United States Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 1994
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 40210
Louisville, Kentucky (Zip Code)
(Address of principal executive offices)
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Registrant's telephone number, including area code (502) 585-1100
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, 1994:
Class A Common Stock (voting) 9,662,697 Class B Common Stock (nonvoting)13,336,049
BROWN-FORMAN CORPORATION
Index to Quarterly Report Form 10-Q
Part I. Financial Information
Item 1. Financial Statements Page Number
Condensed Consolidated Statement of Income
Three months ended January 31, 1994 and 1993 3
Nine months ended January 31, 1994 and 1993 3
Condensed Consolidated Balance Sheet
January 31, 1994 and April 30, 1993 4
Condensed Consolidated Statement of Cash Flows
Nine months ended January 31, 1994 and 1993 5
Notes to the Condensed Consolidated 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
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PART I - FINANCIAL INFORMATION
BROWN-FORMAN CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
(Expressed in thousands except per share amounts)
Three Months Ended Nine Months Ended
January 31, January 31,
1994 1993 1994 1993
-------- -------- ---------- ----------
Net sales $413,312 $426,267 $1,268,692 $1,288,299
Excise taxes 64,769 73,045 201,707 215,886
Cost of sales 145,021 152,239 438,202 447,984
-------- -------- ---------- ----------
Gross profit 203,522 200,983 628,783 624,429
Selling, general, and
administrative expenses 89,403 92,741 277,709 269,971
Advertising expenses 51,793 46,306 164,196 153,298
-------- -------- ---------- ----------
Operating income 62,326 61,936 186,878 201,160
Gain before income taxes on
sale of business -- -- 30,077 --
Interest income 1,276 765 3,332 2,150
Interest expense 3,675 4,836 11,293 11,938
-------- ------- --------- ----------
Income before income taxes 59,927 57,865 208,994 191,372
Taxes on income 21,154 20,625 78,252 67,702
-------- ------- --------- ----------
Income before cumulative
effect of changes in
accounting principles 38,773 37,240 130,742 123,670
Cumulative effect of changes
in accounting principles -- -- 32,542 --
-------- ------- --------- ----------
Net income 38,773 37,240 98,200 123,670
Less preferred stock dividend
requirements 118 118 353 353
-------- ------- --------- ----------
Net income applicable to
common stock $ 38,655 $37,122 $ 97,847 $ 123,317
======== ======= ========= ==========
Weighted average number of
common shares outstanding
in thousands 26,663 27,555 27,258 27,555
Per common share:
Income before cumulative
effect of changes in
accounting principles $ 1.45 $ 1.35 $ 4.78 $ 4.48
Cumulative effect of changes
in accounting principles -- -- 1.19 --
-------- ------- ------- -------
Net income $ 1.45 $ 1.35 $ 3.59 $ 4.48
======== ======= ======= =======
Cash dividends paid $ .71 $ .68 $ 2.0
======== ======= ======= =======
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See notes to the condensed consolidated statements.
BROWN-FORMAN CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(Expressed in thousands)
January 31, April 30,
1994 1993
---------- ----------
(Unaudited)
Assets
- ------
Cash and cash equivalents $ 67,796 $ 74,912
Short-term investments 25,143 18,146
Accounts receivable, net 216,501 238,921
Inventories:
Barreled whisky 141,338 137,880
Finished goods 120,251 142,640
Work in process 69,870 56,857
Raw materials and supplies 31,668 28,139
---------- ----------
Total inventories 363,127 365,516
Other current assets 21,103 22,759
---------- ----------
Total current assets 693,670 720,254
Property, plant and equipment, net 247,743 257,440
Intangible assets, net 275,418 279,681
Other assets 58,137 53,623
---------- ----------
Total assets $1,274,968 $1,310,998
========== ==========
Liabilities
- -----------
Commercial paper $ 272,507 $ --
Accounts payable and accrued expenses 203,682 180,664
Current portion of long-term debt 4,867 6,389
Accrued taxes on income 6,883 7,424
Deferred income taxes 17,725 15,883
---------- ----------
Total current liabilities 505,664 210,360
Long-term debt 149,190 154,408
Deferred income taxes 84,752 108,971
Postretirement benefits 46,306 --
Other liabilities and deferred income 38,814 19,136
---------- ----------
Total liabilities 824,726 492,875
Stockholders' Equity
Preferred stock 11,779 11,779
Common stockholders' equity 438,463 806,344
---------- ----------
Total stockholders' equity 450,242 818,123
---------- ----------
Total liabilities and stockholders' equity $1,274,968 $1,310,998
========== ==========
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Note: The balance sheet at April 30, 1993 has been taken from the audited financial statements at that date, and condensed.
See notes to the condensed consolidated statements.
BROWN-FORMAN CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(Expressed in thousands; amounts in brackets are reductions of
cash)
Nine Months Ended
January 31,
1994 1993
--------- ---------
Cash flows from operating activities:
Net income $ 98,200 $ 123,670
Adjustments to reconcile net income to net cash
provided by (used for) operations:
Cumulative effect of changes in accounting
principles 32,542 --
Depreciation 27,174 25,881
Amortization of intangible assets 7,176 6,345
Deferred income taxes 4,646 (2,485)
Gain net of income taxes on sale of business (18,350) --
Other 1,521 (3,518)
Changes in assets and liabilities:
Accounts receivable 22,420 87
Inventories 2,389 4,327
Other current assets 2,956 (451)
Accounts payable and accrued expenses 19,035 3,257
Accrued taxes on income (12,267) (5,285)
-------- --------
Cash provided by operating activities 187,442 151,828
-------- --------
Cash flows from investing activities:
Proceeds from sale of business 31,837 --
Additions to property, plant, and equipment, net (17,993) (23,256)
Net sales (purchases) of short-term investments (6,997) (2,252)
Other (2,120) 595
Acquisition of business, net of cash acquired -- (4,613)
Equity investment -- (9,467)
-------- --------
Cash provided by (used for) investing activities 4,727 (38,993)
-------- --------
Cash flows from financing activities:
Proceeds from long-term debt -- 2,744
Retirement of debt assumed at the time of
acquisition -- (17,708)
Commercial paper 272,507 (9,070)
Retirement of notes payable -- (8,025)
Reduction of other debt (6,740) (5,188)
Acquisition of treasury stock (407,660) --
Cash dividends paid (57,392) (52,707)
--------- ---------
Cash provided by (used for) financing
activities (199,285) (89,954)
--------- ---------
Net increase (decrease) in cash and cash equivalents (7,116) 22,881
Cash and cash equivalents, beginning of period 74,912 50,030
--------- ---------
Cash and cash equivalents, end of period $ 67,796 $ 72,911
========= =========
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See notes to the condensed consolidated statements.
BROWN-FORMAN CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED STATEMENTS
(Unaudited)
B. Fetzer Vineyards On August 31, 1992, the company purchased substantially all of the outstanding stock of Fetzer Vineyards of Mendocino County, California. The cost of acquiring substantially all the stock includes, among other costs, $4,600,000 in cash, $47,500,000 in notes and four annual payments of $2,800,000 per year beginning fiscal 1996. The acquisition has been accounted for as a purchase, and accordingly, the operating results of Fetzer have been consolidated with the company since the acquisition date. The excess of the acquisition cost over the fair value of the net assets acquired is approximately $46,500,000 which is being amortized over forty years.
THREE MONTHS ENDED
JANUARY 31, %
1994 1993 CHANGE
-------- -------- ------
Net Sales
Wines & Spirits $283,632 $286,146 (0.9)
Consumer Durables 129,680 135,563 (4.3)
Other -- 4,558 (100.0)
-------- --------
Total $413,312 $426,267 (3.0)
Operating Income $ 62,326 $ 61,936 0.6
Net Income $ 38,773 $ 37,240 4.1
Earnings Per Share $ 1.45 $ 1.35 7.4
Effective Tax Rate 35.30% 35.64%
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Wines and spirits sales were down slightly due to lower sales of the company's major beverage brands in the domestic market partially offset by double digit increases overseas. The sales decline in the U.S. reflects consumption trends in the U.S. market as well as a reduction of trade inventory levels. Consumer durables sales declined due in part to the disruptions caused by severe weather conditions in the eastern U.S. and natural disasters in southern California.
Consolidated operating income increased slightly due to the effect of higher margins on international sales and overall lower production costs within the wines and spirits segment. These positives were partially offset by higher advertising expense overseas in the wines and spirits segment.
Consolidated net income increased $1.5 million or 4.1% due primarily to higher operating income and lower net interest expense.
On May 1, 1993, the company adopted Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," and No. 112,
"Employers' Accounting for Postemployment Benefits." The
adoption of these standards resulted in a pretax charge
totaling $46.5 million ($28.4 million or $1.03 per share after-
tax.) The charge to net income from adopting these accounting
standards was recorded as the cumulative effect of changes in
accounting principles. Also, the company adopted Statement of
Financial Accounting Standards No. 109, "Accounting for Income
Taxes," effective May 1, 1993. The effect of the adoption was
immaterial. The company adopted Statement of Position 93-7,
"Reporting on Advertising Costs," on January 31, 1994. This
statement was issued by the American Institute of Certified
Public Accountants, and requires capitalization and
amortization of direct-response advertising to better match
revenues with expense. The adoption had no effect on year-to-
date earnings.
On October 15, 1993, the company sold substantially all
the assets of its credit card processing operations. The sale
resulted in a pretax gain of $30.1 million ($18.4 million or
$.67 per share after tax). Also, in the second quarter, the
company recognized the effect of tax legislation signed into
law August 10. The additional second quarter tax expense of
$4.2 million, or $.15 per share, recognizes the effect of a
higher tax rate on earnings since January 1, as well as the
recording of a noncash charge to restate the company's deferred
tax liability at the new corporate tax rate. The effect of the
higher tax rate on third quarter earnings was $.02 per share.
A summary of operating performance follows (expressed in
thousands, except percentage and per share amounts):
NINE MONTHS ENDED
JANUARY 31, %
1994 1993 CHANGE
---------- ---------- ------
Net Sales
Wines & Spirits $ 870,332 $ 880,174 (1.1)
Consumer Durables 388,307 395,168 (1.7)
Other 10,053 12,957 (22.4)
---------- ----------
Total $1,268,692 $1,288,299 (1.5)
Operating Income $ 186,878 $ 201,160 (7.1)
Gain on Sale of Business $ 30,077 --
Net Income
Income Before Cumulative
Effect of Changes in
Accounting Principles $ 130,742 $ 123,670 5.7
Cumulative Effect of
Changes in Accounting
Principles (32,542) --
----------- ----------
Net Income $ 98,200 $ 123,670 (20.6)
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NINE MONTHS ENDED
JANUARY 31, %
1994 1993 CHANGE
----------- ---------- ------
Earnings Per Share
Earnings Before Cumulative
Effect of Changes in
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Accounting Principles $ 4.78 $ 4.48 6.7
Cumulative Effect of Changes in
Accounting Principles (1.19) --
----------- ----------
Earnings Per Share $ 3.59 $ 4.48 (19.9)
Effective Tax Rate 37.44% 35.38%
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Excluding the effect of the Fetzer acquisition, consolidated net sales decreased 3.8% and wines and spirits sales decreased 4.4%. The overall decline in sales for the nine months ended January 31 was largely the result of lower first-half sales of Jack Daniel's Country Cocktails. Partially offsetting this decline was the addition of Fetzer Vineyards, acquired in August 1992, and worldwide volume gains for Jack Daniel's. Sales of the company's other beverage brands generally declined from last year's level. Sales of consumer durables for the first nine months of the year were off 1.7% due in part to the disruption caused by severe weather conditions in the eastern U.S. and natural disasters in southern California. Lenox Collections sales are significantly below last year for the first nine months. A number of changes that will improve the profitability and competitiveness of Lenox are being initiated. Lenox recently created a united tabletop unit consisting of Lenox, Gorham and Kirk Stieff. This organization will enhance the company's competitiveness in its core tabletop business, and allow the Dansk division to focus on growing its unique retail and product opportunities. Lenox also expects to conclude a strategic assessment of its other retail stores in the fourth quarter. Following weak holiday sales at some locations, the company is considering a plan that would close or reformat about seven stores. The implementation of this plan would probably result in a charge of approximately $.20 to $.25 per share in the fourth quarter and concentrate future efforts on retail formats that have shown the most promise.
Consolidated gross profit increased due primarily to lower production costs within the wines and spirits segment. Consolidated operating income is down 7.1% due primarily to a decline in sales of Jack Daniel's Country Cocktails, promotional costs for the introduction of Southern Comfort Cocktails, and lower sales in the consumer durables segment.
Excluding the gain from the sale of business and the effect of higher taxes, consolidated net income, before the cumulative effect of changes in accounting principles, declined $6.6 million or 5.3% due primarily to lower operating income in the wines and spirits segment.
Excluding unusual items affecting the current year--gain on sale of business ($.67 per share), adoption of new accounting standards ($1.19 per share), and higher tax rate legislation ($.17 per share)--earnings per share declined 4.5% to $4.28 per share.
On January 14, 1994, the company concluded its Dutch Auction tender offer, acquiring 911,484 shares of Class A and 3,644,506 shares of Class B common stock at a total cost of $408 million. The purchase of stock added approximately $.03 per share to third quarter results and is expected to add about $.19 per share to the company's earnings in fiscal 1994. As a result, the company expects full-year earnings per share growth, adjusted for unusual items and charges. The company expects future earnings per share to benefit significantly by the repurchase which will allow the company to pursue several investment strategies in fiscal 1995 that will slow near-term earnings growth, but help the company achieve greater long-term results.
PART II - OTHER INFORMATION
Three of the suits, collectively referred to as Adams, et al. v. Brown-Forman Corporation, were filed by or on behalf of the same 44 plaintiffs; the fourth suit was filed by the U.S. Equal Employment Opportunity Commission (the "EEOC") on behalf of 104 individuals, including the Adams plaintiffs. The lawsuits have been consolidated for trial in the U.S. District Court for the Middle District of Florida. During the course of this litigation, the EEOC has ceased representation of 19 individuals, thus reducing the total to 85 individuals.
The 44 Adams plaintiffs have asserted their damages to be approximately $62 million. The EEOC, using the same expert as that used by the plaintiffs in the private actions, has determined the EEOC's damage claim to be $43 million for the individuals on whose behalf it has brought suit, bringing the total claimed to $105 million. The company and its legal counsel consider this figure to exceed by far any liability to which the company might be exposed. The company denies any liability to the plaintiffs or individuals on whose part the EEOC has brought suit in these matters and is vigorously contesting the litigation.
On June 17, 1992, the Eleventh Circuit Court of appeals reversed a decision of the trial court and ruled in the company's favor that "knowing and voluntary" written releases are valid, even when plaintiffs are making ADEA claims. The company filed a motion for summary judgment on the release and other issues. The magistrate judge heard oral argument on January 5, 1993, and on September 30, 1993, made a report and recommendation to the district court that the releases were valid as to ten of the plaintiffs and recommended that their cases should be dismissed. The magistrate judge found there were "genuine issues of material fact" on the release and other issues with respect to the remaining 75 plaintiffs, and recommended that the motion for summary judgment be denied as to them.
Both sides filed exceptions to the magistrate judge's report and recommendation. After the court makes a decision on the recommendation, a trial date will be set for the remaining plaintiffs, if any.
1.)There were no reports on Form 8-K filed during the quarter ended January 31, 1994.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
BROWN-FORMAN CORPORATION
(Registrant)
Date: March 4, 1994 By: Owsley Brown II
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Owsley Brown II
President and Chief Executive Officer
(Principal Financial Officer)
Date: March 4, 1994 By: Clifford G. Rompf, Jr.
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Clifford G. Rompf, Jr.
Senior Vice President
(Principal Accounting Officer)
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