United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JANUARY 31, 1998
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: March 3, 1998
Class A Common Stock ($.15 par value, voting) 28,988,091
Class B Common Stock ($.15 par value, nonvoting) 39,850,247
<PAGE> -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 January 31, 1998 and 1997 3
Nine months ended January 31, 1998 and 1997 3
Condensed Consolidated Balance Sheet
January 31, 1998 and April 30, 1997 4
Condensed Consolidated Statement of Cash Flows
Nine months ended January 31, 1998 and 1997 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
<PAGE> -2-
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
BROWN-FORMAN CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
(Dollars in millions except per share amounts)
Three Months Ended Nine Months Ended
January 31, January 31,
1998 1997 1998 1997
------ ------ -------- --------
Net sales $480.8 $458.2 $1,463.1 $1,408.2
Excise taxes 62.6 65.0 190.0 193.5
Cost of sales 166.9 173.9 526.2 527.8
------ ------ -------- --------
Gross profit 251.3 219.3 746.9 686.9
Selling, general, and
administrative expenses 104.3 97.8 306.1 287.8
Advertising expenses 71.2 50.8 204.6 179.3
------ ------ -------- --------
Operating income 75.8 70.7 236.2 219.8
Interest income 1.0 .4 2.3 1.6
Interest expense 3.3 4.0 11.2 12.9
------ ------ -------- --------
Income before income taxes 73.5 67.1 227.3 208.5
Taxes on income 27.9 25.5 86.4 79.2
------ ------ -------- --------
Net income 45.6 41.6 140.9 129.3
Less preferred stock dividend
requirements .1 .1 .4 .4
------ ------ -------- --------
Net income applicable to common
stock $ 45.5 $ 41.5 $ 140.5 $ 128.9
====== ====== ======== ========
Earnings per share
- basic and diluted $ .66 $ .60 $ 2.04 $ 1.87
====== ====== ======== ========
Shares (in thousands) used in the
calculation of earnings per share
- basic 68,969 68,996 68,985 68,996
- diluted 69,022 69,023 69,029 69,009
Cash dividends declared
per common share $ .28 $ .27 $ .82 $ .79
====== ====== ======== ========
See notes to the condensed consolidated financial statements.
<PAGE> -3-
BROWN-FORMAN CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(In millions)
January 31, April 30,
1998 1997
(Unaudited)
-------- --------
Assets
- ------
Cash and cash equivalents $ 66.1 $ 58.2
Accounts receivable, net 222.6 262.8
Inventories:
Barreled whiskey 183.8 176.3
Finished goods 172.8 172.3
Work in process 98.2 65.8
Raw materials and supplies 46.0 37.0
-------- --------
Total inventories 500.8 451.4
Other current assets 27.3 29.7
-------- --------
Total current assets 816.8 802.1
Property, plant and equipment, net 281.6 292.2
Intangible assets, net 248.1 253.9
Other assets 87.1 80.2
-------- --------
Total assets $1,433.6 $1,428.4
======== ========
Liabilities
- -----------
Commercial paper $ 96.9 $ 155.0
Accounts payable and accrued expenses 201.8 208.6
Current portion of long-term debt 7.5 6.7
Accrued taxes on income 8.8 6.4
Deferred income taxes 22.1 22.1
Dividends payable 19.4 --
-------- --------
Total current liabilities 356.5 398.8
Long-term debt 49.8 63.4
Deferred income taxes 146.2 135.6
Accrued postretirement benefits 55.7 54.5
Other liabilities and deferred income 37.3 45.7
-------- --------
Total liabilities 645.5 698.0
Stockholders' Equity
Preferred stock 11.8 11.8
Common stockholders' equity 776.3 718.6
-------- --------
Total stockholders' equity 788.1 730.4
-------- --------
Total liabilities and
stockholders' equity $1,433.6 $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.
<PAGE> -4-
BROWN-FORMAN CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(In millions; amounts in parentheses are reductions of cash)
Nine Months Ended
January 31,
1998 1997
------- -------
Cash flows from operating activities:
Net income $ 140.9 $ 129.3
Adjustments to reconcile net income to net
cash provided by (used for) operations:
Depreciation 31.3 30.5
Amortization 7.0 6.9
Deferred income taxes 10.6 4.3
Other (8.5) (6.3)
Changes in assets and liabilities:
Accounts receivable 40.2 44.8
Inventories (50.7) (10.4)
Other current assets 3.7 (2.6)
Accounts payable and accrued expenses (6.8) (40.7)
Accrued taxes on income 2.4 3.5
------- -------
Cash provided by operating activities 170.1 159.3
Cash flows from investing activities:
Additions to property, plant, and equipment (31.9) (41.2)
Disposals of property, plant, and equipment 10.9 2.3
Other (7.3) (4.6)
------- -------
Cash used for investing activities (28.3) (43.5)
Cash flows from financing activities:
Net change in commercial paper (58.1) (49.0)
Proceeds from long-term debt 0.8 1.1
Reduction of long-term debt (13.6) (6.7)
Dividends paid (57.0) (54.9)
Acquisition of treasury stock (6.0) --
------- -------
Cash used for financing activities (133.9) (109.5)
------- -------
Net increase in cash and cash equivalents 7.9 6.3
Cash and cash equivalents, beginning of period 58.2 53.9
------- -------
Cash and cash equivalents, end of period $ 66.1 $ 60.2
======= =======
See notes to the condensed consolidated financial statements.
<PAGE> -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 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 $102.7 million higher than reported as of January 31, 1998, 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, results of operations or cash flows.
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, results of operations or
cash flows.
<PAGE> -6-
5. Earnings Per Share
During the three months ended January 31, 1998, we adopted Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share," which
established new standards for computing and presenting earnings per share. The
adoption of SFAS No. 128 did not change our previously-reported earnings per
share.
Basic earnings per share is calculated using net income reduced by dividend
requirements on preferred stock, 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. Treasury Stock
During January 1998, we purchased 110,900 shares of our Class B common stock on
the open market at a cost of $6.0 million. We will use these shares, along with
additional shares to be acquired in the future, to satisfy future exercises of
stock options.
7. New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("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,
results of operations or cash flows.
8. Reclassifications
Certain prior period amounts have been reclassified to conform with the current
period presentation.
<PAGE> -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 nine months ended January
31, 1998, 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.
<PAGE> -8-
Results of Operations:
Third Quarter Fiscal 1998 Compared to Third Quarter Fiscal 1997
Here is a summary of our operating performance (expressed in millions, except
percentage and per share amounts):
Three Months Ended
January 31, %
1998 1997 Change
------- ------- ------
Net Sales
Wine & Spirits $ 339.7 $ 325.2 4
Consumer Durables 141.1 133.0 6
------- -------
Total $ 480.8 $ 458.2 5
Gross Profit $ 251.3 $ 219.3 15
- ------------
Operating Income $ 75.8 $ 70.7 7
- ----------------
Net Income $ 45.6 $ 41.6 10
- ----------
Earnings per Share - Basic and Diluted $ 0.66 $ 0.60 10
- --------------------------------------
Effective Tax Rate 38.0% 38.0%
- ------------------
Sales for our wine and spirits segment increased 4%, influenced mainly by
increasing demand for the Jack Daniel's family of brands and Southern Comfort in
the United States and many key international markets, as well as worldwide
growth for our wine brands.
Revenues from our consumer durables segment increased 6% for the quarter as a
result of significantly higher volumes for Lenox Collections, our direct
marketing division, partially offset by lower sales to department stores
reflecting relatively modest holiday sales and more aggressive inventory
management policies at most of the large retailers in the United States.
Gross profit and operating income increased 15% and 7%, respectively, for the
quarter. These results primarily reflect the strong performance by our major
spirits brands, an improved mix of higher-margin product sales, favorable raw
material and manufacturing costs, and continued improvement at Lenox
Collections. A portion of the gain in gross profit was reinvested in advertising
and marketing programs designed to strengthen our brands.
Net interest expense declined from last year's third quarter due to lower net
debt balances.
<PAGE> -9-
Nine Months Fiscal 1998 Compared to Nine Months Fiscal 1997
Here is a summary of our operating performance (expressed in millions, except
percentage and per share amounts):
Nine Months Ended
January 31, %
1998 1997 Change
-------- -------- ------
Net Sales
Wine & Spirits $1,048.8 $1,023.4 2
Consumer Durables 414.3 384.8 8
-------- --------
Total $1,463.1 $1,408.2 4
Gross Profit $ 746.9 $ 686.9 9
- ------------
Operating Income $ 236.2 $ 219.8 7
- ----------------
Net Income $ 140.9 $ 129.3 9
- ----------
Earnings per Share - Basic and Diluted $ 2.04 $ 1.87 9
- --------------------------------------
Effective Tax Rate 38.0% 38.0%
- ------------------
Sales of our wines and spirits increased 2% for the nine months ended January
31, driven by solid growth of the Jack Daniel's family of brands 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 and strong growth of Hartmann's luggage
products.
Gross profit and operating income for the period increased 9% and 7%,
respectively, driven by growth in both of our operating segments. Strong U.S.
sales of Jack Daniel's and our wine brands, combined with lower marketing
outlays for frozen cocktail products, continued improvement at Lenox Collections
and higher profitability from dinnerware sales fueled the growth. These gains
were partially offset by further international investment in our beverage
business and by the impact of the stronger U.S. dollar.
Gross margin improved to 51.0% in fiscal 1998 from 48.8% in fiscal 1997,
reflecting favorable raw material and manufacturing costs, selected price
increases and an improved mix of higher-margin product sales.
Net interest expense continued to compare favorably to last year as a result of
lower net debt balances.
Based on 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.
<PAGE> -10-
Liquidity and Financial Condition
Cash and cash equivalents increased by $7.9 million during the nine months ended
January 31, 1998, as cash provided by operations exceeded cash used for
investing and financing activities. Cash provided by operations totaled $170.1
million, primarily reflecting net income for the period and a decrease in
accounts receivable due to the normal seasonality of revenues, partially offset
by an increase in inventories in anticipation of future sales growth. Cash of
$28.3 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 $133.9 million, as
we used excess funds to reduce our debt and to pay dividends.
We have conducted a comprehensive review of our information systems to identify
the systems which may 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, results of operations or cash flows.
Dividends
On January 22, 1998, our Board of Directors declared a regular quarterly cash
dividend of $.28 per share on both Class A and Class B common stock. The Board
also declared a $.10 per share cash dividend on the preferred stock.
Stockholders of record on March 4, 1998 will receive the cash dividend on April
1, 1998. Total cash dividends paid per common share in fiscal 1998 will be
$1.10, a 4% increase over last year.
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, results of operations or cash flows.
<PAGE> -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)
The Federal Appeals Court for the Fifth Circuit on January 12, 1998, affirmed
the trial court's summary judgment dismissal of all claims by Expansion Plus,
Inc. ("EPI") against Brown-Forman and other defendants. EPI's request for
reconsideration was denied on February 12, 1998.
As reported earlier, we bought a start-up credit card processing business in
1988 from 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. It was from this decision that EPI
unsuccessfully appealed, as discussed above.
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
27 Financial Data Schedule
(b) Reports on Form 8-K: None.
<PAGE> -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)
Date: March 6, 1998 By: /s/ Steven B. Ratoff
----------------------------
Steven B. Ratoff
Executive Vice President and
Chief Financial Officer
(On behalf of the Registrant and
as Principal Financial Officer)
<PAGE> -13-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
company's January 31, 1998 Quarterly Report Form 10-Q and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-END> JAN-31-1998
<CASH> 66
<SECURITIES> 0
<RECEIVABLES> 223<F1>
<ALLOWANCES> 0 <F1>
<INVENTORY> 501
<CURRENT-ASSETS> 817
<PP&E> 645
<DEPRECIATION> 363
<TOTAL-ASSETS> 1,434
<CURRENT-LIABILITIES> 357
<BONDS> 50
0
12
<COMMON> 10
<OTHER-SE> 766
<TOTAL-LIABILITY-AND-EQUITY> 1,434
<SALES> 1,463
<TOTAL-REVENUES> 1,463
<CGS> 716<F2>
<TOTAL-COSTS> 716<F2>
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11
<INCOME-PRETAX> 227
<INCOME-TAX> 86
<INCOME-CONTINUING> 141
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 141
<EPS-PRIMARY> 2.04
<EPS-DILUTED> 2.04
<FN>
<F1>Accounts receivable is shown net of allowance for doubtful accounts.
Allowance for doubtful accounts has not changed materially from the
April 30, 1997 balance.
<F2>Includes excise taxes of $190 million.
</FN>
</TABLE>
