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 October 31, 1997 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: December 5, 1997 Class A Common Stock ($.15 par value, voting) 28,988,091 Class B Common Stock ($.15 par value, nonvoting) 40,008,147 -1- 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 October 31, 1997 and 1996 3 Six months ended October 31, 1997 and 1996 3 Condensed Consolidated Balance Sheet October 31, 1997 and April 30, 1997 4 Condensed Consolidated Statement of Cash Flows Six months ended October 31, 1997 and 1996 5 Notes to the Condensed Consolidated Financial Statements 6 - 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 - 11 Part II. Other Information Item 1. Legal Proceedings 12 Item 6. Exhibits and Reports on Form 8-K 12 Signatures 13 -2- PART I - FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) BROWN-FORMAN CORPORATION CONDENSED CONSOLIDATED STATEMENT OF INCOME (Unaudited) (Expressed in millions except per share amounts) Three Months Ended Six Months Ended October 31, October 31, 1997 1996 1997 1996 ------- ------- ------- ------- Net sales $ 554.2 $ 525.6 $ 982.3 $ 950.0 Excise taxes 71.1 69.3 127.4 128.5 Cost of sales 205.0 200.9 359.3 353.9 ------- ------- ------- ------- Gross profit 278.1 255.4 495.6 467.6 Selling, general, and administrative expenses 103.6 96.9 201.8 190.0 Advertising expenses 72.8 65.1 133.4 128.5 ------- ------- -------- ------- Operating income 101.7 93.4 160.4 149.1 Interest income 0.6 0.6 1.3 1.2 Interest expense 4.0 4.7 7.9 8.8 ------- ------- ------- ------- Income before income taxes 98.3 89.3 153.8 141.5 Taxes on income 37.4 33.9 58.5 53.8 ------- ------- ------- ------- Net income 60.9 55.4 95.3 87.7 Less preferred stock dividend requirements 0.1 0.1 0.2 0.2 ------- -------- ------- ------- Net income applicable to common stock $ 60.8 $ 55.3 $ 95.1 $ 87.5 ======= ======= ======= ======= Net income per common share $ .88 $ .80 $ 1.38 $ 1.27 ------- ------- ------- ------- Cash dividends declared per common share $ .27 $ .26 $ .54 $ .52 ======= ======= ======= ======= Average common shares outstanding used to calculate net income per common share 69.0 69.0 69.0 69.0 See notes to the condensed consolidated financial statements. -3- BROWN-FORMAN CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET (Expressed in millions) October 31, April 30, 1997 1997 ---------- ---------- (Unaudited) Assets - ------ Cash and cash equivalents $ 50.2 $ 58.2 Accounts receivable, net 331.8 262.8 Inventories: Barreled whiskey 177.3 176.3 Finished goods 183.5 172.3 Work in process 103.3 65.8 Raw materials and supplies 42.4 37.0 ---------- ---------- Total inventories 506.5 451.4 Other current assets 32.9 29.7 ---------- ---------- Total current assets 921.4 802.1 Property, plant and equipment, net 281.6 292.2 Intangible assets, net 250.0 253.9 Other assets 84.6 80.2 ---------- ---------- Total assets $ 1,537.6 $ 1,428.4 ========== ========== Liabilities - ----------- Commercial paper $ 155.1 $ 155.0 Accounts payable and accrued expenses 269.5 208.6 Current portion of long-term debt 7.5 6.7 Accrued taxes on income 12.4 6.4 Deferred income taxes 22.1 22.1 ---------- ---------- Total current liabilities 466.6 398.8 Long-term debt 49.8 63.4 Deferred income taxes 142.9 135.6 Accrued postretirement benefits 55.3 54.5 Other liabilities and deferred income 35.1 45.7 ---------- ---------- Total liabilities 749.7 698.0 Stockholders' Equity - -------------------- Preferred stock 11.8 11.8 Common stockholders' equity 776.1 718.6 ---------- ---------- Total stockholders' equity 787.9 730.4 ---------- ---------- Total liabilities and stockholders' equity $ 1,537.6 $ 1,428.4 ========== ========== Note: The balance sheet at April 30, 1997, 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) (Expressed in millions; amounts in parentheses are reductions of cash) Six Months Ended October 31, 1997 1996 -------- -------- Cash flows from operating activities: Net income $ 95.3 $ 87.7 Adjustments to reconcile net income to net cash provided by (used for) operations: Depreciation 21.2 20.2 Amortization 4.7 4.6 Deferred income taxes 7.3 5.8 Other (7.9) (4.4) Changes in assets and liabilities: Accounts receivable (69.0) (74.6) Inventories (56.4) (29.2) Other current assets (1.9) (4.6) Accounts payable and accrued expenses 60.9 11.4 Accrued taxes on income 6.0 (1.5) -------- -------- Cash provided by operating activities 60.2 15.4 Cash flows from investing activities: Additions to property, plant, and equipment (20.8) (27.9) Disposals of property, plant, and equipment 9.9 1.5 Other (7.1) (4.2) -------- -------- Cash used for investing activities (18.0) (30.6) Cash flows from financing activities: Net change in commercial paper 0.1 33.2 Proceeds from long-term debt 0.8 1.1 Reduction of long-term debt (13.6) (6.7) Dividends paid (37.5) (36.1) -------- -------- Cash used for financing activities (50.2) (8.5) -------- -------- Net decrease in cash and cash equivalents (8.0) (23.7) Cash and cash equivalents, beginning of period 58.2 53.9 -------- -------- Cash and cash equivalents, end of period $ 50.2 $ 30.2 ======== ======== 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 financial statements using our customary accounting practices as set out in our 1997 annual report on Form 10-K (the "1997 Annual Report"). We made all of the adjustments (which includes only normal, recurring adjustments) needed to present this data fairly. We condensed or left out 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 1997 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 $103.7 million higher than reported as of October 31, 1997, and $98.4 million higher than reported as of April 30, 1997. 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. NEW ACCOUNTING PRONOUNCEMENTS ----------------------------- In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share," which establishes standards for computing and presenting earnings per share. SFAS No. 128 is effective for financial statements for periods ending after December 15, 1997 and requires the restatement (as applicable) of prior-period earnings per share presented in those financial statements. The adoption of SFAS No. 128 will not change our previously-reported earnings per share. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income," which is effective for fiscal years beginning after December 15, 1997. SFAS No. 130 requires companies to classify items defined as "other comprehensive income" by their nature in a financial statement, and to display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of the balance sheet. The adoption of SFAS No. 130 will not have a material impact on our consolidated financial statements. In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information," which is effective for fiscal years beginning after December 15, 1997. SFAS No. 131 establishes standards for reporting information about a company's operating segments, and requires certain disclosures about a company's products and services, the geographic areas in which it operates and its major customers. Although we have not determined the effect that adoption of SFAS No. 131 may have on the format of our financial statement disclosures, it will have no effect on our financial condition or results of operations. 6. RECLASSIFICATIONS ----------------- Certain prior period amounts have been reclassified to conform with the current period presentation. -7- 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 1997 Annual Report. Note that the results of operations for the six months ended October 31, 1997, do not necessarily indicate what our operating results for the full fiscal year will be. In this Item, "we," "us," and "our" refer to Brown-Forman Corporation. RISK FACTORS AFFECTING FORWARD-LOOKING STATEMENTS From time to time, we may make forward-looking statements related to our anticipated financial performance, business prospects, new products, and similar matters. We make several such statements in the discussion and analysis which follows, but we do not guarantee that the results indicated will actually be achieved. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. To comply with the terms of the safe harbor, we note that the following non-exclusive list of important risk factors could cause our actual results and experience to differ materially from the anticipated results or other expectations expressed in those forward-looking statements: Generally: We operate in highly competitive markets. Our business is subject to changes in general economic conditions, changes in consumer preferences, the degree of acceptance of new products, and the uncertainties of litigation. As our business continues to expand outside the United States, our financial results are more exposed to foreign exchange rate fluctuations and the health of foreign economies. Beverage Risk Factors: The U.S. beverage alcohol business is highly sensitive to tax increases; an increase in federal or state excise taxes (which we do not anticipate at this time) would depress our domestic beverage business. Our current outlook for our domestic beverage business anticipates continued success of Jack Daniel's Tennessee Whiskey, Southern Comfort, and our other core spirits brands. Current expectations for our foreign beverage business could prove to be optimistic 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 Germany, the United Kingdom, Japan, and Australia. The wine and spirits business, both in the United States and abroad, is also sensitive to political and social trends. Legal or regulatory measures against beverage alcohol (including its advertising and promotion) could adversely affect sales. Product liability litigation against the alcohol industry, while not currently a major risk factor, could become significant if new lawsuits were filed against alcohol manufacturers. Current expectations for our global beverage business may not be met if consumption trends do not continue to increase. Profits could also be affected if grain or grape prices increase. Consumer Durables Risk Factors: Earnings projections for our consumer durables business anticipate a continued strengthening of our Lenox business. These projections could be offset by factors such as poor consumer response rates at Lenox Collections, weakened demand for fine china, a soft retail environment at outlet malls, or further department store consolidation. -8- Results of Operations: - ---------------------- Second Quarter Fiscal 1998 Compared to Second Quarter Fiscal 1997 - ----------------------------------------------------------------- Here is a summary of our operating performance (expressed in millions, except percentage and per share amounts): THREE MONTHS ENDED OCTOBER 31, % 1997 1996 CHANGE -------- -------- ------ Net Sales - --------- Wine & Spirits $ 391.7 $ 373.9 5 Consumer Durables 162.5 151.7 7 -------- -------- Total $ 554.2 $ 525.6 5 Operating Income $ 101.7 $ 93.4 9 - ---------------- Net Income $ 60.9 $ 55.4 10 - ---------- Net Income per Common Share $ 0.88 $ 0.80 10 - --------------------------- Effective Tax Rate 38.0% 38.0% - ------------------ Sales for our wine and spirits segment increased 5%, influenced mainly by increasing demand for Jack Daniel's Tennessee Whiskey in the United States, Europe and Japan, as well as worldwide growth for our wine brands. Revenues from our consumer durables segment increased 7% for the quarter, reflecting significantly higher volumes for Lenox Collections, our direct marketing division. We also achieved solid sales gains at Dansk and Hartmann, and a modest increase in sales of fine china to department stores. Operating income for the quarter increased 9%, driven primarily by the growth of our beverage brands in the United States and lower marketing outlays for frozen cocktail products, partially offset by overseas margin declines caused by a stronger U.S. dollar. Net interest expense declined from last year's second quarter due to lower net debt balances. -9- Six Months Fiscal 1998 Compared to Six Months Fiscal 1997 - --------------------------------------------------------- Here is a summary of our operating performance (expressed in millions, except percentage and per share amounts): SIX MONTHS ENDED OCTOBER 31, % 1997 1996 CHANGE --------- --------- ------ Net Sales - --------- Wine & Spirits $ 709.1 $ 698.2 2 Consumer Durables 273.2 251.8 8 --------- --------- Total $ 982.3 $ 950.0 3 Operating Income $ 160.4 $ 149.1 8 - ---------------- Net Income $ 95.3 $ 87.7 9 - ---------- Net Income per Common Share $ 1.38 $ 1.27 9 - --------------------------- Effective Tax Rate 38.0% 38.0% - ------------------ Sales of our wines and spirits increased 2% for the six months ended October 31, driven by solid growth of Jack Daniel's in the United States and a significant increase in revenues from our wine brands. This growth was partially offset by sharply lower sales of frozen cocktail products and a stronger U.S. dollar. Revenues from our consumer durables segment were up 8% for the period, led by volume gains for Lenox Collections, higher sales of fine china dinnerware to department stores, and strong growth of Hartmann's luggage products. Operating income for the period increased 8%, driven primarily by the growth of Jack Daniel's in the United States, lower marketing outlays for frozen cocktail products, and continued improvement at Lenox Collections. First half earnings growth was restricted by the stronger U.S. dollar, which reduced margins in many of our overseas markets. Net interest expense continued to compare favorably to last year as a result of lower net debt balances. As discussed in Note 5 to the accompanying condensed consolidated financial statements, SFAS No. 128 will become effective for us beginning with the quarter ending January 31, 1998. We do not expect SFAS No. 128 to have a material impact on the calculation of our net income per common share. Based on the results of the first half of the year and our current projections, we are optimistic about the opportunities for both the wine and spirits segment and the consumer durables segment for the remainder of fiscal 1998. -10- Liquidity and Financial Condition - --------------------------------- Cash and cash equivalents decreased by $8.0 million during the six months ended October 31, 1997, as cash used for investing and financing activities exceeded cash provided by operations. Cash provided by operations totaled $60.2 million, primarily reflecting net income for the period and an increase in accounts payable and accrued expenses related largely to grape purchases, partially offset by an increase in accounts receivable due to the normal seasonality of revenues and an increase in inventories in anticipation of future sales growth. Cash of $18.0 million was used for investing activities, consisting mostly of expenditures to expand and modernize our production facilities and enhance our information systems. Cash used for financing activities was $50.2 million, as we used excess funds to reduce our debt and to pay dividends. We have conducted a comprehensive review of our computer systems to identify the systems that could be affected by the "Year 2000" issue and have developed an implementation plan to resolve the issue. We expect to incur internal staff costs as well as external consulting and other expenses in order to prepare the systems for the year 2000. The cost of this project, which will be expensed as incurred over the next two years, is not expected to have a material impact on our financial condition or results of operations. Dividends - --------- The Board of Directors increased the quarterly cash dividend 3.7% from $.27 to $.28 per share on both Class A and Class B common stock, payable January 1, 1998. As a result, the indicated annual cash dividend per share rose from $1.08 to $1.12. 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. -11- PART II - OTHER INFORMATION Item 1. Legal Proceedings - -------------------------- Expansion Plus, Inc. v. Brown-Forman Corporation, et al. (United States District Court for the Southern District of Texas, Houston Division, Civil Action No. H-94-3498) As we reported earlier, we bought a start-up credit card processing business in 1988 from Expansion Plus, Inc. ("EPI"). We built up this business substantially, and sold it in 1993 for $31.2 million. Months after the sale, EPI claimed that we had never acquired full title to the business, that we had to return all or part of it to EPI, and that our sale of the business to a third party represented a conversion of EPI's assets. In October, 1994, EPI filed a tort action against the buyer and us alleging conversion of property, tortious interference with contractual relationships, misappropriation of trade secrets, and breach of a confidential relationship. EPI sought damages of $31.2 million plus punitive damages in an amount ten times actual damages. On January 30, 1997, the trial judge entered summary judgment in our favor, dismissing all of EPI's claims. EPI has appealed to the Federal Appeals Court for the Fifth Circuit. Oral argument on the appeal was held December 3, 1997, and the parties are awaiting a decision of the court. Our counsel have advised us, and it is our opinion, that the disposition of this suit will not have a material adverse effect on our financial condition or results of operations. Item 6. Exhibits and Reports on Form 8-K - ----------------------------------------- (a)Exhibits: Exhibit Number Exhibit ------ ------- 3(ii) By-laws (amended to increase the mandatory retirement age for outside directors) 27 Financial Data Schedule (b)Reports on Form 8-K: None. -12- 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) /s/ Steven B. Ratoff Date: December 5, 1997 By:_____________________________ Steven B. Ratoff Executive Vice President and Chief Financial Officer (On behalf of the Registrant and as Principal Financial Officer) -13-