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 JULY 31, 1998
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: September 3, 1998
Class A Common Stock ($.15 par value, voting) 28,988,091 Class B Common Stock ($.15 par value, nonvoting) 39,698,147
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 July 31, 1998 and 1997 3
Condensed Consolidated Balance Sheet
July 31, 1998 and April 30, 1998 4
Condensed Consolidated Statement of Cash Flows
Three months ended July 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
Item 3. Quantitative and Qualitative Disclosures about Market Risk 11
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
|
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
July 31,
1998 1997
------ ------
Net sales $445.8 $428.1
Excise taxes 55.7 56.3
Cost of sales 156.9 154.3
------ ------
Gross profit 233.2 217.5
Selling, general, and
administrative expenses 104.6 98.2
Advertising expenses 68.5 60.6
------ ------
Operating income 60.1 58.7
Interest income 1.0 0.7
Interest expense 2.5 3.9
------ ------
Income before income taxes 58.6 55.5
Taxes on income 21.4 21.1
------ ------
Net income 37.2 34.4
Less preferred stock dividend
requirements 0.1 0.1
------ ------
Net income applicable to common
stock $ 37.1 $ 34.3
====== ======
Earnings per share
- basic and diluted $ .54 $ .50
====== ======
Shares (in thousands) used in the
calculation of earnings per share
- basic 68,686 68,996
- diluted 68,750 69,038
Cash dividends declared
per common share $ .28 $ .27
====== ======
|
See notes to the condensed consolidated financial statements.
BROWN-FORMAN CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(In millions)
July 31, April 30,
1998 1998
(Unaudited)
-------- --------
Assets
------
Cash and cash equivalents $ 93.2 $ 78.3
Accounts receivable, net 236.8 264.5
Inventories:
Barreled whiskey 183.1 187.0
Finished goods 200.6 178.6
Work in process 72.9 88.4
Raw materials and supplies 57.5 48.1
-------- --------
Total inventories 514.1 502.1
Other current assets 22.0 23.9
-------- --------
Total current assets 866.1 868.8
Property, plant and equipment, net 280.1 281.1
Intangible assets, net 247.9 249.8
Other assets 103.5 94.2
-------- --------
Total assets $1,497.6 $1,493.9
======== ========
Liabilities
-----------
Commercial paper $ 97.1 $ 107.1
Accounts payable and accrued expenses 215.7 233.3
Current portion of long-term debt 7.5 7.5
Accrued taxes on income 25.9 7.6
Deferred income taxes 27.4 27.4
Dividends payable 19.3 --
-------- --------
Total current liabilities 392.9 382.9
Long-term debt 49.8 49.8
Deferred income taxes 144.7 149.7
Accrued postretirement benefits 56.1 55.4
Other liabilities and deferred income 34.0 38.8
-------- --------
Total liabilities 677.5 676.6
Stockholders' Equity
--------------------
Preferred stock 11.8 11.8
Common stockholders' equity:
Common stock 10.3 10.3
Retained earnings 820.8 821.2
Accumulated other comprehensive income
-cumulative translation adjustment (5.6) (8.8)
Treasury stock (310,000 Class B common shares) (17.2) (17.2)
-------- --------
Common stockholders' equity 808.3 805.5
-------- --------
Total stockholders' equity 820.1 817.3
-------- --------
Total liabilities and stockholders' equity $1,497.6 $1,493.9
======== ========
|
Note: The balance sheet at April 30, 1998, has been taken from the audited financial statements at that date, and condensed.
See notes to the condensed consolidated financial statements.
BROWN-FORMAN CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(In millions; amounts in parentheses are reductions of cash)
Three Months Ended
July 31,
1998 1997
----- ------
Cash flows from operating activities:
Net income $ 37.2 $ 34.4
Adjustments to reconcile net income to net
cash provided by (used for) operations:
Depreciation 11.5 10.3
Amortization 2.4 2.3
Deferred income taxes (5.0) 4.3
Other (6.3) (4.7)
Changes in assets and liabilities:
Accounts receivable 27.7 39.7
Inventories (12.0) (9.0)
Other current assets 1.9 (7.3)
Accounts payable and accrued expenses (17.6) (13.2)
Accrued taxes on income 18.3 9.2
------ ------
Cash provided by operating activities 58.1 66.0
Cash flows from investing activities:
Additions to property, plant, and equipment (9.7) (9.2)
Disposals of property, plant, and equipment 0.1 --
Other (4.2) (0.5)
------ ------
Cash used for investing activities (13.8) (9.7)
Cash flows from financing activities:
Net change in commercial paper (10.0) (53.7)
Dividends paid (19.4) (18.7)
------ ------
Cash used for financing activities (29.4) (72.4)
------ ------
Net increase (decrease) in cash and cash equivalents 14.9 (16.1)
Cash and cash equivalents, beginning of period 78.3 58.2
------ ------
Cash and cash equivalents, end of period $ 93.2 $ 42.1
====== ======
|
See notes to the condensed consolidated financial statements.
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 1998 annual report on Form 10-K (the "1998 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 1998 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 $107.5 million higher than reported as of July 31, 1998, and $104.4 million higher than reported as of April 30, 1998.
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.
5. 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. Comprehensive Income
Effective May 1, 1998, we adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." The adoption of SFAS No.130 did not have a material impact on our consolidated financial statements.
Comprehensive income, which is defined as the change in equity from transactions and other events from nonowner sources, for the three months ended July 31, 1998 and 1997 was as follows (in millions):
1998 1997
------ ------
Net income $ 37.2 $ 34.4
Foreign currency translation adjustment 3.2 (0.5)
------ ------
Comprehensive income $ 40.4 $ 33.9
====== ======
|
7. New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("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 or results of operations.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosure about Pensions and Other Postretirement Benefits," which is effective for fiscal years beginning after December 15, 1997. SFAS No. 132 revises employers' disclosures about pension and other postretirement benefit plans but does not change the measurement or recognition of those plans. Thus, the adoption of SFAS No. 132 will have no effect on our financial condition or results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which is effective for fiscal years beginning after June 15, 1999. SFAS No. 133 requires that all derivatives be measured at fair value and recognized in the balance sheet as either assets or liabilities. SFAS No. 133 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. The adoption of SFAS No. 133 is not expected to have a material impact on our consolidated financial statements.
8. Subsequent Event
On July 23, 1998, our Board of Directors voted to redeem all outstanding shares of preferred stock on October 1, 1998, at a total redemption cost of approximately $12.1 million.
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 1998 Annual Report. Note that the results of operations for the three months ended July 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. 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 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 segment anticipate a continued strengthening of our Lenox and Hartmann businesses. These projections could be offset by factors such as poor consumer response rates at Lenox Collections, a soft retail environment at outlet malls, further department store consolidation, or weakened demand for tableware, giftware and/or leather goods.
Results of Operations:
First Quarter Fiscal 1999 Compared to First Quarter Fiscal 1998
Here is a summary of our operating performance (expressed in millions, except
percentage and per share amounts):
Three Months Ended
July 31, %
1998 1997 Change
------- ------- ------
Net Sales
---------
Wine & Spirits $ 335.1 $ 317.4 6
Consumer Durables 110.7 110.7 --
------- -------
Total $ 445.8 $ 428.1 4
Gross Profit
------------
Wine & Spirits $ 177.9 $ 164.8 8
Consumer Durables 55.3 52.7 5
------- -------
Total $ 233.2 $ 217.5 7
Operating Income (Loss)
-----------------------
Wine & Spirits $ 68.6 $ 65.1 5
Consumer Durables (3.1) (1.5) N/M
Corporate (5.4) (4.9) 10
------- -------
Total $ 60.1 $ 58.7 2
Net Income $ 37.2 $ 34.4 8
----------
Earnings per Share - Basic and Diluted $ 0.54 $ 0.50 8
--------------------------------------
Effective Tax Rate 36.5% 38.0%
------------------
|
Sales for our wine and spirits segment increased 6%, largely due to growth in international sales of Jack Daniel's and Fetzer, as well as a solid performance by many of our beverage brands in the United States. Gross profit and operating income from the wine and spirits segment increased 8% and 5%, respectively, for the quarter. These results primarily reflect the strong performance by our major brands, an improved mix of higher-margin product sales, and more favorable raw material and manufacturing costs. A portion of the gain in gross profit was reinvested in advertising and marketing programs designed to strengthen our brands.
Revenues from our consumer durables segment were flat for the quarter as lower volumes for the wholesale and retail operations were offset by continued growth of the catalog and direct marketing operations of Lenox Collections. Gross profit for the segment increased 5%, however, principally reflecting the greater mix of higher-margin Lenox Collections sales. The operating loss for the quarter reflects higher advertising expense for the segment as well as costs incurred to introduce new Hartmann products. We expect the segment's revenues and operating results to improve over the remainder of the fiscal year.
Net interest expense declined from last year's first quarter due to lower net debt balances. The reduction in the company's consolidated effective tax rate reflects lower effective state tax rates.
As discussed in Note 7 to the accompanying condensed consolidated financial statements, we are required to adopt SFAS No. 133 by May 1, 2000. The adoption of SFAS No. 133 is not expected to have a material impact on our consolidated financial statements.
Liquidity and Financial Condition
Cash and cash equivalents increased by $14.9 million during the three months ended July 31, 1998, as cash provided by operations exceeded cash used for investing and financing activities. Cash provided by operations totaled $58.1 million, primarily reflecting net income for the period and a decrease in accounts receivable due to the normal seasonality of revenues. Cash of $13.8 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 $29.4 million, as we used excess funds to reduce our debt and to pay dividends.
On July 23, 1998, our Board of Directors voted to redeem all outstanding shares of preferred stock on October 1, 1998, at a total redemption cost of approximately $12.1 million.
We have conducted a comprehensive review of our information systems to identify those systems which may be affected by the "Year 2000" issue and we have developed an implementation plan to resolve the issue. In preparing our systems for the year 2000, we expect to incur internal staff costs as well as external consulting and other costs during fiscal years 1999 and 2000. The cost of new systems software will be capitalized. Other costs of the project will be expenses as incurred.
Because we have replaced or updated many of our information systems in recent years, the costs to be incurred in addressing the Year 2000 issue are not expected to have a material impact on our financial condition, results of operations or cash flows. This expectation assumes that our existing forecast of costs to be incurred contemplates all significant actions required and that we will not be obligated to incur significant Year 2000 related costs on behalf of our customers or suppliers.
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.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Since April 30, 1998, 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 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Stockholders of the company held July 23, 1998, the following matter was voted upon:
Election of Barry D. Bramley, Geo. Garvin Brown III, Owsley Brown II, Donald G. Calder, Owsley Brown Frazier, Richard P. Mayer, Stephen E. O'Neil, William M. Street, and James S. Welch to serve as directors until the next annual election of directors, or until a successor has been elected and qualified.
For Withheld
Barry D. Bramley 27,267,259 10,758
Geo. Garvin Brown III 27,271,665 6,352
Owsley Brown II 27,271,665 6,352
Donald G. Calder 27,267,765 10,252
Owsley Brown Frazier 27,268,974 9,043
Richard P. Mayer 27,271,665 6,352
Stephen E. O'Neil 27,265,885 12,132
William M. Street 27,271,665 6,352
James S. Welch 27,271,624 6,393
|
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit Number Exhibit ------ ------- 27 Financial Data Schedule |
(b) Reports on Form 8-K: During the quarter for which this report is filed, the Registrant filed a Current Report on Form 8-K, dated June 1, 1998, regarding an amendment to the Registrant's by-laws which lifted the mandatory retirement age to 70 for non-employee directors.
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: September 3, 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)
|
| ARTICLE 5 |
| This schedule contains summary financial information extracted from the company's July 31, 1998 Quarterly Report Form 10-Q and is qualified in its entirety by reference to such financial statements. |
| MULTIPLIER: 1,000,000 |
| PERIOD TYPE | 3 MOS | |
| FISCAL YEAR END | APR 30 1999 | |
| PERIOD END | JUL 30 1998 | |
| CASH | 93 | |
| SECURITIES | 0 | |
| RECEIVABLES | 237 1 | |
| ALLOWANCES | 0 | 1 |
| INVENTORY | 514 | |
| CURRENT ASSETS | 866 | |
| PP&E | 655 | |
| DEPRECIATION | 375 | |
| TOTAL ASSETS | 1,498 | |
| CURRENT LIABILITIES | 393 | |
| BONDS | 50 | |
| PREFERRED MANDATORY | 0 | |
| PREFERRED | 12 | |
| COMMON | 10 | |
| OTHER SE | 798 | |
| TOTAL LIABILITY AND EQUITY | 1,498 | |
| SALES | 446 | |
| TOTAL REVENUES | 446 | |
| CGS | 213 2 | |
| TOTAL COSTS | 213 2 | |
| OTHER EXPENSES | 0 | |
| LOSS PROVISION | 0 | |
| INTEREST EXPENSE | 3 | |
| INCOME PRETAX | 58 | |
| INCOME TAX | 21 | |
| INCOME CONTINUING | 37 | |
| DISCONTINUED | 0 | |
| EXTRAORDINARY | 0 | |
| CHANGES | 0 | |
| NET INCOME | 37 | |
| EPS PRIMARY | 0.54 3 | |
| EPS DILUTED | 0.54 4 |
| 1 | Accounts receivable is shown net of allowance for doubtful accounts. Allowance for doubtful accounts has not changed materially from the April 30, 1998 balance. |
| 2 | Includes excise taxes of $56 million. |
| 3 | Represents Basic EPS, calculated in accordance with SFAS No. 128. |
| 4 | Represents Diluted EPS, calculated in accordance with SFAS No. 128. |