-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AWwAdwbaXP3aP129osCvdbNra7U94h8fznsW0ADZMM3kduOmVfBOw6MhuuQhlGyj 7xIyE4gxJruRq/f1W74IYw== 0000014693-98-000003.txt : 19980309 0000014693-98-000003.hdr.sgml : 19980309 ACCESSION NUMBER: 0000014693-98-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980131 FILED AS OF DATE: 19980306 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BROWN FORMAN CORP CENTRAL INDEX KEY: 0000014693 STANDARD INDUSTRIAL CLASSIFICATION: BEVERAGES [2080] IRS NUMBER: 610143150 STATE OF INCORPORATION: DE FISCAL YEAR END: 0430 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-00123 FILM NUMBER: 98558736 BUSINESS ADDRESS: STREET 1: 850 DIXIE HWY CITY: LOUISVILLE STATE: KY ZIP: 40210 BUSINESS PHONE: 5025851100 MAIL ADDRESS: STREET 1: P O BOX 1080 CITY: LOUISVILLE STATE: KY ZIP: 40201 FORMER COMPANY: FORMER CONFORMED NAME: BROWN FORMAN INC DATE OF NAME CHANGE: 19870816 FORMER COMPANY: FORMER CONFORMED NAME: BROWN FORMAN DISTILLERS CORP DATE OF NAME CHANGE: 19840807 FORMER COMPANY: FORMER CONFORMED NAME: BROWN FORMAN DISTILLERY CO DATE OF NAME CHANGE: 19670730 10-Q 1 United States Securities and Exchange Commission Washington, D.C. 20549 FORM 10-Q |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended JANUARY 31, 1998 Commission File No. 1-123 BROWN-FORMAN CORPORATION (Exact name of Registrant as specified in its Charter) Delaware 61-0143150 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 850 Dixie Highway Louisville, Kentucky 40210 (Address of principal executive offices) (Zip Code) (502) 585-1100 (Registrant's telephone number, including area code) N/A (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: March 3, 1998 Class A Common Stock ($.15 par value, voting) 28,988,091 Class B Common Stock ($.15 par value, nonvoting) 39,850,247 -1- 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, 1998 and 1997 3 Nine months ended January 31, 1998 and 1997 3 Condensed Consolidated Balance Sheet January 31, 1998 and April 30, 1997 4 Condensed Consolidated Statement of Cash Flows Nine months ended January 31, 1998 and 1997 5 Notes to the Condensed Consolidated Financial Statements 6 - 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 - 11 PART II - OTHER INFORMATION Item 1. Legal Proceedings 12 Item 6. Exhibits and Reports on Form 8-K 12 Signatures 13 -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, 1998 1997 1998 1997 ------ ------ -------- -------- Net sales $480.8 $458.2 $1,463.1 $1,408.2 Excise taxes 62.6 65.0 190.0 193.5 Cost of sales 166.9 173.9 526.2 527.8 ------ ------ -------- -------- Gross profit 251.3 219.3 746.9 686.9 Selling, general, and administrative expenses 104.3 97.8 306.1 287.8 Advertising expenses 71.2 50.8 204.6 179.3 ------ ------ -------- -------- Operating income 75.8 70.7 236.2 219.8 Interest income 1.0 .4 2.3 1.6 Interest expense 3.3 4.0 11.2 12.9 ------ ------ -------- -------- Income before income taxes 73.5 67.1 227.3 208.5 Taxes on income 27.9 25.5 86.4 79.2 ------ ------ -------- -------- Net income 45.6 41.6 140.9 129.3 Less preferred stock dividend requirements .1 .1 .4 .4 ------ ------ -------- -------- Net income applicable to common stock $ 45.5 $ 41.5 $ 140.5 $ 128.9 ====== ====== ======== ======== Earnings per share - basic and diluted $ .66 $ .60 $ 2.04 $ 1.87 ====== ====== ======== ======== Shares (in thousands) used in the calculation of earnings per share - basic 68,969 68,996 68,985 68,996 - diluted 69,022 69,023 69,029 69,009 Cash dividends declared per common share $ .28 $ .27 $ .82 $ .79 ====== ====== ======== ======== See notes to the condensed consolidated financial statements. -3- BROWN-FORMAN CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET (In millions) January 31, April 30, 1998 1997 (Unaudited) -------- -------- Assets - ------ Cash and cash equivalents $ 66.1 $ 58.2 Accounts receivable, net 222.6 262.8 Inventories: Barreled whiskey 183.8 176.3 Finished goods 172.8 172.3 Work in process 98.2 65.8 Raw materials and supplies 46.0 37.0 -------- -------- Total inventories 500.8 451.4 Other current assets 27.3 29.7 -------- -------- Total current assets 816.8 802.1 Property, plant and equipment, net 281.6 292.2 Intangible assets, net 248.1 253.9 Other assets 87.1 80.2 -------- -------- Total assets $1,433.6 $1,428.4 ======== ======== Liabilities - ----------- Commercial paper $ 96.9 $ 155.0 Accounts payable and accrued expenses 201.8 208.6 Current portion of long-term debt 7.5 6.7 Accrued taxes on income 8.8 6.4 Deferred income taxes 22.1 22.1 Dividends payable 19.4 -- -------- -------- Total current liabilities 356.5 398.8 Long-term debt 49.8 63.4 Deferred income taxes 146.2 135.6 Accrued postretirement benefits 55.7 54.5 Other liabilities and deferred income 37.3 45.7 -------- -------- Total liabilities 645.5 698.0 Stockholders' Equity Preferred stock 11.8 11.8 Common stockholders' equity 776.3 718.6 -------- -------- Total stockholders' equity 788.1 730.4 -------- -------- Total liabilities and stockholders' equity $1,433.6 $1,428.4 ======== ======== Note: The balance sheet at April 30, 1997, 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, 1998 1997 ------- ------- Cash flows from operating activities: Net income $ 140.9 $ 129.3 Adjustments to reconcile net income to net cash provided by (used for) operations: Depreciation 31.3 30.5 Amortization 7.0 6.9 Deferred income taxes 10.6 4.3 Other (8.5) (6.3) Changes in assets and liabilities: Accounts receivable 40.2 44.8 Inventories (50.7) (10.4) Other current assets 3.7 (2.6) Accounts payable and accrued expenses (6.8) (40.7) Accrued taxes on income 2.4 3.5 ------- ------- Cash provided by operating activities 170.1 159.3 Cash flows from investing activities: Additions to property, plant, and equipment (31.9) (41.2) Disposals of property, plant, and equipment 10.9 2.3 Other (7.3) (4.6) ------- ------- Cash used for investing activities (28.3) (43.5) Cash flows from financing activities: Net change in commercial paper (58.1) (49.0) Proceeds from long-term debt 0.8 1.1 Reduction of long-term debt (13.6) (6.7) Dividends paid (57.0) (54.9) Acquisition of treasury stock (6.0) -- ------- ------- Cash used for financing activities (133.9) (109.5) ------- ------- Net increase in cash and cash equivalents 7.9 6.3 Cash and cash equivalents, beginning of period 58.2 53.9 ------- ------- Cash and cash equivalents, end of period $ 66.1 $ 60.2 ======= ======= 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 1997 annual report on Form 10-K (the "1997 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 1997 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 $102.7 million higher than reported as of January 31, 1998, and $98.4 million higher than reported as of April 30, 1997. 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, results of operations or cash flows. 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, results of operations or cash flows. -6- 5. Earnings Per Share During the three months ended January 31, 1998, we adopted Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share," which established new standards for computing and presenting earnings per share. The adoption of SFAS No. 128 did not change our previously-reported 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. 6. Treasury Stock During January 1998, we purchased 110,900 shares of our Class B common stock on the open market at a cost of $6.0 million. We will use these shares, along with additional shares to be acquired in the future, to satisfy future exercises of stock options. 7. New Accounting Pronouncements In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive Income," which is effective for fiscal years beginning after December 15, 1997. SFAS No. 130 requires companies to classify items defined as "other comprehensive income" by their nature in a financial statement, and to display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of the balance sheet. The adoption of SFAS No. 130 will not have a material impact on our consolidated financial statements. In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information," which is effective for fiscal years beginning after December 15, 1997. SFAS No. 131 establishes standards for reporting information about a company's operating segments and requires certain disclosures about a company's products and services, the geographic areas in which it operates and its major customers. Although we have not determined the effect that adoption of SFAS No. 131 may have on the format of our financial statement disclosures, it will have no effect on our financial condition, results of operations or cash flows. 8. Reclassifications Certain prior period amounts have been reclassified to conform with the current period presentation. -7- 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 1997 Annual Report. Note that the results of operations for the nine months ended January 31, 1998, 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 federal or state excise taxes (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. Consumer Durables Risk Factors: Earnings projections for our consumer durables business anticipate a continued strengthening of our Lenox business. These projections could be offset by factors such as poor consumer response rates at Lenox Collections, weakened demand for fine china, a soft retail environment at outlet malls, or further department store consolidation. -8- Results of Operations: Third Quarter Fiscal 1998 Compared to Third Quarter Fiscal 1997 Here is a summary of our operating performance (expressed in millions, except percentage and per share amounts): Three Months Ended January 31, % 1998 1997 Change ------- ------- ------ Net Sales Wine & Spirits $ 339.7 $ 325.2 4 Consumer Durables 141.1 133.0 6 ------- ------- Total $ 480.8 $ 458.2 5 Gross Profit $ 251.3 $ 219.3 15 - ------------ Operating Income $ 75.8 $ 70.7 7 - ---------------- Net Income $ 45.6 $ 41.6 10 - ---------- Earnings per Share - Basic and Diluted $ 0.66 $ 0.60 10 - -------------------------------------- Effective Tax Rate 38.0% 38.0% - ------------------ Sales for our wine and spirits segment increased 4%, influenced mainly by increasing demand for the Jack Daniel's family of brands and Southern Comfort in the United States and many key international markets, as well as worldwide growth for our wine brands. Revenues from our consumer durables segment increased 6% for the quarter as a result of significantly higher volumes for Lenox Collections, our direct marketing division, partially offset by lower sales to department stores reflecting relatively modest holiday sales and more aggressive inventory management policies at most of the large retailers in the United States. Gross profit and operating income increased 15% and 7%, respectively, for the quarter. These results primarily reflect the strong performance by our major spirits brands, an improved mix of higher-margin product sales, favorable raw material and manufacturing costs, and continued improvement at Lenox Collections. A portion of the gain in gross profit was reinvested in advertising and marketing programs designed to strengthen our brands. Net interest expense declined from last year's third quarter due to lower net debt balances. -9- Nine Months Fiscal 1998 Compared to Nine Months Fiscal 1997 Here is a summary of our operating performance (expressed in millions, except percentage and per share amounts): Nine Months Ended January 31, % 1998 1997 Change -------- -------- ------ Net Sales Wine & Spirits $1,048.8 $1,023.4 2 Consumer Durables 414.3 384.8 8 -------- -------- Total $1,463.1 $1,408.2 4 Gross Profit $ 746.9 $ 686.9 9 - ------------ Operating Income $ 236.2 $ 219.8 7 - ---------------- Net Income $ 140.9 $ 129.3 9 - ---------- Earnings per Share - Basic and Diluted $ 2.04 $ 1.87 9 - -------------------------------------- Effective Tax Rate 38.0% 38.0% - ------------------ Sales of our wines and spirits increased 2% for the nine months ended January 31, driven by solid growth of the Jack Daniel's family of brands in the United States and a significant increase in revenues from our wine brands. This growth was partially offset by sharply lower sales of frozen cocktail products and a stronger U.S. dollar. Revenues from our consumer durables segment were up 8% for the period, led by volume gains for Lenox Collections and strong growth of Hartmann's luggage products. Gross profit and operating income for the period increased 9% and 7%, respectively, driven by growth in both of our operating segments. Strong U.S. sales of Jack Daniel's and our wine brands, combined with lower marketing outlays for frozen cocktail products, continued improvement at Lenox Collections and higher profitability from dinnerware sales fueled the growth. These gains were partially offset by further international investment in our beverage business and by the impact of the stronger U.S. dollar. Gross margin improved to 51.0% in fiscal 1998 from 48.8% in fiscal 1997, reflecting favorable raw material and manufacturing costs, selected price increases and an improved mix of higher-margin product sales. Net interest expense continued to compare favorably to last year as a result of lower net debt balances. Based on our current projections, we are optimistic about the opportunities for both the wine and spirits segment and the consumer durables segment for the remainder of fiscal 1998. -10- Liquidity and Financial Condition Cash and cash equivalents increased by $7.9 million during the nine months ended January 31, 1998, as cash provided by operations exceeded cash used for investing and financing activities. Cash provided by operations totaled $170.1 million, primarily reflecting net income for the period and a decrease in accounts receivable due to the normal seasonality of revenues, partially offset by an increase in inventories in anticipation of future sales growth. Cash of $28.3 million was used for investing activities, consisting mostly of expenditures to expand and modernize our production facilities and enhance our information systems. Cash used for financing activities was $133.9 million, as we used excess funds to reduce our debt and to pay dividends. We have conducted a comprehensive review of our information systems to identify the systems which may be affected by the "Year 2000" issue and have developed an implementation plan to resolve the issue. We expect to incur internal staff costs as well as external consulting and other expenses in order to prepare the systems for the year 2000. The cost of this project, which will be expensed as incurred over the next two years, is not expected to have a material impact on our financial condition, results of operations or cash flows. Dividends On January 22, 1998, our Board of Directors declared a regular quarterly cash dividend of $.28 per share on both Class A and Class B common stock. The Board also declared a $.10 per share cash dividend on the preferred stock. Stockholders of record on March 4, 1998 will receive the cash dividend on April 1, 1998. Total cash dividends paid per common share in fiscal 1998 will be $1.10, a 4% increase over last year. 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, results of operations or cash flows. -11- PART II - OTHER INFORMATION Item 1. Legal Proceedings Expansion Plus, Inc. v. Brown-Forman Corporation, et al., (United States District Court for the Southern District of Texas, Houston Division, Civil Action No. H-94-3498) The Federal Appeals Court for the Fifth Circuit on January 12, 1998, affirmed the trial court's summary judgment dismissal of all claims by Expansion Plus, Inc. ("EPI") against Brown-Forman and other defendants. EPI's request for reconsideration was denied on February 12, 1998. As reported earlier, we bought a start-up credit card processing business in 1988 from EPI. We built up this business substantially and sold it in 1993 for $31.2 million. Months after the sale, EPI claimed that we had never acquired full title to the business, that we had to return all or part of it to EPI, and that our sale of the business to a third party represented a conversion of EPI's assets. In October, 1994, EPI filed a tort action against the buyer and us alleging conversion of property, tortious interference with contractual relationships, misappropriation of trade secrets, and breach of a confidential relationship. EPI sought damages of $31.2 million plus punitive damages in an amount ten times actual damages. On January 30, 1997, the trial judge entered summary judgment in our favor, dismissing all of EPI's claims. It was from this decision that EPI unsuccessfully appealed, as discussed above. Our counsel have advised us, and it is our opinion, that the disposition of this suit will not have a material adverse effect on our financial condition or results of operations. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: Exhibit Number Exhibit 27 Financial Data Schedule (b) Reports on Form 8-K: None. -12- 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, 1998 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) -13- EX-27 2
5 This schedule contains summary financial information extracted from the company's January 31, 1998 Quarterly Report Form 10-Q and is qualified in its entirety by reference to such financial statements. 1,000,000 9-MOS APR-30-1998 JAN-31-1998 66 0 223 0 501 817 645 363 1,434 357 50 0 12 10 766 1,434 1,463 1,463 716 716 0 0 11 227 86 141 0 0 0 141 2.04 2.04 Accounts receivable is shown net of allowance for doubtful accounts. Allowance for doubtful accounts has not changed materially from the April 30, 1997 balance. Includes excise taxes of $190 million.
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