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 JANUARY 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: March 1, 2000 Class A Common Stock ($.15 par value, voting) 28,988,091 Class B Common Stock ($.15 par value, nonvoting) 39,522,569
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, 1999 and 2000 3 Nine months ended January 31, 1999 and 2000 3 Condensed Consolidated Balance Sheet April 30, 1999 and January 31, 2000 4 Condensed Consolidated Statement of Cash Flows Nine months ended January 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
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, 1999 2000 1999 2000 ------- ------- -------- -------- Net sales $ 516.7 $ 558.1 $1,530.8 $1,638.4 Excise taxes 60.7 62.9 189.1 191.6 Cost of sales 194.8 210.6 564.4 607.6 ------- ------- -------- -------- Gross profit 261.2 284.6 777.3 839.2 Advertising expenses 72.4 76.0 205.9 219.2 Selling, general, and administrative expenses 110.3 121.5 325.2 354.2 ------- ------- -------- -------- Operating income 78.5 87.1 246.2 265.8 Interest income 1.7 2.6 4.2 7.3 Interest expense 2.5 3.4 8.2 11.5 ------- ------- -------- -------- Income before income taxes 77.7 86.3 242.2 261.6 Taxes on income 28.4 31.5 88.4 95.5 ------- ------- -------- -------- Net income 49.3 54.8 153.8 166.1 Less: Preferred stock dividend requirements -- -- 0.2 -- Preferred stock redemption premium -- -- 0.3 -- ------- ------- -------- -------- Net income applicable to common stock $ 49.3 $ 54.8 $ 153.3 $ 166.1 ======= ======= ======== ======== Earnings per share - Basic and Diluted $ 0.72 $ 0.80 $ 2.23 $ 2.42 ======= ======= ======== ======== Shares (in thousands) used in the calculation of earnings per share - Basic 68,560 68,510 68,632 68,509 - Diluted 68,677 68,573 68,716 68,585 Cash dividends declared per common share $ 0.295 $ 0.31 $ 0.855 $ 0.90 ======= ======= ======== ======== See notes to the condensed consolidated financial statements. 3
BROWN-FORMAN CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET (Dollars in millions) April 30, January 31, 1999 2000 (Unaudited) -------- -------- Assets - ------ Cash and cash equivalents $ 171.2 $ 121.3 Short-term investments -- 62.5 Accounts receivable, net 273.8 252.5 Inventories: Barreled whiskey 190.6 191.1 Finished goods 189.1 190.3 Work in process 89.3 91.6 Raw materials and supplies 55.9 48.6 -------- -------- Total inventories 524.9 521.6 Other current assets 29.4 33.6 -------- -------- Total current assets 999.3 991.5 Property, plant and equipment, net 348.0 363.8 Intangible assets, net 264.2 260.4 Other assets 123.9 131.9 -------- -------- Total assets $1,735.4 $1,747.6 ======== ======== Liabilities - ----------- Commercial paper $ 226.6 $ 160.6 Accounts payable and accrued expenses 242.3 277.1 Dividends payable -- 21.2 Current portion of long-term debt 17.8 0.2 Deferred income taxes 30.4 30.4 -------- -------- Total current liabilities 517.1 489.5 Long-term debt 52.9 47.3 Deferred income taxes 137.2 96.6 Accrued postretirement benefits 56.7 59.1 Other liabilities and deferred income 54.0 54.8 -------- -------- Total liabilities 817.9 747.3 Stockholders' Equity - -------------------- Common stock 10.3 10.3 Retained earnings 945.0 1,028.5 Cumulative translation adjustment (8.0) (9.0) Treasury stock (490,000 and 485,578 Class B common shares at April 30 and January 31, respectively) (29.8) (29.5) -------- -------- Total stockholders' equity 917.5 1,000.3 -------- -------- Total liabilities and stockholders' equity $1,735.4 $1,747.6 ======== ======== Note: The balance sheet at April 30, 1999, 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) (In millions; amounts in parentheses are reductions of cash) Nine Months Ended January 31, 1999 2000 ------- ------- Cash flows from operating activities: Net income $ 153.8 $ 166.1 Adjustments to reconcile net income to net cash provided by (used for) operations: Depreciation 34.0 37.2 Amortization 7.0 7.6 Deferred income taxes (26.0) (33.9) Other 1.8 (5.5) Changes in assets and liabilities: Accounts receivable 33.3 21.3 Inventories (22.1) 0.5 Other current assets 0.9 (4.2) Accounts payable and accrued expenses (14.9) 34.8 Accrued taxes on income (1.1) 0.5 ------- ------- Cash provided by operating activities 166.7 224.4 Cash flows from investing activities: Additions to property, plant, and equipment (30.8) (48.9) Net purchases of short-term investments -- (62.5) Other (11.6) (11.0) ------- ------- Cash used for investing activities (42.4) (122.4) Cash flows from financing activities: Net change in commercial paper 12.5 (66.0) Reduction of long-term debt (7.4) (24.2) Acquisition of treasury stock (12.3) -- Redemption of preferred stock (12.1) -- Dividends paid (58.9) (61.7) ------- ------- Cash used for financing activities (78.2) (151.9) ------- ------- Net increase (decrease) in cash and cash equivalents 46.1 (49.9) Cash and cash equivalents, beginning of period 78.3 171.2 ------- ------- Cash and cash equivalents, end of period $ 124.4 $ 121.3 ======= ======= 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 statements using our customary accounting practices as set out in our 1999 annual report on Form 10-K (the "1999 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 1999 Annual Report, which does conform to GAAP. 2. Short-term Investments Short-term investments are those with maturities of less than one year, but greater than three months, when purchased. These investments are readily convertible to cash and are stated at cost, which approximates fair value. 3. 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 $110.1 million higher than reported as of April 30, 1999, and $114.8 million higher than reported as of January 31, 2000. 4. 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. 5. 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
6. Earnings Per Share Basic earnings per share is calculated using net income reduced by dividend requirements on any outstanding 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. 7. Business Segment Information (Dollars in millions) Three Months Ended Nine Months Ended January 31, January 31, 1999 2000 1999 2000 ------ ------ -------- -------- Net sales: Wine and spirits $365.2 $393.8 $1,092.0 $1,177.8 Consumer durables 151.5 164.3 438.8 460.6 ------ ------ -------- -------- Consolidated net sales $516.7 $558.1 $1,530.8 $1,638.4 ====== ====== ======== ======== Operating income: Wine and spirits $ 64.1 $ 74.0 $ 210.2 $ 225.7 Consumer durables 14.4 13.1 36.0 40.1 ------ ------ -------- -------- 78.5 87.1 246.2 265.8 Interest expense, net 0.8 0.8 4.0 4.2 ------ ------ -------- -------- Consolidated income before income taxes $ 77.7 $ 86.3 $ 242.2 $ 261.6 ====== ====== ======== ======== 8. Comprehensive Income Comprehensive income, which is defined as the change in equity from transactions and other events from nonowner sources, was as follows: (Dollars in millions) Three Months Ended Nine Months Ended January 31, January 31, 1999 2000 1999 2000 ------ ------ ------ ------ Net income $ 49.3 $ 54.8 $153.8 $166.1 Foreign currency translation adjustment (0.7) (1.1) 4.3 (1.0) ------ ------ ------ ------ Comprehensive income $ 48.6 $ 53.7 $158.1 $165.1 ====== ====== ====== ====== 9. Reclassifications Certain prior year amounts have been reclassified to conform with the current year presentation. 7
10. New Accounting Pronouncement In June 1998, the Financial Accounting Standards Board ("FASB") 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. In June 1999, the FASB issued Statement No. 137, "Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133," which makes Statement No. 133 effective for fiscal years beginning after June 15, 2000. We plan to adopt Statement No. 133 as of May 1, 2001. The adoption is not expected to have a material impact on our consolidated financial statements. 8
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 1999 Annual Report. Note that the results of operations for the nine months ended January 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 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. 9
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: Third Quarter Fiscal 2000 Compared to Third Quarter Fiscal 1999 Here is a summary of our operating performance (expressed in millions, except percentages and per share amounts): Three Months Ended January 31, 1999 2000 Change ------ ------ ------ Net Sales: Wine & Spirits $365.2 $393.8 8 % Consumer Durables 151.5 164.3 8 % ------ ------ Total $516.7 $558.1 8 % Gross Profit: Wine & Spirits $186.3 $203.9 9 % Consumer Durables 74.9 80.7 8 % ------ ------ Total $261.2 $284.6 9 % Operating Income: Wine & Spirits $ 64.1 $ 74.0 15 % Consumer Durables 14.4 13.1 (9 %) ------ ------ Total $ 78.5 $ 87.1 11 % Net Income $ 49.3 $ 54.8 11 % Earnings per Share - Basic and Diluted $ 0.72 $ 0.80 11 % Effective Tax Rate 36.5% 36.5% Sales and gross profit for our wine and spirits segment increased 8% and 9%, respectively, for the quarter. These increases were driven primarily by strong worldwide growth of Jack Daniel's, as well as U.S. growth for Fetzer and Bolla wines and Finlandia Vodka. Advertising and other operating expenses increased at a slower rate than sales and gross profit, resulting in a 15% gain in operating income for the quarter. Revenues and gross profit from our consumer durables segment increased 8% for the quarter. This growth was driven by improvement across essentially all channels of distribution, including department stores, direct mail and the company's retail operations. Operating income declined 9%, however, as the improvement in sales and gross profit was more than offset by increased advertising and other investments expected to accelerate earnings growth in future periods. 10
Results of Operations: Nine Months Fiscal 2000 Compared to Nine Months Fiscal 1999 Here is a summary of our operating performance (expressed in millions, except percentages and per share amounts): Nine Months Ended January 31, 1999 2000 Change -------- -------- ------ Net Sales: Wine & Spirits $1,092.0 $1,177.8 8 % Consumer Durables 438.8 460.6 5 % -------- -------- Total $1,530.8 $1,638.4 7 % Gross Profit: Wine & Spirits $ 557.8 $ 610.5 9 % Consumer Durables 219.5 228.7 4 % -------- -------- Total $ 777.3 $ 839.2 8 % Operating Income: Wine & Spirits $ 210.2 $ 225.7 7 % Consumer Durables 36.0 40.1 12 % -------- -------- Total $ 246.2 $ 265.8 8 % Net Income $ 153.8 $ 166.1 8 % Earnings per Share - Basic and Diluted $ 2.23 $ 2.42 9 % Effective Tax Rate 36.5% 36.5% Sales and gross profit for the wine and spirits segment increased 8% and 9%, respectively, led by solid growth of Jack Daniel's, Korbel Champagne, Fetzer and Finlandia. Results were also boosted by the impact of the April 1999 acquisition of Sonoma-Cutrer Vineyards. Operating income increased 7%, as gross profit gains were partially offset by brand-building and other investment activities. Revenues and gross profit from the consumer durables segment increased 5% and 4%, respectively, primarily reflecting increased consumer demand for fine china dinnerware and crystal in the wholesale channel, as well as strong sales of collectible products. Operating income grew 12% due to effective management of costs and the closing of certain unprofitable stores and facilities. Net interest expense increased slightly from last year, reflecting financing costs associated with the acquisition of Sonoma-Cutrer Vineyards. 11
As discussed in Note 10 to the accompanying condensed consolidated financial statements, we plan to adopt FASB Statement No. 133 as of May 1, 2001. The adoption is not expected to have a material impact on our consolidated financial statements. Liquidity and Financial Condition Cash and cash equivalents and short-term investments increased by $12.6 million during the nine months ended January 31, 2000. The increase was generated primarily by $210.9 million in net income before depreciation and amortization, offset partially by $90.2 million in debt payments, $61.7 million in dividends paid, and $48.9 million in expenditures to expand and modernize our production facilities. Dividends On January 27, 2000, the Board of Directors declared a regular quarterly cash dividend of $0.31 per share on both Class A and Class B common stock, payable April 1, 2000. Year 2000 Issue Because of remediation efforts made over the past two fiscal years, the Year 2000 issue has resulted in no disruptions to our business operations. While we will continue to monitor our systems for continued Year 2000 compliance and continue to verify the Year 2000 preparedness of our most important customers and suppliers, we do not anticipate any significant business disruptions related to this matter. The total cost of our Year 2000 remediation efforts was approximately $23 million. Of the total cost, approximately $14 million was attributable to new systems and thus capitalized. The other $9 million was expensed as incurred. All costs were funded through operating cash flows. No significant additional costs related to the Year 2000 issue are anticipated. Item 3. Quantitative and Qualitative Disclosures about Market Risk Since April 30, 1999, 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
PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: Exhibit Number Exhibit ------- ------- 4(a) Seventh Amendment to the Brown-Forman Corporation Savings Plan 4(b) Fourth Amendment to the Brown-Forman Corporation Savings Plan for Collectively- Bargained Employees 4(c) Fifth Amendment to the Brown-Forman Winery Operations Savings Plan 4(d) Second Amendment to the Hartmann Employee Savings and Investment Plan 4(e) Corrective Amendment to the Hartmann Employee Savings and Investment Plan 4(f) Third Amendment to the Lenox Savings Plan for Collectively-Bargained Employees 4(g) Fourth Amendment to the Lenox, Incorporated Employee Savings and Investment Plan 4(h) Sixth Amendment to the Lenox Retail Savings and Investment Plan 27 Financial Data Schedule (b) Reports on Form 8-K: None 13
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, 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