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, 1999 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: December 1, 1999 Class A Common Stock ($.15 par value, voting) 28,988,091 Class B Common Stock ($.15 par value, nonvoting) 39,522,081
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, 1998 and 1999 3 Six months ended October 31, 1998 and 1999 3 Condensed Consolidated Balance Sheet April 30, 1999 and October 31, 1999 4 Condensed Consolidated Statement of Cash Flows Six months ended October 31, 1998 and 1999 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 - 13 Item 3. Quantitative and Qualitative Disclosures about Market Risk 13 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 14 Signatures 15 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, 1998 1999 1998 1999 ------- ------- -------- -------- Net sales $ 572.5 $ 643.0 $1,014.1 $1,080.3 Excise taxes 72.7 75.8 128.4 128.6 Cost of sales 211.6 244.7 369.5 397.2 ------- ------- -------- -------- Gross profit 288.2 322.5 516.2 554.5 Advertising expenses 69.5 81.7 133.6 143.1 Selling, general, and administrative expenses 111.1 124.3 214.9 232.7 ------- ------- -------- -------- Operating income 107.6 116.5 167.7 178.7 Interest income 1.5 2.5 2.5 4.7 Interest expense 3.2 4.2 5.7 8.1 ------- ------- -------- -------- Income before income taxes 105.9 114.8 164.5 175.3 Taxes on income 38.6 41.9 60.0 64.0 ------- ------- -------- -------- Net income 67.3 72.9 104.5 111.3 Less: Preferred stock dividend requirements 0.1 -- 0.2 -- Preferred stock redemption premium 0.3 -- 0.3 -- ------- ------- -------- -------- Net income applicable to common stock $ 66.9 $ 72.9 $ 104.0 $ 111.3 ======= ======= ======== ======== Earnings per share - Basic and Diluted $ 0.97 $ 1.06 $ 1.51 $ 1.62 ======= ======= ======== ======== Shares (in thousands) used in the calculation of earnings per share - Basic 68,664 68,510 68,674 68,509 - Diluted 68,735 68,583 68,741 68,591 Cash dividends declared per common share $ 0.28 $ 0.295 $ 0.56 $ 0.59 ======= ======= ======== ======== See notes to the condensed consolidated financial statements. 3
BROWN-FORMAN CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET (Dollars in millions) April 30, October 31, 1999 1999 (Unaudited) -------- -------- Assets - ------ Cash and cash equivalents $ 171.2 $ 114.8 Short-term investments -- 72.4 Accounts receivable, net 273.8 405.6 Inventories: Barreled whiskey 190.6 190.3 Finished goods 189.1 209.0 Work in process 89.3 96.8 Raw materials and supplies 55.9 53.9 -------- -------- Total inventories 524.9 550.0 Other current assets 29.4 31.9 -------- -------- Total current assets 999.3 1,174.7 Property, plant and equipment, net 348.0 357.5 Intangible assets, net 264.2 262.5 Other assets 123.9 131.4 -------- -------- Total assets $1,735.4 $1,926.1 ======== ======== Liabilities - ----------- Commercial paper $ 226.6 $ 290.6 Accounts payable and accrued expenses 242.3 342.1 Current portion of long-term debt 17.8 0.2 Accrued taxes on income -- 5.0 Deferred income taxes 30.4 30.4 -------- -------- Total current liabilities 517.1 668.3 Long-term debt 52.9 46.6 Deferred income taxes 137.2 110.2 Accrued postretirement benefits 56.7 58.1 Other liabilities and deferred income 54.0 53.9 -------- -------- Total liabilities 817.9 937.1 Stockholders' Equity - -------------------- Common stock 10.3 10.3 Retained earnings 945.0 1,016.2 Cumulative translation adjustment (8.0) (7.9) Treasury stock (490,000 and 486,066 Class B common shares at April 30 and October 31, respectively) (29.8) (29.6) -------- -------- Total stockholders' equity 917.5 989.0 -------- -------- Total liabilities and stockholders' equity $1,735.4 $1,926.1 ======== ======== 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) Six Months Ended October 31, 1998 1999 ------- ------- Cash flows from operating activities: Net income $ 104.5 $ 111.3 Adjustments to reconcile net income to net cash provided by (used for) operations: Depreciation 23.2 25.2 Amortization 4.7 5.1 Deferred income taxes (15.5) (20.3) Other (5.0) (5.6) Changes in assets and liabilities: Accounts receivable (86.4) (131.8) Inventories (35.5) (27.9) Other current assets (1.2) (2.5) Accounts payable and accrued expenses 49.1 96.8 Accrued taxes on income 1.1 5.5 ------- ------- Cash provided by operating activities 39.0 55.8 Cash flows from investing activities: Additions to property, plant, and equipment (22.2) (30.4) Net purchases of short-term investments -- (72.4) Other (7.2) (9.1) ------- ------- Cash used for investing activities (29.4) (111.9) Cash flows from financing activities: Net change in commercial paper 96.0 64.0 Reduction of long-term debt (7.4) (23.9) Acquisition of treasury stock (3.0) -- Redemption of preferred stock (12.1) -- Dividends paid (38.7) (40.4) ------- ------- Cash provided by (used for) financing activities 34.8 (0.3) ------- ------- Net increase (decrease) in cash and cash equivalents 44.4 (56.4) Cash and cash equivalents, beginning of period 78.3 171.2 ------- ------- Cash and cash equivalents, end of period $ 122.7 $ 114.8 ======= ======= 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 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 $113.4 million higher than reported as of October 31, 1999. 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 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 Three Months Ended Six Months Ended October 31, October 31, 1998 1999 1998 1999 ------ ------ -------- -------- Net sales: Wine and spirits $395.9 $458.9 $ 726.8 $ 784.0 Consumer durables 176.6 184.1 287.3 296.3 ------ ------ -------- -------- Consolidated net sales $572.5 $643.0 $1,014.1 $1,080.3 ====== ====== ======== ======== Operating income: Wine and spirits $ 82.9 $ 87.6 $ 146.1 $ 151.7 Consumer durables 24.7 28.9 21.6 27.0 ------ ------ -------- -------- 107.6 116.5 167.7 178.7 Interest expense, net 1.7 1.7 3.2 3.4 ------ ------ -------- -------- Consolidated income before income taxes $105.9 $114.8 $ 164.5 $ 175.3 ====== ====== ======== ======== 8. 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, 1998 1999 1998 1999 ------ ------ ------ ------ Net income $ 67.3 $ 72.9 $104.5 $111.3 Foreign currency translation adjustment 1.8 0.6 5.0 0.1 ------ ------ ------ ------ Comprehensive income $ 69.1 $ 73.5 $109.5 $111.4 ====== ====== ====== ====== 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 six months ended October 31, 1999, 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. Our operations could also be adversely impacted by incomplete or untimely resolution of the "Year 2000" issue. 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: Second Quarter Fiscal 2000 Compared to Second Quarter Fiscal 1999 Here is a summary of our operating performance (expressed in millions, except percentage and per share amounts): Three Months Ended October 31, 1998 1999 Change ------ ------ ------ Net Sales: Wine & Spirits $395.9 $458.9 16 % Consumer Durables 176.6 184.1 4 % ------ ------ Total $572.5 $643.0 12 % Gross Profit: Wine & Spirits $198.8 $230.8 16 % Consumer Durables 89.4 91.7 3 % ------ ------ Total $288.2 $322.5 12 % Operating Income: Wine & Spirits $ 82.9 $ 87.6 6 % Consumer Durables 24.7 28.9 17 % ------ ------ Total $107.6 $116.5 8 % Net Income $ 67.3 $ 72.9 8 % Earnings per Share - Basic and Diluted $ 0.97 $ 1.06 9 % Effective Tax Rate 36.5% 36.5% Sales and gross profit for our wine and spirits segment increased 16% for the quarter. The segment continued to perform well in the U.S. and in many important international markets, led by strong worldwide growth of Jack Daniel's. Southern Comfort worldwide revenue and gross profit also grew, mostly as a result of U.S. volume improvement. The company's wine brands continued to grow, as Korbel Champagne made substantial volume gains domestically in anticipation of the millennium celebration and Fetzer wine volumes improved globally. Operating income grew at a slower rate than sales and gross profit, reflecting a significant increase in advertising for the quarter as well as the effect of the acquisition of Sonoma-Cutrer Vineyards and investments in technology. Revenues and gross profit for the quarter from our consumer durables segment increased 4% and 3%, respectively, primarily reflecting gains in sales of fine china, flatware and crystal to department stores, and continued growth for the segment's direct marketing businesses. Operating income grew 17% for the period, reflecting aggressive efforts to contain costs. 10
Results of Operations: Six Months Fiscal 2000 Compared to Six Months Fiscal 1999 Here is a summary of our operating performance (expressed in millions, except percentage and per share amounts): Six Months Ended October 31, 1998 1999 Change -------- -------- ------ Net Sales: Wine & Spirits $ 726.8 $ 784.0 8 % Consumer Durables 287.3 296.3 3 % -------- -------- Total $1,014.1 $1,080.3 7 % Gross Profit: Wine & Spirits $ 371.5 $ 406.6 9 % Consumer Durables 144.7 147.9 2 % -------- -------- Total $ 516.2 $ 554.5 7 % Operating Income: Wine & Spirits $ 146.1 $ 151.7 4 % Consumer Durables 21.6 27.0 25 % -------- -------- Total $ 167.7 $ 178.7 7 % Net Income $ 104.5 $ 111.3 7 % Earnings per Share - Basic and Diluted $ 1.51 $ 1.62 7 % 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 and Korbel Champagne. First half results were also boosted by the impact of the April 1999 acquisition of Sonoma-Cutrer Vineyards. Operating income increased 4%, as gross profit gains were partially offset by brand-building and other investment activities. Revenues and gross profit from the consumer durables segment increased 3% and 2%, respectively, primarily reflecting increased consumer demand for fine china dinnerware in the wholesale channel, as well as strong sales of collectible products. Operating income grew 25% 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 8 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 decreased by $56.4 million during the six months ended October 31, 1999, as cash provided by operating activities was more than offset by cash used for investing and financing activities. Cash provided by operations totaled $55.8 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 $111.9 million was used for investing activities, consisting mostly of purchases of short-term investments as well as expenditures to expand and modernize our production facilities and enhance our information systems. Cash of $0.3 million was used for financing activities, reflecting dividend payments offset by net borrowings during the period. Dividends The Board of Directors increased the quarterly cash dividend 5.1% from $0.295 to $0.31 per share on both Class A and Class B common stock, payable January 1, 2000. As a result, the indicated annual cash dividend per share rose from $1.18 to $1.24. Year 2000 Issue Until recently, computer programs generally were written using two digits rather than four to define the applicable year. Accordingly, programs may recognize a date using "00" as the year 1900 instead of the year 2000. This problem may affect the company's information technology systems (IT systems), such as financial, order entry, inventory control and forecasting systems, and non-IT systems that contain computer chips, such as production equipment and security systems. It may also affect the technology systems of third party vendors and customers, and of governmental entities upon which the company's business ordinarily relies. The Company is addressing the Year 2000 issues in three phases: assessment, design of appropriate remediation, and implementation. For our IT systems as well as our non-IT systems, we have completed the assessment and remediation design phases and have substantially completed the implementation phase, which consists of replacing or repairing non-compliant systems, testing the new systems and training employees to use them. In addition, we have assessed the Year 2000 preparedness of important customers and suppliers and are monitoring their remediation efforts. The total cost of Year 2000 issues is currently estimated at $22-23 million. Of the total estimated cost, we expect that approximately 60% will be attributable to new systems and thus capitalized. The other 40% will be expensed as incurred. All costs are expected to be funded through operating cash flows. Through October 31, 1999, we have incurred approximately $22 million, of which $13 million has been capitalized and $9 million has been expensed. 12
We expect to manage the Year 2000 issues in a timely manner and, based on our efforts to date, we believe that substantial disruptions in our business operations due to Year 2000 non-compliance of our systems are unlikely. However, it is not possible to anticipate all possible future outcomes, especially since third parties are involved. Thus, there could be circumstances in which the company would be unable to process customer orders, produce or ship products, invoice customers, collect payments, receive customary governmental approvals or authorizations as they relate to our business, or perform other normal business activities. To address these risks, we have constructed contingency plans designed to mitigate potential disruptions in operations, including stockpiling raw materials and finished goods, identifying alternative sources of supplies, creating back-up order processing and invoicing procedures, and other appropriate measures. The costs and risks described above represent management's best estimates. However, there can be no guarantee that these estimates will prove to be accurate. Actual results could differ significantly. If we do not successfully complete anticipated replacements and other remediation to our IT systems, if unanticipated disruptions in our non-IT systems occur, or if any of our significant vendors or customers do not successfully achieve Year 2000 compliance on a timely basis, our operations or financial results could be adversely affected in the future. 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. 13
PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: Exhibit Number Exhibit ------- ------- 3(ii) By-Laws (Article 2.1 amended to create a uniform mandatory retirement age of 70 for all directors). 27 Financial Data Schedule (b) Reports on Form 8-K: None 14
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 7, 1999 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) 15