United States Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
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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
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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)