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 July 31, 1997
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: September 5, 1997
Class A Common Stock (voting) 28,988,091
Class B Common Stock (nonvoting) 40,008,147
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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, 1997 and 1996 3
Condensed Consolidated Balance Sheet
July 31, 1997 and April 30, 1997 4
Condensed Consolidated Statement of Cash Flows
Three months ended July 31, 1997 and 1996 5
Notes to the Condensed Consolidated Statements 6 - 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8 - 10
Part II. Other Information
Item 1. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 12
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
BROWN-FORMAN CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
(Expressed in millions except per share amounts)
Three Months Ended
July 31,
1997 1996
------- -------
Net sales $ 428.1 $ 424.4
Excise taxes 56.3 59.2
Cost of sales 154.3 153.0
------- -------
Gross profit 217.5 212.2
Selling, general, and administrative expenses 98.2 93.1
Advertising expenses 60.6 63.4
------- -------
Operating income 58.7 55.7
Interest income .7 .6
Interest expense 3.9 4.1
------- -------
Income before income taxes 55.5 52.2
Taxes on income 21.1 19.8
------- -------
Net income 34.4 32.4
Less preferred stock dividend requirements .1 .1
------- -------
Net income applicable to common stock $ 34.3 $ 32.3
======= =======
Net income per common share $ .50 $ .47
======= =======
Cash dividends declared per common share $ .27 $ .26
======= =======
Average common shares outstanding used to
calculate net income per common share 69.0 69.0
======= =======
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See notes to the condensed consolidated financial statements.
BROWN-FORMAN CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(Expressed in millions)
July 31, April 30,
1997 1997
-------- --------
(Unaudited)
Assets
------
Cash and cash equivalents $ 42.1 $ 58.2
Accounts receivable, net 223.1 262.8
Inventories:
Barreled whiskey 179.9 176.3
Finished goods 182.0 172.3
Work in process 55.3 65.8
Raw materials and supplies 43.2 37.0
-------- --------
Total inventories 460.4 451.4
Other current assets 37.0 29.7
-------- --------
Total current assets 762.6 802.1
Property, plant and equipment, net 290.9 292.2
Intangible assets, net 251.9 253.9
Other assets 83.3 80.2
-------- --------
Total assets $1,388.7 $1,428.4
======== ========
Liabilities
-----------
Commercial paper $ 101.3 $ 155.0
Accounts payable and accrued expenses 195.4 208.6
Current portion of long-term debt 6.7 6.7
Accrued taxes on income 15.6 6.4
Deferred income taxes 22.1 22.1
Dividends payable 18.7 --
-------- --------
Total current liabilities 359.8 398.8
Long-term debt 63.5 63.4
Deferred income taxes 139.9 135.6
Accrued postretirement benefits 55.0 54.5
Other liabilities and deferred income 43.0 45.7
-------- --------
Total liabilities 661.2 698.0
Stockholders' Equity
--------------------
Preferred stock 11.8 11.8
Common stockholders' equity 715.7 718.6
-------- --------
Total stockholders' equity 727.5 730.4
-------- --------
Total liabilities and
stockholders' equity $1,388.7 $1,428.4
======== ========
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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.
BROWN-FORMAN CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(Expressed in millions; amounts in brackets are reductions of cash)
Three Months Ended
July 31,
1997 1996
------ ------
Cash flows from operating activities:
Net income $ 34.4 $ 32.4
Adjustments to reconcile net income to net
cash provided by (used for) operations:
Depreciation 10.3 10.1
Amortization 2.3 2.3
Deferred income taxes 4.3 1.7
Other (4.7) (3.6)
Changes in assets and liabilities:
Accounts receivable 39.7 10.9
Inventories (9.0) (6.8)
Other current assets (7.3) (6.4)
Accounts payable and accrued expenses (13.2) (27.3)
Accrued taxes on income 9.2 11.7
------ ------
Cash provided by operating activities 66.0 25.0
Cash flows from investing activities:
Additions to property, plant and
equipment, net (9.2) (12.6)
Other (.5) (.5)
------ ------
Cash used for investing activities (9.7) (13.1)
Cash flows from financing activities:
Net change in commercial paper (53.7) (24.9)
Proceeds from long-term debt -- .2
Dividends paid (18.7) (18.1)
------ ------
Cash used for financing activities (72.4) (42.8)
------ ------
Net decrease in cash and cash equivalents (16.1) (30.9)
Cash and cash equivalents, beginning of period 58.2 53.9
------ ------
Cash and cash equivalents, end of period $ 42.1 $ 23.0
====== ======
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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.
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.
In June 1997, the 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. The adoption of SFAS No. 131 will have no effect on our financial condition or results of operations. We have not determined the effect that the adoption of SFAS No. 131 will have on our financial statement disclosures.
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 U.S., 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 U.S. 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.
THREE MONTHS ENDED
JULY 31, %
1997 1996 CHANGE
---- ---- ------
Net Sales
---------
Wine & Spirits $ 317.4 $ 324.3 (2)
Consumer Durables 110.7 100.1 11
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Total $ 428.1 $ 424.4 1
Operating Income $ 58.7 $ 55.7 5
----------------
Net Income $ 34.4 $ 32.4 6
----------
Net Income per Common Share $ .50 $ .47 6
---------------------------
Effective Tax Rate 38.0% 38.0%
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Sales for our wine and spirits segment declined 2%, driven by sharply lower sales of frozen cocktail products in the U.S. and softer volumes experienced in certain overseas markets for our major spirits brands. Solid growth of Jack Daniel's in the U.S. and a significant increase in revenues from our wine brands partially offset these declines.
Revenues from our consumer durables segment were up 11% for the quarter as a result of significantly higher sales volume for Lenox Collections, our direct marketing division. In addition, sales to department stores increased modestly as a result of new product lines and merchandising programs.
Operating income for the quarter increased 5%, driven primarily by further improvement in profitability at Lenox Collections and the growth of Jack Daniel's in the U.S., partially offset by continued investment in international markets and higher levels of advertising related to our wine brands.
Net interest expense declined 9% from last year's first quarter due to lower net debt balances.
As discussed in Note 5 to the accompanying condensed consolidated financial statements, SFAS No. 128 will become effective for us beginning with the quarter ending January 31, 1998. We do not expect SFAS No. 128 to have a material impact on the calculation of our net income per common share.
Based on the results of the first quarter and 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.
PART II - OTHER INFORMATION
As we reported earlier, we bought a start-up credit card processing business in 1988 from Expansion Plus, Inc. ("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. EPI has appealed to the Federal Appeals Court for the Fifth Circuit.
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.
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 27,481,362 7,770
Geo. Garvin Brown III 27,483,824 5,308
Owsley Brown II 27,483,164 5,968
Donald G. Calder 27,483,821 5,311
Owsley Brown Frazier 27,481,143 7,989
Richard P. Mayer 27,483,344 5,788
Stephen E. O'Neil 27,481,415 7,717
William M. Street 27,483,357 5,775
James S. Welch 27,483,217 5,915
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Item 6. Exhibits and Reports on Form 8-K
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(a) Exhibits:
Exhibit
Number Exhibit
------- -------
27 Financial Data Schedule
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(b)Reports on Form 8-K: None
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 5, 1997 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)
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| ARTICLE 5 |
| This schedule contains summary financial information extracted from the company's July 31, 1997 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 1998 |
| PERIOD END | JUL 31 1997 |
| CASH | 42 |
| SECURITIES | 0 |
| RECEIVABLES | 223 1 |
| ALLOWANCES | 0 1 |
| INVENTORY | 460 |
| CURRENT ASSETS | 763 |
| PP&E | 647 |
| DEPRECIATION | 356 |
| TOTAL ASSETS | 1,389 |
| CURRENT LIABILITIES | 360 |
| BONDS | 64 |
| PREFERRED MANDATORY | 0 |
| PREFERRED | 12 |
| COMMON | 10 |
| OTHER SE | 706 |
| TOTAL LIABILITY AND EQUITY | 1,389 |
| SALES | 428 |
| TOTAL REVENUES | 428 |
| CGS | 211 2 |
| TOTAL COSTS | 211 2 |
| OTHER EXPENSES | 0 |
| LOSS PROVISION | 0 |
| INTEREST EXPENSE | 4 |
| INCOME PRETAX | 55 |
| INCOME TAX | 21 |
| INCOME CONTINUING | 34 |
| DISCONTINUED | 0 |
| EXTRAORDINARY | 0 |
| CHANGES | 0 |
| NET INCOME | 34 |
| EPS PRIMARY | .50 |
| EPS DILUTED | .50 |
| 1 | Accounts receivable is shown net of allowance for doubtful accounts. Allowance for doubtful accounts has not changed materially from the April 30, 1997 balance. |
| 2 | Includes excise taxes of $56 million. |