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, 2002 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, 2002 Class A Common Stock ($.15 par value, voting) 28,891,260 Class B Common Stock ($.15 par value, nonvoting) 39,420,947
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, 2001 and 2002 3 Nine months ended January 31, 2001 and 2002 3 Condensed Consolidated Balance Sheet April 30, 2001 and January 31, 2002 4 Condensed Consolidated Statement of Cash Flows Nine months ended January 31, 2001 and 2002 5 Notes to the Condensed Consolidated Financial Statements 6 - 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 - 14 Item 3. Quantitative and Qualitative Disclosures about Market Risk 15 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 15 Signatures 16 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, 2001 2002 2001 2002 ------- ------- -------- -------- Net sales $ 559.4 $ 570.5 $1,672.2 $1,684.3 Excise taxes 64.1 66.6 192.3 186.6 Cost of sales 205.0 221.9 594.6 638.1 ------- ------- -------- -------- Gross profit 290.3 282.0 885.3 859.6 Advertising expenses 74.5 76.9 229.0 232.4 Selling, general, and administrative expenses 125.0 116.8 368.9 353.6 ------- ------- -------- -------- Operating income 90.8 88.3 287.4 273.6 Interest income 2.0 0.7 6.8 2.7 Interest expense 4.3 1.5 12.9 6.7 ------- ------- -------- -------- Income before income taxes 88.5 87.5 281.3 269.6 Taxes on income 32.2 30.2 102.4 93.0 ------- ------- -------- -------- Net income $ 56.3 $ 57.3 $ 178.9 $ 176.6 ======= ======= ======== ======== Earnings per share - Basic and Diluted $ 0.82 $ 0.84 $ 2.61 $ 2.58 ======= ======= ======== ======== Shares (in thousands) used in the calculation of earnings per share - Basic 68,460 68,293 68,482 68,341 - Diluted 68,599 68,403 68,563 68,469 Cash dividends declared per common share $ 0.33 $ 0.35 $ 0.95 $ 1.01 ======= ======= ======== ======== See notes to the condensed consolidated financial statements. 3
BROWN-FORMAN CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET (Dollars in millions) April 30, January 31, 2001 2002 (Unaudited) -------- -------- Assets - ------ Cash and cash equivalents $ 86.1 $ 124.8 Accounts receivable, net 302.6 225.5 Inventories: Barreled whiskey 219.6 210.9 Finished goods 216.3 209.0 Work in process 99.1 116.7 Raw materials and supplies 48.5 55.7 -------- -------- Total inventories 583.5 592.3 Other current assets 27.9 23.6 -------- -------- Total current assets 1,000.1 966.2 Property, plant and equipment, net 417.8 429.6 Goodwill 247.4 247.4 Other assets 274.4 296.8 -------- -------- Total assets $1,939.7 $1,940.0 ======== ======== Liabilities - ----------- Commercial paper $ 204.4 $ 162.0 Accounts payable and accrued expenses 280.8 266.2 Accrued taxes on income 45.4 33.9 Dividends payable -- 23.9 Deferred income taxes 8.0 8.0 -------- -------- Total current liabilities 538.6 494.0 Long-term debt 40.2 40.2 Deferred income taxes 61.4 32.9 Accrued postretirement benefits 58.7 59.7 Other liabilities and deferred income 53.6 53.7 -------- -------- Total liabilities 752.5 680.5 Stockholders' Equity - -------------------- Common stock 10.3 10.3 Retained earnings 1,225.6 1,309.0 Accumulated other comprehensive loss (16.5) (17.4) Treasury stock (537,394 and 687,638 common shares at April 30 and January 31, respectively) (32.2) (42.4) -------- -------- Total stockholders' equity 1,187.2 1,259.5 -------- -------- Total liabilities and stockholders' equity $1,939.7 $1,940.0 ======== ======== Note: The balance sheet at April 30, 2001, 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, 2001 2002 ------- ------- Cash flows from operating activities: Net income $ 178.9 $ 176.6 Adjustments to reconcile net income to net cash provided by (used for) operations: Depreciation 40.5 40.4 Amortization 8.9 -- Deferred income taxes (35.0) (28.5) Other (14.7) (15.3) Changes in assets and liabilities: Accounts receivable 50.0 77.1 Inventories (66.4) (8.8) Other current assets 13.4 3.5 Accounts payable and accrued expenses 10.8 (14.6) Accrued taxes on income 39.8 (11.5) ------- ------- Cash provided by operating activities 226.2 218.9 Cash flows from investing activities: Additions to property, plant, and equipment (74.1) (50.7) Investment in affiliates (113.1) -- Other (1.7) (5.4) ------- ------- Cash used for investing activities (188.9) (56.1) Cash flows from financing activities: Net change in commercial paper (64.9) (42.4) Reduction of long-term debt (6.0) -- Acquisition of treasury stock (3.1) (12.7) Dividends paid (65.0) (69.0) ------- ------- Cash used for financing activities (139.0) (124.1) ------- ------- Net increase (decrease) in cash and cash equivalents (101.7) 38.7 Cash and cash equivalents, beginning of period 180.2 86.1 ------- ------- Cash and cash equivalents, end of period $ 78.5 $ 124.8 ======= ======= 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 2001 annual report on Form 10-K (the "2001 Annual Report"). We made all of the adjustments (which includes only normal, recurring adjustments) needed to present this data fairly. We condensed or omitted 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 2001 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 $105.2 million higher than reported as of April 30, 2001, and $118.0 million higher than reported as of January 31, 2002. 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, 2001 2002 2001 2002 ------ ------ -------- -------- Net sales: Wine and spirits $394.0 $400.5 $1,188.5 $1,218.5 Consumer durables 165.4 170.0 483.7 465.8 ------ ------ -------- -------- Consolidated net sales $559.4 $570.5 $1,672.2 $1,684.3 ====== ====== ======== ======== Operating income: Wine and spirits $ 77.5 $ 79.4 $ 241.7 $ 250.8 Consumer durables 13.3 8.9 45.7 22.8 ------ ------ -------- -------- 90.8 88.3 287.4 273.6 Interest expense, net 2.3 0.8 6.1 4.0 ------ ------ -------- -------- Consolidated income before income taxes $ 88.5 $ 87.5 $ 281.3 $ 269.6 ====== ====== ======== ======== April 30, January 31, 2001 2002 Goodwill: ------ ------ Wine and spirits $116.2 $116.2 Consumer durables 131.2 131.2 ------ ------ Consolidated goodwill $247.4 $247.4 ====== ====== 7. Derivative Instruments and Hedging Activities Effective May 1, 2001, we adopted Financial Accounting Standards Board (FASB) Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities." That Statement requires that all derivative instruments be reported on the balance sheet at fair value. The cumulative effect of adopting Statement No. 133 as of May 1, 2001, was not material to the company's consolidated financial statements. We use foreign currency forward contracts and options, generally with average maturities of less than one year, as protection against the risk that the eventual U.S. dollar cash flows resulting from the forecasted sale and purchase of goods in foreign currencies will be adversely affected by changes in exchange rates. These derivative financial instruments are designated as cash flow hedges. 7
We formally assess, both at the inception and at least quarterly thereafter, whether the derivative financial instruments are effective at offsetting changes in the cash flows of the hedged transactions. The effective portion of a derivative's change in fair value is deferred in "Accumulated Other Comprehensive Loss (Income)" until the underlying hedged transaction is recognized in earnings. Any ineffective portion of the change in fair value is immediately recognized in earnings. The net gain recognized in earnings during the nine months ended January 31, 2002 due to the ineffectiveness or discontinuation of cash flow hedges was not material. Because all of our outstanding cash flow hedging instruments hedge sales or purchases that are forecasted to occur within the next twelve months, we expect to reclassify all of the existing $0.8 million net gain from accumulated other comprehensive loss to earnings during the next twelve months. 8. Comprehensive Income Comprehensive income, which includes all changes in equity except those resulting from investments by shareholders and distributions to shareholders, was as follows (in millions): Three Months Ended Nine Months Ended January 31, January 31, 2001 2002 2001 2002 ------ ------ ------ ------ Net income $ 56.3 $ 57.3 $178.9 $176.6 Other comprehensive income: Change in unrealized gain on cash flow hedges: Cumulative effect of accounting change, net of tax expense of $1.3 in the nine months ended January 31, 2001 -- -- -- 2.0 Change in fair value of cash flow hedges, net of tax benefit of $0.6 and $0.4 in the three and nine months ended January 31, 2002, respectively -- 0.9 -- 0.6 Reclassification to earnings, net of tax benefit of $0.3 and $1.2 in the three and nine months ended January 31, 2002, respectively -- (0.5) -- (1.8) ------ ------ ------ ------ -- 0.4 -- 0.8 Foreign currency translation adjustment 3.2 (2.7) (1.0) (1.7) ------ ------ ------ ------ Other comprehensive income (loss) 3.2 (2.3) (1.0) (0.9) ------ ------ ------ ------ Comprehensive income $ 59.5 $ 55.0 $177.9 $175.7 ====== ====== ====== ====== Accumulated other comprehensive loss (income) consisted of the following (in millions): April 30, January 31, 2001 2002 ------ ------ Cumulative translation adjustment $ 16.5 $ 18.2 Unrealized gain on cash flow hedge contracts -- (0.8) ------ ------ $ 16.5 $ 17.4 ====== ====== 8
9. Goodwill and Other Intangible Assets On July 20, 2001, the FASB issued Statement No. 141, "Business Combinations," and Statement No. 142, "Goodwill and Other Intangible Assets." Statement No. 141 requires that the purchase method of accounting be used for all business combinations initiated or completed after June 30, 2001. Statement No. 141 also specifies the criteria under which intangible assets acquired in a purchase method business combination should be recognized and reported apart from goodwill. Statement No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be assessed for impairment at least annually by applying a fair value-based test. Statement No. 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Statement No. 141 became effective upon its issuance. We elected to adopt Statement No. 142 as of May 1, 2001. No impairment of intangible assets was indicated as of that date. The following table adjusts reported net income and earnings per share for the nine months ended January 31, 2001 (prior to the adoption date) to exclude amortization of goodwill and other intangible assets with indefinite useful lives: Net Income Basic and Diluted (in millions) Earnings Per Share ----------- ------------------ As reported $178.9 $ 2.61 Amortization of goodwill 8.4 0.12 Amortization of other intangibles 0.5 0.01 ----------- ------------------ Adjusted $187.8 $ 2.74 =========== ================== The intangible assets with indefinite useful lives, other than goodwill, consist of trademarks of $7.5 million and $8.4 million as of April 30, 2001, and January 31, 2002, respectively. These trademarks are included in "Other Assets" in the accompanying condensed consolidated balance sheet. We have no significant intangible assets with definite useful lives and thus no significant amortization expense for the nine months ended January 31, 2002. 10. Reclassifications Certain prior year amounts have been reclassified to conform with the current year presentation. 11. Other Effective May 1, 2001, we adopted FASB Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." That Statement resolves certain implementation issues related to FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The adoption of Statement No. 144 did not have a material impact on our consolidated financial statements. 9
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 2001 Annual Report. Note that the results of operations for the nine months ended January 31, 2002 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. Important Information Regarding 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, within the meaning of the Private Securities Litigation Reform Act of 1995. The words "believe", "expect", "anticipate", "project", and similar expressions, among others, identify forward-looking statements, which speak only as of the date the statement was made. We have no current intention of updating or revising any forward-looking statements, whether as a result of new information, future events or otherwise, except as otherwise required by law. In the discussion and analysis that follows, we make several such forward- looking statements, but we do not guarantee that the results indicated will actually be achieved. These statements are subject to a number of important risks and uncertainties, which could cause our actual results and experience to differ materially from the anticipated results or other expectations expressed in those forward-looking statements. We set forth below a non-exclusive list of such risks and uncertainties. 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. However, the bulk of our business remains in the U.S. and our business prospects generally are dependent heavily on the state of the U.S. economy, which appears to be in recession. Earnings could be adversely impacted by terrorist attacks, such as those of September 11, 2001 and related subsequent events, including the U.S response, other hostile acts, retaliation, and threats of any of these. Earnings could also be hurt if the United States went to war with Iraq or another country deemed to be harboring terrorists. Beverage Risk Factors: The beverage alcohol business is not "recession proof." Current projections for our domestic beverage business assume that the U.S. economy will rebound in late 2002 and through the next calendar year. Such a rebound should also increase business travel and entertainment, which helps our business. If this rebound does not occur, our earnings will be weaker. Beverage wholesalers and retailers in the U.S. appear to be lowering their beverage trade inventories, which adversely affects shipments. Profits from our international beverage business may be adversely affected 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 long-term outlook for our beverage business anticipates continued success of Jack Daniel's Tennessee Whiskey, Southern Comfort, and our other core spirit and wine 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 hurt by increases in the price of grain, grapes or energy. 10
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. Increases in state excise taxes on spirits and wine to meet budget shortfalls could dampen sales in those states. 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 lawsuits are filed against alcohol manufacturers. Consumer Durables Risk Factors: Earnings from our consumer durables segment are difficult to project because of the uncertain U.S. economy. Growth of fine china dinnerware and crystal glassware hinges on the health of major department stores, the primary channel of distribution for these products. Projections will also be affected by further department store consolidation, a soft retail environment at outlet malls and consumer response to direct mail. The Hartmann luggage business is in a state of transition following a disappointing earnings year, and faces substantially reduced demand due to a decline in business and leisure travel. Consumer durables are discretionary purchases and, as such, demand for these products likely will be dependent on the degree to which the general health of the economy and consumer confidence improve. Results of Operations: Third Quarter Fiscal 2002 Compared to Third Quarter Fiscal 2001 Here is a summary of our operating performance (expressed in millions, except percentage and per share amounts): Three Months Ended January 31, 2001 2002 Change ------ ------ ------ Net Sales: Wine & Spirits $394.0 $400.5 2 % Consumer Durables 165.4 170.0 3 % ------ ------ Total $559.4 $570.5 2 % Gross Profit: Wine & Spirits $209.0 $200.3 (4 %) Consumer Durables 81.3 81.7 1 % ------ ------ Total $290.3 $282.0 (3 %) Operating Income: Wine & Spirits $ 77.5 $ 79.4 2 % Consumer Durables 13.3 8.9 (33 %) ------ ------ Total $ 90.8 $ 88.3 (3 %) Net Income $ 56.3 $ 57.3 2 % Earnings per Share - Basic and Diluted $ 0.82 $ 0.84 2 % Effective Tax Rate 36.4% 34.5% 11
Beverage revenues increased 2% during the quarter. Gross margins were under pressure due to an increasingly competitive pricing environment for wine products, unfavorable exchange rates, and costs related to the company's supply chain initiatives. Wine and spirits operating income increased 2%, reflecting lower operating expenses and the benefit of FASB Statement No. 142 (FAS 142). On a constant exchange basis and excluding the benefit from FAS 142, third quarter operating income for the segment increased 5%. Although depletion growth for Jack Daniel's in the U.S. has slowed this fiscal year, international volume trends remain strong. In particular, depletions have increased at double-digit rates in such important markets as the United Kingdom, Spain, Italy and Korea. Modest U.S. depletion growth for Southern Comfort, combined with sustained price increases, have resulted in record worldwide gross profits for the brand. Volume trends for the company's major wine brands accelerated this quarter and are up solidly year-to-date. However, pricing competition is intense and we expect the gross margin on our wine brands to decrease this year. Third quarter sales and gross profit for the consumer durables segment improved 3% and 1%, respectively, rebounding from a sharp decline experienced in the second quarter. Sales were up strongly in the direct-to-consumer channel and through company-owned retail outlets, while orders from department stores remained weak. Excluding the costs to close a crystal manufacturing plant and the benefit from FAS 142, operating income was up 1% in the quarter. The company is taking steps to reduce future costs through its business improvement initiatives. Although the cost of implementing these programs will lower current year earnings, we believe that the segment will be in a significantly better position for growth in fiscal years 2003 and beyond. As discussed in Note 9 to the accompanying condensed consolidated financial statements, we adopted FAS 142 as of May 1, 2001. As a result, goodwill and other intangible assets that have indefinite useful lives are no longer subject to amortization. Rather, such assets must be assessed for impairment by applying a fair value-based test on at least an annual basis. As of May 1, 2001, no impairment of intangible assets was indicated. The discontinuation of amortization improved operating earnings for the quarter by $3.1 million, or $0.04 per share. On a constant exchange basis, excluding FAS 142 benefits as well as the plant closing costs and other non-recurring business improvement initiatives, the company's earnings per share increased 8% over the same period last year. 12
Results of Operations: Nine Months Fiscal 2002 Compared to Nine Months Fiscal 2001 Here is a summary of our operating performance (expressed in millions, except percentage and per share amounts): Nine Months Ended January 31, 2001 2002 Change -------- -------- ------ Net Sales: Wine & Spirits $1,188.5 $1,218.5 3 % Consumer Durables 483.7 465.8 (4 %) -------- -------- Total $1,672.2 $1,684.3 1 % Gross Profit: Wine & Spirits $ 641.2 $ 636.3 (1 %) Consumer Durables 244.1 223.3 (8 %) -------- -------- Total $ 885.3 $ 859.6 (3 %) Operating Income: Wine & Spirits $ 241.7 $ 250.8 4 % Consumer Durables 45.7 22.8 (50 %) -------- -------- Total $ 287.4 $ 273.6 (5 %) Net Income $ 178.9 $ 176.6 (1 %) Earnings per Share - Basic and Diluted $ 2.61 $ 2.58 (1 %) Effective Tax Rate 36.4% 34.5% Beverage revenues grew 3% during the period, while gross profit declined 1% as a result of a more competitive pricing environment for wines, unfavorable exchange rates, and costs related to the company's supply chain initiatives. Operating income for the segment improved 4%, reflecting reduced operating expenses and the benefit from the adoption of FAS 142 discussed above. Had FAS 142 been effective last year, beverage operating income for the first nine months of fiscal 2001 would have exceeded the amount reported for that period by $4.7 million. Revenues and gross profit for Consumer Durables were down 4% and 8%, respectively, resulting in a 50% drop in operating income. Consequences of September 11 and the effects of a slowing U.S. economy have had a significant impact on sales to department stores and through company owned retail outlets. While the segment benefited from the adoption of FAS 142, lower production levels and higher discounting activity tempered margins during the period. Had FAS 142 been effective last year, segment operating income for the first nine months of fiscal 2001 would have exceeded the amount reported for that period by $4.2 million. Net interest expense declined from last year as a result of lower interest rates. The reduction in the company's consolidated effective tax rate was largely due to the discontinuation of goodwill amortization, which is not tax deductible. 13
The discontinuation of amortization as a result of the company's adoption of FAS 142 improved consolidated earnings for the first nine months of fiscal 2002 by $8.9 million, or $0.13 per share, and will benefit earnings comparisons for the full year by $12.4 million, or $0.18 per share. As announced in July, we are undertaking a series of business improvement initiatives to streamline procurement and production practices, reduce inventories, and improve connections with our customers. The total cost of this program is expected to reduce net income by $20 million over fiscal years 2002 and 2003. First quarter results included $3 million of after-tax costs related to this program. Third quarter results included $4 million of after-tax costs, principally related to a recently announced decision to close our crystal manufacturing facility. Remaining initiatives being contemplated could lower net income by an additional $13 million between now and the end of fiscal year 2003. These initiatives are expected to produce a number of benefits in the future that will strengthen the company's long-term cash flow and earnings. On a constant exchange basis, excluding FAS 142 benefits as well as the plant closing costs and other non-recurring business improvement initiatives, the company's year-to-date earnings per share improved 2%. Liquidity and Financial Condition Cash and cash equivalents increased by $38.7 million during the nine months ended January 31, 2002, as cash provided by operating activities exceeded cash used for investing and financing activities. Cash provided by operations totaled $218.9 million, primarily reflecting net income before depreciation, and a normal seasonal decrease in accounts receivable, offset partially by a continuing liquidation of deferred income taxes in compliance with revised U.S. tax regulations. Cash of $56.1 million was used for investing activities, consisting mostly of expenditures to expand and modernize our production facilities. In financing activities, $124.1 million was used primarily to pay dividends and reduce the amount of outstanding commercial paper. Dividends The Board of Directors increased the quarterly cash dividend 6.1% from $0.33 to $0.35 per share on both Class A and Class B common stock, payable January 1, 2002. As a result, the indicated annual cash dividend per share rose from $1.32 to $1.40. 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk Since April 30, 2001, 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. PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: None (b) Reports on Form 8-K: None 15
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, 2002 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) 16