[Conformed Copy]
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 Commission file number 1-9076
ended March 31, 1998
FORTUNE BRANDS, INC.
------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-3295276
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1700 East Putnam Avenue, Old Greenwich, Connecticut 06870-0811
---------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 698-5000
------------
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 ( )
The number of shares outstanding of the registrant's Common stock, par value
$3.125 per share, at April 30, 1998 was 172,966,155 shares.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS.
- ------ --------------------
FORTUNE BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
---------------------------------------
(In millions)
March 31, December 31,
1998 1997
------------ ------------
(Unaudited)
Assets
Current assets
Cash and cash equivalents $ 173.8 $ 54.2
Accounts receivable, net 893.4 862.0
Inventories
Bulk whiskey 340.6 338.1
Other raw materials, supplies and
work in process 265.9 258.7
Finished products 412.7 358.4
-------- --------
1,019.2 955.2
Other current assets 219.1 224.2
-------- --------
Total current assets 2,305.5 2,095.6
Property, plant and
equipment, net 992.5 980.9
Intangibles resulting from
business acquisitions, net 3,702.5 3,674.1
Other assets 205.8 191.9
-------- --------
Total assets $7,206.3 $6,942.5
======== ========
See Notes to Condensed Consolidated Financial Statements.
-1-
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
---------------------------------------
(In millions, except per share amounts)
March 31, December 31,
1998 1997
------------ ------------
(Unaudited)
Liabilities and stockholders' equity
Current liabilities
Notes payable to banks $ 67.8 $ 36.8
Commercial paper 354.2 191.6
Accounts payable 254.2 254.6
Accrued taxes 478.3 475.2
Accrued expenses and
other liabilities 585.0 634.1
Current portion of long-term debt 136.8 176.2
-------- --------
Total current liabilities 1,876.3 1,768.5
Long-term debt 855.2 739.1
Deferred income taxes 39.0 38.5
Postretirement and other liabilities 367.3 379.3
-------- --------
Total liabilities 3,137.8 2,925.4
-------- --------
Stockholders' equity
$2.67 Convertible Preferred stock -
redeemable at Company's option 11.0 11.3
Common stock, par value $3.125 per
share, 229.6 shares issued 717.4 717.4
Paid-in capital 149.3 151.1
Accumulated other comprehensive income 16.0 6.9
Retained earnings 5,137.9 5,129.7
Treasury stock, at cost (1,963.1) (1,999.3)
-------- --------
Total stockholders' equity 4,068.5 4,017.1
-------- --------
Total liabilities and
stockholders' equity $7,206.3 $6,942.5
======== ========
See Notes to Condensed Consolidated Financial Statements.
-2-
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
for the Three Months Ended March 31, 1998 and 1997
-----------------------------------------------------
(In millions, except per share amounts)
(Unaudited)
1998 1997
---------- ----------
Net sales $1,203.5 $1,105.1
Cost of products sold 618.7 574.5
Excise taxes on distilled spirits 87.1 82.0
Advertising, selling, general and
administrative expenses 346.5 313.0
Amortization of intangibles 26.3 26.0
Interest and related expenses 25.1 37.9
Other (income) expenses, net 2.1 2.1
-------- --------
Income from continuing operations
before income taxes 97.7 69.6
Income taxes 44.7 34.6
--------- --------
Income from continuing operations 53.0 35.0
Income from discontinued operations - 101.6
Extraordinary items (8.4) -
-------- --------
Net income $ 44.6 $ 136.6
======== ========
Earnings per Common share
Basic
Income from continuing operations $.31 $.20
Income from discontinued operations - .60
Extraordinary items (.05) -
---- ----
Net income $.26 $.80
==== ====
Diluted
Income from continuing operations $.30 $.20
Income from discontinued operations - .58
Extraordinary items (.05) -
---- ----
Net income $.25 $.78
==== ====
Dividends paid per Common share $.21 $.50
==== ====
Average number of Common shares outstanding
Basic 172.3 171.3
===== =====
Diluted 177.1 174.3
===== =====
See Notes to Condensed Consolidated Financial Statements.
-3-
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
for the Three Months Ended March 31, 1998 and 1997
-----------------------------------------------------
(In millions)
(Unaudited)
1998 1997
--------- ---------
Operating activities
Net income $ 44.6 $ 136.6
Income from discontinued operations - (101.6)
Extraordinary items 8.4 -
Depreciation and amortization 62.1 62.2
(Increase) decrease in accounts receivable (24.4) 50.1
Increase in inventories (54.6) (49.3)
Decrease in accounts payable, accrued
expenses and other liabilities (74.5) (102.1)
Increase (decrease) in accrued taxes 14.7 (0.4)
Other operating activities, net (17.6) (31.5)
------- -------
Net cash used by continuing
operating activities (41.3) (36.0)
------- -------
Investing activities
Additions to property, plant and equipment (49.5) (34.3)
Acquisition, net of cash acquired (65.3) -
Proceeds from disposition of operations 16.0 -
Other investing activities, net (1.0) (0.6)
------ -------
Net cash used by investing activities (99.8) (34.9)
------ -------
Financing activities
Increase in short-term debt, net 194.9 223.2
Issuance of long-term debt 200.3 -
Repayment of long-term debt (119.2) (100.2)
Dividends to stockholders (36.4) (86.0)
Cash purchases of Common stock for treasury (16.9) -
Other financing activities, net 35.5 43.6
------- -------
Net cash provided by financing activities 258.2 80.6
------- -------
Effect of foreign exchange rate changes on cash 2.5 (5.0)
------- -------
Net increase in cash and cash equivalents 119.6 4.7
Cash and cash equivalents at beginning of period 54.2 34.9
------- -------
Cash and cash equivalents at end of period $ 173.8 $ 39.6
======= =======
See Notes to Condensed Consolidated Financial Statements.
-4-
<PAGE>
<TABLE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
for the Three Months Ended March 31, 1998 and 1997
-------------------------------------------------------------
(In millions)
(Unaudited)
<CAPTION>
$2.67 Accumulated
Convertible other Treasury
Preferred Common Paid-in comprehensive Retained stock,
stock stock capital income earnings at cost Total
================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $12.9 $717.4 $166.5 $(204.1) $5,025.4 $(2,042.1) $3,676.0
Comprehensive income
Net income - - - - 136.6 - 136.6
Changes during the period - - - (29.6) - - (29.6)
------ ------- -------
Total comprehensive income - - - (29.6) 136.6 - 107.0
------ ------- -------
Cash dividends - - - - (86.0) - (86.0)
Purchases - - - - - (1.7) (1.7)
Conversion of securities and
delivery of stock plan shares (0.3) - 4.0 - - 43.5 47.2
----- ------ ------ ------- -------- --------- --------
Balance at March 31, 1997 $12.6 $717.4 $170.5 $(233.7) $5,076.0 $(2,000.3) $3,742.5
===== ====== ====== ======= ======== ========= ========
Balance at December 31, 1997 $11.3 $717.4 $151.1 $ 6.9 $5,129.7 $(1,999.3) $4,017.1
Comprehensive income
Net income - - - - 44.6 - 44.6
Changes during the period - - - 9.1 - - 9.1
----- -------- --------
Total comprehensive income - - - 9.1 44.6 - 53.7
----- -------- --------
Cash dividends - - - - (36.4) - (36.4)
Purchases - - - - - (17.7) (17.7)
Conversion of securities and
delivery of stock plan shares (0.3) - (1.8) - - 53.9 51.8
----- ------ ------ ----- -------- --------- --------
Balance at March 31, 1998 $11.0 $717.4 $149.3 $16.0 $5,137.9 $(1,963.1) $4,068.5
===== ====== ====== ===== ======== ========= ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
-5-
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Principles of Consolidation
The condensed consolidated balance sheet as of March 31, 1998 and
the related condensed consolidated statements of income, cash flows and
stockholders' equity for the three-month periods ended March 31, 1998
and 1997 are unaudited. In the opinion of management, all adjustments
necessary for a fair presentation of such financial statements have
been included. Such adjustments consisted only of normal recurring
items. Interim results may not be indicative of results for a full
year.
The condensed consolidated financial statements and notes are
presented as permitted by Form 10-Q and do not contain certain
information included in the Company's annual consolidated financial
statements and notes. The year-end condensed consolidated balance sheet
was derived from the Company's audited financial statements, but does
not include all disclosures required by generally accepted accounting
principles. This Form 10-Q should be read in conjunction with the
Company's consolidated financial statements and notes incorporated by
reference in its 1997 Annual Report on Form 10-K.
2. Acquisitions
On February 27, 1998, the Company's office products subsidiary
acquired the Apollo Presentation Products group of companies, marketers
of office and conference presentation products, for an aggregate cost
of approximately $65 million.
During the second half of 1997, acquisitions were made in the home
and office products segments for an aggregate cost of $92 million,
including fees, expenses and $9.5 million resulting from the issuance
of Common shares. In connection with the 1997 acquisitions, liabilities
amounting to $72 million were included at the dates of acquisition. The
cost exceeded the fair value of net assets acquired by $90 million.
These operations have been included in consolidated results from
the dates of acquisition. Had operations of these acquisitions been
consolidated from January 1, 1997, they would not have materially
affected results.
3. Discontinued Operations
On May 30, 1997, Gallaher Group Plc ("Gallaher"), the Company's
international tobacco subsidiary, was spun off and the Company's name
was changed from American Brands, Inc. to Fortune Brands, Inc. As a
result, the Company's stockholders owned shares in two publicly-traded
companies -- Fortune Brands, Inc. and Gallaher.
To allocate the overall debt burden of the Company at the time of
the spin-off, Gallaher borrowed and paid to the Company an amount that
-6-
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Discontinued Operations (Concluded)
approximated $1.25 billion, after taxes. The Company used the proceeds
to pay down debt.
Also, in connection with the spin-off, Gallaher and Gallaher
Limited agreed to indemnify the Company against claims arising from
smoking and health and fire safe cigarette matters relating to the
tobacco business of Gallaher and its subsidiaries.
The condensed consolidated financial statements were reclassified
to identify Gallaher's international tobacco operations as discontinued
operations. Summarized results of operations for the international
tobacco operations, net of allocation of interest expense based on a
ratio of Gallaher's net assets to consolidated net assets of the
Company, are as follows:
Three Months Ended
March 31, 1997
--------------------
(In millions,
except per share amounts)
Net sales $1,739.8
========
Income before taxes $152.7
Income taxes (51.1)
------
Income from discontinued
operations $101.6
======
Earnings per Common share
Basic $.60
====
Diluted $.58
====
4. Earnings Per Share
Basic earnings per Common share are based on the weighted average
number of Common shares outstanding in each period and after preferred
stock dividend requirements.
-7-
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Earnings Per Share (Concluded)
Diluted earnings per Common share assume that any dilutive convertible
preferred shares outstanding at the beginning of each period were
converted at those dates, with preferred stock dividend requirements
and outstanding Common shares adjusted accordingly. It also assumes
that outstanding Common shares were increased by shares issuable upon
exercise of those stock options for which market price exceeds exercise
price, less shares that could have been purchased by the Company with
related proceeds.
The computation of basic and diluted earnings per Common share for
"Income from continuing operations" is as follows:
Three Months Ended
March 31,
------------------
1998 1997
---- ----
(In millions,
except per share amounts)
Income from continuing operations $53.0 $35.0
Less: Preferred stock dividends 0.2 0.3
----- -----
Income available to Common
stockholders - basic 52.8 34.7
Convertible Preferred stock
dividend requirements 0.2 0.3
----- -----
Income available to Common
stockholders - diluted $53.0 $35.0
===== =====
Weighted average number of
Common shares outstanding - basic 172.3 171.3
Conversion of Convertible
Preferred stock 2.3 1.7
Exercise of stock options 2.5 1.3
----- -----
Weighted average number of Common
shares outstanding - diluted 177.1 174.3
===== =====
Earnings per Common share
Basic $.31 $.20
==== ====
Diluted $.30 $.20
==== ====
-8-
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Extraordinary Items
During the first quarter of 1998, the Company purchased the
following principal amounts of its outstanding debt: $23.2 million of
8-1/2% Notes, Due 2003, $10.5 million of 9% Notes, Due 1999 and $32.7
million of 8-5/8% Debentures, Due 2021. The extinguishment of debt
resulted in a charge of $8.4 million ($13 million pre-tax), or five
cents per Common share.
6. Long-Term Debt
On March 31, 1998, the Company issued $200 million of 6-1/4%
Notes, Due 2008. The net proceeds were used for general corporate
purposes.
7. Restructuring and Other Nonrecurring Charges
During 1997, the Company recorded $298.2 million of pre-tax
restructuring and other nonrecurring charges. In connection with the
restructuring, the home and office products segments will be reducing
their workforces by 7%, or 1,125 individuals, primarily production
employees. The remaining restructuring liability at March 31, 1998,
which relates principally to employee termination costs that will be
paid during 1998, was $60.3 million. The remaining net book value of
assets to be disposed approximated $24 million. The Company
anticipates that the restructuring activities will be substantially
completed during 1998.
8. Comprehensive Income
During the first quarter of 1998, the Company adopted FAS
Statement No. 130, "Reporting Comprehensive Income" and has elected to
report comprehensive income in the condensed consolidated statement of
stockholders' equity. Comprehensive income is defined as the change in
equity from transactions and other events from nonowner sources and
includes net income and other comprehensive income. The components of
accumulated other comprehensive income are as follows (In millions):
Foreign Minimum Accumulated
Foreign pension other
currency liability comprehensive
adjustments adjustment income
----------- ---------- ---------------
Balance December 31, 1996 $(195.9) $(8.2) $(204.1)
Changes in first quarter (29.6) - (29.6)
------- ----- -------
Balance March 31, 1997 $(225.5) $(8.2) $(233.7)
======= ===== =======
Balance December 31, 1997 $19.9 $(13.0) $ 6.9
Changes in first quarter 9.1 - 9.1
----- ------ -----
Balance March 31, 1998 $29.0 $(13.0) $16.0
==== ===== ====
-9-
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Concluded)
9. Pending Litigation
Tobacco Litigation and Indemnification
On December 22, 1994, the Company sold The American Tobacco
Company subsidiary to Brown & Williamson Tobacco Corporation, a
wholly-owned subsidiary of B.A.T Industries p.l.c. In connection with
the sale, Brown & Williamson Tobacco Corporation and The American
Tobacco Company ("the Indemnitors") agreed to indemnify the Company
against claims including legal expenses arising from smoking and health
and fire safe cigarette matters relating to the tobacco business of The
American Tobacco Company.
The Company is a defendant in numerous actions based upon
allegations that human ailments have resulted from tobacco use.
Management believes that there are meritorious defenses to the pending
actions and these actions are being vigorously contested. However, it
is not possible to predict the outcome of the pending litigation, and
it is possible that some of these actions could be decided unfavorably.
Management is unable to make a meaningful estimate of the amount or
range of loss that could result from an unfavorable outcome of the
pending litigation. Management believes that the pending actions will
not have a material adverse effect upon the results of operations, cash
flows or financial condition of the Company as long as the Indemnitors
continue to fulfill their obligations to indemnify the Company under
the aforementioned indemnification agreement.
Other Litigation
In addition to the lawsuits described above, the Company and its
subsidiaries are defendants in lawsuits associated with their business
and operations. It is not possible to predict the outcome of the
pending actions, but management believes that there are meritorious
defenses to these actions and that these actions will not have a
material adverse effect upon the results of operations, cash flows or
financial condition of the Company. These actions are being vigorously
contested.
10. Environmental
The Company is subject to laws and regulations relating to the
protection of the environment. While it is not possible to quantify
with certainty the potential impact of actions regarding environmental
matters, particularly remediation and other compliance efforts that the
Company's subsidiaries may undertake in the future, in the opinion of
management, compliance with the present environmental protection laws,
before taking into account estimated recoveries from third parties,
will not have a material adverse effect upon the results of operations,
cash flows or financial condition of the Company.
-10-
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To the Board of Directors of Fortune Brands, Inc.:
We have reviewed the condensed consolidated balance sheet of
Fortune Brands, Inc. and Subsidiaries as of March 31, 1998 and the
related condensed consolidated statements of income, cash flows and
stockholders' equity for the three-month periods ended March 31, 1998
and 1997. These financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established
by the American Institute of Certified Public Accountants. A review of
interim financial information consists principally of applying
analytical procedures to financial data, and making inquiries of
persons responsible for financial and accounting matters. It is
substantially less in scope than an audit in accordance with generally
accepted auditing standards, the objective of which is the expression
of an opinion regarding the consolidated financial statements taken as
a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material
modifications that should be made to the condensed consolidated
financial statements referred to above for them to be in conformity
with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet as of December 31,
1997, and the related consolidated statements of income, cash flows and
stockholders' equity for the year then ended (not presented herein) and
in our report dated February 4, 1998, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated
balance sheet as of December 31, 1997 is fairly stated, in all material
respects, in relation to the consolidated balance sheet from which it
has been derived.
1301 Avenue of the Americas COOPERS & LYBRAND L.L.P.
New York, New York
May 13, 1998
-11-
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- ------ AND RESULTS OF OPERATIONS
-----------------------------------------------------------
FORTUNE BRANDS, INC. AND SUBSIDIARIES
--------------------------------------
Results of Operations for the Three Months Ended March 31, 1998
as Compared to the Three Months Ended March 31, 1997
-----------------------------------------------------------------------
Net Sales Operating Income(1)
---------------------- --------------------
1998 1997 1998 1997
-------- --------- ------- ---------
(In millions)
Home products $ 342.4 $ 328.7 $ 47.6 $ 44.4
Office products 321.8 290.1 22.6 21.2
------ -------- ------ ------
Home and office products 664.2 618.8 70.2 65.6
Golf products 277.0 235.9 37.4 29.1
Distilled spirits 262.3 250.4 34.2 31.2
-------- -------- ------ ------
$1,203.5 $1,105.1 $141.8 $125.9
======== ======== ====== ======
(1) Operating income represents net sales less all costs and expenses
excluding corporate administrative expenses, interest and related
expenses and other (income) expenses, net.
CONSOLIDATED
- ------------
Net sales increased 9% on benefits from new products, line extensions,
acquisitions and price increases, partly offset by volume declines, the sale of
nonstrategic businesses and lower average foreign exchange rates (primarily the
Australian dollar). Operating income increased 13%, principally due to the
higher sales, partly offset by higher operating expenses coupled with effects of
lower average foreign exchange rates. Excluding effects of translation at lower
average foreign exchange rates, net sales and operating income were up 10% and
15%, respectively.
During 1997, the Company recorded $298.2 million of pre-tax restructuring and
other nonrecurring charges. (See Notes to Condensed Consolidated Financial
Statements, Note 7.) The sale of the home products' door hardware business was
completed in the first quarter of 1998. The following restructuring activities
are underway: the expansion of the Nogales, Mexico operation to include office
products' Swingline stapling production and a significant portion of home
products' Master Lock
-12-
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
CONSOLIDATED (Continued)
- ------------
assembly operations, the integration of office products in Europe and Australia,
the planned reduction of workforces in the home and office products segments
and the rationalization of golf products' operations. The Company anticipates
that the restructuring activities will be substantially completed during 1998.
Interest and related expenses decreased 34% reflecting lower average borrowings
principally from the use of the proceeds from the Gallaher spin-off, as
discussed below.
The lower effective income tax rate of 45.8% for the three-month period ended
March 31, 1998, as compared with 49.7% for the same period last year,
principally reflected the impact of nondeductible goodwill on the higher pre-tax
income for the three-months ended March 31, 1998. In addition, last year's rate
reflected tax benefits associated with research and development activities.
Income from continuing operations of $53 million, or 31 cents per Common share,
for the three months ended March 31, 1998 compared with $35 million, or 20 cents
per share, for the same period last year.
On May 30, 1997, Gallaher Group Plc ("Gallaher"), the Company's international
tobacco subsidiary, was spun off ("Gallaher spin-off") and the Company's name
was changed from American Brands, Inc. to Fortune Brands, Inc. The consolidated
financial statements were restated to present Gallaher as a discontinued
operation. (See Note 3.)
Income from discontinued operations for the three months ended
March 31, 1997 represented Gallaher's net income of $101.6 million, or 60
cents per share. (See Note 3.)
The extraordinary items charge in the three months ended March 31, 1998 of $8.4
million ($13 million pre-tax), or five cents per share, resulted from the
extinguishment of debt. (See Note 5.)
Net income of $44.6 million, or 26 cents per share, compared with $136.6
million, or 80 cents per share, for the same period last year.
Income from continuing operations and basic and diluted earnings per share of
$53 million, and 31 cents and 30 cents, respectively, in the three months ended
March 31, 1998 compared with pro forma income from continuing operations and
basic and diluted earnings per share of $45.3 million, and
-13-
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
CONSOLIDATED (Concluded)
- ------------
27 cents and 26 cents, respectively, in the three months ended March 31, 1997.
Pro forma results reflect adjustments to income from continuing operations to
include a net cash payment that approximated $1.25 billion, after taxes, that
Gallaher made to the Company in connection with the Gallaher spin-off and the
assumption that such proceeds were used to purchase 2.5 million Common shares
and repay debt as of January 1, 1997. This pro forma information is provided for
informational purposes only and does not purport to be indicative of the results
of operations which would actually have been obtained if the transactions had
occurred on January 1, 1997, or which may exist or be obtained in the future.
See Notes 9 and 10 for discussions of pending litigation and environmental
matters.
In June 1997, FAS Statement No. 131, "Disclosures about Segments of an
Enterprise and Related Information", was issued, to be effective with the 1998
annual financial statements. FAS No. 131 establishes standards for the way that
public companies report information about operating segments in annual financial
statements. FAS No. 131 also establishes standards for related disclosures about
products and services, geographic areas, and major customers and requires
financial statement disclosure for prior periods to be restated. The Company is
in the process of evaluating the disclosure requirements under this standard.
Home Products
- -------------
Net sales increased 4% on an overall volume increase (line extensions and new
products, partly offset by volume declines in some existing products), benefit
from Moen's acquisition of Creative Specialties (Donner bath accessories) and
price increases, partly offset by the absence of Master Lock's door hardware
business and Moen's operations in Japan. Operating income increased 7%
reflecting the sales increase and slightly improved gross margin (benefits of
price and overall volume increases and disposal of lower margin businesses),
partly offset by increased operating expenses. The increased operating expenses
principally resulted from higher volume-related selling expenses and increased
advertising at Moen, partly offset by lower general and administrative expenses.
Office Products
- ---------------
Net sales increased 11% on benefits from acquisitions and an overall volume
increase (new products, partly offset by volume declines in some existing
products), partly offset by lower average foreign exchange rates, reduced
-14-
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
Office Products (Concluded)
- ---------------
prices and the absence of two nonstrategic businesses sold in 1997. Operating
income increased 7% reflecting the sales increase and improved gross margin
(principally stabilized raw material costs and other cost reductions primarily
in North America), partly offset by increased operating expenses. The increased
operating expenses were substantially related to maintaining customer service
levels during implementation of the previously announced restructuring
activities. Operating income benefited from the acquisitions and was negatively
impacted by translation of foreign results at lower average foreign exchange
rates.
Golf Products
- -------------
Net sales were up 17% on an overall volume increase in golf balls, clubs and
gloves (new products and line extensions, partly offset by volume declines in
some existing products coupled with discontinued products associated with new
product introductions) and price increases, partly offset by lower average
foreign exchange rates. Operating income increased 29% reflecting the higher
sales, partly offset by higher advertising and promotional expenditures and
research and development expenses associated with the support of existing
products and the development of new products.
Distilled Spirits
- -----------------
Net sales increased 5% on volume and price increases, partly offset by lower
foreign exchange rates. The overall volume increase principally reflected higher
case shipments in the U.S. (benefits from reduced trade inventories in late
1997) and Canada as well as improved volume in Europe, line extensions and new
products. Operating income increased 10% on the sales increase and improved
gross margin, (principally price increases and favorable product mix), partly
offset by increased operating expenses (principally volume-related selling
expenses in the U.S.) Operating results improved in North America and Europe
while Australian results declined due to the negative impact of translation at a
14% lower average foreign exchange rate. For the remainder of 1998, more modest
growth in operating income is expected.
The merger of Grand Metropolitan PLC and Guinness PLC to create Diageo PLC in
late 1997 reflects the trend towards consolidation in the highly competitive
global spirits business. The creation of Diageo PLC and the breadth of its
portfolio of brands, as well as the continued consolidation of the supplier,
distributor and retailer tiers may present pricing and service challenges for
distilled spirits producers, as well as opportunities for the most efficient
producers.
-15-
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Net cash used by continuing operating activities of $41.3 million for the three
months ended March 31, 1998 compared with net cash used by continuing operating
activities of $36 million for the same three-month period last year.
Net cash used by investing activities for the three months ended
March 31, 1998 was $99.8 million, as compared with net cash used of $34.9
million in the same three-month period last year. The increased use of funds in
1998 reflects the acquisition of Apollo Presentation Products and higher capital
expenditures ($16 million related to restructuring activities), partly offset by
proceeds from a disposed operation.
Net cash provided by financing activities for the three months ended
March 31, 1998 was $258.2 million, as compared with net cash provided of $80.6
million in the same three-month period last year, reflecting higher borrowings
and lower dividends paid, partly offset by purchases of Common stock for
treasury this year. Pursuant to a systematic share purchase program approved in
1997, 431,100 Common shares were purchased by the Company during the first
quarter of 1998. This program is anticipated to be in the range of two million
shares per year.
Total debt at March 31, 1998 was $1.4 billion, an increase of $270.3 million
from December 31, 1997. The ratio of total debt to total capital increased from
22.2% at December 31, 1997 to 25.8% at March 31, 1998.
During the first quarter of 1998, the Company purchased $66.4 million principal
amount of its outstanding debt. (See Note 5.) On March 31, 1998, the Company
issued $200 million of 6-1/4% Notes, Due 2008. (See Note 6.)
Management believes that the Company's internally generated funds, together with
its access to global credit markets, are more than adequate to meet the
Company's capital needs.
-16-
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Concluded)
---------------------------------------------------------
CAUTIONARY STATEMENT
- --------------------
This Quarterly Report on Form 10-Q contains statements relating to future
results, which are forward-looking statements as that term is defined in the
Private Securities Litigation Reform Act of 1995. Actual results may differ
materially from those projected as a result of certain risks and uncertainties,
including but not limited to changes in general economic conditions, foreign
exchange rate fluctuations, competitive product and pricing pressures, the
impact of excise tax increases with respect to distilled spirits, regulatory
developments, the uncertainties of litigation, the impact of weather,
particularly on the home products and golf brand groups, expenses and
disruptions related to shifts in manufacturing to different locations and
sources, delays in the integration of recent acquisitions, as well as other
risks and uncertainties detailed from time to time in the Company's Securities
and Exchange Commission filings.
-17-
<PAGE>
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
- ------ -----------------
(a) Reference is made to Part I, Item 3, "Legal Proceedings", of
Registrant's Annual Report on Form 10-K for the fiscal year ended December 31,
1997. In addition, the Registrant has been named as a defendant in the
proceedings listed under "List of Pending Cases" below:
List of Pending Cases
Brown v. The American Tobacco Company, et al., Superior Court of
Georgia, Richmond County, March 16, 1998;
Christensen v. Philip Morris Companies Inc., et al., District Court of
Clark County, Nevada, April 3, 1998;
Daniels v. The American Tobacco Company, et al., United States District
Court, Southern District of California, April 2, 1998;
Gelfond v. Fortune Brands, Inc., et al., Supreme Court of New York, New
York County, May 1, 1998;
National Asbestos Workers Medical Fund v. The American Tobacco Company,
et al., United States District Court, Eastern District of New York, March 27,
1988; and
Pennetti v. The American Tobacco Company, et al., Court of Common Pleas
of Philadelphia County, Pennsylvania, April 13, 1998.
(b) Reference is made to Note 9, "Pending Litigation", in the Notes to
Condensed Consolidated Financial Statements set forth in Part I, Item 1 of this
Quarterly Report on Form 10-Q.
-18-
<PAGE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
- ------ --------------------------------
(a) Exhibits.
--------
12. Statement re computation of ratio of earnings to fixed
charges.
15. Letter from Coopers & Lybrand L.L.P. dated May 13, 1998 re
unaudited financial information.
23. Consent of Counsel, Chadbourne & Parke LLP.
27. Financial Data Schedule (Article 5).
In lieu of filing certain instruments with respect to long-term debt of
the kind described in Item 601(b)(4) of Regulation S-K, Registrant agrees to
furnish a copy of such instruments to the Securities and Exchange Commission
upon request.
(b) Reports on Form 8-K.
-------------------
Registrant filed a Current Report on Form 8-K, dated January 23,
1998, in respect of Registrant's press release dated January 23,
1998 announcing Registrant's financial results for the three-month
and twelve-month periods ended December 31, 1997 (Items 5 and
7(c)).
Registrant filed a Current Report on Form 8-K, dated February 10,
1998, in respect of Registrant's press release dated February 6,
1998 announcing agreement to acquire Apollo Presentation Products
(Items 5 and 7(c)).
Registrant filed a Current Report on Form 8-K, dated February 20,
1998, in respect of Registrant's press release dated February 17,
1998 announcing Registrant's reaffirmation of its strong growth
outlook for 1998 (Items 5 and 7(c)).
Registrant filed a Current Report on Form 8-K, dated March 2, 1998,
in respect of Registrant's press release dated February 27, 1998
announcing completion of purchase of Apollo Presentation Products
(Items 5 and 7(c)).
Registrant filed a Current Report on Form 8-K, dated March 4, 1998,
in respect of Registrant's press release dated March 3, 1998
announcing Registrant's reaffirmation of its strong earnings
outlook (Items 5 and 7(c)).
Registrant filed a Current Report on Form 8-K, dated April 1, 1998,
in respect of Registrant's sale of $200,000,000 aggregate principal
amount of its 6 1/4% Notes Due 2008 (Items 5 and 7(c)).
-19-
<PAGE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K. (Concluded)
- ------ --------------------------------
Registrant filed a Current Report on Form 8-K, dated April 22,
1998, in respect of Registrant's press release dated April 22, 1998
announcing Registrant's financial results for the three-month
period ended March 31, 1998 (Items 5 and 7(c)).
<PAGE>
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report to be signed on its behalf by
the undersigned, thereunto duly authorized.
FORTUNE BRANDS, INC.
---------------------
(Registrant)
Date: May 13, 1998 By /s/C. P. Omtvedt
------------ -------------------------
C. P. Omtvedt
Senior Vice President and
Chief Accounting Officer
<PAGE>
EXHIBIT INDEX
-------------
Sequentially
Exhibit Numbered Page
- ------- -------------
12. Statement re computation of ratio of
earnings to fixed charges.
15. Letter from Coopers & Lybrand L.L.P. dated
May 13, 1998 re unaudited financial information.
23. Consent of Counsel, Chadbourne & Parke LLP.
27. Financial Data Schedule (Article 5).
EXHIBIT 12
----------
<TABLE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollar amounts in millions)
<CAPTION>
Three Months
Ended
Years Ended December 31, March 31,
---------------------------------------------------- ----------
1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Earnings Available:
Income from continuing operations
before income taxes, minority
interest and extraordinary items......... $249.9 $ 43.4 $358.9 $340.1 $145.2 $ 99.1
Less: Excess of earnings over
dividends of less than
fifty percent owned
companies...................... 0.1 - 0.2 0.2 0.2 0.1
Capitalized interest............... 0.3 0.2 - 0.3 - -
------ ------ ------ ------ ------ ----
249.5 43.2 358.7 339.6 145.0 99.0
====== ====== ====== ====== ====== ====
Fixed Charges:
Interest expense (including
capitalized interest) and
amortization of debt discount
and expenses............................. 200.5 184.6 147.1 172.6 122.4 25.9
Portion of rentals representative
of an interest factor.................... 11.9 12.8 13.5 15.1 14.7 4.4
------ ------ ------ ------ ------ ----
Total Fixed Charges................ 212.4 197.4 160.6 187.7 137.1 30.3
------ ------ ------ ------ ------ ----
Total Earnings Available........... $461.9 $240.6 $519.3 $527.3 $282.1 $129.3
====== ====== ====== ====== ====== ======
Ratio of Earnings to Fixed Charges............ 2.17 1.22 3.23 2.81 2.06 4.27
==== ==== ==== ==== ==== ====
</TABLE>
EXHIBIT 15
----------
May 13, 1998
Securities and Exchange Commission
450 5th Street, N.W.
Attention: Filing Desk, Stop 1-4
Washington, D.C. 20549-1004
Re: Fortune Brands, Inc.
We are aware that our report dated May 13, 1998, on our review of
interim financial information of Fortune Brands, Inc. and Subsidiaries for the
three-month periods ended March 31, 1998 and 1997 included in this Form 10-Q,
has been incorporated by reference into (a) the Registration Statement on Form
S-8 (Registration No. 33-64071) relating to the Defined Contribution Plan of
Fortune Brands, Inc. and Participating Operating Companies, the Registration
Statement on Form S-8 (Registration No. 33-64075) relating to the MasterBrand
Industries, Inc. Hourly Employee Savings Plan, the Registration Statement on
Form S-8 (Registration No. 33-58865) relating to the 1990 Long-Term Incentive
Plan of Fortune Brands, Inc, the Registration Statement on Form S-8
(Registration No. 333-51173) relating to the Fortune Brands, Inc. Non-Employee
Director Stock Option Plan, and the prospectuses related thereto, and (b) the
prospectuses related to the Registration Statements on Form S-3 (Registration
Nos. 33-50832, 33-42397, 33-23039 and 33-3985) of Fortune Brands, Inc. Pursuant
to Rule 436(c) under the Securities Act of 1933, this report should not be
considered a part of such registration statements or prospectuses or
certification by us within the meaning of Sections 7 and 11 of that Act.
Very truly yours,
COOPERS & LYBRAND L.L.P.
1301 Avenue of the Americas
New York, New York 10019
EXHIBIT 23
----------
CONSENT OF COUNSEL
We consent to the incorporation by reference of our opinions
contained in Part II, Item 1, "Legal Proceedings", of this Quarterly Report on
Form 10-Q of Fortune Brands, Inc. into (a) the Registration Statement on Form
S-8 (Registration No. 33-64071) relating to the Defined Contribution Plan of
Fortune Brands, Inc. and Participating Operating Companies, the Registration
Statement on Form S-8 (Registration No. 33-64075) relating to the MasterBrand
Industries, Inc. Hourly Employee Savings Plan, the Registration Statement on
Form S-8 (Registration No. 33-58865) relating to the 1990 Long-Term Incentive
Plan of Fortune Brands, Inc., the Registration Statement on Form S-8
(Registration No. 333-51173) relating to the Fortune Brands, Inc. Non-Employee
Director Stock Option Plan, and the prospectuses related thereto, and (b) the
prospectuses related to the Registration Statements on Form S-3 (Registration
Nos. 33-50832, 33-42397, 33-23039 and 33-3985) of Fortune Brands, Inc.
CHADBOURNE & PARKE LLP
30 Rockefeller Plaza
New York, New York 10112
May 13, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE CONDENSED CONSOLIDATED BALANCE SHEET AND RELATED STATEMENT OF INCOME AS
OF MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> $ 174
<SECURITIES> 0
<RECEIVABLES> 953
<ALLOWANCES> 60
<INVENTORY> 1,019
<CURRENT-ASSETS> 2,306
<PP&E> 1,965
<DEPRECIATION> 972
<TOTAL-ASSETS> 7,206
<CURRENT-LIABILITIES> $1,876
<BONDS> 855
<COMMON> 717
0
11
<OTHER-SE> 3,340
<TOTAL-LIABILITY-AND-EQUITY> 7,206
<SALES> $1,203
<TOTAL-REVENUES> 1,203
<CGS> 619
<TOTAL-COSTS> 619
<OTHER-EXPENSES> 87
<LOSS-PROVISION> 3
<INTEREST-EXPENSE> 25
<INCOME-PRETAX> 98
<INCOME-TAX> 45
<INCOME-CONTINUING> 53
<DISCONTINUED> 0
<EXTRAORDINARY> (8)
<CHANGES> 0
<NET-INCOME> $ 45
<EPS-PRIMARY> $.26
<EPS-DILUTED> $.25
</TABLE>
