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
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
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
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
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
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
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
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
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
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
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
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
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
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