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, 2001 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: February 28, 2001 Class A Common Stock ($.15 par value, voting) 28,988,091 Class B Common Stock ($.15 par value, nonvoting) 39,469,891
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, 2000 and 2001 3 Nine months ended January 31, 2000 and 2001 3 Condensed Consolidated Balance Sheet April 30, 2000 and January 31, 2001 4 Condensed Consolidated Statement of Cash Flows Nine months ended January 31, 2000 and 2001 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, 2000 2001 2000 2001 ------- ------- -------- -------- Net sales $ 557.3 $ 559.4 $1,635.9 $1,672.2 Excise taxes 62.9 64.1 191.6 192.3 Cost of sales 210.6 205.0 607.7 594.6 ------- ------- -------- -------- Gross profit 283.8 290.3 836.6 885.3 Advertising expenses 75.4 74.5 217.7 229.0 Selling, general, and administrative expenses 121.3 125.0 353.1 368.9 ------- ------- -------- -------- Operating income 87.1 90.8 265.8 287.4 Interest income 2.6 2.0 7.3 6.8 Interest expense 3.4 4.3 11.5 12.9 ------- ------- -------- -------- Income before income taxes 86.3 88.5 261.6 281.3 Taxes on income 31.5 32.2 95.5 102.4 ------- ------- -------- -------- Net income $ 54.8 $ 56.3 $ 166.1 $ 178.9 ======= ======= ======== ======== Earnings per share - Basic and Diluted $ 0.80 $ 0.82 $ 2.42 $ 2.61 ======= ======= ======== ======== Shares (in thousands) used in the calculation of earnings per share - Basic 68,510 68,460 68,509 68,482 - Diluted 68,573 68,599 68,585 68,563 Cash dividends declared per common share $ 0.31 $ 0.33 $ 0.90 $ 0.95 ======= ======= ======== ======== See notes to the condensed consolidated financial statements. 3
BROWN-FORMAN CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET (Dollars in millions) April 30, January 31, 2000 2001 (Unaudited) -------- -------- Assets - ------ Cash and cash equivalents $ 180.2 $ 78.5 Accounts receivable, net 293.7 243.7 Inventories: Barreled whiskey 202.1 212.6 Finished goods 183.7 212.2 Work in process 80.3 107.7 Raw materials and supplies 48.1 48.1 -------- -------- Total inventories 514.2 580.6 Other current assets 32.2 18.0 -------- -------- Total current assets 1,020.3 920.8 Property, plant and equipment, net 375.7 413.1 Intangible assets, net 269.6 264.9 Other assets 136.2 256.6 -------- -------- Total assets $1,801.8 $1,855.4 ======== ======== Liabilities - ----------- Commercial paper $ 220.4 $ 155.5 Accounts payable and accrued expenses 280.1 290.9 Dividends payable -- 22.6 Current portion of long-term debt 6.0 -- Accrued taxes on income 1.4 41.2 Deferred income taxes 14.6 14.6 -------- -------- Total current liabilities 522.5 524.8 Long-term debt 40.2 40.2 Deferred income taxes 95.3 60.3 Accrued postretirement benefits 58.3 60.1 Other liabilities and deferred income 37.5 34.3 -------- -------- Total liabilities 753.8 719.7 Stockholders' Equity - -------------------- Common stock 10.3 10.3 Retained earnings 1,080.4 1,171.5 Cumulative translation adjustment (13.3) (14.3) Treasury stock (483,846 and 533,672 Class B common shares at April 30 and January 31, respectively) (29.4) (31.8) -------- -------- Total stockholders' equity 1,048.0 1,135.7 -------- -------- Total liabilities and stockholders' equity $1,801.8 $1,855.4 ======== ======== 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) Nine Months Ended January 31, 2000 2001 ------- ------- Cash flows from operating activities: Net income $ 166.1 $ 178.9 Adjustments to reconcile net income to net cash provided by (used for) operations: Depreciation 37.2 40.5 Amortization 7.6 8.0 Deferred income taxes (33.9) (35.0) Other (5.5) (13.8) Changes in assets and liabilities: Accounts receivable 21.3 50.0 Inventories 0.5 (66.4) Other current assets (4.2) 13.4 Accounts payable and accrued expenses 34.8 10.8 Accrued taxes on income 0.5 39.8 ------- ------- Cash provided by operating activities 224.4 226.2 Cash flows from investing activities: Additions to property, plant, and equipment (48.9) (74.1) Investment in affiliates (6.0) (113.1) Net purchases of short-term investments (62.5) -- Other (5.0) (1.7) ------- ------- Cash used for investing activities (122.4) (188.9) Cash flows from financing activities: Net change in commercial paper (66.0) (64.9) Reduction of long-term debt (24.2) (6.0) Acquisition of treasury stock -- (3.1) Dividends paid (61.7) (65.0) ------- ------- Cash used for financing activities (151.9) (139.0) ------- ------- Net decrease in cash and cash equivalents (49.9) (101.7) Cash and cash equivalents, beginning of period 171.2 180.2 ------- ------- Cash and cash equivalents, end of period $ 121.3 $ 78.5 ======= ======= 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 $104.3 million higher than reported as of January 31, 2001. 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 (in millions) Three Months Ended Nine Months Ended January 31, January 31, 2000 2001 2000 2001 ------ ------ -------- -------- Net sales: Wine and spirits $393.0 $394.0 $1,175.3 $1,188.5 Consumer durables 164.3 165.4 460.6 483.7 ------ ------ -------- -------- Consolidated net sales $557.3 $559.4 $1,635.9 $1,672.2 ====== ====== ======== ======== Operating income: Wine and spirits $ 74.0 $ 77.5 $ 225.7 $ 241.7 Consumer durables 13.1 13.3 40.1 45.7 ------ ------ -------- -------- 87.1 90.8 265.8 287.4 Interest expense, net 0.8 2.3 4.2 6.1 ------ ------ -------- -------- Consolidated income before income taxes $ 86.3 $ 88.5 $ 261.6 $ 281.3 ====== ====== ======== ======== 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 Nine Months Ended January 31, January 31, 2000 2001 2000 2001 ------ ------ ------ ------ Net income $ 54.8 $ 56.3 $166.1 $178.9 Foreign currency translation adjustment (1.1) 3.2 (1.0) (1.0) ------ ------ ------ ------ Comprehensive income $ 53.7 $ 59.5 $165.1 $177.9 ====== ====== ====== ====== 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. While we have not yet quantified all effects of adopting the Statements, at this time we do not expect the adoption 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 $15 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. On December 12, 2000, we acquired 45% of Distillerie Tuoni & Canepa, which owns the trademark to Tuaca liqueur, at a purchase price of approximately $10 million. 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 nine months ended January 31, 2001, 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: 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. This assumption is based in part on favorable demographic trends in the U.S. and many international markets for the sale of spirits and wine. Current expectations for our global beverage business may not be met if these demographic trends do not translate into corresponding sales increases. Profits could also be affected by increases in the price of grain, grapes or energy. Beverage wholesalers and retailers in the U.S. appear to be lowering their beverage trade inventories, which adversely affects shipments. In common with most other consumer businesses, our domestic beverage business will be hurt if the U.S. economy softens further or goes into a recession. Profits from our international beverage business may be adversely affected if the U.S. dollar continues to strengthen 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. 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. 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. 9
Consumer Durables Risk Factors: Earnings projections for our consumer durables segment anticipate a continued strengthening of our Lenox business and the revitalization of our Hartmann business. 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. Consumer durables are usually discretionary purchases and the business would be impacted if the U.S. economy softens further or goes into a recession. Results of Operations: Third Quarter Fiscal 2001 Compared to Third Quarter Fiscal 2000 Here is a summary of our operating performance (expressed in millions, except percentage and per share amounts): Three Months Ended January 31, 2000 2001 Change ------ ------ ------ Net Sales: Wine & Spirits $393.0 $394.0 -- % Consumer Durables 164.3 165.4 1 % ------ ------ Total $557.3 $559.4 -- % Gross Profit: Wine & Spirits $203.1 $209.0 3 % Consumer Durables 80.7 81.3 1 % ------ ------ Total $283.8 $290.3 2 % Operating Income: Wine & Spirits $ 74.0 $ 77.5 5 % Consumer Durables 13.1 13.3 2 % ------ ------ Total $ 87.1 $ 90.8 4 % Net Income $ 54.8 $ 56.3 3 % Earnings per Share - Basic and Diluted $ 0.80 $ 0.82 3 % Effective Tax Rate 36.5% 36.4% Gross profit for our wine and spirits segment improved 3% for the quarter, while sales were even against last year's comparable period, which benefited from millennial celebration activity. Operating expenses increased at a slower rate than gross profit, resulting in a 5% gain in operating income for the quarter. Comparative results were diminished by a challenging December trading environment, unfavorable exchange rates, and costs associated with our participation in the Seagram auction. 10
Revenues and gross profit from our consumer durables segment increased 1% for the quarter, with operating income improving 2%. Collectible products experienced vibrant sales and gross profit growth, while results for other consumer durable product lines generally trailed last year's performance. Results of Operations: Nine Months Fiscal 2001 Compared to Nine Months Fiscal 2000 Here is a summary of our operating performance (expressed in millions, except percentage and per share amounts): Nine Months Ended January 31, 2000 2001 Change -------- -------- ------ Net Sales: Wine & Spirits $1,175.3 $1,188.5 1 % Consumer Durables 460.6 483.7 5 % -------- -------- Total $1,635.9 $1,672.2 2 % Gross Profit: Wine & Spirits $ 607.9 $ 641.2 5 % Consumer Durables 228.7 244.1 7 % -------- -------- Total $ 836.6 $ 885.3 6 % Operating Income: Wine & Spirits $ 225.7 $ 241.7 7 % Consumer Durables 40.1 45.7 14 % -------- -------- Total $ 265.8 $ 287.4 8 % Net Income $ 166.1 $ 178.9 8 % Earnings per Share - Basic and Diluted $ 2.42 $ 2.61 8 % Effective Tax Rate 36.5% 36.4% Sales for our wine and spirits segment increased 1% compared to the same period last year, which benefited from millennial celebration activity and more favorable exchange rates. Sales of used barrels to Scotch whisky distillers are also down substantially this year, reflecting a recent industry decline in the production of Scotch. Beverage gross profit and operating income increased 5% and 7%, respectively, primarily reflecting price increases in selected markets and an improving product mix. Operating income for the consumer durables segment improved 14% on gains in revenues and gross profit of 5% and 7%, respectively, reflecting an increase in consumer demand for collectibles and higher earnings across most wholesale product lines. 11
Net interest expense increased from last year due to higher interest rates as well as higher net debt balances resulting from capital expenditures and the acquisition of equity stakes in Finlandia Vodka Worldwide, Glenmorangie and Distillerie Tuoni & Canepa. The very modest reduction in the company's consolidated effective tax rate reflects lower effective state tax rates. Brown-Forman's prospects for long-term growth remain positive, based upon favorable demographic trends and benefits from sustained brand investments. Signs of a slowing U.S. economy, Hartmann's recent weak performance and a continued movement toward lower beverage trade inventories suggest that the company's earnings growth rate will moderate for the balance of the fiscal year. We have also tempered our outlook for fiscal 2002 earnings growth to a rate in the high single-digit range. 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. While we have not yet quantified all the effects of adopting the Statements, at this time we do not expect the adoption to have a material impact on our consolidated financial statements. Liquidity and Financial Condition Cash and cash equivalents decreased by $101.7 million during the nine months ended January 31, 2001, as cash provided by operations was more than offset by cash used for investing and financing activities. Cash provided by operations totaled $226.2 million. Cash of $188.9 million was used for investing activities, including the acquisition of equity stakes in Finlandia Vodka Worldwide, Glenmorangie and Distillerie Tuoni & Canepa, as well as capital expenditures to expand and modernize our production facilities. In financing activities, $139.0 million was used primarily to pay dividends and reduce the amount of outstanding commercial paper. Dividends On January 25, 2001, the Board of Directors declared a regular quarterly cash dividend of $0.33 per share on both Class A and Class B common stock, payable April 1, 2001. 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: None (b) Reports on Form 8-K: 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. On February 16, 2001, the Registrant filed a report on Form 8-K announcing earnings for the quarter ended January 31, 2001. On February 21, 2001, the Registrant filed a report on Form 8-K announcing (1) the purchase by the company of 13,358 shares of its Class B common stock in a private transaction and (2) a presentation to be made by William M. Street, President of Brown-Forman Corporation, at the CAGNY Conference on February 23, 2001. 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 5, 2001 By: /s/ Phoebe A. Wood Phoebe A. Wood Executive Vice President and Chief Financial Officer (On behalf of the Registrant and as Principal Financial Officer) 14