 68,416 68,376
- Diluted 68,557 68,593
Cash dividends declared per common share $ 0.33 $ 0.35
======= =======
See notes to the condensed consolidated financial statements.
3
BROWN-FORMAN CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(Dollars in millions)
April 30, July 31,
2002 2002
(Unaudited)
-------- --------
Assets
- ------
Cash and cash equivalents $ 115.6 $ 123.8
Accounts receivable, net 280.4 257.2
Inventories:
Barreled whiskey 219.2 219.4
Finished goods 182.9 218.4
Work in process 117.8 99.3
Raw materials and supplies 57.9 64.8
-------- --------
Total inventories 577.8 601.9
Other current assets 55.0 51.6
-------- --------
Total current assets 1,028.8 1,034.5
Property, plant and equipment, net 437.4 438.9
Investment in affiliates 127.4 131.8
Goodwill 246.5 246.5
Other assets 175.6 174.9
-------- --------
Total assets $2,015.7 $2,026.6
======== ========
Liabilities
- -----------
Commercial paper $ 167.4 $ 174.5
Accounts payable and accrued expenses 295.9 270.9
Dividends payable -- 23.9
Accrued taxes on income 31.5 64.9
-------- --------
Total current liabilities 494.8 534.2
Long-term debt 40.2 40.2
Deferred income taxes 57.8 36.0
Accrued postretirement benefits 59.5 60.4
Other liabilities 52.5 53.3
-------- --------
Total liabilities 704.8 724.1
Stockholders' Equity
- --------------------
Common stock 10.3 10.3
Retained earnings 1,360.1 1,348.1
Accumulated other comprehensive loss (19.5) (18.4)
Treasury stock (648,132 and 606,509 common
shares at April 30 and July 31, respectively) (40.0) (37.5)
-------- --------
Total stockholders' equity 1,310.9 1,302.5
-------- --------
Total liabilities and stockholders' equity $2,015.7 $2,026.6
======== ========
Note: The balance sheet at April 30, 2002, 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,
2001 2002
------- -------
Cash flows from operating activities:
Net income $ 39.2 $ 36.1
Adjustments to reconcile net income to net
cash provided by (used for) operations:
Depreciation 13.3 13.8
Deferred income taxes (7.3) (19.6)
Other (3.7) (2.0)
Changes in assets and liabilities:
Accounts receivable 27.1 24.3
Inventories (19.5) (24.1)
Other current assets 7.0 3.4
Accounts payable and accrued expenses (26.8) (28.9)
Accrued taxes on income 11.5 33.4
Other noncurrent assets and liabilities 2.4 2.5
------- -------
Cash provided by operating activities 43.2 38.9
Cash flows from investing activities:
Additions to property, plant, and equipment (19.9) (15.0)
Computer software expenditures (0.8) (0.9)
Trademark and patent expenditures (0.2) (0.2)
------- -------
Cash used for investing activities (20.9) (16.1)
Cash flows from financing activities:
Net change in commercial paper 13.3 7.1
Acquisition of treasury stock (12.7) --
Proceeds from exercise of stock options -- 2.2
Dividends paid (22.6) (23.9)
------- -------
Cash used for financing activities (22.0) (14.6)
------- -------
Net increase in cash and cash equivalents 0.3 8.2
Cash and cash equivalents, beginning of period 86.1 115.6
------- -------
Cash and cash equivalents, end of period $ 86.4 $ 123.8
======= =======
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 2002 annual report on Form 10-K
(the "2002 Annual Report"). We made all of the adjustments (which include 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 2002 Annual Report,
which does conform to GAAP.
2. Inventories
We use the last-in, first-out method to determine the cost of most of our
inventories. If the last-in, first-out method had not been used, inventories
would have been $109.7 million higher than reported as of April 30, 2002, and
$113.2 million higher than reported as of July 31, 2002. Changes in the LIFO
valuation reserve for interim periods are based on a proportionate allocation of
the estimated change for the entire fiscal year.
3. Advertising Costs
We expense most advertising costs when we incur the costs or, in some cases,
when we recognize revenues related to advertising activities. We capitalize and
amortize certain direct-response advertising costs over periods not exceeding
one year.
4. Taxes on Income
Our consolidated effective tax rate may differ from current statutory rates due
to the recognition of amounts for events or transactions that do not have tax
consequences. We use the estimated annual effective tax rate in determining our
interim results.
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
6. 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.
7. 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.
8. Business Segment Information
(Dollars in millions) Three Months Ended
July 31,
2001 2002
------ ------
Net sales:
Wine and spirits $343.0 $360.2
Consumer durables 130.9 119.4
------ ------
Consolidated net sales $473.9 $479.6
====== ======
Operating income (loss):
Wine and spirits $ 62.3 $ 61.7
Consumer durables (1.0) (5.6)
------ ------
61.3 56.1
Interest expense, net 1.5 1.0
------ ------
Consolidated income before income taxes $ 59.8 $ 55.1
====== ======
April 30, July 31,
2002 2002
------ ------
Goodwill:
Wine and spirits $116.2 $116.2
Consumer durables 130.3 130.3
------ ------
Consolidated goodwill $246.5 $246.5
====== ======
7
9. 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,
2001 2002
------ ------
Net income $ 39.2 $ 36.1
Other comprehensive income:
Change in unrealized loss on cash flow hedges:
Cumulative effect of accounting change,
net of tax of $1.3 in 2001 2.0 --
Change in fair value of cash flow hedges,
net of tax benefit of $2.8 in 2002 -- (4.3)
Reclassification to earnings,
net of tax of $0.5 in 2001
and tax benefit of $0.3 in 2002 (0.8) 0.5
------ ------
1.2 (3.8)
Minimum pension liability adjustment -- (0.4)
Foreign currency translation adjustment 0.6 5.3
------ ------
Other comprehensive income 1.8 1.1
------ ------
Comprehensive income $ 41.0 $ 37.2
====== ======
Accumulated other comprehensive loss consisted of the following (in millions):
April 30, July 31,
2002 2002
------ ------
Cumulative translation adjustment $ 15.8 $ 10.5
Minimum pension liability adjustment 3.0 3.4
Unrealized loss on cash flow hedge contracts 0.7 4.5
------ ------
$ 19.5 $ 18.4
====== ======
10. Reclassifications
Certain prior year amounts have been reclassified to conform with the current
year presentation.
8
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 2002 Annual
Report. Note that the results of operations for the three months ended July 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 Note on Forward-Looking Statements:
This report includes forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These statements are subject
to a number of important risks and uncertainties, which could cause actual
results to differ materially from those discussed in these statements. They
include but are not limited to the failure of the U.S. economy to rebound in the
near future and continuing through next year, significant strengthening of the
U.S. dollar against other currencies, a deterioration in economic conditions in
principal countries to which we export beverage products, and a continuation of
the decline in discretionary consumer spending. Increases in excise taxes to
meet budget shortfalls or further weakening of the pricing environment in the
U.S. wine business could also adversely affect earnings in the company's U.S.
beverage business. Consumer Durables sales could also be hurt by a further
deterioration or more consolidation in the department store business, a decline
in consumer demand or a reduction in retail space devoted to tableware, giftware
and/or luggage products. The potential adverse effects of additional terrorist
attacks and related events, or an ongoing lack of investor confidence relating
to perceived inadequacies in the financial reporting systems in the U.S. may
adversely affect earnings as well. The statements in this report are also
subject to the factors mentioned in the section entitled "Important Information
Regarding Forward-Looking Statements" on page 38 of the Company's Annual Report
to Stockholders and referred to in Part I, Item 7 of the Company's Form 10-K for
2002, which Brown-Forman incorporates by reference. Brown-Forman has 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.
9
Results of Operations:
First Quarter Fiscal 2003 Compared to First Quarter Fiscal 2002
Here is a summary of our operating performance (expressed in millions,
except percentage and per share amounts):
Three Months Ended
July 31,
2001 2002 Change
------ ------ ------
Net Sales:
Wine & Spirits $343.0 $360.2 5 %
Consumer Durables 130.9 119.4 (9 %)
------ ------
Total $473.9 $479.6 1 %
Gross Profit:
Wine & Spirits $186.6 $191.5 3 %
Consumer Durables 61.8 55.9 (10 %)
------ ------
Total $248.4 $247.4 0 %
Operating Income (Loss):
Wine & Spirits $ 62.3 $ 61.7 (1 %)
Consumer Durables (1.0) (5.6) N/M
------ ------
Total $ 61.3 $ 56.1 (8 %)
Net Income $ 39.2 $ 36.1 (8 %)
Earnings per Share - Basic and Diluted $ 0.57 $ 0.53 (8 %)
Effective Tax Rate 34.5% 34.5%
The company's earnings per share for the quarter ended July 31, 2002 was $0.53
compared to $0.57 earned last year. Lower earnings primarily reflected a
one-time reduction in trade inventory levels due to a new arrangement for
distributing our spirits brands in the United Kingdom. The underlying strength
of our core spirits brands was encouraging during the period, although the
environment for both wines and consumer durables remains challenging. Overall
first quarter results were consistent with our previously stated outlook for
full year earnings growth of 9% to 12%.
Wine & Spirits:
Despite the impact of reduced sales to the U.K., total beverage revenues
increased 5%. Higher gross margins for spirits products were offset by continued
cost and pricing pressures in the wine business. Advertising investments were up
$7 million, or 14%, as we increased support behind our core brands. SG&A
expenses were lower than last year, reflecting strong cost controls and reduced
business improvement costs in the quarter. While first quarter results were not
significantly affected by a weaker U.S. dollar due to hedging contracts in
place, we believe that a continuation of current exchange rates would benefit
beverage earnings beginning in the second half of the fiscal year.
Worldwide depletions for Jack Daniel's Tennessee Whiskey improved in the
quarter, led by continued growth in Western Europe and solid gains in the U.S.
Worldwide depletions for Southern Comfort were also up, with price increases in
the U.S. significantly improving overall gross profits. Fetzer and Korbel
reported mid-single-digit depletion growth. Wine group profits were down,
however, reflecting an extremely competitive pricing environment in the U.S.
Effective August 1, 2002, we began selling our spirits products directly to the
retail trade in the United Kingdom via a cost sharing arrangement with Bacardi.
We previously recognized income when we sold goods to a third party distributor
in the U.K. We now retain title to the goods until they are sold to the retail
trade, creating a delay in revenue recognition. This one-time adjustment lowered
first quarter gross profit and operating income by an estimated $0.13 per share.
We anticipate that the effect on full year results will be negligible, however,
as we expect to earn a higher profit margin in subsequent quarters.
10
Consumer Durables:
Net sales for Consumer Durables were down 9% and gross profit decreased 10%. The
U.S. market for tabletop, giftware, and luggage has not recovered from a
slowdown that was exacerbated by the events of September 11. Trends in the
direct-to-consumer channel also weakened during the quarter, with sales and
profits lower than last year. As the segment begins to realize benefits from the
Business Improvement investments incurred in fiscal 2002, and in anticipation
that holiday orders will rebound from the depressed period last year, our
Consumer Durables segment is expected to show a recovery in earnings during the
last three quarters of this year.
Business Improvement Program:
We have been implementing a series of Business Improvement initiatives over the
past thirteen months to streamline procurement and production practices, reduce
inventories, and improve connections with customers. In fiscal 2002, we invested
$0.21 per share under this Business Improvement Program, mostly in the Consumer
Durables segment. We intend to spend approximately $0.08 per share in fiscal
2003 to complete the Business Improvement Program.
On August 27, 2002, we announced a new strategic direction designed to further
enhance the company's focus on brand-building activities in the beverage
segment. The management of our distribution system in the U.S. has changed
significantly over the last decade due to consolidation and improved technology.
Therefore, we are reducing the number of people working directly with
distributors and expanding the number of employees on our global brand teams and
in field marketing. These changes will result in costs of about $0.03 per share,
which will be recognized in the second quarter as part of the Business
Improvement Program.
Adjusted Earnings Per Share:
The following chart summarizes the effect on earnings per share of the U.K.
distribution change, as well as non-recurring costs related to the company's
Business Improvement Program:
Three Months Ended
July 31,
2001 2002 Change
------ ------ ------
Reported EPS $0.57 $0.53 (8 %)
Eliminate non-recurring costs of
Business Improvement Program 0.05 0.01
One-time reduction of reported sales
due to change in U.K. distribution -- 0.13
------ ------
Adjusted EPS $0.62 $0.67 +8 %
11
Liquidity and Financial Condition
Cash and cash equivalents increased by $8.2 million during the three months
ended July 31, 2002, as cash provided by operating activities exceeded cash used
for investing and financing activities. Cash provided by operations totaled
$38.9 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 $16.1 million was used for investing
activities, as we continue to expand the capacity of our wine and spirits
production facilities. Cash of $14.6 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, 2002, 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.
Item 4. Controls and Procedures
Not applicable because report covers period ending before August 29, 2002.
12
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 25, 2002, 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 27,929,706 62,983
Barry D. Bramley 27,953,068 39,621
Geo. Garvin Brown III 27,951,166 41,523
Owsley Brown II 27,915,523 77,166
Donald G. Calder 27,953,546 39,143
Owsley Brown Frazier 27,951,042 41,647
Richard P. Mayer 27,953,264 39,425
Stephen E. O'Neil 27,952,299 40,390
William M. Street 27,918,542 74,147
Dace Brown Stubbs 27,950,613 42,076
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: None
(b) Reports on Form 8-K:
On August 13, 2002, the Registrant filed a report on Form 8-K regarding
an amendment to the Registrant's by-laws that permits its Board of
Directors to ask a director to remain on the Board for the balance of
the year in which the director reaches age 70, and for one additional
year thereafter. The Form 8-K also announced that Owsley Brown II, the
Chief Executive Officer of the Corporation, and Phoebe Wood, the Chief
Financial Officer of the Corporation, each delivered to the Securities
Exchange Commission statements under oath regarding facts and
circumstances relating to certain of the Corporation's Exchange Act
filings, pursuant to Commission Order No. 4-460.
On August 21, 2002, the Registrant filed a report on Form 8-K announcing
the resignation of Thomas P. Burnet as president of the company's wine
division to become president and CEO of Southcorp Wines Americas.
On August 27, 2002, the Registrant filed a report on Form 8-K announcing
a new strategic direction designed to strengthen the company's focus on
brand-building activities.
13
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 10, 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)
14
CERTIFICATIONS
I, Owsley Brown II, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Brown-Forman
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report.
Date: September 10, 2002 By: /s/ Owsley Brown II
Owsley Brown II
Chief Executive Officer
I, Phoebe A. Wood, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Brown-Forman
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report.
Date: September 10, 2002 By: /s/ Phoebe A. Wood
Phoebe A. Wood
Chief Financial Officer
15