United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended OCTOBER 31, 2000
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File No. 1-123
BROWN-FORMAN CORPORATION
(Exact name of Registrant as specified in its Charter)
Delaware 61-0143150
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
850 Dixie Highway
Louisville, Kentucky 40210
(Address of principal executive offices) (Zip Code)
(502) 585-1100
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: November 30, 2000
Class A Common Stock ($.15 par value, voting) 28,988,091
Class B Common Stock ($.15 par value, nonvoting) 39,470,091
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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, 1999 and 2000 3
Six months ended October 31, 1999 and 2000 3
Condensed Consolidated Balance Sheet
April 30, 2000 and October 31, 2000 4
Condensed Consolidated Statement of Cash Flows
Six months ended October 31, 1999 and 2000 5
Notes to the Condensed Consolidated Financial Statements 6 - 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9 - 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk 12
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
2
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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 Six Months Ended
October 31, October 31,
1999 2000 1999 2000
------- ------- -------- --------
Net sales $ 642.1 $ 646.8 $1,078.6 $1,112.8
Excise taxes 75.8 72.7 128.6 128.2
Cost of sales 244.8 234.1 397.2 389.6
------- ------- -------- --------
Gross profit 321.5 340.0 552.8 595.0
Advertising expenses 81.3 82.4 142.3 154.5
Selling, general, and
administrative expenses 123.7 128.8 231.8 243.8
------- ------- -------- --------
Operating income 116.5 128.8 178.7 196.7
Interest income 2.5 1.7 4.7 4.8
Interest expense 4.2 4.6 8.1 8.6
------- ------- -------- --------
Income before income taxes 114.8 125.9 175.3 192.9
Taxes on income 41.9 45.8 64.0 70.2
------- ------- -------- --------
Net income $ 72.9 $ 80.1 $ 111.3 $ 122.7
======= ======= ======== ========
Earnings per share
- Basic and Diluted $ 1.06 $ 1.17 $ 1.62 $ 1.79
======= ======= ======== ========
Shares (in thousands) used in the
calculation of earnings per share
- Basic 68,510 68,473 68,509 68,491
- Diluted 68,583 68,535 68,591 68,543
Cash dividends declared
per common share $ 0.295 $ 0.31 $ 0.59 $ 0.62
======= ======= ======== ========
See notes to the condensed consolidated financial statements.
3
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BROWN-FORMAN CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(Dollars in millions)
April 30, October 31,
2000 2000
(Unaudited)
-------- --------
Assets
------
Cash and cash equivalents $ 180.2 $ 98.5
Accounts receivable, net 293.7 386.4
Inventories:
Barreled whiskey 202.1 208.7
Finished goods 183.7 226.8
Work in process 80.3 99.0
Raw materials and supplies 48.1 49.0
-------- --------
Total inventories 514.2 583.5
Other current assets 32.2 18.2
-------- --------
Total current assets 1,020.3 1,086.6
Property, plant and equipment, net 375.7 400.8
Intangible assets, net 269.6 267.2
Other assets 136.2 241.0
-------- --------
Total assets $1,801.8 $1,995.6
======== ========
Liabilities
-----------
Commercial paper $ 220.4 $ 268.7
Accounts payable and accrued expenses 280.1 339.5
Current portion of long-term debt 6.0 5.9
Accrued taxes on income 1.4 43.6
Deferred income taxes 14.6 14.6
-------- --------
Total current liabilities 522.5 672.3
Long-term debt 40.2 40.1
Deferred income taxes 95.3 65.8
Accrued postretirement benefits 58.3 59.7
Other liabilities and deferred income 37.5 36.5
-------- --------
Total liabilities 753.8 874.4
Stockholders' Equity
--------------------
Common stock 10.3 10.3
Retained earnings 1,080.4 1,160.5
Cumulative translation adjustment (13.3) (17.5)
Treasury stock (483,846 and 538,056 Class B
common shares at April 30 and October 31,
respectively) (29.4) (32.1)
-------- --------
Total stockholders' equity 1,048.0 1,121.2
-------- --------
Total liabilities and stockholders' equity $1,801.8 $1,995.6
======== ========
Note: The balance sheet at April 30, 2000, has been taken from the audited
financial statements at that date, and condensed.
See notes to the condensed consolidated financial statements.
4
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BROWN-FORMAN CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(In millions; amounts in parentheses are reductions of cash)
Six Months Ended
October 31,
1999 2000
------- -------
Cash flows from operating activities:
Net income $ 111.3 $ 122.7
Adjustments to reconcile net income to net
cash provided by (used for) operations:
Depreciation 25.2 27.0
Amortization 5.1 5.4
Deferred income taxes (20.3) (29.5)
Other (5.6) (10.4)
Changes in assets and liabilities:
Accounts receivable (131.8) (92.7)
Inventories (27.9) (69.3)
Other current assets (2.5) 13.2
Accounts payable and accrued expenses 96.8 59.4
Accrued taxes on income 5.5 42.2
------- -------
Cash provided by operating activities 55.8 68.0
Cash flows from investing activities:
Additions to property, plant, and equipment (30.4) (50.1)
Investment in affiliates -- (102.0)
Net purchases of short-term investments (72.4) --
Other (9.1) (0.1)
------- -------
Cash used for investing activities (111.9) (152.2)
Cash flows from financing activities:
Net change in commercial paper 64.0 48.3
Reduction of long-term debt (23.9) (0.2)
Acquisition of treasury stock -- (3.1)
Dividends paid (40.4) (42.5)
------- -------
Cash provided by (used for)
financing activities (0.3) 2.5
------- -------
Net decrease in cash and cash equivalents (56.4) (81.7)
Cash and cash equivalents, beginning of period 171.2 180.2
------- -------
Cash and cash equivalents, end of period $ 114.8 $ 98.5
======= =======
See notes to the condensed consolidated financial statements.
5
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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 2000 annual report on Form 10-K
(the "2000 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 2000 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 $110.3 million higher than reported as of April 30, 2000, and
$108.0 million higher than reported as of October 31, 2000.
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
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5. Earnings Per Share
Basic earnings per share is calculated as net income divided by the weighted
average number of common shares outstanding during the period. Diluted earnings
per share is calculated in the same manner, except that the denominator also
includes additional common shares that would have been issued if outstanding
stock options had been exercised during the period. The dilutive effect of
outstanding stock options is determined by application of the treasury stock
method.
6. Business Segment Information
Three Months Ended Six Months Ended
October 31, October 31,
1999 2000 1999 2000
------ ------ -------- --------
Net sales:
Wine and spirits $458.0 $453.4 $ 782.3 $ 794.6
Consumer durables 184.1 193.4 296.3 318.2
------ ------ -------- --------
Consolidated net sales $642.1 $646.8 $1,078.6 $1,112.8
====== ====== ======== ========
Operating income:
Wine and spirits $ 87.6 $ 96.1 $ 151.7 $ 164.2
Consumer durables 28.9 32.7 27.0 32.5
------ ------ -------- --------
116.5 128.8 178.7 196.7
Interest expense, net 1.7 2.9 3.4 3.8
------ ------ -------- --------
Consolidated income
before income taxes $114.8 $125.9 $ 175.3 $ 192.9
====== ====== ======== ========
7. Comprehensive Income
Comprehensive income, which is defined as the change in equity from transactions
and other events from nonowner sources, was as follows (in millions):
Three Months Ended Six Months Ended
October 31, October 31,
1999 2000 1999 2000
------ ------ ------ ------
Net income $ 72.9 $ 80.1 $111.3 $122.7
Foreign currency translation
adjustment 0.6 (4.5) 0.1 (4.2)
------ ------ ------ ------
Comprehensive income $ 73.5 $ 75.6 $111.4 $118.5
====== ====== ====== ======
7
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8. New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities." Statement
No. 133 requires that all derivatives be measured at fair value and recognized
in the balance sheet as either assets or liabilities. Statement No. 133 also
requires that changes in a derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement and requires formal
documentation, designation, and assessment of the effectiveness of derivatives
that receive hedge accounting.
Statement No. 133, as amended by Statements No. 137 and 138, is effective for
fiscal years beginning after June 15, 2000. We plan to adopt the Statements as
of May 1, 2001. The adoption is not expected to have a material impact on our
consolidated financial statements.
9. Investment in Affiliates
On May 17, 2000, we reached an agreement with Glenmorangie plc to become the
sales and marketing representative for the Glenmorangie and Ardberg Single Malt
Scotch brands in certain global markets, including Continental Europe, the Far
East, Australia, Mexico, Canada, the Caribbean, and South America. In connection
with this arrangement, we purchased approximately 10% of the voting rights of
Glenmorangie plc at a cost of $14.8 million.
On August 2, 2000, we acquired 45% of Finlandia Vodka Worldwide Ltd (FVW), which
owns the Finlandia trademark and the rights to market Finlandia Vodka, at a
purchase price of approximately $84 million. In connection with this purchase,
Brown-Forman's rights to distribute Finlandia have been expanded beyond the U.S.
to include all markets other than Finland and the Nordic countries, the Baltic
States, the Czech Republic and Poland. During the three-year period ending
December 31, 2006, Brown-Forman may be required to acquire some or all of the
remaining 55% of FVW.
10. Reclassifications
Certain prior year amounts have been reclassified to conform with the current
year presentation.
8
<PAGE>
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 2000 Annual
Report. Note that the results of operations for the six months ended October 31,
2000, 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 the federal excise tax (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 wine and
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 the United Kingdom, Germany, 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.
9
<PAGE>
Consumer Durables Risk Factors: Earnings projections for our consumer durables
segment anticipate a continued strengthening of our Lenox and Hartmann
businesses. These projections could be offset by factors such as poor consumer
response to direct mail, a soft retail environment at outlet malls, further
department store consolidation, or weakened demand for tableware, giftware
and/or leather goods.
Results of Operations:
Second Quarter Fiscal 2001 Compared to Second Quarter Fiscal 2000
Here is a summary of our operating performance (expressed in millions,
except percentage and per share amounts):
Three Months Ended
October 31,
1999 2000 Change
------ ------ ------
Net Sales:
Wine & Spirits $458.0 $453.4 (1 %)
Consumer Durables 184.1 193.4 5 %
------ ------
Total $642.1 $646.8 1 %
Gross Profit:
Wine & Spirits $229.8 $241.8 5 %
Consumer Durables 91.7 98.2 7 %
------ ------
Total $321.5 $340.0 6 %
Operating Income:
Wine & Spirits $ 87.6 $ 96.1 10 %
Consumer Durables 28.9 32.7 13 %
------ ------
Total $116.5 $128.8 11 %
Net Income $ 72.9 $ 80.1 10 %
Earnings per Share - Basic and Diluted $ 1.06 $ 1.17 10 %
Effective Tax Rate 36.5% 36.4%
Beverage operating income improved 10% for the quarter; segment gross profit
grew 5% while sales declined 1%. Consumer demand expanded around the world for
most of our premium brands, notably Jack Daniel's, Southern Comfort, Finlandia
Vodka and Fetzer Wines. Shipments of Korbel Champagnes were down significantly
from last year's millenial period, however, moderating segment growth trends for
sales and gross profit. Promotional outlays also returned to pre-millenial
levels in the quarter, yielding a higher growth rate for operating earnings.
Second quarter operating income for the consumer durables segment improved 13%
on a 7% gain in gross profit, reflecting solid growth across most product lines
and channels of distribution.
10
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Results of Operations:
Six Months Fiscal 2001 Compared to Six Months Fiscal 2000
Here is a summary of our operating performance (expressed in millions,
except percentage and per share amounts):
Six Months Ended
October 31,
1999 2000 Change
-------- -------- ------
Net Sales:
Wine & Spirits $ 782.3 $ 794.6 2 %
Consumer Durables 296.3 318.2 7 %
-------- --------
Total $1,078.6 $1,112.8 3 %
Gross Profit:
Wine & Spirits $ 404.9 $ 432.2 7 %
Consumer Durables 147.9 162.8 10 %
-------- --------
Total $ 552.8 $ 595.0 8 %
Operating Income:
Wine & Spirits $ 151.7 $ 164.2 8 %
Consumer Durables 27.0 32.5 20 %
-------- --------
Total $ 178.7 $ 196.7 10 %
Net Income $ 111.3 $ 122.7 10 %
Earnings per Share - Basic and Diluted $ 1.62 $ 1.79 10 %
Effective Tax Rate 36.5% 36.4%
Sales for our wine and spirits segment increased 2%, fueled by strong demand
around the world for the Jack Daniel's family of brands, Southern Comfort,
Fetzer, Finlandia and Bolla, partially offset by the negative impact of
translating weaker foreign currencies into U.S. dollars. Beverage gross profit
and operating income increased 7% and 8%, respectively. A higher gross margin
reflected price increases in selected markets, an improving product mix and the
recognition of cost efficiencies. Comparison of operating results for the period
was affected by last year's millenium activity for Korbel Champagne.
Operating income for the consumer durables segment improved 20% on gains in
revenues and gross profit of 7% and 10%, respectively, reflecting broad-based
growth across most product lines.
Net interest expense increased slightly from last year due to higher net debt
balances. The very modest reduction in the company's consolidated effective tax
rate reflects lower effective state tax rates.
11
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Our outlook for growth remains positive. Consumer demand for our premium brands
is strengthening around the world. Shipments of Korbel Champagne are expected to
return to normal levels for the rest of the year, following a period in which
demand was affected by trade overstocking of competitive brands. And while a
weakening of the Euro and other important currencies will likely constrain
dollar earnings growth, we are optimistic in our outlook for the balance of the
year.
As discussed in Note 8 to the accompanying condensed consolidated financial
statements, we plan to adopt FASB Statement No. 133, as amended by Statements
No. 137 and 138, as of May 1, 2001. The adoption of these Statements is not
expected to have a material impact on our consolidated financial statements.
Liquidity and Financial Condition
Cash and cash equivalents decreased by $81.7 million during the six months ended
October 31, 2000, as cash provided by operating and financing activities was
more than offset by cash used for investing activities. Cash provided by
operations totaled $68.0 million, primarily reflecting net income before
depreciation and amortization and an increase in accounts payable and accrued
expenses during the period. These amounts were partially offset by the normal
seasonal increase in accounts receivable and inventories as well as a continued
partial liquidation of deferred income taxes in compliance with revised U.S. tax
regulations. Cash of $2.5 million was provided by financing activities,
primarily reflecting proceeds from the issuance of commercial paper offset by
dividends paid during the period. Cash of $152.2 million was used for investing
activities, consisting mostly of the acquisition of equity stakes in Finlandia
and Glenmorangie, as well as expenditures to expand and modernize our production
facilities.
Dividends
The Board of Directors increased the quarterly cash dividend 6.5% from $0.31 to
$0.33 per share on both Class A and Class B common stock, payable January 1,
2001. As a result, the indicated annual cash dividend per share rose from $1.24
to $1.32.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Since April 30, 2000, there have been no material changes in the company's
interest rate, foreign currency and commodity price exposures, the types of
derivative financial instruments used to hedge those exposures, or the
underlying market conditions.
12
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PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit
Number Exhibit
------- -------
27 Financial Data Schedule
(b) Reports on Form 8-K:
On September 6, 2000, the Registrant filed a report on Form 8-K
announcing (1) the purchase by the company of 61,992 shares of its
Class B common stock in a private transaction and (2) the promotion of
certain executives within its beverage organization.
On November 9, 2000, the Registrant filed a report on Form 8-K announcing
a presentation made by John P. Bridendall, Senior Vice President and
Director of Corporate Development, at the Morgan Stanley Dean Witter
Global Consumer Group Conference on November 8, 2000.
On November 15, 2000, the Registrant filed a report on Form 8-K
announcing the election of William M. Street to the position of
president of Brown-Forman Corporation.
13
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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: December 4, 2000 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)
14
