United States Securities and Exchange Commission Washington, D.C. 20549 Form 10-Q --------- QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended January 31, 1995 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 40210 Louisville, Kentucky (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code (502) 585-1100 --------- 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: March 1, 1995 Class A Common Stock (voting) 28,988,091 Class B Common Stock (nonvoting) 40,008,147 PART I - FINANCIAL INFORMATION Item 1. Financial Statements BROWN-FORMAN CORPORATION CONDENSED CONSOLIDATED STATEMENT OF INCOME (Unaudited) (Expressed in thousands except per share amounts) Three Months Ended Nine Months Ended January 31, January 31, 1995 1994 1995 1994 ---- ---- ---- ---- Net sales $443,696 $413,312 $1,307,180 $1,268,692 Excise taxes 67,759 64,769 197,562 201,707 Cost of sales 152,212 145,021 460,155 438,202 -------- -------- ---------- ---------- Gross profit 223,725 203,522 649,463 628,783 Selling, general, and administrative expenses 106,383 89,403 297,153 277,709 Advertising expenses 49,203 51,793 144,891 164,196 -------- ------- ---------- ---------- Operating income 68,139 62,326 207,419 186,878 Gain on sale of business before income taxes -- -- -- 30,077 Interest income 497 1,276 1,178 3,332 Interest expense 5,758 3,675 17,102 11,293 ------- ------- --------- --------- Income before income taxes and cumulative effect of accounting changes 62,878 59,927 191,495 208,994 Taxes on income 25,186 21,154 76,627 78,252 -------- ------- --------- --------- Income before cumulative effect of accounting changes 37,692 38,773 114,868 130,742 Cumulative effect of accounting changes -- -- -- (32,542) ------- ------- ---------- -------- Net income 37,692 38,773 114,868 98,200 Less preferred stock dividend requirements 118 118 353 353 ------- ------- ---------- -------- Net income applicable to common stock $37,574 $38,655 $ 114,515 $ 97,847 ======= ======= ========== ======== Weighted average number of common shares outstanding in thousands 68,996 79,990 68,996 81,773 Per common share: Income before cumulative effect of accounting changes $ .54 $ .48 $ 1.66 $ 1 .59 Cumulative effect of accounting changes -- -- -- (.39) ------- ------- -------- ------- Net income $ .54 $ .48 $ 1.66 $ 1.20 ======= ======= ======== ======= Cash dividends paid $ .2480 $ .2367 $ .7214 $ .6901 ======= ======= ======== ======= See notes to the condensed consolidated statements. BROWN-FORMAN CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET (Expressed in thousands) January 31, April 30, 1995 1994 ---- ---- (Unaudited) Assets Cash and cash equivalents $ 49,443 $ 30,540 Accounts receivable, net 185,390 240,580 Inventories: Barreled whisky 153,727 143,785 Finished goods 127,580 122,976 Work in process 69,347 59,984 Raw materials and supplies 32,983 31,697 ---------- ---------- Total inventories 383,637 358,442 Other current assets 21,515 20,344 ---------- ---------- Total current assets 639,985 649,906 Property, plant and equipment, net 240,820 245,978 Intangible assets, net 268,303 276,358 Other assets 76,245 61,607 ---------- ---------- Total assets $1,225,353 $1,233,849 ========== ========== Liabilities Commercial paper -- $ 54,229 Accounts payable and accrued expenses $ 186,159 216,175 Dividends payable 17,229 -- Current portion of long-term debt 5,614 4,867 Accrued taxes on income -- 3,815 Deferred income taxes 2,523 1,970 ---------- ---------- Total current liabilities 211,525 281,056 Long-term debt 286,772 299,061 Deferred income taxes 119,012 102,267 Postretirement benefits 49,926 47,223 Other liabilities and deferred income 45,615 40,555 ---------- ---------- Total liabilities 712,850 770,162 Stockholders' Equity Preferred stock 11,779 11,779 Common stockholders' equity 500,724 451,908 ---------- ---------- Total stockholders' equity 512,503 463,687 ---------- ---------- Total liabilities and stockholders' equity $1,225,353 $1,233,849 ========== ========== Note: The balance sheet at April 30, 1994 has been taken from the audited financial statements at that date, and condensed. See notes to the condensed consolidated statements. BROWN-FORMAN CORPORATION CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) (Expressed in thousands; amounts in brackets are reductions of cash) Nine Months Ended January 31, 1995 1994 ---- ---- Cash flows from operating activities: Net income $114,868 $ 98,200 Adjustments to reconcile net income to net cash provided by (used for) operations: Cumulative effect of changes in accounting principles -- 32,542 Depreciation 28,438 27,174 Amortization of intangible assets 6,676 7,176 Deferred income taxes 17,298 4,646 Gain on sale of business, net of income taxes -- (18,350) Other (3,070) 1,521 Changes in assets and liabilities: Accounts receivable 55,190 22,420 Inventories (25,195) 2,389 Other current assets (1,171) 2,956 Accounts payable and accrued expenses (30,016) 19,035 Accrued taxes on income (3,815) (12,267) Dividends payable 17,229 -- -------- -------- Cash provided by operating activities 176,432 187,442 -------- -------- Cash flows from investing activities: Proceeds from sale of business -- 31,837 Additions to property, plant, and equipment, net (23,280) (17,993) Net sales (purchases) of short-term investments -- (6,997) Other (1,123) (2,120) -------- -------- Cash provided by (used for) investing activities (24,403) 4,727 -------- -------- Cash flows from financing activities: Short-term borrowings, net (54,229) 272,507 Reduction of long-term debt (11,541) (6,740) Acquisition of treasury stock -- (407,660) Cash dividends paid (50,127) (57,392) Cash dividends payable (17,229) -- -------- -------- Cash used for financing activities (133,126) (199,285) -------- -------- Net increase (decrease) in cash and cash equivalents 18,903 (7,116) Cash and cash equivalents, beginning of period 30,540 74,912 -------- -------- Cash and cash equivalents, end of period $ 49,443 $ 67,796 ======== ======== See notes to the condensed consolidated statements. BROWN-FORMAN CORPORATION NOTES TO THE CONDENSED CONSOLIDATED STATEMENTS (Unaudited) 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------- The condensed consolidated statements have been prepared in accordance with the company's customary accounting practices as set forth in the company's 1994 annual report on Form 10-K and have not been audited. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary for a fair presentation of this information have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the company's April 30, 1994 annual report on Form 10-K. 2. ACCOUNTING CHANGES ------------------ On May 1, 1993, the company adopted Statements of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," and Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits." In the third quarter of 1994, the company adopted Statement of Financial Accounting Standards No. 116, "Accounting for Contributions Received and Contributions Made," and restated the first quarter as if adoption had occurred May 1, 1993. Accordingly, the company recorded a liability for charitable contributions unconditionally pledged but not yet paid. The cumulative effect of these changes in accounting principles is as follows (in thousands): FAS Statement No. ----------------------------------- 106 112 116 Total --- --- --- ----- Pretax charge $43,684 $2,817 $6,721 $53,222 Income taxes 16,955 1,104 2,621 20,680 ------- ------ ------ ------- Net charge $26,729 $1,713 $4,100 $32,542 ------- ------ ------ ------- Net charge per common share $ .32 $ .02 $ .05 $ .39 ======= ====== ====== ======= On May 1, 1993, the company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." The effect of adopting this standard was immaterial. 3. SALE OF CREDIT CARD OPERATIONS ------------------------------ On October 15, 1993, the company sold substantially all the assets of its credit card processing operations. The sale resulted in a pretax gain of approximately $30,077,000 ($18,350,000 or $.22 per share after-tax). 4. INVENTORIES ----------- The company uses the last-in, first-out method for determining the cost for substantially all inventories. If the last-in, first-out method had not been used, inventories would have been $73,423,000 and $71,626,000 higher than reported at January 31, 1995, and April 30, 1994, respectively. 5. INCOME TAXES ------------ Taxes on income for the nine months ended January 31, 1994 include a charge of $3,580,000 ($.04 per share) for the retroactive effect of a higher tax rate on earnings from January 1, 1993 to April 30, 1993, and a noncash charge to restate the deferred tax liability at the new corporate tax rate. 6. ENVIRONMENTAL ------------- The company, along with other responsible parties, faces environmental claims resulting from the cleanup of several waste deposit sites. The company currently anticipates that the total cost of remediating these sites is approximately $9,600,000. The company has accrued its estimated portion of these cleanup costs and expects other responsible parties and insurance coverage to cover the remaining costs. The company believes that any additional costs incurred by the company will not have a material adverse effect on the company's financial condition or results of operations. 7. CONTINGENCIES ------------- Various suits and claims (asserted and unasserted) arising in the ordinary course of business are pending or threatened against the company. These include product liability suits against the company that allege injury from the consumption of alcoholic beverages and suits that allege employment discrimination based on the plaintiffs' age. While some of these suits and claims seek significant financial recoveries from the company, based on a considered evaluation of all known and threatened litigation, and on the advice of counsel, management believes that the ultimate resolution of these matters will not have a material adverse effect on the company's financial position or results of operations. Item 2. Management's Discussion and Analysis of Financial - ------ ------------------------------------------------- Condition and Results of Operations - ----------------------------------- The following Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the company's April 30, 1994 annual report to stockholders. The results for the nine months ended January 31, 1995 are not necessarily indicative of the operating results for the full year. Unusual Items - ------------- Net income for fiscal 1994 contains unusual income and expense items. Effective May 1, 1993, the company adopted Statements of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," No. 112, "Employers' Accounting for Postemployment Benefits," and No. 116, "Accounting for Contributions Received and Contributions Made." The adoption of these standards resulted in a pretax charge totaling $53,222,000 ($32,542,000 or $.39 per share after-tax). The charge to net income from adopting these accounting standards was recorded as the cumulative effect of accounting changes. On October 15, 1993, the company sold substantially all the assets of its credit card processing operations. The sale resulted in a pretax gain of approximately $30,077,000 ($18,350,000 or $.22 per share after- tax). Taxes on income for the nine months ended January 31, 1994 include an unusual charge of $3,580,000 (or $.04 per share) for the retroactive effect of a higher tax rate on earnings from January 1, 1993 to April 30, 1993, and a noncash charge to restate the deferred tax liability at the new corporate tax rate. Results of Operations - --------------------- Third Quarter Fiscal 1995 Compared to Third Quarter Fiscal 1994 - --------------------------------------------------------------- A summary of operating performance follows (expressed in thousands, except percentage and per share amounts): THREE MONTHS ENDED JANUARY 31, % 1995 1994 CHANGE ---- ---- ------ Net Sales - --------- Wines & Spirits $306,061 $283,632 7.9 Consumer Durables 137,635 129,680 6.1 -------- -------- Total $443,696 $413,312 7.4 Operating Income $ 68,139 $ 62,326 9.3 - ---------------- Net Income $ 37,692 $ 38,773 (2.8) - ---------- Earnings Per Share $ 0.54 $ 0.48 12.5 - ----------------- Sales of the company's wines and spirits segment were up 8% in the quarter due principally to higher sales of Jack Daniel's Tennessee Whiskey. Sales of Brown-Forman's other major spirit brands were generally flat or lower than those for the same period last year, while the company's wine sales increased. Consumer durables sales increased 6% compared to last year. Strong demand for Lenox tabletop and collectible products contributed to the increase in sales. Consolidated operating income increased 9%, attributable to higher sales volume and operating efficiencies in the company's consumer durables business, and continued growth of Jack Daniel's Tennessee Whiskey. Partially offsetting these gains were higher selling, general, and administrative expenses in the company's wines and spirits segment due principally to increased marketing and promotional costs and investments in the company's overseas beverage business. Interest expense associated with the company's January 1994 share repurchase was approximately $5 million higher than the same period last year. As a result of fewer shares outstanding, the repurchase had a positive effect on earnings per share, adding a net benefit of $.03 to third quarter results. The effective tax rate for the quarter increased due to a reduction of overseas tax benefits incorporated within the 1993 tax act and benefits realized last year due to an adjustment of prior years' tax accruals. In addition, the overall corporate tax rate increased as a result of the improvement in consumer durable earnings, which bear relatively higher taxes. Nine Months Fiscal 1995 Compared to Nine Months Fiscal 1994 - ----------------------------------------------------------- A summary of operating performance follows (expressed in thousands, except percentage and per share amounts): NINE MONTHS ENDED JANUARY 31, % 1995 1994 CHANGE ---- ---- ------ Net Sales - --------- Wines & Spirits $ 889,754 $ 870,332 2.2 Consumer Durables 417,426 388,307 7.5 Other -- 10,053 -- ---------- ---------- Total $1,307,180 $1,268,692 3.0 Operating Income $ 207,419 $ 186,878 11.0 - ---------------- Gain on Sale of Business $ -- $ 30,077 -- - ------------------------ Net Income - ---------- Income Before Cumulative Effect of Changes in Accounting Principles $ 114,868 $ 130,742 (12.1) Cumulative Effect of Changes in Accounting Principles -- (32,542) -- ---------- ---------- Net Income $ 114,868 $ 98,200 17.0 NINE MONTHS ENDED JANUARY 31, % 1995 1994 CHANGE ---- ---- ------ Earnings Per Share - ------------------ Earnings Before Cumulative Effect of Changes in Accounting Principles $1.66 $1.59 4.4 Cumulative Effect of Changes in Accounting Principles -- (0.39) -- ----- ----- Earnings Per Share $1.66 $1.20 38.3 Adjustments for Unusual Items ----------------------------- Gain on Sale of Business -- (.22) -- Cumulative Effect of Accounting Changes -- .39 -- Higher Tax Legislation -- .04 -- ----- ----- Adjusted Earnings Per Share $1.66 $1.41 17.7 Sales of the company's wines and spirits segment were up two percent for the nine months ending January 31, led by the company's most important brand, Jack Daniel's Tennessee Whiskey. While sales of the company's premium wine brands increased, sales of other beverage brands generally declined from last year's level. Sales of consumer durables for the first nine months of the year were up 7% compared to last year. Successful new product introductions for Lenox China and Collections and increased same-store sales at the company's retail stores contributed to the increase over last year. Consolidated operating income increased 11% due primarily to strong sales volume gains and operating efficiencies in the consumer durables business. In addition, lower advertising expense in the cocktails category of the wines and spirits segment and the adoption last year of a revised accounting method for direct mail advertising had a positive effect on results for the period. These gains were partially offset by higher selling, general, and administrative expenses in the wines and spirits segment resulting principally from increased marketing and promotional costs and investments in the company's overseas beverage business. Interest costs associated with the company's January 1994 share repurchase lowered net income by about $9 million compared to the same period last year. As a result of fewer shares outstanding, the repurchase had a positive effect on earnings per share, adding $.15 to results for the first nine months. The effective tax rate, before unusual items, for the first nine months increased due to a reduction of overseas tax benefits incorporated within the 1993 tax act and benefits realized last year due to an adjustment of prior years' tax accruals. In addition, the overall corporate tax rate increased as a result of the improvement in consumer durable earnings, which bear relatively higher taxes. The company expects the full year effective tax rate in fiscal 1995 to be approximately 40%. The positive effect from the revised accounting method for direct mail advertising previously mentioned will correspondingly reduce fourth quarter ($.04 per share), having no effect on full year results. As a result of this accounting change, as well as a higher effective tax rate and investments in the company's overseas beverage business, fourth quarter earnings per share are not expected to match the $.52 the company earned during the fourth quarter last year before unusual items. The company expects to experience good growth in earnings per share in fiscal 1995, and current trends in operating income indicate a solid basis for additional growth in the future. Financial Condition at January 31, 1995 Compared to Financial - ------------------------------------------------------------- Condition at April 30, 1994 - --------------------------- The company's cash flow activity for the nine months ended January 31, 1995, continued to reflect strength and flexibility. Cash from operating activities provided more than adequate cash to fund dividends, short and long-term debt payments, and investments in property, plant, and equipment, at a slightly higher level than last year. Cash provided by operating activities of $176 million was $11 million or 6% lower than last year. The company continues to expect sharply reducing debt levels over the next several years as borrowings for the January 1994 share repurchase are repaid. Dividends - --------- On January 26, 1995, a regular quarterly cash dividend of $.2480 per share on Common Stock and $.10 per share on the Preferred Stock was declared by the company's Board of Directors. Stockholders of record on March 9, 1995, will receive the cash dividend on April 1, 1995. Including this action, total cash dividends paid per common share in fiscal 1995 will be $.9694, a 5% increase over last year. Environmental - ------------- The company, along with other responsible parties, faces environmental claims resulting from the cleanup of several waste deposit sites. The company currently anticipates that the total cost of remediating these sites is approximately $9,600,000. The company has accrued its estimated portion of these cleanup costs and expects other responsible parties and insurance coverage to cover the remaining costs. The company believes that any additional costs incurred by the company will not have a material adverse effect on the company's financial condition or results of operations. PART II - OTHER INFORMATION Item 1. Legal Proceedings - ------ ----------------- Adams, et al. v. Brown-Forman Corporation (U.S. District Court, Middle District of Florida, Tampa Division): As previously reported, Brown-Forman Corporation is a defendant in a number of cases, consolidated for trial in federal district court in Tampa, Florida, alleging age discrimination as a result of the termination of employees as part of a 1986 company reorganization. Brown-Forman has defended the claims on the grounds that it did not engage in age discrimination and that the plaintiffs have waived any legal claims that they may have against the company. (Each terminated employee received a compensation package at the time of their termination and, in return, executed a written release of all legal claims against the company.) There are presently 74 plaintiffs in the case, including both plaintiffs represented privately and plaintiffs represented by the U.S. Equal Employment Opportunity Commission. The trial judge has indicated that the case will be called for trial in July 1995. An expert witness hired by the plaintiffs has estimated damages against the company to be a total of $105 million, a figure which the company and its legal counsel consider to exceed by far any liability to which the company might be exposed. While it continues to contest the case vigorously, in recognition of the legal expenses and risks involved, the company has entered into settlement discussions with the plaintiffs. There is a reasonable likelihood that the case will be settled without a trial. Such a settlement, if achieved, would not have a material adverse effect on the company's financial position or results of operations. Brune v. Brown-Forman Corporation (214th District Court, Neuces County, Texas): As previously reported, Brown-Forman was sued by the estate of Marie Brinkmeyer, an 18 year old college student who died after consuming massive quantities of beverage alcohol, including Pepe Lopez Tequila (a Brown-Forman product). The plaintiff alleged that Brown-Forman was responsible for Marie's death because it had a legal duty to warn consumers of the risks associated with the massive over consumption of beverage alcohol. In 1992 a jury in Corpus Christi, Texas, found Brown- Forman to be 35% at fault and Marie Brinkmeyer to be 65% for her death. The jury rendered a verdict against Brown-Forman of $535,000 plus interest. Brown-Forman appealed to the Texas Court of Appeals, which on December 29, 1994, reversed the jury's verdict and rendered judgment in favor of Brown-Forman. The Texas Court of Appeals held that Brown-Forman had no legal duty to warn consumers of the risk of death from over consumption and dismissed the case against the company. The plaintiff sought a rehearing before the Texas Court of Appeals, but on February 2, 1995, that request was denied. On March 6, 1995, the plaintiff filed an appeal with the Texas Supreme Court. It is discretionary with the Texas Supreme Court whether to entertain such an appeal. Item 6. Exhibits and Reports on Form 8-K - ------ -------------------------------- (a)Exhibits: Exhibit Number Exhibit 27 Financial Data Schedule (b)Reports on Form 8-K: 1.) There were no reports on Form 8-K filed during the quarter ended January 31, 1995. 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. BROWN-FORMAN CORPORATION (Registrant) Date: March 15, 1995 By: /s/ Steven B. Ratoff ---------------------------- Steven B. Ratoff Executive Vice President and Chief Financial Officer (On behalf of the Registrant and as Principle Financial Officer)